TITLE V renewed after the same expired. Mr.

S filed a complaint for

BY-LAWS illegal dismissal and PV resisted the complaint arguing that
Mr. S was validly dismissed pursuant to the amended By-
1. At the annual stockholders’ meeting of MS Corporation, Laws. Is the position of PV Corporation tenable?
the stockholders unanimously passed a resolution
authorizing the Board of Directors to amend the corporate Answer: No, the position of PV Corporation is untenable.
By-Laws so as to disqualify any stockholder who is also a Amendments to the By-Laws cannot impair the obligation of
director or stockholder of a competing business from being existing contracts or any vested right. Petitioner is a regular
elected to the Board of Directors of MS Corporation. The By- employee who is entitled to security of tenure; hence, his
Laws were accordingly amended. GK, a stockholder of MS services may only be terminated for causes provided by law.
Corporation and a majority stockholder of a competitor, Such security of tenure cannot be adversely affected by any
sought election to the Board of Directors of MS Corporation. amendment in the By-Laws.
His nomination was denied on the ground that he was
ineligible to run for the position. Seeking a nullification of TITLE VI
the offending disqualification provision, GK consults you MEETINGS
about its validity under the Corporation Code of the
Philippines. (B.P. Big. 68) What would your legal advice be? 1. Triple A Corporation (Triple A) was incorporated in 1960,
with 500 founders’ shares and 78 common shares as its
Answer: I will advise GK that he cannot have the initial capital stock subscription. However, Triple A
disqualification provision in the amended By-Laws nullified, registered its stock and transfer book only in 1978, and
provided that the SEC has already issued a certification that recorded merely 33 common shares as the corporation’s
the same is in accordance with the RCCP. The stockholders’ issued and outstanding shares. On May 6, 1992, a special
approval of the delegation of authority to the Board to stockholders’ meeting was held. At this meeting, what
amend the By-Laws meets the 2/3-vote requirement under would have constituted a quorum? Explain.
Section 48 of the Corporation Code (now Section 47 of the
RCCP). Moreover, it is well-settled that the provision in the Answer: The presence of stockholders holding 290 shares
amended By-Laws, disqualifying any stockholder who is also a constitutes a quorum during the stockholders’ meeting.
director or stockholder of a competing business from being Section 51 of the RCCP, provides that unless otherwise
elected to the Board of Director is valid. The disqualification is provided, quorum in the stockholders’ meeting shall consist
not inconsistent with the provisions of the Corporation Code. of the stockholders representing a majority of the capital
stock. Since there is nothing in the problem that indicates
2. The Board of Directors of C Corporation, engaged in the that there are non-voting shares, the outstanding capital is
manufacture of food products, acting on a standing the total of the founding shares and the common shares of
authority of the stockholders to amend the By-Laws, 578 shares and the quorum is 50% plus one of such number
amended the By-Laws so as to disqualify any stockholder, of shares (or 289 + 1). The number of shares appearing in the
who is also a stockholder and director of the competitor, Articles of Incorporation is controlling and binding on the
from being elected to its Board of Directors. S, a stockholder corporation and its shareholders. The recorded 33 shares are
holding sufficient shares to assure him a seat in the Board not the only outstanding shares.
filed a petition with the Securities and Exchange
Commission for the declaration of nullity of the amended Under the Articles of Incorporation of Manila Industrial
By-Laws and the cancellation of the Certificate of Filing of Corporation, its principal place of business shall be in Pasig,
amended By-Laws. He alleged, among others, that as Metro Manila. The principal corporate offices are at the
stockholder, he had acquired rights inherent in the stock Ortigas Center, Pasig, Metro Manila while its factory
ownership such as the right to vote and be voted upon in processing leather products, is in Manila. The corporation
the election of directors. Reason upon the merits of the holds its annual stockholders’ meeting at the Manila Hotel
stockholder’s petition. in Manila, and its Board of Directors’ meeting at a hotel in
Makati, Metro Manila. The By-Laws are silent as to the place
Answer: The petition has no merit. The Board amended the of meetings of the stockholders and directors.
By-Laws upon authority of the stockholders. As long as the
authority to amend the By-Laws was delegated to the Board a. Who shall preside at the meeting of the directors?
by the owners of at least 2/3 of the outstanding capital stock,
the delegation is valid and so is the amended By-Laws Answer: The Chairman or, in his absence, the President shall
approved by the Board pursuant to such delegation. preside at the meeting of the directors, unless the By-Laws
Moreover, the amendment in the By-Laws of C Corporation is provide otherwise (Section 53, RCCP).
reasonable and valid. The doctrine is based on the principle
that a director cannot serve two masters so to speak. There is b. Can Ting, a stockholder, who did not attend the
a danger that the director will give preference to one stockholders’ meeting in Manila question the validity of the
corporation. The disqualification is only a measure of self corporate resolutions passed at such meeting?
protection against directors who may betray the corporation
by giving preference to the other. (See Gokongwei, Jr. v. SEC, Answer: Yes. Section 50 of the RCCP provides that
April 11, 1979, 89 SCRA 336) (1981 Bar, See also 2001 Bar) stockholders’ meetings, whether regular or special, shall be
held in the principal office of the corporation, or, ifnot
3. Mr. S worked with PV Corporation as administrator from practicable, in the city or municipality where the principal
May 1, 1981 to December 31, 1983. His contract of office of the corporation is located. The Articles of
employment was not renewed after it expired but he Incorporation in the present case is specific that the principal
continued working for PV Corporation even without a place of business of Manila Industrial Corporation is in Pasig,
written contract. In 1987, PV amended its By-Laws making Metro Manila. Hence, the meeting should be held in the
the position of an administrator co-terminus with the term principal office or if not practicable, in the city where the
of the Board of Directors, which appointed him. Mr. S was principal office is located, which is in Pasig. However, if the
thereafter terminated allegedly because his term was not corporation shows that it is not practicable to hold the
meeting in the principal office or in Pasig, then the holding of Enclosed you will find (Babayaran kong lahat pagkatapos na
the meeting in Manila, which is a city in Metro Manila like ako ay makapag-pahuli ng isda) pesos as my initial payment
Pasig, is valid also under Section 50. and the balance payable in accordance with law and the
rules and regulations of the Quezon College. I hereby agree
c. Can the same stockholder question the validity of the to shoulder the expenses connected with said shares of
resolutions adopted by the BOD at the meeting held in stock. I further submit myself to all lawful demands,
Makati? decisions or directives of the Board of Q College and all its
duly constituted officers or authorities (ang nasa itaas ay
Answer: No. Section 52 of the RCC allows the Board of binasa at ipinaliwanag sa akin sa wikang tagalog na aking
Directors to hold its meetings anywhere in or outside the nalalaman) ” No reply was sent by Q College to Ms. DC. Ms,
Philippines. The holding of the Board meeting in Makati was DC died without having paid any portion of the subscription
therefore proper and the validity of the resolutions adopted price. Thereafter, Q College presented a claim in Ms. DC’s
by the Board in that meeting cannot be questioned. (1993 testate proceeding, for the collection of the sum of P20.000,
Bar) representing the value of the subscription to the capital
stock. Will the claim prosper?
1. What is a voting trust and what are the legal limitations
of the voting trust agreement? Answer: No, the claim will not prosper. There was no
perfected subscription contract. Q College did not accept the
Answer: A voting trust is a written agreement duly notarized term of payment suggested by Ms. DC during her lifetime. As
whereby one or more stockholders transfer their shares of Ms. DC’s letter is at variance with the terms evidenced in the
stock to a trustee for the purpose of vesting into the trustee form, there was no absolute necessity on the part of the
the right to vote and other rights pertaining to the shares, for college to express its agreement to DC’s offer in order to bind
a period not exceeding five years at any one time. the latter. Conversely, said acceptance was essential, because
it would be unfair to immediately obligate the Q College
The legal limitations on voting trusts are as follows: (1) they under DCs promise to pay the price of the subscription after
must not exceed the period of five years at any time; (2) In she had caused fish to be caught. In other words, the relation
the case of a voting trust specifically required as a condition between DC and Q College had only thus reached the
in a loan agreement, said voting trust may be for a period preliminary stage. There was no binding contract in the
exceeding five years but shall automatically expire upon full absence as in the present case of acceptance by the Q College
payment of the loan; (3) They must be in writing and of the counter offer of DC. Indeed, the need for express
notarized; and (4) They must specify the terms and conditions acceptance on the part of the Q College becomes the more
thereof. (1985 Bar) imperative, in view of the fact that the proposal of DC was to
pay the value of the subscription after she has harvested fish.
2. A distressed company executed a voting trust agreement There was a condition that was dependent upon DC’s sole will
for a period of three years over 60% of its outstanding paid- and, therefore, potestative in nature, rendering the
up capital shares in favor of a bank to whom it was obligation void under the New Civil Code (Trillana v. Quezon
indebted, with the Bank named as trustee. Additionally, the College, Inc., G.R. No. L-5003, June 27,1953).
Company mortgaged all its properties to the Bank. Because
of the insolvency of the Company, the Bank foreclosed the 1. X Corporation was organized by five individual
mortgaged properties, and as the highest bidder, acquired incorporators who subscribed to the whole authorized
said properties and assets of the Company. The three-year capital stock of Pl,000,000.00 and who paid P500.000.00.
period prescribed in the Voting Trust Agreement having The incorporators, all members of the Board of Directors,
expired, the Company demanded the turnover and transfer agreed among themselves that the unpaid balance of their
of all its assets and properties, including the management subscription will be paid out of expected cash dividends.
and operation of the Company, claiming that under the However, no dividends were ever declared. The Board of
Voting Trust Agreement, the Bank was constituted as Directors decided to condone and cancel the unpaid
trustee of the management and operations of the Company. subscriptions. This action of the Board was ratified by the
Does the demand of the Company tally with the concept of stockholders by unanimous vote of the stockholders at a
a Voting Trust Agreement? Explain briefly your answer. proper meeting. The creditors of the corporation sued the
subscribers for their unpaid subscriptions. Can the creditors
Answer: No. The demand of the Company does not tally with recover? Reason
the concept of a Voting Trust Agreement. The Voting Trust
Agreement does not entitle the trustee to possession and Answer: Yes, the creditors can recover from the subscribers
control of the properties of the corporation. Neither does it the latter’s unpaid subscriptions. Condonation of the
vest management of the corporation on the trustee. The obligation to pay the subscription price violates the Trust
Voting Trust Agreement merely conveys to the trustee the Fund Doctrine because it reduces the amount that is
right to vote the shares of grantor/s (1992 Bar) supposed to be held in trust for them. The same is prejudicial
to the rights and interests of the creditors of the corporation.
TITLE VII (1971 Bar)
STOCKS AND STOCKHOLDERS
2. Ms. Z subscribed to 100 shares of stock of 3D Corporation
1. Q College, Inc. offered 200 shares to Ms. DC for a with par value of P100.00 each, paying P2,500.00 on her
subscription price of P20.000.00. The offer is stated in a subscription. Subsequently, Ms. Z asked Mr.Y, the President
subscription letter form that states that initial payment of the corporation, to release her from her subscription.
should be made and the subsequent payment should be in Mr. Y consented provided that Ms. X forfeits to the
accordance with the terms and conditions of the college. company what she had already paid. Ms. Z agreed and Mr. Y
Later, Ms. DC, instead of sending the subscription form, sent gave her a Certificate of Release. Not long afterwards, 3D
a letter to the Board of Trustees of Q College which states: Corporation went into insolvency and an assignee was
“Please enter my subscription to dalawang daan (200) appointed. The assignee now seeks to collect from Ms. Z the
shares of your capital stock with a par value of P100 each.
unpaid balance of her subscription. Decide the dispute with insolvent because the trust fund is now necessary to
reasons. discharge corporate liabilities. (1988 Bar)

Answer: Ms. Z is liable. The unpaid subscription becomes due 1. Mercy subscribed to 1,000 shares of stock of Rosario
the moment the corporation is declared insolvent. Hence, the Corporation. She paid 25% of said subscription. During the
assignee of the insolvent corporation is well within his right stockholders’ meeting, can Mercy vote all her subscribed
to collect from Ms. Z the unpaid balance of her subscription. shares? Explain your answer.
The release made by the President is invalid, because under
the Trust Fund Doctrine, the capital stock of the corporation Answer: Yes. Section 72 of the Corporation Code (now
constitutes a fund to which the creditors have a right to look Section 71 of the RCCP) provides that full payment of
up to for the satisfaction of their claims. Hence, the unpaid subscription is not required to make one a stockholder and
subscription is part of the amount that can be used to pay the holders of non-delinquent shares shall have all the rights of a
obligations of the insolvent corporation. (1979 Bar) stockholder. There is no showing in this case that Mercy holds
delinquent shares. Mercy is, thus, entitled to all the rights of
1. Assume that you want to be a participant in the business a stockholder upon the perfection of the subscription
independently of your being its legal counsel, and that more agreement, which rights include the right to vote during the
investors are expected after the firm is formally organized. stockholders’ meeting. (1990 Bar)
Explain briefly with legal reasons. Citing the proper law or
laws, how may you lawfully charge your fee and apply them 2. A small stockholder of a Bank filed a suit praying for
to the payment of your share in the capital of the firm? injunction to prevent the approval of the appointments of
two persons whom he claimed were being appointed to
Answer: I may use the chargeable fee as payment for shares their positions only for the purpose of shielding from
in the corporation provided that the corporation ratifies or criminal prosecution the controlling stockholder, alleged to
adopts the agreement for the services that I rendered before be committing fraud in the bank affairs. Defendants were
incorporation. Section 61 of the RCCP provides that the Board of Directors of the Bank, the two persons, whose
consideration for the issuance of stock may be, among other appointments were being questioned, and the controlling
enumerated items, “labor performed for or services actually stockholder of the bank. These defendants moved to dismiss
rendered to the corporation.” Compensation for services the suit on the ground that a mere stockholder is not
actually rendered to the corporation is credit that is property allowed to question the appointments because they were
with ascertainable value. Hence, I can continue to perform corporate acts. Should the case be dismissed?
services for the company after its organization and thereafter
ask as payment shares in the corporation. With respect to the Answer: No. A stockholder has the right to file a derivative
services performed prior to incorporation, the agreement suit to question the appointments. The directors cannot be
with the incorporators or promoters is not necessarily binding expected to nullify the appointments; hence, a stockholder
on the corporation. The corporation can however ratify the can bring a derivative suit on behalf of the corporation. It
same. In such a case, the services can then be used as would be futile for the stockholder to ask the Board to bring
consideration for shares in the corporation. (1973 Bar) the suit because said Board was the one responsible for the
questioned appointments. (1975 Bar)
1. Mr. Balimbing signed a written subscription for 100
shares of stock of Laban and Co., paying 25% of the amount 3. A group of stockholders of Sesame Corporation filed a
thereof. The corporation subsequently became insolvent court suit against the members of the Board of Directors to
due to a series of financial reverses. Mr. Balimbing make good to the shareholders, in proportion to their
demanded from the Corporate Secretary the stock shareholdings, the losses incurred by the corporation
certificates corresponding to 25 shares which he claimed because of the defendant Board of Directors’ management.
was already paid. Since the corporation was insolvent. Mr. Will the action prosper? Reasons.
Balimbing refused to pay for his remaining unpaid
subscription. Answer: No. The action will not prosper. The shareholders
(a) Can the Corporate Secretary validly refuse to issue stock have no right to the corporate assets until liquidation. Hence,
certificates in the name of Mr. Balimbing for 25 shares they cannot ask for shares in whatever is due to the
despite the payment of 25% of the subscription of 100 corporation. Moreover, even if there is a cause of action
shares? Reasons. against the directors, the proper party to file the case is the
corporation. The shareholders may file a derivative suit but
Answer: Yes. The Corporate Secretary validly refused to issue the reliefs should be in favor of the corporation. (1988 Bar)
the stock certificate. No certificate of stock shall be issued
unless the full amount of the subscription is paid. Since Mr. 4. “A" became stockholder of Prime Real Estate Corporation
Balimbing paid only 25% of the subscription price, he cannot (PREC) on July 10, 1991, when he was given one share by
demand the issuance of the certificates another stockholder to qualify him as director. “A” was not
reelected director in July 1,1992 annual meeting but he
(b) Is Mr. Balimbing correct in refusing to pay for the continued to be a registered shareholder of PREC. When he
remaining shares, the Company being already insolvent? was still a director, “A” discovered that on January 5, 1991,
Reasons PREC issued free of charge 10,000 shares to “X,” a lawyer
who assisted in a court case involving PREC.
Answer: No. Mr. Balimbing has no right to refuse to pay the
balance of the subscription price. The subscribed capital is (a) Can “A" now bring an action in the name of the
deemed to be held in trust for the creditors of the corporation to question the issuance of the shares to “X”
corporation. While as a rule, a call is necessary to make the without receiving any payment?
obligation to pay due and demandable, the same is not
necessary if the corporation becomes insolvent. The Answer: No. It is required for the filing of a derivative suit
obligation to pay arises when the corporation becomes that the person who initiates the suit was a stockholder at
the time of the transaction in question. The transaction in
question was entered into before Mr. A became a ownership of the shares by virtue of the assignment made
shareholder. However, if the act complained of is a by “A.” Who has the better right?
continuing one, A may file the derivative suit. It does not
appear that the act is a continuing one in this case. Answer: C* has the better right. A transfer of shares is not
binding on the corporation if the same is not registered in the
(b) Can “X" question the right of “A” to sue him in behalf of books of the corporation. Thus, the transfer must first be
the corporation on the ground that “A” has only one share registered in the name of the transferee in the books of the
in his name? corporation before he can maintain an action for dividends.
(See Section 62, RCCP, previously Section 63, Corporation
Answer: No. The right to file a derivative suit pertains to all Code)
shareholders. Even a shareholder owning one share is
entitled to such right. However, as between “C” and “B,” the transfer is already
valid because the transfer is binding on the parties and their
(c) Can the shares issued to “X” be considered as watered successors in interest. Thus, “B” can file an action against “C”
stock? to recover the dividends. (1981 Bar)

Answer: No. Watered shares are those sold by the 2. Mr. Cruz purchased from Mr. Guzman shares of stock of a
corporation for less than the par or book value. In the instant mining corporation, which shares were covered by several
case, there must be proof that the value of the services certificates indorsed in blank by Mr. Virgilio Malic in whose
rendered by “X” is less than the total par value of the shares name the same was registered in the books of the
issued in his name in order for such shares to be considered corporation. It was later discovered that the said shares
as watered stocks. (1993 Bar) have not been sold or otherwise disposed of by Mr. Virgilio
Malic, but had been stolen from where they were kept. Who
5. The Board of Directors of P Corporation approved a is entitled to said shares, Mr. Cruz or Mr. Malic? Reason.
resolution authorizing the acquisition of up to 100% of the
common stocks of J Corporation. The Board specifically Answer: Mr. Malic is entitled to the shares. The transfer to
appointed one of its Directors, Mr. S, to act as attorney-in- Mr. Cruz is not valid because it was not sanctioned by Mr.
fact and proxy who could vote all the shares of P Malic. Transfer by Mr. Guzman of the shares to Mr. Cruz
Corporation in J Corporation. Mr. S, by virtue of such power, confers no title because the former has no title to the shares
was able to constitute the Board of J Corporation. The Board In addition, the Corporation Code, now the RCCP. provides
of P Corporation likewise approved that the payment ofthe that no transfer of the shares of stock shall be valid, except as
shares ofJ Corporation shallbe made by transferring the real between the parties, until the transfer is recorded in the
property of P Corporation to J Corporation. books of the corporation. The transfer was not registered in
The property to be transferred constitutes substantially all the name of Mr. Cruz; it follows that the transfer allegedly
of the assets of P Corporation. The decision of the Board effected by Mr. Guzman to Mr. Cruz, is not valid even against
was later ratified by the stockholders representing 74% the Corporation (Section 62 Der Los Santos vs. McGrath)
ofthe outstanding capital. However, before the
stockholders’ meeting where such ratification was made, 3. Ricci has in her name 1,000 shares of the capital stock of
the minority stockholders filed a derivative suit asking the CORPO Corporation as evidenced by a stock certificate. Eddy
Court to declare null and void the resolution of the Board. delivered the stock certificate to Erica, who now claims to
Will the action prosper? be the real owner of the shares, having paid for Ricci’s
subscription. CORPO Corporation refused to recognize and
Answer: (basin mugawas taas kaayo ni na case katong register Erica's ownership. Is the refusal justified? Explain
gireport ni boyet)
No, the action will not prosper. The action of the minority Answer: The refusal of CORPO to recognize and register
shareholders should be dismissed for being moot and Erica’s ownership is justified. For a transfer to be valid and
academic. Where the issues have become moot and binding on the corporation the share must be indorsed by the
academic, there is no justiciable controversy, thereby owner or his agent and the transfer must be recorded in the
rendering the resolution of the same of no practical use or books of the corporation. The stock certificate for the 1,000
value. Since the resolution of the Board was ratified by the shares in question is in the name of Ricci and it does not
stockholders, the acquisition by P Corporation of J appear that the same was duly endorsed by Ricci at the time
Corporation is no longer just the act of the Board but also of it was delivered to Erica. (1996 Bar)
the stockholders. By ratification, even an unauthorized act of
an agent becomes the authorized act of the principal. To 4. “A” is the registered owner of Stock Certificate No.
declare the resolution null and void will serve no practical use 000011. He entrusted the possession of said certificate to
or value or affect any of the rights of the parties because the his best friend "B” who borrowed the said endorsed
approval of the stockholders will still remain valid and certificate to support B's application for passport (or for a
binding. (Cua, Jr. v. Ocampo) purpose other than transfer). But “B” sold the certificate to
“X,” a bona fide purchaser who relied on the endorsed
1. “A”, stockholder of X Corporation assigns his shares of certificates and believed him to be the owner thereof
stock to “B” for a valuable consideration. The certificate of
stock was thereupon delivered to “B”. A few days later, “A” (a) Can “A” claim the shares of stocks from “X”? Explain
died. The heirs of “A” in a Deed of Extrajudicial Partition
adjudicated his shares of stock to his son”C”. In the Answer: No, A may not claim the shares from “X”. A estopped
meantime, X Corp declared cash dividends and sent the from questioning the transfer. “A” placed “B” in such a
corresponding notice to A’s address. “A” being the position that it appeared to third parties that he (“B”) is the
registered owner of the shares of stocks in the books of the owner of the shares. The certificate of stock covering said
corporation, “C” received the notice and by virtue of the shares was duly endorsed by “A” and entrusted by him to
aforestated Deed of Partition claimed payment of the “B.”
dividend. “B” likewise claimed payment, asserting
(b) Would your answer be the same if “A” lost the stock Sports Club, Inc. v. Cecile H. Cheng, et al., G.R. No. 178523,
certificate in question or if it was stolen from him? June 16, 2010)

Answer: No, the answer would not be the same. Article 559 TITLE VIII
of the New Civil Code provides that one who has lost any CORPORATE BOOKS AND RECORDS
movable or has been unlawfully deprived thereof, may
recover it from the person in possession of the same. In the 1. A owns 100 out of 10,000 shares in the Manufacturers’
present case, if the certificate of stock was lost or stolen from Rank He filed a suit against B for damages due to an alleged
“A,” “A” has a right to claim the certificate of stock from the breach of contract. A secures a favorable judgment against B
thief, or the latter’s transferee, who has no right or title to but fails to obtain full satisfaction thereof. A receives a tip
the same. (2001 Bar) that B has a big time deposit with Manufacturers’ Bank. B is
not aware that A is stockholder in the said bank. A goes to
5. On October 20, 1994, the Board of Directors of MSC, Inc., the bank and demands the right to inspect the records of
adopted a resolution authorizing the sale of 19 unissued the bank to find out whether B has indeed such a time
shares at a floor price of P400,000.00 and P450,000.00 per deposit and how much. The bank manager refuses to accede
share for Class A and B, respectively. On July 7. 1995, Mr. H to his demand. A threatens to sue him on the ground that as
expressed his interest to buy a share and requested that his a stockholder of the corporation, he is given by the RCCP the
name be included in the waiting list. In November 1995, M right to inspect all the books of the corporation. Is A entitled
Corporation likewise expressed interest in acquiring a share to look at the bank’s records of deposits? Explain.
of MSC and one Class “A” was acquired for Pl,800,000.00
through Urban Bank. The certificate was actually issued only Answer: No. A stockholder’s right to inspect does not cover
on January 5, 1996. inspection of bank accounts. The Secrecy of Bank Deposits
Law makes all bank deposits of whatever nature absolutely
On December 15, 1995, the Deed of Absolute Sale was confidential in nature and the same may not be inquired into
executed by MSC and M Corp, for such purpose. On by any person except under specified circumstances. The
December 27, 1995, M Corporation sent a letter to MSC circumstances herein involved do not fall under any of the
giving notice of its offer to resell the share and for MSC to exceptions under the Bank Secrecy Law. Independent of the
exercise its pre-emptive right under the By-Laws. It appears foregoing, the purpose of the inspection is likewise not
that while the sale between MSC and M Corp was still under acceptable because it is alien to all the other rights ofthe
negotiations, there were negotiations between M Corp, and shareholder. (1983 Bar)
Mr. H for the purchase by the latter of a share. On
November 24,1995, Mr. H paid M Corp. Pl,400,000.00. 2. Petitioner who is a stockholder of Bilmoko Corporation
Another payment of Pl,400,000.00 was made by Mr. H to M wanted to examine the books and records of a foreign
Corp, on December 27, 1995, to complete the purchase price subsidiary wholly owned by Bilmoko Corporation. The books
ofP2,800,000.00. On February 7,1996, MSC was advised of and records of the foreign subsidiary were in the possession
the sale by M Corp, to Mr. H. MSC thereafter filed an action of Bilmoko Corporation. The latter’s board of directors
for damages alleging that M Corp, should be made to pay refused to allow the petitioner to examine the said books
the sum of P1.000,000.00 to MSC, representing the amount and records, contending that the foreign subsidiary is a
MSC had been allegedly defrauded, together with interest separate and distinct corporation domiciled in another
and damages. Will the action prosper? country; hence, the petitioner was not within the class of
persons having an interest in the operations of the foreign
Answer: No, the action will not prosper. Undeniably, on subsidiary.
December 27, 1995, when M Corporation offered for sale one
Class “A” share of stock to MSC for the price of a. Decide the case.
P2,800,000.00 for the latter to exercise its pre-emptive right Answer: The case should be decided in favor of the
it legally had the right to do so since it was already an owner petitioner. The right of a stockholder to inspect the books and
of a Class “A” share by virtue of its payment on November records of a corporation extends to a subsidiary wholly
28,1995, and the Deed of Absolute Share dated December 15, owned by the corporation. It is in consonance with equity,
1995, notwithstanding the fact that the stock certificate was good faith and fair dealing if the right of the shareholder will
issued only on January 5,1996. A certificate of stock is the be so extended.
paper representative or tangible evidence of the stock itself
and of the various interests therein. The certificate is not a b. What are the limitations on a stockholder’s right to
stock in the corporation but is merely evidence of the inspect corporation books and records?
holder’s interest and status in the corporation, his ownership Answer: The shareholder's right to inspect the corporate
of the share represented thereby. It is not equivalent to book may be exercised only if the following are present:
ownership under the law. It expresses the contract between (1) When it is exercised at reasonable hours on business days;
the corporation and the stockholder, but is not essential to (2) When the stockholder has not improperly used any
the existence of a share of stock or the nature of the relation information he secured through any previous examination;
of shareholder to the corporation. M Corp, properly complied and
with the requirement of the By-Laws on MSC’s pre-emptive (3) When the demand is made in good faith or for a
rights. MSC failed to repurchase the Class "A” share from M legitimate purpose.
Corp Hence, absent any of the foregoing, the corporation can deny
the stockholder’s exercise of the right to inspect corporate
Neither can MSC argue that M Corp, was not yet a registered books or records.-(1988 Bar)
owner of the share of stock when the latter offered it for
resale, in order to void the transfer from M Corp, to Mr. H. 3. Don Mariano was able to secure a favorable judgment
The corporation’s obligation to register is ministerial upon the against Nestor Pe for recovery of a sum of money and the
buyer's acquisition of ownership of the share of stock. The said judgment had become final and executory. Don
corporation, either by its board, its By-Laws, or the act of its Mariano was informed by someone that Nestor Pe might
officers, cannot create restrictions in stock transfers. (Makati have a sizable savings deposit with Xena Commercial Bank,
of which Don Mariano was a stockholder, with one share 1. The Articles of Incorporation of X Corporation provides
registered in his name. Immediately, he rushed to the Bank that preferred shares shall earn cumulative dividends of 6%
and demanded from the Bank Manager that he be shown to 16% as the Board may determine. Assume that the
the Bank records to see if Nestor Pe really had such savings delegation of power to the Board is valid. Can a shareholder
deposit. When the Bank Manager refused and invoked exercise an appraisal right every time the Board declares
Republic Act No. 1405, Don Mariano cited his right as a dividends and fixes the rate thereof within the limitations
stockholder to inspect corporate records. Is the stand of the provided for in said By-Laws provision?
Bank Manager legally tenable? Explain.
Answer: No, the appraisal right does not arise each time that
Answer: Yes, the stand of the Bank Manager is legally the Board of Directors fixes the terms and conditions of the
tenable. A stockholder has the right to inspect the corporate preferred shares considering that such authority was given to
books under Section 73 of the RCCP. However, the right to them at the outset and such delegation is not unlimited (if
inspect the books of a corporation is subject to special law, and when revised) and would not change or restrict the rights
like Republic Act No. 1405 or the Bank Deposit Secrecy Law of the stockholders or class of shares or create preferences in
which operates as an exception to the general rule. (1985 any respect superior to those of the outstanding shares of
Bar) any class. (SEC Opinion. January 11, 1982)

TITLE IX 2. The Board of Directors of P Corporation approved a

MERGER AND CONSOLIDATION resolution authorizing the acquisition of up to 100% of the
common stocks of J Corporation. The Board specifically
1. Two corporations agreed to merge. They then executed appointed one of its Directors, Mr. S, to act as attorney-in-
an agreement specifying the surviving corporation and the fact and proxy who could vote all the shares of P
absorbed corporation. Under the agreement of merger Corporation in J Corporation. The Board likewise approved
dated November 5, 1998, the surviving corporation acquired that the payment of the shares shall be made by
all the rights, properties and liabilities of the absorbed transferring the real property of P Corporation. The
corporation. property to be transferred constitutes substantially all of
the assets of the corporation. The decision of the Board was
(a) What would happen to the absorbed corporation? Must later ratified by the stockholders representing 74% ofthe
the absorbed corporation undertake dissolution and outstanding capital. However, before the stockholder’s
winding up procedures? Explain your answer. meeting where such ratification was made, the minority
stockholders filed a derivative suit asking the Court to
Answer: No. It is not necessary for the absorbed corporation declare null and void the resolution of the Board.
to undertake dissolution and winding up procedure. Once the
merger is approved by the SEC, the absorbed corporation is (a) Was appraisal right available?
automatically dissolved and its assets and liabilities are Answer: Yes, appraisal right was available. The decision of the
acquired and assumed by the surviving corporation. Board is in the nature of investment of corporate property in
another corporation. Section 42 of the Corporation Code
(b) Pending the approval of the merger by the SEC, may the (now Section 41 of the RCCP) expressly provides an appraisal
surviving corporation already institute suits to collect all right to all dissenting stockholders in actions of such nature.
receivables due to the absorbed corporation from its In addition, the existence of an appraisal right is provided for
customers? Explain your answer under paragraph (2) of Section 81 of the Corporation Code
(now Section 80 of the RCCP) because P Corporation decided
Answer: No. The approval of the SEC is the operative act that to transfer substantially all of the properties of the
makes the merger effective. Before approval by the SEC of corporation
the merger, the two corporations involved in the merger are
still separate and distinct from each other. (b) The minority shareholders claimed that the appraisal
right was not available because appraisal right may be
(c) A case was filed against a customer to collect on the exercised only by stockholders who had voted against the
promissory note issued by him after the date of the merger proposed action. Is the contention tenable?
agreement. The customer raised the defense that while the
receivables as of the date of the merger agreement were Answer: No, the contention is not tenable. The minority
transferred to the surviving corporation, those receivables stockholders themselves caused the unavailability of the
which were created after the merger agreement remained appraisal right by filing their complaint even before the
to be owned by the absorbed corporation. These receivables Resolution of the Board could be presented to the
would be distributed to the stockholders conformably. with stockholders of P Corporation for approval or rejection. (Cua,
the dissolution and liquidation procedures under the RCCP. Jr. u. Ocampo Tan, G.R. Nos. 181455-56and 182008,
Discuss the merits of this argument. December 4, 2009)

Answer: The argument is not meritorious. The receivables 3. In a stockholders’ meeting, S dissented from the
pertain to the surviving corporation whether or not the same corporate act converting preferred voting shares to non-
were incurred by the absorbed corporation before or after voting shares. Thereafter, S submitted his certificates of
the merger agreement, or before or after the approval stock for notation that his shares are dissenting. The next
thereof by the SEC. Section 79 of the RCCP does not make any day, S transferred his shares toT to whom new certificates
distinction as to the assets and liabilities of the absorbed were issued. Now, T demands from the corporation the
corporation that the surviving corporation would inherit. payment of the value of his shares. Can T exercise the right
(1999 Bar) of appraisal? Reason briefly.

TITLE X Answer: No, T cannot exercise the right of appraisal.

APPRAISAL RIGHT Appraisal right ceased. Section 85 of the RCCP provides that if
the shares represented by the certificates bearing a notation
that they are dissenting shares are transferred, and the
certificates are consequently canceled, the rights of the
transferor, like S, as a dissenting stockholder shall cease and
the transferee, like T, shall have all the rights of a regular TITLE XII
stockholder; and all dividend distributions that would have CLOSE CORPORATIONS
accrued on such shares shall be paid to the transferee. In
addition, it is also required that the appraisal right is 1. Ten classmates, all graduates of Class ’78 of the Los Banos
exercised by any stockholder who voted against the proposed School of Agriculture and Husbandry, decided to form
corporate action. T was not the one who voted for the action. “Gatas Atbp., Inc.” the principal purpose of which is to
(2007 Bar) produce, package, and sell carabao’s milk. The Articles of
Incorporation provided, among others, that the business of
TITLE XI the corporation shall be managed by the stockholders of the
NON-STOCK CORPORATIONS corporation rather than by a board of directors and restricts
the transfer of shares to outsiders.
1. The members of ABC Corporation, a non-stock
corporation, contributed an amount for a corporate activity. One ofthe ten classmates, Mr. Sakit-ulo, disgruntled atthe
However, the total amount that was contributed was more way the affairs of the corporation was being handled,
than sufficient for the activity; hence, a balance of demanded that all the ten stockholders meet to elect
P500,000.00 was left with the corporation. There is a directors. Meanwhile, Ms. Sakit-tiyan, sued all the ten
proposal to offset the unused contribution against the classmates-stockholders for damages for violation of the
balance of the receivables from the members. Is the Food, Drugs Cosmetics Act — a cockroach was found in the
proposal in accordance with law? milk she drank, the package of which bore the inscription
“produced, packaged, and sold by Gatas Atbp., Inc.
Answer: No. The offsetting will amount to distribution of the
assets of the corporation. The properties of a non-stock (a) Can Mr. Sakit-ulo demand that a stockholders' meeting
corporation cannot be distributed and the members cannot be called to elect directors of the corporation?
reduce the corporate capital unless the corporation is
dissolved. Receivables from the members are considered Answer: No. Gatas Atbp., Inc. is a close corporation, and its
assets of the corporation and may not therefore be Articles of Incorporation can provide that the business of the
distributed. (SEC Opinion, November 27, 1985) corporation be managed by the stockholders rather than by a
board of directors. Thus under Section 96 of the RCCP, the
2. The AB Memorial Foundation, Inc. was incorporated as a provision that makes the stockholders managers, precludes
nonprofit, non-stock corporation in order to establish and Mr. Sakit-ulo from demanding that the stockholders meet in
maintain a library and museum in honor of the deceased order to elect directors of the company.
parents of the incorporators. Its Articles of Incorporation
provides for a Board of Trustees composed of five (b) Does Ms. Sakit-tiyan have a cause of action against all
incorporators, which is authorized to admit new members. the ten classmates-stockholders, albeit no negligence has
The Articles of Incorporation also allows the foundation to been proven?
receive donations from members. As of January 30,1993, 60
members had been admitted by the Board of Trustees. Answer: Yes. Ms. Sakit-tiyan has a cause of action against the
stockholders. The stockholders who are managers of the
(a) Can the Foundation use the funds donated to it by its close corporation are liable for corporate torts. Said
members for the purchase of food and medicine for stockholders are made personally liable for corporate torts
distribution to the victims of the Pinatubo eruption? unless the corporation has obtained reasonably adequate
Answer: Yes, as long as the amount of donation is liability insurance. Negligence need not be proven to warrant
reasonable, the donation is allowed under Section 35(i) of the liability by manufacturers of foodstuff under Article 2187
RCCP because the liability under the same provision is in the nature
of strict liability. (1988 Bar)
(b) Can the Foundation operate a specialty restaurant that
caters to the general public in order to augment its funds? 2. Mr. A a member of the board of directors of XYZ
Corporation, a close corporation, engaged the services of
Answer: The action is ultra vires. The purposes of the Mr. X to provide technical service to the corporation. No
corporation are limited to the establishment and meeting was held to approve the contract with Mr. X.
maintenance of the library and museum as stated in the However, all directors signed the contract. Can the contract
problem; thus, the foundation cannot operate a specialty be questioned on the ground that there was no approval by
restaurant that caters to the general public. However, it may the board in a meeting called for such purpose?
also be possible to establish that the act of the corporation is
justified by showing that the restaurant’s purpose is to raise Answer: No. The contract cannot be questioned on such
funds to support the library and museum ground. Section 100 of the RCCP provides that any action by
the directors of a close corporation without a meeting shall
(c) One of the original trustees died while two others nevertheless be deemed valid if, among other cases, before
resigned because they immigrated to the United States. or after such action is taken, written consent of the action
How will the vacancies in the Board of Trustees be filled? taken is signed by all the directors. In this case, all the
directors signed the contract; hence, the same partakes of
Answer: There is no quorum to do business because there the nature of a written consent that makes a meeting of the
are only two members of the Board of Trustees remaining. directors no longer necessary
Consequently, the vacancies will have to be filled up in a
special meeting of the members. (Section 28, RCCP; 1993 Bar) 3. The stockholders of ABC Corporation, a corporation
organized as a close corporation, were sued by an
employee, Mr. X, for separation pay. At that time the
stockholders are the ones managing the close corporation. TITLE XIV
The stockholders do not dispute that the separation pay was DISSOLUTION
unlawfully withheld. However, they invoke the doctrine to
separate personality in support of their position that they 1. “X" Corporation brought an action against Y for the
are not liable. Are the stockholders liable? collection of a sum of money. Y set up the defense that X
had no legal capacity to sue because it was no longer in
Answer: Yes, the stockholders are liable. The fifth paragraph existence a week before the suit was filed. The stockholders
of Section 99 of the RCCP specifically imposes personal held a meeting whereat a resolution was adopted
liability upon the stockholders who are actively managing or unanimously dissolving said corporation. Is the defense
operating the business and affairs of the corporation. This valid? Give reasons
covers cases involving tort liability. Tort under Section 99
consists in the violation of a right given or the omission of a Answer: No, the defense is not valid. In the first place, the
duty imposed by law. In this case, there was an omission of a SEC has not yet approved the dissolution. Secondly, even if
duty to pay separation pay. (Serio F. Naguiat v. NLRC, et al.. there was a duly approved dissolution, the corporate
G.R. No. 116123, March 13, 1997, 269 SCRA 564) existence does not automatically cease. The corporation has
three years after dissolution to liquidate its affairs. (1968 Bar)
4. Rafael inherited from his uncle 10,000 shares of Sta. Ana
Corporation, a close corporation. The shares have a par 2. “X” Corporation shortened its corporate life by amending
value of P10.00 per share. Rafael notified Sta. Ana that he its articles of incorporation. It has no debts but owns a
was selling his shares at P70.00 per share. There being no prime property located in Quezon City. How would the said
takers among the stockholders, Rafael sold the same to his property be liquidated among the five stockholders of said
cousin Vicente (who is not a stockholder) for P700,000.00. corporation? Discuss two methods of liquidation.

The Corporate Secretary refused to transfer the shares in Answer: The prime property of “X” Corporation can be
Vicente’s name in the corporate books because Alberto, one liquidated among the five stockholders through any of the
of the stockholders, opposed the transfer on the ground following modes: (1) liquidation through the Board of
that the same violated the by-laws. Alberto offered to buy Directors; (2) liquidation through a trustee to whom the
the shares at P12.50 per share, as fixed by the by-laws or a properties are conveyed; and (3) liquidation through a
total price of P125,000.00 only. receiver. The board, the trustee, or the receiver as the case
may be will then convey the property and distribute it among
While the by-laws of Sta. Ana provides that the right of first the creditors after paying the corporate debts. It is submitted
refusal can be exercised “at a price not exceeding 25% more that the specific property may either be sold and the
than the par value of such shares,” the Articles of proceeds thereof distributed to the stockholders after paying
Incorporation simply provides that the stockholders of corporate debts or they may actually physically divide the
record “shall have preferential right to purchase said property if no creditor will be affected. (2001 Bar)
shares.” It is silent as to pricing.
3. “Acme Corporation" filed a complaint for collection
Is Rafael bound by the pricing proviso under the by-laws of against “D.” While the case was pending, Acme Corporation
Sta. Ana Corporation? amended its Articles of Incorporation to shorten its terms of
existence up to December 31, 2015. The Securities and
Answer: Yes. In a close corporation, the restriction as to the Exchange Commission approved the amendment. The trial
transfer of shares has to be stated/annotated in the Articles court, however, was not notified thereof, so that the
of Incorporation, the By-Laws, and the Certificate of stock. proceedings therein continued until May 5, 2016, when “D,”
This serves as notice to the person dealing with such shares learning of the dissolution, questioned the personality of
like Rafael in this case. With such notice, he is bound by the the corporation to continue prosecuting the case. “D”
pricing stated in the By Laws. (1994 Bar) alleged that since the corporation had already been
dissolved, but had not taken steps to wind up its affairs and
5. Robert, Rey, and Ben executed a joint venture agreement transfer its assets to a trustee or assignee within the three-
to form a close corporation under the Corporation Code, the year period under the law, it had ceased to exist for all
outstanding capital of which the three of them would purposes. Decide the case with reasons
equally own. They also provided therein that any corporate
act would need the vote of 70% of the outstanding capital Answer: D’s” contention is untenable. If there is still a
stock. The terms of the agreement were accordingly pending case when the three (3) year period to liquidate
implemented and the corresponding close corporation was expired and there is no trustee that is appointed, the counsel
incorporated. After three years, Robert, Rey, and Ben could of the corporation who prosecuted and represented the
not agree on the business in which to invest the funds of the interest of the corporation may be considered a trustee of
corporation. Robert wants the deadlock broken. What are said corporation with respect to the same case and he can
the remedies available to Robert under the RCCP to break continue to represent the corporation. (Gelano v. Court of
the deadlock? Explain. Appeals, G.R. No. L-39050, February 24, 1981) (1981 Bar)

Answer: Robert can petition the SEC to arbitrate the dispute. 4. The corporation, once dissolved, thereafter continues to
Under Section 103 of the RCCP, if the directors or be a body corporate for three years for purposes of
stockholders are so divided respecting the management of prosecuting and defending suits by and against it and of
the corporation’s business and affairs that the votes required enabling it to settle and close its affairs, culminating in the
for any corporate action cannot be obtained, with the final disposition and distribution of its remaining assets. If
consequence that the business and affairs of the corporation the three-year extended life expires without a trustee or
can no longer be conducted to the advantage of the receiver being designated by the corporation within that
stockholder, the SEC shall have the power to arbitrate the period and that time (expiry of the three-year extended
dispute. (1995 Bar) term), the corporate liquidation is not yet over, how, if at
all, can a final settlement ofthe corporate affairs be made?
 (1) The creation of the SEN accounts to be able to participate
Answer: The final settlement can be made through the Board in the network, which will take place in the Philippines;
of Directors. The members of the Board of Directors can (2) The offering for sale and sale ofthe online content services
continue with the winding of the corporate affairs until final of SEN, which will be made to the SEN account holder who is
liquidation. They can act as trustees or receivers for this in the Philippines;
purpose. (1997 Bar) (3) The funding of the online wallet, which shall be in the
Philippines;
5. The Securities and Exchange Commission approved the (4) The payment of the sale, which will be in the Philippines;
amendment of the Articles of Incorporation of GHQ (5) The delivery of the online contents or services, which will
Corporation shortening its corporate life to only 25 years in also be in the Philippines
accordance with Section 136 of the RCCP. As shortened, the
corporation continued its business operations until May 30, SRC
2019, the last day of its corporate existence. Prior to said
date, there were a number of pending civil actions, of 1. X Corporation is engaged in a scheme whereby an
varying nature but mostly money claims filed by creditors, investor is required to become a Business Center Owner
none of which was expected to be completed or resolved (BCO) who must fill-up and sign its application form. The
within five years from May 30, 2019. If the creditors had Terms and Conditions printed at the back of the application
sought your professional help at that time about whether or form indicate that the BCO shall mean an independent
not their cases could be pursued beyond May 30, 2019, representative of Power Homes, who is enrolled in the
what would have been your advise? company’s referral program and who will ultimately
purchase real property from any accredited real estate
Answer: I will advise them that the cases could be pursued developers and as such he is entitled to a referral
beyond the last day of the corporate existence. Although bonus/commission. Paragraph 5 of the same indicates that
Section 139 of the RCCP provides that the corporation there exists no employer/employee relationship between
continues to be a body corporate for three years after its the BCO and the Power Homes Unlimited, Corp. The BCO is
dissolution for the purpose of prosecuting and defending required to pay US$234 as his enrollment fee. His
suits by and against it and for enabling it to settle and close enrollment entitles him to recruit two investors who should
its affairs, the expiration of the said period does not mean pay US$234 each and out of which amount he shall receive
that the pending cases will be terminated. Pending suits upon US$92. In case the two referrals/enrollees would recruit a
the expiration of the three-year period after its dissolution minimum of four (4) persons, each recruiting two (2)
may be prosecuted by the lawyer who is handling the cases persons who become his/her own down lines, the BCO will
and the latter will act as the trustee for such purpose. (2000 receive a total amount of US$147.20 after deducting the
Bar) amount of US$36.80 as property fund from the gross
amount ofUS$184. After recruiting 128 persons in a period
TITLE XV of eight (8) months for each Left and Right business groups
FOREIGN CORPORATIONS or a total of 256 enrollees whether directly referred by the
BCO or through his down lines, the BCO who receives a total
1. SCEH is a corporation organized in Hong Kong and amount of US$11,412.80 after deducting the amount of
operates a network system (referred to as SEN) in several US$363.20 as property fund from the gross amount of
countries. Its servers are in the United States while its US$11,776, has now an accumulated amount of US$2,700
employees are in Hong Kong. SEN is an online platform that constituting as his Property Fund placed in a Property Fund
offers various contents and services including online account with the Chinabank. This accumulated amount of
community and gaming system. A person who wants to US$2,700 is used as partial/full down payment for the real
participate must create a SEN account. Hence, even if SCEH property chosen by the BCO from any of [petitioner’s]
has no physical presence in the country, people, in the accredited real estate developers. Is X Corporation involved
Philippines can also participate by creating accounts. A SEN in the distribution of securities?
account holder can buy content and services from SEN only
by using funds from an associated SEN online wallet, which Answer: Yes, X Corporation is engaged in the business of
can be funded by using a credit, debit or prepaid card sold in distributing securities in the form of investment contract. To
the Philippines through independent contractors. SCEH also be a security subject to regulation by the SEC, an investment
markets its products through independent contractors. Is contract must be proved to be: (1) an investment of money,
SCEH doing business in the Philippines? (2) in a common enterprise, (3) with expectation of profits,
and (4) primarily from efforts of others. In this case, what
Answer: Yes, SCEH is doing business in the Philippines and BCO is really acquiring is the possibility of deriving money
consequently it must secure a license to do business. The from the sale of the plans. Once an individual has purchased a
applicable rule is the Twin Characterization Test, which Plan, he turns his efforts toward bringing others into the
essentially means a foreign corporation is doing business if organization, for which he will receive a part of what they
the transaction is in the pursuit of the main business of the pay. His task is to bring prospective purchasers to “Adventure
foreign corporation and there is an intent to continue the Meetings.” (Power Homes Unlimited Corporation v. Securities
same. In the present case, the following indicates that SCEH is and Exchange Commission, G.R. No. 164182, February 26,
continuing the substance and body of its business in the 2008; See also 2010 Bar)
Philippines: (1) funding of the online SEN wallet; (2) offering
and selling services; (3) accepting online payments including 2. W.J. Howey Company and Howey-in-the-Hills Service, Inc.
Philippine currency; (4) marketing or advertising; (5) hiring of are corporations under direct common control and
independent contractors for advertising or marketing and for management. The Howey Company owns large tracts of
selling pre-paid cards. In addition, the following salient citrus lands. Half of the land was cultivated through Howey-
features of the online commerce will find themselves in the in-Hills Service, Inc. The other half is being offered to the
Philippines as evidenced by the use of an Internet Protocol public “to help financeadditional developments? Each
(IP) address by: prospective customer is offered both a land sales contract
and a service contract. While the purchaser is free to engage
the services of other service companies, the purchaser is US$7,000.00. Under the leaseback and management
informed that it is not feasible to invest in a grove unless agreement, purchasers received $82 per month, a 14%
service arrangements are made and the superiority of annual return. Purchasers were not involved in the day-to-
Howey-in-Hills Service, Inc. is stressed. Around 85% of the day operation of the payphones that they owned. ETS
groves that were sold are covered by contracts with Howey- selected the site for the phone, installed the equipment,
in-Hills Service, Inc. The land sales contracts provide for arranged for connection and long-distance service, collected
uniform price per fraction thereof varying in amount onlyin coin revenues, and maintained and repaired the phones.
accordance with the number of years a particular plot has Under the buyback agreement, ETS promised to refund the
been planted citrus. The land is conveyed upon full payment full purchase price of the package at the end of the lease or
through a deed. The tracts are not separately fenced and within 180 days of a purchaser’s request. The payphones did
the sole indication of several ownership is found in small not generate enough revenues for ETS to make payments
land marks. On the other hand, service contracts are required for the leaseback agreement so the company
generally for ten (10) years without the right to cancel. The depended on funds from new investors to meet its
leasehold right and full control and possession are given to obligations. Are the packages securities?
Howey-in-Hills Service, Inc. The landowner has no right to
over the fruit; he has no right to market the fruits. The Answer: Yes, the packages that were sold are securities.
service contractor is accountable only for an allocation of What is involved is a scheme whereby a person invests his
the net profits based upon a check made at the time of the money in the common enterprise and is led to expect profits
picking. All produce is pooled by the companies which do primarily through the efforts of others. In this caser, the
business under their own names. Are the contracts being investments were made on the promise of monthly income
offered by the two companies in the nature of investment on the leaseback agreement. The fact that the rate of the
contracts that are considered securities under the law? income is fixed is of no moment. There is no distinction
between fixed and variable returns. Otherwise, unscrupulous
Answer: Yes, the contracts are investment contracts that are marketers of investments could evade securities laws by
securities under the law. The companies are offering more simply picking a fixed rate of return. (Securities and Exchange
than fee simple interests in land, something different from a Commission v. Edwards, No. 02-1196, January 13, 2004, 540
farm or orchard coupled with management services. They are U.S. 1)
offering an opportunity to contribute money and to share in
the profits of a large citrus fruit enterprise managed and 5. CJH Development Corporation (CJHDC) is a duly organized
owned by the companies. They are offering this opportunity domestic corporation which is engaged in the acquisition
to persons who reside in different localities and who lack the ,development, sale, lease and management of real estate
equipment and experience requisite to cultivation, harvesting and any improvements thereon or any interest and right
and marketing of citrus products. The respective shares of the therein. CJH Suites Corporation (CJHSC), on the other hand,
purchasers are evidenced by contracts that are convenient is a wholly owned subsidiary of CJHDC which was formed
instruments of determining the shares in the profits. The primarily for the purpose of acquiring, maintaining,
resulting transfer of rights in the land is merely incidental. operating and managing hotels, inns, lodging houses,
Consequently, all the elements of a profit-seeking business restaurants and other allied businesses. On October 19,
venture are present. The investor provides the capital and 1996, CJHDC entered into a Lease Agreement (Agreement)
share in the earnings and profits; the promoter manages, with the Bases Conversion and Development Authority
controls, and operates the enterprise. Thus, investment (BCDA) for the development into a public tourism complex,
contracts are involved regardless of the legal terminology in multiple-use forest watershed and human resource
which such contracts are clothed (SEC u. W.J. Howey Co., 328 development center, of a 247-hectare property within the
U.S. 293 [1946]) John Hay Special Economic Zone in Baguio City. The fixed
annual rental for the property for the first five years was
3. T Corporation has a business plan under which it will pegged at P425,001,378.00 or five percent of Gross
assign leasehold rights over the lots and condotel units for a Revenues, whichever is higher. Thereafter, for the duration
valuable consideration and the assignees will enroll said of the lease period, the fixed annual rental shall not be
units under a management contract with T Corporation or more than P150,000,000.00 or five percent of Gross
its authorized condotel operator to undertake the leasing of Revenues, whichever is higher. Among other provisions, the
the same wherein profits will be realized and remitted to Agreement authorized CJHDC to sub-lease, develop and
the assignee on top of the guaranteed aggregate 30-day use manage the abovementioned property for a period of fifty
per year of the condotel unit. Does the scheme involve (50) years, or until 2046. It was also provided that, upon
investment contracts? expiration of the Agreement, the leased property shall
revert back to the BCDA and all the improvements thereon
Answer: Yes, the transactions are investment contracts that shall become its property
are securities under the SRC. What is involved is a scheme
whereby a person invests his money in the common Subsequently, CJHDC came up with a development plan and
enterprise and is led to expect profits primarily through the put it into effect. Part of such development plan was the
efforts of others. T Corporation is offering more than construction of two (2) condominium-hotels (condotels)
leasehold rights but also the opportunity to contribute money which it named as “The Manor” and “The Suites”. Subject to
and to share in the profits of leasing condotel units managed CJHDC’s leasehold rights under the Agreement, the
and currently owned by T Corporation. (SECOGC Opinion No. residential units in these condotels were then offered for
11-49 dated December 21, 2011) sale to the general public by means of two schemes. The
first is a straight purchase and sale contract where the buyer
4. ETS sold payphones to the public via independent pays the purchase price for the unit bought, either in lump
distributors. The payphones were offered packaged with a sum or on installment basis and, thereafter, enjoys the
site lease, a 5-year leaseback and management agreement benefits of full ownership, subject to payment of
and a buyback agreement. All but a tiny fraction of maintenance dues and utility fees. The second scheme
purchasers chose this package although other management involved the sale of the unit with an added option to avail of
options were offered. The purchase price per package was a “leaseback” or a “money-back” arrangement. Under this
added option, the buyer pays for the unit bought and, CORPORATION and its wholly-owned subsidiary CJH SUITES
subsequently, surrenders its possession to the management CORPORATION, “are engaged in the business of selling
of CJHDC or CJHSC. These corporations would then create a securities without the proper registration issued by this
pool of these units and, in turn, will offer them for billeting Commission in violation [of] Section 8 of the SRC, the
under the management of the hotel operated by the Camp respondents, their respective officers, directors,
John Hay Leisure, Inc. (CJHLI). This arrangement lasts for a representatives, salesmen, agents and any and all persons
period of fifteen (15) years with a renewal option for the claiming and acting for and in their behalf, are hereby
same period until 2046. The buyers who opt for the ordered to immediately CEASE and DESIST from further
“leaseback” arrangement will receive either a proportionate engaging in the business of selling securities until they have
share in seventy percent (70%) of the annual income complied with the requirements of law and its
derived from the hotel operation of the pooled rooms or a implementing rules and regulations.” Was the Cease and
guaranteed eight percent (8%) return on their investment. Desist Order (CDO) validly issued even without prior
On the other hand, those who choose to avail of the hearing? Was there violation of the right of the respondents
“money-back” arrangement are entitled to a return of the to due process?
purchase price they paid for the units by expiration of the
Lease Agreement in 2046. The buyers are given the right to Answer: Yes the CDO was validly issued. There was no
use their units for thirty (30) days within a year and they are violation of the right of the respondents to due process.
exempted from paying the monthly dues and utility fees. Sections 64.1 of the SRC provides that the SEC “after proper
investigation or verification, motu propria, or upon verified
Sometime in May 2010, the BCDA and the CJHDC entered complaint by any aggrieved party, may issue a cease and
into an agreement for the restructuring of the latter’s rental desist order without the necessity of a prior hearing if in its
payments and other financial obligations to the former. judgment the act or practice, unless restrained, will operate
Thus, pursuant to this agreement, CJHDC transferred as a fraud on investors or is otherwise likely to cause grave or
ownership of, among others, sixteen (16) units from “The irreparable injury or prejudice to the investing public. Under
Manor” and ten (10) units from “The Suites” to the BCDA via Section 64.3 of the SRC, the remedy of the party against
dacion en pago. These units were covered by Limited whom the CDO was issued is to file a formal request for lifting
Warranty Deeds and were subject to a ‘leaseback" thereof. The law is clear on the point that a cease and desist
arrangement. Subsequently, the BCDA acquired information order may be issued by the SEC motu proprio, it being
regarding CJHDC and CJHSC’s scheme of selling “The Manor” unnecessary that it results from a verified complaint from an
and “The Suites” units through “leaseback" or “money- aggrieved party. A prior hearing is also not required
back" terms. Hence, in a letter dated November 18, 2011, whenever the Commission finds it appropriate to issue a
the BCDA requested the SEC to conduct an investigation into cease and desist order that aims to curtail fraud or grave or
the operations of CJHDC and CJHSC on the belief that the irreparable injury to investors. There is good reason for this
“leaseback” or “money-back” arrangements they are provision, as any delay in the restraint of acts that yield such
offering to the public is, in essence, investment contracts results can only generate further injury to the public that the
which are considered as securities under Republic Act No. SEC is obliged to protect.
8799, otherwise known as the Securities Regulation Code
(SRC). To equally protect individuals and corporations from baseless
and improvident issuances, the authority of the SEC under
Acting on such a request, the Enforcement and Prosecution this rule is nonetheless with defined limits. A cease and desist
Department (EPD) of the SEC conducted its own order may only be issued by the Commission after proper
investigation of the operations of CJHDC and CJHSC with investigation or verification, and upon showing that the acts
respect to the sale of the subject condotel units and, sought to be restrained could result in injury or fraud to the
thereafter, submitted a Field Investigation Report,5 dated investing public. Without doubt, these requisites were duly
February 1, 2012, to the Chairperson of the SEC, providing satisfied by the SEC prior to its issuance of the subject cease
details of their findings during such investigation. The EPD and desist order.
was also able to confer with several buyers of the condotel
units who gave information with respect to the terms of the In the present case, the SEC through its EPD, conducted an
contracts they entered into with respondents. investigation upon request ofthe BCDA. The EPD dispatched a
team of SEC employees, who posed as representatives of
Subsequently, on April 23, 2012, the SEC’s Corporation interested buyers, to the John Hay Special Economic Zone in
Finance Department (CFD) issued a Memorandum5 Baguio City. There, the team members were able to talk to
indicating its opinion that the «leaseback» arrangements CJHDC’s Director of Sales, who, not only explained to them
offered by respondents to the public are investment the straight and leaseback agreements, but also gave the
contracts. On May 16, 2012, the EPD filed a Motion for team copies of marketing material, as well as sample
Issuance of Cease and Desist Order’ with the SEC En Banc contracts, indicating that respondents are indeed selling the
praying that CJHDC and CJHSC, their respective officers, subject units either on a straight purchase or leaseback
directors, representatives, salesmen, agents, and any and all agreement. Subsequently, on three different occasions, the
persons claiming and acting for and in their behalf be EPD invited several buyers of the subject condotels and met
directed to immediately cease and desist “from further with them in separate conferences wherein these buyers
engaging in activities of selling and/or offering for sale shed light on the transactions they entered into with
investment contracts covering the condotel units on respondents and informed the EPD that they bought condotel
“leaseback” and/or “money-back” arrangements until the units on a leaseback arrangement. These buyers provided the
requisite registration statement is duly filed with and EPD copies of document relating to their purchase of
approved by the Commission and the corresponding permit condotel units on such terms. Upon issuance of the CDO,
to offer/sell securities is issued.”8 The case was docketed as nothing prevented respondents from filing a motion to lift the
SEC-CDO Case No. 05-12-006 said Order wherein they could have amply explained their
position. However, they chose not to avail of this remedy
On June 7,2012, the SEC En Banc issued an Order finding and, instead, went directly, albeit erroneously, to the CA via a
prima facie evidence that respondents CJH DEVELOPMENT petition for review.
 Answer: The directors and key officers of Grand Gas
Lastly, the Court neither agrees with the ruling of the CA that Corporation violated the Securities Regulation Code (SRC)
there is nothing in the assailed CDO which shows that the rules on insider trading. The directors and officers are insiders
acts sought to be restrained therein operate as a fraud on within the contemplation of the SRC, hence, they must
investors. The SEC arrived at a preliminary finding that comply with the disclosure requirement under the said law.
respondents are engaged in the business of selling securities Section 27 of the SRC provides that “it shall be unlawful for
without the proper registration issued by the Commission. an insider to sell or buy securities ofthe issuer, while in
Based on this initial finding, respondents’ act of selling possession of material information with respect to the issuer
unregistered securities would necessarily operate as a fraud or the security that is not generally available to the public,
on investors as it deceives the investing public by making it unless: (a) the insider proves that the information was not
appear that respondents have authority to deal on such gained from such relationship; or (b) if the other party selling
securities. As correctly cited by the SEC, Section 8.1 of the to or buying from the insider (or his agent) is identified, the
SRC clearly states that securities shall not be sold or offered insider proves: (i) that he disclosed the information to the
for sale or distribution within the Philippines without a other party, or (ii) that he had reason to believe that the
registration statement duly filed with and approved by the other party otherwise is also in possession ofthe
SEC and that prior to such sale, information on the securities, information."
in such form and with such substance as the SEC may
prescribe, shall be made available to each prospective buyer. (b) Assuming that the employees of the establishment
The Court agrees with the SEC that the purpose of this handling the printing work of Grand Gas Corporation saw
provision is to afford the public protection from investing in the exploration reports which were mistakenly sent to their
worthless securities. (The Securities and Exchange establishment together with other materials to be printed.
Commission (SEC) Chairperson Teresita J. Herbosa, et. al. v. They too bought shares in the company at low prices and
CJH Development Corporation, G.R. No. 210316, November later sold them at huge profits. Will they be liable for
28, 2016) violation of the SRC? Why?

6. Philippine Palaces Realty (PPR) had been representing Answer: Yes, the employees of the establishment handling
itself as a registered broker of securities, duly authorized by the printing job shall be liable. The obligations imposed under
the Securities and Exchange Commission (SEC). On October Section 27 are also imposed on the same employees. The
6, 2013, PPR sold to spouses Leon and Carina one timeshare employees are also insiders because they are persons whose
of Palacio del Boracay for US$7,500.00. However, its relationship or former relationship to the issuer gives or gave
Registration Statement became effective only on February him access to material information about the issuer or the
11, 2014 after the SEC issued a resolution declaring that PPR security that is not generally available to the public. (Section
was authorized to sell securities, including timeshares. On 3.8(c], SRC) (2008 Bar)
March 30, 1998, Leon and Carina wrote PPR rescinding their
purchase agreement and demanding the refund of the 8. Union Mines, Inc. has total assets of P60 million with 210
amount they paid, because the Palacio del Boracay stockholders holding at least 100 shares each. The company
timeshare was sold to them by PPR without the requisite has two principal stockholders, ABC which owns 60% of the
license or authority from the SEC. PPR contended that the shares of stock, and XYZ which owns 17%. ABC, in turn is
grant of the SEC authority had the effect of ratifying the owned to the extent of 21.31% by Acme, Inc.; 29.69% by
purchase agreement (with Leon and Carina) of October 6, Golden Boy, Inc.; 9% by XYZ; and the rest by individual
2013. Is the contention of PPR correct? Explain stockholders. None of the parties is a publicly-listed
company. XYZ now proposes to buy Acme’s and Golden
Answer: The contention of PPR is not correct. PPR was Boy’s shares in ABC, which would give it direct control of
engaged in what is known as gun jumping. Section 8.1 of the ABC and indirect control of Union Mines. Is the proposed
Securities Regulation Code (R.A. No. 8799) provides that acquisition by XYZ subject to the mandatory tender offer
securities shall not be sold or offered for sale or distribution rule? Why or why not? What is a tender offer and when is it
within the Philippines without a registration statement mandatory?
approved by the SEC. Timeshares are considered securities
and prior to fulfillment of all the other requirements of the Answer: Yes, the proposed acquisition by XYZ is subject to
SRC, PPR is absolutely proscribed from dealing with mandatory tender offer rule. With 210 shareholders holding
unregistered timeshares (Timeshare Realty Corporation v. at least 100 shares each, Union Mines is a public company
Cesar Lao, et al., G.R. No. 158941, February 11, 2008). (2009 although not listed in the company. Acquisition of shares in
Bar) Union Mines is therefore subject to the tender offer rules.
SRC Rule 19 provides that there is mandatory tender offer if
7. Grand Gas Corporation, a publicly listed company, at least 35% of the outstanding shares of a public company is
discovered after extensive drilling a rich deposit of natural to be acquired in one transaction or a series of transaction
gas along the coast of Antique. For five months, the during a 12-month period or even if any acquisition is less
company did not disclose the discovery so that it could than 35% threshold but the result thereof is the ownership of
quietly and cheaply acquire neighboring land and secure more than 51% of the total outstanding shares of a public
mining rights to the land. Between the discovery and its company. If XYZ will acquire of shares of Acme, Inc. and
disclosure of the information to the Securities and Exchange Golden Boy, Inc. in Union Mines and such shares are added to
Commission, all the directors and key officers of the the existing shares of XYZ in Union Mines, then XYZ will own
company bought shares in the company at very low prices. more than 51% of the outstanding capital stock in Union
After the disclosure, the price of the shares went up. The Mines. It should be noted that the rules apply even if one will
directors and officers sold their shares at huge profits acquire the shares in the corporation that owns the shares of
a public company including a subsidiary. (2010 Bar)
(a) What provision of the Securities Regulation Code (SRC)
did they violate, ifany? Explain.