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Chapter I and II - Corporation Law

Chapter I and II - Corporation Law

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Published by: Sui on Aug 10, 2008
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Chapters I: Introduction
Role of corporation in modern business
 — 
Corporate form of business organization permits the combinationof funds from various sources to raise the big capital needed forlarge business and industrial enterprise
 — 
Combination of resources+advantages of limited liability=corporation’s popularity
Definition and attributes of a corporationSection 2.
 
Corporation defined.
- A corporation is an artificial being createdby operation of law, having the right of succession and the powers, attributesand properties expressly authorized by law or incident to its existence. (2)
Four attributes
:(1) artificial being—
 — 
By operation of law, becomes a being with the attributes of anindividual with full capacity to enter into contractual relations
 — 
a juridical person capable of having rights and obligations;
 — 
with a personality separate and distinct from its members or SHs
 — 
fundamental principle in corporate law: SHs are not personallyliable for corporate obligations, and cannot be liable beyondtheir contribution to the corporate capital
 — 
corporation not liable for personal obligations of its SHs(2) created by operation of law
 — 
from a strict legal point of view, a corporation cannot come intobeing by mere consent of the parties
o
there must be a law granting it
o
once granted, form the primary franchise of the corporation
o
mere consent insufficient
 — 
State must have given its consent either through a special law orgeneral enabling law
o
General law: The Corporation Code
o
Compliance with the Code=acquisition of juridicalpersonality
 — 
 There must be an underlying contract among the individualsforming the corporation
o
Interplay of State grant and contractual relations(3) right of succession
 — 
Continued existence cannot be affected by any change in themembers or SHs(4) powers, attributes, and properties expressly authorized by law orincident to its existenceAdvantages of Corporate Form1.strong legal personality2.limited liability to investorsa.limited to their sharesb.in partnerships—creditors can still go after individualproperties of the partners3.free transferability of units of investmenta.GR: shares of stocks can be transferred even without theconsent of other SHs4.Centralized managementa.Centralized in the Boardb.SHs are not agents and cannot bind the corporationc.SHs are bound by management decisions and transactionsof the board, generally
AdvantagesDisadvantages
1Strong legal personalityComplicated and costly formation2Limited liabilityLack of personal element3Free transferabilityAbuse of corporate management4Centralized management Limited liability hits innocentvictims5Double taxation
Laws governing Philippine corporationsChoice of Business organizations
(1)
The Individual Proprietorship
 — 
works well for carrying simple or small businesses
 — 
owner’s unlimited personal liability
 — 
difficulties in expansion
 — 
upon death business will have to stop and be liquidated (2)
The Partnership
 — 
1767: two or more persons bind themselves to contribute moneyor industry to a common fund, with the intention of dividing theprofits among themselves
 — 
partners are personally liable for debts of the partnership; whileSHs cannot be made to personally answer to corporate creditorsbeyond the amount contributed
1
 
 — 
much simpler to form a partnership: 5 incorporators vs. at least2 for partners
 — 
Personal relationship between and among partners based onmutual trust and confidence
o
Death or insolvency of partner will result in dissolution
o
Corporations cannot be voluntarily dissolved except by 2/3vote of stock + some State act, whether judicial oradministrative (SEC)
 — 
Mere agreement is sufficient to give rise to a partnership v.substantial compliance with the Corpo Code for corporations
 — 
Management—every partner is an agent of the partnership, withcapacity to bind vs. centralized management in the BoD forcorporations
o
SH has no voice in the management except to elect directors(3)
The Close CorporationSection 96.
 
Definition and applicability of Title.
- A close corporation, withinthe meaning of this Code, is one whose articles of incorporation provide that:(1) All the corporation's issued stock of all classes, exclusive of treasuryshares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classesshall be subject to one or more specified restrictions on transfer permitted bythis Title; and (3) The corporation shall not list in any stock exchange ormake any public offering of any of its stock of any class. Notwithstanding theforegoing, a corporation shall not be deemed a close corporation when atleast two-thirds (2/3) of its voting stock or voting rights is owned orcontrolled by another corporation which is not a close corporation within themeaning of this Code.Any corporation may be incorporated as a close corporation, except miningor oil companies, stock exchanges, banks, insurance companies, publicutilities, educational institutions and corporations declared to be vested withpublic interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations:Provided, That the provisions of other Titles of this Code shall applysuppletorily except insofar as this Title otherwise provides.
 — 
Small closely-knit group like a family
 — 
 They act and feel as partners but wishing to avail of limitedliability
 — 
Most distinct characteristic: all or most SHs are active in thecorporate business either as directors or officers
 — 
“De facto partnership with a corporate shell”
o
AOI of close corp can do away with a BOD
o
Can vest management exclusively with the SHs
o
SHs active in management are made liable for personal torts
o
Business/industry imbued with public interest cannot be by aclose corporation
(4) The Joint Venture
—a form of partnership and should begoverned by the law on partnerships
 — 
Common defn: organization formed for some temporary purpose
 — 
Community of interests, sharing of profits and losses, mutualagency
 — 
Formed for the execution of a single transaction, and is thus of atemporary nature
 — 
Form of partnership and should be governed by the law onpartnerships
 — 
SC has ruled that a corporation can enter into a JV, but not apartnership
 — 
Separate juridical personality
 — 
Mutual agency
 — 
Unlimited liability
The Business Trust
—a vesting of title to the assets of a businessenterprise in trustees who act as representative thereof, for the benefit of others called the cestui que trust
 — 
deed of trust which is easier and less expensive to constitute forit is not bound by any legal requirements
 — 
No separate juridical personality
 — 
Governed by contract law and common law principles on trusts
Government regulation of corporations
By the LegislatureBy the SEC
Union Glass v SEC
. F:
The complainant Carolina Hofileña is a stockholder of Pioneer Glass Manufacturing Corporation, engaged in the operation of silica mines andthe manufacture of glass and glassware. Since 1967, Pioneer Glass had obtained variousloan accommodations from the Development Bank of the Philippines [DBP], and alsofrom other local and foreign sources which DBP guaranteed. As security for said loanaccommodations, Pioneer Glass mortgaged and/or assigned its assets, real andpersonal, to the DBP, in addition to the mortgages executed by some of its corporateofficers over their personal assets. The proceeds of said financial exposure of the DBP were used in the construction of a glass plant in Rosario, Cavite, and the operation of seven silica mining claims owned by the corporation. Through the conversion intoequity of the accumulated unpaid interests on the various loans amounting to P5.4
2
 
million as of January 1975, and subsequently increased by another P2.2 million in 1976,the DBP was able to gain control of the outstanding shares of common stocks of PioneerGlass, and to get two, later three, regular seats in the corporation's board of directors. When Pioneer Glass suffered serious liquidity problems such that it could no longermeet its financial obligations with DBP, it entered into a
dacion en
pago agreement withthe latter, whereby all its assets mortgaged to DBP were ceded to the latter in fullsatisfaction of the corporation's obligations in the total amount of P59,000,000.00.Part of the assets transferred to the DBP was the glass plant in Rosario, Cavite, whichDBP leased and subsequently sold to herein petitioner Union Glass and ContainerCorporation, hereinafter referred to as Union Glass. Hofileña filed a complaint beforethe respondent SEC against the DBP, Union Glass and Pioneer Glass, asserting thealleged illegality of the aforesaid
dacion en pago
resulting from: [1] the supposedunilateral and unsupported undervaluation of the assets of Pioneer Glass covered by theagreement; [2] the self-dealing indulged in by DBP, having acted both asstockholder/director and secured creditor of Pioneer Glass; and [3] the wrongfulinclusion by DBP in its statement of account of P26M as due from Pioneer Glass whenthe same had already been converted into equity. Union Glass moved for dismissal of the case on the ground that the SEC had no jurisdiction over the subject matter ornature of the suit.I: W/N the SEC or the TC has jurisdiction over the suit of HofilenaH: In the ordinary course of things, petitioner Union Glass, as transferee and possessorof the glass plant covered by the
dacion en pago
agreement, should be joined as party-defendant under the general rule which requires the joinder of every party who has aninterest in or lien on the property subject matter of the dispute. But since petitionerUnion Glass has no intra-corporate relation with either the complainant or the DBP, its joinder as party-defendant in SEC Case No. 2035 brings the cause of action assertedagainst it outside the jurisdiction of the respondent SEC, as delineated by Section 5 of PD No. 902-A. This grant of jurisdiction must be viewed in the light of the nature andfunction of the SEC under the law. Section 3 of PD No. 902-A confers upon the latter(SEC) "absolute jurisdiction, supervision, and control over all corporations,partnerships or associations, who are grantees of primary franchise and/or license orpermit issued by the government to operate in the Philippines ... " The principalfunction of the SEC is the supervision and control over corporations, partnerships andassociations with the end in view that investment in these entities may be encouragedand protected, and their activities pursued for the promotion of economic development.Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships:[a] between the corporation, partnership or association and the public;[b] between the corporation, partnership or association and its stockholders,partners, members, or officers;[c] between the corporation, partnership or association and the state in so far as itsfranchise, permit or license to operate is concerned; and[d] among the stockholders, partners or associates themselves.The fact that the controversy at bar involves the rights of petitioner Union Glass whohas no intra-corporate relation either with complainant or the DBP, places the suit beyond the jurisdiction of the respondent SEC. The case should be tried and decided by the court of general jurisdiction, the Regional Trial Court. Since petitioner has no intra-corporate relationship with the complainant, it cannot be joined as party-defendant insaid case as to do so would violate the rule or jurisdiction. Hofileñas complaint againstpetitioner for cancellation of the sale of the glass plant should therefore be broughtseparately before the regular court. The SC added however that for Hofileñas complaintagainst Union Glass to prosper, final judgment must first be rendered in the issue of the validity of the
dacion en pago,
which is a prejudicial question, the resolution of which isa logical antecedent of the issue involved in the action against petitioner Union Glass.But the Court held that the SEC had no jurisdiction over petitioner Union Glass Corp.,impleaded as third party purchaser of the plant from DBP in the action to annul thedacion en pago. The Court held that such action for recovery of the glass plant could be brought by the dissenting stockholder to the regular courts only if and when the SECrendered final judgment annulling the dacion en pago and furthermore subject toUnion Glass' defenses as a third party buyer in good faith.
Abejo v dela Cruz. F
:
Case involves a dispute between the principal stockholdersof the corporation Pocket Bell Philippines, Inc. (Pocket Bell), a "tone and voice pagingcorporation," namely, the spouses Jose Abejo and Aurora Abejo vs. De la Cruz Abejo(hereinafter referred to as the Abejos) and the purchaser, Telectronic Systems, Inc.(hereinafter referred to as Telectronics) of their 133,000 minority shareholdings (for P6million) and of 63,000 shares registered in the name of Virginia Braga and covered by five stock certificates endorsed in blank by her (for P1,674,450.00), and the spouses Agapito Braga and Virginia Braga (hereinafter referred to as the Bragas), erstwhilemajority stockholders. With the said purchases, Telectronics would become themajority stockholder, holding 56% of the outstanding stock and voting power of thecorporation Pocket Bell. Telectronics requested the corporate secretary of thecorporation, Norberto Braga, to register and transfer to its name, and those of itsnominees the total 196,000 Pocket Bell shares in the corporation's transfer book, cancelthe surrendered certificates of stock and issue the corresponding new certificates of stock in its name and those of its nominees. Norberto Braga, the corporate secretary and son of the Bragas, refused to register the aforesaid transfer of shares in thecorporate books, asserting that the Bragas claim preemptive rights over the 133,000 Abejo shares and that Virginia Byaga never transferred her 63,000 shares toTelectronics but had lost the five stock certificates representing those shares. Thistriggered off the series of intertwined actions between the protagonists, all centered onthe question of jurisdiction over the dispute. The Bragas assert that the regular civilcourt has original and exclusive jurisdiction as against the Securities and ExchangeCommission, while the Abejos and Telectronics, as new majority shareholders, claimthe contrary. Respondent Judge de la Cruz issued an order rescinding the order whichdismissed the complaint of the Bragas in the RTC, thus holding that the RTC and notthe SEC had jurisdiction. Respondent judge also revived the temporary restrainingorder previously issued restraining Telectronics' agents or representatives fromenforcing their resolution constituting themselves as the new set of officers of PocketBell and from assuming control of the corporation and discharging their functions.The Abejos filed a MR, which motion was duly opposed by the Bragas, which wasdenied by respondent Judge.
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