LAW ON BUSINESS ORGANIZATIONS

FINAL EXAMINATIONS

I.
Multiple Choice Questions

1. The nationality of a corporation is determined by the law of its domicile or place of

principal business. The test is known as:
A. The control theory
B. The full absorption theory
C. The incorporation theory
D. The management theory

2. This is unincorporated business organization created by an instrument by which

property is to be held and managed by trustees for the benefit and profit of such person
as may be or become the holders of transferable certificates evidencing the beneficial
interests in the estate
A. Business Trust
B. Close Corporation
C. Condominium Corporation
D. Joint Stock Company

3. When preferred shares are issued by a corporation with a fixed annual interest on the
face thereof, the effect is:
A. The contract of subscription is between the corporation and the stockholder
subsists
B. The stockholder is a plain investor who may rise or fall with the financial success or
failure of the corporation.
C. The stockholder is a creditor of the corporation
D. The shares of stock are negotiable instruments under the Negotiable Instruments
Law

4. This class of shares are those issued for no consideration or inadequate consideration:
A. Bonus shares
B. Deferred shares or founders shares
C. Over issued shares
D. Watered shares

5. The power to deny pre-emptive right as a corporate power is classified as an:

A. Express power
B. Incidental power
C. Implied power
D. Discretionary power

6. The power to invest corporate funds in another corporation or business or for any other
purpose as a corporate power is classified as an:
A. Express power
B. Incidental power
C. Implied power
D. Discretionary power
7. The power of conducting commercial contracts (to increase the business) and
sponsoring athletic contest for employees to keep them in good health or maintaining a
hospital for the employees is an example of:
A. Express power
B. Incidental power
C. Implied power
D. Discretionary power

8. To establish pension, retirement, and other plans for the benefits of its directors,
trustees, officers and employees is an example of:
A. Express power
B. Incidental power
C. Implied power
D. Discretionary power

9. A religious order is considered as a:

A. Corporation by prescription
B. Public corporation
C. Corporation sole
D. None of them.

10. Place of residence of a corporation shall be its:

A. Place of incorporation
B. Place of residence of majority of stockholders
C. Place where the principal office is established
D. None of them

11. This shall constitute a quorum for transaction of corporate business:

A. Majority of the members
B. Majority of the stockholders
C. Majority of the directors
D. All of them

12. Juridical personality of a corporation begins:

A. From the date of issuance of certificate of incorporation
B. By agreement of the parties
C. Acknowledgement before a Notary Public
D. None of them

13. Right which the existing stockholders of corporation cannot be deprived without the
consent is their right to subscribe or to purchase new stock issued by the corporation;
or unissued original stock, in proportion to their holdings before it can be offered to
others:
A. Right of redemption
B. Pre-emptive right
C. Right to purchase
D. None of them

14. A private corporation organized under the corporation law commences to have corporate
existence and juridical personality and is deemed incorporated from:
A. The date when the articles of incorporation is signed by the incorporators
B. When the articles of incorporation and by laws are presented and received by the
Securities and Exchange Commission and the filing fee is paid
C. From the date the SEC issues a certificate of incorporation under its official seal
 D. When the Articles of Incorporation is notarized by a Notary Public

15. The following are the qualifications of incorporators . Choose the exemption:
A. Majority of whom must be Filipinos
B. Majority of whom are residents of the Philippines
C. All are of legal age
D. Natural persons, not less than five but not more than 15.

16. These are the shares of stock which have been issued and fully paid for, but
subsequently reacquired by the issuing corporation:
A. Redeemable shares
B. Treasury shares
C. Founder’s share
D. None of the three

17. In the amendment of the Articles of Incorporation of a stock corporation, the following is
necessary:
A. Amendment by the majority vote of the Board of Directors plus a vote or written
assent of the stockholders representing at lest 2/3 of the outstanding capital stock.
B. Amendment by a vote of 2/3 of the stockholders
C. Amendment by the majority vote of the Board of Directors
D. None of the three

18. Corporation governed by special laws, aside from the requirements specified under the
corporation laws, in order that their articles of incorporation may be approved or
accepted, must present before the Security and Exchange Commission:
A. A favorable recommendation from the Ministry of Finance
B. A copy of previous income tax return and a statement of assets, liabilities and net
worth
C. A favorable recommendation of the appropriate government agency to the effect that
such articles or amendment is in accordance with law.
D. An undertaking to change the name of the corporation if found that there is already
registered with the SEC a name or a name similar to the name of this corporation

19. The following are some of the requisites of a de facto corporation. Choose the exception:
A. Valid law under which it is incorporated
B. Attempt to incorporate
C. Assumption of corporation power
D. None of the above

20. The following are the qualifications of director in a corporation. Choose the exemption:
A. Majority of the directors must be Filipino citizens
B. He must own at least one share of the stock in his name
C. Majority of the corporate directors must be residents of the Philippines
D. He must not have convicted by final judgment of an offense carrying an
imprisonment exceeding 6 years or an offense constituting a violation of the
Corporation Code

21. The secretary of a stock corporation shall be:

A. A director of the corporation
B. An incorporator of the corporation
C. A resident and citizen of the Philippines
D. Of legal age and citizen of the Philippines
22. Directors or trustees who willfully and knowingly vote or assent to patently unlawful act
of the corporation or who are guilty of gross negligence or had faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in conflict with
their duty shall be liable:
A. As trustee for the corporation
B. Criminally for violation of the corporation code
C. Jointly and severally for the damages suffered by the corporation
D. None of the above

23. The following are methods of dissolving a corporation:

A. Expiration of the term
B. Failure to organize and commence business within two (2) years from date of
issuance of certificate of incorporation
C. Shortening of the corporate term
D. All of the above
24. Three of the following enumeration are not authorized to issue no par value shares of
stock. Which is the exception?
A. Insurance companies
B. Industrial companies
C. Public utilities
D. Trust companies

25. Any stockholder of a corporation shall have the right to dissent and demand payment of
the fair value of his share/s in three of the following corporate acts. Which is the
exception?
A. In case of any amendment to the articles of incorporation which has the effect of
changing or restricting the rights of any stockholder or class of shares.
B. In case of merger or consolidation
C. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all
or substantially all of the corporate assets and property of the corporation.
D. In case of incurring, creating or increasing bonded indebtedness

26. The authorized capital stock of a proposed corporation is P100,000 divided into 1,000
shares with a par value of P100.00 each. The minimum amount of subscription that
must be paid is:
A. P8,750 or 87.5 shares C. P5,000 or 50 shares
B. P6,250 or 62.5 shares D. P7,500 or 75 shares

27. In the matter of management of the business affairs of a corporation, this is supreme:
A. Majority of the stockholders
B. 2/3 of the stockholders
C. Board of Directors
D. President of the corporation

28. This is the equitable right of stockholders to subscribe to newly issued shares of the
corporation in proportion to their present shares in order to maintain their equity in the
corporation.
A. Right of redemption
B. Concept of corporation entity
C. Right to sue and be sued
D. Pre-emptive right

29. This is a written acknowledgement of an interest of a stockholder in the corporation.

A. Proxy C. Certificate of Stock
B. Share of stock D. Capital Stock
30. These are the persons who sign the Articles of Incorporation, who may or may not be
subscribers of shares
A. Incorporators C. Directors
B. Trustees D. Promoters

31. Choose the minimum requirement of the Corporation Law to corporate formation:

Authorized Capital Subscribed Capital Paid-In Capital

A. P100,000 P20,000 P5,000
B. 100,000 20,000 4,000
C. 100,000 25,000 5,000
D. 100,000 25,000 6,250

32. They provide and regulate the internal matters of the corporation, such as calling the
Board of Directors and Stockholders meetings.
A. Board of Directors C. By-laws
B. Majority of Stockholders D. Articles of Incorporation

33. This is an authority to vote in a corporation stockholders meeting.

A. Proxy C. Certificate of stock
B. By-laws D. Share of stock

34. A gratuitous reissue of Treasury shares will result in:

A. Capital surplus C. Watered stock
B. Additional profit D. Stock dividend

35. Three (3) of the following are similarities between a partnership and a corporation.
Which is not?
A. The individuals composing both have title voice in the conduct of the business
B. Both have juridical personality separate and distinct from that of the individuals
composing them
C. Like a partnership, a corporation can act only through agents
D. Both are organizations composed of an aggregate if individuals

36. One of the following is the limitation on proxies. Which is?

A. Proxy acquires legal title to the shares of the stock
B. A proxy votes even in the presence of the stockholder
C. The proxy is voted only for the meeting for which it was intended
D. A proxy is revocable at any time

37. The number of the Board of Trustees in a non-stock corporation:

A. Shall not be less than five but not more than eleven
B. May be more than fifteen upon its organization
C. May be less than five upon its organization
D. Shall not be less than five but not more than fifteen

38. One of the following is a ground for the suspension or revocation of the certificate of
incorporation by the Securities and Exchange Commission.
A. If the corporation has commenced its business transactions and afterwards ceased
operation continuously for a period of at least five (5) years
B. If the corporation fails to commence and start to operate and the failure is due to
causes beyond the control of the Corporation
 C. If the corporation does not formally commence its business transaction and
subsequently become continuously inoperative for a period of two (2) years

39. Right of the corporation to continue as a juridical entity for the term stated in the
articles of incorporation despite the death of any stockholder.
A. Juridical personality C. Right of succession
B. Pre-emptive right D. Right of existence

40. Original signatories in the articles of incorporation are called:

A. Corporators C. Stockholders
B. Promoters D. Incorporators

41. They regulate different internal matters of the corporation such as calling and defining
the conduct of the meeting of stockholders and directors.
A. Board of directors C. Articles of incorporation
B. By-laws D. Proxy

42. The document conferring authority to vote stock in a corporate meeting:

A. Power of attorney C. Capital stock
B. Shares of stock D. Proxy

43. The minimum requirement of Corporation Law to corporate formation.

Authorized Subscribed Capital Paid in Capital

A. P500,000 P100,000 P25,000
B. 500,000 125,000 31,250
C. 500,000 100,000 20,000
D. 500,000 125,000 25,000

44. Three (3) of the following are attributes of a corporation. Which is the exception?
A. An artificial being
B. Has the right of succession
C. Has powers, attributes and properties expressly authorized by law or incident to its
existence
D. Created by agreement of the incorporators

45. Three of the following are qualifications of the Board of Directors. Which is the
exception?
A. He must own at least one (1) share of the capital stock
B. At least majority of them are citizens of the Philippines
C. The shares owned must be recorded in the books of the corporation.
D. He must continuously own at least one )1) share of the stock of the corporation

46. The voting requirement to increase or decrease capital stock

A. Majority vote of the board of directors and consented by the stockholders
representing two-thirds (2/3) of the outstanding capital stock
B. Two-thirds (2/3) vote of the board of directors with the consent of majority of
outstanding capital stock
C. Majority vote of the board of directors and with consent if majority of the
outstanding capital stock
D. Majority vote of the board of directors and three-fourths (3/4) vote of the
outstanding capital stock

47. A dividend payable partly in cash and partly in stocks, as to class of dividend, is a :
A. Optional dividend C. Liquidation dividend
 B. Property dividend D. Composite dividend

48. Bonds which are not secured by any specific mortgage lien of pledge or corporate
property but by the general corporation are:
A. Guaranteed bonds C. Income bonds
B. Debenture bonds D. Redeemable bonds

49. These are the rules and guidelines adopted by the stockholders of a corporation for the
internal government.
A. Rules and regulations C. Minutes of the meetings
B. Articles of Incorporation D. By-law

50. Which of these conditions comply with the minimum requirement of the law to
corporate formation?

Authorized Capital Subscribed Capital Paid In Capital

A. P100,000 P25,000 P12,500
B. 64,000 16,000 4,000
C. 200,000 50,000 10,000
D. 200,000 40,000 10,000

51. A distribution by a corporation of shares held by it in another corporation is:

A. Stock dividend
B. Sales of capital asset
C. Property dividend of actual distribution of corporate assets
D. Sale of treasury stock

52. Corporations organized by private persons performing public function and for profit to
private parties are:
A. Public corporations
B. Government controlled corporation
C. Quasi-public corporation
D. Private corporation

53. This is a document of a corporation acknowledging the interest of a stockholder in the

corporation’s assets.
A. Certificate of stock C. Share of stock
B. Capital stock D. Stockholder’s equity

54. In a corporation, any two (2) or more positions may be hels concurrently by the same
person, except that no one (1) person shall act as:
A. Chairman of the Board and President
B. Secretary and Treasurer
C. President and Secretary
D. Treasurer and Director

55. A corporation may invest its funds in any other corporation of business or any purpose
other than the primary purpose for which it was organized, only if:
A. There is majority vote of the Board of Directors and ratified by the stockholders
representing 2/3 of the outstanding capital stock
B. It is reasonably necessary to accomplish its secondary purpose, the approval of the
stockholders not necessary
C. There is a majority vote of the Board of Directors
D. There is majority vote of the outstanding capital stock
56. The following are advantages of no-par value share of stock. Which is the exception?
A. No-par value share allow flexibility in price
B. The stockholders of no-par value shares are relieved of personal liability for unpaid
stock subscription
C. It allows the issue of stock in exchange of property
D. No-par value shares afford a possible remedy or relief from the evil of over-
capitalization and stock watering

57. The right to vote at meetings, the right to receive dividends and the right to receive
copies of financial statements is known as:
A. Right of existence C. Pre-emptive right
B. Directors right D. Stockholder’s right

58. The Garcia Realty Development Corporation has a capital stock of P1,000,000 divided
into 10,000 shares with a par value of p100 each. 5,000 shares are ordinary share and
5,000 shares are 10% preference share. In 2008 there was no declared dividends but in
2009 dividends in the amount of P200,000 were declared. The holders of the preference
share are entitled to receive:
A. P50,000 if cumulative, non-participating
B. P125,000 in non-cumulative, participating
C. P125,000 if cumulative, participating
D. P100,000 if non-cumulative, non-participating

59. Persons who compose the corporation whether as stockholder in a stock corporation or
member in a non-stock corporation, are called:
A. Incorporators C. Promoters
B. Subscribers D. Corporators

60. In three of the following, these persons qualify to be incorporators. Which is the
exception?
A. Must have paid at least 25% of their subscription
B. Natural persons not less than five, not more than 15
C. Majority are residents of the Philippines
D. Need not be citizens of the Philippines

61. Dividends are declared and paid out of the

A. Paid-up capital
B. Capital stock
C. Net income of the current year
D. Unrestricted retained earnings

62. The following defect will preclude the creation of even a de facto corporation:
A. The name of the corporation closely resembles that of a pre-existing corporation that
it will tend to deceive the public
B. The incorporators or a certain number of them are not residents of the Philippines
C. Lack of certificate of incorporation from the Securities and Exchange Commission
D. Answer not given

63. The distinction between a proxy and a voting trust is that in a voting trust:
A. The trust has a legal title to the shares of the transferring stockholder
B. Unless coupled with interest, is revocable at any time
C. Is not limited to any particular meeting
D. Answer not given
64. The distinction between subscription of shares from purchase of shares is that in
subscription of shares:
A. It is an independent agreement between the individual and the corporation to buy
shares of stock from it at a stipulated price
B. It takes place before or after incorporation and is generally paid in installment or
upon call.
C. In case of insolvency of the corporation, the subscription price cannot be enforced
on the theory that the corporation can no longer perform its obligation to deliver the
certificate of stock
D. Answer not given

65. A corporation created in strict or substantial conformity with the statutory

requirements for incorporation and whose right to exist as a corporation cannot be
successfully attacked even in a direct proceeding for that purpose by the State is known
as:
A. De jure corporation C. De facto corporation
B. Corporation by estoppels D. Answer not given

66. One of the characteristics of treasury shares is that:

A. They have the status of outstanding shares
B. They may not be reissued or sold again
C. They participate neither in dividends nor in the meetings of the corporation as
voting stocks
D. Answer not given

67. Which of the following will not qualify as incorporator of a corporation?

A. A minor who is emancipated by voluntary concession or marriage
B. A married woman without the consent of her husband where the property involved
in the act of incorporation is paraphernal
C. A corporation
D. Answer not given

68. The articles of incorporation is required to state the names, nationalities and residences
of persons who act as directors or trustees are duly elected and qualified. This
requirement is intended to provide a basis by which the Securities and Exchange
Commission could determine whether the Articles of Incorporation has complied with
the requirement that:
A. At least a majority of the directors or trustees are residents of the Philippines
B. All the directors or trustees are residents of the Philippines
C. 2/3 of the directors or trustees are residents of the Philippines
D. Answer not given

69. The power to revoke corporate franchise for causes specified by law is vested only in
the:
A. President of the Republic of the Philippines
B. Securities and Exchange Commission
C. Court of component jurisdiction
D. Answer not given

70. Corporate dissolution may take place by voluntary inaction which will in the cessation
of its corporate powers and the corporation shall be deemed dissolved. Such dissolution
may result from:
 A. Inaction by the corporation through its failure to formally organize and commence
with the transaction of its businesses or the construction of its works within two
years from the date of its incorporation
B. Failure of the corporation to submit the annual reports required by the Securities
and Exchange Commission for a period of five years
C. Merger or consolidation with respect to absorbed corporation
D. Answer not given

71. Watered stocks are shares of stock issued by a corporation for a consideration in any
form other than cash valued in excess of its fair value. In this regard:
A. The issue by itself is void
B. The agreement that it shall be paid less than its par or issued value is illegal and
void and can not be enforced
C. The subscriber and purchaser shall not be liable for the full par value of the shares
D. Answer not given

72. The voting proportion required to enable a corporation to invest its funds in any other
corporation on business of for any purpose other than its primary purpose:
A. 2/3 vote of the board of directors and ratified by majority of the outstanding capital
stock
B. Majority vote of the board of directors and ratified by majority of the stockholders
C. Majority of the board of directors and ratifies by 2/3 of the outstanding stockholders
D. Majority of the board of directors and ratified by 2/3 of the outstanding capital
stock

73. An officer of a corporation may hold two or more positions in the corporation but not as:
A. Chairman of the Board and President
B. President and Treasurer
C. Secretary and Treasurer
D. Vice President and Secretary

74. The right of a corporation to exist as juridical person during its term as stated in its
Articles of Incorporation despite the death of any of its stockholders is:
A. Right of existence C. Right of succession
B. Right of redemption D. Pre-emptive right

75. The interest or right of the owner in the corporation’s profits or in the net assets of the
corporation on dissolution is:
A. Dividend C. Certificate of stock
B. Share of stock D. Capital

76. Requirement to effect the amendment of by-laws of a corporation.

A. Majority vote of the board of Directors
B. Vote of 2/3 of the outstanding capital stock
C. Majority vote of the Board of Directors and majority vote of the outstanding capital
stock
D. Majority vote of the outstanding capital stock

77. The nationality of the corporation is determined by the place of the controlling
stockholders. This test is:
A. Control test C. Incorporation test
B. Domicile test D. Capitalalization test

78. The following person can not be incorporator of a corporation.

A. A resident alien
 B. A married woman without the consent of the husband even if the payment of her
shares is her paraphernal property
C. A subscriber on the share of the corporation who pays less than 25% of his
subscription
D. A corporation organized under the laws of the Philippines

79. One of the following is not required and does not form part of the three-fold duty of
directors of a corporation. Which one?
A. Duty of diligence C. Duty of obedience
B. Duty of loyalty D. Duty of efficiency

80. These do not form part of the outstanding capital stock:

A. Bonus shares C. Founder’s shares
B. Treasury shares D. Redeemable shares

81. One of the following does not require stockholder’s approval:

A. Merger or consolidation
B. Change of corporate name
C. Investment of corporate funds for a purpose outside of the main purpose of the
corporation.
D. Declaration of cash dividend

82. Under this test, a corporation is a national of the country pursuant to whose laws it is
incorporated:
A. Nationality test C. Control test
B. Capitalization test D. Incorporation test

83. Which of the following statements is not correct?

A. In the delinquency sale at public auction, the highest bidder is one who offers to pay
the full amount of the balance of the subscription plus interest and expenses of the
sale for the highest number of shares.
B. The sale of delinquent stock at public auction can be stopped if the Board of
Directors stops the sale for valid reason.
C. Payment of unpaid subscription may not be enforced by applying cash dividends to
delinquent stockholders.
D. The Board of Directors shall order, by resolution, the sale of delinquent stock
specifying the amount due plus accrued interest, the place, time and date of the
sale

84. A stockholder who does not approve the action taken by the Board of Directors in
proposing to amend the Articles of Incorporation is allowed to withdraw from the
corporation in one of the following instances:
A. Merger or consolidation
B. Investment of corporate funds in another corporation
C. Creating, incurring, increasing or decreasing any bonded indebtedness
D. Shortening or prolonging corporate existence

85. I. Membership in a non-stock corporation and all rights arising therefrom cannot be
transferred even if provided in the articles of incorporation or by laws because
membership and the rights arising therefrom are personal and non-transferable.

II. Treasury stocks sold for less than par or issued value are considered “watered stock”
and as such are prohibited by law.
 Which is correct?

A. True; False
B. Both statements are false
C. False; True
D. Both statements are true.

II.

Essay Questions 3 Points each

Q.1 A Korean national joined a corporation which is engaged in the furniture manufacturing
business. He was elected to the Board of Directors. To complement its furniture
manufacturing business, the corporation also engaged in the logging business. With the
additional logging activity, can the Korean national still be a member of the Board of
Directors? Explain. (3%)

Q2. ABC Pigger Inc is engaged in raising and selling hogs in the local market. Mr. De Dios, one
of its directors while traveling abroad, met a leather goods manufacturer who was
interested in buying pig skins from the Philippines. Mr De Dios set up a separate
company and started exporting pig skins to his foreign contact but the pig skins
exported were not sourced from ABC. His fellow directors in ABC complained that he
should have given this business to ABC. How would you decide on this matter?

Q3. A Corporation was created by a special law. Later, the law creating it was declared
invalid. May such corporation claim to be a de facto corporation?

Q4. PR Co owns a beach resort with several cottages. Jaime, the President of PR,
occupied one of the cottages for residential purposes. After Jaime’s term expired,
PR wanted to recover possession of the cottage. Jaime refused to surrender the
cottage, contending that as a stockholder and former President, he has a right to
possess and enjoy the properties of the corporation. Is Jaime’s contention correct? Explain.

Q5. Suppose A is the owner of several inactive securities. To create an appearance of active
trading for such securities, A connives with B by which A will offer for sale some of his
securities and B will buy them at a certain fixed price, with the understanding that although
there would be an apparent sale, A will retain the beneficial ownership thereof.

a) Is the arrangement lawful? (3%)

b) If the sale materializes, what is it called? (2%)
 Bonus Questions 3 points each

1. He was an unethical former maester who was thrown out of the order for conducting
illegal human experimentation. After coming into Cersei Lannister's service, he becomes
Varys's replacement as Master of Whisperers on the small council.
2. He is a skilled and dangerous sellsword who comes to prominence when he champions
for Tyrion Lannister in his trial by combat at the Eyrie. He subsequently enters Tyrion's
service as his personal bodyguard, assassin, and enforcer and in return was given
knighthood, power, and wealth.
3. He was the younger brother of King Joffrey and Princess Myrcella. Though legally the
son of the late King Robert Baratheon and Queen Cersei Lannister, his true father is
Ser Jaime Lannister, the Queen's twin brother, and is thus a bastard born of incest.
4. He is popularly nicknamed the Hound, was the younger brother of Ser Gregor
Clegane and was the personal bodyguard of Prince Joffrey Baratheon.
5. What is my whole name.

“What do we say to the Lord of Death?'

'Not today.”
― George R.R. Martin, A Game of Thrones