revised

corporation
code

MIAM
outline
• GENERAL PRINCIPLES
• STOCK VS. NON-STOCK CORPORATIONS
• DE FACTO CORPORATIONS AND
CORPORATIONS BY ESTOPPEL
• ARTICLES OF INCORPORATION AND BY-
LAWS
• BOARD OF DIRECTORS/TRUSTEES, AND
CORPORATE OFFICERS
• POWERS OF CORPORATIONS
• STOCKHOLDERS AND MEMBERS
• OTHER CORPORATIONS (CLOSE, NON-
STOCK, OPC)
• MERGERS, AND CONSOLIDATIONS
• FOREIGN CORPORATIONS
What is a corporation?

• An artificial being
• Created by operation of law
• Having the rights of succession
• Powers, attributes, and properties expressly
authorized by law or incident to its existence.
• STRONG JURIDICAL PERSONALITY SEPARATE AND DISTINCT
FROM ITS INDIVIDUAL STOCKHOLDERS OR MEMBERS, AND
OFFICERS
- LIMITED LIABILITY RULE
• EVEN THE “ONE PERSON CORPORATION” IS SEPARATE FROM
THE PERSON COMPRISING IT

An artificial being
Mendoza and Yokoto, on authority of the
Board of Directors, obtained a loan on QUIZ
behalf of TVI with LBC Bank, and
mortgaged the company’s video QUESTION
machines to guarantee the loan. Later,
the video machines were relocated in
another business establishment owned
and operated by a new corporation
named FGT. When the Bank sought to
foreclose on the machines, Mendoza and
Yokoto feigned ignorance of the
whereabouts. The Bank brought suit
against both TVI, FGT, Mendoza and
Yokoto for the payment of the loan. Can
FGT, Mendoza, and Yokoto be held liable
for the loan of TVI?
On May 21, 1980, AID Corporation granted in favor of CMC a loan in the amount of
P800,000. Mr. Dee was the President of CMC and acted as the surety for the loan.
The loan was unpaid. Eventually, the RTC issued a Writ of Execution against Mr.
Dee. Thereafter, a Notice of Levy was issued and addressed to the Register of
Deeds of Antipolo City, to levy upon "the rights, claims, shares, interest, title and
participation" that Mr. Dee may have over a parcel of land covered by TCT No.
1234. The land is registered in the name of Vonnel Industrial Park, Inc. (VIP), of
which Mr. Dee was an incorporator and a stockholder of record. Mr. Ling filed a
third-party claim to object to the execution of the land. Mr. Ling alleged that Mr.
Dee sold all his stocks in VIP to him, as evidenced by a deed of sale.

Is the levy on the land covered by TCT No. 1234 proper? Explain.

QUIZ QUESTION
ALTER EGO
CASES
PIERCE THE
FRAUD VEIL OF
CASES CORPORATE
ENTITY

EQUITY
CASES
INSTRUMENTALITY RULE / THREE-
PRONGED CONTROL TEST

1 2 3
CONTROL, MEANING CONTROL USED TO CONTROL
COMPLETE COMMIT FRAUD OR PROXIMATELY
DOMINATION WRONG CAUSED THE INJURY
OR UNJUST LOSS
COMPLAINED OF
 KINDS OF PIERCING

TRADITIONAL VEIL- REVERSE PIERCING The

PIERCING corporation is held liable
An insider is held liable for the debts of a
for corporate debt corporate insider
 BAR QUESTION
In 2016, X Corp. obtained a loan worth ₱50,000,000.00 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
₱35,000,000.00, thereby leaving a ₱15,000,000.00 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. (2.5%)

(b) Should Y, Inc. be held liable? Explain. (2.5%)
In an action for collection of a sum of money, the Regional Trial Court (RTC) of
Makati City issued a decision finding D-Securities, Inc. liable to Rehouse
Corporation for P10,000,000.00. Subsequently, the writ of execution was issued
but returned unsatisfied because D-Securities had no more assets to satisfy the
judgment. Rehouse moved for an Alias Writ of Execution against Fairfield Bank
(FB), the parent company of D-Securities. FB opposed the motion on the grounds
that it is a separate entity and that it was never made a party to the case. The RTC
granted the motion and issued the Alias Writ of Execution. In its Resolution, the
RTC relied on the following facts: 499,995 out of the 500,000 outstanding shares
of stocks of D-Securities are owned by FB; FB had actual knowledge of the subject
matter of litigation as the lawyers who represented D-Securities are also the
lawyers of FB. As an alter ego, there is no need for a finding of fraud or illegality
before the doctrine of piercing the veil of corporate fiction can be applied. The RTC
ratiocinated that being one and the same entity in the eyes of the law, the service
of summons upon D-Securities has bestowed jurisdiction over both the parent and
wholly-owned subsidiary. Is the RTC correct?

BAR QUESTION
PRINCIPLE OF PIERCING THE
CORPORATE VEIL APPLIES TO OPCs
BUT…
SECTION 130. LIABILITY OF SINGLE
SHAREHOLDER
- shareholder has burden of showing that
the corporation is adequately financed.
- when the single stockholder cannot
prove that the property of the One Person
Corporation is independent of the stockholder’s
personal property, the stockholder shall be
jointly and severally liable for the debts and
other liabilities of the corporation.
- it seems as if, without proof, the single
stockholder and the OPC are one and the same
 CREATED BY
OPERATION OF LAW
HAVING THE RIGHTS
OF SUCCESSION
POWERS, ATTRIBUTES, AND PROPERTIES
EXPRESSLY AUTHORIZED BY LAW OR
INCIDENT TO ITS EXISTENCE

Theory of
Ultra Vires
Special
Acts
Capacities
CLASSIFICATIONS
OF CORPORATION
■ DOMESTIC CORPORATION VS.
FOREIGN CORPORATION
■ STOCK VS. NON-STOCK
CORPORATION
■ DE JURE vs. DE FACTO vs.
CORPORATION BY ESTOPPEL
■ ONE PERSON CORPORATION VS.
CORPORATION SOLE VS.
CORPORATION AGGREGATE
 DOMESTIC
CORPORATION
VS. FOREIGN
CORPORATION
NATIONALITY OF
CORPORATION
GENERAL RULE: PLACE OF INCORPORATION TEST
EXCEPTION: 1. CONTROL TEST
WHEN? IF IT INVOLVES PROPERTIES,
BUSINESSES OR INDUSTRIES RESERVED FOR
FILIPINOS

2. GRANDFATHER RULE
- IF THERE IS DOUBT ON THE 60-40%
OWNERSHIP OF THE CORPORATION
 X CORPORATION

•- INCORPORATED IN THE PHILS. COMPOSED OF A, B, AND C.

A, FILIPINO CORPORATION 60%

•ALI INC, FILIPINO CORPORATION 60%

•B, BELGIAN CORPORATION 20%

EXAMPLE •C, UK CORPORATION 20%

B, BELGIAN CORPORATION 20%

C, UK CORPORATION 20%

GRANDFATHER RULE:
FILIPINO: A CORPORATION 60% X (ALI) 60% = 36%
 BAR
Bell Philippines, Inc. (BelPhil) is a public utility
company, duly incorporated and registered with the
Securities and Exchange Commission. Its
authorized capital stock consists of voting common
shares and non-voting preferred shares, with equal
QUESTION
par values of P100.00/share. Currently, the issued
and outstanding capital stock of BelPhil consists
only of common shares shared between Bayani
Cruz, a Filipino with 60% of the issued common
shares, and Bernard Fleet, a Canadian, with 40%.
To secure additional working fund, BelPhil issued
preferred shares to Bernard Fleet equivalent to the
currently outstanding common shares. A suit was
filed questioning the corporate action on the
ground that the foreign equity holdings in the
company would now exceed the 40% foreign equity
limit allowed under the Constitution for public
utilities.
Rule on the legality of Bernard Fleet's current
holdings.
GAMBOA V. TEVES -- 60% - FULL BENEFICIAL OWNERSHIP

COMPLY WITH:
60% FILIPINO -- VOTING SHARES
60% FILIPINO -- TOTAL SHARES
-- THE TWO-TIERED TEST

ROY V. HERBOSA
ROY V The following is the composition of the
outstanding capital stock of Company X:

HERBOSA 100 common shares

100 Class A preferred shares (with
right to elect directors)
100 Class B preferred shares
(without right to elect directors)

TOTAL VOTING SHARES: 200 SHARES

TOTAL SHARES: 300 SHARES
 SEC-MC No. 8
(2) 60% (required percentage of Filipino)
applied to BOTH (a) the total number of
outstanding shares of stock, entitled to vote in
the election of directors; AND (b) the total
number of outstanding shares of stock,
whether or not entitled to vote in the election
of directors.
GAMBOA DECISION/RESOLUTION
"Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60
percent of the voting rights"81 or "Full
beneficial ownership of the stocks, coupled
with appropriate voting rights x x x shares with
voting rights, as well as with full beneficial
ownership"82
ROY V. HERBOSA

If at least a total of 180 shares of all the outstanding capital

stock of Company X are owned and controlled by Filipinos,
provided that among those 180 shares a total of 120 of the
common shares and Class A preferred shares (in any
combination) are owned and controlled by Filipinos, then
Company X is compliant with both requirements of voting rights
and beneficial ownership under SEC-MC No. 8 and
the Gamboa Decision and Resolution.
STOCK VS. NONSTOCK CORPORATION
STOCK
CORPORATION
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.

NONSTOCK? If it does not meet the

two requisites.
WHAT IS A SHARE?
The unit of ownership in a business is called a SHARE OF STOCK.
The amount of a company a shareholder owns will depend on
how many shares they own, in proportion to the total number of
issued shares in the corporation.

Example:
Alberto Company has issued 1,000 shares.
If shareholder Mr. B has 500 shares, then Mr. B owns 500/1,000
shares or 50% of the capital stock of the company.
If dividends are issued, Mr. B gets 50% of the dividends.
TYPES OF CAPITAL STOCK
 In its Articles of Incorporation, Bravo Corporation
states that the amount of its authorized capital stock
is P100,000.00, divided into 100,000 shares with
P1.00/share.

AUTHORIZED CAPITAL STOCK : P100,000.00

PAR VALUE : P1.00

Questions:

1. Do you need to pay the authorized capital

stock of P100,000.00 at the time of

EXAMPLE:
incorporation?

2. Is there a minimum amount of cash or

property needed to incorporate?

3. Can you subscribe and pay for stock at more

than the par value (example, you get 1,000
shares at P1.50/share)?

4. Can you pay for stock at less than the par

value (example, you get 1,000 shares at
P0.90/share)?

NO. WATERED STOCK. Violates the TRUST

FUND DOCTRINE.
TRUST “Subscriptions to the capital of
a corporation constitute a fund

FUND to which creditors have a right

to look for satisfaction of their
claims and that the assignee in
DOCTRINE insolvency can maintain an
action upon any unpaid stock
subscription in order to realize
assets for the payment of its
debts.”
COMMON SHARES VS.
PREFERRED SHARES
COMMON SHARES
- with voting rights
PREFERRED SHARES
- preferred with respect to distribution of dividends and in
the distribution of assets in case of liquidation
- may be deprived of voting rights
- may be cumulative or noncumulative
- may be participating / nonparticipating
BAR QUESTION
Yangchou lnc.'s (YI) Articles of Incorporation (AOI) provides for two (2)
types of shares of stock: common and preferred shares. Its AOI further
provides that "the preferred shares shall have a guaranteed annual
dividend of 3% of the par value." Its By-Laws also specifically provides
that "preferred shareholdings shall be cumulative and participating." No
other terms of preference are provided for preferred shares in either the
AOI or By-Laws of YI.
For the first five years of operations, the company was operating at a loss.
At the end of the sixth year, YI realized a net profit of PhP 100 million, and
unrestricted retained earnings of PhP 30 million. The YI Board of
Directors declared and paid out dividends of 1 % on common shares, and
5% on preferred shares, which amounted to a total of PhP 30 million.
However, the preferred shareholders made a formal demand that they be
given an additional 3% dividend for each of the five (5) years based on
the preferred shares features of "cumulative and participating," and an
additional 1 % given to the common shareholders, which could all be
accommodated within the remaining balance of the net profits.
Should Yi's Board heed the demand of its preferred shareholders? (2.5%)
WHAT IS A DIVIDEND?

A part of the profit that the corporation shares with its

shareholders.
TYPES OF DIVIDENDS:
1. Cash
2. Property
3. Stock
Is the corporation obliged to pay dividends to stockholders if
there is a profit?
DE JURE CORPORATION –
corporation organized in
accordance with
requirements of law

DE FACTO CORPORATION – a
corporation where there AS TO
LEGAL
exists a flaw in its
incorporation
- Only State can directly

STATUS
attack existence in a Quo
Warranto proceeding

CORPORATION BY ESTOPPEL
– group of persons which
holds itself out as a
corporation
 Existence of a valid law
under which it may be
incorporated

An attempt in good faith to

incorporate
REQUISITES
OF A DE FACTO
CORPORATION
Use of corporate powers

SEC issued Certificate of

Incorporation
QUESTIONS
1. Z Corporation failed to submit its by-laws on time.
What is the legal status of the corporation?
2. X Corporation was created by a special law. Later,
the law creating it was declared invalid. What is the
legal status of the corporation?
3. A and B gave money to C to invest in Y Corporation.
C proposed that he, A, and B shall be the
incorporators in Y Corp. Later, it was found out that
C failed to submit the Articles of Incorporation to
the SEC. What is the legal status of the
corporation? What are the liabilities of A, B, C to
the creditors?
 CORPORATION AGGREGATE
two or more stockholders / members

CORPORATION SOLE
AS TO organized and formed by one person.
NUMBER OF Applies to religious corporations to
COMPONENTS administer the properties of the
church.
ONE PERSON CORPORATION (OPC)
a corporation with a single
stockholder.
DISTINCTIONS

■ CORPORATORS VS.
INCORPORATORS
■ STOCKHOLDERS VS. MEMBERS
■ DIRECTORS VS. TRUSTEES
 CONTENTS OF THE ARTICLES OF
INCORPORATION
1. Name of the corporation (with INC, or OPC);
2. Purpose, indicating the primary and secondary purpose;
3. Place of principal office;
4. Term of corporate existence;
5. Names, nationalities, and residences of INCORPORATORS;
6. Number of directors or trustees;
7. Names, nationalities, residence of first directors/trustees;
8. STOCK CORPORATION – Amount of Authorized Capital Stock,
number of shares, if with par then the par value per share;
name of subscribers and number of shares subscribed and
paid;
9. Name of TREASURER and Certification by Treasurer.
COMMENCEMENT OF JURIDICAL
PERSONALITY, SUSPENSION,
REVOCATION
■ From the time of the issuance of the CERTIFICATE OF
INCORPORATION
■ if inoperative for a period of at least five (5) consecutive
years, SEC may place corporation under DELINQUENT STATUS
■ If the corporation fails to resume operations within two (2)
years from the time it was placed under delinquent status,
SEC shall cause REVOCATION of Certificate of
Incorporation.
CORPORATE
STRUCTURE
DOCTRINE OF CENTRALIZED
MANAGEMENT
Unless otherwise provided, all corporate
powers shall be exercised, all business
conducted, and all corporate property
shall be controlled and held by the Board
of Directors or Trustees.
- The Board should act as a BODY.
BUSINESS
JUDGMENT RULE
FIRST ASPECT
Questions of policy or management are left
solely to the honest decision of the officers
and directors of a corporation and the
courts are without authority to substitute
their judgment for the judgment of the
board of directors.

SECOND ASPECT
The rule of non-liability: Directors, trustees,
and officers, exercising business judgment
cannot be held liable for corporate
contracts or for the loss or damages
suffered by the corporation in the exercise
of business judgment,
EXCEPT when there is a breach of the
duties of Obedience, Diligence, and Loyalty.
QUALIFICATIONS OF
DIRECTORS

Owns at least one (1) Of legal age; Not disqualified by

share of stock in his the RCCP, other laws
own name; and regulations.
INDEPENDENT
DIRECTOR
■ For corporations vested with public interest (covered by
RA 8799, banks and other financial intermediaries), at
least 20% of the board should constitute of
INDEPENDENT DIRECTORS;
■ A person who, apart from shareholdings and fees
received from the corporation, is independent of
management and free from any business or other
relationship
■ Which could reasonably be perceived to materially
interfere with the exercise of independent judgment in
carrying out the responsibilities as a director.
WHAT COMPANIES ARE REQUIRED TO
HAVE AN INDEPENDENT DIRECTOR?

a) Corporations covered by Republic Act No. 8799, otherwise known

as “The Securities Regulation Code”, namely those
whose securities are registered with the Securities and Exchange
Commission, corporations listed with an exchange, or with assets of
at least P50,000,000 and having two hundred (200) or more
holders of shares, each holding at least one hundred (100) shares
of a class of its equity shares. These are also called “public
companies“;
b) Banks and quasi-banks, Non- Stock Savings and Loan
Associations (NSSLAs), pawnshops, corporations engaged in money
service business, pre-need, trust and insurance companies, and
other financial intermediaries; and
c) Other corporations engaged in business vested with public
interest similar to the above, as may be determined by the SEC.
 QUESTION

Two years since it began to operate, a

corporation has amassed assets valued at
over P60Million. It also has 250
shareholders, each holding at least 150
shares. Is the corporation required to have
an independent director? Explain.
ELECTION OF DIRECTORS OR
TRUSTEES
- Total Votes of Each Stockholder entitled to vote:
<number of shares owned> X <no. of directors to be
elected>

The stockholder can vote by:

- STRAIGHT VOTING or
- CUMULATIVE VOTING
Illustration – Voting

Stockholder X has 10 shares. There are 5 directors to be elected.

Nominees are A, B, C, D, E, F, and G.
Assume that Stockholder X wants to vote for A, C, D, E, and G.
STRAIGHT VOTING:
Stockholder X casts 10 votes each for A, C, D, E, and G.
CUMULATIVE VOTING:
Stockholder X can cast (10 shares x 5 seats) = 50 votes for
1 nominee, or distribute his 50 votes as Stockholder X likes.
REMOVAL OF
DIRECTORS OR
TRUSTEES
■ Take place at a regular meeting or
special meeting duly called for the
purpose;
■ Previous notice to the stockholders of
the intention to propose a removal;
■ By a vote representing at least 2/3
OCS or 2/3 of the members;
■ Removal is with or without cause,
except if elected by minority, which
requires cause.
BAR QUESTION

Henry is a board director in XYZ Corporation. For being the

"fiscalizer" in the Board, the majority of the board directors want
him removed and his shares sold at auction, so he can no longer
participate even in the stockholders' meetings. Henry approaches
you for advice on whether he can be removed as board director
and stockholder even without cause. What is your advice?
Explain "amotion" and the procedure in removing a director. (5%)

Problem does not state that he is elected by the minority. Can be

removed even without cause. Can he be removed as a
stockholder? No. Because stockholder.
FILLING OF VACANCIES

■ BY REMAINING BOARD MEMBERS

- If still constituting a quorum
- if cause of vacancy is NOT removal, expiration
of term, or increase in the number of directors

■ BY STOCKHOLDERS THEMSELVES
- in all other cases
- if vacancy is by a holdover director
QUESTION
In the November 2010 stockholders meeting of Greenville Corporation, eight
(8) directors were elected to the board. The directors assumed their posts in
January 20 ll. Since no stockholders' meeting was held in November 2011,
the eight directors served in a holdover capacity and thus continued
discharging their powers.
In June 2012, two (2) of Greenville Corporation's directors- Director A and
Director B -resigned from the board. Relying on Section 29 of the Corporation
Code, the remaining six (6) directors elected two (2) new directors to fill in
the vacancy caused by the resignation of Directors A and B.
Stockholder X questioned the election of the new directors, initially, through a
letter-complaint addressed to the board, and later (when his letter-complaint
went unheeded), through a derivative suit filed with the court. He claimed
that the vacancy in the board should be filled up by the vote of the
stockholders of Greenville Corporation. Greenville Corporation's directors
defended the legality of their action, claiming as well that Stockholder X's
derivative suit was improper.
Rule on the issues raised.
EXECUTIVE
COMMITTEE
■ COMPOSITION: At least three (3) directors;
■ Can act on any matter delegated by BYLAWS or
BOARD, EXCEPT:
– Approval of any action for which SH
approval is also required;
– Filling of vacancies in the board;
– Amendment or repeal of bylaws or the
adoption of new bylaws;
– Distribution of cash dividends to SH.
EMERGENCY ■ Remaining directors/trustees do not
constitute a quorum;
BOARD ■ A need for emergency action;
■ Action is necessary to prevent grave,
substantial, and irreparable loss or
damage to the corporation;
■ Temporary replacement must come
from the officers of the corporation;
■ Temporary replacement must be
elected by a unanimous vote;
■ Notice given to the SEC within three
(3) days from creation of emergency
board.
CONDUCT OF BUSINESS
What vote is needed to consider every decision to be a valid corporate act?
(1%)
(A) a majority of the directors present at the meeting
(B) two-thirds of the directors present at the meeting
(C) a majority of the directors present at the meeting at which there is a
quorum
(D) two-thirds of the directors present at the meeting at which there is a
quorum

Sec 52 SEC. 52. Regular and Special Meetings of Directors or Trustees;

Quorum. – Unless the articles of incorporation or the bylaws provides for a
greater majority, a majority of the directors or trustees as stated in the
articles of incorporation shall constitute a quorum to transact corporate
business, and every decision reached by at least a majority of the directors
or trustees constituting a quorum, except for the election of officers which
shall require the vote of a majority of all the members of the board, shall be
valid as a corporate act
CORPORATE OFFICERS
REQUISITES:
(1) POSITION IS UNDER THE CHARTER, BY-LAWS, OR SPECIFIED BY
LAW; AND
(2) ELECTION OF THE OFFICER IS BY THE DIRECTORS OR
STOCKHOLDERS.
REQUIREMENTS FOR CERTAIN POSITIONS:
 PRESIDENT – must be a director
 TREASURER – must be a resident;
 COMPLIANCE OFFICER – if corporation is vested with public
interest;
 OTHER OFFICERS AS PROVIDED IN THE BYLAWS.
 President should not be Concurrent Secretary; President should
not be Concurrent Treasurer, unless otherwise allowed by the
Code.
 DUTY OF
OBEDIENCE
DUTIES OF
DIRECTORS, DUTY OF
TRUSTEES,
AND LOYALTY
OFFICERS
DUTY OF
DILIGENCE
 SECTION 23, RCCP
•The directors or trustees shall
perform their duties as
prescribed by law, rules of
good corporate governance,
DUTY OF and bylaws of the corporation.
OBEDIENCE SECTION 24, RCCP.
•The officers shall manage the
corporation and perform such
duties as may be provided in
the bylaws and/or as resolved
by the board of directors.
DUTY OF Directors or trustees who

DILIGENCE (I) willfully and knowingly vote for or

assent to patently unlawful acts of the
corporation;
(II) Or who are guilty of gross negligence
(III) or bad faith in directing the affairs of
the corporation …

shall be liable jointly and severally for all

damages resulting therefrom suffered by
the corporation, its stockholders or
members and other persons. (s.30,
RCCP).
DOCTRINE OF
SELF-DEALING
CORPORATE
DIRECTORS
OPPORTUNITY

DUTY OF
OTHER
LOYALTY
INTERLOCKING CONFLICT OF
DIRECTORSHIP INTEREST
SITUATIONS
DOCTRINE OF CORPORATE
OPPORTUNITY
If there is presented to a director or officer a
business opportunity which from its nature is in line
with the corporation’s business, is of practical
advantage to it, and is one in which the corporation
has an interest or a reasonable expectancy,
and by embracing the opportunity, the self-interest of
the director or officer will be brought into conflict with
that of his corporation,
the law will not permit him to seize the opportunity for
himself, and if he does, the corporation may elect to
claim all the benefits of the transaction for itself.
CONSEQUENCES; ■ (D/T) Jointly and severally liable for
CONFLICT OF all damages resulting therefrom
INTEREST suffered by the corporation, its
stockholders, members and other
persons
■ (D/T/O) Liable as trustee for the
corporation and must account for the
profits
■ However, for directors, the act may be
ratified by at least 2/3 OCS.
SELF- Contracts between the corporation and
(1) a director or trustee or (2) officer or
DEALING (3) their spouses or (4) relatives within
the fourth civil degree of consanguinity
DIRECTORS or affinity. Sec 31

/ TRUSTEES ILLUSTRATION
/ OFFICERS X Corporation is engaged in a
restaurant business. F, the brother of
one of the directors of X Corporation,
entered into a contract with X
Corporation, so that F will supply water
to X Corporation. Is the contract valid?
Explain.

voidable
SELF-DEALING DIRECTORS /
TRUSTEES/OFFICERS
■ Voidable at the option of the corporation, UNLESS
– Presence of the D/T is not necessary to constitute quorum;
– Vote of the D/T is not necessary for the approval of the
contract;
– Contract is fair and reasonable under the circumstances;
– IF CORP is vested with public interest; material contracts
approved by 2/3 members of the board, with at least a
majority of independent directors;
– If contract with officer, the contract previously authorized
by the board.
CONTRACTS OF CORPORATIONS WITH
INTERLOCKING DIRECTORSHIP

There is an interlocking director in a corporation when one

(or some or all) of the directors in one corporation is (or are) a
director in another corporation.
- INTERESTS BOTH SUBSTANTIAL – If the interest of the
interlocking director in the corporations are both substantial
(exceed 20% OCS). - no problem
- INTEREST SUBSTANTIAL IN ONE, NOMINAL IN ANOTHER. If the
interest in one corporation is 20% or less (nominal), but
exceeds 20% in the other (substantial). – fear is that ma take
advantage yung nominal corporation. Syempre ikaw is prefer
mo yung corp with bigger investment. What the law seeks to
protect
 Z Corporation is engaged in retail sale of
ready-to-wear clothes for kids. Y
ILLUSTRATION: Corporation is a manufacturer and
wholesaler of clothes. Y Corp and Z Corp
entered into a contract whereby Y Corp will
supply Z Corp with clothes.
Alfred is a director of both Y Corporation
and Z Corporation. Alfred owns 30% of Y
Corporation, and holds 5% of Z
Corporation. Brad, a stockholder of Z
Corporation, questions the validity of the
contract.
Is the contract between Y Corp and Z Corp
valid? Explain.

Defective contract. Voidable at the option

of the one with the nominal interest. Follow
again the requirements.
POWERS OF THE
CORPORATION
■ EXPRESS POWERS – expressly authorized by the RCCP, and
other laws and the Articles of Incorporation.
■ IMPLIED POWERS – those that can be inferred from or
necessary for the exercise of the express powers.
■ INCIDENTAL POWERS – incidental to the existence of the
corporation.
ULTRA VIRES ACTS <Acts in
excess of corporate powers>
- FIRST TYPE – those outside of the express, implied, or
incidental powers of the corporation;
- SECOND TYPE – within the powers of the corporation, but
through an agent or representative who acts without
authority; The Corporation can ratify. Note also the DOCTRINE
OF APPARENT AUTHORITY.
- THIRD TYPE – those contrary to laws or public policy.
RULES ON ULTRA VIRES

a. WHOLLY EXECUTORY – cannot be enforced;

b. WHOLLY EXECUTED – shall not be interfered with as between
the parties, but State can always question said contract;
c. ULTRA VIRES EXECUTED ON ONE SIDE, EXECUTORY ON THE
OTHER – recovery can be made.
ILLUSTRATION

ABSOLUTE Corporation is a corporation whose primary

purpose is to engage in the retail of grocery items. Later, the
corporation entered into a contract with Z Corporation for the
latter to supply materials to Absolute, who will engage in
manufacturing food items.
Z Corp delivered the materials, Absolute Corp
manufactured the items, and later on the items were sold.
a) Was the act of Absolute Corp in entering into a contract
to engage in manufacturing considered ultra vires?
b) Can the stockholders of Absolute Corporation assail the
validity of these acts?
DOCTRINE OF APPARENT
AUTHORITY
If a corporation knowingly permits one of its officers, or any
other agent, to act within the scope of an apparent authority, it
holds him out to the public possessing the power to so do those
acts; and thus, the corporation will, as against anyone who has in
good faith dealt with it through such agent, be estopped from
denying the agent’s authority.
DIVIDENDS

■ There must be unrestricted retained earnings

■ Resolution of the Board, or for stock dividends, Board + 2/3
OCS
TRUST “Subscriptions to the capital of
a corporation constitute a fund

FUND to which creditors have a right

to look for satisfaction of their
claims and that the assignee in
DOCTRINE insolvency can maintain an
action upon any unpaid stock
subscription in order to realize
assets for the payment of its
debts.”
BAR QUESTION
Yangchou lnc.'s (YI) Articles of Incorporation (AOI) provides for two (2)
types of shares of stock: common and preferred shares. Its AOI further
provides that "the preferred shares shall have a guaranteed annual
dividend of 3% of the par value." Its By-Laws also specifically provides
that "preferred shareholdings shall be cumulative and participating." No
other terms of preference are provided for preferred shares in either the
AOI or By-Laws of YI.
For the first five years of operations, the company was operating at a loss.
At the end of the sixth year, YI realized a net profit of PhP 100 million, and
unrestricted retained earnings of PhP 30 million. The YI Board of
Directors declared and paid out dividends of 1 % on common shares, and
5% on preferred shares, which amounted to a total of PhP 30 million.
However, the preferred shareholders made a formal demand that they be
given an additional 3% dividend for each of the five (5) years based on
the preferred shares features of "cumulative and participating," and an
additional 1 % given to the common shareholders, which could all be
accommodated within the remaining balance of the net profits.
Should Yi's Board heed the demand of its preferred shareholders? (2.5%)
Answer

■ No. YI’s Board should not heed the demand of its preferred
shareholders. While the preferred shares are cumulative and
participating, the holders thereof are entitled to dividends
only if the unrestricted retained earnings are sufficient to pay
such dividends. Dividends are declared based on unrestricted
retained earnings and not on the amount of net profit
(Republic Planters Bank v. Agana, G.R. No. 51765, March 3,
1997; Section 43 of the Corporation Code). Here, the
unrestricted retained earnings are not sufficient to pay such
dividends. Hence, YI’s Board should not heed the demand of
its preferred shareholders.
BAR QUESTION
DEF Corporation has retained surplus profits in excess of 100%
of its paid-in capital stock. However, it is unable to declare
dividends, because it had entered into a loan agreement with a
certain creditor wherein the declaration of dividends is not
allowed without the consent of such creditor. If DEF Corporation
cannot obtain this consent, will it be justified in not declaring
dividends to its stockholders? Explain.

A: YES. Sec 42 of the RCC provides that stock corporations

are prohibited from retaining surplus profits in excess of
100% of their paid-in capital stock except among others,
when the corporation is prohibited under any loan
agreement with any financial institution or creditor;
whether local or foreign, from declaring dividends without
the consent of the creditor and such consent has not been
secured
SALE OF ALL OR SUBSTANTIALLY
ALL PROPERTIES
■ WHEN IS IT CONSIDERED A SALE OF ALL OR SUBSTANTIALLY
ALL PROPERTIES?

■ Majority vote by the board;

■ 2/3 OCS;
■ Stockholders meeting duly called for the purpose;
■ Notice of proposed action.
Bar question
Under the Nell Doctrine, so called because it was first pronounced by the
Supreme Court in the 1965 ruling in Nell v. Pacific Farms, Inc. (15 SCRA
415), the general rule is that where one corporation sells or otherwise
transfers all of its assets to another corporation, the latter is not liable
for the debts and liabilities of the transferor.
State the exceptions to the Nell Doctrine.

1. where the purchasers expressly or impliedly agrees to assume

` the debts
2. where the selling corporation fraudulently enters into the
transactions to escape liability for those debts
3. where the purchasing corporation is merely a continuation of
the selling corporation
4. where the transaction amounts to a consolidation or merger of
the corporations
 STOCKS AND
STOCKHOLDERS
 HOW DOES ONE BECOME A STOCKHOLDER?

CONCEPT OF A SUBSCRIPTION CONTRACT

CONSIDERATIONS

DOCTRINE OF EQUALITY OF SHARES

OUTLINE OF SHARE OF STOCK VS. CERTIFICATE OF STOCK

DISCUSSION
DELINQUENCY

TRANSFER OF SHARES

RIGHTS OF STOCKHOLDERS

INTRA-CORPORATE DISPUTES
 How does
1. SUBSCRIPTION
one become
2. TRANSFER OF SHARES –
a
a. Purchase treasury shares
shareholder
from the corporation in a
b. Acquire shares from corporation?
existing shareholders by
sale or other contract
SUBSCRIPTION CONTRACT

■ Any contract for the acquisition of unissued stock in an

existing corporation or a corporation still to be formed.
■ INDIVISIBILITY OF SUBSCRIPTION CONTRACT
– A subscription is one, entire and indivisible whole
contract even if two or more shares are covered. The
subscriber is not entitled to the certificate for part or all
of certificates covered until full payment of the
subscription price plus interest and expenses in case of
delinquent shares.
EXAMPLE:
Corporation X has authorized capital stock of P1Million Pesos,
composed of 1,000,000 shares at P1.00 / share.
Mr. A entered into a subscription contract with Corporation X,
whereby Mr. A will subscribe to 1,000 shares of Corporation X at
P1.00/share.
If Mr. A pays for the 500 shares, is he entitled to the issuance of the
certificate of stock commensurate to the 500 shares?

No. A subscription contract is indivisible. Consequently, where

stocks were subscribed and part of the subscription contract
price was not paid, the whole subscription shall be considered
delinquent and not only the shares which correspond to the
amount not paid.

SEC. 63. Issuance of Stock Certificates. – No certificate of

stock shall be issued to a subscriber until the full amount of
the subscription together with interest and expenses (in case
of delinquent shares), if any is due, has been paid
CONSIDERATIONS SHOULD NOT BE LESS THAN THE PAR OR ISSUED PRICE.

SHOULD NOT BE IN EXCHANGE OF PROMISSORY NOTES

OR FUTURE SERVICES

Considerations may be in
a. Actual cash
b. Property, at a fair valuation equal to the par or
issued value of the stock
c. Labor performed or services actually rendered to the
corporation
d. Previously incurred indebtedness of the corporation
(Debt-Equity Swap)
e. Amounts transferred from unrestricted retained
earnings to stated capital (Stock Dividends)
f. Shares of stock in another corporation; or
g. Other generally accepted form of consideration.
DELINQUENCY
NOTE: Holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder. (s.71, RCCP)
■ WHEN ARE SHARES CONSIDERED DELINQUENT?
– If the stockholders concerned do not pay within thirty
(30) days from the date specified in the contract of
subscription or in the call, all the stocks covered by
the subscription shall be declared delinquent.
– QUERY: If you already paid for a portion, can the
proportionate portion be considered not delinquent?
■ WHAT IS A CALL?
– A declaration by the board of directors that the unpaid
subscriptions are due and payable to the corporation
■ EFFECT OF DELINQUENCY
– No delinquent stock shall be voted for, or entitled to
vote, or be represented at a stockholder’s meeting,
nor to any right except the right to dividends, until and
unless payment is made (+ interest, + cost and
expenses of advertisement, if any)
REMEDIES TO ENFORCE
PAYMENT OF STOCKS
1. Extrajudicial Delinquency Sale at Public Auction
2. Judicial Action
3. Collection from cash dividends and withholding of stock
dividends
DOCTRINE OF EQUALITY OF
SHARES
■ A.k.a. EQUALITY DEFAULT PRINCIPLE Sec 6
– In the absence of any provision in the articles of
incorporation to the contrary, all shares of stock are
equal in features, and have equal voting rights.
■ But! no share may be deprived of voting rights except those
classified and issued as “preferred” or “redeemable” shares
■ There shall always be a class or series of shares which have
complete voting rights
SPECIAL TYPES OF SHARES
■ TREASURY SHARES
– issued shares which are subsequently reacquired by the issuing
corporation through purchase, redemption, donation or some other
lawful means
■ REDEEMABLE SHARES
– Shares which may be purchased by the corporation upon the
expiration of a fixed period REGARDLESS of the existence of
unrestricted retained earnings
■ FOUNDERS’ SHARES
– Shares of incorporators. Founders may begiven rights and privileges
not enjoyed by the owners of the other stock
– BUT, where the exclusive right to vote and be voted for in the
election of directors is granted, it must be for a limited period not to
exceed five (5) years from the date of incorporation.
■ Right not available if it will violate Anti-Dummy Law and Foreign
Investments Act of 1991
SHARE OF STOCK VS.
CERTIFICATE OF STOCK
SHARE OF STOCK CERTIFICATE OF STOCK

• Unit of interest in a • Evidence of the

corporation stockholder’s ownership
• Incorporeal or of the stock and of his
intangible property right as a shareholder
• Recognized even if the • Concrete and tangible
subscription is not fully • May be issued only if
paid the subscription is fully
paid
TRANSFER OF SHARES

FREE TRANSFERABILITY OF SHARES

- Shares of stocks are personal property and may be
transferred by delivery of the certificate or certificates
indorsed by the owner, his attorney-in-fact, or any other
person legally authorized to make the transfer.
- QUASI-NEGOTIABLE CHARACTER OF STOCK CERTIFICATES
- But, to be valid against third parties, the transfer must be
recorded in the books of the corporation
QUESTION
X owns 10,000 shares in Z Telecoms Corp. As he is in immediate
need of money, he offered to sell all his shares to his friend, Y, at
a bargain price. Upon receipt of the purchase price from Y, X
proceeded to indorse in blank the certificates of shares and
delivered these to Y. The latter then went to the corporate
secretary of Z Telecoms Corp. and requested the transfer of the
shares in his name. The corporate secretary refused since X
merely indorsed the certificates in blank to Y. According to the
corporate secretary, the certificates should have been specifically
indorsed to the purchaser, Y. Was the corporate secretary
justified in declining Y's request? Discuss. (5%)

Yes. Bearer Instrument: A negotiable instrument payable “to

bearer” or to “cash,” rather than to an identifiable payee.
Certificates of stock may be issued only to registered owners of
stock. The issuance of “bearer” stock certificates is not allowed
under the law
QUIZ QUESTION
On May 21, 1980, AID Corporation granted in favor of CMC a loan in the
amount of P800,000. Mr. Dee was the President of CMC and acted as
the surety for the loan. The loan was unpaid. Eventually, the RTC issued
a Writ of Execution against Mr. Dee. Thereafter, a Notice of Levy was
issued and addressed to the Register of Deeds of Antipolo City, to levy
upon "the rights, claims, shares, interest, title and participation" that Mr.
Dee may have over a parcel of land covered by TCT No. 1234. The land is
registered in the name of Vonnel Industrial Park, Inc. (VIP), of which Mr.
Dee was an incorporator and a stockholder of record. Mr. Ling filed a
third-party claim to object to the execution of the land. Mr. Ling alleged
that Mr. Dee sold all his stocks in VIP to him, as evidenced by a deed of
sale.
Does the third-party claim of Mr. Ling have merit? Explain.
No. A certificate of stock is the evidence of the holder’s ownership of the
stock and of his right as a shareholder. Deed of sale is not. A certificate
of stock is a prima facie evidence of ownership and evidence can be
presented to determine the real owner of the shares. Shares of stocks
are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner, his attorney-in-fact, or
any other person legally authorized to make the transfer
RIGHT OF SHAREHOLDERS

MANAGERIAL PROPRIETARY REMEDIAL INSPECTION

RIGHTS RIGHTS RIGHTS RIGHTS
• Right to Attend • Pre-emptive • Right to File • Right to Inspect
Stockholders Right / Right of Individual Suit, and Copy
Meetings First Refusal Representative Corporate
• Right to Vote • Right to Suit, Derivative Records
Dividends Suits • Right to
• Appraisal Right Financial
Statements
RIGHT TO VOTE

Delinquent
Unpaid Shares Treasury Shares
Shares

Shares subject Shares subject

Shares Pledged of a Proxy of a Voting Trust
Agreement Agreement
MANNER OF VOTING -
STOCKHOLDERS
■ IN PERSON
■ BY PROXY
- in writing, signed and filed by the SH/member, in any
form, received by CorSec within a reasonable time before the
meeting
- valid only for the meeting, except if otherwise provided.
Continuing proxy cannot be for a period longer than 5 years
IF BY-LAWS OR MAJORITY OF BOARD AUTHORIZE
■ THROUGH REMOTE COMMUNICATION
■ IN ABSENTIA
 PRE-EMPTIVE RIGHT
■ The shareholders’ right to subscribe to all issues or disposition of
shares of any class in proportion to their stockholdings
■ The purpose of pre-emptive right is to enable the shareholder to retain
his proportionate control in the corporation and to retain his equity in
the surplus
■ EXCEPTIONS:
– Right is denied by the articles of incorporation or an amendment
thereto
– To comply with laws requiring stock offering or minimum stock
ownership by the public
– Shares issued in good faith with the approval of 2/3 OS in
exchange for property needed for corporate purpose

– Shares issued in good faith with the approval of 2/3 OS in

exchange for payment of previously contracted debt
PRE-EMPTIVE RIGHT,
EXAMPLE
Bar Question

In June 2018, DEF Corp. sent notices to its stockholders informing

them of the corporation's issuance of new shares of stock. The
notice included a reminder that, pursuant to DEF Corp.' s Articles of
Incorporation, any stockholder who fails to exercise his or her pre-
emptive right within three (3) weeks from receipt of notice would be
considered to have waived the same.
Ms. Z, a stockholder of DEF Corp., failed to exercise her pre-emptive
right within the said period. However, she claimed that she did not
validly waive her right to do so because a waiver must be expressed
in writing.
(a) Explain the concept of pre-emptive right under the Corporation
Code. (2 %)
RIGHT OF FIRST REFUSAL

- The contractual option given to a stockholder or the

corporation to purchase from a registered stockholder any
sale or transfer of his shares.
- Can only arise if provided for in the articles of incorporation,
or provided for in a contractual stipulation
RIGHT TO FINANCIAL
STATEMENTS
■ A corporation shall furnish a stockholder or member, within
ten (10) days from receipt of their written request, its most
recent financial statement. (s74, RCCP)
RIGHT TO INSPECT CORPORATE
BOOKS and MAKE COPIES
■ WHO CAN DEMAND? Any director, trustee,
stockholder/member, or by a representative
– Must not have improperly used any information secured
through previous examination
– Demand made in GF and for a legitimate purpose
– Should not represent the interest of a COMPETITOR
– Bound by confidentiality rules, penalized under
S158,RCCP
■ HOW? Demand in writing
■ WHEN? At reasonable hours on business days
IF OFFICER/AGENT OF
CORPORATION REFUSES?
■ Administrative. May report such denial/inaction to SEC. SEC
to conduct a summary investigation within 5 days and issue
an order directing inspection or reproduction of requested
records
■ Judicial
– Mandamus, Damages.
– Criminal Action under S. 161, RCCP
QUESTION
Sid used to be the majority stockholder and President of Excellent
Corporation (Excellent). When Meridian Co., Inc. (Meridian), a local
conglomerate, took over control and ownership of Excellent, it
brought along its team of officers. Sid thus became a minority
stockholder and a minority member of the Board of Directors.
Excellent, being the leading beverage manufacturer in the country,
became the monopoly when Meridian’s own beverage business was
merged with Excellent’s, thereby making Excellent virtually the only
beverage manufacturer in the country.
Left out and ignored by the management, Sid became a fiscalizer of
sorts, questioning during the Board meetings the direction being
pursued by Excellent’s officers.
Ultimately, Sid demanded the inspection of the books and other
corporate records of Excellent. The management refused to comply,
saying that his right as a minority stockholder has been much
reduced.
State under what conditions may Sid properly assert his right to
inspect the books and other corporate records of Excellent. Explain
your answer. (3%)
 One which pertains to any of
the following relationships:
• between the corporation,
partnership or association and the
public;
RELATIONSHIP • between the corporation,
partnership, or association and the
TEST: INTRA- State insofar as its franchise, permit
CORPORATE or license to operate is concerned;
DISPUTE • between the corporation,
partnership or association and its
stockholders, partners, members,
or officers; and
• among the stockholders, partners
or associates themselves
NATURE OF THE The controversy must not only be rooted
in the existence of an intra-corporate
CONTROVERSY relationship, but must as well pertain to
TEST: INTRA- the enforcement of the parties’
CORPORATE correlative rights and obligations under
the Corporation Code and the intra-
DISPUTE corporate regulatory rules of the
corporation
KU V. RCBC Securities Inc.
GR No. 219491, 17 Oct 2018
RCBC Securities Inc. is a corporation primarily engaged in the
brokerage business, specifically for the purpose of buying and
selling shares, bonds, securities etc. Ku opened an account with
RCBC for the purchase and sale of securities.
Ku later learned that his account has been the subject of
unauthorized transactions by an Agent of RCBC Securities.
Because of these transactions, Ku alleged that RCBC owed him
70Million Pesos. Ku filed a Complaint for Sum of Money.
DOES THE CASE INVOLVE AN INTRACORPORATE CONTROVERSY?
KU V. RCBC Securities Inc.
GR No. 219491, 17 Oct 2018
NO, This case is not an intra-corporate dispute but an ordinary
civil action.
There are no intra-corporate relations between the parties. Ku is
neither a stockholder, partner, member, or officer of RCBC. The
parties’ relationship is limited to that of an investor and a
securities broker.
Moreover, the questions involved neither pertain to the parties’
rights and obligations under the Corporation Code, if any, nor to
matters directly relating to the regulation of the corporation.
SAN JOSE and ANGCAO V. OZAMIZ
GR NO. 190590, 12 JULY 2017
Ozamiz is a stockholder of Philcomsat Holdings Corp (PHC). He
wrote to the Corporate Secretary to request for a copy of the
minutes of the meetings of the Board of Directors and the
Executive Committee from 2000 to 2007 and a certification as to
the completeness thereof. Ozamiz was told that his request
would be taken up at the next Board Meeting. Then, Ozamiz did
not hear anything from PHC and its Board of Directors.
Ozamiz then filed a complaint for inspection of books with the
RTC.
DOES THE CASE INVOLVE AN INTRACORPORATE DISPUTE?
SAN JOSE and ANGCAO V.
OZAMIZ
GR NO. 190590, 12 JULY 2017
YES, it is an intra-corporate dispute.
It is a conflict between a stockholder and the corporation, which
satisfies the relationship test, and it involves the enforcement of
the right of Ozamiz, as a stockholder, to inspect the books of PHC
and the obligation of the latter to allow its stockholder to inspect
its books.
BAR QUESTION

Mr. Y filed a case captioned as "Injunction with Prayer for Status

Quo Order, Temporary Restraining Order and Damages" against Z
Company to prohibit the latter from selling shares which Mr. Y
purportedly bought from Z Company. Mr. Y alleged that the
subscription for the said shares was already partly paid by him, but
the subject shares were nonetheless being offered for sale by Z
Company to the corporation's other stockholders.
(a) Is the case filed by Mr. Y against Z Company considered an intra-
corporate dispute? Explain. (2.5%)
(b) Assuming that it was Z Company which instead filed a case
against Mr. Y in order to collect the unpaid balance of his stock
subscriptions, is the case considered an intra-corporate dispute?
Explain. (2.5%)
SUITS BY STOCKHOLDERS /
MEMBERS
■ INDIVIDUAL SUIT
– Those brought by the shareholder in his own name against
the corporation when a wrong is directly inflicted against
him. (i.e., refusal of right to inspect corporate records)
■ REPRESENTATIVE SUIT
– Those brought by the stockholder in behalf of himself and
all other stockholders similarly situated when a wrong is
committed against a group of stockholders
■ DERIVATIVE SUIT
– Those brought by one or more stockholders/members in
the name and on behalf of the corporation to redress
wrongs committed against it, or protect/vindicate corporate
rights whenever the officials of the corporation refuse to
sue, or are the ones to be sued, or have control of the
corporation
REQUISITES OF A
DERIVATIVE SUIT
■ Plaintiff is a stockholder or member
– at the time the acts or transactions subject of
the action occurred AND
– at the time the action was filed;

■ Exerted all reasonable efforts (and alleges the same

with particularity in the complaint) to exhaust all
remedies available to obtain the relief desired;

■ No appraisal right is available for the act complained

of;

■ The suit is not a nuisance or harassment suit; and

■ The corporation is impleaded as a plaintiff.
Question

In May 2018, ABC Corp. entered into a merchandising contract

which terms and conditions were totally lopsided in favor of the
counterparty, XYZ, Inc. As a result, ABC Corp. suffered
tremendous financial losses.
A year after, or in May 2019, Mr. X became a stockholder of ABC
Corp. Learning about the circumstances surrounding the
merchandising contract, Mr. X filed a derivative suit against ABC
Corp. 's directors to claim damages on behalf of ABC Corp. due to
their mismanagement.
(a) What is a derivative suit? (2%)
(b) Was Mr. X's filing of a derivative suit proper? Explain. (3%)
APPRAISAL RIGHT

Right of dissenting stockholder

to withdraw from the corporation
and demand payment of the fair value of
his shares,
which right is exercised
after dissenting from or voting against
proposed corporate acts involving
fundamental changes in the corporate
structure.
WHEN ■ Change in corporate term
■ Amendment in the Articles of
APPRAISAL Incorporation has the effect of
RIGHT MAY – changing or restricting the
rights of any stockholder or
BE class of shares, or
EXERCISED? – authorizing preferences
superior to those of outstanding
shares
■ Sale or other disposition of all or
substantially all assets
■ Merger or consolidation
■ Investment of corporate funds for any
purpose other than the primary
purpose
REQUIREMENTS FOR
APPRAISAL RIGHT
■ Must be a dissenting stockholder
■ Make a written demand on the corporation
within 30 days after vote was taken
■ Submit his certificates of stock within 10 days
from demanding payment for notation that the
shares are dissenting shares
■ Price to be paid is the fair value of the shares on
the date before the vote was taken
■ Corporation should have unrestricted retained
earnings to cover payment
QUESTION

Santorini Corporation (Santorini) was in dire straits. In order to firm

up its financial standing, it agreed to entertain the merger and
takeover offer of Proficient Corporation (Proficient), the leading
company in their line of business. Erica, the major stockholder of
Santorini, strongly opposed the merger and takeover. The matter of
the merger and takeover by Proficient was included in the agenda of
the next meeting of Santorini’s Board of Directors. However, owing to
Erica’s serious illness that required her to seek urgent medical
treatment and care in Singapore, she failed to attend the meeting
and was consequently unable to cast her vote. The Board of
Directors approved the merger and takeover. At the time of the
meeting, Santorini had been in the red for a number of years owing
to its recurring business losses and reverses.
Erica seeks your legal advice regarding her right as a stockholder
opposed to the corporate action. Explain your answer. (4%)