CORPORATION LAW

FINAL EXAM 2021

TEST I – 2 points each

Multiple Choice. Choose the best answer.

1. When a certificate of stock is issue for shares whose subscription is not fully paid, then -

a) the certificates are deemed null and void for being in violation of express prohibition of the
Corporation Code.
b) the directors and officers who allowed such issuance of the certificate shall be liable to the
corporation for the balance of the subscription that remains unpaid.
c) the shares are conclusively deemed fully paid as to every due holder in good faith of the
certificate of stock.
d) the registered stockholder shall no longer be liable for the unpaid portion of the subscription.

2. Shares of stock that have been issued by the corporation for consideration reflected as equal
to the par or issued value of the shares, when in fact the amount actually received was less,
would technically be called -

a) “Discounted stock”
b) “Premium stocks”
c) “Watered stocks”
d) “Void stocks”

3. Which of the following is correct?

a) Dividends may be declared out of a reappraisal surplus or revaluation increment because

they constitute profits.
b) Dividends are profits but not all profits are dividends.
c) All dividends are taxable as income of the stockholder.
d) The declaration of any kind of dividend requires the assent of at least 2/3 of the outstanding
capital stock.

4. A prohibition in the articles of incorporation and by-laws that none of the stockholders shall
engage in similar competing or antagonistic business or activity to what the corporation is
primarily engaged in -

a) is a valid and reasonable exercise of corporate authority

b) is not a reasonable exercise of corporate powers
c) is in consonance with the business judgement rule
d) is in violation of fair competition in an industry

5. Which of the following statement is true of a corporation’s by-laws?

a) A corporation’s by-laws, being an intramural document, only binds corporate insiders.

b) A corporation’s by-laws, being an intramural document binding on corporate insiders, cannot
be dispensed with and any act done by corporate insiders in violation thereof is null and void.
c) A corporation’s by-laws, being an intramural document, binds only corporate insiders and
such third parties with actual knowledge of its contents.
d) A corporation’s by-laws, being a public document on record with the SEC, binds all parties.

6. Which of the following statements is true in applying the trust fund doctrine?

a) The trust fund doctrine only applies if a corporation has corporate creditors; otherwise, it has
no application whatsoever.
b) The trust fund doctrine only reserves an amount corresponding to the outstanding capital
stock of a corporation.

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c) The trust fund doctrine applies whether or not a corporation is insolvent.
d) The trust fund doctrine does not apply if a corporation is not yet incorporated or is already
dissolved.

7. Which of the following statements is true in applying the ultra vires act?

a) All kinds of ultra vires acts may be ratified by the vote of stockholders owning or representing
at least two-thirds (2/3) of the outstanding capital stock of a corporation.
b) All kinds of ultra vires acts may be the basis for imposing personal liability on the directors or
officers responsible therefor.
c) All ultra vires acts which are not within the primary purpose of the corporation may be ratified.
d) All ultra vires acts which are outside of the scope of actual authority given to corporate officer,
once ratified, frees such corporate officer from any personal liability thereon.

8. Whereas, a decrease of the authorized capital stock will not be approved by the SEC if the
effect is to prejudice the rights of the creditors, and yet no such qualification is provided for under
Section 37 of the Corporation Code when it comes to the increase in authorized capital stock,
because –

a) it is an application of the coverage of the trust fund that always makes an increase of
authorized capital stock favorable or non-prejudicial to the creditors of the corporation.
b) It is presumed that creditors of the corporation will always be happy with the increase of its
authorized capital stock
c) no appraisal right is triggered by an increase in the authorized capital stock of the corporation.
d) creditors of the corporation, not being within the intra-corporate relationship, have no standing
on matters that pertain to the capital structure of the corporation.

9. The principle that “By-law provisions cannot contravene the law,” is based on the rationale
that –

a) a corporation’s articles of incorporation constitutes the law as to the corporation.

b) the corporation being a creature of the law, it cannot, in the exercise of its inherent powers like
adopting a set of by-laws, contravene the law, public policy or public order.
c) a corporation being a creature of the law, cannot, in the exercise of its inherent powers,
contravene in its own charter.
d) a corporation being a creature of the law, it is mandated, in the exercise of its inherent
powers, to carry on the business pursuant to the interest, and not to unduly restrict or
disadvantage, those who are intended to be the beneficiaries of law.

10. X subscribed to 1,000 shares of stock in ABS. He paid 50% of the subscription but such
subscription was later on declared delinquent. The total liability of X, including the balance,
accrued interest, costs, and other expenses amounted to P50,000. Which bidder is considered
the highest bidder in the delinquency sale?

a) A bid of P45,000 for 500 shares

b) A bid of P43,000 for 504 shares
c) A bid of P50,000 for 900 shares
d) A bid of P40,000 for 300 shares

11. To adopt by-laws –

a) majority of the outstanding capital stock or of the members

b) majority of the vote of the board and of the outstanding capital stock or the members
c) 2/3 of the outstanding capital stock or of the members
d) majority vote of the board and 2/3 of the outstanding capital stock or of the members

12. In a corporate setting, the “shares of stock” represent –

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a) ownership of the corporation over its assets.
b) ownership interest of the stockholders over the assets of the corporation.
c) co-ownership rights of all the stockholders over the assets of the corporation.
d) ownership interest of the stockholder over the corporate enterprise.

13. The “Management Contract” entered into between two corporations which requires the
separate Board resolutions approving it to be ratified separately by stockholders of each of the
corporations is that which involves the management –

a) by the managing corporation of the primary purpose business of the managed corporation
b) by the managing corporation of the non-primary purpose business of the managed
corporation.
c) by the managing corporation of all or substantially all of the business of the managed
corporation.
d) by the managing corporation of the investments and securities of the managed corporation.

14. Shares of stock that have been issued by the corporation at their par or issued value of the
shares, when in fact no consideration was received paid by the subscriber with the
understanding that he need never pay for them, would technically be called –

a) “Discounted stock”
b) “Premium stocks”
c) “Watered stocks”
d) “Bonus stocks”

15. The pre-emptive rights of stockholders in a corporation are not statutory rights, but are
______ and exist even when no specific grant or recognition of such right is provided for in
statutory law.

a) inherent rights
b) common law rights
c) provided by the Corporation Code
d) implied rights

16. A corporation may enter into a management contract under the condition wherein:

a) a foreign club corporation will supervise, manage, direct and operate the domestic country
club.
b) the management period is at least 5 years.
c) a foreign corporation will intervene in the management and operation of the corporation
engaged in partially nationalized activity.
d) the management period is from January 1, 2011 to December 31, 2020 for the manufacture of
garments.

17. The principle that “By-laws cannot contravene, much less override, the articles of
incorporation,” is based on the rationale that –

a) a corporation being a creature of the law, cannot in the exercise of its inherent powers,
contravene its own charter.
b) the corporation being a creature of the law, it cannot by its acts and inherent rules defy its
creators or the orders of its creator.
c) a corporation being a creature of the law, it is mandated, in the exercise of its inherent
powers, it must carry on the business pursuant to the interest, and not to unduly restrict or
disadvantage those who are intended to be the beneficiaries thereof.
d) a corporation’s articles of incorporation constitute the law as to said corporation.

18. When a certificate of stock is issued for shares whose subscription is not fully paid, then –

a) the certificates are deemed null and void for being in violation of express prohibition of the
Corporation Code.

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b) the directors and officers who allowed such issuance of the certificate shall be liable to the
corporation for the balance of the subscription that remains unpaid.
c) the shares are conclusively deemed fully paid as to every due holder in good faith of the
certificate of stock.
d) the registered stockholder shall no longer be liable for the unpaid portion of the subscription.
19. The corporation may deny the exercise of the stockholder of his right to inspect over
business secrets or confidential matters based on the principle that –

a) what every person can do himself, he has a right to designate another person to do it for him.
b) the exercise of the power to inspect can be exercised only in consonance with or germane to
propriety rights of the stockholder pertaining to his shares of stock in the corporation.
c) the right to inspect being a common law right is absolute.
d) the right to inspect should be for a legitimate purpose that is protective of the interests of the
corporation.

20. Under the terms of a “Subscription Agreement” which provided that the total par value of the
shares subscribed shall be paid “by means of offsetting from the monthly billings for legal
services of the subscriber who is both the legal counsel and Corporate Secretary of the
corporation,” the consideration would be void because –

a) the Corporation Code prohibits all forms of services as valid consideration for a subscription
agreement.
b) the Corporation Code prohibits future services to valid consideration under a subscription
agreement.
c) the Corporation Code prohibits “promises to pay” as valid consideration for subscription
agreements.
d) the agreement amounts to self-dealing of a corporate officers with the corporation, and which
are voidable at the option of the corporation.

21. But the Subscription Agreement nevertheless is –

a) void, for lacking in the essential element of valid cause or consideration.

b) voidable, at the option of the corporation.
c) valid, where the consideration being void is deemed to have been agreed to be in cash.
d) valid, where the consideration is deemed to be an accounts payable on the part of the
subscriber.

22. X Corp. has already issued the 1,000 originally authorized shares of the corporation so that
its Board of Directors and stockholders wish to increase X’s authorized capital stock. After
complying with the requirements of the law on increase of capital stock, X issued an additional
1,000 shares of the same value. S presently holds 200 shares out of the original 1,000 shares.
Which of the following statements is true?

a) If ever there is pre-emptive right, the same must be exercised within a reasonable time as
fixed by the Board of Directors if the Articles and the by-laws are silent.
b) S must be offered equivalent 200 shares under his pre-emptive right if stated in the Articles of
Incorporation.
c) The increase in shares must be offered first to the stockholders of record under the “Doctrine
of First Refusal.” If they refuse it will be offered to the general public.
d) The new subscription in the increase in authorized capital stock must first be offered to
stockholders on record in proportion to their present equity holdings, and the portion pertaining
to those who refuse may now be offered by the Board of Directors to any interested party.

23. X subscribed to a total of 1,000 shares of stock. His first subscription was for 600 shares
which was fully paid and he was issued a stock certificate for 600 shares. For his second
subscription of 400 shares, he only paid 40%. Is X entitled to vote for the 1,000 shares?

a) Yes, since the unpaid shares have not been declared delinquent.
b) No, since X has not paid for the entire subscription.
c) No, but X is entitled to vote for 760 shares, corresponding to the total amount he paid.
d) Yes, X is entitled to vote for his entire subscription for he will be considered a debtor of the
corporation for the unpaid shares.

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24. S subscribed to 100 shares of stock of C Corporation with a par value of P100 each, paying
P3,000 on his subscription. Subsequently S asked the President of C Corporation to release him
from his subscription. The President of C Corporation consented provided that S forfeits to the
corporation what he had already paid. However, C Corporation went into insolvency and an
assignee was appointed and seeks to collect from S, the balance of his unpaid subscription. Can
the assignee still collect from S?

a) Yes, consent of all stockholders and creditors of C Corporation is necessary in order for the
release to be valid.
b) No, the President of C Corporation already released S from his obligation.
c) No, the President is clothed with apparent authority to release S from his unpaid subscription.
d) Yes, consent of the majority of the Board of Directors is necessary, not only that of the
President, in order for the release to be valid.

25. The “Management Contract” entered into between two corporations which requires the
separate Board resolutions approving it to be ratified separately by stockholders of each of the
corporations is that which involves the management –

a) by the managing corporation of the primary purpose business of the managed corporation.
b) by the managing corporation of the non-primary purpose business of the managed
corporation.
c) by the managing corporation of all or substantially all of the business of the managed
corporation. Sec. 43 Corporation Code.
d) by the managing corporation of the investments and securities of the managed corporation.

26. The distribution of dividends from capital and the acquisition of corporate shares without
corporate unrestricted earnings is not allowed by law because of:

a) the trust fund doctrine.

b) the corporate opportunity theory.
c) the corporate entity doctrine.
d) None of the above.

27. Which of the following statements is not true pertaining to foreign corporations?

a) Doing business in the Philippines, it needs no license to sue before the Philippine courts on
an isolated transaction.
b) Doing business in the Philippines without a license, it cannot sue before the Philippine courts.
c) Not doing business in the Philippines, it needs no license to sue before Philippine courts on a
cause of action entirely independent of any business transaction.
d) Doing business in the Philippines with the required license, it can sue before Philippine courts
on any transaction.

28. Watered stocks are those issued not in exchange for its equivalent either in cash, property,
share, stock dividends or services; thus, the issuance of such stock is prohibited. An instance of
issuance of a watered stock would be:

a) stock issued with a minimal consideration.

b) issued without consideration.
c) issued as fully paid when corporation has received its par value.
d) issued as stock dividend with sufficient surplus.

29. There are several ways of decreasing the capital stock of a corporation. One of these ways
may involve:

a) decreasing the par value of existing shares without changing the number of shares.
b) decreasing the number of shares and increasing the par value.
c) decreasing the number of shares without retaining the par value.
d) maintaining the number of shares and decreasing the par value.

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30. George subscribed to 1,000 shares of stock in ABC Corp. at P10.00 per share. He only paid
P5,000.00 and promised to pay the balance after 60 days. Despite the lapse of the 60-day
period and an additional 30-day grace period given by the corporation, George still failed to pay.
How may the shares subscribed by George can be declared delinquent?

a) 500 shares, representing the shares for which no payment was made.
b) All of the 1,000 shares he subscribed to.
c) All of the 1,000 shares he subscribed to, provided, however, that the corporation grants him
the primary right to buy the shares during the delinquency sale.
d) 500 shares only, provided he relinquishes his right to subscribe to the other 500 shares.

31. Assuming that ABC Corp., based on the given facts in the immediately preceding question,
declares the entire 1,000 shares of George as delinquent, sells the shares in a public auction,
where Alfred was declared as the highest bidder paying P500.00 for 300 shares, what should
ABC Corp. do with the remaining 700 shares?

a) Register 500 shares in the name of George and register an additional 200 shares in the name
of Alfred.
b) Register 500 shares in the name of George and declare the 200 shares as treasury shares.
c) Register the entire 700 shares in the name of George.
d) Register the entire 700 shares as additional shares of Alfred since he was the highest bidder
in the foreclosure sale.

32. Why do stockholders have pre-emptive rights?

a) To increase their dividends;

b) To increase their voting power;
c) To protect themselves from dilution;
d) To increase their interest in the corporation.

33. The pre-emptive right extends to the right to subscribe:

a) Only to new issues of shares arising out of an increase of the capital stock.
b) Only to the issuance of previously unissued portions of the outstanding capital stock.
c) To all issues of shares or dispositions of shares of any class;
d) To all issues or dispositions of shares of any class other than redeemable or treasury shares.

34. The pre-emptive right if not denied by the corporation generally extends to all issues of
shares in proportion to a stockholder’s shareholdings. Even if not denied, the right does not
extend to certain specified issuances enumerated below. Which is the exception?

a) Shares to be issued in compliance with laws requiring stock offerings to the public.
b) Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the
outstanding capital stock in exchange for property needed for corporate purposes.
c) Shares to be issued to incorporators.
d) Shares to be issued in payment of a previously contracted debt.

35. The following are remedies available to a corporation to enforce payment of stocks except:

a) mandamus
b) extra-judicial sale
c) withholding of stock dividends
d) deduction from cash dividends

36. A corporation after its dissolution shall continue to operate as a corporate body for three
years except:

a) to distribute its assets

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b) to dispose and convey its property
c) to prosecute and defend suits by or against it
d) to execute contracts to accomplish the purpose for which it was accomplished

37. Which is not an isolated transaction in relation to foreign corporations?

a) Its activity in the Philippines is acting as an off-line international carrier, although limited only
to ticketing services through its main ticket sales office and through designated sales agents and
which sale will not be subject of tax as “Gross Philippine Billings”
b) When it enters into a single agreement within a particular state or makes such state a place
for the conduct of any part of its corporate business
c) When it has no intention to repeat the same business
d) It entered into a loan contract in the amount of $2,000,000.00
38. A corporation extended its corporate life by amending its articles of incorporation. A
stockholder does not agree to the said extension. What right is available to this stockholder?

a) right of appraisal
b) derivative suit
c) pre-emptive right
d) right to dividends

39. M filed a complaint with the Securities and Exchange Commission alleging the Bonanza, Inc.
has violated the provisions of the Corporation Code. The SEC seeks to inspect the books of the
Corporation. Bonanza, Inc. objected to the inspection on the ground that M, the complainant is
not a stockholder of the Corporation. Is the contention of Bonanza, Inc. tenable?

a) No, SEC may inspect the books and may order the examination of all documents to dispose
cases before it.
b) Yes, a non-stockholder has no right to inspect the books of the Corporation.
c) No, the RTC has jurisdiction over intracorporate cases.
d) Yes, a non-stockholder may inspect the books once it has filed a case with the RTC or SEC.

40. Boboy, Jim and Danny executed a joint venture agreement to form a close corporation under
the Corporation Code, the outstanding capital stock of which three of them would equally own.
They also provided therein that any corporate act would need the vote of seventy percent (70%)
of the outstanding capital stock. The terms of the agreement were accordingly implemented and
the corresponding close corporation was incorporated. After three (3) years, Boboy, Jim and
Danny could not agree on the business in which to invest the funds of the corporation. Boboy
wants the deadlock broken. What will he do to break to deadlock?

a) a written petition must be made addressed to the SEC to arbitrate the dispute
b) the SEC can automatically assume jurisdiction over the corporation
c) a written petition for corporate rehabilitation must be filed with the SEC
d) a petition for the appointment of a receiver shall be filed with the RTC

TEST II - 5 points each

1) C Corp. is the direct holder of 10% of the shareholdings in U Corp., a nonlisted (not
public) firm, which in turn owns 62% of the shareholdings in H Corp., a publicly listed
company. The other principal stockholder in H Corp. is C Corp. which owns 18% of its
shares. Meanwhile, the majority stocks in U Corp. are owned by B Corp and v Corp at
22% and 30%, respectively. B Corp. and v Corp. later sold their respective shares in U
Corp. to C Corp., thereby resulting in the increase of C Corp’s interest in U Corp., whether
direct or indirect, to more than 50%.

(A) Explain the Tender Offer Rule under the Securities Regulation Code. (2.5 points)

A Tender Offer means a publicly announced intention by a person acting alone or in concert
with other persons to acquire the outstanding equity securities of a public company or it’s

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 outstanding equity securities of an associate or related company of such public company
which controls said public company (Section 19.1.8 of the SRC Implementing Rules and
Regulations).

(B) Does the Tender Offer Rule apply in this case where there has been an indirect
acquisition of the shareholdings in H Corp. by C Corp.? Discuss. (2.5 points)

Yes, the mandatory tender offer is still applicable even if the acquisition, direct or indirect, is
less than 35% when the purchase would result in direct or indirect ownership of over 50% or
the total outstanding equity, securities of a public company (Cemco Holdings v. National Life
Insurance Company of the Philippines, GR No. 171815, August 7, 2007).

2) Royal Links Golf Club obtained a loan from a bank which is secured by a mortgage on
a titled lot where holes 1, 2, 3 and 4 are located. The bank informed the Board of Directors
(Board) that if the arrearages are not paid within thirty (30) days, it will extra-judicially
foreclose the mortgage. The Board decided to offer to the members 200 proprietary
membership shares, which are treasury shares, at the price of P175,000.00 per share even
when the current market value is P200,000.00

In behalf and for the benefit of the corporation, Peter, a stockholder, filed a derivative suit
against the members of the Board for breach of trust for selling the shares at P25,000.00,
lower than its market value, and asked for the nullification of the sales and the removal of
the board members. Peter claims the Club incurred a loss of PS million. The Board
presented the defense that in its honest belief any delay in the payment of the arrearages
will be prejudicial to the Club as the mortgage on its assets will be foreclosed and the
sale at a lower price is the best solution to the problem. Decide the suit and explain. (5
points)

A:
The derivative suit will not prosper, because while it was filed by a stockholder on behalf of the
corporation the complaint did not allege the other elements of derivative suit namely;
a) exhaustion of intra-corporate remedies available under the articles of incorporation, by-laws
and rules and regulations governing the corporation to obtain the relief the stockholder
desires; b) it is not a nuisance suit; and c) appraisal right is not available (Ching v. Subic Bay
Golf and Country Club, GR. No. 174353, September 10, 2014).

A: The derivative suit will not prosper because while it was filed by a stockholder on behalf of
the corporation the complaint did not allege the other elements of derivative suit namely; a)
exhaustion of intra corporate remedies available under the articles of incorporation, bylaws
and rules and regulations governing the corporation to obtain the relief the stockholder
desires; b) it is not a nuisance suit; and c) appraisal right not available.

Furthermore, there was no wrongful act on the part of the board of directors for simply selling
the treasury shares below market value given the circumstances obtaining in the corporation.
The terms and conditions of the sale of treasury shares are reasonably determined by the
board of directors under the business judgment rule. Under such rule, questions of policy and
management are left to the sound discretion of the board of directors and their acts are valid
for as long as they acted in good faith and not contrary to law.

3) Name 5 characteristics of an OPC. (5 points)

a. A corporation with a single stockholder (Sec. 116);

b. Only a natural person, trust, or an estate may form an OPC (Sec. 116);
c. OPC shall not be required to have a minimum authorized capital stock, except as
otherwise provided by special law (Sec. 117);

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 d. Shall indicate the letters “OPC” either below or at the end of its corporate name (Sec.
120);
e. The single stockholder shall be the sole director and president of the OPC (Sec. 121)

4) Distinguish Sole Proprietorship from OPC. (5 points)

Sole Proprietorship OPC

A sole proprietorship is a business owned OPC is a business structure that allows a

and operated by one person.
This means one person has complete control
over all decision-making regarding the
business
single person to incorporate a company as a
separate legal entity.
This means the corporation is separate
from the owner and can enter into contracts,
own assets and incur liabilities in its name.

The owner of the OPC is called a “single

stockholder,” and is the corporation’s sole
owner.