Commercial Law Review Midterm Exams

I
a.
Mr. Ong and his son are not compelled to recuse themselves at the
meeting. Although reclusion is provided in the Revised Corporation Code to
prevent conflicts of interests, Mr. Ong and his son may still attend the
meeting as long as shareholders owning at least 2/3 of the outstanding
capital stock would vote in their favor to proceed with the meeting after full
disclosure of their interests and the contract be fair and reasonable.

If they attend and vote to approve the contract absent the 2/3 concurrence
of stockholders representing the corporation’s outstanding capital stock, the
contract would be voidable and would thus be valid until annulled.

If they attend and vote to approve the contract with the 2/3 concurrence of
the stockholders, the contract would be valid.

b.
With only two directors remaining, they cannot form a quorum and would
therefore need to fill in the vacancies left by absence of the three directors.
In this case, they must call a stockholder’s meeting to vote on persons to fill
in the vacancy, to meet the required quorum for the purpose of the
meeting.

II
a.
No, the contract to sell in favor of Mr. Labrador is not valid and not binding
upon JG. This is because the SPA of Ms. Dingo which empowered her to
negotiate with Mr. Labrador was not granted to her by the JG board, but
only by Mr. German. It must be emphasized that it should be the JG board
that should empower a third party to act on their behalf, and not by any of
the board members. However, it may become valid if the JG board would
subsequently ratify it.

b.
Yes, the deed of sale on installment in favor of Atty. Terrier is valid, but it
may not be considered binding to JG. This is because Mr. Basset was with
the proper authority through a resolution of the JG Board to negotiate with
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 Commercial Law Review Midterm Exams

prospective buyers. However, Mr. Basset did not only negotiate with Atty.
Terrier but actually entered into a sale with her already. Absent any
showing that the JG Board also authorized Mr. Basset to execute a deed of
sale, his acts may be considered ultra vires and cannot validly bind JG.
However, the JG board may still validly agree to bind themselves with the
deed of sale after ratification.

III
a.
No, the absence of unrestricted retained earnings in the 2018 FS is not a
ground to deny Ms. Tan’s appraisal right. This is because all stockholders
are entitled to their corresponding shares of stocks after successfully
invoking their appraisal right should they disagree to any decision of the
corporation. Although the existence of unrestricted retaining earnings is
necessary to pay these out to the stockholder, it is not a prerequisite that
the 2018 FS be relied on, since there could be unrestricted retaining
earnings in the corporation’s 2019 FS.

b.
No, appraisal rights cannot be availed of in cases where the corporation
shortened its corporate term. Although the Revised Corporation Code is
explicit in providing this when there is shortening or extension of corporate
term, jurisprudence explains how the appraisal right is erroneously included
as there would be no prejudice afforded to the dissenting stockholder in
case where the corporation’s life would be shortened since it would result
to its immediate liquidation. Thus, the dissenting stockholder would still
receive their monetary equivalent of shares.

IV
a.
In the first desired outcome Ms. Moses should file a petition for inspection
with the SEC and showing proof of CGCE, the Club, and the Association’s
denial of her previous request.

In the second desired outcome, Ms. Moses should file a petition before the
RTC Special Commercial Courts since her wanting to be reinstated to
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active status involves an intra-corporate dispute involving the appreciation

of the corporation’s AOI and/or bylaws as basis for active status
membership. However, she may first proceed with the SEC since it may
have specialized knowledge relating to such intra-corporate matters, and
may eventually resolve the issue faster.

In the third desired outcome, a derivative suit may be filed before the RTC
Special Commercial Courts because it concerns CGCE, the Club, and the
Association as a whole due to their directors/trustees’ gross negligence and
handling of the corporation.

In the fourth desired outcome, a petition for holding of elections may be

filed before the SEC after showing that the board rejected her request for
such. There is also a history of non-holding of elections without justifiable
reasons and she may amply raise that it is about time for a change.

b.
Yes, there is legal basis for Ms. Moses to invoke piercing the corporate veil
doctrine. Since the directors/trustees of CGCE are also the ones exercising
complete control over the Club and the Association, the directors/trustees
cannot hide behind the separate juridical personality afforded to the Club
and the Association to escape from their blatant gross negligence and
incompetency over the facilities of the common areas, causing their
deterioration and prejudice to the members.

V
a.
Yes, the Certificate of Investment is a security, particularly an investment
contract. To be precise, the Certificate of Investment is only an evidence of
a security.

Under the Howey Test, which is jurisprudentially relied upon to determine

whether or not a certain transaction is an investment contract or not,
provides the following requisites: (1) there is an investment in money; (2) in
a common fund; (3) with expectation of profits; and (4) primarily derived
from the effort of others. All the following requisites are met here since
there is (1) an investment of USD 100,000; (2) in the common fund of
MESA, Inc.,; (3) expecting monthly payouts of 10 MESAcoins; and (4) Mr.
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 Commercial Law Review Midterm Exams

Mesa would not need to do anything else and only expects a return of his
investment, except if he wishes to increase his receivable by recruiting at
least 10 people.

b.
Possible violations of MESA, its directors, officers, and employees would
be for Fraudulent Transactions, and for failure to acquire a secondary
license for purposes of selling MESAcoins to their public. Fraudulent
transactions are those activities prohibited by the SRC as to induce
innocent persons to invest in scams or grossly unfavorable investment
arrangements, regardless if they are registered or not with the SEC.
MESA’s sales agents, absent any secondary license to sell and offer such
securities, may also be held liable for failing to acquire the necessary
license to transact with such securities.

VI
a.
After BBC filed such petition for court-supervised rehabilitation
proceedings, the court will issue a stay order or a suspension order, and
subsequently appoint a receiver. The receiver should not have any conflict
of interest between BBC and its creditors, but such conflict of interest may
be waived upon agreement of the parties. The suspension order or stay
order will enjoin the creditors from enforcing their claims against BBC.

The receiver would then take over BBC but only with respect to its business
operations relevant to its successful rehabilitation. The receiver will then
coordinate with BBC and its creditors for the creation of a reasonable
rehabilitation plan, indicating therein an inventory of BBC’s total assets and
liabilities, preference of creditors, liquidation plan, and measures to be
undertaken for successful rehabilitation, among others.

The receiver will then continue to oversee the operations of BBC until BBC
is back to its financial condition, and after satisfactorily answering the
claims of its creditors. If it seems that rehabilitation of BBC is not possible,
the proceedings will then be converted into liquidation proceedings to
satisfy the claims of the creditors, and BBC would be considered dissolved.

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b (i).
Katy, now as an individual debtor as a natural person, may not either opt
for to file a petition for suspension of payments or file a petition voluntary
rehabilitation. The remedy of involuntary rehabilitation may also be
available for Katy as individual debtor, but this will be initiated by the
creditors, and not by the Katy.

b (ii).
Under suspension of payments, the secured creditor may not foreclosure
the securities attached to their credit, except when there is a guaranty.
Thus, if there is a guaranty, the secured creditor may proceed to claim for
the principal transaction against such guaranty.

Under voluntary rehabilitation, and upon issuance of a suspension or stay

order by the court, the secured creditor cannot claim against Katy.
However, if the period provided therein already expires, then they may
proceed for foreclosure of the attached securities to their credit. The
secured creditors will also coordinate with the appointed receiver to
determine the most optimum methods of satisfying their claims.

Under involuntary rehabilitation, it is the creditors themselves who initiated

such petition, and therefore they may proceed to foreclose any securities
attached to their credit. They will also have to coordinate with the receiver
to determine the most viable way to satisfy their claims.

VII
a.
No, MSB’s action for injunctive relief and conservatorship before the RTC
will not prosper. Pursuant to the “close now, hear later” principle, the MB
has discretion to order a bank closed based on examination reports of
unsafe and unsound banking practices. Furthermore, pertinent laws on
banking expressly prohibits banks from stopping their closure via injunction
since it would be contrary to the national policy of ensuring safe banking
practices and trust on the public to the banking system.

Conservatorship is also not a prerequisite for closure, as expressly

mentioned in the banking laws. This is because the decision of whether to
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place banks under conservatorship is with the sole discretion of the MB and
they may even proceed to liquidation immediately. This is also pursuant to
the “close now, hear later” principle. However, VSB may assail such
exercise of discretion by the MB under a Rule 65 Certiorari petition before
the courts.

b.
Under the NCBA and/or GBL, VSB will have to undergo receivership and
the MB will then appoint the PDIC as a receiver to secure the bona fide
deposits of its depositors. PDIC may also be appointed both as a receiver
and a liquidator, if the MB opines that liquidation is the best remedy. Under
receivership process, the receiver will account for all the assets and
liabilities of the bank, and will execute reports to the MB regarding its
financial condition, particularly on whether rehabilitation is possible or if
liquidation will ensure.

If liquidation follows, PDIC will have to first pay all of the banks’ insured
depositors, and will then subrogate the depositors to claim against the bank
through various modes such as the selling of its assets, or by inviting new
investors to closed bank for renewal of its banking operations.

VIII
a.
As to the similarities of the receiver under the NCBA and PDIC Charter,
and the FRIA:
1. They both have the responsibility to take over the corporation and
operate it in such means that will not worsen its financial state;
2. They will also submit periodic reports either to the MB or the court
regarding the corporation’s financial condition, and for possible
rehabilitation;
3. They may represent the corporation in a suit but only to those
pertaining to their functions as a receiver;
4. They may hire persons as are necessary to the efficient
administration of the receivership process.

As to their differences:
1. The receiver under the NCBA/PDIC reports to the MB, while the
receiver under the FRIA reports to the court;
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2. The receiver under the NCBA/PDIC only deals with banks, quasi-
banks, and other financial institutions subject to the NCBA and
PDIC’s supervision, while the receiver under the FRIA deals with
corporations in general;
3. The receiver under the NCBA/PDIC is appointed by the MB, while the
receiver under the FRIA is appointed by the court, through
recommendation by the parties;
4. The receiver under the NCBA/PDIC make be a receiver only up to 12
months, while the receiver under the FRIA may take as long as
needed for a determination of successful rehabilitation or liquidation.

b.
As to the similarities of a liquidation of bank ordered closed by the MB,
stock corporation voluntarily dissolved under the RCCP, and a juridical
debtor who proceeded to liquidation under FRIA:
1. A liquidator will be appointed to oversee their respective liquidation
proceedings;
2. The liquidator may also be the receiver previously appointed by the
MB, or the courts;
3. The liquidator is required to prepare an inventory of assets and
liabilities, a schedule of claims for the creditors, and an overall
liquidation plan;
4. There must be a satisfaction for the payment of their outstanding and
delinquent taxes;
5. The properties not subject to foreclosure and forfeiture under applies.

As to their differences:
1. For banks ordered closed by the MB, the PDIC may be appointed as
liquidator by the MB; while for corporations under RCCP and juridical
debtors under FRIA, the court may appoint a liquidator recommended
by the parties;
2. For banks ordered closed by the MB, the PDIC must first satisfy the
claims of insured depositors for their bona fide deposits; while for
corporations under the RCCP and juridical debtors under the FRIA,
the concurrence and preference of credits must be followed;
3. For banks ordered closed by the MB, there is no need for a BIR Tax
Clearance, while for corporations under the RCCP and juridical
debtors under the FRIA, a prior certificate of Tax Clearance is
necessary before they may be successfully liquidated;

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4. For banks ordered closed by the MB, certain types of unpaid taxes
need not be paid, while for corporations under the RCCP and juridical
debtors under the FRIA, all types of unpaid taxes need to be paid.

IX
a.
The AMLC may show existence of probable cause by attaching the
affidavits of the BIDI whistleblowers, and the CTRs/STRs. The CTR/STR,
or Covered Transaction Reports or Suspicious Transaction Reports must
then reflect the receiving of such named DPWH officials of the alleged 20%
winning bid amount.

b.
Under the AMLA, the AMLC may file for issuance of a freeze order over
those OFW accounts to suspend the perpetuation of bribery, which is one
of the unlawful activities expressly enumerated in AMLA. This would
warrant the issuance of a freeze order if the CA will be satisfied in their own
determination of probable cause that there has been bribery, and violations
of the AMLA is being perpetuated.

The AMLC may also file for a forfeiture case to recover the amounts
subject of the unlawful activity after filing a petition thereof to the CA,
sufficiently identifying the location of the money and the respondent, and
the reliefs prayed for.

The AMLC may also file a corresponding report to the Ombudsman, if the
DPWH officials are classified as at least salary grade 27, or with the
respective prosecutors, for the prosecution of a case for AMLA violations.