Corporation Law – Atty. Ruben C.

Ladia
Midterms

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

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

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

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

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

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 - True.
2. Nationality is not a requirement in for incorporators - True. Only residency requirement
3. Last Name of a person can be used as part of the Corporation Name - True. Provided consent is given and not
a stockholder
4. There can only be 5 incorporators - False. In case of an educational institution an incorporator can be from 5
to 15
5. A corporation can be an incorporator- True. A corporation in a rural bank
6. All corporations acquire Juridical Personality only upon the approval of SEC- False. In case of sole corporation,
corporation created by special charter, corporation by estoppel.
7. Labor performed or services rendered can be a consideration for stocks- True
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- False
10. By Laws may provide for additional qualification of a director- True
11. There is no minimum requirement to be subscribed in a corporation- True
12. Non-voting does not have a voting right- False. Sec. 6
13. In Piercing the veil of corporate fiction, control means majority or complete stock control. - False. Includes
complete domination as to the finance, policy and management of the corporation

Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
 14. Members of the executive committee must be a member of a board- True. Exercise powers and authority that
is within the competence of the board.
15. Directors cannot receive compensation- False. Reasonable per diems, provided in the bylaws or upon majority
vote of the stockholders; and perform functions other than a director provided that the total yearly
compensation of such director will not exceed 10% of the net income before income tax of the corporation
during the preceding year
16. Directors can dispose all or substantially all of the Corporation properties. -False. A director cannot dispose all
or substantially all of the corporation properties that would render the corporation incapable of continuing
its business or accomplishing the purpose for which it was incorporated.
17. Ultra Vires acts are subject to ratification of the stockholders. -False. When such ultra vires act is not illegal
per se, it can be ratified by the stockholders in order such act to be validated.
18. Shareholders are not conclusively presumed to know By– Laws- True
19. Common share cannot be denied their right to vote. -False. Common shares can be denied by founder’s shares
which are given exclusive right to vote or be voted to the board for a period not exceeding 5 years.

Define or Differentiate the Following:

1. What is a corporation?
A corporation is an artificial created by operation of law, having the right of succession and the powers, attributes, and
properties expressly authorizes by law or incidental to its existence.

2. What are Ultra Vires Acts

Ultra Vires acts are those which cannot be performed by a corporation because they are not within the express, implied
or inherent powers as defined by their charters or articles of incorporation. Accordingly, it can be subject to collateral
attacks questioning the authority of the corporation in engaging in such particular endeavors. An ultra vires act that is not
illegal per se may be validated by ratification of the stockholders, or on equitable ground, or by estoppel.

3. Differentiate De Facto from De Jure Corporation

A de facto corporation exist by virtue of a defect or irregularities in its organization or creation or from omission to comply
with a requirement that is required to form a de jure corporation . However, there is a colorable compliance with the
requirements of the law which they might be incorporated for the purpose and its existences can only be attacked directly
by a state through a quo warranto proceeding. A De Jure Corporation is form, created and organized with strict compliance
and adherence with the law and its right of existence cannot be successfully attack even by the state through a quo
warranto proceeding.

4. What are Unrestricted Retained Earnings?

They are the fruits of investment of a stockholders. The undistributed earning of the corporation which have not been
allocated for any managerial, contractual or legal purposes and which are free for distribution to the stockholders as
dividends.

5. What is Corporation by Estoppel

Corporation which are so defectively formed not to be either a de facto or de jure corporation but which are considered
as corporation only as to those who cannot deny its existence through their agreement, conduct or admission.
a. When there is fraud;
b. When a party is not estopped even if he is trying to evade liability.

Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
 6. What is the Incorporation test?
Applied in order to determine whether a corporation is a foreign or domestic corporation. If it is incorporated under the
laws of another state, then it is a foreign corporation. If it is made under the laws of the Philippines, then it is a filipino or
domestic corporation irrespective of the nationalities of its stockholders.

7. Define Doctrine of Secondary Meaning

This doctrine is to the effect that a word or phrase originally incapable of exclusive appropriation with reference to an
article on the market, because it is geographical or otherwise descriptive, may nevertheless be used exclusively by one
producer with reference to his article so long as in that trade and to that branch of the purchasing public, the word or
phrase has come to mean that the article was his product.

8. Define and differentiate Authorized Capital, Subscribed Capital and Paid Up Capital
Authorized capital stock signifies as the maximum numbers of shares that a corporation can issue; Subscribed capital stock
refers to the portion of the authorized capital stock that has already been subscribed by the subscribers or stockholders;
and Paid up capital stock is the actual amount or value which have been actually paid to the corporation in consideration
of the subscriptions made thereon.

9. What is outstanding Capital Stock

The total shares of stocks issued under a binding subscription agreements to the subscribers or stockholders, whether or
not fully or partially paid. It does not include treasury shares.

10. What are Non-par value shares

Those issued price are not stated in the certificate of stocks but may be fixed in the AOI or by the board of directors when
so authorized by the AOI or the bylaws, or in the absence thereof, by the shareholders themselves.
Conditions and limitations in the issuance of Non-par value share:
A. when issued, non par value shares are deem fully paid and, thus, non assessable;
B. The consideration of such issuance must not be less than 5 pesos;
C. Entire consideration constitutes a capital, hence, cannot be declare as dividends;
D. Cannot be issued as preferred stocks; and
E. Cannot be issued by banks, trust companies, insurance companies, public utilities and loans association.

11. What are preferred stocks

Stocks that gives the holder preference as to the holder of common stocks with respect to the issuance of stock dividends
and or the distribution of capital in case of liquidation.
Limitations:
A. Only be issued with the stated par value; and
B. The preference must be stated in the articles of incorporation and the certificate of stocks otherwise such share shall
be treated as common shares.

12. What is cumulative voting?

Gives the stockholders the right to vote a candidate as many votes as the number of directors to be elected multiplied by
the number of his shares. The purpose of this is to give the minority stockholders a representation in the board of directors.

13. Differentiate Cumulative Preferred Shares vs. Earned Cumulative/Dividend Credit Type
Disclaimer:
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Cumulative preferred shares entitles the owner the payment, not only of current dividends, but also back dividends not
previously paid whether there are profits or not. Earned cumulative in entitled only to arrears if there are profits in those
years.

14. What are Treasury Shares?

Shares which are already issued and fully paid but subsequently reacquired by the issuing corporation through purchase,
redemption, donation or some other lawful means. It can be issued for a price even below the its original par value. It can
also be declared as dividends since it is a property of the corporation. The owners of a treasure shares are not given the
right to vote or the right to a share of dividends.

15. What is the Doctrine of Limited Liability?

The liability of a shareholders shall only be up to the extent of his subscription or promised contribution. The disadvantage
is that it limits the credit available to the corporation.

16. What is Pre-emptive Rights and when can it be exercised?

The right given to all existing stockholder to subscribe to all issues or disposition of shares of any class, in proportion to
their respective holdings, subject to the limitations imposed by law. Unless the articles of incorporation denied the
issuance of such right.

The exercise of pre-emptive right can be denied when:

A. Shares are to be issued is in compliance with laws requiring stock offerings or minimum stock ownership by the public;
or
B. Shares to be issued in good faith and with the approval of stockholders representing at least 2/3 of the outstanding
capital stock either in exchange for property need for corporate purpose; or payment of previously conducted debt.

17. What is the Corporate Entity Theory?

A corporation has its own juridical personality separate and distinct from its stockholders and members and is not affected
by the personal rights, obligations, or transactions of the latter. The properties it owns belong exclusively to the
corporation and that the creditors of its members or stockholders cannot validly attach corporate properties to satisfy its
claim.

18. What is Business Judgment Rule?

A business judgment rule states in effect that a question of policy and management are left solely to the hones decision
of the board of directors and the court are without authority to substitute its judgment against the former.
The directors are the business managers, and as long as they acted in good faith with their dealings, such act cannot be
subject to a judicial review.

19. Differentiate ordinary vs special amendment

Special amendments require a meeting of the stockholders duly called for the purpose, while in ordinary amendment, a
written assent of a stockholder will suffice. The approval by the SEC is required in special amendment, and not in a ordinary
amendment.

20. Differentiate Self-Dealing vs. Interlocking Directors

Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
 The contract entered into by a self-dealing director is voidable at the option of the corporation unless all the
conditions laid down under the corporation code are complies. On the other hand, a contract entered into by an
Interlocking director, in the absence of fraud and provided that the contract is fair and reasonable under the
circumstances, is a valid contract. It can only be made voidable when the interest of the director in one corporation is
substantial and to other corporation is merely nominal.

21. Differentiate Grandfather rule from control test

Under the Grandfather rule, it provides that the nationality of the stockholders is material or critical in determining the
nationality of a corporation or its compliance with our law on permissible foreign investments. While a control test, if, on
the basis of the documents presented, it can be seen that at least 60 percent of corporation’s capital is owned by filipinos,
the corporation will be considered of Philippine nationality. Once the 60 percent has been established, no further inquiries
will be made to the citizenship of the other stockholders.

Enumerate the Following:

1. When may Directors and/or Officers be personally liable with the corporation?
A.Willfully and knowingly vote or assent to patently unlawful acts of the corporation, gross negligence or
bad faith in directing affairs of the corporation and when he acquire any personal or pecuniary interest
in conflict with their duty as Directors or Officers;
B.Consented to the issuance of watered stocks or who, having knowledge thereof, does not file with the
corporate secretary his written objection thereto;
C. Made personally liable by a specific provision of law; and
D. The director or officer contractually made himself personally or solidarily liable with corporation.

2. What is the test in determining whether a corporation has the implied power to do a certain act? The
lawful act, not otherwise prohibited, must essential or reasonably necessary in carrying out its purpose or
purposes expressly granted to it by the articles of incorporation and such act must reasonably contribute
to the promotion of those corporate purposes.

3. What is the limitation imposed by law on the right of a corporation to decrease its capital stock?
A.When such decrease in the capital stock will prejudice a creditor pursuant to the Trust Fund Doctrine.

4. What is the reason for the decrease of capital stock?

A.To reduce or wipe out existing deficit where no creditors would thereby be affected; and
B.When capital is more than what is necessary to procreate the business or reduction of capital surplus;
C.To write down the value of its fixed assets to reflect their present actual value in case where there is a
decline in the value of the fixed assets of the corporation.

5. What is the Business Judgment Rule?

Questions of policy and management are left solely to the honest decision of the board of directors and
the court has no authority to substitute its judgment as against the former.

6. Advantages of the Corporate form of business

A. Capacity to act as a single unit
B. Limited shareholder’s liability
C. Continuity of existence
D. Feasibility of Greater Undertaking
E. Transferability of shares
Disclaimer:
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 F. Centralized management
G. Standardized method of organization, management and finance

7. Requirements for the Amendments of AOI

A. Resolution by the Board of Directors;
B. Votes or written assent of the stockholders representing at least 2/3 the outstanding capital stock;
B. Submission and Filing of the amended articles of incorporation with the SEC; and
C. Approval by the SEC.

8. Disadvantage of the Corporate form of business

A. Board meeting is required in order for a corporation to have a valid and binding corporate act;
B. A corporation cannot act outside the jurisdiction of a state from where it was incorporated unless authorized to so;
C. The limited shareholders’ liability tends to limit a credit available to the corporation;
D. Transferability of shares may result to incompatible or conflicting interest;
E. The minority shareholders may practically have no say in the conduct of the corporation;
F. Doubt taxation may be imposed in corporate income;
G. Always subject to government regulation, supervision and control.

9. What is the test in determining whether a corporation is private or public corporation?

The test to determine the nature of a corporation is the relation of the body to the state. A public corporation is created,
form and organized for political or governmental purpose with political powers to be exercised for purposes connected
with the public good in the administration of the civil government. While a private corporation is created, form and
organized for the purpose of advancing the interest of a private individual.

10. Enumerate the Instrumentality Test

A. There is a complete domination of finance, policy and business practice of a corporation;
B. Such control must be used by the defendant to commit fraud or unlawful act; and
C. The control and breach of duty must be the proximate cause of the injury.

11. What can be a consideration for stock?

A. Actual cash paid to the corporation;
B. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use or lawful
purpose at a fair evaluation equal to a par or issued value of the stocks;
C. Labor or services actually performed to the corporation;
D. Perviously incurred indebtedness;
E. Amounts transferred from URE to the stated capital; and
F. Outstanding shares exchanged for stocks in the event of reclassification or conversion.

12. Enumerate the defenses available to the directors for their failure or refusal to declare dividends
A. Justified by a definite corporate expansion approved by the BOD;
B. Corporation is prohibited under a loan agreement from declaring dividends and that the consent of such creditor has
not yet been secured;
C. Special reserve for probable contingencies.

13. When can Non-Voting Shares participate in voting?

A. Amendment of the AOI;
B. Adoption and amendment of the by-law;
C. Sale, lease, exchange, pledge, mortgaged or other disposition of all or substantially all of the corporate property;
D. Increase or decrease of capital stocks;
E. Merger or consolidation of the corporation with another corporation;
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F. Investment of corporate funds in another corporation or business in accordance with the corporation code;
G. Dissolution of a corporation.

14. What are justifiable reasons for non-declaration of corporate dividends?

A. Justified by a definite corporate expansion approved by the BOD;
B. Corporation is prohibited under a loan agreement from declaring dividends and that the consent of such creditor has
not yet been secured;
C. Special reserve for probable contingencies.

15. Modes of Increasing Capital Stock?

A. Increase the par value of existing number of shares without increasing the number of shares;
B. Increase the number of existing shares without increasing the par value thereof;
C. Increasing the number of shares and at the same time increasing the par value thereof.

16. What are the types of Dividend

A. Cash dividends payable in lawful money or currency;
B. Property dividends those paid in the form of property
C. Stock dividends which is the corporation’s own shares of stock out of the remaining unissued shares which would
require the approval of 2/3 of the outstanding capital stock at a regular or special meeting for such purpose.

17. The limitation that the corporation must at all times have ―unrestricted retained earnings is a condition
for the exercise of this power, EXCEPT:
1. Redemption of redeemable shares
2. Exercise of a stockholders right to compel a close corporation to purchase his shares for any reason under the
corporation code and when the corporation has enough assets in its book to cover any debts or liabilities exclusive of
its capital stocks;
3. In case of deadlocks.

18. Provisions that cannot be amended

A. Names of the incorporators and the incorporating directors and trustees;
B. Name of the treasurer originally or first elected by the subscribers or members of such corporation;
C. Numbers of shares and the amount originally subscribed and paid out of the original authorized capital stock of the
corporation;
D. Date and place of the execution of articles of incorporation and the signatories and acknowledgment thereof.

19. A close corporation may not be denied its pre-emptive right.

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.
It is absolute because a close corporation is intended not to be open for public. In a close corporation, there is no public
investors and the shareholders are active in the conduct of the corporate affairs.

2. Labor performed or services rendered can be a consideration for stocks

A consideration is necessary in exchange for actual labor or services to the corporation. Hence, the corporation code
allowed labor performed or services rendered to be a consideration for stocks.

Disclaimer:
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 3. Minors can be a corporator
A minor can be a corporator provided that such minor is accompanied by his parent, guardian or administrator.

4. Members of the executive committee must be a member of a board

Because an executive committee is formed to act on a specific matters which would require the competence a member
of a board.

5. Service of summons against a corporation must not be made upon Branch Manager
Branch manager is an agent of the corporation and under the new rules, the court cannot acquire jurisdiction over the
corporation if the service of summon is made to an agent unless it is made to the person enumerated under section 13 of
the revised rules of court.

6. Treasury shares may be issued lower than par value

Because treasury shares are shares which have been issued and fully paid but subsequently reacquired by the corporation
through any lawful purpose.

7. Corporate extension may be made earlier than 5 years prior expiration

As a general rule, corporate expansion cannot be made earlier than 5 years prior expiration unless there are justifiable
reasons in allowing for an earlier extension determined by the SEC.

8. Demand may be waived in a Derivative Suit.

Demand may be waived in a derivative suit when such demand is became futile such as when a director, that is being
sued, has complete control over the corporation.

9. Corporations persists to exist despite death, incapacity, civil interdiction or withdrawal of stockholders or
members
Because a corporation, having its own juridical personality, is separate and distinct from the personality of its incorporators
and shareholders.

10. Cumulative voting is not allowed in a Non-Stock Corporation

Each member of a non-stock corporation is entitled by the code to only have one vote. Hence, each members are equal
with respect to their right to vote unlike in a stock corporation.

11. A corporation may acquire its own shares.

A. To eliminate fractional shares arising out of stock dividends;
B. To collect or compromise indebtedness to the corporation, arising out of unpaid subscription, in a delinquency share,
and to purchase delinquent shares sold during the said sale;
C. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of the code.

12. 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.
When a business opportunity was first offered to the director and such business opportunity should have been for the
corporation. Such act of the director can be ratified by the stockholder pursuant to the corporation code.

13. Acts of self-dealing director is merely voidable

It can be voidable when the conditions are complied, first, when there is a meeting duly called for such purpose; second,
full disclosure of the adverse interest of the director; and third, that the contract is fair and reasonable under the
circumstance.

14. Acts of Interlocking directors are valid

Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
The acts of interlocking directors are valid provided that there is an absence of fraud and the contract is reasonable under
the circumstances.

15. Incorporators are not subject of any amendments

Incorporators are the founders of the corporation, thus, amendment cannot be made with regards to them.

Essay:

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.
Ans: No. only a member of the board of directors can be made a member of an executive committee.
Under the corporation code, the bylaws may create an executive committee, composed of not less than three members
of the board of directors, to be appointed by the board. The executive committee may act, by majority vote of all its
member, on such specific matter within the competence of the board except as otherwise provided.
In this case, A, not being a member of the board, is not qualified to be a member of the executive committee since the
acts of the latter requires the competence of a board of director delegated to it by the bylaws or on majority vote of the
board.

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?
Yes, the board may create an executive committee provided it is not been prohibited by the bylaws. An executive
committee is composed by not less than 3 members of the board, to be appointed by the board.

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?
No. An act of executive committee requires the competence of a member of board of director which has been delegated
to it by the bylaw or by majority vote of the members of the board. In allowing a non member of the board to be appointed
as a member of an executive committee would result to undue delegation of corporate powers.

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.
No. Secondary purpose must be consistent with the primary purpose of the corporation. Moreover, a certificate for public
convenience must first be acquired in order for the corporation to validly engage in water transportation.

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?
Yes. The corporation code expressly declares that a corporation may purchase, hold or lease real properties necessary to
enable to carry out the purpose from which they are created. In so far that the lot was lawfully acquired, it is entitled to
full beneficial use thereof.

No. The corporation code expressly declares that a corporation may purchase, hold, or lease real properties that is
reasonably necessary to enable then to carry out the purpose from which they are created. In this case, a 12 story building
is far from being reasonably necessary in carrying out the purpose of the corporation.

Disclaimer:
These are mere practice questions to gauge the students’ mastery about the subject. Basahin, Intindihin, Madaling Sagutin! God bless us all!!
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?
A stockholder may file a personal action towards the BOD. The exercise of a pre-emptive right is personal to the
stockholder.

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.
Yes. Since the act of the board of directors, in denying the pre emptive right of a stockholder, is patently unlawful they
can be made personally liable against the stockholder.

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?
No. Because a special provision of a law makes the president personally liable.

11. Illustrate cumulative voting

Cumulative voting give a stockholder, entitled to vote, the right to give a candidate as many votes as the number of
directors elected multiples by the number of his shares shall equal or he may distribute them among the candidates as he
may see fit. The purpose of cumulative voting is to give the minority a rightful representation in the board of directors.
The illustration will explain a cumulative voting in a 5 board.
Majority
1m 5m
1m 5m
1m X5 5m
500 2.5m
500 2.5m
Minority
500 2.5m
200 X5 1m
200 1m
100 500

In this illustration, it shows that, in order to have a seat in the board, a stockholder must have at least 5 million votes. In
adding up the total votes of the minority, the required number votes to have a rightful representation, which is 5 million
votes, have been met

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