SU College of LawJD 204/302

Practical ExercisesJanuary 3, 2014

Problem I The Coca Cola Company of Atlanta, USA (Coke USA) entered into a joint

venture to form a corporation organized under the laws of the Philippines, named Coca Cola Bottlers Phils. Inc., (CocaPhil), with equity of 40%. Its joint venture partners were Filipino citizens and residents controlling 60% of CocaPhil. 15% of CocaPhil was held by the exclusive local importer and distributor of Coca Cola concentrates in the Philippines, which obtained a loan from Coke USA to pay for its 15% equity in CocaPhil. The loan was secured by a voting trust agreement, whereby the holder of the 15% equity in CocaPhil bound himself to always vote his shares with Coke USA. The remaining 45% was subscribed by San Miguel Corporation. The joint venture proved to be very profitable. However, after 15 years in operation, there was a falling out between the joint venture partners which led to a series of suits.

a. One suit involved the Solicitor General which challenged the legal status of CocaPhil in a quo warranto proceeding on the ground that it failed to pass the nationality requirement. Can the Solicitor General prove that the local distributor is a mere dummy and not a bona fide investor? If so, how? Assuming this fact is proved, is Coke USA doing business in the Philippines? Determine its status, zrights and liabilities? Decide and discuss fully with legal citations and authorities.

b. Suppose the local distributor voted with San Miguel Corporation to oust the President who favored Coke USA. May Coke USA invoke the voting trust? If so, how may Coke USA enforce its rights under the Voting Trust Agreement? May the local distributor repudiate the voting trust on the ground that it violates the nationality requirements for the corporation? What are their respective rights? Decide and discuss fully with legal citations and authorities.

c. Suppose that the local distributor executed a continuing proxy in favor of Coke USA for its shares in CocaPhil. May it regain its voting power from Coke USA? If no, why not? If yes, detail the procedures to be taken. Suppose the local investor indorsed its stock certificate to the 15% equity in blank to Coke USA, Would your answer remain the same? Does Coke USA have the right to demand of the Corporate Secretary that it be registered in the corporate stock and transfer book as the owner of these shares? Why or why not? If your answer is no, what are Coke USA’s remedies? Decide and discuss fully with legal citations and authorities.

Problem II:Plan a strategy for an anticipated proxy fight in Company MacF. The stocks are distributed as follows:

Your client: 510 common shares 100 preferred shares The opposition: 300 common shares 900 preferred shares Others: 190 common shares 0 preferred shares

a. There are 9 seats in the Board. Your objective is to elect 6 Directors to ensure that you can control 2/3 of the Board. Prepare cumulative voting simulations for your client and advise him on the best strategy to solicit proxies from others and how many more shares through proxies need to be targeted.

b. Suppose, aside from the election, there is a proposal to amend the Articles through an increase in the authorized capital stock. Your client opposes the amendment. How would you advise your client on the strategy to defeat the vote? In the event your client fails, what would you advise him?

Problem IIIa. Company A is engaged in the manufacture of athletic and sports shoes. One of

the divisions, B, makes sports bags as a complement to the shoes. The Board of Company A decides to spin-off B as a joint venture company with C, whereby A shall hold 60% and C 40% of the equity of B. Outline the necessary steps to effect the spin-off. Provide details with examples.

b. As B begins to operate an independent and bona fide operation. D, a former contractor of A for leather, canvass and nylon, questions the spin-off on the ground that it is a mere subterfuge to avoid contractual liabilities, considering that D, in anticipation of a big contract with A, hired additional employees. Discuss the implications of this situation.

Problem IVBank S is currently controlled by M, a Filipino group, and N, a Canadian Bank. To remain competitive, S needs fresh capital infusion. M, however, would rather sell its shares than put in more money. N is willing and able to put in all the money needed, but there is the problem of S becoming a foreign-owned bank. N does not want S converted into an off-shore bank. Prepare a counselor’s brief on all the acceptable legal options available to N. Cite pertinent laws and authorities.

Problem V ABC, Inc. owns a prime parcel of land in Calindagan. DEF Co.

approaches it and proposes a joint venture to develop a high-end condo-tel. Under the terms of this joint venture, ABC’s only exposure shall be the land, while DEF shall finance the development from its own resources, without using the land as collateral for a loan. To pursue the joint venture, the parties organize a new corporation, Monticello Arms Hotel Corporation, with ABC holding 30% of the equity and DEF controlling 70%. Shares were divided into common and preferred shares. Soon after the joint venture company is formed, DEF requires ABC to assign its land to the joint venture company. ABC is reluctant at first, because it would like to assign its property only when DEF shall have also put in a substantial portion of the capital needed to implement the project. However, DEF

is very persuasive, so ABC eventually assigns the property even without DEF’s counterpart capital.

A consequence of this assignment, however, is that ABC temporarily acquires control of the joint venture company. This is because, under the Internal Revenue Code (Sec. 35, c.2), a tax-free exchange can only be effected if the stockholder exchanging its property for stock retains at least majority control of the corporation to which the property has been transferred.

In the meantime, DEF still has not put in its capital, although it has succeeded in interesting a few investors to acquire shares from the joint venture company. The proceeds of these sales have been deposited in the joint venture company’s bank account. Technically, however, the shares that have been sold to investors should pertain to DEF’s shares, because the joint venture company has not opened for subscription additional shares from its authorized capital stock, neither has ABC waived its pre-emptive right to the additional subscription, if there ever was any available. To complicate matters, DEF, at the time when it was still in control of the joint venture company, issued stock certificates to these investors, ABC and itself. Again, this violated the provision in the Corporation Code that no stock certificate may be issued until the full subscription for a batch of shares has been fully paid. The issuance of the certificates was also defective, because: 1. The certificates were not issued in series; thus investors were issued certificates numbers 1-9, while ABC’s certificates were already numbered 33-45; 2. The stock certificates did not contain the restrictions indicated in the By Laws; and 3. The certificates were issued in a single series without any distinction as to whether they were issued for common or preferred shares.

When DEF still failed to proceed with the development, ABC exercised its controlling interest and convinced DEF to withdraw from its role as developer and allow the joint venture company to directly pursue the project. Consequently, a new agreement was forged, and DEF agreed to remain a mere minority investor in the joint venture company.

With this reorganization, the joint venture company awarded the construction contract for the project to GHI Construction on a share swap basis (for preferred shares only). After the groundbreaking, however, GHI fails to proceed with the works. Concerned about the delay, ABC steps in and does the work for GHI. Due to very limited resources, however, the work moves very slowly. This gives DEF an opportunity to complain to ABC that it was in conflict-of-interest because it was doing business with the joint venture company as a sub-contractor of GHI. ABC ignore’s DEF’s complaint.

In the meantime, ABC discovers that, after the reorganization, DEF closed the bank account of the joint venture company and withdrew all the remaining cash. Needless to state, DEF did this without authority from the Board of Directors of the joint venture company, although DEF’s representatives were still authorized signatories of the bank account.

Concluding that fraud was being committed by DEF, ABC initiates a second reorganization of the joint venture company. This time, all of DEF’s representatives to the Board are ousted and replaced by ABC’s nominees. DEF protests, and claims that all its actions were consistent with its role as developer

under the original agreement. DEF also insists that ABC is in breach of the joint venture agreement for not protecting its representatives’ right to sit on the Board as agreed upon by the parties.

a. A Law Firm is being engaged by DEF to file an action to prevent the new Board from acting on behalf of the joint venture company, while another Law Firm is engaged by ABC defend it against the complaint filed by DEF.

b. A third Law Firm is engaged by the ABC’s stockholders in the joint venture company to perpetually disqualify DEF’s nominees to the Board for ultra vires acts which has proven inimical to the interests of the joint venture company; and to reject all claims by investors through DEF.

c. A fourth Law Firm is engaged by GHI to demand its proportionate share of preferred stocks from the joint venture company based on what it had accomplished before it was terminated; and to protect itself against potential actions by DEF against ABC and itself on the alleged “conflict-of-interest” sub-contracting deal.

d. A fifth Law Firm is engaged by XYZ, an investor through DEF, to compel the joint venture company to honor its investment in the joint venture company, which has been repudiated and cancelled by the new Board on the ground that the company never received the investment through DEF

Problem VI Star Marketing Corporation (Star) is a publicly traded company with A (exclusively traded for citizens only) & B (openly traded). It is classified as a Filipino multinational corporation. Its major stockholders are as follows:

Santos group 9 % A2% B

Zulueta group 7% A7% B

SSS 7% AGSIS 7% A

BPI Trust 5% AMetrobank Trust 5% ARobertson Summa Corp. 5% AAFP Retirement Fund 2% AHSBC Trust 11 % BCiticorp Investments 9% BRepublic of Indonesia 5% BPPSTA 2% AStar Employees Retirement Fund 3% AStar Officers’ Retirement Fund 3% AIndividual investors/stockholders 1% AIndividual Investors/stockholders 1% BPCGG 4% A

Republic of Nauru 5% B 100%

Star is currently controlled by the Santos group, supported by its relatives, the Zulueta Group. Robertson Summa Corp., a competitor and a wholly-owned subsidiary of Jonathan Granger International, a foreign corporation licensed to do business in the Philippines, has made a bid for a seat on the Board of Star. The current management wants to block the move on the ground that company secrets would be exposed to its competition and give it an undue advantage.

In the midst of this impending proxy and legal battle, the Zulueta Group declares that it intends to wrest control of management from the Santos Group.

By way of secret backdoor negotiations, brokered by a high Malacañang personality, the Robertson Suma Corp. intimates possible compromise arrangements: sale of its interest in Star, a merger with Star on a 60 (Star) – 40 (Robertson Summa) basis to form the Star Robertson Summa Co,. Inc. (“New Co.”), or buy out by Star of Robertson Summa resulting in making the latter a subsidiary of the former. Incidentally, the alliance, in whatever form, may result in a near monopoly of the business by the surviving entity.

a. One Law Firm is engaged by the Santos Group, while another is engaged by the Roberston Summa Corp. Both clients request their respective counsel to prepare a legal strategy (legal basis, advice, procedures/steps, draft documentations) to address the following options:

1. Engaging the opposition (this should include the Zulueta group for both parties) in a proxy war (from soliciting proxies, to presenting/challenging proxies, to the stockholders’ meeting/election of directors, to post-election controversies).2. Selling all or substantially all of corporate assets (from corporate

actions, to reporting requirements, to addressing appraisal right challenges).

3. Potential quo warranto filed by the Solicitor General for illegal combinations in restraint of trade.

4. Selling/acquiring all or the controlling interest in the other company (from corporate actions, to bank syndication for financing, to escrow Arrangements for payment, to due diligence inspections).

5. Merger resulting in New Co. (from corporate actions, to organization of New Co, to procedure for retirement of existing shares and distribution of new ones, to valuation of shares [i.e., 3 for every 2, etc.]).

Problem VII Z is a non-stock, non-profit educational foundation. Due to severe

economic difficulties, the foundation goes through its dissolution process. After satisfying all the liabilities and obligations of the foundation, several assets remain. These assets may be classified as:

(a) The school’s library collection donated by the USAID upon a condition requiring return, transfer or conveyance to the donor or grantor upon dissolution;

(b) The school’s gymnasium which is subject to limitations permitting its use only for educational purposes, without any condition to return to the grantor or donor upon dissolution; and (c) A forklift, 2 dump trucks, the A/S & Law buildings, and assorted Apple Macs, I-Pads, and the radio station with its broadcast franchise and license, which are held without any apparent or implied limitations.

Several the members of the foundation claim ownership over any of its assets during the winding up process? Discuss fully how these assets may be distributed by the foundation and, and if so, to whom and under what conditions.

Problem VIII A family-owned corporation controls and operates a school. Under its

Articles of Incorporation, the corporation’s primary purpose is to establish and operate the school. Under its current set-up, the school’s President is simply an administrative employee and not the corporation’s chief executive officer. This situation has arisen, because the By Laws of the corporation do not require that the President should be chosen from among the members of the Board of Directors/Trustees. Discuss fully that propriety/regularity, on the one hand, or the infirmity/irregularity of this situation. Extend your discussion to both stock and non-stock education corporations.

Problem IX:

ABC Corp., a close corporation, already has 20 stockholders. It needs to expand and therefore needs an additional capital 70% more of what it already has. XYZ Corp. approaches ABC Corp. and offers to cover the additional capital. ABC Corp. seeks your legal advice, and makes it clear that it wants to maintain exclusive control over the management of the business.

Problem X

Smart Machines Corporation (SMC) is publicly listed in the Makati Stock Exchange (MSE). It is controlled and operated by Santiago who holds 11% of SMC’s stocks. His cousin, Zoilo, is openly challenging Santiago for control of the company and is actively buying SMC shares traded at the MSE. Lacking the resources to fend off Zoilo’s challenge, Santiago enlists Carlos as his “white knight” by arranging to sell 10% of his SMC shares to Carlos. Carlos, in turn, promises to match Zoilo’s aggressive purchase of SMC shares at the MSE. Santiago agrees to sell the shares to Carlos at P 25/share. The shares are currently being traded at the MSE for P 20/share. They agree that they will instruct their respective brokers to buy and sell the shares simultaneously at 10 am on February 17, 2009. Santiago’s arrangement with Carlos is that he will continue to be President of SMC, while Carlos would be the new Chairman. Roberto, Santiago’s Finance Officer, who is privy to the confidential negotiations, also instructs his broker to sell his own SMC shares, which is about 1% of SMC’s outstanding stock, at

P 25/share at 11 am, on February 17, 2009, at the MSE. When the SMC stocks are traded at 10 am on February 17, 2009, they open at P 25/share and attract investor interest so that the price closes at P 27.50/share on that day. The following day, when demand for the shares dramatically decreases, the price per share closes at P 19.50.

a. Discuss fully whether the transaction of Santiago and Carlos violates the Revised Securities Code. b. Discuss fully whether Roberto violated the Revised Securities Code.c. What schemes to defraud the investing public are considered violations of the Revised Securities Code? Give examples and discuss each fully. d. Discuss fully whether the failure of a pre-need company to make good on its commitments to planholders is actionable under the Revised Securities Code.e. What is a ponzi scheme? Assume a “double-your-money” promo of a company is a ponzi scheme, discuss fully whether it is actionable under the Revised Securities Code.

Problem XI a. J is the parish priest of Mendoza. The church at Mendoza has acquired several

properties, so these were all titled in the name of J. J died suddenly. During the settlement of his estate, his heirs adjudicate the properties titled in his name to themselves. The parishioners come to you for legal advise. Discuss their options fully.

b. Part of the properties listed in J’s estate is property he inherited as capital from his father. The parish social action center has been built on this property as an annex to the church and is used actively for the ministry activities of the parish. How would you characterize J’s title to this property.

c. Can a corporation sole be converted? Discuss fully.

Problem XII a. Alfonso MediTools, Inc. (Alfonso), from Manila, contracted with Bernard

Hospital Systems Corporation (Bernard), from New York, to import medical apparatus. They concluded their agreement over the internet. Bernard burned the copy of the contract in a compact disc. This became the only copy of the contract between the parties. A dispute arose between them. Bernard sues Alfonso for breach of contract in a Manila court. Assume their relationship is limited to this isolated transaction. When Bernard’s lawyer presents the CD as proof of the contract, Alfonso’s lawyer objects on the ground that the contents of the CD are not admissible in evidence for not having been reduced in writing, duly signed by the parties, and for not being notarized and authenticated before the Philippine consul of New York. Decide.

b. If the judge denies the objection, what other sustainable objections can you raise on behalf of Alfonso? Discuss fully.

c.If the place of execution is material to the enforceability of the contract, where was the transaction in problem No. 1 above executed? Discuss fully.

d. There is an 11 hour time difference between Manila and New York. If the date of execution is material to implementation of the contract, what is the governing effective date of execution? Discuss fully.

e. Section 25 of the Corporation Code provides: xxx a majority of the number of directors xxx shall constitute a quorum for the transaction of corporate business xxx. To authorize Alfonso to enter into the contract with Bernard, a Board meeting was held at its corporate headquarters. Present in person at the Board Room were 6 directors of a 15-man Board. Also present by tele and video conference equipment in the Board Room were 1 director in Dumaguete, and 2 directors from Cebu. The other directors did not participate. Was this a valid meeting? If yes, discuss the documentation requirements which should be observed.

Problem XIIIMLFI, a foreign corporation, through MLFPh, a local company, sold commodity futures to the public without the proper license to do business. MLFI filed a case in court against a local investor. The local investor, aware that MLFI had no license, argues that it has no legal standing in Philippine courts. Decide.

Problem XIVPhilsugar is owned 40% by American Sugar, a US company, and Luzon International Trading, a Philippine corporation with 40% foreign equity. It has a Board of 5. Two are Filipinos and Two are Americans. The fifth director is nominated by the 60-40 Philippine corporation on a rotation basis: for 1 year, a Filipino; the next, an American. Its business is the manufacture of sugar which is to be exported 100%. ACTI, a competitor, challenges Philsugar for failing to obtain a license to do business from the SEC. Philsugar counters by asserting that it is a Philippine National. Decide.

Problem XVThe Hospital Tools, USA puts out general advertisements in national newspapers. Several hospital and medical laboratories place orders directly to the USA. As a result, Hospital Tools, USA arranges to train the personnel of these client hospitals and laboratories in the use of the equipment, all expenses paid, at their manufacturing plant in the USA. Philippine Instrumentation, Inc., a local company, challenges Hospital Tools, USA for not being licensed to do business in the Philippines and sues to cancel the latter’s contracts with the hospitals and laboratories. Hospital Tools, USA argues that its acts do not constitute doing business. Decide.

Problem XVITWI, a foreign company, enters into a licensing and representative agreement with TWPhil, a local company. The agreements are structured in a way that TWI is allowed to buy and distribute only TWI products to the public, and, as an exception, of other local manufacturers with which TWPhil is affiliated through interlocking directorships and common equity control. The DTI demands that TWI should apply for a license to do business with the SEC. TWI argues that TWPhil is an independent

entity which transacts business in its own name and for its own account and is not in any way considered TWI’s alter ego. Decide.

Problem XVIIY company, based in Japan, manufactures ball bearings under the trade name bolas. It appointed Y Distribution, Inc., a domestic corporation, to be its exclusive distributor in the Philippines. Y did not sell any of its products directly to Filipino consumers. Because of the popularity of bolas in the market, Estoy Kenkoy, a Filipino entrepreneur from Danao created bulas with essentially the same packaging. When the sale of bulas begins to affect the market share of bolas, Y appoints Pedro Penduko as its resident agent in the Philippines and promptly files suit against Kenkoy for unfair competition. The question of legal standing is raised as a defense. Decide.

Problem XVIIIZ is a non-stock, non-profit educational foundation. Its campus sits on prime real estate in the city. Mega Real Estate Company makes an offer thru, C, one of the members-directors to buy substantially all of the assets of the foundation. C convinces the others to sell on the promise that the proceeds of the sale will be divided among them. In spite of the protests of D, the sale is approved and consummated. When C claims for a share in the proceeds of the sale, Z denies the claim saying that the proceeds will go to the scholarship fund and to the acquisition of property for a new campus. C files a suit to compel Z to pay on the ground that the latter is a family and a close corporation. Decide.

Problem XIX EJA corporation was organized with an authorized capital stock of P 1,000,000. P 250,000 of this was duly subscribed and paid for. RLC subscribed to P50,000 worth of the shares. Subsequently, the Board decided to open for subscription the remaining P750,000 worth of shares and the same were duly subscribed and paid for by TDR. RLC protested TDR’s subscription on the ground that no stockholders’ meeting was duly called for the purpose of opening for subscription the unissued shares, and for not being able to exercise his pre-emptive rights to the issuance. Decide.

Problem XX The Hospital Tools, USA puts out general advertisements in national newspapers. Several hospital and medical laboratories place orders directly to the USA. As a result, Hospital Tools, USA arranges to train the personnel of these client hospitals and laboratories in the use of the equipment, all expenses paid, at their manufacturing plant in the USA. Philippine Instrumentation, Inc., a local company, challenges Hospital Tools, USA for not being licensed to do business in the Philippines and sues to cancel the latter’s contracts with the hospitals and laboratories. Hospital Tools, USA argues that its acts do not constitute doing business. Is ACTI correct?

Problem XXI

a. The American Standard Company, USA entered into a joint venture in a corporation organized under the laws of the Philippines, named Sanitary Wares, Inc. (Saniwares), with an equity of 49%. Its joint venture partners were Filipino citizens and residents controlling 51% of Saniwares. 2% of Saniwares (part of the 51%) was held by the exclusive local importer and distributor of American Standard in the Philippines, which obtained a loan from American Standard to pay for its equity in Saniwares. The loan was secured by a voting trust agreement, whereby the holder of the 2% equity in Saniwares bound himself to always vote his shares with American Standard. The joint venture proved to be very profitable. However, after 15 years in operation, there was a falling out between the joint venture partners which led to a series of suits. One suit involved the Solicitor General which challenged the legal status of Saniwares in a quo warranto proceeding on the ground that it failed to pass the nationality requirement. Decide.

b. Suppose, the local distributor voted with the other Filipino investors to oust the President who favored American Standard. May American Standard invoke the voting trust? May the local distributor repudiate the voting trust on the ground that it violates the nationality requirements for the corporation? What are their respective rights? Assuming the local distributor is a mere dummy and not a bona fide investor, is American Standard doing business in the Philippines? Determine its status, rights and liabilities?

Problem XXII The Philippine Motor Corporation is a domestic corporation engaged in the importation and distribution of luxury cars. It shareholders are Jose, Antonio, Pedro, Carlos and Nicholas. Five years later, Pablo, son of Jose, Carmen, wife of Antonio, Reynaldo, brother-in-law of Pedro, Carlos and Nicholas, organized the Fancy Cars, Inc., a domestic corporation engaged in the selling of luxury cars. Upon its incorporation, the Philippine Motor Corporation appointed the Fancy Cars, Inc. as its exclusive distributor in the Visayas and Mindanao. Sales taxes for the original sale of each imported car to the Fancy Cars, Inc. were duly paid by the Philippine Motor Corporation. The Fancy Cars, Inc. did not pay sales taxes for its subsequent sale of cars to the public on the premise that their sales did not constitute original sales. The Bureau of Internal Revenue, alleging that the Fancy Cars, Inc. is a mere subsidiary of the Philippine Motor Corporation, assessed the latter for deficiency sales taxes. Decide.

Problem XXIIIAnselmo was the president and principal stockholder of City Transport, Inc. He leased to the corporation 3 jeepneys for hire. Ignacio, an employee of City Transport, Inc., while driving one of the jeepneys, figured in an accident resulting in injury to Mauro. Ignacio was convicted for reckless negligence, but could not pay the damages. Mauro sued Anselmo, claiming that City Transport is his mere alter ego and is subsidiarily liable for the damages incurred. Decide.

Problem XXIVRomulus, Remus, Hercules, Ulysses and Achilles were the stockholders of Titans, Inc. which owned considerable real estate. They decided to dissolve the company and entered into a partition agreement as a consequence of the dissolution. When they submitted the plan of partition to the Register of Deeds, the latter rejected it and refused to register it. Decide.

Problem XXVFlavio had the idea of starting a new business and engaged Franklin to prepare a feasibility study. When the study was done, Flavio sent it out to prospective investors to get them interested. Teodoro and Eusebio were among those who invested substantially in the corporation, which was eventually organized. When Franklin was not paid for his services, he sued Flavio, Teodoro, Eusebio and the company as joint and solidary debtors. Decide.