1992 Bar questions

Corporation; Voting Trust Agreement (1992)

A distressed company executed a voting trust agreement for a period of three years over 60% of its
outstanding paid up shares in favor of a bank to whom it was indebted, with the Bank named as trustee.
Additionally, the Company mortgaged all its properties to the Bank. Because of the insolvency of the
Company, the Bank foreclosed the mortgaged properties, and as the highest bidder, acquired said
properties and assets of the Company
The three-year period prescribed in the Voting Trust Agreement having expired, the company demanded
the turn-over and transfer of all its assets and properties, including the management and operation of the
Company, claiming that under the Voting Trust Agreement, the Bank was constituted as trustee of the
management and operations of the Company.
Does the demand of the Company tally with the concept of a Voting Trust Agreement? Explain briefly
Suggested answer :
The demand of the company does not tally with the concept of a Voting Trust Agreement. The Voting
Trust Agreement merely conveys to the trustee the right to vote the shares of grantor/s. The consequence
of foreclosure of the mortgaged properties would be alien to the Voting Trust Agreement and its effects

Trust Fund Doctrine (1992)

A Corporation executed a promissory note binding itself to pay its President/Director, who had tendered
his resignation, a certain sum in payment of the latters shares and interests in the company. The
corporation defaulted in paying the full amount so that said former President filed suit for collection of
the balance before the SEC. a) Under what conditions is a stock corporation empowered to acquire its
own shares? b) Is the arrangement between the corporation and its President covered by the trust fund
doctrine? Explain your answers briefly

SUGGESTED ANSWER:
a) A stock corporation may only acquire its own shares of stock if the trust fund doctrine is not impaired.
This is to say, for instance, that it may purchase its own shares of stock by utilizing merely its surplus
profits over and above the subscribed capital of the corporation
b) The arrangement between the corporation and its President to the extent that it calls for the payment of
the latters shares is covered by the trust fund doctrine. The only exceptions from the trust fund doctrine
are the redemption of redeemable shares and, in the case of close corporation, when there should be a
deadlock and the SEC orders the payment of the appraised value of a stockholders share.

1993 Bar Questions

Derivative Suit: Watered Stock (1993
A became a stockholder of Prime Real Estate Corporation (PREC) on July 10, 1991, when he was given
one share by another stockholder to qualify him as a director. A was not re- elected director in the July 1,
1992 annual meeting but he continued to be a registered shareholder of PREC.
When he was still a director, A discovered that on Jan 5, 1991, PREC issued free of charge 10,000 shares
to X a lawyer who assisted in a court case involving PREC.
1.) Can A now bring an action in the name of the corporation to question the issuance of the shares to X
without receiving any payment?
2.) Can X question the right of A to sue him in behalf of the corporation on the ground that A has only one
share in his name?
3.) Cannot the shares issued to X be considered as watered stock?
Suggested answer:
1.) As a general rule, A cannot bring a derivative suit in the name of the corporation concerning an act that
took place before he became a stockholder. However, if the act complained of is a continuing one, A may
do so.
2.) No. In a derivative suit, the action is instituted/ brought in the name of a corporation and reliefs are
prayed for therein for the corporation, by a minority stockholder. The law does not qualify the term
minority in terms of the number of shares owned by a stockholder bringing the action in behalf of the
corporation.
3.) No. WATERED SHARES are those sold by the corporation for less than the par/book value. In the
instant case, it will depend upon the value of services rendered in relation to the total par value of the
shares

Corporation; Meetings; BOD & Stockholders (1993)

Under the Articles of Incorporation of Manila Industrial Corp, its principal place of business shall be in
Pasig, MM. The principal corporate offices are at the Ortigas Center, Pasig, MM while its factory
processing leather products, is in Manila. The corporation holds its annual stockholders meeting at the
Manila Hotel in Manila and its BOD meeting at a hotel in Makati MM. The by-laws are silent as to the
place of meetings of the stockholders and directors.
1) Who shall preside at the meeting of the directors?
2) Can Ting, a stockholder, who did not attend the stockholder's annual meeting in Manila question the
validity of the corporate resolutions passed at such meeting?
3) Can the same stockholder question the validity of the resolutions adopted by the BOD at the meeting
held in Makati?
Suggested Answer:
1) The President presides over the meeting of the directors, if there is no position of Chairman provided in
the By-Laws. If there is the position of Chairman provided in the By-Laws, the Chairman presides over
the meeting of the Directors (Sec 54 Corp Code)
2) No. The law provides that the annual stockholders meeting shall be held in the city or municipality
where the principal office of the Corporation is located. For this purpose, the law also provides that Metro
Manila is considered a city or municipality. Since the principal place of business of MIC is Pasig, MM,
the holding of the annual stockholders meeting in Manila is proper. (Sec 51 Corp)
3) No. The law allows the BOD to hold its meeting anywhere in the Philippines. The holding of the BOD
meeting in Makati was proper and the validity of the resolutions adopted by the Board in that meeting
cannot be questioned. (Sec 53 Corp code)

Corporation; Non-Stock Corporation (1993)

The AB Memorial Foundation was incorporated as a non-profit, non-stock corporation in order to
establish and maintain a library and museum in honor of the deceased parents of the incorporators. Its
Articles of Incorporation provided for a board of trustees composed of 5 incorporators, which authorized
to admit new members. The Articles of Incorporation also allow the foundation to receive donations from
members. As of Jan 30, 1993, 60 members had been admitted by the BOT.
1) Can the Foundation use the funds donated to it by its members for purchase of food and medicine for
distribution to the victims of the Pinatubo eruption?
2) Can the Foundation operate a specialty restaurant that caters to the general public in order to augment
its funds?
3) One of the original trustees died and the other two resigned because they immigrated to the US. How
will the vacancies in the BOT be filled?
Suggested answer:
(1)Yes, (Sec 36(9) of the Corp Code) as long as the amount of donation is reasonable.
(2) If the purposes of the corporation are limited to the establishment and maintenance of the library and
museum as stated in the problem, the foundation cannot operate a specialty restaurant that caters to the
general public. In such case, the action of the foundation will be ultra vires.
OR
If the act of the corporation is justified by the secondary purpose of the corporation which includes the
act of operating a restaurant, the foundation will be within its power to do so.
3) Since there are only 2 of the members of the BOT remaining and there is no quorum, the vacancies will
have to be filled up in a special meeting of the members (sec 29 Corp)