Quiz No.

12 – The Revised Corporation Code (Corporate Powers)

I
X Corporation is in need of land on which to construct an additional factory to be used in the
expansion of its business. Jose Cruz owns a piece of land in Taytay, Rizal, which is ideal for the
purpose, and the corporation offers to buy it at a fair price. Jose is willing to part with the land on
condition that he is paid in shares of stocks of the corporation. The Board of Directors decided to
accept the terms of Jose, but since the authorized capital stock of the corporation has been fully
subscribed, it proposed to increase the capital stock so that it can consummate the sale of the
land. The proposal, including the purchase of Jose’s land in exchange for the new shares, was
submitted to the stockholders in a meeting called for that purpose. Pedro Reyes who has 100
shares in the corporation, alleging that he and all other stockholders have a pre-emptive right to
the new shares, insists that the corporation issue to him his proportionate quota of the new shares
that he offers to buy in cash. Holders of 80% of the outstanding capital stock are in favor of the
proposal to increase the capital stock, including the exchange of Jose’s land for new shares of
stock. Is Pedro Reyes within his rights in claiming a pre-emptive right/ Explain. (10%)

Answer: 1983 Bar Exam; Aquino, p. 372

No. Pedro Reyes was not well within his right to claim pre-emptive right. Section 39 of the
Corporation Code provides that all stockholders shall enjoy the pre-emptive right to subscribe to
all issues of shares in proportion to their respective shareholdings. However, Section 39 provides
that such pre-emptive right does not exist when shares are issued in exchange for property
needed for corporate purposes, provided stockholders representing 2/3 of the subscribed capital
stock approve of such issuance. Therefore, since more than 2/3 of the stocks favored the
proposal, Pedro Reyes cannot insist on the pre-emptive right.

II
B Corporation is engaged in selling canned goods on wholesale basis. It is merely renting a
bodega and 95% of its assets consists of stocks of goods. On a given day, Mr. X, a regular
customer, purchased all the stocks of B Corporation. Is the transaction a sale of substantially all
of the assets of the corporation requiring concurrence of stockholders representing 2/3 of the
outstanding capital stock? (10%)

Answer: Aquino, p. 380

No. The sale in the given problem appears to be a sale in the regular course of business because
B Corporation is engaged in wholesale business. Section 40 of the Corporation Code provides
that nothing in the law is intended to restrict the power of any corporation, without authorization
by the stockholders or members, to sell or otherwise dispose of any of its property and assets if
the same is necessary in the usual and regular course of business or if the proceeds of the sale or
other disposition of such property and assets be appropriated for the conduct of its remaining
business. The sale in the given problem appears to be a sale in the regular course of business
because X Corporation is engaged in wholesale business.

III
X Corporation is engaged in the business of milling of rice. Around 60% of its assets consists of
cash in the bank, 30% consists of rice milling machine and the remaining 10% consists of office
equipment and supplies. X Corporation sold its rice milling machine. Can it be considered sale of
substantially all of the assets of the corporation? (10%)

Answer: Aquino, pp. 380-381

Yes. The sale is sale of substantially all of the assets of X Corporation. It cannot continue its
business without the machine. There is a sale of substantially all of the assets of the corporation
if it would be rendered incapable in continuing its rice milling business. The fact that it is only
30% of the total assets of the corporation is immaterial.
 IV
One of the stockholders of VM Corporation is OP Corporation. VM Corporation has been
advancing money to OP Corporation to answer for its commitments. OP Corporation is now
offering its shares in VM Corporation to pays its advances. Can VM Corporation acquire its own
shares which are in the name of OP Corporation by way of dacion en pago despite the presence
of a negative retained earning in its books? (10%)

Answer: Aquino, pp. 385-386

No. VM Corporation cannot acquire its own shares. Section 41 requires the presence of
unrestricted retained earnings before a corporation can acquire its own shares. The case does not
fall under any of the exceptions to the rule that unrestricted retained earnings is required. In
addition, the derecognition of receivables without receiving any cash from the debtor would
further aggravate the liquidity position of the company. If the acquisition is allowed, the
corresponding recognition of treasury shares would further increase the amount of negative
equity of the company. (SEC SGC Opinion No. 09-11 dated May 8, 2009).

V
Stikki Cement Corporation (STIKKI) was organized primarily for cement manufacturing.
Anticipating substantial profits, its President proposed that STIKKI invest in (a) power plant
project, (b) concrete road project, and (c) quarry operations for limestone used in the
manufacturing of cement. What corporate approvals of votes are needed for the proposed
investments? Explain. (10%)

Answer: 1995 Bar Exam; Aquino, p. 390

All the proposed actions require only the approval of the board of directors provided that they are
reasonably necessary to accomplish the primary purpose of the corporation. A power plant that is
meant to cater to the needs of the cement factory is reasonably necessary to accomplish the
primary purpose. Moreover, construction of concrete roads leading to the factory or the quarry
may also be deemed necessary for the accomplishment of the primary purpose. With respect to
the quarry operations for the limestone, the same is an indispensable ingredient in the
manufacture of cement and may therefore, be considered reasonably necessary to accomplish the
primary purpose of STIKKI.

Take Note: I still consider correct even if your answers are different as long as the reasoning is
correct. Some consider the power plant and the concrete road are not necessary to accomplish
primary purpose of the organization thus requiring the approval of the stockholders is required –
this answer is still correct.

VI
Ace Cruz subscribed to 100,000 shares of stock of JP Development Corporation, which has a par
value of P1 per share. He paid P25,000.00 and promised to pay the balance before December 31,
2008. JP Development Corporation declared a cash dividend on October 15, 2008 payable on
December 1, 2008. For how many shares is Ace Cruz entitled to be paid in cash dividends?
Explain. (10%)

Answer: 2008 Bar Exam; Aquino, p. 410

Ace Cruz is entitled to be paid cash dividends for all the 100,000 shares of stock that was
covered by his subscription. Section 43 of the Corporation Code provides that the dividends are
payable to all stockholders on the basis of outstanding stock held by them. In addition, Section
72 of the Corporation Code states that a shareholder is entitled to all the rights of a shareholder,
including the right to dividend even if he has not fully paid for his shares of stock. A delinquent
shareholder is even entitled to dividends provided that the cash dividends shall be applied first to
the unpaid balance of the subscription while stock dividends shall be withheld until full payment
of the subscription.
 VII
The employees of Acoje Mining who were living within the company compound in the mining
demanded the installation of a post office branch to facilitate postal services. The Postmaster
General who agreed to open a branch provided the company post a surety bond to answer for any
malversation that the postmaster in the newly created office may commit. The bond was posted,
and subsequently, the postmaster malversed public funds. The Postmaster General sued on the
bond but the company raised the defense of ultra vires act, alleging that it was not authorized to
file a bond for a public officer and therefore, such act did not bind the corporation. Is the
company correct when it states that such act did not bind the corporation? (10%)

Answer: Cesar Villanueva, p. 559; Republic v. Acoje Mining, 3 SCRA 361 (1963)

No. The filing of the surety bond, which may be ultra vires, but not illegal se and which was
ratified by the acceptance by the mining company of the benefits attendant to the opening of a
post office in the mining compound, is binding on the corporation.

VIII
Nielson & Co., Inc. had a management contract with Lepanto Consolidated Mining Co., by
which Nielson was given as added renumeration, a right to 10% of the net profits of Lepanto.
Stock dividends were declared by said corporation. May Nielson claim the issuance in its favor
of 10% of the stock dividends as part of its compensation? (10%)

Answer: Perez, p. 212; Nielson & Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA 569;
Asked, 1991 Bar Exams

No. Stock dividends cannot be issued to a person who is not a stockholder in payment of services
rendered. Hence, Nielson cannot be paid in shares of stock which form part of the stock
dividends of Lepanto for services it rendered under the management contract. However, Nielson
is entitled to payment in cash for services he rendered pursuant to his management contract.

IX
Printwell, Inc. (Printwell) was commission by BMedia, Inc. (BMedia) for the printing of its
magazine, Philippines. Out of its obligation of P300,000.00, BMedia was able to pay only
P25,000.00 prompting Printwell to sue the former for sum of money. Printwell impleaded X, Y,
and Z, incorporators and original stockholders of BMedia to recover on their unpaid
subscription. For their defense, X, Y, and Z contended that BMedia has a separate personality
distinct from them; that they issued checks in full payment of their subscription; and that the
directors and stockholders of BMedia resolved to dissolved the corporation. However, there is no
proof that the check issued by X, Y, and Z was encashed and credited in payment of their
subscription. Rule on the suit filed by Printwell. (10%)

Answer: Dimaampao, p. 280-281

The suit will prosper. Although a corporation has a personality separate and distinct from those
of its stockholders, directors, or officers, such separate and distinct personality is merely a fiction
created by law for the sake of convenience and to promote the ends of justice. The corporate
personality may be disregarded, and the individuals composing the corporation will be treated as
individuals, if the corporate entity is being used as a cloak or cover for fraud or illegality; as a
justification for a wrong; as an alter ego, an adjunct, or a business conduit for the sole benefit of
the stockholders. X, Y, and Z operated BMedia. They cannot be allowed to hide behind the veil
of corporate fiction by dissolving BMedia and evading their liability.
Also, under the Trust Fund Doctrine, BMedia’s assets are in equity a fund for the payment of its
debts. Subscriptions to the capital of a corporation constitute a fund to which creditors have a
right to look for satisfaction of their claims and that the assignee in insolvency can maintain an
action upon any unpaid stock subscription in order to realize assets for the payment of its debts.
When the corporation is insolvent, not only the capital stock, but also other property and assets
generally regarded in equity is a trust fund for the payment of corporate debts. All assets and
property belonging to the corporation held in trust for the benefit of creditors that were
distributed or in the possession of the stockholders, regardless of full payment of their
subscriptions, may be reached by the creditor in satisfaction of its claim.

There is no proof that the check issued by X, Y, and Z was encashed and credited in payment of
their subscription. Printwell is allowed to maintain an action against X, Y, and Z upon any
unpaid subscription as it steps into the shoes of the corporation for the satisfaction of its debt.
They cannot be allowed to dissolve the corporation through a Board Resolution to evade lawful
obligation. (Halley vs. Printwell, Inc., 649 SCRA SCRA 116).

X
The stockholders of People Power Inc. (PPI) approved two resolutions in a special stockholders’
meeting: a) Resolution increasing the authorized capital stock of PPI; and b) Resolution
authorizing the Board of Directors to issue, for cash payment, the new shares from the proposed
capital stock increase in favor of outside investors who are non-stockholders. The foregoing
resolution were approved by stockholders representing 99% of the total outstanding capital
stock. The sole dissenter was Jimmy Morato who owned 1% of the stock. Are the resolutions
binding on the corporation and its stockholders including Jimmy Morato, the dissenting
stockholder? (10%)

Answer: Dimaampao, pp. 275-276

No. The resolutions are not binding on the corporation and its stockholders including Jimmy
Morato. While these resolutions were approved by the stockholders, the directors’ approval,
which is required by law in these cases, was not obtained.