BUSINESS ORGANIZATION

Part 1:

1. Which of the following acts could be ratified by a vote representing at least 2/3 of the outstanding capital stock?
a. Acts of directors or trustees who are guilty of gross negligence or bad faith to, directing the affairs of the
corporation.
b. An attempt by a director to acquire or actual acquisition of any interest adverse to that of the corporation in
respect of any matter reposed upon him in confidence.
c. Acts of directors constituting an approval of patently unlawful acts.
d. Acquisition of a business opportunity which should belong to the corporation, thereby acquiring profits which
should belong to the corporation.

2. Which of the following statement is true of a corporation's by-laws?

a. A corporation's by-laws, being an intramural document, only binds corporate insiders.
b. A corporation's by-laws, being an intramural document binding on corporate insiders, cannot be dispensed with
and any act done by corporate insiders in violation thereof is null and void.
c. A corporation’s by-laws, being an intramural document, binds only corporate insiders and such third parties with
actual knowledge of its contents.
d. A corporation’s by-laws, being a public document on record with the SEC binds all parties.

3. Stockholders have pre-emptive rights:

a. To increase their share of dividends.
b. To increase their voting power.
c. To protect themselves from a dilution of interest.

4. Which of the following statements is true in applying the ultra vires doctrine?
a. All kinds of ultra vires acts may be ratified by the vote of stockholders owning or representing at least two-thirds
(2/3) of the outstanding capital stock of a corporation.
b. All kinds of ultra vires acts may be the basis for imposing personal liability on the directors or officers responsible
therefor.
c. All ultra vires acts which are not within the primary purpose of the corporation may be ratified.
d. All ultra vires acts which are outside of-the scope of actual authority given to a corporate officer, once ratified,
frees such corporate officer from any personal liability thereon.

5. Which is true pertaining to the by-laws of a corporation?

a. It has prospective effect.
b. It can be waived.
c. It has retroactive effect.
d. It has retroactive effect, unless the intent is for it to apply prospectively.

6. An attribute of a corporation wherein it has the continuity of corporate life during its term of existence stated in the
articles of incorporation, independent from that of its stockholders or members.
a. Right of succession.
b. Right to corporate term.
c. Right to extend corporate existence.
d. Right of continuous use of corporate charter.

7. Oink, Inc. is engaged in the business of raising and selling pigs in the local martei4. Oink, Inc. is operating at full capacity
and is able to fully dispose of its stock. While on a- trip abroad, director A met a leather goods manufacturer who was
interested in importing pig skins from the Philippines. Upon his return, A set up Piggy, Inc. to supply the pig skins, sourcing
the same from another company. Subsequently, another director in Oink, Inc. discovered the existence of the company set
up by A and complained that this export business should have been given to Oink, Inc. This complaint will:
a. Not prosper as Oink, Inc. is not a stockholder of Piggy, Inc.
b. Not prosper as there is no conflict between Oink, Inc. and Piggy, Inc.
c. Prosper as director A is guilty of disloyalty.
d. Prosper as director A has violated the corporate opportunity doctrine.
8. Due to failed investments and continued losses, the board decided to replace the president. When the decision to replace
was conveyed to the president, he offered to resign and sell back his shares to the corporation. The buying back of the
shares the corporation is:
a. Not allowed as it violates the trust fund doctrine.
b. Not allowed as it violates the corporate opportunity doctrine.
c. Allowed as a valid exercise of management prerogative.
d. Allowed as corporate profitability must be restored.

9. AAA Corporation is engaged in the business of milling rice. Its assets are: 50% cash, 40%- milling equipment, 10% office
equipment and supplies. Upon a 4-1 vote of the attending members of its 7-man board, it decides to sell its milling
equipment. The sale is:
a. Valid, as it is arrived upon a majority vote of the quorum.
b. Valid, as it is a sale in the ordinary course of business.
c. Not valid, as it is required to be approved by a majority vote of the board.
d. Not valid, as it is required to be concurred in by a 2/3 vote of the outstanding capital stock.

10. The essential distinction between the contract entered into on behalf of a corporation de jure and that entered into on
behalf of a corporation de facto is:
a. There is no difference at all
b. The contract of a de jure corporation is valid and binding: whereas, the contract of the de facto corporation is
voidable for vice or defect in consent:
c. The contract of a de jure corporation is valid and enforceable: whereas, the contract of the de facto corporation is
unenforceable:
d. The contract of a de jure corporation is valid and enforceable: whereas,, the contract of the de facto corporation is
rescissible.

Part 2:
1) Explain the following: doctrine of piercing the veil of corporate fiction; doctrine of corporate opportunity; and right of
pre-emption.
a) Doctrine of piercing the veil of corporate fiction.
i) Consequently, the corporation as a juridical person has a personality separate and distinct from the persons
composing it. In fact, this separate personality is recognized under the Civil Code which begins the minute it is
said to be duly constituted according to law. It is an exception because the application of the doctrine seeks to
hold the stockholder or members of the corporation personally liable for corporate obligations.
(1) For the doctrine to apply, any of following circumstances must obtain:
(a) Corporate fiction is being used to defeat public convenience. The convenience is the creation of a
separate and distinct person from the stockholder or members to facilitate the transaction of
business. These are referred to as the Alter-Ego cases. An example Is when a stockholder or member
who has an unsavory reputation utilizes corporate fiction to hide his true identity for illegal purposes,
or
(b) It justifies a wrong, protects fraud or defends crime. These are the referred to as the Fraud cases.

b) Doctrine of corporate opportunity.

i) When a director is disloyal by virtue of his office, he acquires for himself a business opportunity which should
belong to the Corporation, thereby obtaining profit, you must account for it by refunding the same to the
Corporation, even if the director risk his own funds in the venture, unless, his act is rectified by a vote of the
stockholders owning or representing 2/3 of outstanding capital stock. This is also known as the DOCTRINE OF
CORPORATE OPPORTUNITY. The provision does not apply if: (a) he acts in good faith, (b) the Corporation is
unable to undertake the opportunity or the same is not essential to the Corporation.
(1) This rule is premised on the principles of “trust”. It is the position of domination and control that makes
the thing of corporate opportunity objectionable.
(2) Distinguishing between Section 31 and Section 34, the former speaks of the acquisition of any personal or
pecuniary interest in conflict with his duty in respect to a matter reposed in him in confidence as to which
equity imposes a disability to deal in his own behalf, he shall be liable as trustee it must account for all the
profits that would have otherwise accrued to the Corporation. What is violated is the trust specifically
reposed, thus there is no ratification, the latter speaks of a violation of the general trust that is reposed on
a director.

c) Right of pre-emption
i) Pre-emptive right is a common law right granted to the stockholders to be granted the first option to
subscribe to any opening of the corporation’s unissued capital stock, or to any increase of its authorized
capital stock.
ii) The recognition of the pre-emptive right is intended to protect both the proprietary and voting rights of a
stockholder in a corporation, since such proportionate interest determines his proportionate power to vote in
 corporate affairs when the law gives the stockholders a right to affirm or deny board actions. It also
determines his proportionate share in the dividends declared by the corporation, as well as his proportionate
right to the remaining assets of the corporation upon dissolution of the corporation.”

2) How will the liability of a corporation be determined if the obligation was contracted prior to incorporation? Will the
failure of a corporation to formally organize and commence transaction of business within the prescribed period result in
a corporation having de facto status? Discuss fully.
a) Liability prior to incorporation –
i. A corporation by Estoppel arises when the persons assume to act as a corporation knowing it to be without authority
to do so; in this case said persons shall be liable general partners for debts, liabilities and damages and it cannot as a
defense, neither can one dealing with it resist performance. Hence, one who assumes an obligation to an ostensible
corporation as such; cannot resist-performance thereof on the ground that there was in fact no corporation.
b) De facto status – Sec. 20. De facto corporations. - The due incorporation of any corporation claiming in good faith
to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into
collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the
Solicitor General in a quo warranto proceeding.
i) The requisites of a de facto corporation are:
(1) There is a valid law under which the corporation may be recognized.
(2) There is a bona fide attempt in good faith to incorporate
(3) There is an actual valid exercise of corporate powers.
ii) In general a de facto corporation is deemed to have substantial legal existence except as against the state.
Consequently it has the same corporate power and liabilities like a de jure corporation. It is obliged to pay
taxes contracts that are entered, into are valid and binding, it is allowed to bring suit
iii) Its existence is not open to a collateral attack. The only way by which is can be; attacked is by way of quo
warranto proceedings to determine the right to the use or exercise of a franchise or office and to oust the
holder from his enjoyment of the same, that is initiated by the Solicitor General because (a) it is the state's
right or authority that is usurped (b) it would produce endless confusion if it's existence is questioned in
every suit that it is a party to (c) it is in the public interest to maintain the validity of the business transactions
entered into with de facto corporations
c) Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. - If a corporation does not
formally organize and commence the transaction of its business or the construction of its works within two (2) years from
the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a
corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a
period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or
certificate of incorporation. This provision shall not apply if the failure to organize, commence the transaction of its
businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the
corporation as may be determined by the Securities and Exchange Commission.

3) Enumerate the instances when a director, trustee or officer would be liable for corporate acts or obligations.
a) Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent
to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of
the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall
be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which
equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must
account for the profits which otherwise would have accrued to the corporation.
b) Directors are to be held to be personally liable if he:
i) Willfully and knowingly assents or votes about the unlawful act of the Corporation
ii) he is guilty of gross negligence or bad faith in directing the affairs of the Corporation. Example is illegal
dismissal of employees when attended by bad faith or malice, where they would be solidarity liable with the
Corporation.
iii) acquisition of any personal or backing any interest in conflict with his duty in respect of matter reposed in him
in confidence,
iv) Consents to the issuance of watered stocks or having knowledge of the issuance of watered stock does not
quantify the corporate secretary in writing of the fact of issuance
v) Agrees to be personally liable
vi) is made liable by specific provision of law.

4) How is the trust fund doctrine violated by a corporation’s acquisition of its shares?
a) The power to acquire its own shares can only be undertaken if it is for a legitimate corporate purpose/s provided
that it has unrestricted retained earnings.
i) The conditions that must obtain to be able to exercise the power to acquire:
(1) capital is not impaired
(2) there must be unrestricted retained earnings.
(3) that it be for a legitimate and proper purpose
(4) the Corporation is in good faith and without prejudice the stockholder rights
(5) Condition of corporate affairs where it.
ii) Absent the conditions, there is a violation of the Trust Fund Doctrine which holds that the assets of the
corporation as represented by its capital are trust funds that are to be maintained unimpaired and to be used
 by the corporation to pay its creditors and that no distribution of the same can be made without provisions for
the payment of corporate debt
iii) The legitimate corporate purposes for acquisition are: (a) elimination of fractional shares or those less than 1
share (b) to collect or the compromise and indebtedness to the Corporation arising out of an unpaid
subscription in a delinquency shares and to purchase delinquent shares at the auction (c) to pay dissenting or
withholding stockholders entitled to the payment of their shares.
iv) Other legitimate purposes are (a) Exercise of the right of appraisal when there is an amendment of the
articles, shortening or extending of the term, investment in other businesses, merger or consolidations, sale or
other disposition of corporate assets, with no one in the close Corporation (b) redemption of shares (c)
Decrease of capital stock (d) deadlock in a close Corporation

5) What specific conditions are imposed on corporate acquisition of property?

a) Conditions on acquisition of property - Property so required or conveyed to the corporation is the property of the
corporation and vice versa. It has no personality to bring action for recovery of property belonging to stockholder
or its members.

6) Will the existence of profits render mandatory the declaration of dividends?

a) Dividend declaration is generally discretionary but becomes mandatory when its surplus profits are in excess of
100% of paid in capital stock. However, the mandatory character shall not obtain: (a) when justified by definite
corporate expansion projects or programs approved by the board (b) When it is prohibited by a loan agreement
with any financial institution or creditor from declaring dividends without its consent is not yet obtained (c) when
it can be shown that such attention is necessary under special circumstances obtaining in the Corporation, as there
is a need for a special reserve for probable contingencies

7) Can treasury shares be given as dividends?

a) TREASURY SHARES are shares that have been issued and paid for but subsequent reacquired by purchase, redemption,
donation or any other lawful means. It may again be disposed of for a reasonable price as determined by the board. Note
that its acquisition must be always be funded by surplus profits, otherwise it violates the TRUST FUND DOCTRINE as
capital is impaired.

8) XYZ Corporation entered into a contract with ABC Corporation. A and X are on the board of both corporations. B and Y
are stockholders of both corporations. A owns 25% of the outstanding capital stock of XYZ Corporation and 30% of the
outstanding capital stock of ABC Corporation. X owns 15% of the outstanding capital stock of XYZ Corporation and
10% of the outstanding capital stock of ABC Corporation. B and Y each own 10% of the outstanding capital stock of
XYZ Corporation and 30% of the outstanding capital stock of ABC Corporation. Assuming that the contract is fair and.
reasonable, is it voidable at the option of i of the corporations or is it a valid contract?"

9) X, a stockholder in ABC Corporation gave a written proxy to stockholder A. Prior to the meeting. A designated B as his
alternate proxy. On the dote of the meeting for which the proxy was Intended, A and B were both present. Who
between A and B should exercise the voting rights pertaining to the shares of X?

10) Can the corporate secretary bar a stockholder from exercising the right to vote when his shares appear in the books and
records to have been pledged in favor of a third person?
a) Although, not stockholders the following may exercise the right to voted (a) Pledgees or mortgagees when they are given
the right and such is recorded in the books of the corporation 188 (b) Executors, administrators, receivers and other legal
representatives appointed by the Court (c) heirs of the stockholder who have executed a judicial or extra-judicial
settlement, registered with the Registry of Deeds upon presentation of the settlement to the corporate secretary.

11) Explain how a proxy and a voting trust agreement may be utilized as corporate control devices.
VOTING TRUST AGREEMENTS
1. A voting trust agreement is an agreement in writing whereby one or more stockholders of a stock corporation
transfers their share to any person/s or corporation having authority to act as a trustee or the purpose of vesting
 in such person voting or other rights pertaining to the shares for a certain period not exceeding that fixed in the
Code and upon terms and conditions stated in the agreement.
a. The statute does not apply to agreements-whereby stockholders agree to bind themselves to each other
as shall vote their shares. These are called pooling agreements generally a stockholder exercises wide
liberality in voting and his motives, while for personal profit, are not objectionable "or may be determined
by whims or caprices, so long as he does not violate a duty owed to other stockholders.
b. The limitations applying to voting trust agreements are: (a) it should not be executed for a period not
excess of 5 years except if executed as a condition for a loan, in which case It should expire upon payment
(b) it should not be executed to circumvent the law against monopolies and Illegal combinations in
restraint of trade or used for purposes of fraud, such as fixing prices or a merger/consolidation to create a
monopoly
c. The other requirements are: (a) must be in writing, notarized 'containing and specifying all terms and
conditions (b) it should must be filed with the SEC, otherwise it is ineffective or unenforceable [ (c) it
should be subject to examination (d) It should automatically expire at the end of the agreed period
d. Some uses of voting trust agreements are: (a) concentrate stockholder control in one or few persons, who
primarily through the election of directors can control corporate affairs utilized by founders or
incorporators to retain control.
2. If a voting trust agreement is validly executed, the shares of the trustor are cancelled and new ones are Issued to
the trustee and noted in the corporate books that the transfer is pursuant to a voting trust agreement
a. The trustee then delivers or executes voting trust certificates, which are transferable like shares, to
evidence the trustors' ownership and right to dividends.
b. Both the shares and voting trust certificates are then cancelled upon the expiration of the term and new
certificates are issued to the' trustor.
c. The voting trustee shall then be allowed to: (a) possess the right to vote (b) exercise the right to vote in
person or by proxy (c) has the right of inspection (d) since he is the legal bidder, he can be elected as a
director

DISTINCTION BETWEEN PROXY AND A VOTING TRUST

1. The distinctions between a proxy and a voting trust are: (a) proxy has no legal title, a voting trustee has legal title
(b) the proxy is generally revocable, while a voting trust generally is not revocable (c) proxy can only act at a
specified meeting unless it is continuing, a trustee Is not so limited (d) proxy can only vote if stockholder or
member is not present while a trustee votes nevertheless (e) a proxy is usually shorter in duration than a voting
trust
2. Other distinctions: (a) a voting trustee can appoint a proxy, while a proxy, as a rule, cannot further delegate his
authority (b) a voting trustee votes in his own name, while a proxy is an agent of the shareholder. .