Set 1

1. Q: What is the nationality of a corporation organized and incorporated under the

laws of a foreign country, but owned 100% by Filipinos? (1998 BAR)

A: Under the control test of corporate nationality, this foreign corporation is of

Filipino Nationality. Where there are grounds for piercing the veil of corporate
entity, that is, disregarding the fiction, the corporation will follow the nationality of
the controlling members or stockholders, since the corporation will then be
considered as one and the same.

2. Q: In 2016, X Corp. obtained a loan worth P50,000,000.00 from J Bank, which was
secured by a third-party mortgage executed by Y, Inc. in favor of X Corp. Since X
Corp. was not able to settle its loan obligation to J Bank when it fell due, and despite
numerous demands, J Bank foreclosed the mortgaged properties. The properties were
sold in a foreclosure sale for P35,000,000.00, thereby leaving a P15,000,000.00
deficiency. For failure of X Corp. to pay said deficiency, J Bank filed a complaint for
sum of money against X Corp., its President, Mr. P, and Y, Inc. With respect to Mr. P,
J Bank argued that he should be held solidarily liable together with X Corp. because
he signed the loan document on behalf of X Corp. in his capacity as President. On the
other hand, J Bank contended that Y, Inc. should also be held solidarily liable
because the shareholdings of both corporations are identically owned and their
operations are controlled by the same people; hence, Y, Inc. is a mere alter ego of X
Corp.

a. Should Mr. P be held liable? Explain.

b. Should Y, Inc. be held liable? Explain. (2019 BAR)

a. Mr. P is not liable. The corporation being a mere artificial person can only
act through its representative. The corporate representative is not liable for any act
taken on behalf of the corporation unless he acted in bad faith or with gross
negligence in directing the affairs of the corporation or made himself liable
solidarily with the corporation. In this case, P, as President, signed the loan
document not for himself but on behalf of X Corporation. Nothing in the facts
indicated show that he bound himself liable with the corporation or he acted in bad
faith or with gross negligence.

b. Y, Inc. is not liable. Interlocking shareholders, directors and officers, per se,
is not enough reason to set aside the separate legal personalities of X and Y. Piercing
the corporate veil based on the alter ego theory requires the concurrence of three
elements, namely:
 1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in respect to the
transaction attacked so that the corporate entity as to this transaction had at the time
no separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of plaintiff’s legal right; and

3. The aforesaid control and breach of duty must have proximately caused the
injury or unjust loss complained of (Development Bank of the Philippines v. Hydro
Resources Contractors Corporation, G.R. No. 167603, March 13, 2013)

Control then is not enough. The facts do not show that the control over the
corporation was used to perpetuate fraud or violate a positive legal duty in
contravention of the J Bank’s right and that such control and breach of duty was the
proximate cause suffered by the Bank.

3. Q: How does one pierce the veil of corporate fiction? (2004 BAR)

A: The veil of corporate fiction may be pierced by proving in court that the
notion of legal entity is being used to defeat public convenience, justify wrong,
protect fraud, or defend crime or the entity is just an instrument or alter ego or
adjunct of another entity or person.

4. Q: YKS Trading filed a complaint for specific performance with damages against
the PWC Corporation for failure to deliver cement ordered by plaintiff. In its answer,
PWC denied liability on the ground, inter alia, that YKS has no personality to sue,
not being incorporated, and that the President of PWC was not authorized to enter
into a contract with plaintiff by the PWC Board of Directors, hence the contract is
ultra vires. YKS Trading replied that it is a sole proprietorship owned by YKS, and
that the President of PWC had made it appear in several letters presented in evidence
that he had authority to sign contracts on behalf of the Board of Directors of PWC.

Will the suit prosper or not? Reason briefly. (2014 BAR)

A: YES, the suit will prosper. As the sole proprietorship, the proprietor of YKS
Trading has the capacity to act and the personality to sue PWC. It is not necessary for
YKS Trading to be incorporated before it can sue. On the other hand, PWC is stopped
from asserting that its President had no authority to enter into the contract,
considering that, in several of PWC’s letters, it had clothed its President with
apparent authority to deal with YKS Trading.

5. Define: Trust fund doctrine. (2015 BAR)

 A: By the trust fund doctrine subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have the right to look for 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. (Halley v. Printwell, GR No. 157549, May 30, 2011; Ong
v. Tiu, 401 SCRA 1)

6. Q: Yenetic Corporation wants to increase its Authorized Capital Stock (which is

currently fully subscribed and issued) to be able to increase its working capital to
undertake business expansions. The Board of Directors consults with you as legal
counsel on the proper answers to the following issues:

a. Can Yenetic's AOI be formally amended to remove the right of appraisal on all
dissenting stockholders in all matters under the law which requires a ratification
vote of the stockholders?

b. If the increase in Authorized Capital Stock is formally submitted to the

stockholders in a meeting duly called for the purpose, what is the vote necessary for
the stockholders’ ratification, and would the dissenting stockholders have a right to
exercise their right of appraisal?

c. Once the increase in the Authorized Capital Stock of Yenetic has been legally
effected with the SEC, can the new shares from the unissued shares be offered to a
new limited group of investors without having to offer them to the shareholders of
record since no pre-emptive right is provided for in the AOI and By-laws of Yenetic?
(2018 BAR)

A.
a. Yenetic’s AOI cannot be amended to remove the appraisal right of the
stockholders on matters requiring their approval in cases where the law grants them
such appraisal right, like:

1. In case any amendment to the articles of incorporation has the effect of

changing or restricting the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares
of any class, or of extending or shortening the term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other

disposition of all or substantially all of the corporate property and assets;

3. In case of merger (Section 81 of the Corporation Code);

 4. In case of investment of funds in the secondary purpose of the corporation
or another business (Section 42) Appraisal right is a statutory right. It cannot be
denied to the stockholders in cases where the law allows such right. For all the other
matters under the Corporation Code which require ratificatory approval of the
shareholders, the AOI may be formally amended to remove appraisal right, because
the right does not exist anyway in those cases.

b. Any provision or matter stated in the AOI may be amended by a majority

vote of the board of directors and the vote or written assent of the stockholders
representing at least 2/3 of the outstanding capital stock. Stockholders cannot
exercise any appraisal right in case of amendment to the articles of incorporation to
increase capital stock, because this is not one of the cases allowed by law where
appraisal right may be exercised (Articles 81 and 42 of the Corporation Code)

c. The new shares from the unissued shares cannot be validly offered to a new
limited group of investors without having to offer to shareholders of record, as pre-
emptive rights are not explicitly denied in the AOI. Section 39 of the Corporation
Code provides that all stockholders of a stock corporation shall enjoy pre-emptive
right to subscribe to all issues or disposition of shares of any class, in proportion to
their respective shareholdings. There need not be an explicit grant of preemptive
rights in the AOI for it to exercised.

7. Q: Explain the concept of pre-emptive right under the Corporation Code. (2019
BAR)

A: Pre-emptive right is the right of the stockholders to subscribe to any and all
issuance or disposition of shares of any class by the corporation in proportion to their
shareholding in the corporation. This means that except in the cases provided by law,
shares of stock the corporation should first be offered to the stockholders prior to any
offer to non-stockholders. This rule is intended to prevent the dilution of
stockholder’s equity stake in the corporation.

8. Q: What is a derivative suit? (2019 BAR)

A: A derivative suit is an action filed by the stockholder in the name and on

behalf of the corporation to enforce a corporate right or cause of action to set aside
wrongful acts committed by its directors and/or officers. (Ang, for and in behalf of
Sunrise Marketing v. Ang, G.R. No. 201675, June 19, 2013; Florete v. Florete, G.R. No.
174909, January 20, 2016)

9. Q: “A” is the registered owner of Stock Certificate No. 000011. He entrusted the
possession of said certificate to his best friend “B” who borrowed the said endorsed
certificate to support B’s application for passport (or for a purpose other than
transfer). But “B” sold the certificate to “X”, a bona fide purchaser who relied on the
endorsed certificates and believed him to be the owner thereof. Can “A” claim the
shares of stocks from “X”? Explain. (2001 BAR)

A: NO. Assuming that the shares were already transferred to “B”, “A” cannot
claim the shares of stock from “X” the certificate of stock covering said shares have
been duly endorsed by “A” and entrusted by him to “B”. By his said acts “A” is now
estopped from claiming said shares from “X”, a bona fide purchaser who relied on
the endorsement by “A” of the certificate of stock.

10. Q: When is a foreign corporation deemed to be “doing business in the

Philippines?” (1998 BAR)

A: A foreign corporation is deemed to “deemed business in the Philippines” if

it is continuing the body or substance of the business or enterprise for which it was
organized. It is the intention of an entity to continue the body of its business in the
country. The grant and extension of 90-day credit terms of a foreign corporation to a
domestic corporation for every purchase shows an intention to continue transacting
with the latter.