ATENEO DE MANILA LAW SCHOOL

CORPORATE LAW - 2A & 2B Dean CESAR L. VILLANUEVA

FINAL EXAMINATIONS 30 March 2008, Monday
INSTRUCTIONS
The Examination consists of FIVE (5) Problems on THREE (3) pages. Read each item carefully. Answer
the questions SEQUENTIALLY, concisely and clearly STARTING EVERY ANSWER ON A SEPARATE
RIGHT-HAND PAGE, but thereafter you may write on the back page. Do not repeat the questions and
MAKE SURE YOU ADDRESS THE SPECIFIC QUESTIONS ASKED AT THE END OF EACH PROBLEM. A
mere “YES” or “NO” or MERE CONCLUSIONS OF LAW will receive very little credit, if at all . Unless
otherwise expressly stated, all statements in the problems are already deemed proven (this is not an
examination in Evidence), and your answers must take the form of a decision or ruling of a judge that
disposes of the issues raised, and not a mere academic discussion. GOOD LUCK!
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FACTS COMMON TO PROBLEMS 1, 2 AND 3

Nicolas Trading Corp. is a domestic corporation in existence for the last ten years, and had as its
original incorporators the following individuals:

No. of Amount Amount

Shares Subscribed Paid-Up .
Nicolas 10,000 P 1,000,000 P 500,000
Artemio 8,000 800,000 500,000
Wilfredo 7,000 700,000 500,000
Eusebio 6,000 600,000 500,000
Teofilo 5,000 500,000 500,000
Both the articles of incorporation and by-laws provided for a 5-man Board of Directors, of which
the incorporators have always elected themselves to fill-up, with Nicolas elected regularly as President,
and Artemio as Corporate Secretary. The by-laws also provide that the Board of Directors may, in the
exercise of its business judgment issue certificates of stock over portions of the subscriptions that are
paid.
Five years ago, new investors were invited to invest in the company as follows:
Shares Subscribed Paid-Up .
Thomas 5,000 P 500,000 P 100,000
William 5,000 500,000 100,000
Hilary 5,000 500,000 100,000
Octavius 5,000 500,000 100,000
Jefferson 5,000 500,000 100,000

Subscription agreements were executed for each of the additional investors where it was
specifically provided that the shares subscribed by each new investor shall be “in escrow” and not
considered to be part of the outstanding capital stock of Nicolas Trading until the subscription is fully-
paid and a covering certificate of stock issued. Each of the agreement provided for payment within 10
years, with interest at 12% p.a., or earlier when by resolution, the Board makes a call.
It turns out that six year ago (before new investors came in), the Board of Directors had formally
approved the issuance of certificates of stock covering the entire subscriptions of the incorporating
stockholders, and classifying the unpaid subscriptions from “Subscriptions Receivable” to “Notes
Receivables,” for which each of them issued corresponding promissory notes payable within 10 years,
with interest at 12% p.a.

1.
 In January of this year, under a Deed of Absolute Sale, Wilfredo sold his entire shareholdings in
Nicolas Trading to San Pablo, and duly endorsed and delivered the covering stock certificate. A couple
of days later, under another Deed of Absolute, San Pablo also bought the entire shareholdings of
Jefferson. When San Pablo sought to have the purchased shares registered in the books of the
Company, Nicolas and Artemio, as leading officers, refused on the ground that under Section 63 of the
Corporation Code, “No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.”
San Pablo brought suit for specific performance (not mandamus) against the company, and
included therein as defendants both Wilfredo and Jefferson, who filed answers confirming their sales of
equity to, and acceding to the right of, San Pablo. The company was able to prove that there were still
unpaid subscriptions on each of the two sets of shareholdings, and that in the case of Jefferson, since
the shares were still in escrow, he had no property rights to sell. How would you rule on the suit?
Decide with reasons. (10%)

SUGGESTED ANSWERS:
Insofar as the shares of Wilfredo, having been covered by a stock certificate, which made the shares
conclusively insofar as the corporation is concerned as “fully-paid and non-assessable”, the same should be
registered in the name of San Pablo, since his purchase is supported by both a deed and the covering certificate
endorsed and delivered, and the previously registered stockholder (Wilfredo) acknowledging that the shares
should be registered in the name of San Pablo.
With respect to the shares in the name of Jefferson, even though the subscription agreements provided
the shares to be in escrow, nonetheless, the operative effect of subscription is the issuance of the shares and
the constitution of Jefferson (and all the new investors) as shareholders, entitled to all the rights pertaining to
such position, including the right to sell or encumber their shares. Nonetheless, although Jefferson had the right
to sell or dispose of his shares, the validity and enforceability of the contract of disposition (sale) is as between
the parties thereto, and cannot be binding on the corporation unless it agrees thereto in accordance with the
clear provisions of Section 63 of the Corporation Code. In other words, since a disposition of unpaid shares
constitutes a novation by substitution of the principal obligor (Jefferson), the same is not valid as to the obligee
(Nicolas Trading), unless done with the consent of the latter. The sale is valid as between Jefferson and San
Pablo, but cannot be binding upon Nicolas Trading without the latter’s consent, and which can hold Jefferson
liable to the original terms of the unpaid subscription. The remedy of San Pablo is to pay-up the unpaid
subscription due on the shares or to rescind the purchase.

2.
[Facts in Problem 5 Do Not Exist:] When the company’s operations needed further working funds,
the Board of Directors passed a resolution making a formal call on all outstanding subscription to be
paid. It was then that the new investors, through examination of corporate records, learned that the
previous subscriptions of the original incorporators had been converted into promissory notes. When
the new investors refused to pay until the original stockholders also paid their promissory notes, the
Board of Directors of Nicolas Trading brought suit to collect on the unheeded call.
(a) The new investors opposed the suit on the ground that the proper remedy of the Board should
have been a delinquency sale under Section 68 of the Corporation Code. (5%)
(b) The new investors filed a counterclaim against the members of the Board of Directors for them
to also pay to the corporation their outstanding promissory notes. The Board opposed the counterclaim
on the grounds that the new investors had no standing to bring the same since it pertain to the exercise
of business judgment. (10%)
(c) Further the Board members claimed that unlike the new investors, the original stockholders
did not sign any subscription agreement by which they would be bound; and the terms of the
promissory note did not make the obligations therein due and demandable nor subject to a call. (10%)
(d) How would you decide on the suit itself, including the counterclaim, especially when the
members of the Board insist that both the books of the company and the General Information Sheet filed
with the SEC clearly indicate that their shareholdings are fully paid. (10%)
In each case, you must decide with reasons.

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SUGGESTED ANSWERS:
2(a). There is no doubt that based on the formal call made by the Board of Directors of Nicolas Trading,
that the unpaid subscriptions of the new investors had to be paid, or became due and demandable under the
terms of the subscription agreements each of them executed. Although the company is given the right to collect
on unpaid subscription based on the delinquency sale provided under Section 68 of the Corporation Code,
nevertheless this is not the only remedy afforded to the company. Section 70 provides that “Nothing in this Code
shall prevent the corporation from collecting by action in a court of proper jurisdiction the amount due on any
unpaid subscription, with accrued interest, costs and expenses.” (5%)

2(b). There is no merit to the assertion of the Board that the new investors had no standing to bring the
counterclaim against them, for being stockholders by entering into the subscription agreements, under Section
72 of the Corporation Code, “Holders of subscribed shares not fully paid which are not delinquent shall have all
the rights of a stockholder,” although a call has been made, there has been no declaration of delinquency.
Therefore, since the suit was originally brought in the name of the corporation by the Board, then the new
investors had standing to bring a derivative suit by way of counterclaim in behalf of the company against the
original stockholders, especially so when the relief sought was not for their benefit but for the benefit of the
company. No previous demand was necessary on the part of the new investors as relators for the company
since it was obviously useless clearly shown by the fact that the directors themselves are involved and they had
made formal position denying obligation to pay the original unpaid subscription to the corporation. Likewise,
there were stockholders already of the corporation at the time when the cause of action against the Board
members arose (a call was made not including themselves) and at the time the counterclaim by way of
derivative suit was filed.

2(c). It may be true that the original incorporators did not sign formal subscription contracts with the then
new company, but it does not mean that they did not enter into subscription agreements. Under Section 60 of
the Corporation Code, “Any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the
fact that the parties refer to it as a purchase or some other contract.” There is no requirement that for that
subscription agreement to be valid and enforceable it had to be in writing. In any event, there is clear written
evidence of the subscription agreements of each of the incorporators with the company, which is the provisions
in the articles of incorporation submitted to the SEC embodying the incorporators, and the incorporation
subscription and paid-up capital stock.

2(d). The new investors would be liable to pay the unpaid balance of their subscriptions based on the
call made by the Board of Directors, as this condition is clearly provided for in their covering subscription
agreements. There is also no doubt that the original shareholders are liable on their unpaid subscriptions which
are now evidenced by their promissory notes, under the principle that when a call is made by the Board, it shall
be uniformly applied to all shareholders.
In spite of the entries in the books of the company showing that the shareholdings of the original
stockholders are fully paid, and notwithstanding the entries in the GIS to the same effect, the same would be
void as contravening the trust fund doctrine. It is clear under Section 62 of the Corporation Code that the
consideration for the subscription of shares of stock must be payable in money or in property useful to the
corporation, and that payment made “for promissory notes or future services,” is void for being in contravention
of the trust fund doctrine. In fact, the resolute doctrine is that any contractual stipulation or transaction that either
renders ineffective or subjects to condition the payment of the subscription of shares would be void.

3.
[Independent of the facts in Problem 2:] Nicolas Trading came into financial difficulties and
became insolvent, and thereby shut down operations. Eventually, the SEC directed the dissolution of
the company (an order that was published in newspapers of general circulation) for having been
inoperative and failing to comply with the agency’s reportorial requirements. Four years thereafter, a
large creditor of the company, Lo Peng Lam, managed to locate the whereabouts and the assets of both
the original incorporators and the new investors, and brought suit against them collectively to recover
from the original incorporators on their outstanding promissory notes to the company, and from the
new investors their unpaid subscription. An integral part of the relief in the complaint filed by Lo Peng
Lam is for the court to appoint a receiver to receive the amounts for the benefit of all creditors of
Nicolas Trading. The defendants opposed the claim on the ground that Lo Peng Lam had no standing to

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recover on property rights that pertained to a separate juridical person and for which it could not even
recover since it is beyond the 3-year liquidation period mandated under Section 122 of the Corporation
Code. How would you decide the suit? Decide with reasons (10%)

SUGGESTED ANSWER:
I would basically rule for the appointment of the receiver to whom the amounts owed by the stockholders
of record would be paid to cover outstanding obligations of Nicolas Trading. There is no doubt that both the
original incorporators and the new investors their unpaid subscriptions to the company, irregardless of the terms
and conditions of their underlying subscription agreement, became due and demandable for the benefit of the
creditors as one of the legal consequence of the application of the trust fund doctrine. In spite of the language of
Section 122 of the Corporation Code of the abatement of all suits for or against a dissolved corporation after the
lapse of the 3-year period, the Supreme Court has through various decisions held that the legal right and ability
of the creditors of a dissolved corporation do recover from the assets of the corporation cannot fail.
The stockholders are deemed to have in their possession assets of the dissolved company (i.e.,
subscription receivables of Nicolas Trading), and the Court held in Tan Tiong Bio v. Commissioner, 100 Phil. 86
(1956), that even after the three (3) year period of liquidation, corporate creditors can still pursue their claims
against corporate assets against the officers or stockholders who have taken over the properties of the
corporation.
Lately, in Paramount Insurance Corp. v. A.C. Ordoñez Corp., 561 SCRA 327 (2008), the Court held that
“Dissolution or even the expiration of the three-year liquidation period should not be a bar to a corporation’s
enforcement of its rights as a corporation.” In support of this ruling, Paramount Insurance quoted from Section
145 of the Corporation Code which provided that “No right or remedy in favor of or against any corporation . . .
shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent
amendment or repeal of this Code or of any part thereof.” It should be noted however that the provisions of
Section 145 were primarily for transition for corporations then in existence under the terms of the old
Corporation Law.

FACTS COMMON TO PROBLEMS 4 AND 5

Golden Acres Corp., a Delaware corporation engaged in the manufacture and distribution of
agricultural food products, entered into a Shareholders Agreement with Dela Cruz Trading Corp., a
domestic company registered with the primary purpose to engage in “commercial trading”, whereby
they set-up and established in the Philippines a new local company, Golden Pinoy Ventures, Inc., to
engage in the primary purpose of marketing and distribution of processed foodstuff products of Golden
Acres throughout the archipelago, with the following equity: 40% Golden Acres; 60% Dela Cruz Trading.
The Shareholders Agreement also provided that the 5-man Board of Directors shall be composed of 2
nominees of Golden Acres, and 3 nominees of Dela Cruz Trading; and that the Chairman and Corporate
Secretary shall be nominated by Acres Corp., while the President and Corporate Treasurer would be
nominated by Dela Cruz Trading.
Once Golden Pinoy was registered with the SEC, a Licensing and Distributorship Contract was
entered into with Golden Acres, with the former being appointed the exclusive distributor of all of the
latter’s products in the Philippines, to be sold in the name of and under the control of Golden Pinoy, but
with the huge cost of advertising throughout the archipelago and through all media for the account of
Golden Acres.
Apart from the equity contributions into Golden Pinoy, Golden Acres also extended a P10.0
million loan to the local company to fund the setting-up of distribution networks throughout the country.
Finally, a Management Contract was entered into between Golden Pinoy and Dela Cruz Trading,
whereby the latter was granted power to manage the distribution business of Golden Pinoy, which
would entitle Dela Cruz Trading a management fee equivalent to 18% of gross monthly receipts. The
terms of the Management Contract also allowed Golden Pinoy to maintain its head office in a separate
building within the compound of Dela Cruz Trading.
Mr. Patrick Medina was hired from outside to become the President of the Golden Pinoy, and its
Chairman representing one of the three (3) spots to be nominated by Dela Cruz, with two (2) other
members of the Board coming from the Vice-President ranks of Dela Cruz; while the two (2) members

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assigned to Golden Acres were officers in Delaware who would come regularly to the Philippines to
attend Board meetings.

4.
Delfin, one of the minority stockholders of Dela Cruz Trading, demanded from the Board of
Directors that they abandon the various agreements they entered into with Golden Acres and Golden
Pinoy for being unlawful having been effected through mere Board resolutions without stockholders’
approval. He also demanded an examination and copying of all corporate records of Golden Pinoy.
When the Dela Cruz Board refused to heed his demand on the grounds that the project and the
underlying agreement were within the business judgment of the Board, and that Delfin had no standing
to examine the books of Golden Pinoy of which he is not a stockholder of record, Delfin brought before
the RTC special commercial court:
(a) Seeking an order directed to Dela Cruz and Golden Pinoy allowing him to examine
and copy the records of Golden Pinoy pertaining to its corporate registration and
on the distribution project. Is Delfin entitled to the relief sought? (5%)
(b) A derivative suit to have Dela Cruz Trading’s investment into the Golden Pinoy
project be declared unlawful, including the execution of the Stockholders’
Agreement. (10%)
(c) To have the Management Agreement declared unlawful and void. (10%)
Decide each of the three causes of action with reasons.

SUGGESTED ANSWERS:
4(a). Delfin has legal standing to examine and copy, at his own cost, the corporate records of Golden
Pinoy. It may be true that Delfin is not a stockholder of record of Golden Pinoy, and the right to inspect corporate
records only pertains to stockholders of record, nevertheless, being a stockholder of record of the parent
company, Dela Cruz Trading, Inc., it has been held in Gokongwei v. Securities and Exchange Commission, 89
SCRA 336 (1979), that a stockholder’s right to inspect shall extend to the records of a subsidiary company that
is under the management anc control of the parent company. By virtue of the Management Contract, and the
actual business set-up between Dela Cruz Trading and Golden Pinoy, it is clear that the latter is within the
effective control of the former, which would bring the latter within the inspection rights of the stockholders of the
former. (5%)

4(b). Being a stockholder of record, and having made former demand which were not heeded, the filing
of the derivative suit in behalf of Dela Cruz Trading was properly laid, since the cause of action and relief sought
are purportedly to protect the interest of Dela Cruz Trading.
All investments made by the corporation that are pursuant to or necessary for the fulfillment of the
primary purpose fall within the business discretion of the Board under Section 23 of the Corporation Code.
Stockholders’ ratificatory approval is required under Section 42 of the Corporation Code only to investments on
a business enterprise outside of the primary purpose are indicated in the articles of incorporation, and the same
section is careful enough to declare: “That where the investment by the corporation is reasonable necessary to
accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or
members shall not be necessary.“ Since Dela Cruz Trading is registered with the primary purpose of
“commercial trading in all sorts of goods and products” then it is clear that its controlling investment in a
domestic company engaged in the distribution of foodstuffs is consistent with its primary purpose and does not
require stockholders’ ratification to be valid. Consequently, the execution of the Stockholders Agreement in
pursuant of the investment and the project is valid, by mere board resolution and without the need for
stockholders’ ratificatory approval.

4(c). The Management Contract grants to Dela Cruz Trading the power to manage the distribution
business of Golden Pinoy, which constitutes its main and only business undertaking, and would fall within the
coverage of Section 44 of the Corporation Code that requires that the same to be valid, must be approved
separately by each of the Boards of Directors of Dela Cruz Trading and Golden Pinoy, but also ratified
separately by their stockholders: in the case of Dela Cruz, by a majority of its outstanding capital stock, in the
case of Golden Pinoy, by two-thirds (2/3) of its outstanding capital stock. Without such stockholders’ approval,

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the management contract would be deemed not merely voidable, but void for lacking the essential element of
“complete consent.”

5.
In the course of the operations of the business enterprise of Golden Pinoy, some of the
suppliers were not paid, and due to the economic downturn, the company became insolvent, and its
operations shut down permanently. Termagan Supplies, Inc., one of the unpaid suppliers, filed suit
before the local court against Golden Pinoy, Dela Cruz Trading, and Gold Acres to be liable for the
unpaid credit. Service of summons was made upon the proper officers of Golden Pinoy and Dela Cruz,
and one of the directors of Golden Acres during his visit in the Philippines.
(a) Dela Cruz Trading opposed the suit that sought to make it liable for an account that was
obtained directly in the name of Golden Pinoy, with strong position that Dela Cruz Trading cannot be
made “personally” liable for the obligations incurred directly in the name of Golden Pinoy within the
scope of authority and in the proper pursuit of business, and there being no fraud alleged to have been
committed by Dela Cruz Trading in the matter. (10%)
(b) Golden Acres, by counsel, who only entered under “special appearance,” seeks the dismissal
of the suit as against Golden Acres on the ground that the trial court has no jurisdiction over its person.
In opposing the motion to dismiss, Termagan posits that from the facts of the case ( i.e., common facts
are deemed proven), it is clear that Golden Acres was engaged in business in the Philippines without a
license, and therefore can be validly sued before local courts. (10%)
Decide the case with proper and full reasoning.

SUGGESTED ANSWERS:
5(a) With Golden Pinoy without assets to cover its outstanding debts, it is clear that Dela Cruz Trading
may be held liable for the subsidiary’s obligation, not under fraud piercing since there was no proof thereof, but
under alter-ego piercing. Although it may be true that majority control in the equity of a corporation does not by
itself authorized the application of the piercing doctrine, however, when this is coupled by other factors which
clearly indicate that a corporation is merely being used as a conduit or an alter ego, then there would be proper
application of the piercing doctrine to merge two corporations as one and make them liable for the debt of the
other. Aside from majority equity, the majority of the members of the Board of Golden Pinoy were designated
and even officers of Dela Cruz Trading; the head office of Golden Pinoy was located within the same compound
owned by Dela Cruz Trading; and more importantly, the entirety of the business enterprise and operations of
Golden Pinoy were under the control of Dela Cruz Trading under the Management Contract. There is more than
enough evidence to support the fact that Golden Pinoy was merely operated as a conduit or alter ego of Dela
Cruz Trading.
5(b) Although it may be true that Golden Acres does not have a license to do business in the
Philippines, it does not mean that it is susceptible of being sued in local courts, unless it is shown that it has
engaged in business in the Philippines. Both jurisprudence and prevailing rules and regulations provide that
equity investment by itself in any business in the Philippines, no matter how significant in amount, does not by
itself constitute doing business; nor does the exercise of the equity rights, such as election of directors into the
Board, constitute doing business. There is nothing in the facts proven to show that Golden Acres was nothing
but a passive foreign investor in the Golden Pinoy project, much less were there unduly restrictive terms in the
licensing/distribution agreement that would indicate that Golden Pinoy was merely reduced to a conduit or agent
of Golden Acres, or that Dela Cruz Trading was acting merely as an agent of Golden Acres in the Philippines.
The fact that Golden Acres was bound to undertake expensive advertising campaign in the Philippines for its
product do not constitute doing business in the Philippines as expressly so provided under the implementing
rules and regulations of the Foreign Investment Acts of 1991.
Not being “present” in the Philippines, and having not consented nor surrendered jurisdiction over its
person, the local court has no authority over Golden Acres which is an entity beyond its territorial jurisdiction;
and if it proceeds to render any judgment against Golden Acres it would violate principles of due process.

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