BAR QUESTIONS 2004

By: Dianne Cruz

Sec. 2 Corporation defined and Sec. 110. Corporation Sole
What is a corporation sole? How does one pierce the veil of corporate fiction?
Sec. 110 of the Corporation Code defines a corporation sole as one formed for the purpose of administering and
managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church. It is formed by the
chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church.
The veil of corporate fiction may be pierced by proving in court that the notion of legal entity is being used to defeat
public convenience, justify wrong, protect fraud, or defend crime or the entity is just an instrument or alter ego or adjunct of
another entity or person.
Sec. 3. Classes of Corporation
Distinguish clearly [1] a private corporation from a public corporation; and [2] a stock corporation from a non-
stock corporation.
A private corporation is one formed for some private purposes, benefit or end, while a public corporation is formed for
the government of a portion of the State for the general good or welfare. The true test is the purpose of the corporation. If the
corporation is created for political or public purpose connected with the administration of government, then it is a public
corporation. If not, it is a private corporation although the whole or substantially the whole interest in the corporation belongs to
the State. A public corporation is created by special legislation or act of Congress. A private corporation must be organized under
the Corporation Code.
A stock corporation is one that has capital stock divided into shares and is authorized to distribute to the holders of
such shares dividends or allotments of the surplus profits on the basis of the shares held. All other corporations are non-stock
corporations.
Is there a difference between a de facto corporation and a corporation by estoppel? Explain briefly.
A de facto corporation is one which actually exists for all practical purposes as a corporation but which has no legal
right to corporate existence as against the State. It is essential to the existence of a de facto corporation that there be [1] a valid
law under which a corporation might be incorporated, [2] a bona fide attempt to organize as a corporation under such law, and [3]
actual use or exercise in good faith of corporate powers conferred upon it by law.
A corporation by estoppel exists when persons assume to act as a corporation knowing it to be without authority to do
so. In this case, those persons will be liable as general partners for all debts, liabilities and damages incurred as a resul t of their
actions.
Sec. 63. Certificate of stock and transfer of shares
Four months before his death, PX assigned 100 shares of stock registered in his name in favor of his wife and
his children. They then brought the deed of assignment to the proper corporate officers for registration with the request
for the transfer in the corporations stock and transfer books of the assigned shares, the cancellation of the stock
certificates in PXs name, and the issuance of new stock certificates in the names of his wife and his children as the
new owners. The officers of the Corporation denied the request on the ground that another heir is contesting the
validity of the deed of assignment.
May the Corporation be compelled by mandamus to register the shares of stock in the names of the
assignees? Explain briefly.
Yes. The corporation may be compelled by mandamus to register the shares of stock in the name of the assignees.
The only legal limitation imposed by Section 63 of the Corporation Code is when the Corporation holds any unpaid claim against
the shares intended to be transferred. The alleged claim of another heir of PX is not sufficient to deny the issuance of new
certificates of stock to his wife and children. It would be otherwise if the transferees title to the shares has no prima facie validity
or is uncertain.
Sec. 39. Power to deny pre-emptive right
The Board of Directors of ABC, Inc., a domestic corporation, passed a resolution authorizing additional
issuance of shares of stocks without notice nor approval of the stockholders.
DX, a stockholder, objected to the issuance, contending that it violated his right of pre-emption to the
unissued shares. Is his contention tenable? Explain briefly.
Yes. DXs contention is tenable. Under Section 39 of the Corporation Code, all stockholders of ABC, Inc. enjoy
preemptive right to subscribe to all issues of shares of any class, including the reissuance of treasury shares in proportion to their
respective shareholdings.
















BAR QUESTIONS 2005
By: Dianne Cruz
Sec. 41. Power to acquire own shares
Under what conditions may a stock corporation acquire its own shares?
The conditions under which a stock corporation can acquire its own shares are: (a) that it be for a legitimate and proper
corporate purpose; and (b) that there shall be unrestricted retained earnings to purchase the same and its capital is not
thereby impaired.
Sec. 62 (3) Considering for stocks
Janice rendered some consultancy work for XYZ Corporation. Her compensation included shares of stock
therein.
Can XYZ Corporation issue shares of stock to pay for the services of Janice as its consultant? Discuss your
answer.
The corporation can issue shares of stock to pay for actually performed services to the corporation, but not for future
services or services yet to be performed.
Sec. 40. Sale or other disposition of assets
Divine 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 demand for garments in the
international market, Divine Corporation could not meet its obligations. It decided to sell all its equipment such as
sewing machines, perma-press machines, high speed sewers, cutting tables, ironing tables, etc. as well as its supplies
and materials to Top Grade Fashion Corporation, its competitor.
Can Divine Corporation sell the aforesaid items to its competitor, Top Grade Fashion Corporation? What are
the requirements to validly sell the items? Explain.
Divine Corporation can sell the aforesaid items to Top Grade Fashion Corporation. But it must secure the approval of
at least two-thirds of its stockholders and a majority vote of the members of its board of directors as this is a sale of all or
substantially all of its assets.
Sec. 43. Power to declare dividends
Under what circumstances may a corporation declare dividends?
A corporation may declare dividends if it has unrestricted retained earnings.
Distinguish dividend from profit; cash dividend from stock dividend.
Profits belong to the corporation, while dividends belong to the stockholders when dividend is declared.
A cash dividend involves disbursement of earnings to stockholders, while stock dividend does not involve any
disbursement. A cash dividend affects the fractional interest in property which each share represents, while a stock dividend
decreases the fractional interest in corporate property which each share represents. A cash dividend does not increase the legal
capital, while a stock dividend does, as there is no cash outlay involved. Cash dividends are subject to income tax, while stock
dividends are not. Declaration of stock dividend requires the approval of both the majority of the members of the board of
directors and at least two-thirds of the stockholders. In the declaration of cash dividend, the approval by a majority of the
members of the board of directors will suffice.
From what funds are cash and stock dividends sourced? Explain why.
Both cash and stock dividend may be declared out of unrestricted retained earnings. Paid-in surplus can be declared
stock dividend but not cash dividend, because a stock dividend merely transfers the paid-in surplus from surplus to capital.
Sec. 34. Disloyalty of a director
Briefly discuss the doctrine of corporate opportunity.
The doctrine of corporate opportunity means that if the director acquired for himself a business opportunity that should
belong to the corporation, he must account to the corporation for all the profits he obtained unless his act was ratified by at least
two-thirds of the stockholders.
Malyn, Schiera and Jaz are the directors of Patio Investments, a close corporation formed to run the Patio
Caf, an al fresco coffee shop in Makati City. In 2000, Patio Caf began experiencing financial reverses, consequently
some of the checks it issued to its beverage distributors and employees bounced.
In October 2003, Schiera informed Malyn that she found a location for a second caf in Taguig City. Malyn
objected because of the dire financial condition of the corporation.
Sometime in April 2004, Malyn learned about Fort Patio Caf located in Taguig City and that its development
was undertaken by a new corporation known as Fort Patio, Inc., where both Schiera and Jaz are directors. Malyn also
found that Schiera and Jaz, on behalf of Patio Investements, had obtained a loan of P500,000.00, from PBCom Bank, for
the purpose of opening Fort Patio Caf. This loan was secured by the assets of Patio Investments and personally
guaranteed by Schiera and Jaz.
Malyn then filed a corporate derivative action before the Regional Trial Court of Makati City against Schiera
and Jaz, alleging that the two directors had breach their fiduciary duties by misappropriating money and assets of Patio
Investments in the operation of Fort Patio Caf.
Did Schiera and Jaz violate the principle of corporate opportunity? Explain.
Schiera and Jaz violated the principle of corporate opportunity, because they used Patio Investments to obtain a loan,
mortgaged its assets and used the proceeds of the loan to acquire a coffee shop through a corporation they formed.