Bar Q and A #26

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1.) The stockholders of People Power, Inc. (PPI) approved the following two resolutions in a special stockholder’s meeting: (i) Resolution increasing the authorized capital stock of PPI, and (ii) Resolution authorizing the Board of Directors to issue for cash payment the new shares from the proposed capital stock increase in favor of outside investors who are non-stockholders. The foregoing resolutions were approved by stockholders representing 99% of the total outstanding capital stock. The sole dissenter was Jose Estrada who owned the rest 1% of the stock. a. Are the resolutions binding on the corporations and its stockholders, including Estrada, the dissenting stockholder? b. What remedies, if any, are available to Estrada?

a. The board resolutions (i) increasing the authorized capital stock of PPI, and (ii) authorizing the Board to issue new shares from that increase of capital stock in favor of outside investors is binding on the stockholders since the said resolutions were approved by the stockholders representing at least 2/3 of the total outstanding capital stock.

b. Estrada, the dissenting stockholder, may avail himself of the appraisal rights by claiming that since the resolutions appear to favor outside investors, as against incumbent stockholders, on the increase in capital stock, he may demand the payment of the appraised value of his shares.

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2.) In 1999, Corporation “A” passed a board resolution removing “X” from his position as manager of said corporation. The by- laws of “A” corporation provides that the officers are the president, vice-president, treasurer and secretary. Upon complaint filed with the SEC, it held that a manager could be removed by mere resolution of the board of directors. On motion for reconsideration, “X” alleged that could only be removed by the affirmative vote of the stockholders representing 2/3 of the outstanding capital stock. Is “X’s” contention legally tenable. Why?

NO. Stockholders’ approval is necessary only for the removal of the members of the Board. For the removal of a corporate officer or employee, the vote of the Board of Directors is sufficient for the purpose.

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3.) A distressed company executed a voting trust agreement for a period of 3 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 3-year period prescribed in the Voting Trust Agreement having expired, the company demanded the turnover 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.

NO. 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 the foreclosure of the mortgaged properties would be alien to the Voting Trust Agreement and its effects.

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4.) In a stockholder’s meeting, S dissented from the corporate act converting preferred voting shares to non-voting shares. Thereafter, S submitted his certificates of stock for notation that his shares are dissenting. The next day, S transferred his shares to T to whom new certificates were issued. Now, T demands from the corporation the payment of the value of his shares. a. What is the meaning of stockholder’s appraisal right? b. Can T exercise the right of appraisal? Reason briefly.

a. Appraisal right is the right of a stockholder, who dissents from a fundamental or extraordinary corporate action, to demand payment of the fair value of his shares. It is the right of a stockholder to withdraw from the corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in the corporate structure.

b. NO. T cannot exercise the right of appraisal in this case. When S transferred his shares to T and T was issued new stock certificates, the appraisal right of S ceased, and T acquired all the rights of a regular stockholder. The transfer of shares from S to T constitutes an abandonment of the appraisal right of S. All that T acquired from the issuance of new stock certificates was the rights of a regular stockholder.

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5.) Petitioner who is a stockholder of Bilmoko Corporation wanted to examine the books and records of a foreign subsidiary wholly owned by Bilmoko Corporation. The books and records of the foreign subsidiary were in the possession of Bilmoko Corporation. The latter’s board of directors refused to allow the petitioner to examine said books and records, contending that the foreign subsidiary is a separate and distinct corporation domiciled in another country; hence, the petitioner was not within the class of persons having an interest in the operations of the foreign subsidiary. a. Decide the case. b. What are the limitations on a stockholder’s rights to inspect corporation books and records?

a. The statutory right of a stockholder to inspect the books and records of a corporation extends—in consonance with equity, good faith and fair dealing—to a foreign subsidiary wholly owned by the corporation.

b. The right of inspection does not allow the stockholder to improperly use any information that is secured thereby. The stockholder must exercise the right in good faith and for a legitimate purpose only.

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6.) Explain the concept of pre-emptive right under the Corporation Code.

Pre-emptive right is the right of the stockholders to subscribe to any and all issuance or disposition of shares of any class by the corporation in proportion to their shareholding in the corporation. This means that except in the cases provided by law, shares of stock the corporation should first be offered to the stockholders prior to any offer to non-stockholders. This rule is intended to prevent the dilution of stockholder’s equity stake in the corporation. (Section 39, Corporation Code; Section 38 of the Revised Corporation Code)

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7.) In June 2018, DEF Corp. sent notices to its stockholders informing them of the corporation's issuance of new shares of stock. The notice included a reminder that, pursuant to DEF Corp.' s Articles of Incorporation, any stockholder who fails to exercise his or her pre-emptive right within three (3) weeks from receipt of notice would be considered to have waived the same. Ms. Z, a stockholder of DEF Corp., failed to exercise her pre-emptive right within the said period. However, she claimed that she did not validly waive her right to do so because a waiver must be expressed in writing. Is Ms. Z's contention correct? Explain.

Z’s contention is not correct. Pre-emptive right is not absolute. It may be waived expressly or impliedly. Failure of the stockholder to exercise his right within the period set forth by the corporation amounts to a waiver of preemptive right.

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8.) ABC Corporation has an authorized capital stock of P1M divided into 50,000 common shares and 50,000 preferred shares. At its inception, the Corporation offered for subscription all the common shares. However, only 40,000 shares were subscribed. Recently, the directors thought of raising additional capital and decided to offer to the public all the authorized shares of the Corporation at their market value. a. Would Mr. X, a stockholder holding 4,000 shares, have pre-emptive rights to the remaining 10,000 shares? b. Would Mr. X have pre-emptive rights to the 50,000 preferred shares? c. Assuming that the existing stockholders are entitled to pre-emptive rights, at what price will the shares be offered? Explain your answers.

a. YES Mr. X, a stockholder holding 4,000 shares, has pre-emptive right to the remaining 10,000 shares. All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. The ruling in Benito v. Datu and Tan v. SEC to the effect that preemptive right applies only to issuance of shares in connection with an increase in capital is no longer a valid rule under the Corporation Code. The facts in those cases happened during the regime of the old Corporation Law.

b. YES. Mr. X would have pre-emptive rights to the 50,000 preferred shares. All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings.

c. The shares will be offered to existing stockholders, who are entitled to pre-emptive right, at a price fixed by the Board of Directors, which shall not be less than the par value of such shares.

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9.) Suppose that “X” Corporation has already issued the 1000 originally authorized shares of the corporation so that its Board of Directors and stockholders wish to increase “X’s” authorized capital stock. After complying with the requirements of the law on increase of capital stock, “X” issued an additional 1000 shares of the same value. a. Assume that the stockholder “A” presently holds 200 out of the 1000 original shares. Would “A” have a preemptive right to 200 of the new issue of 1000 shares? Why? b. When should stockholder “A” exercise the preemptive right?

a. YES, “A” would have a preemptive right to 200 of the new issue of 1000 shares. “A” is a stockholder of record holding 200 shares in “X” Corporation. According to the Corporation Code, each stockholder has the preemptive right to all issues of shares made by the corporation in proportion to the number of share he holds on record in the corporation.

b. Preemptive right must be exercised in accordance with the Articles of Incorporation or the By-Law. When the Articles of Incorporation and By-Laws are silent, the Board may fix a reasonable time within which the stockholders may exercise the right.

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10.) The Board of Directors of ABC, Inc., a domestic corporation, passed a resolution authorizing additional issuance of shares of stocks without notice nor approval of the stockholders. DX, a stockholder, objected to the issuance, contending that it violated his right of pre-emption to the unissued shares. Is his contention tenable? Explain briefly.

YES. DX/s contention is tenable. Under Section 39 of the Corporation Code, all stockholders of ABC, Inc. enjoy preemptive right to subscribe to all issues of shares of any class, including the reissuance of treasury shares in proportion to their respective shareholdings.

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