Bar Q and A #32

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1.) AAA Corporation is a bank. The operations of AAA Corporation as a bank was not doing well. So, to avert any bank run, AAA Corporation, with the approval of the Monetary Board, sold all its assets and liabilities to BBB Banking Corporation which includes all deposit accounts. In effect then, BBB Corporation will service all deposits of all depositors of AAA Corporation. a. Will the sale of all assets and liabilities of AAA Corporation to BBB Banking Corporation automatically dissolve or terminate the corporate existence of AAA Corporation? Explain your answer. b. What are the legal requirements in order that a corporation may be dissolved?

a. NO. AAA Corporation is an artificial being created by law and has a legal personality of its own. A corporation does not owe its existence upon the presence of assets and properties. It can only be dissolved in cases provided for by law. As such, AAA Corporation will subsist regardless of the sale of all of its assets and liabilities to another corporation.

b. A corporation may be dissolved voluntarily, by shortening of the corporate term and through involuntary dissolution. In voluntary dissolution, the action for dissolution must be approved by majority of the directors or trustees and 2/3 of the stockholders representing the outstanding capital stock or members, publication requirement and filed with SEC which will issue certificate of dissolution. If there are creditors affected, there must be a hearing to hear the objections and claims of the creditors. In case of shortening of corporate term, through amendment of the AOI. In involuntary dissolution, through filing of a verified complaint with the SEC based on any ground provided by law or rules.

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2.) XYZ Corporation entered into a contract of lease with ABC, Inc., over a piece of real estate for a term of 20 years, renewable for another 20 years, provided that XYZ’s corporate term is extended in accordance with law. Four years after the term of XYZ Corporation expired, but still within the period allowed by the lease contract for the extension of the lease period, XYZ Corp. notified ABC Inc., that it is exercising the option to extend the lease. ABC Inc. objected to the proposed extension, arguing that since the corporate life of XYZ Corp. had expired, it could no longer opt to renew the lease. XYZ Corp. countered that withstanding the lapse of its corporate term it still has the right to renew the lease because no quo warranto proceedings for involuntary dissolution of XYZ Corp. has been instituted by the Office of the Solicitor General. Is the contention of XYZ Corp. meritorious? Explain briefly.

XYZ Corporation’s contention is not meritorious. Based on the ruling of the Supreme Court in Philippine National Bank v. CFI of Rizal, 209 SCRA (1992). XYZ Corp. was dissolved ipso facto upon the expiration of its original term. It ceased to be a body corporate for the purpose of continuing the business for which it was organized, except only for purposes connected with its winding up or liquidation. Extending the lease is not an act to wind up or liquidate XYZ Corp.’s affairs. It is contrary to the idea of winding up the affairs of the corporation.

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3.) “X” Corporation shortened its corporate life by amending its articles of incorporation. It has no debts but owns a prime property located in Quezon City. How would the said property be liquidated among the five stockholders of said corporation? Discuss two methods of liquidation.

The prime property of “X” Corporation can be liquidated among the five stockholders after the property has been conveyed by the corporation to the five stockholders, by dividing or partitioning it among themselves in any two of the following ways:
1. By physical division or partition based on the proportion of the values of their stockholdings; or

2. Selling the property to a third person and dividing the proceeds among the five stockholders in proportion to their stockholdings; or

3. After the determination of the value of the property, by assigning or transferring the property to one stockholder with the obligation on the part of said stockholder to pay the other four stockholders the amount/s in proportion to the value of the stockholding of each.

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4.) Name 3 methods by which a stock corporation may be voluntarily dissolved. Explain each method.

The 3 methods by which a stock corporation may be voluntarily dissolved are:

1. Voluntary dissolution where no creditors are affected. This is done by a majority vote of the directors, and resolution of at least 2/3 vote of stockholders, submitted to the SEC.

2. Voluntary dissolution where creditors are affected. This is done by a petition for dissolution which must be filed with the SEC, signed by a majority of the members of the board of directors, verified by the president or secretary, and upon affirmative vote of stockholders representing at least 2/3 of the outstanding capital stock.

3. Dissolution by shortening of the corporate term. This is done by amendment of the articles of incorporation.

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5.) The corporation, once dissolved, thereafter continues to be a body corporate for three years for purposes of prosecuting and defending suits by and against it and of enabling it to settle and close its affairs, culminating in the final disposition and distribution of its remaining assets. If the 3 year extended life expires without a trustee or receiver being designated by the corporation within that period and by that time (expiry of the 3 year extended term), the corporate liquidation is not yet over, how, if at all, can a final settlement of the corporate affairs be made?

The liquidation can continue with the winding up. The members of the BOD can continue with the winding of the corporate affairs until final liquidation. They can act as trustees or receivers for this purpose.

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6.) Bam filed an action to enjoin SN Company’s Board of Directors from selling a parcel of land registered in the corporation’s name, to compel the corporation to recognize Bam as a stockholder with 50 shares, to allow him to inspect the corporate books, and to claim damages against the corporation and its officers. Subsequently, the corporation and the individual defendants moved to dismiss the complaint since the corporation’s certificate of registration was revoked by the SEC during the pendency of Bam’s case on the ground of non-compliance with reportorial requirements. The special commercial court granted the motion and reasoned that only an action for liquidation of assets can be maintained when a corporation has been dissolved and Bam cannot seek reliefs which in effect lead to the continuation of the corporation’s business. The court also ruled that it lost jurisdiction over the intra-corporate controversy upon the dissolution of the corporation. a. Was the court correct? b. Four years later, SN Company files an action against Bam to recover corporate assets allegedly held by the latter for liquidation. Will this action prosper?

a. The court is not correct. An action to be recognized as a stockholder and to inspect corporate documents is an intra-corporate dispute which does not constitute a continuation of business. The dissolution of the corporation simply prohibits it from continuing its business. Moreover, under Section 145 of the Corporation Code, no right or remedy in favor of or against any corporation, its stockholders, members, directors and officers shall be removed or impaired by the subsequent dissolution of the corporation. The dissolution does not automatically convert the parties into strangers or change their intra-corporate relationship. Neither does it terminate existing causes of action which arose because of the corporate ties of the parties. The cause of action involving an intra- corporate controversy remains and must be filed as an intra-corporate dispute despite the subsequent dissolution of the corporation. (Aguirre v. FQB +7, Inc. GR no. 170770, Jan. 9, 2013)

b. The action cannot prosper because the corporation has no more legal capacity to sue after three years from its dissolution. (Alabang Development Corporation v. Alabang Hills Village Association, GR no. 187456, June 2, 2014)

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7.) The SEC approved the amendment of the articles of incorporation of GHQ Corporation shortening its corporate life to only 25 years in accordance with Section 120 of the Corporation Code. As shortened, the corporation continued its business operations until May 30, 1997, the last day of its corporate existence. Prior to said date, there were a number of pending civil actions, of varying nature but mostly money claims filed by creditors, none of which was expected to be completed or resolved within 5 years from May 30, 1997. If the creditors had sought your professional help at that time about whether or not their cases could be pursued beyond May 30, 1997, what would have been your advice?

The cases can be pursued even beyond May 30, 1997, the last day of the corporate existence of GHQ Corporation. The Corporation is not actually dissolved upon the expiration of its corporate term. There is still the period for liquidation or winding up.

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8.) Malyn, Schiera and Jaz are the directors of Patio Investments, a close corporation formed to run the Patio Café, an al fresco coffee shop in Makati City. In 2000, Patio café began experiencing financial reverses, consequently, some of the checks it issued to its beverage distributors and employees bounced. In October 2003, Schiera informed Malyn that she found a location for a second café in Taguig City. Malyn objected because of the dire financial condition of the corporation. Sometime in April 2004, Malyn learned about Fort Patio Café located in Taguig City and that its development was undertaken by a new corporation known as Fort Patio, Inc., where both Schiera and Jazz are directors. Malyn also found that Schiera and Jaz, on behalf of Patio Investments, had obtained a loan of P500,000.00 from PBCom Bank, for the purpose of opening Fort Patio Café. This loan was secured by the assets of Patio Investments and personally guaranteed by Schiera and Jaz. Malyn then filed a corporate derivative action before the Regional Trial Court of Makati City against Schiera and Jaz, alleging that the two directors had breached their fiduciary duties by misappropriating money and assets of Patio investments in the operation of Fort Patio Café. a. Did Schiera and Jaz violate the principle of corporate opportunity? Explain. b. Was it proper for Malyn to file a derivative suit with prayer for injunctive relief? Explain. c. Assuming that a derivative suit is proper, may the action continue if the corporation is dissolved during the pendency of the suit? Explain.

a. YES, although Malyn refused the business before, nevertheless, using the resources and credit standing of the company, Schiera and Jaz clearly demonstrated that the business could have been successfully pursued in the name of the close corporation. More importantly, Schiera and Jaz are guilty of diverting the resources of the close corporation to another entity, equivalent to fraud and bad faith.

b. YES. Where corporate directors are guilty of breach of trust, a stockholder may institute a suit in behalf of himself and other stockholders for the benefit of the corporation, to bring about a redress of a wrong inflicted directly upon the corporation and indirectly upon the stockholders (Reyes vs. Tan, 3 SCRA 198).In this case, Schiera and Jaz breached a fiduciary duty when they used the property of Patio investments in the operation of Fort Patio café despite the latter’s financial condition to the prejudice of the corporation. Further, an individual stockholder may institute a suit in behalf of a corporation, wherein he holds stocks, in order to protect corporate rights whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation (Republic Bank v. Cuaderno). Furthermore, the demand on the Board of Directors to file a derivative suit would be a futile formality since majority of the Board is the precursor of the wrongful act. Injunction is likewise proper to prevent foreclosure of the assets of the corporation used as security of the loan availed by the two erring Board of Directors.

c. YES, under Section 145 of the Corporation Code, no right or remedy in favor of or against any corporation shall be removed or impaired either by the subsequent dissolution of said corporation. No reason can be conceived why a suit already commenced by the corporation during its existence to proceed to final judgment and execution thereof because even a mere trustee (of a dissolved corporation), who, by fiction, merely continues the legal personality may commence a suit which can proceed to final judgment even beyond the 3-year period of liquidation. (Knecht v. United Cigarette Corporation, 348 SCRA 48)

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9.) Rafael inherited from his uncle 10,000 shares of Sta. Ana Corporation, a close corporation. The shares have a par value of P10.00 per share. Rafael notified Sta. Ana that he was selling his shares at P70 per share. There being no takers among the stockholders, Rafael sold the same to his cousin Vicente (who is not a stockholder) for P700,000. The Corporate Secretary refused to transfer the shares in Vicente’s name in the corporate books because Alberto, one of the stockholders, opposed the transfer on the ground that the same violated the by-laws. Alberto offered to buy the shares at P12.50 per share, as fixed by the by-laws or a total price of P125,000 only. While the by-laws of Sta. Ana provides that the right of first refusal can be exercised “at a price not exceeding 25% more than the par value of such shares, the Articles of Incorporation simply provides that the stockholders of record” shall have preferential right to purchase the said shares.” It is silent as to pricing.

YES. In a close corporation, the restriction as to the transfer of shares has to be stated/ annotated in the Articles of Incorporation, the By-Laws and the certificate of stock. This serves as notice to the person dealing with such shares like Rafael in this case. With such notice, he is bound by the pricing in the By- Laws.

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10.) “X” company is a stock corporation composed of the Reyes family engaged in real estate business. Because of the regional crisis, the stockholders decided to convert their stock corporation into a charitable non-stock and non-profit association by amending the articles of incorporation. a. Could this be legally done? Why? b. Would your answer be the same if at the inception, “X” company is a non-stock corporation? Why?

a. YES, it can be legally done. In converting the stock corporation to a non-stock corporation by a mere amendment of the Articles of Incorporation, the stock corporation is not distributing any of its assets to the stockholders. On the contrary, the stockholders are deemed to have waived their right to share in the profits of the corporation which is a gain not a loss to the corporation.

b. NO, my answer will not be the same. In a non-stock corporation, the members are not entitled to share in the profits of the corporation because all present and future profits belong to the corporation. In converting the non-stock corporation to a stock corporation by a mere amendment of the Articles of Incorporation, the non-stock corporation is deemed to have distributed an asset of the corporation—i.e. its profits, among its members, without a prior dissolution of the corporation. Under Section 122, the non-stock corporation must be dissolved first.

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