1. ABC Corporation is engaged in the business of manufacturing soft drinks.

For the past 10

years, it has bought all its bottles from XYZ Corporation. Considering the volume of its
production, it now finds that it will be more economical to manufacture its own bottles.

The Board of Directors, after studying and discussing the matter thoroughly, decides to set
aside the amount of 1 Million for this project. Most of this amount will go to the cost of
equipment and materials.

M is a stockholder of ABC Corporation and is against this investment in the bottling project
and would like to withdraw from the corporation by exercising his appraisal right if the
project goes through. He therefore demands that the project be submitted to the
stockholders for approval, but the board refuses to do so on the ground that there is no
need for such approval and that the calling of a special stockholder’s meeting would entail
too much expenses.

M thus cannot have the opportunity to exercise his appraisal right. He wants to sue the
board to compel it to submit the matter to the stockholders and to enjoin it from pursuing
the project until the stockholders shall have approved it.

a) Before whom should M file his suit? Why?

b) Do you think the matter needs the stockholders’ approval or is the action of the Board of
Directors sufficient? Explain.

Answer:
a) A should bring his case before the Regional Trial Court.

According to Section 5.2 of the Securities Regulation Code, the jurisdiction of the SEC
over all cases enumerated under Section 5 of PD 902-A has been transferred to the
courts of general jurisdiction or the appropriate RTC.

In the case at bar, it involves a controversy which arose from the intra-corporate relation
between a stockholders and the corporation. Under the law, jurisdiction over this kind of
case has been transferred to the RTC and the SEC does not have jurisdiction over it.
Thus, the RTC have jurisdiction over the case and A should bring his case before the
RTC.

b) No, it does not need the approval of the stockholders, and the action of the Board is
sufficient.

According to Section 41 of the Revised Corporation Code, a corporation may invest its
funds in another business or in any purpose other than the primary purpose for which it
was organized, when approved by the Board of Directors and by 2/3 of the outstanding
capital stock in a meeting called for the purpose. Any dissenting stockholder shall have
the appraisal right. However, where the investment is reasonably necessary to
accomplish its primary purpose, the approval of the stockholders is not necessary.

In the case at bar, the manufacture of bottles is reasonably necessary for the
corporation’s primary business of manufacturing soft drinks. Thus, it does not need the
approval of the stockholders.

Therefore, the action of the board is sufficient.

2. X Corporation is in need of land on which to construct an additional factory to be used in
the expansion of its business Jose Cruz owns a piece of land in Tagaytay, Rizal, which is
ideal for the purpose, and the corporation offers to buy it at a fair price. Jose is willing to
part with the land on condition that he be paid in shares of stocks of the corporation. The
Board of Directors decides to accept the terms of Jose, but since the authorized capital
stock of the corporation has been fully subscribed, it proposes to increase the capital stock
so that it can consummate the sale of the land. The proposal, including the purchase of
Jose’s land in exchange for the new shares was submitted to the stockholders in a meeting
called for the purpose.

Pedro Reyes, who has 100 shares in the corporation, alleging that he and all other
stockholders have a preemptive right to the new shares, insists that the corporation issue to
him his proportionate quota of the new shares which he offers to buy in cash. Holders of
80% of the outstanding capital stock are in favor of the proposal to increase the capital
stock, including the exchange of Jose’s land for new shares of stock.

Is Pedro Reyes within his rights in claiming a preemptive right? Explain.

Answer:
No, Pedro Reyes’ preemptive right is not available and thus he cannot claim the same.

According to Section 38 of the Revised Corporation Code, all stockholders of a stock

corporation shall enjoy preemptive right to subscribe to all issues or disposition of shares of
any class, in proportion to their respective shareholdings, unless such right is denied by the
articles of incorporation or an amendment thereto. However, such preemptive right shall not
be available to shares issued in compliance with laws requiring stock offerings or minimum
stock ownership by the public; or to shares issued in good faith, with the stockholders
representing 2/3 of the outstanding capital stock, in exchange for property needed for
corporate purposes.

In the case at bar, 80% of the stockholders representing the outstanding capital stock are in
favor of the proposal to increase the capital stock, including the exchange of Jose’s land for
new shares of stock. Since shares are issued in exchange for property needed for
corporate purposes and 80% or more than 2/3 of the stockholders favored the proposal,
pre-emptive right is not available.

Therefore, Pedro Reyes cannot insist on the preemptive right as his pre-emptive right is not
available in this case.