2006 BAR EXAMINATION

1. What is the doctrine of

piercing the ei! of corporate
entit"#
$%&&E$TE' AN$WER( Under the
doctrine of piercing the veil of
corporate entity, the legal fction
that a corporation is an entity with
a juridical personality separate and
distinct from its members or
stockholders may be disregarded
and the corporation will be
considered as a mere association of
persons, such that the liability will
attach directly to the ofcers and
stockholders (Umali v. Court of
ppeals, !"# $C% &'#, &'#
(!##)*+. ,t is an e-uitable doctrine
developed to address situations
where the separate corporate
personality of a corporation is
abused or used for wrongful
purposes.
2. To )hat circ*+stances )i!!
the doctrine app!"#
$%&&E$TE' AN$WER( .he
doctrine will apply when the
corporation/s separate juridical
personality is used0
(a+ to defeat public
convenience1
(b+ to justify wrong, protect
fraud, or defend crime1
(c+ as a shield to confuse
legitimate issues1
(d+ where a corporation is the
mere alter ego or business conduit
of a person1 or
(e+ where the corporation is
organi2ed and controlled and its
a3airs are so conducted as to make
it merely an instrumentality,
agency, conduit or adjunct of
another corporation. (Umali v.
Court of ppeals, !"# $C% &'#,
&'# (!##)*+
,. What is the +ini+*+ and
+a-i+*+ n*+.er of
incorporators re/*ired to
incorporate stoc0 corporation#
Is this a!so the sa+e +ini+*+
and +a-i+*+ n*+.er of
directors re/*ired in a stoc0
corporation#
$%&&E$TE' AN$WER( .o
incorporate a stock corporation, a
minimum of fve (&+ and a
ma4imum of ffteen (!&+
incorporators are re-uired ($ec. !),
Corp. Code+
5es, the same minimum and
ma4imum number of directors is
re-uired in a stock corporation
($ec. !6, Corp. Code+.
1. M*st a!! incorporators and
directors .e residents of the
2hi!ippines#
$%&&E$TE' AN$WER( 7o 8nly
majority of the incorporators and a
majority of the directors must be
residents of the 9hilippines ($ecs.
!) and ':, Corp. Code+.
3. What is an intra4corporate
controers"#
$%&&E$TE' AN$WER( n intra;
corporate controversy is a dispute
between a stockholder and the
corporation of which he is a
stockholder, or between a
stockholder and another
stockholder of the same
corporation, where the subject of
the dispute or controversy arose
out of such relationship ($unset
<iew Condominium Corporation v.
Campos, =r., !)6 $C% :): (!#"!*.
78.>?% $U@@?$.?A 7$B?%0
n intra;corporate dispute is a civil
case involving the following0 (a+
devices or schemes employed by,
or any act of, the board of
directors, business associates,
ofcers or partners, amounting to
fraud or misrepresentation which
may be detrimental to the interest
of the public andCor of the
stockholders, partners, or members
of any corporation, partnership, or
association1 (b+ controversies
arising out of intra;corporate,
partnership, or association
relations, between and among
stockholders, members, or
associates1 and between, any or all
of them and the corporation,
partnership, or association of which
they are stockholders, members, or
associates, respectively1 (c+
controversies in the election or
appointment of directors, trustees,
ofcers, or managers of
corporations, partnerships or
associations1 (d+ derivative suits1
and (e+ inspection of corporate
books ($C dm. Demo. 7o. )!;';)6
('))!*+.
6. Is the $ec*rities and
E-change 5o++ission the
en*e for actions ino!ing
intra4corporate controersies#
$%&&E$TE' AN$WER( 7o.
ctions involving intra;corporate
controversies are cogni2able by the
%egional .rial Court, designated by
the $upreme Court under $C dm.
Demo 7o. ));!!;):, which has
jurisdiction over the principal ofce
of the corporation, partnership or
association concerned ($ec. &, %ule
!, $C dm. Demo. 7o. )';';)6+.
2003 BAR EXAMINATION
1. %nder )hat conditions +a" a
stoc0 corporation ac/*ire its
o)n shares#
$%&&E$TE' AN$WER( .he
conditions under which a stock
corporation can ac-uire its own
share are0 (a+ that it be for a
legitimate and proper corporate
purpose1 and (b+ that there shall be
unrestricted retained earnings to
purchase the same and its capital
is not thereby impaired. ($ec. 6!,
Corp. Code+
2. 6anice rendered so+e
cons*!tanc" )or0 for X78
5orporation. 9er co+pensation
inc!*ded shares of stoc0
therein.
5an X78 5orporation
iss*e shares of stoc0 to pa" for
the serices of 6anice as its
cons*!tant# 'isc*ss "o*r
ans)er.
$%&&E$TE' AN$WER( .he
corporation can issue shares of
stock to pay for actually performed
services to the corporation, but not
for future services or services yet
to be performed. ($ec. E'(:+, Corp.
Code+
,. 'iine 5orporation is
engaged in the +an*fact*re of
gar+ents for e-port. In the
co*rse of its .*siness: it )as
a.!e to o.tain !oans fro+
indiid*a!s and ;nancing
instit*tions. 9o)eer: d*e to
the drop in the de+and of
gar+ents in the internationa!
+ar0et: 'iine 5orporation
co*!d not +eet its o.!igations.
It decided to se!! a!! its
e/*ip+ent s*ch as se)ing
+achines: per+a4press
+achines: high speed se)ers:
c*tting ta.!es: ironing ta.!es:
etc. as )e!! as its s*pp!ies and
+ateria! to Top &rade <ashion
5orporation: its co+petitor.
=a> 9o) )o*!d "o*
c!assif" the transaction#
=.> 5an 'iine
5orporation se!! the aforesaid
ite+s to its co+petitor: Top
&rade <ashion 5orporation#
What are the re/*ire+ents to
a!id!" se!! the ite+s. E-p!ain.
=c> 9o) )o*!d "o* protect
the interests of the creditors of
'iine 5orporation#
=d> In case 'iine
5orporation io!ated the !a):
)hat re+edies are aai!a.!e to
Top &rade <ashion 5orporation
against 'iine 5orporation#
$%&&E$TE' AN$WER(
(a+ .he sale is a sale in bulk,
because it is a sale of all or
substantially all of the f4tures used
in and about the business of the
vendor, a garments manufacturer.
($ection ', ct 7o. :#&'+
(b+ Aivine Corporation can
sell the aforesaid items to .op
@rade Fashion Corporation. Gut it
must secure the approval of at
least two;thirds of its stockholders
and a majority vote of the
members of its board of directors
as this is a sale of all or
substantially all of its assets.
($ection 6), Corporation Code+
(c+ .o protect the interest of
the creditors, , will re-uire the
seller to prepare an afdavit
stating the names of all its
creditors, their addresses, the
amount of their credits and their
respective maturities, and to
submit the afdavit to the buyer
who, in turn, should notify the
creditors about the transaction he
is about to conclude with the seller.
($ecs. :, 6, &, H, #, Gulk $ales Iaw+
,f the transaction was made
to defraud creditors, the latter may
have the contract rescinded. .he
creditors may also fle a petition for
involuntary insolvency and have
the sale voided if it was made in
fraud of creditors.
(d+ .op @rade Fashion may
recover the amount paid if the sale
was made in fraud of creditors and
sue for damages.
1. %nder )hat circ*+stances
+a" a corporation dec!are
diidends#
$%&&E$TE' AN$WER(
corporation may declare dividends
if it has unrestricted retained
earnings. ($ec. 6:, Corp. Code+
3. 'isting*ish diidend fro+
pro;t? cash diidend fro+
stoc0 diidend.
$%&&E$TE' AN$WER( 9rofts
belong to the corporation, while
dividends belong to the stockholder
when dividend is declared.
cash dividend involves
disbursement of earnings to
stockholders, while stock dividend
does not involve any disbursement.
cash dividend a3ects the
fractional interest in the property
which each share represents, while
a stock dividend decreases the
fractional interest in corporate
property which each share
represents. cash dividend does
not increase the legal capital, while
a stock dividend does, as there is
no cash outlay involves. Cash
dividends are subject to income
ta4, while stock dividends are not.
Aeclaration of stock dividend
re-uires the approval of both the
majority of the members of the
board of directors and at least two
thirds of the stockholders. ,n the
declaration of cash dividend, the
approval by majority of the
members of the board of directors
will sufce.
6. <ro+ )hat f*nds are cash
and stoc0 diidends so*rced#
E-p!ain )h".
$%&&E$TE' AN$WER( Goth case
dividend and stock dividend may
be declared out of the unrestricted
retained earnings. 9aid;in surplus
can be declared stock dividend but
not cash dividend, because a stock
dividend merely transfers the paid;
in surplus to capital.
@. A Aorean nationa! Boined a
corporation )hich is engaged
in the f*rnit*re +an*fact*ring
.*siness. 9e )as e!ected to the
Board of 'irectors. To
co+p!e+ent its f*rnit*re
+an*fact*ring .*siness: the
corporation a!so engaged in
the !ogging .*siness.
With the additiona!
!ogging actiit": can the Aorean
nationa! sti!! .e a +e+.er of
the Board of 'irectors# E-p!ain.
$%&&E$TE' AN$WER( 5es. .he
Jorean can still be a member of the
board of directors, if he has
sufcient e-uity to entitle him to a
seat. $ince the corporation is only
re-uired to be at least E)K owned
by Filipino citi2ens, foreigners can
be members of the board of
directors in proportion to their
e-uity which cannot e4ceed 6)K.
($ec.!, 9.A. 7o. H!&, amending C..
7o. $ec. '; of C.. 7o. !)", .he
nti;Aummy Iaw+
C. BrieD" disc*ss the doctrine
of corporate opport*nit".
$%&&E$TE' AN$WER( .he
doctrine of corporate opportunity
means that if the director ac-uired
for himself a business opportunity
that should belong to the
corporation, he must account to
the corporation for all the profts
obtained, unless his acts was
ratifed by at least two;thirds of the
stockholders. ($ection :6, Corp.
Code+
E. Ma!"n: $chiera and 6aF are
the directors of 2atio
Inest+ents: a c!ose
corporation for+ed to r*n the
2atio 5afe: an a! fresco coGee
shop in Ma0ati 5it". In 2000:
2atio 5afe .egan e-periencing
;nancia! reerses:
conse/*ent!": so+e of the
chec0s it iss*es to its .eerage
distri.*tors and e+p!o"ees
.o*nced.
In Octo.er 200,: $chiera
infor+ed Ma!"n that she fo*nd
a !ocation for a second cafe in
Tag*ig 5it". Ma!"n o.Bected
.eca*se of a dire ;nancia!
condition of the corporation.
$o+eti+e in Apri! 2001:
Ma!"n !earned a.o*t <ort 2atio
5afe !ocated in Tag*ig 5it" and
that its dee!op+ent )as
*nderta0en ." a ne)
corporation 0no)n as <ort
2atio: Inc. )here .oth $chiera
and 6aF are directors. Ma!"n
a!so fo*nd that $chiera and 6aF:
on .eha!f of 2atio Inest+ents:
had o.tained a !oan of
2300:000 fro+ 2B5o+ Ban0:
for the p*rpose of opening <ort
2atio 5afe. This !oan )as
sec*red ." the assets of 2atio
Inest+ents and persona!!"
g*aranteed ." $chiera and 6aF.
Ma!"n then ;!ed a
corporate deriatie action
.efore the Regiona! Tria! 5o*rt
of Ma0ati 5it" against $chiera
and 6aF: a!!eging that the t)o
directors had .reach their
;d*ciar" d*ties ."
+isappropriating +one" and
assets of 2atio Inest+ents in
the operation of <ort 2atio
5afe.
=a> 'id $chiera and 6aF
io!ate the princip!e of
corporate opport*nit". E-p!ain.
=.> Was it proper for
Ma!"n to ;!e a deriatie s*it
)ith pra"er for inB*nctie
re!ief# E-p!ain.
=c> Ass*+ing that a
deriatie s*it is proper: +a"
the action contin*e if the
corporation is disso!ed d*ring
the pendenc" of the s*it#
E-p!ain.
$%&&E$TE' AN$WER(
(a+ $chiera and =a2 violated
the principle of corporate
opportunity, because they used
9atio ,nvestments to obtain a loan,
mortgaged its assets and used the
proceeds of the loan to ac-uire a
co3ee shop through a corporation
they formed. ($ection :6,
Corporation Code+
(b+ ,t was proper for Dalyn to
fle a derivative suit with a prayer
for injunction, because $chiera and
=a2 diverted the assets of the
corporation for their own personal
beneft. (Gallentine on Corporations
%ev, ?d., p.::6+
(c+ .he case should be
allowed to continue so that the
assets and claims should be
administered for the beneft of all
concerned, as they should have
been administered before
dissolution of the corporation.
(Gallentine on Corporations %ev,
?d., p.::"+
2001 BAR EXAMINATION
1. Ms. OB )as e+p!o"ed in MA$
Inest+ent Ban0. WI5: a
+edica! dr*g co+pan":
retained the Ban0 to assess
)hether it is desira.!e to +a0e
a tender oGer for 'O2
co+pan": a dr*g
+an*fact*rer. OB oerheard in
the co*rse of her )or0 the
p!ans of WI5. B" herse!f and
thr* associates: she p*rchased
'O2 stoc0s aai!a.!e at the
stoc0 e-change priced at 220
per share. When WI5Hs tender
oGer )as anno*nced: 'O2
stoc0s B*+ped to 2,0 per
share. Th*s OB earned a
siFa.!e pro;t.
Is OB !ia.!e for .reach
and +is*se of con;dentia! or
insider infor+ation gained
fro+ her e+p!o"+ent# Is she
a!so !ia.!e for da+ages to
se!!ers or .*"ers )ith )ho+
she traded# If so: )hat is the
+eas*re of s*ch da+ages.
E-p!ain .rieD".
$%&&E$TE' AN$WER( 8G is an
insider (as defned in $ubsection
:." (:+ of the $%C since she is an
employee of the Gank, the fnancial
adviser of A89, and this
relationship gives her access to
material information about the
issuer (A89+ and the latter/s
securities (shares+, which
information is not generally
available to the public. ccordingly,
8G is guilty of insider trading under
$ection 'H of the $ecurities
%egulation Code which re-uires
disclosure when trading in
securities.
8G is also liable for damages
to sellers or buyers with whom she
traded. Under $ubsection E:.! of
the $ecurities %egulation Code, the
damages awarded could be an
amount not e4ceeding triple the
amount of the transaction plus
actual damages. ?4emplary
damages may also be awarded in
case of bad faith, fraud,
malevolence, or wantonness in the
violation of the $ecurities
%egulation Code or its
implementing rules. .he court is
also authori2ed to award attorney/s
fees not e4ceeding :)K of the
award.
2. What is a corporation so!e#
9o) does one pierce the ei! of
corporate ;ction#
$%&&E$TE' AN$WER( $ection
!!) of the Corporation Code
defnes a corporation sole as one
formed for the purpose of
administering and managing, as
trustee, the a3airs, property and
temporalities of any religious
denomination, sect or church. ,t is
formed by the chief archbishop,
bishop, priest, minister rabbi or
other presiding elder of such
religious denomination, sect or
church.
.he veil of corporate fction
may be pierced by proving in court
that the notion of legal entity is
being used to defeat public
convenience, justify wrong, protect
fraud or defend crime or the entity
is just an instrument or alter ego or
adjunct of another entity or person.
,. 'isting*ish c!ear!" =1> a
priate corporation fro+ a
p*.!ic corporation? and =2> a
stoc0 corporation fro+ a non4
stoc0 corporation.
$%&&E$TE' AN$WER( private
corporation is one formed for some
private purpose beneft or end,
while a public corporation is formed
for the government of a portion of
the $tate for the general good or
welfare. .he true test is the
purpose of the corporation. ,f the
Corporation is created for political
or public purpose connected with
the administration of the
government, then it is a public
corporation. ,f not, it is a private
corporation although thw hole or
substantially the whole interest in
the corporation belongs to the
$tate. public corporation is
created by special legislation or act
of Congress. private corporation
must be organi2ed under the
Corporation Code.
stock corporation is one
with that has capital stock divided
into shares and is authori2ed to
distribute to the holders of such
share dividends or allotments of
the surplus proft on the basis of
the shares held. ll other
corporations are non;stock
corporations.
1. Is there a diGerence
.et)een de facto corporation
and a corporation ." estoppe!#
E-p!ain .rieD".
$%&&E$TE' AN$WER( de facto
corporation is one which actually
e4ists for all practical purposes as a
corporation but which has no legal
right to corporate e4istence as
against the $tate. ,t is essential to
the e4istence of a de facto
corporation that there be (!+ a
valid law under which a corporation
might be incorporated, ('+ a bona
fde attempt to organi2e as a
corporation under such law, and (:+
actual use or e4ercise in good faith
of corporate powers conferred
upon it by law.
corporation by estoppel
e4ists when persons assume to act
as a corporation knowing it to be
without authority to do so. ,n this
case, those persons will be liable as
general partners for all debts,
liabilities and damages incurred or
arising as a result of their actions.
3. <o*r +onths .efore his
death: 2X assigned 100 shares
of stoc0 registered in his na+e
in faor of his )ife and his
chi!dren. The" then .ro*ght
the deed of assign+ent to the
proper corporate oIcers for
registration )ith the re/*est
for the transfer in the
corporationHs stoc0 and
transfer .oo0s of the assigned
shares: the cance!!ation of the
stoc0 certi;cates in 2XHs na+e:
and the iss*ance of ne) stoc0
certi;cates in the na+es of his
)ife and his chi!dren as the
ne) o)ners. The oIcers of the
5orporation denied the re/*est
on the fo*nd that another heir
is contesting the a!idit" of the
deed of assign+ent.
Ma" the corporation .e
co+pe!!ed ." +anda+*s to
register the shares of stoc0 in
the na+es of the assignees#
E-p!ain .rieD".
$%&&E$TE' AN$WER( 5es. .he
Corporation may be compelled by
mandamus to register the shares of
stock in the name of the assignee.
.he only legal limitation imposed
by $ection E: of the Corporation
Code is when the Corporation holds
any unpaid claim against the
shares intended to be transferred.
.he alleged claim of another heir of
9L is not sufcient to deny the
issuance of new certifcates of
stock to his wife and children. ,t
would be otherwise if the
transferee/s title to the shares has
no prima facie validity or is
uncertain.
6. The Board of 'irectors of
AB5: Inc.: a do+estic
corporation passed a reso!*tion
a*thoriFing additiona! iss*ance
of shares of stoc0s )itho*t
notice nor approa! of the
stoc0ho!ders.
'X: a stoc0ho!der:
o.Bected to the iss*ance:
contending that it io!ated the
right of pre4e+ption to the
*niss*ed shares. Is his
contention tena.!e# E-p!ain
.rieD".
$%&&E$TE' AN$WER( 5es. AL/s
contention is tenable. Under
$ection :# of the Corporation Code,
all stockholders of GC, ,nc. enjoy
pre;emptive right to subscribe to
all issues of shares of any class,
including the reissuance of treasury
shares in proportion to their
respective shareholdings.
@. AA: a +inorit" stoc0ho!der:
;!ed a s*it against BB: 55: ''
and EE: the ho!ders of the
+aBorit" shares of MO2
5orporation: for a!!eged
+isappropriation of corporate
f*nds. The co+p!aint aerred:
inter a!ia: that MO2
5orporation is the corporation
in )hose .eha!f and for )hose
.ene;t the deriatie s*it is
.ro*ght. In their capacit" as
+e+.ers of the Board of
'irectors: the +aBorit"
stoc0ho!ders adopted a
reso!*tion a*thoriFing MO2
5orporation to )ithdra) the
s*it. 2*rs*ant to said
reso!*tion: the corporate
co*nse! ;!ed a Motion to
'is+iss in the na+e of MO2
5orporation.
$ho*!d the +otion .e
granted or denied# Reason
.rieD".
$%&&E$TE' AN$WER( 7o. ll the
re-uisites for a valid derivative suit
e4ist in this case. First, was
e4empt from e4hausting his
remedies within the corporation,
and did not have to make a
demand on the G8A for the latter
to sue. >ere, such a demand would
be futile, since the directors who
comprise the majority are the ones
guilty of the wrong complained of.
$econd, appears to be a
stockholder at the time of the
alleged misappropriation of
corporate funds. .hird, the suit is
brought on behalf and for the
beneft of D89 Corporation. ,n this
connection, it was held in Conmart
(9hils.+ ,nc. v. $?C, !#" $C% H:
(!##!+ that to grant to the
corporation concerned the right of
withdrawing or dismissing the suit,
at the instance of the majority
stockholders and directors who
themselves are the persons alleged
to have committed the breach of
trust against the interests of the
corporation would be to
emasculate the right of minority
stockholders to seek redress for the
corporation. Filing such action as a
derivative suit even by a one
stockholder is one of the
protections e4tended by law to
minority stockholders against
abuses of the majority.
". X78 5orporation entered into
a contract of !ease )ith AB5:
Inc.: oer a piece of rea! estate
for a ter+ of 20 "ears:
rene)a.!e for another 20
"ears: proided that X78Hs
corporate ter+ is e-tended in
accordance )ith !a). <o*r
"ears after the ter+ of X78
5orporation e-pires: .*t sti!!
)ithin the period a!!o)ed ."
the !ease contract for the
e-tension of the ease period:
X78 5orp. noti;ed AB5: Inc.:
that it is e-ercising the option
to e-tend the !ease. AB5: Inc.
o.Bected to the proposes
e-tension: arg*ing that since
the corporate !ife of X78 5orp.
had e-pired: it co*!d no !onger
opt to rene) the !ease. X78
5orp. co*ntered that
)ithstanding the !apse of its
corporate ter+ it sti!! has the
right to rene) the !ease
.eca*se no /*o )arranto
proceedings for ino!*ntar"
disso!*tion of X78 5orp. has
.een instit*ted ." the OIce of
the $o!icitor &enera!.
Is the contention of X78
5orp. +eritorio*s# E-p!ain
.rieD".
$%&&E$TE' AN$WER( .he
contention is not meritorious.
Gased on the ruling of the $upreme
Court in 9hilippine 7ational Gank v.
CF, of %i2al, ')# $C% (!##'+. L5M
Corp. was dissolved ipso facto upon
the e4piration of its original terms.
,t ceased to be a body corporate
for the purpose of continuing the
business for which it was
organi2ed, e4cept only for purposes
connected with its winding up or
li-uidation. ?4tending the lease is
not an act to wind up or li-uidate
L5M Corp./s a3airs. ,t is contrary to
the idea of winding up the a3airs of
the corporation.
#. 5J$ .rading fled a complaint for
specifc performance with damages
against 9BC Corporation for failure
to deliver cement ordered by
plainti3. ,n its answer, 9BC denied
liability on the ground, inter alia,
that
E. 7A$ Trading ;!ed a
co+p!aint for speci;c
perfor+ance )ith da+ages
against 2W5 5orporation for
fai!*re to de!ier ce+ent
ordered ." p!aintiG. In its
ans)er: 2W5 denied !ia.i!it" on
the gro*nd: inter a!ia: that 7A$
has no persona!it" to s*e: not
.eing incorporated: and that
the 2resident of 2W5 )as not
a*thoriFed to enter into a
contract )ith p!aintiG ." the
2W5 Board of 'irectors: hence
the contract is *!tra ires. 7A$
Trading rep!ied that it is a so!e
proprietorship o)ned ." 7A$:
and that the 2resident of 2W5
had +ade it appear in seera!
!etters presented in eidence
that he had the a*thorit" to
sign the contracts on .eha!f of
the BO' of 2W5.
Wi!! the s*it prosper or
not#
$%&&E$TE' AN$WER( 5es the
suit will prosper. s a sole
proprietorship, the proprietor of
5J$ .rading has the capacity to act
and the personality to sue 9BC. ,t
is not necessary for 5J$ .rading to
be incorporated before it can sue.
8n the other hand, 9BC is
estopped from asserting that its
9resident has no authority to enter
into the contract, considering that
in several of 9BC/s letters, it had
clothed its 9resident with apparent
authority to deal with 5J$ .rading.