CASE ASSIGNMENT

Corporate Practice

Submitted by: Francis Ray A. Filipinas

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PROBLEM V

ABC, Inc. owns a prime parcel of land in Calindagan. DEF Co. approaches it and
proposes a joint venture to develop a high-end condo-tel. Under the terms of this joint
venture, ABC’s only exposure shall be the land, while DEF shall finance the development
from its own resources, without using the land as collateral for a loan. To pursue the joint
venture, the parties organize a new corporation, Monticello Arms Hotel Corporation, with
ABC holding 30% of the equity and DEF controlling 70%. Shares were divided into common
and preferred shares. Soon after the joint venture company is formed, DEF requires ABC to
assign its land to the joint venture company. ABC is reluctant at first, because it would like to
assign its property only when DEF shall have also put in a substantial portion of the capital
needed to implement the project. However, DEF is very persuasive, so ABC eventually
assigns the property even without DEF’s counterpart capital.
A consequence of this assignment, however, is that ABC temporarily acquires
control of the joint venture company. This is because, under the Internal Revenue Code (Sec.
35, c.2), a tax-free exchange can only be effected if the stockholder exchanging its property
for stock retains at least majority control of the corporation to which the property has been
transferred.
In the meantime, DEF still has not put in its capital, although it has succeeded in
interesting a few investors to acquire shares from the joint venture company. The proceeds
of these sales have been deposited in the joint venture company’s bank account.
Technically, however, the shares that have been sold to investors should pertain to DEF’s
shares, because the joint venture company has not opened for subscription additional
shares from its authorized capital stock, neither has ABC waived its pre-emptive right to the
additional subscription, if there ever was any available. To complicate matters, DEF, at the
time when it was still in control of the joint venture company, issued stock certificates to
these investors, ABC and itself. Again, this violated the provision in the Corporation Code
that no stock certificate may be issued until the full subscription for a batch of shares has
been fully paid. The issuance of the certificates was also defective, because: 1. The
certificates were not issued in series; thus investors were issued certificates numbers 1-9,
while ABC’s certificates were already numbered 33-45; 2. The stock certificates did not
contain the restrictions indicated in the By Laws; and 3. The certificates were issued in a
single series without any distinction as to whether they were issued for common or
preferred shares.
When DEF still failed to proceed with the development, ABC exercised its controlling
interest and convinced DEF to withdraw from its role as developer and allow the joint
venture company to directly pursue the project. Consequently, a new agreement was
forged, and DEF agreed to remain a mere minority investor in the joint venture company.
With this reorganization, the joint venture company awarded the construction
contract for the project to GHI Construction on a share swap basis (for preferred shares
only). After the groundbreaking, however, GHI fails to proceed with the works. Concerned
about the delay, ABC steps in and does the work for GHI. Due to very limited resources,
however, the work moves very slowly. This gives DEF an opportunity to complain to ABC that
it was in conflict-of-interest because it was doing business with the joint venture company as
a sub-contractor of GHI. ABC ignore’s DEF’s complaint.
In the meantime, ABC discovers that, after the reorganization, DEF closed the bank
account of the joint venture company and withdrew all the remaining cash. Needless to
state, DEF did this without authority from the Board of Directors of the joint venture

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company, although DEF’s representatives were still authorized signatories of the bank
account.
Concluding that fraud was being committed by DEF, ABC initiates a second
reorganization of the joint venture company. This time, all of DEF’s representatives to the
Board are ousted and replaced by ABC’s nominees. DEF protests, and claims that all its
actions were consistent with its role as developer under the original agreement. DEF also
insists that ABC is in breach of the joint venture agreement for not protecting its
representatives’ right to sit on the Board as agreed upon by the parties.

a. A fourth Law Firm is engaged by GHI to demand its proportionate share of

preferred stocks from the joint venture company based on what it had
accomplished before it was terminated; and to protect itself against potential
actions by DEF against ABC and itself on the alleged “conflict-of-interest” sub-
contracting deal.

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 CASE BRIEF
(GHI CONSTRUCTION)

Problem:
GHI Construction seeks to demand proportionate share of preferred stocks from the joint
venture company, Monticello Arms Hotel Corporation, based on what it had accomplished
before it was terminated; and to protect itself against potential actions by DEF Co. against ABC,
Inc. and itself on the alleged “conflict of interest” subcontracting deal.

Statement of Facts:
Monticello Arms Hotel Corporation, formed by ABC, Inc. and DEF, Co., awarded the
construction contract project to develop a high-end condo-tel on a parcel of land in Calindagan
to GHI Construction on a share swap basis (preferred shares only). GHI Construction was unable
to proceed with the works after the ground breaking which prompted ABC, Inc. to finish the
work.

Issues:
1. Whether or not GHI Construction is entitled for proportionate share of the preferred
stocks based on what it had accomplished before ABC, Inc. took over due to the failure
of the former in finishing the work.
2. Whether or not GHI Construction may be held liable (jointly/solidarily) for the alleged
conflict-of-interest subcontracting deal with ABC, Inc.

Discussion:
1. GHI Construction cannot be entitled to any share of the preferred stock because of its
non-fulfillment of its obligation to finish the construction contract it entered upon with
Monticello Arms Hotel Corporation. GHI Construction will only be issued the preferred
shares of stocks if it has fulfilled its end of the bargain which is to construct and develop
a high-end condo-tel on a parcel of land in Calindagan. However, after the
groundbreaking, GHI Construction did not proceed with its obligation. This act of GHI
Construction would deny it the right to claim the consideration of preferred shares. The
first paragraph of Article 1191 of the New Civil Code provides that “The power to rescind
obligations is implied in reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him”. 1

2. “Contracting or subcontracting refers to an arrangement whereby a principal agrees to

put out or farm out with a contractor or subcontractor the performance or completion
of a specific job, work or service within a definite or predetermined period, regardless of
whether such job, work or service is to be performed or completed within or outside the
premises of the principal as hereinafter qualified”. 2 In the case at bar, it cannot be seen
that GHI Construction had contracted with ABC, Inc. to do the work of developing the
high-end condo-tel. It must be appreciated that Monticello Arms Hotel Corporation was
the company which contracted with GHI Construction. The board of the corporation
that granted the contract to GHI Construction is composed of not only ABC, Inc. but
including DEF Co. as well. Hence, it is not ABC, Inc. which GHI Construction had
contracted. Also, GHI Construction did not execute a sub-contract with ABC, Inc.. It is

1
NCC, Art. 1191
2
Section 4(c) of Department Order No. 10, series of 1997, Amending the Rules Implementing Books III and
VI of the Labor Code, as amended.

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ABC, Inc’s own choice to continue the work which GHI Construction could not proceed.
Thus, GHI Construction may not be held liable for any liability that may be charged
against ABC, Inc. for conflict-of-interest.