Q&A MIDTERM CORPORATION LAW

1.
Qi: Can the subscription of shares of stocks be made out of salary of the employee
arising from future service? (Paragraph D)
Ai:
K: No, the subscription of shares of stocks cannot be made out of salary of the employee
arising from future service.
Under the Corporation Code, a stock corporation can issue shares for the following
considerations:
1. Actual Cash;
2. Property, intangible or tangible and necessary for the use of the corporation;
3. Previously incurred indebtedness by the corporation;
4. Labor performed for or services rendered to the corporation.
Furthermore, the Labor Code provides that unpaid subscription agreements cannot be
deducted from the salary of an employee, offsetting is not allowed.
In the given circumstances, C promised to subscribed 1 million shares of the authorized
capital stock, however unpaid subscriptions cannot be offset against an employee’s salary,
otherwise there will be a violation of the Labor Code. Furthermore, future services or
promissory notes are not allowed as consideration by the Corporation Code, therefore the
subscription agreement of C is void.

C: No, the subscription of shares of stocks cannot be made out of salary of the employee
arising from future service. The Corporation Code provides that payment for the
subscription of shares of stocks may be in any form, either cash or property. The shares of
stocks may also be used as payment for the service already rendered but it cannot be paid
through future services. In this case, the subscription will be paid through the salary of
employee for future service which is contrary to the provisions of the Corporation Code.
Therefore, the subscription of shares of stocks cannot be made out of salary from future
services.

Qii: Should the proposal of D and E to engage in the construction business

simultaneously with the funeral business operation be allowed? (Paragraph F)
Aii:
K: No the proposal of D and E to engage in the construction business simultaneously with the
funeral business operation should not be allowed.
The Corporation Code provides that a resolution of the majority of BOD and an approval by
the stockholders representing at least 2/3 of the outstanding capital stock is required before
the Corporation can pursue its secondary purpose.
In the case at bench, it appears that the corporation has not been incorporated yet, however
even after incorporation and election of directors, a corporation cannot engage with both the
primary and secondary purpose at the same time because pursuance of the secondary
purpose is subject to the voting requirements. Therefore, the proposal of D and E should be
rejected.

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C: No, the proposal of D and E to engage in the construction business simultaneously with
the funeral business operation cannot be allowed. The law provides that secondary purpose
or purposes of a corporation must be connected or incidental to its primary purpose. In this
case, the construction business is neither connected or incidental to the funeral business
operation of the corporation. Thus, the proposal of D and E to engage in construction
business shall not be allowed.

Qiii: Is F required to share the profits she earned from the catering provider?
(Paragraph H)
Aiii:
K: No, F is not required to share her profits.
The doctrine of separate personality provides that a corporation has a personality separated
and distinct from its stockholders, members or officers. The properties of a corporation are
not properties of the stockholder, neither are the obligations of a corporation the obligations
of a stockholder because a stockholder only has an indirect interest in the business and
assets of the corporation.
From the facts given F merely advised the group to have the funeral parlor occupy the place
beside her carinderia so that she can oversee the business operations. By applying the
abovementioned doctrine, F as a stockholder has a personality separate from the corporation
to be formed, therefore, her profit is not the profit of the corporation.

C: F will be required to share the profits she earned from the catering provider provided that
she entered into a contract or business venture with the corporation. Otherwise, she will not
be required to share to profits as a catering provider. The Corporation Code allows
corporations to enter into contracts or business ventures provided that they are interrelated
or connected to the primary business of the corporation. In this case, the catering business of
F is interrelated to the funeral services so F can enter into a contract or venture with the
corporation. Therefore, she will be required to share profits of her catering services with the
corporation.

Qiv: Is J allowed to receive compensation and per diem from the corporation?
(Paragraph J)
Aiv:
K: The answer is qualified. The Corporation Code provides that in the absence of provisions
in the by-laws, directors or stockholders are not entitled to compensation except for
reasonable per-diems. However, compensation may be granted by majority of the
stockholders provided that the yearly compensation shall not exceed 10% of the net income
before taxes pf the preceding year.
In the instant case, if compensation is provided in the by-laws then J may receive
compensation and per-diem otherwise, he is not entitled to it. However, it may be granted by
the stockholders.

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C: Yes, J will be entitled to compensation as an employee of the corporation and without pay
any per diem as stockholder. The general rule is that BOD or Trustees are not entitled to
compensation except reasonable per diems or unless approved by majority of the
stockholders of the corporation. In this case, J is only a stockholder; thus, he is not entitled
to per diem. However, as he will be rendering his services to the corporation as an
embalmer, he is entitled to compensation as an employee of the corporation. Therefore, J
will be allowed to receive compensation but no per diem from the corporation.

Qv: When should the meeting of stockholders be held? Will your answer be the same
in case of meeting of the BOD? (Paragraph L)
Av:
K: In case of regular stockholders meeting, it should be held annually from the date fixed in
the by-laws. In the absence of a provision it should be held on any date of April every year
as determined by the BOD.
In case of special stockholders meeting, it should be held on the date provided in the by-
laws, in the absence thereof, at any date deemed necessary.
No. In case of board meetings it can be held at any date as determined by the board unless
otherwise provided by the by-laws.

C: The meeting of stockholders shall be held annually on the date specified on its by-laws.
In case of a special stockholders’ meeting, it may be held anytime upon proper notice to the
stockholders. In both regular and special stockholders’’ meeting, it shall be held in the
principal office of the corporation.
My answer will not be the same in case of meeting of the BOD. The regular meeting of the
BOD shall be held at least once a month on the date specified on its by-laws. In the case of
special meeting of BOD, it may be held anytime upon proper notice to the BOD.

Qvi: Can the members of the BOD be removed from their position? (Paragraph N)
Avi:
K: Yes, the members of the BOD can be removed.
Under the Corporation Code, members of the BOD can be removed by a vote of stockholders
Representing at least 2/3 of the outstanding capital stock.

In the instant case, A allowed the sale of unclaimed bodies to medical students without
authority from the board or shareholders, therefore, his act can be a ground for his removal/ it
should be noted that a member of the board can be removed by the stockholders with or
without cause except for directors elected by the minority stockholders.

C: Yes, the members of the BOD, may be removed provided that the removal is approved by
at least 2/3 of the stockholders. In this case, if the required vote for the removal of the
members of BOD which is a vote at least 2/3 of the stockholders of the corporation is attained,
the members will be removed.

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 Qvii: Is C considered as Interlocking Director? (Paragraph Q)
Avii:
K: No, C is not an interlocking director.
There are interlocking directors when one or some of the directors of one corporation is or at
the same time directors of another corporation.
In the instant case, it was not stated that C is a director of the make-up brand that the latter
supplies to the corporation. Therefore, C cannot be considered an interlocking director.
C: No, C is not considered an interlocking director. An interlocking director is one wherein
a person is a director of both companies undertaking business with each other and have
substantial interest to both companies. In this case, C is not states as a director of the makeup
company. Hence, C cannot be considered as an interlocking director.

Qviii: With regard to paragraph R, should the proposal be allowed?

Aviii:
K: The answer is no. Under the Corporation Code, a resolution of majority of the board and
approval of stockholders representing at least 2/3 of the outstanding capital stock is required
before a corporation can invest corporate funds in another corporation.
In the case at bar, if the proposal would be allowed, the same would be prejudicial to the
stockholders because there would be no dividend declaration. Therefore, the proposal should
be rejected.
C: No, the proposal should not be allowed. One of the instances wherein dividends can be not
declared is when the profits or assumed dividends will be used in expansion which is in
accordance with the primary or secondary purposes of the corporation. In this case, the
investment to another company will be used neither for expansion nor capital investment
project if the corporation in accordance with its purpose but in order not to declare dividends.
Nevertheless, the proposal may still be allowed if it is ratified by the vote of at least 2/3 of
the outstanding capital stock of the stockholders. But generally, the proposal shall not be
allowed.

Qix: Is the Voting Trust Agreement valid? Can R be elected as Chairman of the Board in
the election duly called for the purpose?
Aix:
K: Yes, the VTA is valid.
The Corporation Code provides that a VTA may be allowed to exceed the 5-year limitation, if
it is required under a loan agreement. Provided that the trust shall automatically expire upon
full payment of the loan.
In the case given. Mr. R required J to execute a VTA for a period of 10 years. Generally, such
agreement can only last for 5 years but since it was required under a loan agreement it can
therefore exceed the 5-year limitation period subject to termination upon full payment of the
loan.
Yes, R can be elected as chairman of the board because he has legal title over the share of J by
virtue of the VTA.

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C: The VTA is not valid. The law allows the execution of a VTA but its term cannot exceed 5
years. In this case, the VTA executed was for 10 years. Hence, it is invalid.
No, R cannot be elected as the Chairman of the Board. The law provides that every member of
the Board shall have at least one share of stock in the corporation. In this case, R does not own
at least one share of stock in the corporation as the VTA which empowers him to have other
rights of a stockholder is invalid. Thus, he cannot be elected as the Chairman of the Board.

Qx: Can the payment of J be issued as Dividend? Who can decide issuance of Stock
Dividend? Is your answer the same in case of Cash Dividends? (Paragraph U)
Ax:
K: No, the payment of J cannot be issued as dividends.
It is well settled that the subscribed capital considered a trust fund for the benefit of corporate
creditors. Dividends cannot be declared out of the subscribed capital, otherwise there would be
a violation of the trust fund doctrine.
From the facts given, J’s payment is treated as part of the capital, therefore dividends cannot be
declared out it. Dividends can only be declared out of unrestricted retained earnings.
In case of stock dividends, there must be a resolution of majority of the board and there must
be an approval of stockholders representing at least 2/3 of the outstanding capital stock.
No. in case of cash dividends, a board resolution is sufficient.
C: Yes, the payment of Ja can be issued as dividend provided that the BOD declare such to be
distributed as dividends.
The issuance of stock dividends can be decided by a vote of the majority of the BOD and
approved by at least 2/3 of the outstanding capital stock of stockholders.
No, my answer will not be the same in case at cash dividends. The issuance of cash dividends
can be decided only by the majority of the BOD themselves without any further approval of the
stockholders. This is because one of the purposes of a stock corporation is to declare cash
dividends, thus, it does not require any further approval from the stockholders.

Qxi: Did the Board commit an ulta vires act for the issuance of shares of stocks to Mr. R
at Php 0.50 per share? What is ultra vires act? (Paragraph V)
Axi:
K: No, the board did not commit an ultra vires act. In the instant case, since the company
reacquired the shares of H and I, it became treasury shares which can be reissued by the
corporation for less than par value. It is not considered a watered-stock since the same applies
only to original issues of shares.
Ultra Vires Act are those acts of the corporation committed outside the powers conferred by
the Articles of Incorporation, by-laws or the law.
C: Yes, the issuance of shares of stocks to Mr R at Php 0.50 per share is an ultra vires act. An
ultra vires act is an act of the corporation beyond the powers conferred to it by law. In this
case, the shares that are reacquired by the company are delinquent shares. Being delinquent,
the shares must be sold in accordance with the procedure of sale of delinquent shares by first
proving notice of the sale of such share and offering it at a public action. Without first

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 complying with these requirements, the company cannot just reissue and sell the delinquent
shares to Mr. R. Thus, the issuance of shares of stock to Mr. R is an ultra vires act.

An Ultra Vires Act is an act of the corporation which is beyond the powers conferred to it by
the law, its articles of incorporation and by-laws. They are voidable subject to the ratification
of the stockholders.
Qxii: What are the requirements for the increase of capital stocks?
Axii:
K:
1. There must be a meeting duly called for the purpose;
2. There must be notice to all shareholders and members of the board;
3. There must be a resolution of the majority of BOD and an approval by stockholders
representing 2/3 of the outstanding capital stock;
4. There must be an amendment of the Articles of Incorporation and the amendment must be
submitted for approval to the SEC.
C: The requirements for the increase of capital stocks are the vote of majority of the BOD and
approved by at least 2/3 of the outstanding capital stock of the stockholders. Another
requirement is the existence of unrestricted retained earnings in the books of the corporation.

Qxiii: Is the contention of E and G tenable? What is a Pre-emptive right? Due to denial of
pre-emptive right, can E and G exercise their appraisal right or file injunction suit against
BOD? (Paragraph X)
Axiii:
K: Yes, the contention of E and G is tenable, they can exercise their pre-emptive right to
maintain the proportionate strength and voting power with the existing stockholders. The
Corporation Code provides that all shareholders shall enjoy the exercise the pre-emptive right to
purchase additional shares in proportion to their respective shareholdings. Therefore, E and G
should have been allowed to exercise their pre-emptive right.
Pre-emptive right is a privilege granted to existing shareholders to purchase additional shares
before they can be offered to the general public.
E and G cannot exercise their appraisal right.
The Corporation Code provides that a stockholder can exercise his appraisal right in case of
amendment of Articles of Incorporation and there would be a change or restriction in the rights
of the stockholders.
In the instant case, in the board meeting for the increase of capital stock, the proposed action was
overwhelmingly ratified by the stockholders therefore it is evident that E and G did not vote
against the action. A dissenting vote is an indispensable requirement before an appraisal right
can be exercised. Therefore, E and G cannot exercise their appraisal right. However, it is
submitted that E and G can file an action against the board to compel them to let E and G
exercise their pre-emptive right.
C: Yes, the contention of E and G is tenable. The Corporation Law provides that stockholders
shall have pre-emptive right on the issuance of a corporation of share of stocks of any class in
proportion to their current shareholdings. In this case, the shares of stocks should have been

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offered to existing stockholders for the latter to exercise their pre-emptive right over such shares.
Thus, the contention of E and G is tenable.
Pre-emptive is the right of the stockholders to subscribe on the newly issued shares of stocks of
any class of a corporation in the proportion to their respective shareholdings.
The purpose of this is to allow the stockholders to retain their current holdings in the corporation.
E an G can exercise their right to be paid baes on the value of their shares and withhold their
right from the corporation when there is substantial change in the corporation that they do not
agree or when the law provides for the appraisal right. In this case, there is a substantial change
in the corporation being publicly listed. Hence, E and G can exercise their appraisal right.

Qiv: Is the derivative suit filed by F meritorious? (Paragraph Y)

Aiv:
K: No, the derivative suit is not meritorious. Instead of a derivative suit, F should have filed a
representative action.
A representative action is a suit brought by a stockholder in his behalf and other stockholders
when a wrong is committed against a group of stockholders.
In the instant case, F is trying to represent the minority stockholders, therefore a representative
suit is proper. Also the suit should be filed in the RTC where the principal office of the
corporation is located because that is the proper venue.
C: No, the derivative suit filed by F is not meritorious. A derivative suit can be filed by a
stockholder on behalf of a corporation in order to prevent or redress a wrong or protect a right of
a corporation or when the corporation has the right to sue but it failed to do so or when the
corporate directors, trustees, or officers themselves committed the wrongdoings. In this case, the
derivative suit is not the proper remedy as the cause of action of F is for the minorities and not on
behalf of the corporation. If they felt deprived, F should have filed a representative suit and not a
derivative suit. Hence, the derivative suit is not meritorious.

Qxv: Is the conversion from stock to non-stock allowed? Is the company allowed to shorten
the corporate life of funeral parlor? (Paragraph Z)
Axv:
K: Yes, a stock corporation can be converted to a non-stock corporation by mere amendment of
the Articles of Incorporation. It will be deemed that the stockholders waived their rights to their
share in the profits of the corporation.
Yes, the company may shorten the life of the corporation by amending the articles of
incorporation and submitting it to the SEC for approval. Shortening the life span would have the
effect of dissolution.
C: Yes, the conversion from stock to non-stock corporation is allowed provided that the approval
of the majority of BOD and vote at least 2/3 of the outstanding capital stock of the stockholders
is satisfied. This is because the conversion will involve amendment of the Articles of
Incorporation of the company.
The company is allowed to shorten the corporate life of the funeral parlor provided that the
approval of the majority of the BOD and vote of at least 2/3 of the outstanding capital stock of
the stockholder is satisfied. The shortening of the corporate life of the funeral parlor must also be
approved by the Securities and Exchange Commission.
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 2. Renato was a Manager at Sangu Phils., Inc. He was terminated from his position as
Manager through board resolution adopted by the corporation’s BOD. When he filed an
illegal dismissal case, the corporation claimed that Renato is a stockholder and at the same
time occupying a managerial position as shown in the corporation’s General Information
Sheet. Thus, the NLRC dismissed the illegal dismissal case holding that the case is an
intra-corporate controversy over which the NLRC has no jurisdiction.
Q: i. Who are corporate officers?
ii. Was Renato a corporate Officer? Why?
iii. Was the case filed by Renato an intra-corporate controversy case?
A:
K: i. President, Vice-President, Treasurer, Secretary, Assistant Secretary and Chairman.
ii. No, Renato was not a corporate officer because a manager is not considered an
officer under the by-laws.
iii. No, there was no intra-corporate dispute. An intra-corporate dispute is one
between the corporation and its directors, officers or one between the corporation and its
stock-holders.
In the instant case, Renato was terminated as an employee of the corporation not as a
stockholder, therefore the illegal dismissal case in the NLRC should not have been
dismissed. Renato is still a stockholder of the corporation.

C: i. Corporate Officers are those who adopt and implement the rules and regulations set
by the BOD. Corporate officers attend to the daily transactions of the company.
ii. No, Renato was not a corporate officer. This is because as a manager, he is merely an
employee of the corporation. Aside from this, the General Information Sheet of the
corporation clearly indicates that he occupies a managerial position and not as a
corporate officer.
iii. The case filed by Renato is no an intra-corporate dispute. An intra-corporate dispute
involves a controversy among the officers, directors, trustees and stockholders of the
corporation. In this case, Renato is not a director, trustee or officer of the corporation.
Although he is a stockholder, Renato is filing the case as an employee of the
corporation. Hence, it is not an intra-corporate dispute.

3. Lorna is a stockholder of LAF Corp. on May 1, 2015, she assigned all her shares and
delivered to Aida the certificate of shares in her possession after the latter paid the
agreed consideration. On June 15, 2015, the LAF Board approved a resolution
declaring a hefty cash dividend payment to all stockholders of record as of June 30,
2015. Consequently, the corporate secretary, paid the case divided to Lorna. When
Aida learned that the cash dividend payout was given to Lorna, she sued both Lorna
and LAF Corp.
Qi: What is a certificate stock?
ii. Was Aida correct in suing LAF Corp for paying the cash dividend to Lorna?
Why?
A:

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K: i. A certificate of stock is a prima facie evidence that the holder thereof is a shareholder
in the corporation.
ii. Yes, Aida was correct in suing LAF Corp.
Well established is the rule that the person entitled to dividend is the person who owns the
share at the time of dividend declaration. In the instant case, Aida was already the owner
of the share when the dividend was declared, therefore, she is entitled to the cash dividend.
However, if the transfer of the share was not recorded in the books of the corporation,
Lorna would still be considered the owner of the share.
C: i. A certificate stock is a written evidence of the ownership of a person or an entity of
shares of stocks in a corporation. The certificate stock cannot be issued unless the
subscription of the shares of stocks is fully paid.
ii. No, Aida is not correct for suing LAF Corp. The law provides in order for an
assignment of shares of stock to be binding against third person, the seller of the stocks
shall endorsed the certificate stock to the purchaser and the assignment must be registered
by the corporate secretary in the books of the corporation. In this case, it was not stated
that Lorna properly put her endorsement in the certificate stock and such endorsement
must be shown to the corporate secretary so it will be recorded and binding even against
third person. The failure of Aida to make the corporate secretary record the assignment of
stocks was fatal on her part because the assignment was binding only between her and
Lorna and not to the corporation. Therefore, Aida is not correct in suing LAF Corp for
paying cash dividends to Lorna.

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