FERNANDO, Laurice Fay A.

Corporation Law
Final Examination

I. a) What is the Alter-ego theory? (5 pts)

The alter-ego doctrine requires the court to see through the protective shroud which
exempts its stockholders from liabilities that ordinarily they could be subject to, or
distinguishes one corporation from a seemingly separate one, were it not for the
existing corporate fiction.

b) What is a corporation and what are its attributes? (5 pts)

Under Sec. 2 of the Revised Corporation Code, a corporation is an artificial being
created by operation of law, having the right of succession and the powers, attributes
and properties expressly authorized by law or incident to its existence.

Its attributes are as follows:

a) It is an artificial being;
b) It is created by operation of law;
c) It has the right of succession; and
d) It has only the powers, attributes, and properties expressly authorized by law or
incident to its existence.

II. a) What is the Doctrine of Separate Juridical Personality? (5 pts)

Under this doctrine, a corporation is a legal or juridical person with a personality
separate and apart from its individual stockholders or members and from any other
legal entity to which it may be connected. It is not in fact and in reality a person but the
law treats it as though it were a person by process of fiction. The stockholders or
members who, as natural persons, are merged in the corporate body, compose the
corporation but they are not the corporation.

b) What is the Doctrine of Piercing the Veil of Corporate Fiction? (5 pts.)

The doctrine of piercing the veil of corporate fiction refers to when the court looks at the
corporation as a mere collection of individuals or an aggregation of persons
undertaking business as a group, disregarding the separate juridical personality of the
corporation unifying the group.

III. a) What is a One Person Corporation? Define (5 pts.)

A one person corporation or otherwise called as OPC is composed of a single
stockholder who can only be a natural person, trust or estate. Its term of existence is
perpetual but in case of a trust or estate, the term shall be coterminous with the
existence of the trust or estate.

b) What is a promoter? Define. (5 pts.)

Promoters or persons who bring about or cause to bring about the formation and
organization of a corporation by bringing together the incorporators or the persons
interested in the enterprise, procuring subscriptions or capital for the corporation and
setting in motion the machinery which leads to the incorporation of the corporation
itself. Simply signing and verifying the articles of incorporation and subscribing for
stock in the proposed company is said not to make one a promoter thereof. When used
in connection with corporations, the term refers to persons who undertake the
formation of a corporation without their being incorporators. They lay the groundwork
for corporate existence.
 IV. a) What is reverse piercing? (5 pts)
Reverse piercing flows in the opposite direction of traditional corporate veil piercing
and makes the corporation liable for the debt of the shareholders.

b) What is the Grandfather rule? Explain. (5 pts.)

It is one of the two methods by which the SEC uses in determining the nationality of the
corporation depending on the corporation’s business.
The "grandfather rule" is a method of determining the nationality of a corporation
which is owned in part by another corporation by breaking down the equity structure
of the shareholder corporation. This method can be useful when a corporation's
economic activity is strictly limited by law to Filipino citizens, such as certain types of
retail trading and mass media.

V.
Mike Wheeler was invited by his friends Dustin Henderson and Lucas Sinclair to
invest in Hawkins Corporation, a newly organized firm engaged in money market
and financing operations. Because of his heavy investments, Mike Wheeler became
the firm’s president and as such, purchased a big number of computers, typewriters
and other equipment from Lenora Corporation. Hawkins Corporation paid the down
payment and Lenora Corporation issued the corresponding receipt. To his chagrin,
Mike Wheeler discovered that the Articles of Incorporation had not been filed by his
friends. Hawkins Corporation became bankrupt three months later.

Upon being sued by Lenora Corporation in his personal capacity, Mike Wheeler
raised the doctrines of de facto corporation and corporation by estoppel among his
defenses. Can these two defenses be validly raised? Explain why or why not. (10 pts.)

The first defense shall not hold water while the other defense will prosper.

Wheeler erred in raising the contention that Hawkins Corporation is a de facto

corporation. Under the jurisprudence, the filing of articles of incorporation and the
issuance of the certificate of incorporation are essential for the existence of a de facto
corporation. In fine, it is the act of registration with SEC through the issuance of a
certificate of incorporation that marks the beginning of an entity’s corporate existence.
Applying the jurisprudence, Wheeler personally discovered that the Articles of
Incorporation in question has not yet been filed by his friends. Hence, the subject
entity’s corporate existence never started in the first place and so the doctrine of de
facto corporation does not apply.

On the other hand, the doctrine of corporation by estoppel shall apply in this case
because under Sec. 21 of the RCC, all persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities, and damages incurred or arising as a result. Applying the provision,
Wheeler dealt with the corporation as if it were a real one. This is evident from the fact
that Wheeler purchased some properties from Leonora Corp. in favor of the
corporation. The doctrine of corporation by estoppel shall apply to prevent injustice and
unfairness thus, we shall afford upon the unorganized entity corporate fiction and
juridical personality for the sole purpose of upholding the contract or transaction.

VI.
Brooklyn Philippines (BrookPhil) is a public utility company, duly incorporated and
registered with the Securities and Exchange Commission. Its authorized capital stock,
as provided in its Articles of Incorporation, consists of voting common shares and
non- voting preferred shares, with equal par values of Php 100.00 per share.
Currently, the issued and outstanding capital stock of BridgePhil consists only of
common shares divided between Rosa Diaz, a Filipino with 60% of the issued
common shares, and Raymond Holt, a British, with 40%.

To secure additional working funds, BrookPhil issued preferred shares to Raymond

Holt equivalent to the currently outstanding common shares. A suit was filed by a
certain Amy Santiago 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 Raymond
Holt’s current holdings. (10 pts.)

I will question the legality of Raymond Holt’s current holdings. Under the law, the
foreign ownership shall be limited by the Constitution with a maximum of 40% of
capital stock. Since the foreign equity in question has been exceeded, the action of
BrookPhil’s transfer of preferred shares shall be void.

VII.
The Securities and Exchange Commission, through its Chairperson, issued on May
20, 2013, SEC-MC No. 8, series of 2013, entitled “Guidelines on Compliance with the
Filipino- Foreign Ownership Requirements Prescribed in the Constitution and/or
Existing Laws by Corporations Engaged in Nationalized and Partly Nationalized
Activities.” Section 2 of SC Mc. No. 8 provides:

“All corporations shall, at all times, observe the constitutional or statutory ownership
requirement. For purposes of determining compliance therewith, the required percentage
of Filipino ownership shall be applied to BOTH: (a) the total number of outstanding
shares of stock; AND (b) the total number of outstanding shares of stock, whether or
not entitled to vote in the election of directors.”

Given that the case of Gamboa v. Teves, 652 SCRA 690, which attained finality on
October 18, 2012, held that the term “capital” in Section 11, Article XII of the 1987
Constitution refers only to shares of stock entitled to vote in the election of directors
(only to common shares) and not to the total outstanding capital stock (common and
preferred shares), Atty. Bobba Fett impugned the validity of SEC MC No. 8 for not
conforming to the letter and spirit of the Gamboa Decision. You are a Supreme Court
Justice and the assigned Ponente. How would you resolve the case? (10 pts.)

Atty. Bobba Fett’s contention shall prosper. Under our Constitution, the participation of
foreign investors in the governing body of any public utility enterprise shall be limited
to their proportionate share in its capital, and all the executive and managing officers of
such corporation or association must be citizens of the Philippines.

VIII.
a) Define a close corporation. (5 pts)
A close corporation, within the meaning Sec. 96 of the RCC, is one whose articles of
incorporation provide that:
 (1) All of the corporation's issued stock of all classes, exclusive of treasury shares,
shall be held of record by not more than a specified number of persons, not
exceeding twenty (20);
(2) All of the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and
(3) The corporation shall not list in any stock exchange or make any public offering
of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall be deemed not a close corporation
when at least two- thirds (2/3) of its voting stock or voting rights is owned or controlled
by another corporation which is not a close corporation within the meaning of this
Code.

b) Does corporate life cease to exist immediately upon dissolution? Explain. (5 pts)
No. Under Sec. 139 of the RCC, every corporation whose charter expires pursuant to its
articles of incorporation, is annulled by forfeiture, or whose corporate existence is
terminated in any other manner, shall nevertheless remain as a body corporate for three
(3) years after the effective date of dissolution, for the purpose of prosecuting and
defending suits by or against it enabling it to settle and close its affairs, dispose of and
convey its property, and distribute its assets, but not for the purpose of continuing the
business for which it was established.

IX.
a) Explain the concepts of merger and consolidation, constituent corporation and
consolidated corporation. (6 pts)
Under Sec. 76 of the RCC, two or more corporations may merge into a single
corporation which shall be one of the constituent corporations or may consolidate into a
new single corporation which shall be the consolidated corporation.

The board of directors or trustees of each corporation party to the merger or

consolidation setting forth the following:
1. The names of the corporations proposing to merge or consolidate, or referred to
as constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the same into
effect;
3. A statement of the changes, if any, in the articles of incorporation of the surviving
corporation in case of merger; and, with respect to the consolidated corporation,
in case of consolidation, all the statements required to be set forth in the articles
of incorporations organized under the RCC; and
4. Such other provisions with respect to the proposed merger or consolidation as
are deemed necessary or desirable.

b) What is the Doctrine of Equality of Shares? (4 pts.)

It means that in the absence of any provision in the articles of incorporation and in the
certificate of stock to the contrary, all stocks, regardless of their class nomenclature,
enjoy the same rights and privileges and are subject to the same liabilities.

X.
a) What is the Howey Test and what are its elements? (5 pts.)
The Howey Test, under the US Supreme Court, embodies a flexible rather than a static
principle, one that is capable of adaptation to meet the countless variable schemes
devised by those who seek the use of the money of others on the promise of profits.
Simply put, it requires a transaction, contract, or scheme whereby a person (1) makes an
investment of money, (2) in a common enterprise, (3) with the expectation of profits, (4)
to be derived solely from the efforts of others.

b) When is a corporation deemed to be doing business in the Philippines? Explain. (5

pts.)
“Doing business”, under the Foreign Investments Act, includes soliciting orders, service
contracts, opening offices, appointing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the country for a period/s totaling one
hundred eighty (180) days or more; participating in the management, supervision or
control of any domestic business, firm, entity or corporation in the Philippines; and any
other act/s that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts, or the exercise of some of the
functions normally incident to, and in progressive prosecution of commercial gain or of
the purpose and object of the business organization.

XI.
a) What is the trust fund doctrine? (5 pts)
Under the jurisprudence, the assets of the corporation as represented by its capital stock
are “trust funds” to be maintained unimpaired and to be used to pay corporate
creditors in the sense that there can be no distribution of such assets among the
stockholders without provision being first made for the payment of corporate debts and
that any such disposition of it is fraud on the creditors of the corporation who extend
credit to the corporation on the faith of its outstanding capital stock and, therefore, void.

b) What is the Business Judgment Rule? (5 pts.)

Under the well-known “business judgment” rule, the courts cannot undertake to control
the discretion of the board of directors about administrative matters as to which they
have the legitimate power of action, and contracts intra vires entered into by the board
of directors are binding upon the corporation and courts will not interfere unless such
contracts are so unconscionable and oppressive as to amount to a wanton destruction of
the rights of the minority. As long as it acts in good faith, its orders are not reviewable
by the courts.

XII.
Pritchett Corporation is engaged in the manufacture of garments for export. In the
course of its business, it was able to obtain loans from individuals and financing
institutions. However, due to the drop in the demand for garments in the
international market, Pritchett Corporation could not meet its obligations. It decided
to sell all its equipment such as sewing machines, cutting tables, ironing tables, as
well as its supplies and materials to Chambers Corporation, its competitor.

How would you classify the transaction? Can Pritchett Corporation sell the aforesaid
items to its competitor Chambers Corporation? What are the requirements to validly
sell the items? Explain. (10 pts.)

The transaction is void. Under the law, if a corporation sells its items to its competitor
corporation, it violates the trust fund doctrine as the rule is dictated by the necessity of
protecting the interests of existing creditors who might be adversely affected by the
purchase.
In order to validly sell the items, the corporate charter shall require the consent of all
stockholders by virtue of Sec. 16 of the RCC. To meet the situation whereby an arbitrary
minority group of stockholders could prevent advantageous corporate action, the RCC
authorizes the making of changes in the corporate structure in specified instances, by
less than the unanimous vote, and to prevent any injustice to the minority, gives them
the right to payment of their stock.

XIII.
Bebop Corporation (BebopCo) is a corporation with a Board of Directors consisting
of 5 Directors, under its Articles of Incorporation. BebopCo was incorporated
recently under the Revised Corporation Code. BebopCo operates a coffee shop called
Cafe Bebop which specializes in affordable Civet Coffee. The Five Directors are: Faye
Valentine, Spike Spiegel, Edward Wong, Jet Black and Gren Eckener. Meanwhile, its
corporate officers are: Kallen Stadtfeld (President), Lelouch Lamperouge (Treasurer)
and Jeremiah Gottwald (Corp. Sec.), who, by the way, is the boyfriend of Director
Faye Valentine.

During a typhoon (called Inday), a freak lightning strike hits the car being driven by
Edward Wong, with Jet Black and Faye Valentine as his passengers. Shocked by the
lightning strike, Edward, who is a bad driver anyway, drives the car off a cliff. All
three are grievously injured and taken to the hospital. None of them are conscious.
Meanwhile, the typhoon has increased in intensity, and a flood is now rising,
threatening the coffee shop operated by BebopCo. The remaining Directors, Spike
Spiegel and Gren Eckener want to save the coffee shop but there are only two of
them and they are unable to make a decision. They call in Kallen Stadtfeld, Lelouch
Lamperouge and Jeremiah Gottwald to an emergency zoom meeting, as well as their
legal counsel (who, by the way, is you), to decide on what to do.

At the meeting, the remaining members of the Board and the corporate officers ask
you for legal advice on how to legally move forward to save the corporation. What do
you advise them? (10 pts.)

I will advise them to file a derivative suit wherein the stockholder or member brings the
action in the name and on behalf of the corporation for a wrong done to the corporation
and the plaintiff shall be entitled for reimbursement at least of legal expenses.

The following are the requisites of a derivative suit:

1. There must be an existing cause of action in favor of the corporation;
2. The stockholder or member must first make a demand upon the corporation;
3. The stockholder or member must have been such at the time of the objectionable
acts; and
4. The action must be brought by the stockholder or member in the name and for
the benefit of the corporation.

XIV.
For the past three years of its commercial operations, Steins Gate Corporation, an oil
company, has been earning tremendously in excess of 100% of the corporation’s
paid-in capital. All of the stockholders, led in particular by a very vocal stockholder
named Rintarou Okabe, have been claiming that they should share in the profits of
the corporation by way of dividends but the Board of Directors failed to do anything.
a) Is Steins Gate Corporation guilty of violating any law? If the answer is in the
affirmative, state the basis and explain. (5 pts.)
Yes. Under the RCC, stock corporations are prohibited from retaining surplus profits in
excess of 100% of their paid-in capital stock except when justified by definite corporate
expansion projects or programs, or when the corporation is prohibited under any loan
agreement with any financial institution or creditor, or when it can be clearly shown
that such retention is necessary under any special circumstances. Since the situation in
this case does not belong in any of the mentioned exceptions, the general rule shall
apply. Hence, Steins Gate Corporation violated the RCC.

b) Are there instances when a corporation shall not be held liable for declaring
dividends? (5 pts.)
Yes. Under Sec. 43 of the RCC, the BOD of a stock corporation may declare dividends
out of the unrestricted retained earnings which shall be payable in cash, in property, or
in stock to all stockholders on the basis of outstanding stock held by them.

XV.
Mr. Anthony Bridgerton, a shareholder of Whistledown Corp., wants to review the
corporate records of the said corporation. He sends a formal letter to Mr. Theo
Sharpe, President of Whistledown, requesting to review the corporate records of the
company. Mr. Sharpe refuses to allow him access to the records, claiming that Mr.
Anthony Bridgerton, who is also a shareholder of Danbury Corporation, should not
be given access. Mr. Sharpe claims that Danbury Corp is a direct competitor of
Whistledown, although Mr. Bridgerton contests this claim, as Whistledown Corp
manufactures television sets, while Danbury Corporation is a weapons manufacturer.

Mr. Anthony Bridgerton goes to his law firm, Sharma & Sharma Law Office, and asks
his assigned lawyer (i.e. you) for advice on what to do. You are a Sharma & Sharma
Partner. What would you advise Mr. Anthony Bridgerton? Explain. (10 pts.)
As Mr. Bridgerton’s lawyer, I will advise him that he should ask the corporate secretary
for the inspection of corporate records as the president of the said company has no
power over it. Since he is a stockholder of the company, he has a vested right to inspect
the corporate books and records by virtue of Sec. 74 of the RCC. The remedies available
for him are as follows:
a) Mandamus under Rule 65;
b) Damages;
c) Civil liability and criminal liability under Sec. 74 and 144 of the RCC;
d) Resort to SEC; and
e) File a complaint under Rule 7 Interim Rule for Intra-Corporate Controversies.

However, the right of inspection shall be properly exercised. It must be exercised during
reasonable hours on business days, the copies shall be made at the expense of the
inspecting stockholder, the demand shall be made in good faith and for a legitimate
purpose, and the person demanding it has not improperly used any information
obtained through any previous examination of the books and records of the
corporation.