Unit Activity 11: Stocks And Stockholders

Due Aug 14 at 11:59pm Points 3 Questions 3 Available Aug 12 at

12pm - Aug 14 at 11:59pm Time Limit None Allowed Attempts 2

CASE QUESTIONS:  These questions will help you apply your understanding of the
underlying principles in stock subscriptions in a private corporation.
Instructions: In not less than fifty words for each item, answer the questions in each
comprehensively. Make sure to answer questions using your own words. Copying from
the internet is prohibited. Make sure 85% of the answer is not plagiarized. Your answer
will be graded based on the following criteria: 3.5 points Contents and Substance, 2.5
points Organization of Idea, 2.5 points Originality and 1.5 points Effort in the Conduct of
Additional Research.
1.) The Board of Directors of ABC Corporation, by a vote of ten in favor and one
against, declared due and payable all unpaid subscription to the capital stock.
The lone dissenting director failed to pay on due date, i.e., 19 August 2020, his
unpaid subscription. Other than the shares wherein he was unable to complete
payment, he did not own any share in the corporation. On August 23, 2020, he
was informed by the Board of Directors that, unless due payment is meanwhile
received, he could no longer serve as a director of the corporation hence, would
not be entitled to the cash and stock dividends which were declared and payable
on August 24, 2020; and could not vote in the stockholders meeting scheduled to
take place on August 26, 2020. Was the action of the Board of Directors of ABC
Corporation on each of the given matters Valid?

No, the action of the Board of Directors of ABC Corporation declaring that he
could no longer serve as a director of the corporation and he would not be
entitled to the cash and stock dividends which were declared and payable on
August 24, 2020 are invalid. On the other hand , the declaration that he could not
vote in the stockholders meeting scheduled to take place on August 26, 2020 is
valid.
Section 42 of the Revised Corporation Code of the Philippines provides that: "The
board of directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, property, or in
stock to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall first be applied
to the unpaid balance on the subscription plus costs and expenses, while stock
dividends shall be withheld from the delinquent stockholders until their unpaid
subscription is fully paid: Provided, further, That no stock dividend shall be
issued without the approval of stockholders representing at least two-thirds
(2/3) of the outstanding capital stock at a regular or special meeting duly called
for the purpose."
Furthermore, Section 70 of the same law states that: "No delinquent stock
shall be voted for, be entitled to vote, or be represented at any stockholder's
 meeting, nor shall the holder thereof be entitled to any of the rights of a
stockholder except the right to dividends in accordance with the provisions of
this Code, until and unless payment is made by the holder of such delinquent
stock for the amount due on the subscription with accrued interest, and the costs
and expenses of advertisement, if any. "
In the case at bar, the Board of Directors of ABC Corporation, by a vote of
ten in favor and one against, declared due and payable all unpaid subscription to
the capital stock. However, the lone dissenting director failed to pay in due date
his unpaid subscription, hence he was informed by the Board of Directors that,
unless due payment is meanwhile received, he could no longer serve as a
director of the corporation hence, would not be entitled to the cash and stock
dividends which were declared and payable on August 24, 2020; and could not
vote in the stockholders meeting scheduled to take place on August 26, 2020.
Applying the law, the act of the board of directors of preventing the lone
dissenting director from serving as a director of the corporation and preventing
him from receiving cash and stock dividends which were declared and made
payable are invalid. Under the law, a director can be remove from office only by
the stockholders and when he ceases to own at least one share in the
corporation. In this case, although his shares were declared to delinquent, such
are still in the name of the director in the records of the corporation, hence, he
cannot be unseated from the board. Also, the action of the board of directors of
disentitling him from receiving the cash and stock dividends are also valid. Under
the law, delinquent shares are still entitled to dividends only that the , That any
cash dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus costs and expenses, while stock dividends shall
be withheld from the delinquent stockholders until their unpaid subscription is
fully paid. Therefore, these actions are invalid for these do not have a leg to stand
on.
On the other hand, with regard to disallowing him from voting in the
scheduled stockholders meeting, such is valid. Under the law, no delinquent
stocks shall be voted for nor be entitled to vote or be represented at any
stockholder's meeting nor shall the holder thereof be entitled to any of the rights
of a stockholder except the right to dividends. Hence, disallowing him from
voting the scheduled stockholders meeting is legally tenable.

2.) Susana subscribed to 2,000 shares of stock of Banawe Corporation. She paid 25%
of said subscription. During the stockholders’ meeting, can Susana vote all her
subscribed shares? Explain your answer.

Yes, Susana can vote all her subscribed shares. Section 71 of the Revised
Corporation Code of the Philippines states that: "Rights of Unpaid Shares,
Nondelinquent. — Holders of subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder. "
In the case at bar, Susana subscribed to 2,000 shares of stock of Banawe
Corporation. However, only 25% of the said subscription was paid. Applying the
law, Susana can vote all her subscribed shares even if only 25% of it was paid.
 The law provides that holders of the subscribed share even if not fully paid, as
long as not delinquent, can have all the rights of a stockholder and the right to
vote during stockholder's meeting is one of the rights of a stockholder.
Furthermore, there was no mention that the subscribed shares of Susana were
already declared delinquent.
Therefore, Susana can vote all her subscribed shares during the
stockholder's meeting.

3.) Mr. D became a stockholder of Brime Real Estate Corporation (BREC) on July 10,
2019, when he was given one share by another stockholder to qualify him as
director. Mr. D was not re-elected director in July 1, 2020 annual meeting but he
continued to be a registered shareholder of BREC. When he was still a director,
Mr. D discovered that on January 6, 2019, BREC issued free of charge 10,000
shares to Mr. B, a lawyer who assisted in a court case involving BREC.
a. Can Mr. D now bring an action in the name of the corporation to question
the issuance of the shares to Mr. B without receiving payment?
No, Mr. D cannot bring an action in the name of the corporation to
question the issuance of the shares to Mr. B without receiving payment.
Under the law, a stockholder of a corporation can bring an action
in the name of the corporation provided that there is a corporate cause of
action, the stockholder bringing the suit must be a stockholder already of
the corporation at the time the transaction subject of the suit occurred
and at the time he brought the suit, he must have exhaustive all the intra-
corporate remedies, it is not a suit to harass, and appraisal right must not
be available to him.
In the case at bar, the transaction complained of happened on
January 6, 2019. However, Mr. D became a stockholder only of the
corporation on July 10, 2019. Hence, one of the requisites in order to
have a derivate suit is missing and that is the stockholder bringing the
suit must be a stockholder at the time the transaction subject of the suit
happened and at the time he filed the action. In this case, Mr. D is not yet a
stockholder when the transaction happened.
Therefore, Mr. C cannot bring an action in the name of the
corporation to question the issuance of shares to Mr. B without
receiving payment.
b. Can Mr. B question the right of Mr. D to sue him in behalf of the
corporation on the ground that Mr. D has only one share in his name?
No, Mr. B cannot question the right of Mr. D to sue him in behalf of the
corporation on the ground that Mr. D has only one share in his name.

One of the requisite to bring a derivative suit is that the

stockholder instituting it must brought in the name of the corporation and
the stockholder must be a stockholder at the time the transaction
complained of occurred and at the time he filed the action. There is no
 requirement that the stockholder must own a certain number of shares in
order to be allowed to bring a derivative suit.

Therefore, considering that the law do not provide such

qualification, we should not also qualify, hence Mr.D can institute a
derivative suit in behalf of the corporation even though he only have
one share in his name in the corporation.

c. Can the shares issued to Mr B be considered as watered stock?

No, the shares issued to Mr. B cannot be considered as watered

stock.
Section 64 of the Revised Corporation Code states that: "Liability of
Directors for Watered Stocks. — A director or officer of a corporation
who: (a) consents to the issuance of stocks for a consideration less than
its par or issued value; (b) consents to the issuance of stocks for a
consideration other than cash, valued in excess of its fair value; or (c)
having knowledge of the insufficient consideration, does not 1le a written
objection with the corporate secretary, shall be liable to the corporation
or its creditors, solidarily with the stockholder concerned for the
difference between the value received at the time of issuance of the stock
and the par or issued value of the same. "
Hence, in order for the stocks issued to be considered as watered,
such should be issued for a consideration that is less than its par or issued
value or if it was issued for a consideration other than cash, the value of
such is in excess of its fair value. In the case at bar, BREC issued free of
charge 10,000 shares to Mr. B, a lawyer who assisted in a court case
involving BREC. Considering that it was issued for the services rendered
by Mr. B to BREC, such cannot be considered to be watered stocks. Rather,
the value of the services rendered by him to the corporation should be
considered first in relation to the par value of the shares that were issued
to him.
Therefore, the shares issued to Mr. B cannot be considered as
watered stock.
          No, it is not legitimate for the ABC Corporation Board of Directors to have stated that
he could no longer serve as a director of the company and would no longer be eligible to
receive the cash and stock dividends that were announced and due on August 24, 2020. The
assertion, however, that he was unable to cast a ballot at the shareholders meeting set for
August 26, 2020, is legitimate.

          According to Section 42 of the Philippine Revised Corporation Code, a stock

corporation's board of directors has the authority to declare dividends from unrestricted
retained earnings, which are payable to all stockholders in accordance with the number of
outstanding shares they own in the form of cash, property, or stock: While stock dividends
must be withheld from tardy shareholders until their outstanding subscription is completely
paid, any cash dividends payable on delinquent shares must first be used to the unpaid
amount on the subscription plus charges and expenditures. Additionally, no stock dividend
may be paid out without the consent of shareholders representing at least two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting that has been lawfully convened
for that reason.

          The same law's Section 70 further stipulates that no delinquent stock shall be voted for,
be entitled to vote at, or be represented at, any stockholder's meeting, nor shall the holder
thereof be entitled to any rights of a stockholder, except the right to dividends in accordance
with the provisions of this Code, until and unless payment is made by the holder of such
delinquent stock for the amount due on the subscription with accrued interest, and the costs
and expenses incurred.

          By a vote of ten in favor and one against in the current case, the board of directors of
ABC Corporation declared all overdue subscriptions to the capital stock due and payment.
The Board of Directors informed the lone dissenting director that he could no longer serve as
a director of the corporation and would not be entitled to the cash and stock dividends that
were declared and payable on August 24, 2020, and that he could not cast a vote at the
stockholders meeting scheduled for August 26, 2020, if his unpaid subscription had not been
paid by the due date.

          Applying the law, the board of directors' actions to bar the corporation's only dissident
director from serving as a director and to deny him cash and stock dividends that had been
declared and made due are illegal. A director may only be removed from office by the
shareholders and when he no longer owns at least one share of the business, according to the
legislation. In this instance, despite the fact that his shares were deemed overdue, they are
still included in the director's name in the corporation's records, making it impossible to
remove him from the board. The board of directors' decision to deny him the right to receive
dividend payments in cash and shares is likewise legal. Delinquent shares are still eligible for
dividends under the law, but only if the outstanding amount of the subscription plus charges
and expenditures is paid in full. Cash dividends on delinquent stock must also be applied to
the unpaid balance of the subscription before being distributed to shareholders. As a result,
these activities are illegitimate since they lack a foundation.

          However, it is legal to prevent him from casting a ballot at the planned shareholders
meeting. Delinquent stocks are prohibited by law from being represented at stockholder
meetings, voting, or having any other shareholder rights, outside the right to dividends,
granted to their holders. Therefore, it is permissible to prevent him from casting a ballot at the
planned shareholders meeting.

          Susana is able to vote on all of her subscribed shares. The following is stated in Section
71 of the Philippine Revised Corporation Code: "rights to unpaid shares that are past due.
Holders of subscribed shares that haven't been completely paid but aren't past due are entitled
to all shareholder rights.

          In the contested situation, Susana purchased 2,000 shares of Banawe Corporation

stock. But just 25% of the aforementioned subscription was paid. Susana may vote all of her
subscribed shares under the legislation, even though only 25% of them have been paid. The
legislation stipulates that holders of subscribed shares may exercise all stockholder rights,
including the ability to vote at shareholder meetings, even if their subscriptions are not
completely paid or they are otherwise in default. The fact that Susana's subscribed shares had
previously been deemed overdue was not mentioned either.

          Susana is able to vote on all of her subscribed shares at the stockholders' meeting
as a result.

a.) If there is a corporate cause of action, the stockholder bringing the suit must have been a
stockholder of the corporation at the time the transaction that is the subject of the suit
occurred and at the time he brought the suit, he must have exhausted all intra-corporate
remedies, it cannot be a suit to harass, and the appraisal right must not be available to him.

The transaction in question in this instance took place on January 6, 2019. On July 10, 2019,
Mr. D, however, became a sole shareholder of the company. The requirement that the
shareholder filing the complaint must have been a stockholder at the time the transaction at
issue occurred and at the time he filed the case is therefore lacking, and a derivative suit
cannot be brought. In this instance, Mr. D was not a shareholder at the time of the transaction.

As a result, Mr. C is not permitted to file a lawsuit on behalf of the business to contest
the company's decision to issue Mr. B shares without first obtaining payment.

b.) One requirement for bringing a derivative action is that the shareholder bringing it must
do so in the name of the company and the stockholder must have been a stockholder at the
time the complaint-related transaction occurred and at the time he filed the action. It is not
necessary for the shareholder to own a minimum number of shares in order to file a derivative
lawsuit.

Mr. D may file a derivative lawsuit on behalf of the business even if he only owns one
share in its stock since the law does not stipulate that qualification, therefore we should
not qualify as well.
 

c.) No, the shares given to Mr. B cannot be regarded as stock that has been diluted.
According to Section 64 of the Revised Corporation Code, "Directors' Liability for Watered-
Down Stocks. A director or officer of a corporation who: (a) consents to the issuance of
stocks for a consideration less than their par or issued value; (b) consents to the issuance of
stocks for a consideration other than cash, valued in excess of their fair value; or (c) having
knowledge of the insufficient consideration, does not file a written objection with the
corporate secretary, shall be liable to the company or its creditors, jointly and severally with
the stockholder in question, for the underpayment of the consideration"

The value of the issued stocks must thus be more than their fair value if they were issued for
a payment other than cash or for a consideration less than their par value, in order for them to
be deemed watered. In the pending lawsuit, BREC gave 10,000 shares to Mr. B, an attorney
who supported BREC in a legal proceeding, without charge. It cannot be said that these are
watered stocks since they were issued in exchange for the services that Mr. B provided to
BREC. Instead, the worth of the services he provided to the company should be weighed
against the par value of the shares that were given to him. As a result, the shares given to
Mr. B cannot be regarded as being watered stock.