Cagayan State University

College of Law
Final Examinations – Corporation Law
June 25, 2021 – 6:00 to 9:00PM
Atty. Romeo G. Guillermo
Associate Professor

INSTRUCTIONS: Read each question carefully before answering. Answer the questions directly
and concisely. DO NOT REPEAT THE QUESTION. If you need to erase, cancel or change a word,
phrase or sentence in your answer, do it by putting or drawing a single horizontal line on the
word, phrase or sentence you wish to erase, cancel or change. GOOD LUCK and GOD BLESS
YOU!

1. Grand Gas Corporation, a publicly-listed company, discovered after extensive drilling a rich
deposit of natural gas along the coast of Antique. For five (5) months, the company did not
disclose the discovery so that it could quietly and cheaply acquire neighboring land and
secure mining rights to the land. Between the discovery and its disclosure of the
information to the Securities and Exchange Commission, all the directors and key officers of
the company bought shares in the company at very low prices. After the disclosure, the
price of the shares went up. The directors and officers sold their shares at huge profits. a)
What provision of the Securities Regulation Code (SRC) did they violate, if any? Explain.
(5pts) b) Assuming that the employees of the establishment handling the printing work of
Grand Gas Corporation saw the exploration reports which were mistakenly sent to their
establishment together with other materials to be printed. They too bought shares in the
company at low prices and later sold them at huge profits. Will they be liable for violation of
the SRC? Why? (5pts)

1. The directors and key officers are liable for being inside traders.

the Securities Regulation Code provides that it is unlawful for an insider to sell or buy a security of the
issuer, while in possession of material information not generally available to the public. Here, the
directors and key officer took advantage of the material information of the undisclosed discovery of the
rich deposit of natural gas by buying shares at low prices. As such they fall under the definition of an
inside trader under said law. Hence, being inside traders, they violated the SRC.

Hence, the directors and key officers are guilty of insider trading in violation of the Securities Regulation
Code.

2. Yes, they are liable.

Under the Securities Regulation Code, a person whose relationship or former relationship to the issuer
gives or gave him access to material information about the issuer or security that is not generally
available to the public is likewise an insider.

In the case at bar, it can be readily seen that the employees of the printing company received the
material information through its relationship with Grand Gas Corporation as its printer. They are
therefore insiders. When they purchased the shares while in possession of material non-public
information, they committed insider trading.

Hence, they can be held liable for violation of the Securities Regulation Code.
2. Barn filed an action to enjoin SN Company's Board of Directors from selling a parcel of land
registered in the corporation's name, to compel the corporation to recognize Barn as a
stockholder with 50 shares, to allow him to inspect the corporate books, and to claim
damages against the corporation and its officers. Subsequently, the corporation and the
individual defendants moved to dismiss the complaint since the corporation's certificate of
registration was revoked by the SEC during the pendency of Barn's case on the ground of
non-compliance with reportorial requirements. The special commercial court granted the
motion and reasoned that only an action for liquidation of assets can be maintained when a
corporation has been dissolved and Barn cannot seek reliefs which in effect lead to the
continuation of the corporation's business. The court also ruled that it lost jurisdiction over
the intra-corporate controversy upon the dissolution of the corporation. Was the court
correct? Explain (10pts)

The court is not correct.

The Corporation Code provides that no right or remedy for or against the corporation is
impaired by the subsequent dissolution of the corporation. Here, Barn seeks to enforce his right
to be recognized as a stockholder and inspect corporate books. Such is right is not impared
despite the dissolution of the Corporation as provided under the said provision.

3. Stockholder X of ABC Corporation obtained a car loan from IBP Bank. As a security for this
loan, Mr. X pledged his shares of stock in ABC Corporation to IBP Bank. The contract of
pledge was duly recorded in the stock and transfer book (STB) of ABC Corporation. During
the annual stockholders’ meeting of ABC Corporation, both X and the IBP Banks’s
authorized representative, Mr. Y, attended the meeting and invoked their right to vote on
the “pledged shares of stock”. Who between Mr. X and Mr. Y has a tenable contention
under the Revised Corporation Code of the Philippines? (10pts)

4. Mr. and Mrs. Reyes invested their hard-earned savings in securities issued by LEAD Bank.
After discovering that the securities sold to them were not registered with the SEC in
violation of the Securities Regulation Code, the spouses Reyes filed a complaint for nullity of
contract and for recovery of a sum of money with the RTC. LEAD Bank moved to dismiss the
case on the ground that it is the SEC that has primary jurisdiction over actions involving
violations of the Securities Regulation Code. If you were the judge, how would you rule on
the motion to dismiss? (10pts)

The motion should be denied.

Securities Regulation Code provides that Civil suits such as selling unregistered securities as in the
instant case are within exclusive original jurisdiction of the Regional Trail Court. With regard on the
defense of primary jurisdiction, according to Jurisprudence, SEC has primary jurisdiction over criminal
cases that violate said law. As the present case is a civil case, the motion should be denied.

5. C Corp. is the direct holder of 10% of the shareholdings in U Corp., a non-listed (not public)
firm, which in turn owns 62% of the shareholdings in H Corp., a publicly listed company. The
other principal stockholder in H Corp. is C Corp. which owns 18% of its shares. Meanwhile,
the majority stocks in U Corp. are owned by B Corp. and V Corp. at 22% and 30%,
respectively. B Corp. and V Corp. later sold their respective shares in U Corp. to C Corp.,
 thereby resulting in the increase of C Corp.'s interest in U Corp., whether direct or indirect,
to more than 50%.

(A) Explain the Tender Offer Rule under the Securities Regulation Code. (5pts)

(B) Does the Tender Offer Rule apply in this case where there has been an indirect
acquisition of the shareholdings in H Corp. by C Corp.? Explain (5pts)

A) A Tender Offer Rule means a publicly announced intention by a person to acquire the
equity securities of a public company. It is an offer to stockholders of such company to tender
their shares.

(B) Yes. Tender offer rule applies if the acquisition would result in ownership of 50% of the total
securities as in the instant case.

6. Data Realty, Inc. (DRI) was engaged in realty development. The family of Matteo owned
100°/o of the capital stock of DRI. Matteo was also the President and Chairman of the Board
of Directors. Other members of Matteo's family held the major positions in DRI. Because of
a nasty takeover fight with D&E Realty Co., Inc. (D&E), another realty developer, for the
control of a smaller realty company with vast landholdings, DRI and D&E engaged in an
expensive litigation that eventually led to a money judgment being rendered in favor of
D&E.

Meantime, DRI, facing inability to pay its liabilities as they fall due but still holding
substantial assets, filed a petition for voluntary rehabilitation. Trying to beat the
consequences of rehabilitation proceedings, D&E moved in the trial court for the issuance
of a writ of execution. The trial court also happened to be the rehabilitation court. The writ
of execution was issued.

Serving the writ of execution, Merto, the court sheriff who had just passed his Credit
Transactions subject in law school, garnished Matteo's bank accounts, and levied his real
properties, including his house and lot in Makati.

Are the garnishment and levy of Matteo's assets lawful and proper? Explain your answer.
(10pts)

7. Yelp Pictures Inc. (Yelp Pictures), a movie production company based in California, USA,
entered into a contract with Yehey Movies Inc., a Filipino movie production and distribution
company which is registered in the Philippines under the Securities Regulation Code (SRC)
and listed in the Philippine Stock Exchange Inc. (PSE), for the exclusive distribution in the
Philippines of movies produced in the USA by Yelp Pictures. Yehey Movies is currently
owned 85% by Yavic Yamson, and the balance, by the public in the Philippines. For purposes
of entering into the contract, suing for breach of such contract, and prosecuting
unauthorized showing of movies produced by Yelp Pictures, it appointed Atty. Yson, a local
lawyer, as its attorney-in-fact.
 Simultaneously with the execution of the film distribution agreement, Yehey Movies also
granted Yelp Pictures an option to acquire up to 40% of the total outstanding capital stock
in Yehey Movies post-exercise of the option, at the option price of PhP .01 per number of
shares covered by the option, exercisable within a period of one (1) year from the date of
the grant, at the exercise price of PhP 100 per share. Once exercised, Yelp Pictures was
granted the right to nominate two (2) directors to the Board of Yehey Movies, and Yavic
Yamson agreed to vote all his shares for the election of directors to be nominated by Yelp
Pictures.

(A) May the acts of entering into the film distribution contract, the subsequent execution
and performance of the terms of the contract in the Philippines, and the appointment of
Atty. Yson, be considered as act of "doing business" in the Philippines that will require Yelp
Pictures to register as a foreign corporation and obtain a license to do business in the
Philippines? (5pts)

(B) Will your answer in (a) be the same if Yelp Pictures exercises the option, becomes a
substantial shareholder, and is able to elect two (2) directors in the Board of Yehey Movies?
(5pts)

8. X corporation is a foreign company which has been conducting business in the Philippines
without a license. X corporation sued before a Philippine court a domestic corporation for
collection of some of money. The domestic corporation had been aware of the lack of
license of X corporation but still entered into contracts with latter. Some of these contracts
are now the subject of the collection suit. In its Answer, the domestic company moved to
dismiss the complaint for lack of capacity to sue of X corporation having no license to
transact business in the Philippines. (A) Is the defense of the domestic company tenable?
Explain (3pts). (B) Supposing the domestic company also filed a criminal case against X
corporation for violation of the RCCP as it has been doing business in the Philippines
without a license, will the that case prosper? Explain (3pts) (C) Supposing X corporation was
duly licensed to conduct business in the Philippines and the local company moved to
dismiss the complaint on the ground that the Certification of Non-forum Shopping was
signed by X’s resident agent. Resolve the Motion to Dismiss. Explain. (4pts)

9. EFG, Inc. is indebted to Bank Y in the amount of ₱50,000,000.00. The loan was secured by a
suretyship agreement issued by Z Insurance Co.
Due to EFG, Inc's default, Bank Y filed a case against Z Insurance Co. as surety. There is also
a pending criminal case for violation of the Bouncing Checks Law against the President of
EFG, Inc., Mr. P, who signed the check as signatory for the company.
Unable to meet its obligations as they fell due, EFG, Inc. filed a petition for rehabilitation.
Finding the petition sufficient in form and substance, the court issued a Commencement
Order, which was thereafter published.
(A) Should the case filed against Z Insurance Co. be suspended in light of the
Commencement Order? Explain. (5pts)
(B) Should the criminal case filed against Mr. P be suspended in light of the Commencement
Order? Explain. (5pts)

10. What is a One Person Corporation (OPC)? Does it also have a separate personality from its
sole stockholder? Does the doctrine of piercing the veil of corporate entity apply to OPC?
Discuss (5pts)