1992 Bar Examination

Topic: Corporation; Voting Trust Agreement (1992)

Question:
A distressed company executed a voting trust agreement for a period of three years over 60% of
its outstanding paid up shares in favor of a bank to whom it was indebted, with the Bank named
as trustee. Additionally, the Company mortgaged all its properties to the Bank. Because of the
insolvency of the Company, the Bank foreclosed the mortgaged properties, and as the highest
bidder, acquired said properties and assets of the Company.
The three-year period prescribed in the Voting Trust Agreement having expired, the company
demanded the turn-over and transfer of all its assets and properties, including the management
and operation of the Company, claiming that under the Voting Trust Agreement, the Bank was
constituted as trustee of the management and operations of the Company.
Does the demand of the Company tally with the concept of a Voting Trust Agreement? Explain
briefly.

Suggested answer:
NO. The demand of the company does not tally with the concept of a Voting Trust Agreement.
The Voting Trust Agreement merely conveys to the trustee the right to vote the shares of grantor/s.
The consequence of foreclosure of the mortgaged properties would be alien to the Voting Trust
Agreement and its effects. The law simply provides that a voting trust agreement is an agreement
in writing whereby one or more stockholders of a corporation consent to transfer his or their shares
to a trustee in order to invest in the latter voting or other rights pertaining to said shares for a
period not exceeding five years upon the fulfillment
Under section 59 par. 5 of the Corporation Code, a voting trust agreement may confer upon a
trustee not only the stockholders voting rights but also other rights pertaining to his shares as long
as the voting trust agreement is not entered "for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of trade or used for purposes of fraud. Thus, the
traditional concept of a voting trust agreement primarily intended to single out a stockholder's right
to vote from his other rights as such and made irrevocable for a limited duration may in practice
become a legal device whereby a transfer of the stockholders shares is effected subject to the
specific provision of the voting trust agreement.
The execution of a voting trust agreement, therefore, may create a dichotomy between the
equitable or beneficial ownership of the corporate shares of a stockholder, on the one hand, and
the legal title thereto on the other hand. (Lee vs. CA, Feb. 4, 1992)
1992 Bar Examination
Topic:Trust Fund Doctrine (1992)
Question:
A Corporation executed a promissory note binding itself to pay its President/Director, who had
tendered his resignation, a certain sum in payment of the latter ‘s shares and interests in the
company. The corporation defaulted in paying the full amount so that said former President filed
suit for collection of the balance before the SEC.
a) Under what conditions is a stock corporation empowered to acquire its own shares?
b) Is the arrangement between the corporation and its President covered by the trust fund
doctrine? Explain your answers briefly.

Suggested answer:
a) Under the Corporation Code, a stock corporation shall have the power to purchase or acquire
its own shares for a legitimate corporate purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has unrestricted retained earnings in its books to
cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription,
in a delinquency sale, and to purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code.

b) The arrangement between the corporation and its President to the extent that it calls for the
payment of the latter ‘s shares is covered by the trust fund doctrine.
The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the
payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital
stock, property, and other assets of a corporation are regarded as equity in trust for the payment
of corporate creditors, who are preferred in the distribution of corporate assets. The creditors of
a corporation have the right to assume that the board of directors will not use the assets of the
corporation to purchase its own stock for as long as the corporation has outstanding debts and
liabilities. (Turner vs. Lorenzo Shipping Corporation, G.R. No. 157479, November 24, 2010).
The only exceptions from the trust fund doctrine are the redemption of redeemable shares and,
in the case of close corporation, when there should be a deadlock and the SEC orders the
payment of the appraised value of a stockholder ‘s share.
Thus, the agreement between the corporation and its former president is covered only by the trust
fund doctrine for the payment of the latter’ shares from the corporation.