Corporation Law – Atty. Ruben C.

Ladia
Midterms
Coverage: Until By-Laws
Multiple Choice:
1. A, B, C, D and E organized/formed DKD Inc. was issued a certificate of registration by the appropriate government
agency. It turned out, however, that C,D, and E are not residents of the Philippines. What type/kind of corporation is
DKD Inc.?

a. De Facto
b. De Jure
c. Corporation by Estoppel
d. It does not exist as a Corporation at all.

2. A director who was compensated and paid 15% of the net income before tax of the corporation for the preceding
year for the services rendered by him as corporate secretary by a mere Board resolution is

a. Valid since he is acting in a capacity other than as such director

b. Invalid since only 10% of the net income before tax is allowed by law
c. Invalid because it requires stockholders’ approval or a by-law provision authorizing it
d. Valid because all corporate powers, all businesses are conducted and all properties are controlled by the Board
of Directors

3. The declaration of stock dividends will generally have

a. the effect of decreasing the total assets of the corporation

b. the effect of an increase in the proportionate interest of the stockholders
c. no effect in the proportionate interest of the stockholders
d. the effect of increasing the authorized capital stock notwithstanding the fact that the corporation has a free
portion of its capital stock to cover the declaration/distribution

4. A contract between a corporation and its president is

a. valid id not tainted with fraud and the contract is fair and reasonable
b. valid if previously approved by the Board of Directors
c. voidable is the president holds a substantial interest in the corporation
d. voidable at the option of the corporation

5. It is common practice in DKD Inc. for the general manager to enter into contracts for an in behalf of the corporation
without prior approval of the Board of Directors. Said contracts are

a. invalid since the power and authority is lodged to that of the Board of Directors
b. valid because approval of the Board is not required for its validity
c. invalid because the general manager is not authorized by law to enter into contracts for and in behalf of the
corporation
d. valid because similar acts were approved and allowed by the Board as a matter of practice, custom and policy
and thus binding on the corporation even without formal Board resolution

6. Non-voting shares are not included in determining the voting requirements imposed by the code in cases of

a. removal of a member of the Board of Directors

b. providing for additional disqualifications of directors in the by-laws
c. shortening of the corporate terms
Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
 d. changing the principal office of the corporation

7. DKD INC.. declared cash dividends of P1.00 per share on January 18, 2011 to be paid to the stockholders of record
on January 31, 2011. Said declaration was duly announced to the stockholders. On January 20, 2011, “A”, one of the
stockholders holding 100,000 shares valued at P100,000 sold his shares for the same amount to “B”, who is not a
stockholder of the same corporation, and on January 25, 2011 the transfer in favor of “B” was duly recorded in the
books of the corporation. Absent any agreement to the contrary, as between “A” and “B” who has better right to
the dividends?
a. “A” because the transfer of his share was in violation of a by-law provision granting existing stockholders the
preferential right to buy the shares of a selling stockholders
b. “A” because he was the owner of the shares at the time of the declaration of the dividend
c. “B” because he was the recorded owner of the share even before payment of the dividend
d. “B” because he was the owner of the share at the time/date of payment

8. A stock corporation shall have the power to reacquire its own shares irrespective of the existence of unrestricted
retained earnings

a. to eliminate fractional shares arising out of stock dividends.

b. to pay dissenting stockholders in the exercise of their appraisal rights
c. to pay a stockholder in a close corporation who compels the latter that he be paid the value of his shares
d. to collect/compromise an indebtedness to the corporation arising out of unpaid subscription in a delinquency
sale

9. Only the stockholders/members can fill up a vacancy created in the office of a director if the said vacancy occurs

a. by virtue of the resignation of a hold-over director

b. by virtue of the death of a director
c. if the director ceases to be a stockholder
d. if the director is subsequently disqualified by a by-law provision

10. The Articles of Incorporation of DKD INC.. provides for a nine (9) man member Board of Directors. Two of them died.
On January 15, 2011, the corporate secretary of the company resigned such that at a Director’s meeting was held
and conducted to elect an0ther corporate secretary. Five (5) if the directors attended the meeting and four (4) of
them elected “A” to replace the resigned corporate secretary. Is the election valid?

a. Yes, because there are only seven (7) living members of the Board and the vote of four (4) constitutes a majority
b. No, because the vote required is majority of the Board as fixed in the Articles of Incorporation
c. No, because the quorum requirement was not complied with
d. Yes, because the vote required is only a majority of those present at which there is a quorum

11. DKD INC.. paid A CO., INC. 10% of the property dividend declared by the Board of Directors of the former pursuant
and in consideration of messenger services actually rendered by the later. Is the payment valid?

a. Yes because it is a valid contractual arrangement between the parties

b. No because stockholders’ approval is required for its validity
c. No because it would result to a dilution of dividend rights of the stockholder
d. Yes because labor or services actually rendered may be paid by way of property

12. All persons who assume to act as a corporation knowing it without authority to do so shall be liable

a. only to the extent of their subscription to the capital stock of the corporation
b. only to the extent of the corporate assets
Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
 c. as limited partners for all debts, liabilities and damages arising therefrom
d. as general partners for all debts, liabilities and damages arising therefrom

13. A, B, C, D and E are the 5-man member of the Board of Directors of DKD INC.. On January 15, 2011, the remaining
members of the Board of Directors consisting of A, B and C conducted a meeting to fill up two (2) vacancies in the
Board cause by the removal of D by the stockholders and by the death of E. D was unanimously replaced by F, and E
by G. The election of F and G is

a. valid for both

b. not valid for both
c. not valid for G but valid for F
d. valid for G but not valid for F

14. DKD INC.. filed/submitted an amendment of its Articles of Incorporation with the SEC. If the latter does not act on it
within 6 months without fault attributable to the corporation, the amendment takes effect on the date of its filing
except

a. when the amendment consists of a decrease in the capital stock

b. when the amendment consists of a decrease in the number of directors
c. when the amendment consists of including reasonable restrictions on transfer of shares
d. when the amendment consists of a change in the principal office of the corporation

15. The Board of Directors cannot, without stockholders’ approval, pass a valid corporate act

a. to sell/dispose of its only property in the usual course of its business

b. to invest its corporate funds necessary to carry out the secondary purpose indicated in the articles of
incorporation
c. to declare property dividends
d. to reacquire its own shares

16. A contract between corporations with interlocking directors will be subject to the provisions of section 32 of the
Code (voidable) when

a. the interlocking director owns 20% of the outstanding capital stock in one corporation while 18% in the other
b. the interlocking director owns 22% in one corporation while 25% in the other
c. the interlocking director owns 20% in one corporation while 22% in the other
d. the interlocking director owns 22% in both corporation

17. A director who ceases to be a stockholder shall

a. automatically cease to be a director

b. continue to serve in a hold-over capacity until his successor has been duly elected and qualified
c. continue to serve as such until the expiration of his term.
d. continue to serve as such until the expiration of his term if authorized by the Board of Directors

18. DKD INC.. is engaged in the realty business with no other purpose indicated in the article of incorporation. It entered
into a catering service with Y CO., INC. for the retirement of the latter’s president for a consideration of Php150,000.
X CO. fully complied with its obligation but Y CO., later refused to pay the agreed amount claiming that X CO., is not
empowered/authorized to engage in the food catering business. In an action brought before the Court, may Y CO.,
INC. be compelled to pay?

Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
 a. No, because the actuation of DKD INC.. is beyond its corporate powers and authority. (Doctrine of Limited
Capacity)
b. Yes, because the party who has received the benefits of the contract is estopped to set up that contract is
beyond the corporate powers of X CO., to defeat an action on the same.
c. Yes, because the contract is valid per se
d. No, because the court cannot interfere with the business judgment of the Board of Directors

19. A provision in the by-laws of a regulatory/ordinary stock corporation may validly provide

a. for a greater quorum and voting requirement in stockholders’ meeting

b. for a denial of cumulative voting of the stockholders
c. for a greater quorum and voting requirements in directors’ meeting
d. for the holding of stockholders’meeting anywhere in the Philippines

20. “A”, the President of DKD INC.. which is engaged in the realty business, bought (in his personal and individual
capacity) from his friend a parcel of land for Php5M and later sold it at Php5.5M thereby making a profit of Php.5M.
May his act be validly ratified by the stockholders at the objection of any one single stockholder?

a. Yes, because he acted as a natural person separate and distinct of the corporation which he is the President
b. No, because he acquired a personal interest in conflict with his duty as a director
c. No, because he serves in a fiduciary position and should not advance his selfish motives to the damage and
prejudice of the corporation
d. Yes, because he merely acquired a business opportunity rightfully belonging to the corporation

True or False:
1. Moral damages cannot be awarded to a corporation
2. Nationality is not a requirement in for incorporators
3. Last Name of a person can be used as part of the Corporation Name
4. There can only be 5 incorporators
5. A corporation can be an incorporator
6. All corporations acquire Juridical Personality only upon the approval of SEC
7. Labor performed or services rendered can be a consideration for stocks
8. According to Ronnie Duter, corporations exists only for a period of 25 years.
9. All shareholders of a Non-stock Corp are automatically considered as members
10. By Laws may provide for additional qualification of a director
11. There is no minimum requirement to be subscribed in a corporation
12. Non-voting does not have a voting right
13. In Piercing the veil of corporate fiction, control means majority or complete stock control.
14. By Laws are not mandatory
15. Non-filing of By Law results to immediate dissolution.
16. Members of the executive committee must be a member of a board
17. Directors cannot receive compensation
18. Directors can dispose all or substantially all of the Corporation properties.
19. Ultra Vires acts are subject to ratification of the stockholders
20. Shareholders are not conclusively presumed to know By – Laws

Define or Differentiate the Following:

1. What is a corporation?
2. What are Ultra Vires Acts
3. Differentiate De Facto from De Jure Corporation
Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
 4. What are Unrestricted Retained Earnings?
5. What is Corporation by Estoppel
6. What is the Incorporation test?
7. Define Doctrine of Secondary Meaning
8. Define and differentiate Authorized Capital, Subscribed Capital and Paid Up Capital
9. What is outstanding Capital Stock
10. What are Non-par value shares
11. What are preferred stocks
12. What is cumulative voting?
13. Differentiate Cumulative Preferred Shares vs. Earned Cumulative/Dividend Credit Type
14. What are Treasury Shares?
15. What is the Doctrine of Limited Liability?
16. What is Pre-emptive Rights and when can it be exercised?
17. What is the Corporate Entity Theory?
18. What is Business Judgment Rule?
19. Differentiate ordinary vs special amendment
20. Differentiate Self-Dealing vs. Interlocking Directors

Enumerate the Following:

1. When may Directors and/or Officers be personally liable with the corporation?
A. Willfully and knowingly vote or assent to patently unlawful acts of the corporation;
B. Guilty of Gross Negligence or Bad Faith in directing affairs of the corporation;
C. Acquire any personal or pecuniary interest in conflict with their duty as Directors or Officers;
D. Consented to the issuance of watered stocks or who, having knowledge thereof, does not file with
the corporate secretary his written objection thereto;
E. Made personally liable by a specific provision of law; and
F. Corporation fiction is used to defeat public convenience, justify wrong, protect fraud, or defend
crime.

2. What is the test in determining whether a corporation has the implied power to do a certain act?
A. Whether the act is lawful and not otherwise prohibited;
B. Whether the act is essential or reasonably necessary to the carrying out the purpose of serving the
corporate ends; and
C. Whether the act would reasonably contribute to the promotion of of those corporate end in a
substantial and not in a remote and fanciful sens.
3. What is the limitation imposed by law on the right of a corporation to decrease its capital stock?
A. When such decrease in the capital stock will prejudice a creditor;
B.
4. What is the reason for the decrease of capital stock?
A. To reduce or wipe out existing deficit where no creditors would thereby be affected; and
B. When capital is more than what is necessary to procreate the business or reduction of capital surplus;
C. To write down the value of its fixed assets to reflect their present actual value in case where there is a
decline in the value of the fixed assets of the corporation.

5. What is the Business Judgment Rule?

6. Elements of By Laws
7. Advantages of the Corporate form of business
8. Requirements for the Amendments of AOI
9. Requirements for the Amendments of By Laws
10. Disadvantage of the Corporate form of business
Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
 11. What is the test in determining whether a corporation is private or public corporation?
12. Enumerate the Instrumentality Test
13. What can be a consideration for stock?
14. Enumerate the defenses available to the directors for their failure or refusal to declare dividends
15. When can Non-Voting Shares participate in voting?
16. What are justifiable reasons for non-declaration of corporate dividends?
17. Modes of Increasing Capital Stock?
18. Reason for Decreasing Capital Stock?
19. Elements of By Laws
20. What are the types of Dividends
21. Enumerate the test in determining whether a corporation has the implied powers to do certain acts

Explain why the following statements are CORRECT:

1. If not denied by a provision in the articles of incorporation, the pre-emptive right of a stockholder in a close
corporation is absolute.
2. Failure of a corporation to adopt/file its by-laws within the time frame provided for by law does not result to the
automatic dissolution of the corporation.
3. Labor performed or services rendered can be a consideration for stocks
4. Minors can be a corporator.
5. Members of the executive committee must be a member of a board
6. Adoption of By Laws prior incorporation is more convenient than after incorporation.
7. Service of summons against a corporation must not be made upon Branch Manager
8. Treasury shares may be issued lower than par value
9. Corporate extension may be made earlier than 5 years prior expiration
10. Demand may be waived in a Derivative Suit.
11. Corporations persists to exist despite death, incapacity, civil interdiction or withdrawal of stockholders or
members
12. Third-person can be bound by the By Laws of a Corporation.
13. Directors or Officers can be liable with the corporation.
14. Pre-emptive right of a stockholder in a close corporation is absolute.
15. Cumulative voting is not allowed in a Non-Stock Corporation
16. A corporation may acquire its own shares.
17. Disloyal act of a director may be subject to ratification by a vote of stockholders owning or representing at least
2/3 of the outstanding capital stock.
18. Acts of self-dealing director is merely voidable
19. Acts of Interlocking directors are valid
20. Incorporators are not subject of any amendments

Essay:

DKD INC.. which is engaged in land transportation business has an authorized capital stock of Php100M divided into
100M shares with a par value of Php1.00 per share. 50M has been subscribed and 25M was duly paid up. The Board of
Directors consist of 10 members as fixed in the Articles of Incorporation. The by-laws are silent as to whether or not the
company may create an Executive Committee. One of its stockholders, “A”, recently graduated Magna Cum Laude in
Business Administration from Yale University and the Board firmly believes that he (A) will be able to help bring the
company to its highest level of competence. The company approaches you if

1. The Board of Directors may create an executive committee. If yes, why and if not, why not, and what should be done
in order that one may be created?

Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
2. If such an executive committee may be created, may it be composed of 5 members consisting of 4 directors and “A”
who is not a director? Why or why not?
3. May the company validly engage in water transportation without amending the articles of incorporation to include
such an activity in the purpose clause? Explain.
4. May the company put up a 12 story building, occupy 3 stories for its offices and rent out the rest to the public? Why
or Why not?
5. If the company made Php30M surplus profits (unrestricted retained earnings) may the Board be compelled to
declare dividends even if there are no preferred shareholders? If Yes, to what extent or how much may they be
compelled to declared? If no, why not?
6. If DKD INC.. earlier entered into a contract with Z CO., which represented itself as a corporation for the lease/rental
of 5 of the buses of the former who was aware that Z CO., INC. is not in fact registered as a corporation, and DKD
INC.., fully complied with its obligation, on a suit brought to by it (DKD INC..) directly against the person/s who
assumed to act as such corporation, may the latter interpose that DKD INC.. has no cause of action against them
because he dealt with Z CO., INC. as a corporation and thus admitted its legal existence as a corporate body?
7. Assuming that Z CO., INC., (as stated in no. 6) is a de facto corporation, may the stockholder who made
representation of the existence of the corporation be sued in their personal/individual capacities?
8. If a stockholder is denied to exercise his pre-emptive right by the board of directors and the former intends to sue
the latter, what type of suit may he institute/bring?
9. In relation to item 8, may service of summons be validly served upon a director who is neither the president,
managing director, in house counsel, corporate secretary or treasurer. Explain.
10. If the president DKD INC., issues a corporate check to pay corporate liabilities and the check bounced for
insufficiency of funds, may he successfully advance the Corporate Entity Theory to evade liability in an action filed
against his person? Why or why not?

Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!