2007 BAR
Stockholders;
Appraisal Right (2007)
No.VII. In a stockholders
meeting, S dissented from the corporate act converting preferred voting shares
to non-voting shares. Thereafter, S submitted his certificates of stock for
notation that his shares are dissenting. The next day, S transferred his shares
are dissenting. The next day, S transferred his shares to T to whom new
certificates were issued. Now, T demands from the corporation the payment of
the value of his shares. (10%)
(A) What is the meaning of a
stockholder’s appraisal right?
ANSWER: Appraisal right is
the right of stockholder, who dissents from a fundamental or extraordinary
corporate action, to demand payment of the fair value of his shares. It is the
right of a stockholder to withdraw from the corporation and demand payment of
the fair value of his shares after dissenting form certain corporate acts
involving fundamental changes in the corporate structure (Section 81,
Corporation Code).
(B) Can T exercise the right
of appraisal? Reason briefly?
ANSWER: No, T cannot
exercise the right of appraisal in this case. When S transferred his shares to
T and T was issued new stock certificates, the appraisal right of S ceased, and
T acquired all the rights of a regular stockholder. The transfer of shares from
S to T constitutes an abandonment of the appraisal right of S. All the T
acquired from the issuance of new stock certificated was the rights of a
regular stockholders (Section 86, Corporation Code).
Trust
Fund Doctrine (2007)
No.VI. Discuss the trust
fund doctrine. (5%)
ANSWER: The trust fund
doctrine means that the capital stock, properties and other assets of a
corporation are regarded as equity in trust for the payment of corporate
creditors. Stated simply, the trust fund doctrine states that all funds
received by the corporation in payment of the shares of stock shall be held in
trust for the corporate creditors and other stockholders of the corporation.
Under such doctrine, no fund shall be used to buy back the issued shares of stock
except only in instances specifically allowed by the Corporation Code (Boman
Environmental Development Corporation v. Court of Appeals, 167 SCRA 540
[1988]).
2008 BAR
Dividends;
Declaration of Dividends (2008)
No.XIV. Ace Cruz subscribed
to 100,000 shares of stock of JP Development Corporation, which ahs a par value
of P1 per share. He paid P25,000 and promised to pay the balance before
December 31, 2008. JP Development Corporation declared a cash dividend on
October 15, 2008, payable on December 1, 2008 (A) For how many shares is Ace
Cruz entitled to be paid cash dividends? Explain. (2%)
ANSWER: Ace Cruz is entitled
to be paid each cash dividends to the entire 100,1000 shares subscribed, and
not only to the paid-up portion thereof. The legal character of being a
“stockholder,” and therefore the entitlement to all the rights of a
stockholder, are determined from the time of “subscription” and not from
payment of the subscription. Under Sec. 43 of the Corporation Code, “a stock
corporation may declare dividends out of the unrestricted retained earnings
which shall be payable in cash, in property, or in stock to all stock-holders
on the basis of outstanding stock held by them” on not on the basis on what
stocks have been paid.
ALTERNATIVE ANSWER: Under Sec.
71, only when a stockholder has been declared delinquent do his rights as
stockholder become suspended. It means therefore that a stockholder who has not
paid the full subscription, provided he is not declared delinquent has complete
exercise of all of his rights, including the right to receive dividends. But
any cash dividends due on delinquent stock shall first be applied to the unpaid
balance of the subscription (Sec. 43, Corporation Code).
(B) On December 1, 2008, can
Ace Cruz compel JP Development Corporation to issue to him the stock
certificate corresponding to the P25,000 paid by him? (2%)
ANSWER: No, Ace Cruz cannot
compel JP Development Corporation to issue him the stock certificate for the P
25,000.00. No Certificate of Stock can be issued to a subscriber until the full
amount of his subscription together with interest and expense, if any is due,
has been paid. A Subscription is one, entire and indivisible whole contract
which cannot be divided into portions. The stockholder is not entitled to a
Certificate of Stock until he has remitted the full amount of his subscription
(Sec. 64, Corporation Code; SEC Opinion [January 6, 1989]).
Piercing
the Corporate Veil (2008)
No.X. Nelson owned and
controlled Sonnel Construction Company. Acting for the company, Nelson
contracted the construction of a building. Without first installing a
protective net atop the sidewalks adjoining the construction site, the company
proceeded with the construction work. One day a heavy piece of lumber fell from
the building. It smashed a taxicab which at that time had gone offroad and onto
the sidewalk in order to avoid traffic. The taxicab passenger died as a result.
Assume that the company had
no more account and property in its name. As counsel for the heirs of the victim,
whom will you sue for damages, and what theory will you adopt? (3%)
ANSWER:
I would sue Nelson, as the
person who owned and controlled Sonnel Contruction Company, under the doctrine
of “piercing the veil of corporate fiction.” Although a corporation has a
juridical personality separate and distinct from that of its stockholders, when
the corporation is used merely as an alter ego or controlled for the benefit of
a stockholder, or when it is necessary to render justice, then the courts have
the right to pierce the veil of corporate fiction to hold the controlling
stockholder-officer personally liable for the corporate tort or wrong
committed. The contractor should also be held liable, since being an
independent contractor it is liable for the fault or negligence of its people.
(B) If you were the counsel
for Sonnel Construction, how would you defend your client? What would be your
theory? (2%)
ANSWER:
I would use the theory that
the company cannot be held liable for damages because there was no fraud or
negligence by its officers in undertaking the project for the construction of
the building or the selection of a construction company. Since a contractor is
not an agent of Sonnel Construction, the latter cannot be held liable for the
contractor’s negligence. I would also argue that piercing the veil of corporate
fiction is a remedy of last resort and cannot be availed of without clear
evidence showing fraud or disrespect of the separate juridical personality of
the corporation. Mere control of equity has not been considered as sufficient
basis for piercing the veil.
(C) Could the heirs hold the
taxicab owner and driver liable? Explain. (2%)
ANSWER: Yes, the taxicab
company can be liable for damages because it failed to comply with its
obligation as a common carrier to use extraordinary diligence in transporting
the passenger, and because at the time of death of the passenger, the cab
driver was violating a traffic regulation. Under Art. 2185 of Civil Code, it is
presumed that a person driving a motor vehicle has been negligent if at time of
mishap he was violating a traffic regulation, such as when he was driving on
the wrong side of the road (Mallari, Sr. v. CA, G.R. No. 128607, 31 January
2000).
BOD;
Conflict of Interest; Ratification (2008)
No.XII. Pedro was 70% of the
subscribed capital stock of a company which owns an office building. Paolo and
Juan own the remaining stock equally between them. Paolo also owns a security
agency, a janitorial company and a catering business. In behalf of the office
building company, Paolo engaged his companies to render their services to the
office building. Are the service contracts valid? Explain. (4%)
Answer:
The contracts of Paolo, who
owns 15% of the Outstanding Capital Stock of the office building company is
concerned if they were not approved by the Board of Directors and Paolo was not
designated to execute them on behalf of said company. On the other hand, if the
contracts were duly approved by the Board of Directors of the office building
company with Paolo duly designated as company representative, they would
nevertheless be voided at the option of the company. Under Sec. 32 of the
Corporation Code. “A contract of the corporation with one or more of its
directors or trustees or officers is voidable at the option of such
corporation, unless all the following conditions are present,” (a) if Paolo as
a director in the board meeting in which the contracts were approved was not
necessary to constitute a quorum for such meeting; (b) Paolo’s vote at such
meeting was not necessary for the approval of the contracts; (c) Each of the
contract are fair and reasonable under the circumstances.
If condition (a) or (b) is
absent, Sec, 32 requires that the contracts must be ratified by the
shareholders representing at least two-thirds (2/3) of outstanding capital
stock, provided that there was full disclosure of
the adverse interest of
Paolo to Pedro
Formation; Enactment of a
Law (2008)
No.XI. (A) Since February 8,
1935, the legislature has not passed even a single law creating a private
corporation. What provision of the Constitution precludes the passage of such a
law? (3%)
Answer:
Under
Sec. 16, Art. XII of the 1987 Constitution, Congress cannot, except by general
law, provide for the formation, organization, or regulation of private
corporations. It is only government owned or controlled corporations that may
be created or established through special charters. Consequently, it has been
held that a private corporation created pursuant to a special law is a nullity,
and such special law is void for being in violation of the Constitution (NDC v.
Phil. Veterans Bank, G.R. Nos. 84132-33, 10 December 1990).
B) May the composition of
the board of directors of the National Power Corporation (NPC) be validly
reduced to three (3)? Explain your answer fully. (2%)
Answer:
The
NPC Board may be reduced to only three (3) members, but this would have to be
affected by legislative amendment of its charter. The National Power
Corporation (NPC is a chartered government corporation, not governed by the
general provisions of the Corporation Code which requires that Boards of
Directors of private corporations shall not have less than 5 members. The
provisions of the Corporation Code are applicable to government corporations
only in a suppletory manner.
===============
2009 BAR
Derivative
Suit; Jurisdiction (2009)
No.II. Atlantis Realty
Corporation (ARC), a local firm engaged in real estate development, plans to
sell one of its prime assets—a three-hectare land valued at about P100-million.
For this purpose, the board of directors of ARC unanimously passed a resolution
approving the sale of the property for P75-million to Shangrila Real Estate
Ventures (SREV) a rival realty firm. The resolution also called for a special
stockholders meeting at which the proposed sale would be up for ratification.
Atty. Edric, a stockholder who owns only one (1) share in ARC, wants to stop
the sale. He then commences a derivative suit for and in behalf of the
corporation, to enjoin the board of directors and the stockholders from
approving the sale.
(A) Can Atty. Edric, who
owns only one share in the company, initiate a derivative suit? Why or why not?
(2%)
ANSWER: Yes, Atty. Edric can
initiate a derivative suit, otherwise known as the minority stockholders’ suit.
It is allowed by law to enable the minority stockholder/s to protect the
interest of the corporation against illegal or disadvantageous act/s of its
officers or directors, the people who are supposed to protect the corporation
(Pascual v. Del Zaz Orozco, 19 Phil. 82 (1991)).
(B) If such a suit is
commenced, would it constitute an intra-corporate dispute? If so, why and where
would such a suit be filed? If not, why not? (2%)
ANSWER:
Yes, such suit would
constitute an entra-corporate dispute as it is a suit initiated by a
stockholder against other stockholders who are officers and directors of the
same corporation (P.D. No. 902-A, Sec. 5(b)). Such suit should be filed in the
Regional Trial Court designated by the Supreme Court as a corporate or
commercial court.
(C) Will the suit prosper?
Why or why not? (3%)
ANSWER: No. The suit will
not prosper. There is no requisite demand on the officers and directors
concerned. There is, therefore, no exhaustion of administrative remedies.
Dividends;
Declaration of Dividends (2009)
No.I. Dividends on shares of stocks can only be declared out of
unrestricted retained earnings of the corporation.
ANSWER: True. Dividends on
shares of stock of a corporation, whether cash dividend or stock dividend, can
be validly declared only out of unrestricted retained earnings (Sec. 43,
Corporation Code). It cannot be declared out of the capital. Otherwise, such declaration
of dividend will violate the trust fund doctrine.
Dividends;
Declaration of Dividends (2009)
No.XVI. On September 15,
2007, XYZ Corporation issued to Paterno eight hundred preferred shares with the
ff. terms: ―The Preferred Shares shall have the ff. rights, preferences,
qualifications, and limitations, to wit: (1) The right to receive a quarterly
dividend of One per Centum cumulative and participating; (2) These shares may
be redeemed, by drawing of lots, at any time after two years from date of
issue, at the option of the Corporation; xxx Today, Paterno sues XYZ
Corporation for specific performance, for the payment of dividends on, and to
compel the redemption of , the preferred shares, under the terms and conditions
provided in the stock certificates. Will the suit prosper? Explain. (3%)
ANSWER: No. the suit will
not prosper. Paterno cannot compel XYZ Corporation to pay dividends, which have
to be declared by the Board of Directors and the latter cannot do so, unless
there are sufficient unrestricted retained earnings. Otherwise, the corporation
will be forced to use its capital to make said payments in violation of the
trust fund doctrine. Likewise, redemption of shares cannot be compelled. While
the certificate allws such redemption, the option and discretion to do so are
clearly vested in the corporation (Republic Planters Bank v. Agana, 269 SCRA 1
[1997]).
Stock
and Transfer Book (2009)
No.XVIII. (C) What is a
stock and transfer book? (1%)
ANSWER: A Stock and transfer
book is a book which records all stocks in the name of the stockholders
alphabetically arranged; the installments paid or unpaid on all stocks for
which subscription has been made and the date of payment of any installment, a
statement of every alienation, sale or transfer of stock made, the date
thereof, and by and to whom made; and such other entries as the by-laws may
prescribe (Section 74, Corporation Code).
Stockholders;
Contractual Relationship; Quorum (2009)
No.XVIII. Triple a
Corporation (Triple A) was incorporated in 1960, with 500 founders’ shares and
78 common shares as its initial capital stock subscription. However, Triple A
registered its stock and transfer book only in 1978, and recorded merely 33
common shares as the corporation’s issued and outstanding shares. (A) In 1982,
Juancho, the sole heir of one of the original incorporators filed a petition
with the Securities and Exchange Commission (SEC) for the registration of his
property rights over 120 founder’s shares and 12 common shares. The petition
was supported by a copy of the Articles of Incorporation indicating the
incorporator’s initial capital stock subscription. Will the petition be
granted? Why or why not? (3%)
ANSWER:
Yes. The articles of
Incorporation define the charter of the corporation and the contractual
relationship between the State and the Corporation, the State and the
stockholders, and between the corporation and the stockholders. Its contents
are thus binding upon both the corporation and the stockholders, conferring on
Juancho a clear right to have his stockholding recorded (Lanuza v. Court of
Appeals, 454 SCRA 54 (2005)).
(B) On May 6, 1992, a
special stockholders’ meeting was held. At this meeting, what would have
constituted a quorum? Explain. (3%)
ANSWER: A quorum consists of
the majority of the totality of the shares which gave been subscribed and
issued. Thus the quorum for such meeting would be 289 shares or a majority of
the 576 shares issued and outstanding as indicated in the article of
incorporation. This includes the 33 common shares reflected in the stock and
transfer book, there being no mention or showing of any transaction effected
from the time of Triple A’s incorporation in 1960up to the said meeting
(Section 52 in Relation to Section 137 of corporation Code; Lanuza v. court of
Appeals, 454 SCRA 54 (2005)).
Ultra
Vires Acts (2009)
When is there an ultra
vires act on the part of (a) the corporation; (b) the board of directors;
and (c) the corporate officers? (3%)
(A) the corporation;
ANSWER: Under Section 45 of
the Corporation Code, no corporation shall possess or exercise any corporate
power except those conferred by the Code or by its articles of incorporation
and except such as are necessary or incidental to the exercise of the powers so
conferred. When a corporation does an act or engages in an activity which is
outside of its express, implied or incidental powers set out in its articles of
incorporation, the act is deemed to be ultra vires.
(B) the board of directors;
ANSWER: When the Board
engages in an activity or enters into a contract without the ratificatory vote
of the stockholders in those instances where the Corporation Code so Requires
such ratificatory vote, such as when the corporation is made to invest in
another corporation or engage in a business which is not in pursuit of its
primary purpose, the board resolution not ratified by stockholders owning or
representing at least two-thirds of the outstanding capital stock would make
the transaction void, as being ultra vires.
(C) the corporate officers
ANSWER: When a corporate
officer enters into a contract on behalf of the corporation without having been
so expressly or impliedly authorized by the Board of Directors, even when the
act or contract falls within the corporation’s express, implied or incidental
power, then the unauthorized act of the corporate
2010 BAR
Corporation;
Sole Proprietorship (2010)
No.IX. Your client Dianne
approaches you for legal advice on putting up a medium-sized restaurant
business that will specialize in a novel type of cuisine. As Dianne feels that
the business is a little risky, she wonders whether she should use a
corporation as the business vehicle, or just run it as a single proprietorship.
She already has an existing corporation that is producing meat products
profitably and is also considering the alternative of simply setting up the
restaurant as a branch office of the existing corporation.
(A) Briefly explain to your
client what you see as the legal advantages and disadvantages of using a
separate corporation, a single proprietorship, or a branch of an existing
corporation for the proposed restaurant business. (3%)
ANSWER: If Dianne will set
up a separate corporation, her liability for its obligations and losses will be
limited to the amount of her subscription in the absence of showing that there
is a ground to disregard its separate juridical personality. If she were to
operate a single proprietorship, her liability for its debts and losses will be
unlimited. The formation and the operation of a corporation require a great
deal of paper work and record-keeping. This is not the situation in the case of
a single proprietorship. If Dianne will form a separate corporation, it can
raise more funds for the business than if she were to set up a single
proprietorship.
If she were to set up the
restaurant as a branch office an existing corporation, the corporation will
have more funds as capital than if she were to form a separate corporation.
However, all the assets of the existing corporation will be liable for the
debts and losses of the restaurant business.
(B) If you advise your
client to use a corporation, what officer positions must the corporation at
least have?(2%)
ANSWER: The corporation must
have at least five directors (Section 14 of the Corporation Code). It Must also
have a president, a treasure, and secretary (Section 25 of the Corporation
Code).
(C) What particular
qualifications, if any, are these officers legally required to possess under
the Corporation Code? (2%)
ANSWER: Every director must
own at least one share of the capital stock of the corporation, which must be
recorded in his name on the books of the corporation, and a majority of the
directors must be residents of the Philippines (Section 25 of the Corporation
Code). The president must also be a director. The secretary must be a resident
and citizen of the Philippines (Section 25 of the Corporation Code).
2012 BAR
BOD;
Qualifications (2012)
No.VI. X is a Filipino
immigrant residing in Sacramento, California. Y is a Filipino residing in
Quezon City, Philippines. Z is a resident alien residing in Makati City. GGG
Corporation is a domestic corporation - 40% owned by foreigners and 60% owned
by Filipinos, with T as authorized representative. CCC Corporation is a foreign
corporation registered with the Philippine Securities and Exchange Commission.
KKK Corporation is a domestic corporation (100%) Filipino owned. S is a
Filipino, 16 years of age, arid the daughter of Y. (A) Who can be
incorporators? Who can be subscribers? (2%)
Answer:
X,Y,Z and T could all be
incorporators and subscribers. Note, however, that Sec.10 of the Corporation
Code requires that there must be at least five but not more than fifteen
incorporators (who must all be natural persons) and that a majority of the
incorporators must be residents of the Philippines. S, being a minor, could
neither be an incorporator nor a subscriber. GGG Corporation, CCC Corporation,
and KKK Corporation, CCC Corporation, and KKK Corporation could not be
incorporators as they are not natural persons. However, they could be
subscribers.
(B) What are the differences
between an incorporator and a subscriber, if there are any? (2%)
ANSWER:
Some of the differences are
as follows: first, all the incorporators are required to sign and acknowledge
the Articles of Incorporation while the subscribers, as such, are not subject
to the same requirement; second, the incorporators could be either natural or
juridical persons; and third, the number of incorporators cannot exceed fifteen
while the number of subscribers could be more than fifteen (subject to
compliance, in the appropriate cases, with the requirements of the Securities
Regulation Code).
(C) Who are qualified to
become members of the board of directors of the corporation? (2%)
ANSWER:
X,Y,Z and T could be
directors (subject to the residency requirement mentioned in (a) above and any
nationality requirement under the law governing the business of the
corporation) but not GGG Corporation, CCC Corporation, and KKK Corporation as
they are not natural persons. However, the aforementioned corporations could
have their respective representatives nominated and possibly elected as
directors by the stockholders. Each director must own at least one share of the
capital stock of the corporation (Sec.23, Corporation Code).
(D) Who are qualified to act
as Treasurer of the company? (2%)
ANSWER:
The Corporation Code does
not impose any nationality or residency requirement in respect of the
Treasurer. Any such requirement or any other reasonable requirement may be
adopted by the corporation and reflected in its by-laws, or required by the
law(s) governing the business of the corporation or a law of general application
(e.g., the Anti-Dummy Law which applies to all nationalized businesses).
Accordingly, anybody with the qualifications required under the by-laws of the
corporation or under the law(s) governing the business of the corporation,
could be elected Treasurer by the Board of Directors. Note, however, that the
Treasurer could not be the President at the same time (Sec. 25, Corporation
Code).
(E) Who can be appointed
Corporate Secretary? (2%)
ANSWER:
The Secretary is required to
be both a resident and a citizen of the Philippines (Sec. 10, Corporation
Code). [Note: The problem does not state what kind of business the
corporation would engaged in. Neither does it state whether X,Y,Z and T are all
of legal age and otherwise have the capacity to enter into contracts.
Accordingly, the Answer set out below assume that the corporation would not be
engaging in a nationalized activity and that X,Y,Z and T are all of legal age
and otherwise have the capacity to enter into contracts.]
Corporation;
Dissolution (2012)
No.X. AAA Corporation is a
bank. The operations of AAA Corporation as a bank was not doing well. So, to
avert any bank run, AAA Corporation, with the approval of the Monetary Board,
sold all its assets and liabilities to BBB Banking Corporation which includes
all deposit accounts. In effect then, BBB Corporation will service all deposits
of all depositors of AAA Corporation.
(A) Will the sale of all
assets and liabilities of AAA Corporation to BBB Banking Corporation automatically
dissolve or terminate the corporate existence of AAA Corporation? Explain your
answer. (5%)
ANSWERS: No, the sale of
all the assets and liabilities of AAA Corporation to BBB Banking Corporation
will not result in the automatic dissolution of termination of the existence of
the former. A decision to dissolve AAA Corporation or to terminate its
corporate existence would require a separate approval by a majority of the
Board of Directors of AAA Corporation and its stockholders holding at least two
thirds of the total outstanding capital stock, as well as the separate approval
by the Monetary Board.
(B) What are the legal
requirements in order that a corporation may be dissolved? (5%)
ANSWERS: A corporation
may be dissolved voluntarily under Section 118 (where no creditors are
affected) or under Section 119 (where creditors are affected), or by shortening
of the corporate term under Section 120, or involuntarily by the SEC under
Section 122, all of the Corporation Code. Dissolution under Section 118,119 and
120 require the same corporate approvals stated in (a) above.
Note that the SEC also has
the authority under Section 6 of PD 902-A to revoke the certificate of
registration of a corporation upon any of the grounds provided by law,
including the aforementioned Section 6-A Corporation;
Liabilities;
BOD; Corporate Acts (2012)
No.IX. A, B, C, D, E are all
duly elected members of the Board of Directors of XYZ Corporation. F, the
general manager, entered into a supply contract with an American firm. The
contract was duly approved by the Board of Directors. However, with the
knowledge and consent of F, no deliveries were made to the American firm. As a
result of the non- delivery of the promised supplies, the American firm
incurred damages. The American firm would like to file a suit for damages. Can
the American firm sue:
(A) The members of the Board
of Directors individually, because they approved the transaction? (2%) ANSWERS:
No. In approving the transaction, the directors were not acting their personal
capacities but rather in behalf of XYZ Corporation exercising the powers of the
corporation and conduction its business (Sec. 23, Corporation Code). The
problem contains no facts that would indicate that the directors acted
otherwise.
(B) The corporation? (2%)
ANSWERS: Yes. The Board
approved the supply contract and the General Manager entered into the contract,
both of them acting on behalf of the XYZ Corporation.
(C) F, the general manager,
personally, because the non-delivery was with his knowledge and consent? (2%)
ANSWERS:
Yes, F could be sued in his
personal capacity because he knowinglyconsented to the non-delivery of the
promised supplies contrary to the contract that was duly approved by the Board
of Directors. The problem does indicate any circumstance that would excuse or
favorably explain the action of F.
(D) Explain the rules on
liabilities of a corporation for the act of its corporate officers and the
liabilities of the corporate officers and Board of Directors of a corporation
acting in behalf of the corporation. (4%)
ANSWERS: A corporation would
be liable for the acts of its Board of Directors and officers if the said acts
were performed by them in accordance with powers granted to them under the
Corporation Code, the articles of incorporation and by-laws of the corporation,
the laws and regulations governing the business of, or otherwise applicable to,
the corporation, and, in the case of officers, the resolutions approved by the
Board of Directors.
As the directors have a personality
separate from that of the corporation, they would be personally liable only if
they acted wilfully and knowingly vote for or assent to a patently unlawful act
of the corporation, or when they are guilty of gross negligence or bad faith in
directing the affairs of the corporation, or when they acquire any personal or
pecuniary interest in conflict with their duty as directors, which acts result
in damages to the corporation, its stockholders or other persons, when they
agree to hold themselves personally and solidarily liable with the corporation,
or when they are made, by a specific provision of law, to personally answer for
the corporate action. (Sec. 31, Corporation Code).
2013 BAR
Derivative
Suit; Expiration of Term (2013)
No.VIII. In the November
2010 stockholders meeting of Greenville Corporation, eight (8) directors were
elected to the board. The directors assumed their posts in January 2011. Since
no stockholders meeting was held in November 2011, the eight directors served in
a holdover capacity and thus continued discharging their powers. In June 2012,
two (2) of Greenville Corporation’s directors - Director A and Director B –
resigned from the board. Relying on Section 29 of the Corporation Code, the
remaining six (6) directors elected two (2) new directors to fill in the
vacancy caused by the resignation of Directors A and B. Stockholder X
questioned the election of the new directors, initially, through a
letter-complaint addressed to the board, and later (when his letter-complaint
went unheeded), through a derivative suit filed with the court. He claimed that
he vacancy in the board should be filled up by the vote of the stockholders of
Greenville Corporation. Greenville Corporation’s directors defended the
legality of their action, claiming as well that Stockholder X’s derivative suit
was improper. Rule on the issues raised. (8%)
ANSWER:
The remaining directors
cannot elect new directors to fill in the two vacancies. The board of directors
may fill up vacancy only if the ground is not due to expiration of term,
removal or increase in the number of board seats. In this case, the term of the
two directors expired after one year. They hold-over period is not part of
their term. The vacancies should be filled up by election by the stockholders
(Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202, 2009). The derivative
suit was improper. In a derivative suit, the corporation, not the individual
stockholder, must be the aggrieved party and that the stockholder is suing on
behalf of the corporation. What stockholder X is asserting is his individual
right as a stockholder to elect the two directors. The case partakes more of an
election contest under the rules on intra-corporate controversy (Legaspi Towers
300, Inc. v. Muer, 673 SCRA 453, 2012).
Stockholders;
Preferred Shares (2013)
No.X. Bell Philippines, Inc.
(BelPhil) is a public utility company, duly incorporated and registered with
the Securities and Exchange Commission. Its authorized capital stock consists
of voting common shares and non-voting preferred shares, with equal par values
of P100.00/share. Currently, the issued and outstanding capital stock of
BelPhil consists only of common shares shared between Bayani Cruz, a Filipino
with 60% of the issued common shares, and Bernard Fleet, a Canadian, with 40%.
To secure additional working fund, BelPhil issued preferred shares to Bernard
Fleet equivalent to the currently outstanding common shares. A suit was filed
questioning the corporate action on the ground that the foreign equity holdings
in the company would now exceed the 40% foreign equity limit allowed under the
Constitution the for public utilities. Rule on the legality of Bernard Fleet’s
current holdings. (8%)
ANSWER:
The holding of Bernard Fleet
equivalent to the outstanding common shares is illegal. His holdings of
preferred shares should not exceed 40%. Since the constitutional requirement of
60% Filipino ownership of the capital of public utilities applies not only to
voting control but also to beneficial ownership of the corporation, it should
also apply to the preferred shares. Preferred shares are also entitled to vote
in certain corporated matters. (Gamboa v. Teves, 682 SCRA 397, 2012) The state
shall develop a self-reliant and independent national economy effectively
controlled by Filipinos. (Articles II, Sec. 19, 1987 Constitution) The
effective control here should be mirrored across the board on all kinds of
shares.
