Monterona, Eldee B.

4th Year – Teehankee

Business Organization 2 Examination

1. Two types of corporate acquisitions:

a. Asset sales – the corporate entity sells all or substantially all of its assets to
another entity.
b. Stock sales – the individual or corporate shareholder sell a controlling block
of stock to new or existing shareholders

2. The principle of limited liability is the condition under which the losses that owners
(shareholders) of a business firm may incur are limited to the amount of capital
invested by them in the business and do not extend to their personal assets. 

3. The principle of “Piercing the Corporate Veil” is used to describe the action of the
court when it sets aside limited liability to hold corporate shareholders or directors
personally liable for the corporation’s actions or debts.

4. Trust Fund Doctrine provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of
their claims. The scope of the doctrine encompasses not only the capital stock but
also other property and assets generally regarded in equity as a trust fund for the
payment of corporate debts.

5. The trust fund doctrine backstops the requirement of unrestricted retained

earnings to fund the payment of the shares of stocks of the withdrawing
stockholders. Under the doctrine, the capital stock, property, and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors,
who are preferred in the distribution of corporate assets. The creditors of a
corporation have the right to assume that the board of directors will not use the
assets of the corporation to purchase its own stock for as long as the corporation
has outstanding debts and liabilities. There can be no distribution of assets among
the stockholders without first paying corporate debts. Thus, any disposition of
corporate funds and assets to the prejudice of creditors is null and void.

6. Without full and valuable consideration, a corporation cannot release an original

subscriber to its capital stock from the obligation of paying for his subscribed shares
because a stock subscription is a contract between the corporation on one side, and
the subscriber on the other, and courts will enforce it for or against either. The law
clearly recognizes that a stock subscription is subsisting liability from the time the
subscription is made. The subscriber is as much bound to pay the amount of the
share subscribed by him as he would be to pay any other debt, and the right of the
company to demand payment is no less incontestable.
7. The creditor is allowed to maintain an action upon any unpaid subscriptions and
thereby steps into the shoes of the corporation for the satisfaction of its debt when
insolvency supervenes upon a corporation. In insolvency, the court assumes
jurisdiction to wind up, all unpaid stock subscriptions become payable on demand,
and are at once recoverable in an action instituted by the assignee or receiver
appointed by the court. In an action instituted by proper authority, in this case the
creditor, he himself can proceed to collect the subscription.

8. A. In stock corporations, stockholder voting right allow shareholders of record in a

company to vote on certain corporate actions, elect members to the board of
directors, and approve issuing new securities or payment of dividends.
Shareholders cast votes at a company's annual meeting. If they cannot attend, they
may utilize a proxy vote to convey their wishes. Typically common shares carry one
vote per share, while preferred shares have no voting rights.

B. In stock corporations, shareholders may generally transfer their shares. Thus, on

the death of a shareholder, the executor or administrator duly appointed by the
Court is vested with the legal title to the stock and entitled to vote it. Until a
settlement and division of the estate is effected, the stocks of the decedent are held
by the administrator or executor.

C. A non-stock corporation typically has members who are the functional equivalent
of stockholders in a stock corporation. The right of the members of to vote may be
limited, broadened, or denied to the extent specified in the articles of incorporation
or the bylaws. Unless so limited, broadened, or denied, each member is entitled to
one vote.

D. Membership in and all rights arising from a nonstock corporation are personal
and non-transferable, unless the articles of incorporation or the bylaws of the
corporation provide otherwise. In other words, the determination of whether or not
dead members are entitled to exercise their voting rights (through their executor or
administrator), depends on those articles of incorporation or bylaws. Section 91 of
the Corporation Code further provides that termination extinguishes all the rights of
a member of the corporation, unless otherwise provided in the articles of
incorporation or the bylaws.

9. If no payment was made within thirty days from the date specified in the
subscription contract on the date stated in the call made by the board of directors,
all stocks covered by the subscription shall become “delinquent” and shall be
subjected to sale, unless the board of director orders otherwise.

10. A corporation is an artificial being created by operation of law, having the right of
succession and the powers, attributes, and properties expressly authorized by law
or incidental to its existence.
Stock corporations are those which have capital stock divided into shares and are
authorized to distribute to the holders of such shares, dividends, or allotments of
the surplus profits on the basis of the shares held. All other corporations are non-
stock corporations.

Section 6. Classification of Shares. – The classification of shares, their corresponding

rights, privileges, or restrictions, and their stated par value, if any, must be indicated
in the articles of incorporation. Each share shall be equal in all respects to every
other share, except as otherwise provided in the articles of incorporation and in the
certificate of stock.

The shares in stock corporations may be divided into classes or series of shares, or
both. No share may be deprived of voting rights except those classified and issued
as “preferred” or “redeemable” shares, unless otherwise provided in this Code:
Provided, that there shall always be a class or series of shares with complete voting
rights.

Holders of nonvoting shares shall nevertheless be entitled to vote on the following

matters:
a. Amendment of the articles of incorporation;
b. Adoption and amendment of bylaws;
c. Sale, lease, exchange, mortgage, pledge, or other disposition of all or
substantially all of the corporate property;
d. Incurring, creating, or increasing bonded indebtedness;
e. Increase or decrease of authorized capital stock;
f. Merger or consolidation of the corporation with another corporation or other
corporations;
g. Investment of corporate funds in another corporation or business in accordance
with this Code; and
h. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote required

under this Code to approve a particular corporate act shall be deemed to refer only
to stocks with voting rights.