Corporation Law – Atty. Ruben C.

Ladia
Midterms Practice Questions
Coverage: Until By-Laws
Multiple Choice:
1. A, B, C, D and E organized/formed DKD Inc. was issued a certificate of registration by the appropriate
government agency. It turned out, however, that C,D, and E are not residents of the Philippines. What
type/kind of corporation is DKD Inc.?

a. De Facto
b. De Jure
c. Corporation by Estoppel
d. It does not exist as a Corporation at all.

2. A director who was compensated and paid 15% of the net income before tax of the corporation for the
preceding year for the services rendered by him as corporate secretary by a mere Board resolution is

a. Valid since he is acting in a capacity other than as such director

b. Invalid since only 10% of the net income before tax is allowed by law
c. Invalid because it requires stockholders’ approval or a by-law provision authorizing it
d. Valid because all corporate powers, all businesses are conducted and all properties are controlled by
the Board of Directors

3. The declaration of stock dividends will generally have

a. the effect of decreasing the total assets of the corporation

b. the effect of an increase in the proportionate interest of the stockholders
c. no effect in the proportionate interest of the stockholders
d. the effect of increasing the authorized capital stock notwithstanding the fact that the corporation
has a free portion of its capital stock to cover the declaration/distribution

4. A contract between a corporation and its president is

a. valid id not tainted with fraud and the contract is fair and reasonable
b. valid if previously approved by the Board of Directors
c. voidable is the president holds a substantial interest in the corporation
d. voidable at the option of the corporation

5. It is common practice in DKD Inc. for the general manager to enter into contracts for an in behalf of the
corporation without prior approval of the Board of Directors. Said contracts are

a. invalid since the power and authority is lodged to that of the Board of Directors
b. valid because approval of the Board is not required for its validity
c. invalid because the general manager is not authorized by law to enter into contracts for and in
behalf of the corporation
d. valid because similar acts were approved and allowed by the Board as a matter of practice, custom
and policy and thus binding on the corporation even without formal Board resolution

6. Non-voting shares are not included in determining the voting requirements imposed by the code in cases
of

a. removal of a member of the Board of Directors

b. providing for additional disqualifications of directors in the by-laws
c. shortening of the corporate terms
d. changing the principal office of the corporation

7. DKD INC.. declared cash dividends of P1.00 per share on January 18, 2011 to be paid to the stockholders
of record on January 31, 2011. Said declaration was duly announced to the stockholders. On January 20,
2011, “A”, one of the stockholders holding 100,000 shares valued at P100,000 sold his shares for the
Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
 same amount to “B”, who is not a stockholder of the same corporation, and on January 25, 2011 the
transfer in favor of “B” was duly recorded in the books of the corporation. Absent any agreement to the
contrary, as between “A” and “B” who has better right to the dividends?
a. “A” because the transfer of his share was in violation of a by-law provision granting existing
stockholders the preferential right to buy the shares of a selling stockholders
b. “A” because he was the owner of the shares at the time of the declaration of the dividend
c. “B” because he was the recorded owner of the share even before payment of the dividend
d. “B” because he was the owner of the share at the time/date of payment

8. A stock corporation shall have the power to reacquire its own shares irrespective of the existence of
unrestricted retained earnings

a. to eliminate fractional shares arising out of stock dividends.

b. to pay dissenting stockholders in the exercise of their appraisal rights
c. to pay a stockholder in a close corporation who compels the latter that he be paid the value of his
shares
d. to collect/compromise an indebtedness to the corporation arising out of unpaid subscription in a
delinquency sale

9. Only the stockholders/members can fill up a vacancy created in the office of a director if the said
vacancy occurs

a. by virtue of the resignation of a hold-over director

b. by virtue of the death of a director
c. if the director ceases to be a stockholder
d. if the director is subsequently disqualified by a by-law provision

10. The Articles of Incorporation of DKD INC.. provides for a nine (9) man member Board of Directors. Two of
them died. On January 15, 2011, the corporate secretary of the company resigned such that at a
Director’s meeting was held and conducted to elect an0ther corporate secretary. Five (5) if the directors
attended the meeting and four (4) of them elected “A” to replace the resigned corporate secretary. Is
the election valid?

a. Yes, because there are only seven (7) living members of the Board and the vote of four (4)
constitutes a majority
b. No, because the vote required is majority of the Board as fixed in the Articles of Incorporation
c. No, because the quorum requirement was not complied with
d. Yes, because the vote required is only a majority of those present at which there is a quorum

11. DKD INC.. paid A CO., INC. 10% of the property dividend declared by the Board of Directors of the former
pursuant and in consideration of messenger services actually rendered by the later. Is the payment valid?

a. Yes because it is a valid contractual arrangement between the parties

b. No because stockholders’ approval is required for its validity
c. No because it would result to a dilution of dividend rights of the stockholder
d. Yes because labor or services actually rendered may be paid by way of property

12. All persons who assume to act as a corporation knowing it without authority to do so shall be liable

a. only to the extent of their subscription to the capital stock of the corporation
b. only to the extent of the corporate assets
c. as limited partners for all debts, liabilities and damages arising therefrom
d. as general partners for all debts, liabilities and damages arising therefrom

13. A, B, C, D and E are the 5-man member of the Board of Directors of DKD INC.. On January 15, 2011, the
remaining members of the Board of Directors consisting of A, B and C conducted a meeting to fill up two
(2) vacancies in the Board cause by the removal of D by the stockholders and by the death of E. D was
unanimously replaced by F, and E by G. The election of F and G is
Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
 a. valid for both
b. not valid for both
c. not valid for G but valid for F
d. valid for G but not valid for F

14. DKD INC.. filed/submitted an amendment of its Articles of Incorporation with the SEC. If the latter does
not act on it within 6 months without fault attributable to the corporation, the amendment takes effect
on the date of its filing except

a. when the amendment consists of a decrease in the capital stock

b. when the amendment consists of a decrease in the number of directors
c. when the amendment consists of including reasonable restrictions on transfer of shares
d. when the amendment consists of a change in the principal office of the corporation

15. The Board of Directors cannot, without stockholders’ approval, pass a valid corporate act

a. to sell/dispose of its only property in the usual course of its business

b. to invest its corporate funds necessary to carry out the secondary purpose indicated in the articles of
incorporation
c. to declare property dividends
d. to reacquire its own shares

16. A contract between corporations with interlocking directors will be subject to the provisions of section
32 of the Code (voidable) when

a. the interlocking director owns 20% of the outstanding capital stock in one corporation while 18% in
the other
b. the interlocking director owns 22% in one corporation while 25% in the other
c. the interlocking director owns 20% in one corporation while 22% in the other
d. the interlocking director owns 22% in both corporation

17. A director who ceases to be a stockholder shall

a. automatically cease to be a director

b. continue to serve in a hold-over capacity until his successor has been duly elected and qualified
c. continue to serve as such until the expiration of his term.
d. continue to serve as such until the expiration of his term if authorized by the Board of Directors

18. DKD INC.. is engaged in the realty business with no other purpose indicated in the article of
incorporation. It entered into a catering service with Y CO., INC. for the retirement of the latter’s
president for a consideration of Php150,000. X CO. fully complied with its obligation but Y CO., later
refused to pay the agreed amount claiming that X CO., is not empowered/authorized to engage in the
food catering business. In an action brought before the Court, may Y CO., INC. be compelled to pay?

a. No, because the actuation of DKD INC.. is beyond its corporate powers and authority. (Doctrine of
Limited Capacity)
b. Yes, because the party who has received the benefits of the contract is estopped to set up that
contract is beyond the corporate powers of X CO., to defeat an action on the same.
c. Yes, because the contract is valid per se
d. No, because the court cannot interfere with the business judgment of the Board of Directors

19. A provision in the by-laws of a regulatory/ordinary stock corporation may validly provide

a. for a greater quorum and voting requirement in stockholders’ meeting

b. for a denial of cumulative voting of the stockholders
c. for a greater quorum and voting requirements in directors’ meeting
d. for the holding of stockholders’meeting anywhere in the Philippines
Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
20. “A”, the President of DKD INC.. which is engaged in the realty business, bought (in his personal and
individual capacity) from his friend a parcel of land for Php5M and later sold it at Php5.5M thereby
making a profit of Php.5M. May his act be validly ratified by the stockholders at the objection of any one
single stockholder?

a. Yes, because he acted as a natural person separate and distinct of the corporation which he is the
President
b. No, because he acquired a personal interest in conflict with his duty as a director
c. No, because he serves in a fiduciary position and should not advance his selfish motives to the
damage and prejudice of the corporation
d. Yes, because he merely acquired a business opportunity rightfully belonging to the corporation

True or False:
1. Moral damages cannot be awarded to a corporation
2. Nationality is not a requirement in for incorporators
3. Last Name of a person can be used as part of the Corporation Name
4. There can only be 5 incorporators
5. A corporation can be an incorporator
6. All corporations acquire Juridical Personality only upon the approval of SEC
7. Labor performed or services rendered can be a consideration for stocks
8. According to Ronnie Duter, corporations exists only for a period of 25 years.
9. All shareholders of a Non-stock Corp are automatically considered as members
10. By Laws may provide for additional qualification of a director
11. There is no minimum requirement to be subscribed in a corporation
12. Non-voting does not have a voting right
13. In Piercing the veil of corporate fiction, control means majority or complete stock control.
14. By Laws are not mandatory
15. Non-filing of By Law results to immediate dissolution.
16. Members of the executive committee must be a member of a board
17. Directors cannot receive compensation
18. Directors can dispose all or substantially all of the Corporation properties.
19. Ultra Vires acts are subject to ratification of the stockholders
20. Shareholders are not conclusively presumed to know By – Laws

Define or Differentiate the Following:

1. What is a corporation?
2. What are Ultra Vires Acts
3. Differentiate De Facto from De Jure Corporation
4. What are Unrestricted Retained Earnings?
5. What is Corporation by Estoppel
6. What is the Incorporation test?
7. Define Doctrine of Secondary Meaning
8. Define and differentiate Authorized Capital, Subscribed Capital and Paid Up Capital
9. What is outstanding Capital Stock
10. What are Non-par value shares
11. What are preferred stocks
12. What is cumulative voting?
13. Differentiate Cumulative Preferred Shares vs. Earned Cumulative/Dividend Credit Type
14. What are Treasury Shares?
15. What is the Doctrine of Limited Liability?
16. What is Pre-emptive Rights and when can it be exercised?
17. What is the Corporate Entity Theory?
18. What is Business Judgment Rule?
19. Differentiate ordinary vs special amendment
Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
 20. Differentiate Self-Dealing vs. Interlocking Directors

Enumerate the Following:

1. When may Directors and/or Officers be personally liable with the corporation?
2. What is the test in determining whether a corporation has the implied power to do a certain
act?
3. What is the limitation imposed by law on the right of a corporation to decrease its capital
stock?
4. What is the Business Judgment Rule?
5. Elements of By Laws
6. Advantages of the Corporate form of business
7. Requirements for the Amendments of AOI
8. Requirements for the Amendments of By Laws
9. Disadvantage of the Corporate form of business
10. What is the test in determining whether a corporation is private or public corporation?
11. Enumerate the Instrumentality Test
12. What can be a consideration for stock?
13. Enumerate the defenses available to the directors for their failure or refusal to declare
dividends
14. When can Non-Voting Shares participate in voting?
15. What are justifiable reasons for non-declaration of corporate dividends?
16. Modes of Increasing Capital Stock?
17. Reason for Decreasing Capital Stock?
18. Elements of By Laws
19. What are the types of Dividends
20. Enumerate the test in determining whether a corporation has the implied powers to do
certain acts

Explain why the following statements are CORRECT:

1. If not denied by a provision in the articles of incorporation, the pre-emptive right of a stockholder in
a close corporation is absolute.
2. Failure of a corporation to adopt/file its by-laws within the time frame provided for by law does not
result to the automatic dissolution of the corporation.
3. Labor performed or services rendered can be a consideration for stocks
4. Minors can be a corporator.
5. Members of the executive committee must be a member of a board
6. Adoption of By Laws prior incorporation is more convenient than after incorporation.
7. Service of summons against a corporation must not be made upon Branch Manager
8. Treasury shares may be issued lower than par value
9. Corporate extension may be made earlier than 5 years prior expiration
10. Demand may be waived in a Derivative Suit.
11. Corporations persists to exist despite death, incapacity, civil interdiction or withdrawal of
stockholders or members
12. Third-person can be bound by the By Laws of a Corporation.
13. Directors or Officers can be liable with the corporation.
14. Pre-emptive right of a stockholder in a close corporation is absolute.
15. Cumulative voting is not allowed in a Non-Stock Corporation
16. A corporation may acquire its own shares.
17. Disloyal act of a director may be subject to ratification by a vote of stockholders owning or
representing at least 2/3 of the outstanding capital stock.
18. Acts of self-dealing director is merely voidable
19. Acts of Interlocking directors are valid
20. Incorporators are not subject of any amendments

Essay:

Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
DKD INC.. which is engaged in land transportation business has an authorized capital stock of Php100M
divided into 100M shares with a par value of Php1.00 per share. 50M has been subscribed and 25M was duly
paid up. The Board of Directors consist of 10 members as fixed in the Articles of Incorporation. The by-laws
are silent as to whether or not the company may create an Executive Committee. One of its stockholders,
“A”, recently graduated Magna Cum Laude in Business Administration from Yale University and the Board
firmly believes that he (A) will be able to help bring the company to its highest level of competence. The
company approaches you if

1. The Board of Directors may create an executive committee. If yes, why and if not, why not, and what
should be done in order that one may be created?
2. If such an executive committee may be created, may it be composed of 5 members consisting of 4
directors and “A” who is not a director? Why or why not?
3. May the company validly engage in water transportation without amending the articles of incorporation
to include such an activity in the purpose clause? Explain.
4. May the company put up a 12 story building, occupy 3 stories for its offices and rent out the rest to the
public? Why or Why not?
5. If the company made Php30M surplus profits (unrestricted retained earnings) may the Board be
compelled to declare dividends even if there are no preferred shareholders? If Yes, to what extent or
how much may they be compelled to declared? If no, why not?
6. If DKD INC.. earlier entered into a contract with Z CO., which represented itself as a corporation for the
lease/rental of 5 of the buses of the former who was aware that Z CO., INC. is not in fact registered as a
corporation, and DKD INC.., fully complied with its obligation, on a suit brought to by it (DKD INC..)
directly against the person/s who assumed to act as such corporation, may the latter interpose that DKD
INC.. has no cause of action against them because he dealt with Z CO., INC. as a corporation and thus
admitted its legal existence as a corporate body?
7. Assuming that Z CO., INC., (as stated in no. 6) is a de facto corporation, may the stockholder who made
representation of the existence of the corporation be sued in their personal/individual capacities?
8. If a stockholder is denied to exercise his pre-emptive right by the board of directors and the former
intends to sue the latter, what type of suit may he institute/bring?
9. In relation to item 8, may service of summons be validly served upon a director who is neither the
president, managing director, in house counsel, corporate secretary or treasurer. Explain.
10. If the president DKD INC., issues a corporate check to pay corporate liabilities and the check bounced for
insufficiency of funds, may he successfully advance the Corporate Entity Theory to evade liability in an
action filed against his person? Why or why not?

Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!