CORPORATIONS The Corporation Code of the Philippines sets out the general rules governing all corporations in the

country. The Code defines a corporation as an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. Unlike those in other counties like the US and the UK, we only have two types of private corporations in the Philippines: stock and non-stock. Examples of non-stock corporations include the following: educational institutions, non-profit organizations, associations, foundations, etc. Stock corporations are easier to spot: they are business enterprises whose main motivation for existence is to make profit for its shareholders. To form a new corporation, its founders (or incorporators) must file an application for charter to the Securities and Exchange Commission. Once this application is approved, this charter or articles of incorporation should state the following: 1. 2. 3. 4. 5. The name of the corporation. The purposes and the nature of the corporation. Location of the corporate headquarters. Names, nationalities and addresses of the incorporators. The maximum number of shares of authorized capital stock that may be issued, the par value of each class of stock, and a description of the various classes of such stock. 6. The names, nationalities and addresses of the original members of the Board of Directors. 7. Capital stock, number of which it is divided and par value and NNR of original subscriber and amount paid by each; 8. Treasurers Affidavit of subscription; 9. The rights of the stockholders; 10. Other matter not inconsistent with law. Important facts: A private corporation has a lifespan of 50 years. At least 5 natural persons, but not more than 15, may form a private corporation. The corporation is primarily managed by its Board of Directors, who are elected at the corporations annual stockholders meeting.

When forming a new corporation, the articles of incorporation should state the following: 1. The maximum number of shares that may be issued. 2. The par value of each class of stock. Both are arbitrary numbers. The maximum number of shares essentially refers to the total pool of stocks (or shares) that investors (including future investors) can buy or subscribe. The par value is the amount of money, expressed in Peso, that you assign to be the price of each share. Sometimes this is also called face value. When you multiply the

maximum number of shares by the par value of each share, you can what is called the authorized capital stock. The Corporation Law does not specify a minimum authorized capital stock requirement, but it states in part that at least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription. Subscribed capital This amount refers to the number of shares actually issued to the shareholders. Paid-up capital This is the amount that is actually paid in by the investors, where payment may be in the form of cash, real property, equipment, service, or anything of value. The Corporation Code also specifies that in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. The incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the AOI for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. Rights afforded to shareholders: 1. 2. 3. 4. Examine the books of a corporation. Receive dividends when paid. Transfer shares from themselves to other investors. Receive the remaining assets of the corporation after all other claims in the property of the corporation are satisfied. 5. Vote at an annual meeting to elect the Board of Directors. 6. Receive a stock certificate. BOARD OF DIRECTORS All corporate powers, business conducted and all property of corporations are exercised by the BOD. BOD are selected thru an election and they shall hold office for one year and until their successors are elected and qualified. Stockholders cannot interfere with the boards exercise of its powers and functions except when the law expressly gives them the authority. Directors owe their duties to corporation rather than to individual shareholders. The directors or trustees shall not act individually nor separately but as a body in a lawful meeting. Contracts entered into without a formal board resolution does not bind the corporation except when majority of the board has knowledge of the contract and the contract benefited the corporation. Qualification of Directors Every director must own at least one (1) share of the capital stock of the corporation, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Majority of BOD should be resident of the Philippines.

Disqualifications: grounds: 1. Conviction by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years; or 2. Violation of corporation code committed within five (5) years prior to the date of his election or appointment. Election of BOD: 1. Notice to the stockholder/members of the election as provided in AOI; 2. Presence of, in person or by proxy, majority of the outstanding capital stock / member entitled to vote; 3. Election by ballot; 4. Candidate receiving highest number of votes shall be declared elected; and 5. Report to the SEC, within 30 days, the names, nationality and residences of the elected officers and directors. Deaths and resignation must likewise be reported. Stockholders may exercise cumulative voting or straight voting. Cumulative voting is done by casting as many votes as he has number of shares multiplied by the number of directors up for election. This provides the minority an opportunity to elect a representative to the board of directors. Straight voting is done by casting votes as he has number of shares multiplied by the number of directors to a single candidate. The total number of votes cast by a stockholder shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected. The BOD has authority to modify the proposed terms of the contracts of the corporation for the purpose of making the terms more acceptable to the other contracting parties. The test to be applied is whether the act in question is the direct and immediate furtherance of the corporations business, fairly incidental to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise it is not Self-Dealing Directors Directors and officers may enter into contract with the corporation in which he is a director or officer. However, this agreement is being frowned upon by law because there can be no real bargaining where the same is acting on both sides of the trade. In fact, all contracts entered into by directors and officers re considered voidable unless the following requisites are present: 1. The presence of the director/trustee in the board meeting approving the contract was not necessary for constituting a quorum for such meeting; 2. The vote of such director/trustee in the board meeting approving the contract was not necessary for the approval of the contract; 3. The contract is fair and reasonable under the circumstances; and 4. In the case of an officer, there was previous authorization by the board of directors. Although the following requisite is not followed, such contract may be ratified by 2/3 affirmative vote of the outstanding capital stock, provided that there is full disclosure of the adverse interest of the director involved is made at such meeting, and that the contract is fair and reasonable.

Interlocking Directors Interlocking directors are those who sit in the boards of two or more corporations that contract with one other, whether on isolated or regular basis. Contracts between two or more corporations having interlocking directors cannot be invalidated on that ground alone, except cases of [1] fraud and [2] the contract is fair and reasonable. If the interest of the interlocking director in one corporation is merely nominal, the condition set in self-dealing directors will be imposed, thus, the contract voidable. Stockholdings exceeding 20 percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. Hence, nominal interest means stockholdings of not exceeding 20 percent of the outstanding capital stock. Removal of BOD Procedure: 1. Call for meeting for the purpose of removing the BOD, by BOD or majority of stockholders; 2. Notice, by publication or registered mail, to the stockholder by the officer or by majority of the outstanding stock; 3. Election; and 4. Affirmative vote of 2/3 of the outstanding capital stock; Removal of BOD may be with cause or without cause, however, removal without cause may not be used to deprive minority stockholders of the right of representation. Vacancy Any vacancy occurring in the BOD terms may be filled by the vote of at least majority of the remaining directors, if still constituting quorum. If quorum cannot be obtained, vacancies must be filled by the stockholders in a regular or special meeting for that purpose. Same rule applies if the vacancy is due to removal by the stockholder or by expiration of the directors term, or th ere is increase of number of directors in a corporation. A director filling the vacancy shall serve only for the unexpired term of his predecessor. Corporate officers The officers execute polices laid down by the board and perform the duties enjoined by them by the AOI and by-laws. Immediately after the election of BOD, the directors of a corporation must formally organize the election of: 1. A president, who shall be a director; 2. A treasurer who may or may not be a director; 3. A secretary who shall be a resident and citizen of the Philippines, and 4. Such other officers as may be provided for in the by-laws. Any two or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. Directors cannot attend or vote by proxy in a board meeting compared to stockholders which can attend and vote by proxy in a stockholders meeting.

The Corporation Code does not require that one elected or appointed as vicepresident of a corporation should be the owner of shares of stock of the corporation. Executive Committee The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. Such committee may act on specific matter within the competence of the board as may be delegated by the by-laws or majority vote of the board, except the following: 1. Approval of any action for which shareholders' approval is also required; 2. Filing of vacancies in the board; 3. Amendment, repeal or adoption of by-laws; 4. Amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and 5. Distribution of cash dividends to the shareholders. Quorum Majority of the number of director shall constitute the quorum for the transaction of the business unless the AOI or by-provide otherwise. Majority of the directors/trustees constituting the quorum shall be valid as corporate act except the election of officer which requires majority of all the members of the board. Compensation of Directors 1. Reasonable per diem; 2. Provision in the by-laws fixing their compensation; and 3. Compensation granted by majority of the stockholders. In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net income before income tax of the corporation during the preceding year. The said compensation is applicable only to directors; thus, when the director is an officer as well, the BOD may grant compensation to them because the prohibition in Sec. 30 does not apply. POWERS OF CORPORATIONS General Powers: 1. To sue and be sued in its corporate name; 2. Succession; 3. To adopt and use a corporate seal; 4. To amend its AOI; 5. To adopt by-laws; 6. to issue or sell stocks and admit members; 7. To acquire and encumber properties; 8. To enter into merger or consolidation; 9. To make reasonable donations except in political parties; 10. To establish pensions and benefits for the employees and officers; and 11. Essential and necessary powers to promote its purpose. Specific Powers: 1. To Extend or Shorten Corporate Term Procedure:

a. b. c. d.

Majority vote of BOD; Notice of the proposed action to the stockholders/members; Affirmative vote of at least 2/3 of the outstanding capital stock; Amended and original AOI copy, certified under oath by the corporate secretary and majority of BOD shall be filed to SEC; and e. Shall take effect upon approval of SEC or upon 6 months of inaction. In case of extension of corporate term, any dissenting stockholder may exercise his appraisal right. Appraisal right is also available in case of shortening the corporate term under Section 81. 2. To Increase or Decrease Capital Stock Procedure: a. Majority vote of BOD; b. Written notice to the stockholder; c. Affirmative vote of (2/3) of the outstanding capital stock favoring the increase of decrease of capital stock; d. Certificate in duplicate must be signed by majority BOD and countersigned by the chairman and secretary of the stockholders meeting; e. Filing of the certificate with the original AOI to the SEC and Treasurers affidavit indicating that at least 25% of the increased capital stock has been subscribed and at least 25% of such subscribed stock has been actually paid; f. Keeping of copy in the office of the corporation; g. Approval of the SEC. Any increase or decrease in the capital stock bonded indebtedness shall require prior approval of the SEC. From and after approval SEC and the issuance of certificate, the capital stock shall stand increased or decreased. Decrease of capital stock shall not be approved if it will prejudice the creditors of the corporation. 3. To Incur, Create or Increase Bonded Indebtedness Procedure: a. Follow step a, b, c, d, e (certificate only), and 6 of the preceding number (procedure to increase/decrease capital stock); b. Bonds issued by a corporation shall be registered with the SEC, which shall have the authority to determine the sufficiency of the terms thereof. 4. To deny pre-emptive rights Pre-emptive right is the right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, including subsequently issued shares, treasury shares or unissued stocks before it can be disposed of in favor of the others. The purpose of which is to enable the shareholder to retain his proportionate control in the corporation and retain equity to the surplus profit. This right may be denied by the AOI or by its amendment shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith, with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purpose. 5. To sell or dispose of corporate assets

Sale by the corporation is considered a sale of all or substantially all of the corporate assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing its purpose; such sale may be made by a majority vote of the BOD, sending notice to the stockholder and obtaining 2/3 affirmative votes of the stockholders. Take note that stockholders vote is not necessary when the disposition is necessary in the usual and regular business of the corporation or the proceeds of such sales was appropriated for its regular business. Dissenting stockholder may exercise his appraisal right in relation to section 81. The BOD has authority to abandon the said disposition after the approval of the stockholders. 6. To Acquire Own Shares A stock corporation shall have the power to purchase or acquire its own shares for legitimate corporate purposes provided it has unrestricted retained earnings to cover the shares to be acquired. This includes but not limited to the following: 1. To eliminate fractional shares; 2. To collect or compromise an indebtedness to the corporation:; and 3. To pay dissenting or withdrawing stockholders exercising appraisal rights. The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits. Corporation may not dissipate this and the creditors may sue stockholders directly for the unpaid subscription (Trust Fund doctrine). . 7. Invest corporate funds in another corporation or business A private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized. When the investment is reasonably necessary to accomplish the primary purpose of the corporation, stockholders voting requirement is not required and only the majority approval of the BOD is necessary. Any dissenting stockholder may exercise his appraisal rights. Procedure: a. Approval of majority of BOD/T; b. Written notice of the proposed investment to the stockholder; and c. Affirmative votes of two-thirds (2/3) of the outstanding capital stock. If an act of investing corporate fund is done pursuance of the corporate purpose, it does not need the approval of the stockholders but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary. When the purposes are stated in its AOI, the approval of the stockholders is not necessary. 8. To declare dividends Dividends are unrestricted retained earnings set apart from the general mass of funds of the corporation and distributed among the stockholders, in proportion to their shares or interest in the corporation, in the form of cash, property or stocks.

The BOD of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by stockholder. If the stockholder is a delinquent stockholder, his cash dividend shall be applied to the unpaid balance on the subscription plus costs and expenses. If it be a stock dividend, it shall be withheld from them until his unpaid subscription is fully paid. Take note that the approval of the stockholders is not necessary in the approval of cash dividend but such affirmative vote is necessary for declaring stock dividend. Stock corporations are prohibited from retaining surplus profits in excess of 100 percent of their paid-in capital stock, except: a. When justified by definite corporate expansion programs;; or b. When the corporation is prohibited under any loan agreement with any creditors from declaring dividends without its consent; or c. When the retention is necessary under special circumstances. 9. To enter into management contract Management contract is one where a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise. No management contract shall be entered into longer than five years for any one term. Procedure: a. Meeting duly called for the purpose; b. Approval of the majority of the BOD and stockholders of both the managing and the managed corporation; c. If the interest of the stockholder of one of the corporation is more than 1/3 of the total outstanding stock, or majority of the BOD of the managed corporation is also the members of the majority of the managing corporation, then 2/3 affirmative votes of the outstanding stockholders of the managed corporation is required. MEETINGS Meetings of directors or stockholders may be regular or special. Regular meetings of stockholders are those held annually on the date fixed in the by-laws or on any date of April on the absence of which. Regular meeting of BOD is conducted monthly unless provided by the by-laws otherwise. Special meetings of stockholders are those called for good cause, as ordered by SEC, upon petition of stockholders. Notice in writing, indicating the time and place, is required before a meeting can be held. Special meetings of BOD are those called by the President or as provided in the bylaws. Meetings of stockholders shall be held in the city/municipality where the principal office of the corporation is located. In a non-stock corporation, the by-laws may allow the meeting of its members to be held anywhere in the Philippines. Meetings of BOD may be held in or outside of the Philippines unless the by-laws provide otherwise. Quorum in a stockholders meeting consists of the stockholders representing the majority of the outstanding capital stock except the by-laws provide for a greater

number. Quorum in the BODs meeting consists of majority of numbers of director fixed in AOI unless the AOI or by-laws provides for higher number. The president shall preside at all meetings of the directors or trustee as well as of the stockholders or members, unless the by-laws provide otherwise. Right to Vote A mortgaged/pledge shares of stock does not give the authority to the pledgee or mortgagee the right to vote unless expressly given such right in writing and was recorded in the corporate book. On the other hand, administrator, executor and other legal representative appointed by court may attend and vote in behalf of the stockholder without the need of any written proxy (ibid). In case of co-ownership of stocks, consent of all the co-owners is necessary in order to vote for the said stocks unless there is a written proxy signed by all the co-owners. If the shares are owned in an and/or capacity, anyone can vote or appoint a proxy. STOCKS AND STOCKHOLDERS Subscription is an offer to acquire a specified number of unissued shares of an existing corporation or one still to be formed. It is an entire and indivisible whole contract; it cannot be divided into portions (Doctrine of Indivisibility of Subscription Contract). Any contract for the acquisition of the unissued stock is considered subscription notwithstanding the fact that the parties considered it as a purchase or any other contract. However, sale of treasury stock by the corporation is a contract of sale because the stock referred was already issued and was reacquired by the corporation. Subscription of shares of stock of a corporation still to be formed shall be irrevocable at least six months from date of subscription, unless all of the other subscribers consent to the revocation or the incorporation of said corporation fails to materialize within six months or within a longer period as stipulated in the contract. If AOI was submitted to SEC, pre-incorporation subscription cannot be revoked. Considerations in Subscription Agreement d. Cash; e. Property; f. Labor or services actually rendered to the corporation; g. Prior corporate obligations; h. Amounts transferred from unrestricted retained earning to stated capital; and i. Outstanding shares in exchange for stocks in the event of reclassification or conversion. Shares of stock shall not be issued in exchange for promissory notes or future services. After payment of such shares, a certificate of stock, signed by the president or VP and corporate secretary or asst. secretary, shall be issued to the stockholder. However, no certificate of stock shall be issued until the full amount of his subscription, including interest, has been paid. Shares of stock are considered personal property and may be transferred by delivery of the certificate of stock. The transfer will be valid to the contracting parties but not to the corporation unless said transfer is recorded to the book of corporation.

However, if the corporation has an unpaid claim to that stock, the corporation may refuse to record such transfer. The purpose of registration is to enable the transferee to exercise all the rights of a stockholder and to inform the corporation of any changes in share ownership so that the latter may ascertain the persons entitled to the rights and liabilities of shareholders. Until the transfer has not been recorded to the book of the corporation, the transferee cannot vote or voted for; has inferior rights over attaching creditor; is not entitled to dividends; and cannot participate in the meeting. Watered Stocks are those issued less than the par value of the stock. Water in the stock refers to the difference between the fair market value at the time of the issuance of the stock and the par value of the said stock. The existence of such water is determined at the time of the issuance of stock. Payment of delinquent stock Payment of stock becomes due and payable in the following manner: 1. The term prescribed in the subscription contract; and 2. In the absence of the provision contract, at any time specified by BOD. Failure to pay on such period shall render the entire balance due and payable and renders the stockholder liable to interest. If no payment was made within 30 days after such period, the stock shall be considered delinquent stock, which is subject to delinquency sale. Take note that unpaid subscriber is different from delinquent stockholder. Delinquency Sale Procedure: 1. BODs resolution indicating the time and place of sale which shall be not less than 30 days nor more than 60 days from the date of the stock became delinquent; 2. Notice of sale and resolution shall be sent to the delinquent stockholder; 3. Publication for two consecutive weeks in newspaper generally circulating in the province where the principal office of the corporation. Is located; 4. Public auction on the specified date; 5. Transfer of stock to the purchaser and issuance of certificate of stock to the highest bidder; and 6. Remaining shall be credited in favor of the delinquent stockholder. If the delinquent stockholder pays the balance before the public auction, said sale shall not commence and the certificate of stock shall be issued to him. In case there is no bidder at the public auction who pays the full amount of the balance, the total amount shall be credited as paid and its title to all the shares of stock shall be vested in the corporation as treasury shares which may be disposed by the corporation. Actions questioning the delinquency sale should be commenced within six months from the date of sale; otherwise, it shall be barred forever. Also, the complainant should pay or tender to buyer of the stock the sum for which the stock was sold. Ground for irregularity or defect in the notice of sale or the sale itself is also unavailing for the complainant.

Delinquency sale does not bar the corporation to file a judicial action for the collection of the unpaid subscription. Effects of Delinquency 1. Stockholder have no right to vote or be voted upon; and 2. Not entitled to any right except dividends Lost or destroyed certificates Procedure 1. Owner shall file an affidavit on how the certificate is lost, number of shares and certificate number; 2. Publication for three consecutive weeks; 3. If no contest was filed within one year, the corporation will cancel in its books the certificate of stock and issue in lieu thereof new certificates of stock. 4. If a contest was filed or there is pending suit regarding such stocks, the issuance of new certificate shall be suspended until the final decision of the court. After the said procedure was followed, no action may be brought against the corporation who issued the certificates of stock in lieu of those lost, stolen or destroyed unless there is fraud, bad faith, or negligence on the part of the corporation and its officers. APPRAISAL RIGHT Appraisal right is a right to demand payment of the fair value of his shares, after dissenting from a proposed corporate action involving fundamental changes in the corporation. These fundamental changes in the corporation include the following instances: 1. Amendment of AOI which has an effect of changing or restricting the rights of any stockholders or authorizing preferences in any respect superior to outstanding shares or extending or shortening the corporate term; 2. Encumbering all or substantially all of its corporate properties; 3. Merger or consolidation; 4. Investing corporate funds in another corporation or business; and 5. For any reason in close corporation. Procedure : 1. Written demand on the corporation within thirty (30) days after the date on which the vote was taken; 2. Surrender of certificate of stock within 10 days for notation (Sec. 86); 3. Payment of fair value; and 4. Shareholder shall transfer his shares to the corporation.(Sec. 82) If within 60 days after the corporate action was approved and the dissenting stockholders and the corporation cannot agree in the fair value of the shares, it shall be determined by three disinterested person: one chosen by the stockholder, one by the corporation and the other one chosen by the two. Their determination of the fair value is final and shall be paid within 30 days.

Purpose of Notation Notation is necessary so as to guide the secretary of the corporation who shall deny to the dissenting stockholder the right to vote and the right to receive dividends in the proper situation. Failure to do so shall give right to the corporation to terminate the rights of the stockholder. Transfer of Dissenting Shares When the shares of a dissenting stockholder are transferred or assigned, the assignee becomes a regular stockholder and the appraisal right of the dissenting stockholder shall cease. All dividends which accrue on such shares shall be paid to the transferee. Conditions for Valid Exercise of Appraisal Rights: 1. The demand for payment of shares arise from the instances provided in Corporation Code; 2. Existence of unrestricted retained earnings; 3. The demand was made within 30 days after the corporate action; failure to exercise of such constitutes waiver of this right Effect of Demand of Payment of Stockholders Share: 1. All rights accruing to such shares, including voting and dividend rights, shall be suspended; 2. The stockholder is entitled to payment of his shares; 3. If the dissenting stockholder is not paid within 30 days, his voting and dividend will be restored; and 4. Demand for payment may not be withdrawn unless with consent of the corporation. Termination of Right of Appraisal 1. If demand for payment is withdrawn with the consent of the corporation; 2. If the proposed corporate action is abandoned or rescinded by the corporation; 3. If the proposed corporate action disapproved by the SEC; and 4. If the SEC determines that such stockholder is not entitled to the appraisal right In these cases, the right of appraisal of the stockholder ceases, his status as a stockholder shall be restored, and all dividend distributions which would have accrued on his shares shall be paid to him. Costs of Appraisal 1. By the corporation: a. If the value as determined by the appraiser is higher than what was offered by the corporation; and b. If the action is filed to recover the fair value of the shares and the stockholders refusal to receive payment is justified. 2. By the stockholder: a. If the value is determined by the approximately the same as the price offered by the corporation; and b. Where an action to recover is filed and the refusal of such stockholder to receive payment is unjustified.