Topic: SRC; Tender Offer (2002)

A. What is tender offer? (2%)

B. In what instances is a tender offer required to be made? (3%)

ANSWER:

A. A tender offer is an offer by the acquiring person to stockholders of a public company for
them to tender their shares therein on the terms specified in the offer. Tender offer is in
place to protect minority shareholders against any scheme that dilutes the share value of
their investments. It gives the minority shareholders the chance to exit the company
under reasonable terms, giving them the opportunity to sell their shares at the same
price as those of the majority shareholders (CEMCO Holdings v. National Life Insurance
Company, G.R. 171815, August 7, 2007)

B. Rule 19.2 of the Implementing Rules and Regulations of the Securities and Regulation
Code provides:
19.2. Mandatory Tender Offers –
1. Any person or group of persons acting in concert, who intends to acquire fifteen percent
(15 %) of equity securities in a public company in one or more transactions within a
period of twelve (12) months, shall file a declaration to that effect with the Commission.
2. Any person or group of persons acting in concert, who intends to acquire thirty five
percent (35%) of the outstanding voting shares or such outstanding voting shares that
are sufficient to gain control of the board in a public company in one or more
transactions within a period of twelve (12) months, shall disclose such intention and
contemporaneously make a tender offer for the percentage sought to all holders of such
securities within the said period. xxx
3. Any person or group of persons acting in concert, who intends to acquire thirty five
percent (35%) of the outstanding voting shares or such outstanding voting shares that
are sufficient to gain control of the board in a public company directly from one or more
stockholders shall be required to make a tender offer for all the outstanding voting
shares. The sale of shares pursuant to the private transaction or block sale shall not be
completed prior to the closing and completion of the tender offer.
4. If any acquisition that would result in ownership of over fifty percent (50%) of the total
outstanding equity securities of a public company, the acquirer shall be required to make
a tender offer under this Rule for all the outstanding equity securities to all remaining
stockholders of the said company at a price supported by a fairness opinion provided by
an independent financial advisor or equivalent third party. The acquirer in such a tender
offer shall be required to accept all securities tendered.

C. Instances where tender offer is required to be made:

1) The person intends to acquire 15% or more of the equity share of a public
company pursuant to an agreement made between or among the person and
one or more sellers.
2) The person intends to acquire 30% or more of the equity shares of a public
company within a period of 12 months.
 3) The person intends to acquire equity shares of a public company that would
result in ownership of more than 50% of the said shares.

Topic: Dissolution of a Corporation (2002)

Name three (3) methods by which a stock corporation may be voluntarily dissolved. Explain
each method. (5%)

Suggested Answer:

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

1. Voluntary dissolution where no creditors are affected – This may be effected by majority
vote of the board of directors or trustees, and by a resolution adopted by the affirmative
vote of the stockholders owning at least majority of the outstanding capital stock or
majority of the members and the same shall be submitted to the Securities and
Exchange Commission (Sec. 134, RCCP);
2. Voluntary dissolution where creditors are affected – This is done by a petition for
dissolution which must be filed with Securities and Exchange Commission, signed by a
majority of the members of the board of directors, verified by the president or security,
and upon affirmative vote of stockholders representing at least 2/3 of the outstanding
capital stock (Sec. 135, RCCP); and
3. Dissolution by shortening of the corporate term. This is done by amendment of the
articles of incorporation (Sec, 136, RCCP).

Topic: Powers of the Corporation (2002)

Which of the following corporate acts are valid, void, or voidable? Indicate your answer by
writing the paragraph number of the query, followed by your corresponding answer as “Valid,”
“Void,” or “Voidable,” as the case may be. If your answer is “Void,” explain your answer, In the
case of a “Voidable” answer, specify what conditions must be present or complied with to make
the corporate act valid. (5%)

1) XL Foods Corporation, which is engaged in the fast food business, entered into a
contract with its President Jose Cruz, whereby the latter would supply the corporation
with its meat and poultry requirements.
2) The board of directors XL Foods Corporation declared and paid cash dividends without
the approval of the stockholders
3) XL Foods Corporation guaranteed the loan of its sister company XL Meat Products, Inc.

ANSWER:
1) Voidable – Sec 31 of the RCCP provides that a contract of the corporation with one or
more of its directors, trustees, officers or their spouses and relatives within the fourth
civil degree of consanguinity or affinity is voidable, at the option of such corporation.
President Jose Cruz is a self-dealing director within the contemplation of this provision.
 2) Valid – Sec 42 of the RCCP provides for the board of director’s power to declare
dividends. The approval of the stockholders is not required in the exercise of such
power.
3) Void – This is not among the corporate powers and capacity enumerated in Sec. 35 of
the RCCP or other specific express powers found in Title IV of the same code.
Therefore, it is an ultra vires act on the part of XL Foods Corporation.

Topic: Foreign Stockholders (1984)

Acme Manufacturing Co. (ACME) is engaged in the manufacture of electrical equipment. Its
general manager is Otto, a German engineer. 50% of the capital stock of ACME is owned by
Filipino individuals and the remaining 50% is owned by corporation XYZ, whose stock is in turn
60% Filipino-owned and 40% German-owned.

A. Is ACME eligible to engage in the retail business?

B. If ACME sells some of the electrical equipment produced by it to industrial and
manufacturing firms which would use the same in their establishments, would there be a
violation of the Retail Trade Nationalization Law? From the legal standpoint, would it be
necessary to replace Otto with a Filipino general manager if Corporation XYZ sells its
shares to a wholly-owned Filipino company?

ANSWER
A. No. ACME is not eligible to engage in the retail business. R.A. 1180, otherwise known as
the Retail Trade Nationalization Law, prohibits a corporation the capital of which is not
wholly owned by Filipino citizens from engaging, directly or indirectly in retail business.

As noted in Narra Nickel Mining v. Redmont Consolidated Mines (G.R. 195580, April 21,
2014) generally, the test that should be applied is the Control Test and not the
“Grandfather Rule”. The Control Test is explained as “Shares belonging to corporations
or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality.” However, applying the same test to corporations
engaged in businesses or industries to which the law specifically requires the full
ownership by Filipino citizens is misplaced. This test can be applied when a law makes
an activity partly nationalized.

The more appropriate method in the case at bar is the Grandfather Rule which
determines the nationality of a corporation, which in turn is owned, by another
corporation by breaking down the equity structure of the shareholders of the corporation.
Tracing the foreign ownership of ACME using the Grandfather Rule, the 40% holding of
aliens in XYZ Corporation, which holds 50% of ACME’s capital stock, disqualifies the
latter in engaging in retail business.

To hold otherwise would allow non-qualified corporations to indirectly engage in retail

business which may be viewed as a circumvention of the Filipino ownership requirement
set forth by R.A. 1180.

B. There would be no violation of the Retail Trade Nationalization Law. RA 1180, as

amended by P.D. 714, defines “Retail business” as habitually selling direct to the general
public merchandise or goods for consumption. P.D. 714 expanded the exceptions from
the coverage of the law to include manufacturer or processor selling to industrial or
 commercial users or consumers who use the products bought by them to render service
to the general public and/or to produce or manufacture goods which are in turn sold by
them.

Accordingly, ACME’s sales of electrical equipment to industrial and manufacturing firm

which would use the same in their establishments do not constitute “retail business” as
such sales fall within the purview of section 4(c) of R. A. 1180, as amended by P.D. 714.

If Corporation XYZ sells its shares to a wholly owned Filipino company, ACME would
become a corporation wholly owned by Filipinos and qualified to engage in retail
business.

Since it is believed that ACME will not be engaged in retail business by selling electrical
equipment produced by it to industrial and manufacturing firms, the prohibitions of the
Anti Dummy Law will not apply to Otto, even though German, may continue as general
manager.

Topic: Pre-emptive Right (1984)

XYZ Corporation has an authorized capital stock of P100,000.00, divided into 10,000 shares,
each with a par value of P10. The subscribed capital stock is P50,000 or 5,000 shares. At the
time of incorporation, S subscribed to 1,000 shares or P10,000. In need of additional funds, XYZ
Corporation proposes to offer the unsubscribed 5,000 shares to new stockholders at P15 per
share or an aggregate amount of P75,000.

Explain whether or not S has a right to subscribe to any of the 5,000 shares and, if so, at what
price?

ANSWER
S has a right to subscribe to 1,000 out of the 5,000 unsubscribed shares being offered by XYZ
Corporation at the price of P15 per share.

This is in exercise of the pre-emptive right provided under Section 38 of the New Corporation
Code which states that “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” subject to several exceptions which are not applicable in this case.

The same provision does not distinguish between newly issued shares and previously
unsubscribed shares; hence, the pre-emptive right is available to existing shareholders with
respect to unsubscribed but previously issued shares. This right is given to stockholders to allow
them to maintain the existing ratio of their interest and voting power in the corporation.

Presently, S is a stockholder with 1,000 of the 5,000 outstanding shares of the corporation, in
view of his pre-emptive right, he must be allowed to subscribe to another 1,000 out of the 5,000
unsubscribed shares to be offered to new stockholders. Said right of S is satisfied if the shares
are offered to him at the same price as that to be offered to the new stockholders, which is P15
per share.
Hence, in exercise of the pre-emptive right given to S as an existing shareholder, he may
subscribe to the shares offered to new stockholders up to the extent as to allow him to maintain
his present proportionate interest in the corporation.

1. Prince Manufacturing Co., Inc. filed a complaint for unfair competition under section 21-A of
R.A. 166 against Prince Industries, Inc. the complaint substantially alleges that plaintiff is a
foreign corporation organized under the laws of California, USA., with offices in San
Francisco; that defendant Prince Industries, Inc. is a corporation organized under the laws of
the Philippines with principal office at Sucat Road, Paranaque, Metro Manila; that plaintiff,
founded in 1920 by Iver Prince, is the largest manufacturer of ball bearings with the
trademark “Prince” and the tradename “Prince Manufacturing Co., Inc.” had been exported
to the Philippines since 1960; that due to the superior quality and widespread use of its
products by the public, the same are well known to Filipino consumers under the tradename
“Prince Manufacturing Industries, Inc.” and trademark “Prince”; that long after the
commencement of the use of plaintiff’s trademark and tradename in the Philippines,
defendant began manufacturing and selling ball bearings under the trademark “Prince” and
tradename “Prince Industries, Co.”; that defendant has registered with the Philippine Patent
Office the trademark “Prince”, which registration is contrary to Sec. 4 of RA 166, as
amended, and violative of plaintiff’s right to the trademark “Prince”; that the defendant not
only uses the trademark “Prince” but likewise has copied the design used by plaintiff in
distinguishing its trademark; and that the use thereof by defendant on its products would
cause confusion in the minds of the consumers and likely deceive them as to the source or
origin of the goods, thereby enabling the defendant to pass off their products as those of
plaintiff.

Invoking the provisions of Sec. 21 A of RA 166, as amended, plaintiff prayed for damages. It
also sought the issuance of a writ of injunction to prohibit defendants from using the
tradename “Prince Industries Co.” and the trademark “Prince”.

a) If you were the counsel for the defendant Prince Industries Co., what grounds would you
invoke to have the complaint dismissed?
b) If you were the counsel for the plaintiff, what administrative remedy would you advise
your client to pursue in the event the court action fails?

Answer:
a) Defendant should file a motion to dismiss for failure to state a cause of action, drawing
attention to plaintiff’s failure to allege in the complaint its capacity to sue.

Plaintiff cannot sue under Section 21-A of RA 166 because it has not complied with the
requirement that (1) its trademark has been registered with the Patent Office or in the
least, that plaintiff is the assignee of such registered trademark and (2) that the country
of which the foreign corporation is a citizen or domiciliary grants to Filipino corporations
the same reciprocal treatment, either thru treaty, convention, or law, to bring an action
for unfair competition.

The mere allegation by the plaintiff that it is a foreign corporation is not sufficient. Such
bare averment not only fails to comply with Section 21-A but violates as well the directive
 of Section 4, Rule 8 of the Rules of Court that “facts showing the capacity of a party to
sue and be sued in a representative capacity or the legal existence of an organized
association of persons that is made a party, must be averred.” (Levitan Industries v.
Salvador, 114 SCRA 420 [1982])

b) Administrative cancellation of the trademark under Section 17 of RA 166 as amended.

Such remedy is available to a foreign corporation as said section does not require that
the trademark of the foreign corporation alleged to have been infringed should have
been registered in the Philippine Patent Office (General Garments v. Directors of
Patents, 41 SCRA 50 [1971])