Commercial Law Review | Section G06

Part 1

I.1. A judgment was obtained by the Aladdin Bank against the Lion
King Corporation (LKC) on a defaulted loan. It was executed
upon LKC shares registered in the name of its majority
stockholder, Mr. Lee K. Chan, who promptly claimed that the
execution was improper. Is Mr. Chan’s claim valid or not? Why?

Mr. Chan’s claim is valid. This is because of the trust fund doctrine,
and the separate juridical personality enjoyed by the corporation
apart from its stockholders.

The trust fund doctrine provides that the assets of the corporation are
the ones to be exhausted first in satisfaction of creditors, before
claiming against individual stockholders. Since corporations have
separate juridical personalities, they can also own properties and be
sued in their own names. Furthermore, there is no showing that Mr.
Lee K. Chan has unpaid subscriptions sufficient for him to also be
impleaded for the corporation’s liabilities.

I.2. Mr. Ben Cruz engaged the services of a SEC licensed broker, the
Magic Securities Corporation, to trade in listed shares of stock
upon his instructions for his account. Magic Securities, through
its salesperson, traded without Mr. Cruz’ knowledge whose
account suffered a loss of P10 million. Mr. Cruz sued Magic
Securities as well as its parent company BSP registered Magic
Banking Corporation for damages arising from fraud. Magic
Bank asserted it cannot be held liable for the alleged fraud
committed by its subsidiary, even if 90% of the latter ‘s shares
are owned by Magic Bank and that both corporations have their
principal offices at the Magic Building BGC. Is Magic Bank’s
claim valid or not? Why?

Magic Bank’s claim is valid. What Mr. Ben Cruz did in suing the
parent company is the application of the alter-ego situation under the
piercing of corporate veil doctrine.

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In order for the alter-ego doctrine to be applicable, the following

elements must concur:
1. Complete control by the parent company of the subsidiary
company’s policies, finances, and business practice;
2. The control was used to commit fraud; and
3. The control and breach of duty is the proximate cause of injury.

Since there is no showing that Magic Bank has complete control over
Magic Securities’ policies, finances, and business practice, they
cannot be held liable for the alleged fraud committed by Magic
Securities. The fact of 90% ownership is not sufficient to establish
their complete control.

I.3. The Doon Ka Corporation (DKC) is engaged in

telecommunications thus at least 60% of its shares should be
owned by Filipinos. If DKC has total outstanding shares of
100,000 out of which 80,000 are voting and 20,000 non-voting:

a) How many voting shares must Filipinos own?

Filipinos must own at least 60% voting shares, which is equivalent to

48,000 shares.

b)How many non-voting shares must Filipinos own?

Filipinos must own at least 60% non-voting shares, which is

equivalent to 12,000 shares.

c) How many voting and non-voting shares must Filipinos own?

Filipinos must own at least 60% voting shares, which is equivalent to

48,000 shares; and at least 60% non-voting shares, which is
equivalent to 12,000 shares. In all, Filipinos must own a total of at
least 60,000 shares.

d)How many voting shares may foreigners own?

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Foreigners may own not more than 40% of voting shares, which is
equivalent to 8,000 shares.

e) How many non-voting shares may foreigners own?

Foreigners may own not more than 40% non-voting shares, which is
equivalent to 32,000 shares.

f) How many voting and non-voting shares may foreigners own?

Foreigners may own not more than 40% voting shares, which is
equivalent to 32,000 shares; and not more than 40% non-voting
shares, which is equivalent to 8,000 shares. In all, foreigners may
own a total of not more than 40,000 shares.

I.4. The owner of an office space leased it to the RIPLAW, a

partnership. Since it was unable to pay the rentals, RIPLAW was
sued by the owner. The founding partner of RIPLAW moved to
dismiss the suit saying that the owner should have sued him as
the real party in interest. Who is correct and why?

The owner of the office space is correct because it is RIPLAW, a

partnership, that was the lessee in the contract of lease, and not the
founding partner.

Jurisprudence expounds how as a partnership, RIPLAW, is the

proper party to be sued in an ejectment case since it has a separate
juridical personality, and not its managing partner or any of its
partners.

I.5. The XXX Corporation Board of Directors proposed the

amendment of its articles of incorporation to provide for the
denial of preemptive right. A stockholder Ed Sirano is against
the denial but was told by the corporate secretary that he cannot
vote at the stockholders meeting called for the purpose because

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he owns preferred not common shares. Is the corporate

secretary correct or not? Why?

The corporate secretary is not correct. This is because as a preferred

stockholder, Ed Sirano may be allowed to vote because it was for a
meeting to amend the corporation’s Articles of Incorporation. The
Revised Corporation Code expressly allows preferred stockholders to
vote in instances of amendments to the corporation’s Articles of
Incorporation.

I.6. Mr. Sirano’s preferred shares are also redeemable. Per his
subscription contract with XXX Corporation, he may redeem the
shares after two years at his option. After the lapse of two
years, Mr. Sirano opted to have his shares redeemed. However,
the XXX Corporation refused, alleging that it has no unrestricted
retained earnings; worse, its capital has been impaired due to
losses and presently its debts are more than its assets. May Mr.
Sirano compel XXX Corporation to redeem his shares? Explain.

No, Mr. Sirano cannot compel the XXX Corporation to redeem his
shares. Sec. 8 of the Revised Corporation Code explains how
redeemable shares are those that may be purchased, or redeemed,
by the corporation upon the expiration of a fixed period, regardless of
the existence of unrestricted retained earnings. However, the
corporation should still have assets to cover its liabilities, in order to
redeem the shares. Since XXX Corporation’s debts are more than its
assets, Mr. Soriano cannot compel his shares to be redeemed.

I.7. The AOI that the BB Corporation submitted to the SEC for
registration stated that its primary purpose was to engage in
mass media; however, among its incorporators, directors and
stockholders, were an American and a British national. The SEC
‘s Corporate Registration and Monitoring Department (CRMD)
immediately disapproved of the same. Do you agree with
CRMD’s denial or not? Why?

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I do not agree with CRMD’s denial. This is because the nationality

requirement of a corporation does not pertain to the nationality of its
incorporators, but to the nationality of the corporation itself.

As such, regardless of the nationality of the incorporators, as long as

full beneficial ownership of 60% outstanding capital stock coupled
with 60% voting rights are owned by Filipinos, the mass media
company may still be allowed to be incorporated.

I.8. On February 14, 2019, the White Cheese Corporation (WCC)

applied with the CRMD to shorten its corporate term to one
ending on June 14, 2019, which application was granted on
February 21, 2019. A few days after, the Revised Corporation
Code became effective. What should WCC do, if any, to pursue
its intention to end its term on June 14, 2019?

WCC should notify the SEC of their intention to retain their shortened
date of June 14, 2019 after getting a majority vote from its
outstanding capital stockholders.

Since the default term of all corporations upon effectiveness of the

Revised Corporation Code is perpetual, corporations intending to
shorten their term must notify the SEC.

I.9. Is the corporate name “Indian Chamber of Commerce Phils.,

Inc.” distinguishable from “Filipino Indian Chamber of
Commerce in the Philippines, Inc.”? Explain.

No, it is not distinguishable. Sec. 17 of the Revised Corporation Code

disallows names with punctuations, articles, contractions,
abbreviations, different tenses, or number of the same word or
phrase as they are not distinguishable.

Thus, “Indian Chamber of Commerce Phils., Inc.,” is confusingly

similar with “Filipino Indian Chamber of Commerce in the Philippines,
Inc.,” because it merely rearranged the same words, and included
abbreviations and different tenses.

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I.10. Four brothers decided to form a corporation. Because of their

love for their deceased grandmother and to comply with the
minimum of five incorporators, they included her as one of the
incorporators in the AOI and one of them signed as an “attorney
in fact”. The CRMD unknowingly approved the AOI and issued
a certificate of registration. Later, a whistleblower tipped the
CRMD about the deceased incorporator. If you were the CRMD
Director, how will you decide the matter?

If I were the CRMD Director, I would still approve of the corporation’s

issuance of its Articles of Incorporation but remove the deceased
grandmother and her attorney in fact as incorporators.

The Revised Corporation Code removed the required number of five

incorporators, and thus four incorporators would already be sufficient.
Deceased persons cannot be incorporators since Sec. 10 of the
Revised Corporation Code explicitly requires incorporators to be
either natural or juridical persons, and death extinguishes all civil
personality and a person’s capacity to act.

I.11. Mr. Jay Donat is the majority stockholder and CEO of the
Healthy Doughnuts Inc. The Board of Directors in one board
meeting resolved not to proceed with building another branch at
one of the parcels of land owned by the corporation. The wife of
Mr. Donat, Joy, who is likewise a director and the treasurer of
the corporation, immediately negotiated the sale of the land to
the adjoining property owner who readily gave her a substantial
amount as earnest money. However, the sale was not finalized
because Joy had never been authorized by the Board to sell the
land. Who is liable to the frustrated buyer for the aborted sale?
The corporation, directors and/or the officer involved? Explain.

Joy and Mr. Jay Donat should be held liable to the frustrated buyer
for the aborted sale. The Business Judgement Rule requires the
Board of Directors to decide whether or not the corporation will enter
into contracts corporation. Since they never allowed Joy to sell the

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land, Joy acted in excess of her authority, she should be held liable,
and not the corporation and its directors.

However as Joy’s husband and also a member of the Board of

Directors as CEO, Mr. Jay Donat should also be held liable. He is
presumed to be aware of Joy’s actions and hence he should also be
held liable.

I.12. Thereafter, a director of Healthy Doughnuts, Inc., Mr. Jose

Krispo, then offered to buy the land. At the board meeting to
approve the sale to him, he did not recuse himself but attended
the meeting to meet the quorum, and voted affirmatively for the
resolution otherwise it would not have passed. When the
Board’s attention was called to the anomaly, Mr. Krispo said the
stockholders may ratify the sale to him because the terms
therefor are fair and reasonable. Do you agree with Mr. Krispo or
not? Why?

Yes, I agree with Mr. Krispo. Although Sec. 31 of the Revised

Corporation Code lays down the general rule that contract between
the corporation and any of its directors are voidable, it also provides
for the exceptions.

The conditional exceptions which makes the contract valid are:

1. The presence of such director in the board meeting was not
necessary to constitute a quorum;
2. The vote of such director was not necessary in the approval of the
contract;
3. The contract is fair and reasonable under the circumstances;
4. In cases where a corporation is vested with public interest, a 2/3
vote of the entire board membership is required, with at least a
majority of the independent directors voting; and
5. In case of an officer, the contract be previously authorized by the
board.

Sec. 31 also provides for the exception to the exception, wherein if

the first three conditions are absent, the contract may be ratified by at

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least 2/3 of the outstanding capital stockholders, provided that full

disclosure of the director’s interest is made.

Thus, Mr. Krispo is correct in stating that his contract to purchase the
land can be ratified by 2/3 of the stockholders, after they ascertain the
contract’s fairness and reasonableness.

I.13. Out of four directors of the Zombies Corporation, one died due
to Covid, two others got infected and remained in critical
condition at the hospital. The remaining director wants to know
whether he can form an emergency board considering that the
Corporation has to adopt certain urgent measures under the new
normal otherwise it might go bankrupt. What will your advice
be?

My advice to the remaining director is to indeed form an emergency

board from the officers of the corporation, and the actions of the
designated director is limited to the emergency action necessary.
This is in accordance with Sec. 28 of the Revised Corporation Code.
The corporation must also notify the SEC of the emergency board’s
creation within three days of its creation.

An emergency board is proper in this case since out of the four

directors, only one remained. It is not sufficient for him to form a
quorum by himself.

I.14. Mr. Joe Misu was found by the US SEC to be administratively

liable for insider trading and imposed upon him a fine.
Immediately after paying the fine, Mr. Misu came home to the
Philippines and was invited by his friend Mr. Jake Bimpop to be
his co- director at the Pluto Construction Corporation (PCC). Mr.
Misu agreed thus Mr. Bimpop assigned to him one share of
PCC . That same day, both of them were elected directors at the
PCC regular stockholders meeting. Later, the other directors
learned about Mr. Misu’s US SEC case, however, Mr. Bimpop
prevailed upon them to just keep quiet about it. After several
weeks, the SEC got an anonymous tip. How should the SEC
proceed on the matter?

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The SEC may proceed to remove Mr. Misu as a director of the

corporation after due notice and hearing. This is because being
administratively liable for insider trading is one of the disqualifications
of directors and the events occurred well within 5 years, as required
by Sec. 26 of the Revised Corporation Code.

1.15 No question provided

Explain the following doctrines with references to pertinent provisions

of law and/or jurisprudence:

I.16 Separate juridical personality

Separate juridical personality elaborates how the corporation is

separate and distinct from that of its incorporators, directors, officers,
and shareholders. Thus, it can own properties and rights and
accordingly exercise those rights subject to legal limitations.

I.17 Piercing the corporate veil

Piercing the corporate veil is the exception to the separate juridical

personality doctrine in instances where the corporation’s directors are
using the corporation’s separate juridical personality to evade their
personal liability for the fraudulent actions committed.

As such, the separate juridical personality is disregarded and the

incorporators, directors, officers, or shareholders may be held liable
when the corporation was used:
1. To defeat public convenience and when used as a vehicle for
evading an existing obligation;
2. In fraud cases, or when used to justify a wrong, protect a fraud, or
commit a crime; or
3. In alter ego cases where a corporation is merely a farce since it is
a mere business conduit of a person.

I.18 Trust fund doctrine

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The trust fund doctrine is mainly established for the interest of the
creditors and future creditors of the corporation. It states that those
subscriptions to the capital stock constitutes as a trust fund for those
creditors’ claims in the event of the corporation’s insolvency. It also
includes the share premium or amounts received by the corporation
in excess of par, or commonly known as the additional paid-in capital
(APIC).

I.19 Apparent authority

The doctrine of apparent authority explains how a corporation may be

held liable along with its agent when, by the corporation's own acts,
holds the agent in public as possessing the power and authority to
commit such acts when in fact, the agent does actually have. As
such, the corporation is estopped from denying the agent’s authority.

I.20. Discuss whether or not a corporation may recover or be

awarded moral damages.

A corporation may not recover or be awarded moral damages.

Although corporations have separate juridical personalities, they do
not have feelings, emotions, nor senses as the injury of such serves
as the basis of moral damages.

An exemption would be in instances where the reputation of a

corporation is sufficiently established to be tarnished, as shortly
mentioned in Mambulao Lumber v. Philippine National Bank and
People v. Manero. However, BNL Management Corp v. Uy
expounded how these doctrines are mere obiter dicta, and exceptions
are only applied pro hac vice.

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Part 2

II.1. The Board passed a resolution providing gratuity pay to its

employees. After the employees had received the benefits, a
director complained that she did not get a notice to the meeting
where the resolution was passed. While she was indeed absent
at the meeting, she nevertheless was found to have affixed her
signature to some cash vouchers in implementation of the
resolution. She claimed that the doctrine of ultra vires applies.
What do you think?

The doctrine of ultra vires is not applicable. This is because the

authority of the Board to pass a Resolution for gratuity pay to its
employees is one of the inherent corporate powers expressly
enumerated in Sec. 35 of the Revised Corporation Code.

The ultra vires doctrine is only applicable in instances where the

corporation exercises powers or acts outside those conferred by the
Revised Corporation Code, its Articles of Incorporation, and those
necessary or incidental its conferred powers.

II.2. Under an Asset Purchase Agreement, SeeSaw Corporation

transferred to Swing, Inc. all its properties and assets . A
creditor demanded from Swing the payment of SeeSaw’s debt.
Swing refused in the absence of a stipulation that it was
assuming the obligations of SeeSaw under their Agreement. Is
Swing liable or not to the creditor? Why?

Swing Inc., is liable to the creditor. Generally, the buying corporation

is not liable for the liabilities of the selling corporation. However, the
Nell Doctrine provides for an exception in the following instances:
1. When the buying corporation expressly or impliedly agrees to
assume the debts;
2. When the transaction amounts to a consolidation or merger of the
corporations;
3. When the buying corporation is merely a continuation of the
selling corporation; or

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4. When the transaction is fraudulently entered into to escape liability

of debts.

In this case, the following third exception applies because the selling
corporation is offering all of its assets and properties to the buying
corporation. In effect, the debtor-selling corporation is left with no
juridical personality and devoid of any earning capacity. As such,
Swing Inc., is merely a continuation of SeeSaw Corporation and they
may be held liable for SeeSaw Corporation’s debts.

II.3. XYZ Technology Foundation, Inc. owns and operates an

educational institution for computer science courses. Its Board
resolved to act as third-party mortgagor to secure the proposed
loan that its partly owned subsidiary, XYZ Training Institute, Inc.,
that handles seminars, workshops and the like, was going to
obtain from the ABC Bank Inc. However, the latter disapproved
the loan application of XYZ Training and claimed that the third-
party mortgage that will secure the loan was an illegal act of the
Board of XYZ Technology. Do you agree? Why or why not?

I do not agree that the third-party mortgage is an illegal act of the

XYZ Technology Board. Illegal acts are those that are prohibited by
law and contrary to public policy and morals. There is no law
prohibiting an educational institution to act as a third-party mortgagor,
nor is it also immoral nor contrary to public policy.

Distinction must be made between illegal acts and ultra vires acts.
The Board may have committed an ultra vires act if their Articles of
Incorporation did not include third-party mortgages, or if the Board did
not acquire the necessary votes. While the act can be deemed as
ultra vires since it is outside the primary purpose of XYZ Technology
Foundation, Inc., as an educational institution, the act cannot be said
to be illegal.

II.4. Soap Makers, Inc.’s bylaws (approved under the old Corporation
Code) provide that notice to its regular stockholders meeting
shall be sent out at least 14 days prior to the meeting. The
Revised Corporation Code (effective Feb 23, 2019) prescribes “at

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least 21 days unless a different period is required in the bylaws,

law or regulation”. If you were the Corporate Secretary, when
will you send out the notice to the regular stockholders meeting
scheduled on March 1, 2021? Explain.

If I were the Corporate Secretary, I will follow the period of at least 21

days prescribed by the Revised Corporation Code. This is because
the bylaws of Soap Makers, Inc., was made prior to the amendment
which required at least two weeks’ notice, or 14 days, prior to the
scheduled meeting.

Since the bylaws of the corporation must also adhere to the law, the
periods prescribed under it contrary to law must be accordingly
adjusted. Furthermore, Sec. 49 of the Revised Corporation Code
mentions a minimum of 21 days’ notice, unless otherwise provided by
the bylaws. Since 14 days is lesser than 21 days, it cannot be valid.

II.5. Jose Cruz and Maria Santos with three other friends formed a
corporation. Maria did not have money and Jose paid for both
their shares. The AOI thus reflected that each incorporator owns
20% of the subscribed and fully paid up shares. After the
corporation attained financial success and the shares have
became valuable, Maria wanted to cash in and demanded
inspection of the books and financial statements to determine
the value of the shares in her name. Jose, however, claimed that
Maria’s shares were merely placed in her name in trust for him
for the reason among others at the time a minimum of five
incorporators was required. Maria wants to file an action that
would immediately allow her as stockholder to inspect soonest.
What kind of action could she file and which one - the SEC, the
commercial court and/or the ordinary court - has jurisdiction.
Explain.

Maria should file an action under Sec. 161 of the Revised Corporation
code since her right to inspect the corporation’s books and financial
statements was violated. She should also file this with the Regional
Trial Courts acting as a Special Commercial Court (RTC-SCC)

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The jurisdiction of the RTC-SCC is limited to intra-corporate disputes.

Intra-corporate disputes are those passing both the relationship test
and the nature of controversy test. The relationship test pertains to
the relationship of the parties in the case, if they are between the
corporation and the public; the corporation and the shareholder,
board member, or officer; or the corporation and the government. The
nature of controversy test pertains to rights and obligations under the
Revised Corporation Code.

Here, both the relationship test and the nature of controversy test is
met. The parties are both stockholders, since they are incorporators,
and Maria relies on Sec. 161 of the Revised Corporation Code in
enforcing her right to inspect the books and financial statements.

II.6. The Bonifacio Best Condominium Corporation (BBCC) by-laws

state that all members may vote for trustees at the annual
members meeting subject to voting and quorum requirements.
Among others, the by-laws prescribe that the majority of
members shall constitute a quorum. The members of BBCC are
individual as well as corporate unit owners. Prior to the first
annual members meeting of BBCC, a member challenged the
right to vote of the corporate unit owners on the ground that
their proxies were void because these were in the form of
notarized Special Powers of Attorney executed by their
respective CEO/President or Chairman or Corporate Secretary.
In the case of BB Land, Inc., since it was the developer of the
BBC project yet to sell or transfer the few still vacant units to
buyers, its membership as well as its right to vote was
disputed. Resolve these legal issues.

The member’s challenge fails. Sec. 57 of the Revised Corporation

Code provides that proxies may vote in lieu of the member, and no
format was provided except for the requirement that it be in writing,
signed, and filed by the member according to their bylaws. Absent
any violations of the format prescribed by the bylaws of the
corporation, the notarized Special Powers of Attorney should be
allowed.

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The right to vote of BB Land, Inc., should be upheld. As developer of

BBCC project, it essentially is also a stockholder of such corporation.
Regardless of its business operations status, so long as it sufficiently
shows that they are duly stockholders of BBCC, they may exercise
their right to vote.

II.7. Incorporator X subscribed to 1000 shares of XOXO Corporation

but initially paid for 50% of the subscription price or
representing the value of 500 shares only. Per the subscription
contract, he would pay the balance in 12 monthly installments
with interest. However, he defaulted and the Board, after
complying with the requisites and procedure, declared the
unpaid amount due and payable. X was still not able to pay said
amount, interests, etc. but demanded that he be issued a
certificate of stock for 500 shares. XOXO Corporation refused
and set the delinquency sale of all 1000 shares to whoever
would bid the highest amount for all shares. X said that the
Corporation is acting in violation of corporation law. Who is
correct - incorporator X or XOXO Corporation or neither?
Explain

XOXO Corporation is correct. Under Sec. 63 of the Revised

Corporation Code, no certificate of stock shall be issued until the full
amount of the subscription has been paid.

Since X only paid 50% out of his 1000 shares subscription, he still
has an outstanding balance, and thus he cannot be issued a stock
certificate for the 50% that he already paid.

II.8. Stockholder X wants to sue the Cancel Culture Corporation

(CCC) which has prevented him from exercising his pre-emptive
right to the proportionate number of shares from out of its
increase of capital stock. He believes that CCC’s action was in
retaliation for his having earlier complained about the Board’s
failure to provide for adequate health measures for its officers
and employees amidst the pandemic and to declare cash
dividends for its stockholders to have some financial assistance
during the pandemic. What would you advise X to file – an
individual suit or derivative suit?
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I will advise Stockholder X to file an individual suit. Derivative suits

are those commenced by the stockholders in the name of the
corporation against the fraudulent, negligent, or ultra vires acts
committed by the corporation’s directors. As such, derivative suits
seek to represent the stockholders’ interests in the corporation. In this
case, Stockholder X is only interested in enforcing his personal pre-
emptive right. It is far from the interests of the corporation as a whole.
Hence, an individual suit is proper.

II.9. William Tee filed a derivative suit before the RTC Commercial
Court against his brother, Benjamin Tee, who is President/CEO
and majority stockholder of an insurance company. William
alleged that Benjamin has committed acts of mismanagement
and fraud thereby causing damage to him arising from the
tremendous decrease in the fair value of the shares of their
deceased mother in said insurance company. Is Mr. Tee’s
derivative suit proper?

Mr. William Tee’s derivative suit will not prosper. In order for a
derivative suit to prosper, the following must be complied with:
1. The person filing must be a shareholder or member at the time of
the acts or transactions’ occurrence;
2. The complainant must have exerted all reasonable efforts and
alleges those efforts in particularity in the complaint, and have
exhausted all remedies available under the Articles of
Incorporation, bylaws, rules, or laws;
3. No appraisal rights are available for the acts complained of; and
4. The suit is not for nuisance or a harassment.

Here, there is no indication that Mr. William Tee is a shareholder

since it cannot be simply inferred that Mr. Willian Tee inherited all of
his mother’s shares in the company. There was also no showing that
he exerted all reasonable efforts and remedies. It can also be inferred
that the case is a nuisance, since he is complaining against his
brother, which he may reasonable talk to with out of court. As such,
the derivative suit must fail.

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II.10. The controlling stockholder, President and Chairman of the

BIGBOY Corporation, wanted to safeguard and secure the
corporate books and records thus he removed these from the
principal office of the Corporation and took custody of the same
by bringing these to his residence not too far away or still within
the same city. Is he liable for doing so?

Yes, he is liable under Sec. 161 of the Revised Corporation Code for
violating the duty to maintain records. Sec. 73 of the Revised
Corporation Code explicitly requires corporate records to be kept and
carefully preserved at the corporation’s principal place of business.
Despite the fact that his residence is not too far away or still within the
same city, it is still not the principal place of business of the
corporation. This is important because of the right of the corporation’s
stockholders, officers, and directors to inspect the corporate books.

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Part 3

III.1. O LA! Movers Corporation and GOBUY Online Store, Inc. want to
join forces. O LA! suggests an exchange of shares between the
stockholders of O LA! and those of GOBUY resulting in each
corporation being owned by common stockholders in 60-40 ratio
via stock purchase agreements. O LA! moreover wants a
reorganization for the purpose of terminating its employees and
replacing them with retrenched GOBUY employees. O LA!
claims that the transaction involves a merger. Is this correct or
not?

No, O LA!’s contention is incorrect. Sec. 75 of the Revised

Corporation Code defines a merger when two or more corporations
merges into a single corporation, becoming a constituent corporation;
or consolidates into a single new corporation, becoming the
consolidated corporation.

Since the O LA! Movers Corporation and GOBUY Online Store Inc.,
still retains a 60-40 ownership ratio, it cannot be said that a single
corporation exists.

On the other hand, GOBUY proposes an asset purchase

agreement whereby O LA! will sell all of its vehicles,
motorcycles and other equipment to GOBUY in exchange for
shares in GOBUY. O LA! will dissolve, terminate all employees
and proceed to liquidation by distributing as liquidating
dividends GOBUY shares to O LA! shareholders. GOBUY claims
that this transaction likewise involves a merger. Is this correct or
not?

GOBUY’s claim is correct. This transaction is now a merger since O

LA! agreed to sell all of its vehicles and equipment, dissolve,
terminate their employees, and liquidate. As such, the corporate
existence of O LA! is extinguished, and it was merged with GOBUY
as the constituent corporation.

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III.2. Is the dissenting stockholder who already demanded from the

corporation the payment of the fair value of his shares in
exercise of his appraisal right prohibited from transferring such
shares to a third party?

No, the dissenting stockholder is not prohibited from transferring such

rights to a third party. Sec. 85 of the Revised Corporation Code
mentions how a third party is presumed to have known the status of
the stocks as dissenting shares, since the dissenting stockholder
must submit their stock certificate to the corporation for notation
within 10 days after demanding payment of their shares.

However, if the dissenting stockholder fails to submit the stock

certificate within 10 days, the corporation may terminate all the rights
of the dissenting stockholder to transfer such dissenting shares.

What if the status of such shares as dissenting shares has

already been annotated in the stock certificates?

The same answer, since it is the duty of the dissenting stockholder to

submit their stock certificate to the corporation for notation. As such,
the third party is presumed to know of the stock’s status as dissenting
shares.

III.3. May a non-stock corporation provide in its articles that net

assets upon its liquidation will be immediately distributed
among its members? Explain.

Yes, the Articles of Incorporation of a non-stock corporation can

provide for such distribution of assets. Sec. 93 (d) of the Revised
Corporation Code provides for certain assets owned by the non-stock
corporation may be distributed among its members upon liquidated.

The assets which cannot be distributed are:

1. Those held by the corporation upon a condition to return them;
and
2. Those used exclusively for charitable, religious, benevolent, or
educational purposes not requiring return, but required to be
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transferred to one or more corporations or societies engaged in

the substantially similar activities.
Thus, all assets not covered by those above can be distributed
among the members.

III.4. Instead of forming a one-person corporation, Mr. Juan Reyes

formed a close corporation (with just one other incorporator –
his eldest son). He argued that he chose a close corporation
over a one-person corporation because the provisions on ways
to resolve deadlocks and those allowing stockholders to directly
manage the close corporation are more advantageous. Do you
agree with Mr. Reyes’ position? Why or why not?

No, I do not agree with Mr. Reyes’ position. Deadlocks are

inconsistent with the definition of a one-person corporation because
there are no other person exercising business judgements aside from
the sole stockholder constituting the one-person corporation.

Art. 103 of the Revised Corporation Code defines deadlocks as a

situation where the directors or stockholders are so divided on a
corporation business management or affair that the required votes for
corporate action cannot be obtained. Art. 116 defines one-person
corporations as a corporation with a single stockholder who is a
natural person, trust, or estate.

III.5. Olivio Rodrigo set up a one person corporation named the “OR,
Inc. (OPC)” to engage in the business of owning, buying,
selling, leasing and managing real properties. In the course of its
operations, OR would renovate several old houses for reselling.
OR sold one such house and lot to Bruno Marso who later sued
Olivio Rodrigo alleging that the house had fallen apart within 3
months after he moved in, indicating that Olivio Rodrigo spent
practically nothing or a measly amount for the alleged
renovation thus naturally turned out substandard. Olivio wants
to dismiss the suit on the ground that OR not him should have
been the defendant, and that there is no cause of action against
him personally because OR has limited liability. Is Olivio correct
in his defenses?

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Yes, Olivo is correct in his defenses. Art. 130 of the Revised

Corporation Code expressly provides that the liability of the
stockholder in a one-person corporation is limited. However, the
stockholder has the burden of affirmatively showing that the
corporation is financed adequately. It is only when the stockholder
cannot prove of such financial adequacy that they can be held
solidarily liable with the one-corporation.

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Part 4

IV.1. A corporation was found by final judgment to have acquired SEC

registration through fraud. The judgment ordered dissolution
and civil forfeiture of its assets and served the same upon the
SEC. What should the SEC do?

The SEC should proceed in dissolving the corporation. Sec. 138 (d)
of the Revised Corporation Code expressly allows the SEC to
dissolve a corporation, motu proprio or on a verified complaint filed by
any party, upon a final judgement that the corporation procured its
incorporation though fraud.

IV.2. A foreign corporation has a distributor in the Philippines. The

latter acts in his own name and account. Will this distributorship
be considered as doing business by the foreign company in the
Philippines?

No, it is not considered as doing business by the foreign company in

the Philippines. This is because distributors are only considered as
“doing business”, as defined in the Foreign Investments Act, when
they stay in the Philippines for a period totaling 180 days or more.

What is the legal basis for your answer?

Sec. 3 (d) of the Foreign Investments Act explicitly stated that the
mere fact of a foreign corporation appointing a representative or a
distributor domiciled in the Philippines which transacts business in its
own name and account, among others, does not constitute as “doing
business”.

IV.3. ABC Corporation was organized in Malaysia but has a branch in

the Philippines. All its outstanding shares of stock are owned by
Filipino citizens. Is ABC Corporation a Philippine national?

Yes, ABC Corporation is a Philippine national. One of the

enumerations for the definition of a Philippine national under Sec. 3

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(a) of the Foreign Investments Act includes those corporations

organized abroad and registered as doing business in the Philippines,
of which 100% of the outstanding capital stocks entitled to vote are
wholly owned by Filipinos.

Since all the outstanding shares of ABC Corporation are wholly

owned by Filipino citizens and they have a Philippine branch despite
its organization in Malaysia, it squarely falls within the definition of a
Philippine national under Sec. 3 (a) of the Foreign Investments Act.

IV.4. A corporation’s use of its name turned out to be unauthorized

and its directors and corporate officers refused to comply with
the undertaking in the AOI to change its name. What are the
actions/ remedies that the aggrieved party may avail of under the
Code?

The aggrieved parties may file for petitions for contempt under Sec.
157 of the Revised Corporation Code, or for administrative sanctions
under Sec. 158 of the Revised Corporation Code, against the non-
compliant directors and corporate officers.

Sec. 17 of the Revised Corporation code allows the SEC to hold the
corporation and its responsible directors or officers in contempt for
their failure to comply with the their SEC orders. The SEC may also:
1. Summarily order the corporation to immediately cease and desist
from using the name;
2. Require the corporation to register a new name; or
3. Cause the removal of all visible signages and marks bearing the
unauthorized corporate name.

IV.5. While the corporation’s articles nor by-laws did not provide for
arbitration, several stockholders, among themselves, had
entered into an agreement which contained an arbitration clause
pursuant to Sec 181. Later, two of those stockholders had a
dispute regarding an intra-corporate matter. One demanded
arbitration but the other refused saying that jurisdiction over the
matter is with the RTC Commercial Court. Who is correct?

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The stockholder who demanded arbitration is correct. Sec. 181 of the

Revised Corporation Code explicitly provides that an intercorporate
dispute should be dismissed if it is filed with the RTC when in fact an
agreement that arbitration should be the mode of dispute resolution
was written in the corporation’s Articles of Incorporation, bylaws, or in
a separate document.

Thus, even if there was no arbitration clause in the corporation’s

Articles of Incorporation and bylaws, there was a separate agreement
to that effect.

Where does jurisdiction (RTC Commercial Courts, ordinary RTC, SEC,

DOJ, primary regulators, other government agencies, CA, etc.) lie over
the following matters:

IV.6. Nullification of election of directors because holders of proxies

that were not notarized were counted for quorum purposes and
allowed to vote

Jurisdiction lies with the RTC Commercial Courts. Issues regarding

validity of proxies were previously with the SEC, but with the
enactment of Rep. Act No. 8799, matters which were previously with
the SEC were now transferred to the RTC. One of those matters
transferred is the jurisdiction to pass upon the validity of issuances of
proxies.

IV.7. Nullification of a voting trust exceeding 5 years

Jurisdiction lies with the RTC Commercial Courts. Issues regarding

validity of voting trusts were previously with the SEC, but with the
enactment of Rep. Act No. 8799, matters which were previously with
the SEC were now transferred to the RTC. One of those matters
transferred is the jurisdiction to pass upon the validity of voting trust
agreements for absent stockholders and members.

IV.8. Petition to exercise right of inspection

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Jurisdiction lies with the SEC. Sec. 73 of the Revised Corporation

Code provides that in the event the corporation does not act on a
demand for inspection and/or reproduction, the aggrieved party may
report such to the SEC.

IV.9. Appeal from a SEC Commission en banc decision

Jurisdiction lies with the CA. Rule 43 of the Rules of Court allows
appeals from quasi-judicial bodies, such as the SEC, to be elevated
to the CA.

IV.10. Creation of an emergency board

Jurisdiction lies with the SEC. Sec. 28 of the Revised Corporation

Code requires the corporation to notify the SEC within three days
from the creation of the emergency board, along with the reason for
its creation.

IV.11. Unjust dismissal of a corporate officer

If the dismissed officer is the president, secretary, treasurer, or any

officer expressly mentioned as “corporate officers” in the corporation’s
Articles of Incorporation and/or bylaws, jurisdiction lies with the RTC
Commercial Courts. This is because the relationship test and the
nature of controversy test aligns with corporate functions between the
parties, and the subject matter of the suit.

If the dismissed officer is a corporate officer not expressly mentioned

in the Revised Corporation Code, the corporation’s Articles of
Incorporation, and/or its bylaws, jurisdiction lies with the Labor
Arbiter. This is because of the employee-employer relationship
between the parties.

IV.12. Appointment of a provisional director

Jurisdiction lies with the SEC. Sec. 103 of the Revised Corporation
Code expressly provides that the qualification of a provisional director

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be determined by the SEC. Their removal is also subject to the

discretion of the SEC.

IV.13. Prosecution of any of the specific offenses under Sec 159 to 169

Jurisdiction lies with the SEC. Sec. 179 (c) of the Revised Corporation
Code empowers the SEC to impose sanctions for violations of the
Revised Corporation Code, its implementing rules, and orders of the
SEC. Since Sec. 159 to 169 of the Revised Corporation provides for
punishable acts and the corresponding penalties afforded to the
wrongdoer, the SEC has the proper jurisdiction.

IV.14. Petition for civil forfeiture of corporate assets arising from

involuntary dissolution due to non-use of corporate charter

Jurisdiction lies with the SEC. Although Sec. 138 of the Revised
Corporation Code enumerates the grounds for the dissolution of a
corporation, they are not exclusive. This is because of the operative
word “may” used in the text of the law. As such, the SEC may dissolve
a corporation motu proprio or upon a verified complaint grounded on
non-use of the corporation’s corporate charter.

IV.15. Falsification of the AOI by the treasurer in procuring SEC

registration

Jurisdiction lies with the SEC and with the RTC. The SEC has
jurisdiction pursuant to Sec. 164 in relation to Sec. 179 (c) of the
Revised Corporation Code, empowering the SEC to impose sanctions
for violations of the Revised Corporation Code.

The RTC, as an ordinary court with general jurisdiction, has such

power to take cognizance of a treasurer falsifying a corporation’s
Articles of Incorporation depending on the manner of falsification used,
which may be punishable by the Revised Penal Code, Civil Code, or
Administrative Code. The Revised Corporation Code also provides that
the crime of falsification shall be separate from any other
administrative, criminal, or civil liabilities.

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