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CASE ASSIGNMENT

Corporate Practice
Submitted by: Francis Ray A. Filipinas

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 condotel. Under the terms of this joint venture, ABCs 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 DEFs
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 companys bank account. Technically, however, the shares
that have been sold to investors should pertain to DEFs shares, because
the joint venture company has not opened for subscription additional
shares from its authorized capital stock, neither has ABC waived its preemptive 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
ABCs 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
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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 ignores DEFs
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 DEFs
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 DEFs
representatives to the Board are ousted and replaced by ABCs 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 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.

CASE BRIEF
(GHI CONSTRUCTION)
Problem:
GHI Construction seeks to demand proportionate share of preferred stocks
from the joint venture company, Monticello Arms Hotel Corporation,
based on what it had accomplished before it was terminated; and to protect
itself against potential actions by DEF Co. against ABC, Inc. and itself on the
alleged conflict of interest subcontracting deal.
Statement of Facts:
Monticello Arms Hotel Corporation, formed by ABC, Inc. and DEF,
Co., awarded the construction contract project to develop a high-end condotel on a parcel of land in Calindagan to GHI Construction on a share swap
basis (preferred shares only). GHI Construction was unable to proceed with
the works after the ground breaking which prompted ABC, Inc. to finish the
work.
Issues:
1. Whether or not GHI Construction is entitled for proportionate share of
the preferred stocks based on what it had accomplished before ABC,
Inc. took over due to the failure of the former in finishing the work.
2. Whether or not GHI Construction may be held liable (jointly/solidarily)
for the alleged conflict-of-interest subcontracting deal with ABC, Inc.
Discussion:
1. GHI Construction cannot be entitled to any share of the preferred
stock because of its non-fulfillment of its obligation to finish the
construction contract it entered upon with Monticello Arms Hotel
Corporation. GHI Construction will only be issued the preferred
shares of stocks if it has fulfilled its end of the bargain which is to
construct and develop a high-end condo-tel on a parcel of land in
Calindagan. However, after the groundbreaking, GHI Construction did
not proceed with its obligation. This act of GHI Construction would
deny it the right to claim the consideration of preferred shares. The first
paragraph of Article 1191 of the New Civil Code provides that The
power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him. 1
2. Contracting or subcontracting refers to an arrangement whereby a
principal agrees to put out or farm out with a contractor or
subcontractor the performance or completion of a specific job, work or
service within a definite or predetermined period, regardless of
whether such job, work or service is to be performed or completed
within or outside the premises of the principal as hereinafter
qualified.2 In the case at bar, it cannot be seen that GHI
1 NCC, Art. 1191
2 Section 4(c) of Department Order No. 10, series of 1997, Amending the
Rules Implementing Books III and VI of the Labor Code, as amended.
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Construction had contracted with ABC, Inc. to do the work of


developing the high-end condo-tel. It must be appreciated that
Monticello Arms Hotel Corporation was the company which
contracted with GHI Construction. The board of the corporation that
granted the contract to GHI Construction is composed of not only
ABC, Inc. but including DEF Co. as well. Hence, it is not ABC, Inc.
which GHI Construction had contracted. Also, GHI Construction did
not execute a sub-contract with ABC, Inc.. It is ABC, Incs own choice
to continue the work which GHI Construction could not proceed.
Thus, GHI Construction may not be held liable for any liability that
may be charged against ABC, Inc. for conflict-of-interest.

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