REVIEW NOTES IN BUSINESS ORGANIZATION II

CPU College of Law

Second Semester 2020-2021

BY:

ATTY. ZACARIAS D. BEDONA, JR.

Professor

Max and his wife have three children, namely: Paul, Peter and James, who
are all of legal age, residents and citizens of USA. Max decided to incorporate his
food business in Iloilo City. He asked his wife and three children to act as
incorporators, with 25 shares of stocks each, while he owned 999,900 shares of the
capital stock.

Max wanted to know if he can serve as Chairman of the Board of Directors,

President and Chief Executive Officer of the corporation at the same time. Give
your advice.

YES. Max can serve as the Chairman of the Board of Directors, President and
Chief Executive Officer of the corporation at the same time since the law provides
that the President shall be the director and if officers such as the Chairman and the
Chief Executive Officer are provided in the by-laws, then Max can serve all of the
three positions in the corporation.

II

XYZ Corporation has fifteen members of the Board of Directors.

a. Give the number of the Board of Directors to constitute a quorum.

Unless the Articles of Incorporation or the by-laws provide for a
greater majority, a majority of the directors or trustees as stated in the
articles of incorporation shall constitute a quorum.

b. Give the vote needed to consider every decision to be valid corporate

act.
Majority vote of the board of directors

III

In January 2021, X Corporation passed a board resolution removing P from

his position as General Manager of the said corporation. The By-Laws of X
Corporation provide that the officers are President, Treasurer, and Secretary. P
filed a complaint with SEC, and it was decided that a General Manager could be
removed by a mere resolution of the board of directors. P filed a motion for
reconsideration, and he alleged that he could only be removed by the affirmative
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vote of the stockholders representing two-thirds of the outstanding capital stock. Is

the contention of P legally valid?

No. Stockholders‘ approval is necessary only for the removal of the members of
the BOD. For the removal of a corporate officer or employee, the vote of the BOD
is sufficient for the purpose.

IV

Ricky is a board director in ABC Corporation. A majority of the board of

directors wanted to remove him and to sell his shares at public auction for being a
fiscalizer, so he can no longer attend and participate in stockholders’ meetings.

Can the board of directors remove Ricky as board director and stockholder
without cause? Explain.

NO. The board of directors cannot remove Ricky as the board director and
stockholder without cause. The law provides that there can be removal without
cause, provided, that such removal without cause may not be used to deprive
minority stockholders or members of the right of representation to which they may
be entitled. In the case at bar, the removal would cause Ricky to be no longer able
to attend and participate in stockholders’s meeting. He was deprived of his right of
representation. Thus, the removal is not valid.

P is a director in R Corporation, who was elected for a one-year term on

January 15, 2021. On February 14, 2021, B resigned due to health issues, and was
replaced by C, who assumed as director on April 1, 2021. On May 30, 2021, C
died. D was elected in his place. Until which time should D serve as director?
Explain.

D should serve as the director only for the unexpired term of the predecessor in
office.

VI

Briefly discuss the “Doctrine of Corporate Opportunity”.

Doctrine of Corporate Opportunity covers cases when a director takes a business
opportunity that belongs to the corporation such as when: a.) the corporation is
financially able to undertake; b.) from its nature, it is in line with the corporation’s
business; and c.) it is one in which the corporation has an interest or a reasonable
expectancy. If a director. By virtue of such office, seizes a business opportunity
belonging to the corporation thereby obtaining profits to the prejudice of the latter,
the former must account and refund to the corporation all the profits, unless the
contract was ratified by a vote of stockholders owning at least 2/3 of the
outstanding capital stock.
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VII

The Board of Directors of Delta Corporation, unanimously passed a

Resolution approving the taking of steps that in reality amounted to willful tax
evasion. Upon discovery of the unlawful acts, the government filed tax evasion
charges against all members of the Board of Delta Corporation. The directors
invoked that they have no personal liability being mere directors of Delta
Corporation, an artificial being. Are the directors correct? Explain.

NO. The directors are not correct. Based on the doctrine of piercing the corporate
veil, the corporate veil shall be pierced if the veil of corporate fiction is used as a
shield to perpetuate fraud, to defeat public convenience, justify wrong or defend
crime. When the veil is pierced, the individuals composing the corporation, and the
corporation, will be treated identically. In the case at bar, the corporation was used
as a shield from tax evasion by passing a resolution by the board of directors. Thus,
the board of directors shall be personally liable.

VIII

The Board of Directors of T Corporation created an Executive Committee

pursuant to its By-Laws to manage the affairs of the corporation between board
meetings. The Board of Directors appointed the following members of the
Executive Committee: The President, Joe; and two directors, Henry and George.
The Executive Committee me and decided on the following matters:

a. Shorten the corporate term of T Corporation;

b. Purchase a delivery truck for its lumber business;
c. Purchase a house and lot for its office;
d. Declaration and approval of 13th month pay bonus;
e. Declaration of PhP100.00 per share cash dividend.
Are the actions of the Executive Committee valid?
a. NOT VALID. The approval of the shareholders is required for such action.
b. VALID.
c. VALID.
d. NOT VALID. The approval of the shareholders is required for such action.
e. NOT VALID. The approval of the shareholders is required for such action.

IX
Andy subscribed to 100,000 shares of stock of Heaven’s Memorial Park,
which has par value share of P1 per share. He paid P25,000 and promised to pay
the balance before December 31, 2021. Heaven Memorial Park declared cash
dividend on May 15, 2021, payable on December 15, 2021.

For how many shares is Andy entitled to be paid cash dividends? Explain.
Andy is entitled to be paid each cash dividends to the entire 100,1000 shares
subscribed, and not only to the paid-up portion thereof. The legal character of
being a “stockholder,” and therefore the entitlement to all the rights of a
stockholder, are determined from the time of “subscription” and not from payment
of the subscription. The law provides that “a stock corporation may declare
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dividends out of the unrestricted retained earnings which shall be payable in cash,
in property, or in stock to all stock-holders on the basis of outstanding stock held
by them” on not on the basis on what stocks have been paid.

What is the meaning of Stockholder’s Appraisal Right?

It is the right to withdraw from the corporation and demand payment of the fair
value of his shares after dissenting from certain corporate acts involving
fundamental changes in corporate structure.

XI

What is Stock and Transfer Book?

A stock and transfer book is the record of all stocks in the names of the
stockholders alphabetically arranged; the installment paid and unpaid on all stock
for which subscription has been made and the date of payment of any installment, a
statement of every alienation, sale, transfer of stock made, and such other entries as
the by-laws may prescribe.

XII

F is a minority stockholder of Maya Corporation. G is a member of the

Board of Directors and at the same time President of Maya Corporation.

F believes that G is mismanaging Maya Corporation hence, as a stockholder

and in behalf of the stockholders, he wanted sue G. Is F permitted to institute a
derivative suit for himself and in behalf of the stockholders? Explain.
YES. F is permitted to institute a derivative suit for himself and in behalf of the
stockholders. The requisites for a valid derivative suit exist in this case. First, F
was exempt from exhausting his remedies within the corporation and did not have
a demand on the Board of Directors for the latter to sue. Here, such a demand
would be futile, since G, a member of the board of director and at the same time
the President of the corporation is the one guilty of the wrong complained of.
Second, F appears to be a stockholder at the time of the alleged mismanagement of
corporate funds. Third, the suit is brought on behalf and for the benefit of Maya
Corporation.

XIII

Z,D,B,J, and R were members of the 2020-2021 Board of Directors of FPJ

Corporation. At the election for 2021-2022, not one of them was elected. They
filed a derivative suit against the newly elected members of the Board of Directors.
They questioned the validity of meeting and election because there was no quorum,
and they prayed for the nullification of the election. The 2021-2022 Board of
Directors moved to dismiss the complaint because a derivative suit is not proper.
Decide.
The position taken by the 2004-2005 Board of Directors is correct. The derivative
suit is not proper. The members of the 2003-2004 Board of Directors of FLP
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Corporation are the injured parties, not FLP Corporation, as their rights to vote and
to be voted upon were directly affected by the election of the new set of directors.

XIV

What is an intra-corporate controversy? If a suit were to be initiated as an

intra-corporate controversy, should the matter be submitted to SEC or the regular
courts?
An intra-corporate controversy is a suit arising from intra-corporate relations or
between or among stockholders or between any or all of them and the corporation.
If a suit were to be initiated as an intra-corporate controversy, the matter should be
submitted to the regular court which has the jurisdiction on the principal place of
business of the corporation.

XV

The interest of an interlocking director in one corporation may be nominal or

substantial. When is the interest nominal?
The interest is nominal if it does not exceeds 20% of the outstanding capital stock.

XVI

What is “watered stock” and what is the legal consequence of the issuance of
such stock?
A watered stock is a stock issued in exchange for cash, property, share, stock
dividends, or services lesser than its par value.
Directors who consent to the issuance of a watered stock are personally liable.
Although the general rule is that directors, trustees or officers are not solidarily
liable with the corporation, consenting to the issuance of a watered stock is one of
the exceptions.  

XVII

What is a Trust Fund Doctrine?

The subscribed capital stock of the corporation is a trust fund for the payment of
debts of the corporation which the creditors have the right to look up to satisfy
their credits, and which the corporation may not dissipate.

XVIII

What is your understanding of “treasury shares”?

Are said shares considered: (a) issued; (b) fully paid; (c) outstanding; (d)
entitled to dividends?
Treasury shares are shares that have been earlier issued as fully paid and have
thereafter been acquired by the corporation by purchase, donation, and redemption
or through some lawful means.
a. It is issued.
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b. It is fully paid.
c. It is no longer outstanding.
d. It is not entitled to dividends.

XIV

What is One Person Corporation (OPC)? Who may form an OPC? Who may
be appointed officers of an OPC?
An OPC is a corporation with a single stockholder.
The single stockholder shall be the sole director and president of the OPC.
The OPC shall appoint a treasurer, corporate secretary, and other officers as it may
deem necessary.

XX

What is Corporation Sole? Distinguish Corporation Sole from OPC and

Close Corporation.
A corporation sole is a special form of corporation, usually associated with the
clergy, consisting of one person only and his successors, who is incorporated by
law to give some legal capacities and advantages.
A close corporation is one whose articles of incorporation provides that all the
corporation’s issued stock of all classes , exclusive of treasury shares, shall be held
of record by not more than a specified number of persons not exceeding 20; all the
stocks of all classes shall be subject to one or more specified restrictions on
transfer permitted; and the corporation shall not list in any stock exchange or make
any public offering of its stock of any class.
An OPC is a corporation with a single stockholder.

XXI

What is a Foreign Corporation? When is a foreign corporation deemed to be

“doing business in the Philippines?” (Mentholatum v. Mangaliman, 72 Phil. 524)
A foreign corporation is a corporation formed, organized or existing under any law
other than those of the Philippines, and whose laws allow Filipino citizens and
corporation to do business in its own country or state.
The test is whether the foreign corporation is continuing the body or substance of
the business or enterprise for which it was organized or whether it has substantially
retired from it and turned it over to another. The term implies a continuity of
commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of, the purpose and object of its
organization.

XXII
A foreign company has been exporting goods to a Philippine company for
several years now. When the Philippine company failed to pay the latest
exportation, the foreign company sued to collect in the Philippines. The Philippine
company interposed the defense that the foreign company was doing business in
the Philippines without a license hence, could not sue before a Philippine court. Is
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this defense tenable? Explain your answer. (Global Business Holdings, Inc. v.
Surecomp Software, G.R. No. 173463, October 13, 2010; B. Van Zuiden Bros.
Ltd. v. GTVL Manufacturing Industries, G.R. No. 1479056, May 28, 2007)
NO. As a general rule, a corporation has a legal status only within the state or
territory in which it was organized. In order to subject a foreign corporation doing
business in the country to the jurisdiction of our courts, it must acquire a license
from the Securities and Exchange Commission and appoint an agent for service of
process, without which it cannot institute a suit in the Philippines. The exception to
this rule is the doctrine of estoppel. A foreign corporation doing business in the
Philippines without license may sue in Philippine courts a Filipino citizen or a
Philippine entity that had contracted with and benefited from it. A party is
estopped from challenging the personality of a corporation after having
acknowledged the same by entering into a contract with it. The principle is applied
to prevent a person contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes, chiefly in cases where such
person has received the benefits of the contract.

XII

The term of CCC Corporation in accordance with its Articles of

Incorporation ended last June 1, 2015. The term was not extended. What will
happen to the corporation? (Majority Stockholder of Ruby Industrial Corp. v. Lim
(650 SCRA 461), June 6, 2011.)
After the term had expired without extension, the corporation is dissolved. The
remedy of the stockholders is reincorporation.

XIII

XXX Corporation is a bank. The operation of XXX Corporation as a bank

was not doing well. So, to avert any bank run, XXX Corporation, with the approval
of the Monetary Board, sold all itys assets and liabilities to ZZZ Banking
Corporation which includes all deposit accounts. In effect, ZZZ will service all
deposits of all depositors of XXX Corporation.

Will the sale of all assets and liabilities of XXX Corporation to ZZZ
Banking Corporation automatically dissolve or terminate the corporate existence of
XXX Corporation? Explain your answer.
No, the sale of all the assets and liabilities of XXX Corporation to ZZZ Banking
Corporation will not result in the automatic dissolution of termination of the
existence of the former. A decision to dissolve XXX Corporation or to terminate
its corporate existence would require a separate approval by a majority of the
Board of Directors of XXX Corporation and its stockholders holding at least two
thirds of the total outstanding capital stock, as well as the separate approval by the
Monetary Board.

XIV

EEE Corporation was dissolved on May 31, 2018. The three-year extended
life has expired without a trustee or receiver having been expressly appointed by
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EEE Corporation within that period. How will corporate liquidation be completed?
(Gonzales v. Sugar Regulatory Administration, 174 SCRA 377; Gelano v. court of
Appeals, 103 SCRA 90)
The liquidation can continue with the winding up. The members of the BOD can
continue with the winding of the corporate affairs until final liquidation. They can
act as trustees or receivers for this purpose.

XV

What are Securities?

Securities are shares, participation or interests in a corporation or in a commercial
enterprise or profit-making venture and evidenced by a certificate, contract,
instrument, whether written or electronic in character.

What is the purpose of Revised Securities Act (B.P. Blg. 178)? (SEC v. CA,
G.R. Nos. 106425 and 106431-32, July 21, 1995)
It is to protect public investors from fraudulent schemes by regulating the sale and
the disposition of securities, creating for this purpose a Securities and Exchange
Commission to ensure proper compliance with the law.

What is Blue Sky Doctrine? (Power Homes Unlimited Corporation v. SEC,

G.R. No. 164182, February 26, 2008)
Act No. 2581, better known as the Blue Sky Law, is patterned after similar laws
enacted in various states of the Union, one of the oldest of which, if not the oldest,
is that of the State of Kansas, which was amended in 1913 and 1915 (Fletcher, vol.
7 [1919], p. 7714). The purpose of these laws, as was said by Justice Mckenna, is
to protect the public against the imposition of unsubstantial schemes and the
securities based thereon. It is said that the name given the law indicates the evil
against which it is directed, namely, speculative schemes which have no more
basis than a few feet of the blue sky.
 
Study the Definition of Terms that I gave you in my Notes.
Definition of Terms

a) “Issuer” is the originator, maker, obligor, or creator of the security.

b) “Broker” is a person engaged in the business of buying and selling

securities for the account of others.

(c) “Dealer” means any person who buys and sells securities for his/her
own account in the ordinary course of business.

(d) “Clearing Agency” is any person who acts as intermediary in making

deliveries upon payment to effect settlement in securities transactions.

(e) “Exchange” is an organized marketplace or facility that brings

together buyers and sellers and executes trades of securities and/or
commodities.
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(f) Pre-Need Plans” are contracts which provides for the performance of
future services or the payment of future monetary considerations at
the time of actual need, for which planholders pay in cash or
installment at the stated prices, with or without interest or insurance
coverage and incudes life, pension, education, interment, and other
plans which the Commission may from time to time approve.

(g) “Promoter” is a person who, acting alone or with others, takes

initiatives in founding and organizing the business or enterprise of the
issuer and receives consideration therefore.

(h) “Prospectus” is the document made by or in behalf an issuer,

underwriter or dealer to sell or offer securities for sale to the public
through a registration statement filed with the Commission.

(i) “Registration Statement’ is the application for registration of

securities required to be filed with the Commission.

(j) “Uncertificated Security” is a security by electronic or similar records.

(k) “Underwriter” is a person who guarantees on a firm commitment

and/or declared best effort basis the distribution and sale of securities
of any kind by another company.
Definition of Terms

c) “Issuer” is the originator, maker, obligor, or creator of the security.

d) “Broker” is a person engaged in the business of buying and selling
securities for the account of others.

(c) “Dealer” means any person who buys and sells securities for his/her
own account in the ordinary course of business.

(d) “Clearing Agency” is any person who acts as intermediary in making

deliveries upon payment to effect settlement in securities transactions.

(e) “Exchange” is an organized marketplace or facility that brings

together buyers and sellers and executes trades of securities and/or
commodities.

(f) Pre-Need Plans” are contracts which provides for the performance of
future services or the payment of future monetary considerations at
the time of actual need, for which planholders pay in cash or
installment at the stated prices, with or without interest or insurance
coverage and incudes life, pension, education, interment, and other
plans which the Commission may from time to time approve.
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(g) “Promoter” is a person who, acting alone or with others, takes

initiatives in founding and organizing the business or enterprise of the
issuer and receives consideration therefore.

(h) “Prospectus” is the document made by or in behalf an issuer,

underwriter or dealer to sell or offer securities for sale to the public
through a registration statement filed with the Commission.

(ii) “Registration Statement’ is the application for registration of

securities required to be filed with the Commission.

(j) “Uncertificated Security” is a security by electronic or similar records.

(k) “Underwriter” is a person who guarantees on a firm commitment

and/or declared best effort basis the distribution and sale of securities
of any kind by another company.

XVI

SS Corporation and YY Corporation have agreed to be merged into one

corporation. To facilitate the merger, both corporation agreed that the merger be
made effective March 15, 2021. The Securities and Exchange Commission (SEC)
approved the Articles of Merger on May 30, 2021. What is the effective date of
merger? (Bank of Commerce v. Radio Philippines Network, Inc., G.R. No.
195615, April 21, 2014)
The effective date of merger id May 30,2021. A merger shall only be effective
upon the approval of the SEC.

XV

TT Corporation was in dire straits. In order to firm up its financial standing,

it agreed to entertain the merger and takeover offer of PP Corporation, the leading
company in their line of business. Jane, the major stockholder of TT Corporation,
strongly opposed the merger and takeover. The merger and takeover by PP
Corporation was included in the agenda of the next meeting of the TT
Corporation’s Board of Directors. However, Jane was in serious medical condition
that required medical treatment and attention in Singapore that she failed to attend
the meeting and cast her vote. The Board of directors of TT Corporation approved
the merger and takeover.

Jane seeks your legal advice regarding her right as a stockholder opposed to
the corporate action. Explain your answer.
Jane, as a stockholder has an appraisal right. Appraisal right is the right of a
dissenting stockholder to demand appraisal and payment of the fair value of his
stocks from the corporation. It allows a stockholder who dissents and
votes against a proposed corporate action to withdraw from the corporation by
demanding payment of the fair value of his shares.

XVI
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Two corporations agreed to merge. They then executed an agreement

specifying the surviving corporation and the absorbed corporation. Under the
agreement of merger dated January 30, 2020, the surviving corporation acquired all
the rights, properties and liabilities of the absorbed corporation.

1. What would happen to the absorbed corporation? Must the absorbed

corporation undertake dissolution, and the winding up procedures?
Explain your answer.

No. There is no need for the absorbed corporation to undertake dissolution and
winding up procedure. As a result of the merger, the absorbed corporation is
automatically dissolved and its assets and liabilities are acquired and assumed by
the surviving corporation.

2. Pending the approval of merger by SEC, may the surviving

corporation already instate suits to collect all receivables due to the
absorbed corporation from its customers? Explain your answer.
No. The merger does not become effective until and unless approved by the SEC.
Before approval by the SEC of the merger, the surviving corporation has no legal
personality with respect to receivables due to the absorbed corporation.

XVII

JJJ Corporation is a foreign corporation that wants to operate a

representative office in the Philippines. As requir3d by the corporation code, there
is a need to appoint a Resident Agent as a condition precedent to the issuance of a
license to transact business in the Philippines. After two years, JJJ Corporation
removed its Resident Agent and did not appoint anyone anymore. Can that be a
ground for revocation or suspension of its license to do business? Explain.
YES. The law provides that failure to appoint and maintain a resident agent in the
Philippines as required is a valid ground for the revocation of license. The
appointment of a resident agent is required for the purpose of accepting and
receiving, on behalf of the foreign corporation: a) notice affecting the corporation
pending the establishment of its local office and b) summons and other legal
processes in all proceedings for or against the corporation. Without the presence of
a resident agent, the corporation cannot be subject to the jurisdiction of the court.

XVIII

What is the number of the Board of Trustees of a non-stock, non-profit

educational institution?
It shall not be less than 5 nor more than 15.

XIX

Is an OPC required to file articles of incorporation and by-laws?

An OPC is required to file Articles of Incorporation but not by-laws.
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XX

K Corporation shortened its corporate life by amending its articles of

incorporation. It has no debts but owns a prime property located at Iloilo city. How
would the said property be liquidated among the five stockholders of K
Corporation? (Stockholders of F., Guanzon & Sons, Inc. v. Registry of Deeds,
G.R. No. L-18216, October 30, 1962; Sec. 122)
The prime property of X Corporation can be liquidated among the five
stockholders after the property has been conveyed by the corporation to the five
stockholders, by dividing or partitioning it among themselves in any two of the
following ways:
1) by PHYSICAL DIVISION or PARTITION based on the proportion of the
values of their stockholdings; or
2) SELLING THE PROPERTY to a third person and dividing the proceeds among
the five stockholders in proportion to their stockholdings; or
3) after the determination of the value of the property, by ASSIGNING or
TRANSFERRING THE PROPERTY to one stockholder with the obligation on the
part of said stockholder to pay the other four stockholders the amount/s in
proportion to the value of the stockholding of each.