MANUEL S.

ENVERGA UNIVERSITY FOUNDATION

College of Law Student ID Number
Second Semester

PHILIPPINE CORPORATE LAW

Atty. Jose Maria B. Duhaylongsod, CTEP

FINAL1 EXAMINATION
GENERAL INSTRUCTIONS: DO NOT WRITE YOUR NAME. Write your STUDENT
ID NUMBER and SECTION on the upper right hand corner of this questionnaire and
your exam booklet. Take note, further instructions will be given. Good luck!

“BUT, IN TRUTH, SUCCESS DOESN'T DEMAND A PRICE.

EVERY STEP FORWARD PAYS A DIVIDEND.”

- D.J. SCHWRATZ, The Magic of

Thinking Big

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I. ESSAY: PLEASE WRITE YOUR ANSWER FOR EACH QUESTION ON A

SEPARATE PAGE. ANY ANSWER BEYOND THE ALLOCATED AREA WILL NOT BE READ AND
WILL RECEIVE NO GRADE. DO NOT REPEAT THE QUESTION. A MERE “YES” OR “NO” WILL
NOT BE GIVEN ANY CREDIT. DO NOT ASSUME OR INVENT FACTS, WHICH ARE NOT GIVEN
IN THE PROBLEM. KINDLY BE DIRECT AND RESPONSIVE TO THE QUESTIONS. JUST ANSWER
ACCORDINGLY AND TO THE BEST OF YOUR ABILITIES. FEEL FREE TO USE THE PROVISIONS
OF LAW AS WELL AS THE ASSIGNED CASES TO ELABORATE. LASTLY, REMEMBER “ALAC”
WHEN ANSWERING. [FIVE (5) POINTS EACH]

COMMON FACTS

Mr. John Wayne Gacy, a Filipino citizen, set up a holding company, Le Gacy Holdings,
Inc. (“LG Holdings”), of which he owns all of the outstanding capital stock (“OCS”),
except for four (4) shares, which are in the name of the four (4) other directors of LG
Holdings.

Mr Gacy and LG Holdings in turn each own forty percent (40%) or a combined eighty
percent (80%) of the OCS of the following corporations (collectively “LG Subsidiaries”):

 Le Gacy Bank, Inc. (“LG Bank”), a commercial bank duly organized and existing
under Philippine laws and authorized to operate as such by the Banko Sentral ng
Pilipinas. The remaining twenty percent (20%) of the OCS of LG Bank is owned
by Ng Brothers, Inc. (“NBI”), which is equally owned, foreign and Filipino, at
fifty-fifty (50%-50%).
 Le Gacy Pre-Need Company, Inc. (“LG Pre-Need”), a pre-need company duly
organized, registered with the Securities and Exchange Commission (“SEC”), and
authorized to operate as such by the Insurance Commission (“IC”). The remaining
twenty (20%) of the OCS of LG Pre-Need is owned by JM Enterprises, Inc., a
holding company which is equally owned, foreign and Filipino, at fifty-fifty
(50%-50%).
 Le Gacy Realty Development Corporation, Inc. (“LG Realty”), a corporation duly
organized and registered as such with the SEC, the primary purpose of which is to
engage in real estate business. The remaining twenty percent (20%) of the OCS of
LG Realty is equally owned by NBI and JME.

LG Holdings and the LG Subsidiaries have the same five (5) directors, namely Messrs.
Gacy, Ely, Raymund, Marcus, and Budd, all Filipino Citizens. Except for Mr. Gacy, all
remaining directors are all nominees of the former (for LG Holdings) and LG Holdings
(for the LG Subsidiaries). As such, they all executed nominee agreements and blank
Deeds of Assignment, and indorsed in blank the stock certificates covering their
qualifying shares in LG Holdings and the LG Subsidiaries.

PROBLEM I
ADDITIONAL FACTS

Due to the sudden global economic meltdown, Mr. Gacy wanted to hoard as much cash
as he can in preparation for his candidacy in the 2022 Federal Elections (due to the
upcoming approval of Charter Change). Thus, Mr. Gacy caused LG Holdings to borrow
(ostensibly for additional capital requirements) the amount of Php1,000,000,000.00 (the
“Loan”) from LG Bank using LG Holdings’ shares in all LG Subsidiaries as collateral.
The Loan falls exactly within the maximum allowable limits mandated by the General
Banking Law and BSP regulations.

PROBLEM I
QUESTIONS

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1. In extending the Loan, LG Bank merely approved it at the Board of Directors’

level, without stockholders’ ratification. Can NBI, as minority stockholders of LG Bank,
impugn the validity of the Loan on the ground that such stockholders’ ratification was not
secured?

2. Without going into the requirements under banking laws, can LG Bank validly
accept its own shares as collateral without violating the Trust Fund Doctrine?

3. Assuming all necessary approvals by the pertinent Boards of Directors,

stockholders, and regulatory bodies are obtained for purposes of the foregoing
transaction, can NBI have the Loan nullified if the Loan turns our to be a “bad deal” due
to LG Holdings’ incapacity to repay the Loan?

4. Assuming all necessary approvals by the pertinent Boards of Directors,

stockholders, and regulatory bodies are obtained for purposes of the foregoing
transaction, can NBI hold the board of directors of LG Bank, which approved the Loan,
liable for violation of their duty of loyalty as directors if the Loan turns our to be a “bad
deal” due to LG Holdings’ incapacity to repay the Loan?

5. If Mr. Gacy abstained from voting at the board of directors’ meetings of LG

Holdings and LG Subsidiaries approving the above-mentioned transactions, can he be
held liable for violation of his duties as a director if it is shown that the transaction is
fraudulent?

6. If the Loan is shown to be fraudulent, can NBI exercise its appraisal right as
stockholder of LG Bank on the premise that it did not approve of such use of funds?

7. If the Loan is shown to be fraudulent, can JME, as stockholder of LG Pre-Need

and LG Realty inspect the books of LG Holdings on the basis of piercing the veil of
corporate fiction?

8. In case of a request to inspect the books of LG Holdings as provided in question 7

above, can the Corporate Secretary refuse to allow such inspection on the ground that
JME will in all probability use the information to institute a lawsuit?

PROBLEM II
ADDITIONAL FACTS

Due to the sagging confidence of the Filipino people in the pre-need industry, JME
sought to sell its shares in LG Pre-Need to FJ Ventures, Inc. (“FJV”), a one-hundred
percent (100%) Filipino-owned holding company, which owns one-hundred percent
(100%) of the OCS of FJ Pre-Need Corp. (“FJP”), a direct competitor of LG Pre-Need.

PROBLEM II
QUESTIONS

1. Mr. Gacy and LG Holdings sought to block the intended sale of shares by
amending the By-Laws of LG Pre-Need to prohibit the sale of shares to direct
competitors, their holding companies, subsidiaries, and affiliates (the “Prohibition”), such
that a violation of the Prohibition would render the sale void. Assuming the SEC
approves such amendment of LG Pre-Need’s By-Laws prior to the sale by JME of its
shares in LG Pre-Need to FJV, can the sale be declared void based on the Prohibition?

2. Assuming the Prohibition is valid and incorporated in LG Pre-Need’s Articles of

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Incorporation, would the fact that the Prohibition is not contained in the stock certificated
covering the shares of stock to be sold material in deciding whether the Prohibition is
binding on FJV?

3. Assuming the Prohibition is void, and FJV requests a recording of its purchase of
JME’s shares in the stock and transfer book (“STB”) of LG Pre-Need. Can the Corporate
Secretary of LG Pre-Need be compelled to record such transfer, and if so, how?

4. Pending recording of the purchase of JME’s shares in the STB of LG Pre-Need,

can JME validly issue a proxy in favor of FJV to allow the latter to exercise voting rights,
notwithstanding that JME is, as between the parties, no longer the owner of the shares?

PROBLEM III
ADDITIONAL FACTS

Due to the sagging confidence of the Filipino people in the pre-need industry, Mr. Gacy
and LG Holdings sought to liquidate their interest in LG Pre-Need in favor of FJV, a one-
hundred percent (100%) Filipino-owned holding company, which owns one-hundred
percent (100%) of the OCS of FJ Pre-Need Corp. (“FJP”), a direct competitor of LG Pre-
Need.

PROBLEM III
QUESTIONS

1. If Mr. Gacy and LG Holdings sell their entire shareholdings in LG Pre-Need to

FJV, does JME have any legal right to compel FJV to likewise buy-out its shares in LG
Pre-Need?

2. If LG Pre-Need sells its entire portfolio of pre-need plans (liabilities) and the
corresponding trust fund (assets) to FJP, is FJP liable to the holders of the said pre-need
plans under this mode of acquisition?

3. If LG Pre-Need sells its entire portfolio of pre-need plans (liabilities) and the
corresponding trust fund (assets) to FJP, and as a result ceases operations, can FJP be
held liable for the claims of the displaced employees of LG Pre-Need, if the latter no
longer has assets sufficient to pay for such claims?

4. If LG Pre-Need sells its entire portfolio of pre-need plans (liabilities) and the
corresponding trust fund (assets) to FJP, can such sale be declared null and void on the
ground that the stockholders’ ratification was not obtained in a meeting duly called for
that purpose. Even if Mr. Gacy and LG Holdings collectively own eighty percent (80%)
of the OCS of LG Pre-Need?
PROBLEM IV
ADDITIONAL FACTS

In the year 2016, due to the downtrend in the real estate market, LG Realty sought to take
the following measures to generate income:

 Issuance of ten percent (10%) preferred shares (apart from existing common
shares) to attract investors to infuse capital; and,
 Investment of its surplus profit in Philippine Treasury Bonds.

PROBLEM IV
QUESTIONS

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1. If preferred shares are issued, can the holders of the common shares exercise their
pre-emptive right on the issuance thereof?

2. Assuming that the preferred shares were issued for past services rendered, can the
holders of the common shares object to such issuance?

3. If an election of LG Realty is conducted, and Mr. Gacy and LG Holdings vote as

one block, can JME and NBI, voting separately, elect a director to the five (5) available
seats in LG Realty’s Board? How about if JME and NBI vote as a block, how many seats
can they get?

4. If LG Realty invests its surplus profit in Philippine Treasuries, can such

investment be invalidated on the ground that it is ultra vires? If so, under what
circumstances?

PROBLEM V
ADDITIONAL FACTS AND BONUS QUESTIONS2

1. Please state section 123 (Place of Incorporation Test) of the Corporation Code
verbatim.

2. Prior to 2016, there had been no dividend declaration for two (2) years. In a twist
of fate (mainly due to an unexpected property boom and settlement of several law suits),
LG Realty completely reversed its position and is now, quite literally, swimming in cold
cash. In line with the adopted strategy, at the close of LG Realty’s fiscal year for 2016,
Php1,000,000,000.00 had been earmarked for the purchase of Philippine Treasury Bonds.
At such time, the capital accounts of LG Realty are stated as follows:

Common, Php1.00 par Php100,000,000.00

10% Preferred, Php100.00 par Php10,000,000.00

Share Premiums Php10,000,000.00

Retained Earnings Php5,000,000,000.00

Total Shareholders’ Equity Php5,120,000,000.00

Also, because net income after tax for the same year was Php10,000,000,000.00, the
Board of Directors issued a resolution that fifty percent (50%) of the retained earnings
will be declared as dividends, payable on the first day of the first month immediately
following the close of the above-mentioned fiscal year. Ignoring any applicable taxes,
how much should go to each share if the preferred shares are: a) cumulative and
participating; b) non-cumulative and participating; c) cumulative and non-participating;
and, d) non-cumulative and non-participating.

3. Having completed the both courses (ATP and Corp), what specific aspects did
you not like? In the interest of improving the courses for future students, what changes
would you suggest?

2
Additional Instructions for Nos. 1 and 2: Absolutely no erasures allowed. This is all or nothing. Thus,
in order to get full bonus credit, the answers to both questions (including sub-questions) must be entirely
correct. Otherwise, no points will be awarded.
Additional Instructions for No. 3: Your answer must be truthful and constructive, but, as much as
possible, should not contain anything positive, congratulatory or any form of affirmation.
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