[Answer/discuss the question below, or see 2017 bar exam Mercantile Law Instructions; Also check the other 2017 Mercantile Law Questions:1, 2, 3, 4, 6, 7, 8, 9, 10, 11, and 12; See also 2017 Bar Exam: Information, Discussions, Tips, Questions and Results]
Under the Nell Doctrine, so called because it was first pronounced by the Supreme Court in the 1965 ruling in Nell v. Pacific Farms, Inc. (15 SCRA 415), the general rule is that where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor.
State the exceptions to the Nell Doctrine. (4%)
Santorini Corporation (Santorini) was in dire straits. In order to firm up its financial standing, it agreed to entertain the merger and takeover offer of Proficient Corporation (Proficient}, the leading company in their line of business. Erica, the major stockholder of Santorini, strongly opposed the merger and takeover. The matter of the merger and takeover by Proficient was included in the agenda of the next meeting of Santorini’s Board of Directors. However, owing to Erica’s serious illness that required her to seek urgent medical treatment and care in Singapore, she failed to attend the meeting and was consequently unable to cast her vote. The Board of Directors approved the merger and takeover. At the time of the meeting, Santorini had been in the red for a number of years owing to its recurring business losses and reverses.
Erica seeks your legal advice regarding her right as a stockholder opposed to the corporate action. Explain your answer. (4%)
Samito is the President and a Director of Lucky Bank (Lucky}, a commercial bank holding its main office in Makati. His brother, Othello, owned a big fishing business based in Malabon. Othello applied for a loan of PSO Million with Lucky. Othello followed the ordinary banking procedures in all the stages of the processing of his application. When required, he made the necessary arrangements to guarantee the loan. Thus, in addition to the real estate mortgage, Othello executed a joint and solidary suretyship, issued postdated checks, and submitted all other requirements prescribed by Lucky.
When the loan application was about to be approved and the proceeds released, BG Company, a keen competitor of Othello in the fishing industry, wrote to the Board of Directors and the management of Lucky questioning the loan on the ground of conflict of interest due to Samito and Othello being brothers, citing the legal restriction against bank exposure of directors, officers, stockholders or their related interests (DOSRI).
(a) What are the three restrictions imposed by law on DOSRI transactions? (4%)
(b) Is BG Company’s opposition based on conflict of interest and violation of the restrictions on DOSRI transactions legally and factually correct? Explain your answer. (4%)