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1 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y.

2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
Chapter I. Introduction Role of Corporation in Modern Business Corporate form of business permits the combination of funds from various sources to raise the big capital needed for large business and industrial enterprises Combination of resources coupled with the advantage which the investor therein gains by the legal theory limiting the liability to the amount of his investment Definition and Attributes of a Corporation CorpCode, 2. Corporation Defined A corporation is 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. Artificial being a juridical person capable of having rights as well as obligations, with a personality separate and distinct from its members or stockholders o Fundamental principle in corporation law: stockholders are not personally liable for corporate obligations and cannot be held liable to 3rd persons who have claims against the corporation beyond their agreed contribution to the corporate capital Created by operation of law before it can acquire a juridical personality, the State must give its consent either in the form of a special law or a general enabling act o The general law under which a private corporation may be formed or organized is the Corporation Code, the requirements of which must be complied with by those wishing to incorporate Right of succession its continued existence cannot be affected by any change in the members or stockholders, whether this change be the consequence of death, insolvency or any other incapacity; nor is it affected by the transfer of shares by a stockholder to a 3rd person It has the powers, attributes and properties expressly authorized by law or incident to its existence o Traditional concept: a corporation, being merely a creature of law, can exercise only such powers as the law may choose to grant it, either expressly or impliedly Laws Governing Philippine Corporations Choice of Business Organizations Although the form in which a business is conducted will not necessarily determine its ultimate success or failure, it may influence the facility and efficiency of its operations as well as the actual profits which would accrue to its owners The Individual Proprietorship - One-man business, where the owner is at the same time the workers - He makes the decision alone and this can act without delay or other formalities - Earnings subjected only to income tax once - Unlimited personal liability - Capital will be limited by his resources - Upon his death or incapacity, the business will probably cease as well The Partnership NCC, 1767. By the contract of partnership two or more persons bind themselves to contribute money, or industry to a common fund, with the intention of dividing the profits among themselves x x x The Close Corporation CorpCode, 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, 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 classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared The Limited Partnership - In between a corporation and a partnership - It makes possible the sharing of profits by an investor, whose liability is limited to his investment - Limited partner cannot take part in the management of the business and must leave it exclusively in the hands of general partners The Joint Venture - Of common law origin - No precise legal definition, but it has generally been understood to mean an organization formed for some temporary purpose - Main distinction from a general partnership = partnership contemplates a general business with some degree of continuity, while a joint venture is formed for the execution of a single transaction The Business Trust - Vesting of title to the assets of a business enterprise in trustees, who act as representatives thereof, for the benefit of others (beneficiaries) - It cannot have the juridical personality which the partnership and the corporation possess - Advantage: centralized management in the hands of trustees, easy transferability of beneficiaries interest - Deed of trust similar to an AOI in that it sets up the organization and specifies its purpose, powers of the trustees as well as rights of beneficiaries

2 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
to be vested with public 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 apply suppletorily except insofar as this Title otherwise provides.

- Much simpler to form - 2 persons are sufficient to form a partnership - Mere agreement gives rise to the juridical personality of a partnership - Formation usually entails less expenses - Management factor: all the owners actively participate - Makes for more flexibility as far as internal arrangements are concerned - Nature of liability: partners are personally liable for the debts of the partnership which its assets cannot satisfy (as opposed to stockholders of a corporation cannot be made to personally answer to corporate creditors beyond the amount which they have contributed)

- Where business associates belong to a small, closelyknit group, like a family, they usually prefer to keep the organization exclusive and would not welcome strangers - ULTIMATE EFFECT: a de facto partnership with a corporate shell

Government Regulation of Corporations - By the Legislature government regulation of corporations can be justified not only by the police power of the state, but also by the fact that they owe their existence to it o The power to regulate corporations in their activities and operations is exercised through the legislative and executive branches of government - By the SEC o Administrative supervision over corporations is vested by law in the SEC, a quasi-judicial body charged with the enforcement of all laws affecting corporations PD 902-A, Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships, or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines, and in the exercise of its authority, it shall have the power to enlist the aid and support of and to deputize any and all enforcement, agencies of the government, civil or military as well as any private institution, corporation, firm, association or person. Significant Powers of the SEC: (1) To approve or reject AOI (2) To approve by-laws of corporations and amendments thereto (3) To approve registration of securities, like shares and bonds, before they can be publicly sold (4) To approve amendments to AOI (5) To approve increase or reduction of capital stock (6) To conduct investigations as it may consider necessary in the enforcement of the Corporation Code and other related laws, and in this connection, to inspect the books of any corporation within its jurisdiction, to issue subpoenas and subpoenas duces tecum as well as to order the search and seizure of documents and records of any person or entity under investigation (7) To punish for contempt, direct or indirect (8) To require corporations to submit financial and other reports as it may deem necessary in the public interest or for the proper discharge of its duties (9) to issue rulings and opinions as to the proper interpretation and application of laws entrusted to it for administration (10) to impose fines and/or penalties for violation of the laws implemented by it, as well as its rules and regulations, its orders, decisions and/or rulings (11) to act on complaints of any violation of law, rule or regulation required to be enforced by it or for non-compliance of any term or condition of any certificate, license or permit issued by it

3 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
(12) (13) (14) (15) (16) (17) to suspend or revoke, after proper notice and hearing, the certificate of registration of any corporation on certain specified grounds to promulgate rules and regulations as may be necessary for the proper execution of all the laws administered by it to grant licenses to foreign corporations to enable them to transact business in the Philippines to issue preliminary or permanent injunctions, whether prohibitory or mandatory, in all cases in which it has jurisidiction to issue writs of attachment in cases in which it has jurisdiction, in order to preserve the rights of parties to appoint one or more receivers of the property, real and personal, which is the subject of the action pending before it in accordance with the Rules of Court, and in such other cases whenever necessary to preserve rights of parties litigants and/or protect the interest of the investing public and creditors (18) to create and appoint a management committee, board, or body upon petition motu proprio to undertake the management of corporations not supervised or regulated by other government agencies in appropriate cases when there is imminent danger of dissipation or loss of assets or other properties or paralization of business operations of such corporation which may be prejudicial to minority stockholders, parties-litigants or general public (19) ORIGINAL AND EXCLUSIVE JURISDICTION TO HEAR AND DECIDE CASES as in PD 902-A, Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: (a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partnership, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder, partners, members of associations or organizations registered with the Commission; (b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity; and (c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations; (d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree. Commissioner en banc CA SC Under PD 902-A, Sec. 5, regular courts are deprived of any jurisdiction over all cases affecting controversies within the corporation On the other hand, where the case involves the rights and obligations of parties outside the corporation, then the regular courts and not the SEC would have the sole power to hear and decide the same Effect of Corporation Code on Existing Corporations CorpCode, 148. Applicability to existing corporations. - All corporations lawfully existing and doing business in the Philippines on the date of the effectivity of this Code and heretofore authorized, licensed or registered by the Securities and Exchange Commission, shall be deemed to have been authorized, licensed or registered under the provisions of this Code, subject to the terms and conditions of its license, and shall be governed by the provisions hereof: Provided, That if any such corporation is affected by the new requirements of this Code, said corporation shall, unless otherwise herein provided, be given a period of not more than two (2) years from the effectivity of this Code within which to comply with the same. CorpLaw, 76. This Act or any part thereof may be amended or repealed at any time by the legislative authority, and any and all corporations created by virtue of this act may be dissolved by legislative enactment. No right or remedy in favor pf pr accrued against any corporation, its stockholders or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Act or of any part or portion thereof Chapter II. Classification of Private Corporations Stock and Non-Stock Corporations CorpCode, 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. CorpCode, 87. Definition. - For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. CorpCode, 88. Purposes. - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations. Stock corporations, elements: (1) It must have capital stock divided into shares (2) Must be authorized to distribute to its shareholders dividends out of its surplus profits Implicit is the main purpose of such corporation: to make profits for its shareholders Non-stock corporations exist for purposes other than profit Corporation Sole an incorporated office held by only one person. Grew out of the convenience it affords to religious sects in administration of church properties and funds Only a religious corporation can be a corporation sole; all other must be corporations aggregate CorpCode, 110. Corporation sole. - For the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. Parent and Subsidiary Corporations, Holding Companies; Affiliate Corporations Subsidiary: one in which control, usually in the form of ownership of majority of its shares, is in another corporation, called the parent corporation o The parent corporations control is in its power to elect the subsidiarys directors thus controlling management policies Holding company: where the sole function of the parent company is to hold the shares of other corporations which it controls o It has no other business aside from holding the shares of its subsidiaries Investment company: where a corporation holds shares in other corporations not for the purpose of controlling them but merely to invest therein Affiliates: those corporations which are subject to common control and operated as part of a system; sister corporations Chapter III. Formation and Organization of Corporation Who May Form Corporation CorpCode, 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. Must be natural persons but the law does not preclude such corporations and partnerships from becoming stockholders or members as long as they are not incorporators At least five incorporators

4 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
o Must sign o Does not necessarily prevent a one-man corporation where the business is actually owned by only the individual, it is still possible for him to incorporate by giving nominal ownership of only one share of stock to each of the four other persons Residence requirement; citizenship requirement only in certain areas o While the code requires that a majority of the incorporators be residents of the Philippines, there is no general requirement of Philippine citizenship o HOWEVER, by virtue of the Constitution and various special laws, there are some areas of business and industry wherein ownership is reserved, wholly or partially, in favor of Filipino citizens among others Public utilities (1987 Consti, Art. XII, Sec. 11) Retail trade (RA 1180) Banks (General Banking Act [RA 337]) Investment houses (PD 129, Sec. 5) Saving and loan associations (RA 3779) Schools (1987 Consti, Art. XIV, Sec 4(2)) o Even in areas where there are no legal restrictions as to alien ownership, where more than 40% of the outstanding capital of a proposed corporation is to be owned or controlled by aliens, a written authorization must first be sought from the BOI before it can register with the SEC Restriction on stock ownership of closely knit groups CorpCode, 140. Stock ownership in certain corporations. - Pursuant to the duties specified by Article XIV of the Constitution, the National Economic and Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation or by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their prevention or correction. Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section, belonging to individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restraint or trade, or to implement national economic policies declared in laws, rules and regulations designed to promote the general welfare and foster economic development. In recommending to the Batasang Pambansa corporations, business or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export potential, as well as other factors which are germane to the realization and promotion of business and industry. CorpCode, 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and 3. The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors.

Steps in Formation of Corporation 1. Promotional Stage Promoter one who brings together persons who become interested in the enterprise, aids in procuring subscriptions and sets in motion the machinery which leads to the formation of the corporation itself He formulates the necessary initial business and financial plans, and if necessary, buys the rights and property which the business may need, with the understanding that the corporation when formed, shall take over the same Rev. Securities Act, Sec. 2. Definitions -- (r) "Promoter" includes (1) any person who, acting alone or in conjunction with one or more other persons, directly or indirectly, takes initiative in founding and organizing the business or enterprise of an issuer; or (2) any person who, in connection with the founding and organizing of the business of an issuer, directly or indirectly, receives in consideration of services or property or both services or property ten (10%) per centum or more of any class of securities of the issuer or ten (10%) per centum or more of the proceeds from the sale of any class of such securities. However, a person who receives such securities or proceeds either solely as underwriting commissions or solely as consideration of property shall not be deemed a promoter within the meaning of this paragraph if such person does not otherwise take part in founding and organizing the enterprise The code requires that before incorporation at least 25% of the authorized capital stock of the proposed corporation should be subscribed and at least 25% of this subscription should be paid in the promoters must therefore secure these before the corporation can be registered In many cases, the promoters are also incorporators If they can supply the minimum capital requirement, then no additional subscription need be solicited 2. Drafting Articles of Incorporation AOI the contract between the corporation and its stockholders as well as the agreement among the stockholders CorpCode, 14. Contents of the articles of incorporation. - All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are he secondary purpose or purposes: Provided, That a nonstock corporation may not include a purpose which would change or contradict its nature as such; 3. The place where the principal office of the corporation is to be located, which must be within the Philippines; 4. The term for which the corporation is to exist; 5. The names, nationalities and residences of the incorporators; 6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); 7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; 9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and 10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five (25%) percent of the authorized capital stock of the

5 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
corporation has been subscribed, and at least twenty-five (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five (25%) percent of the said subscription, such paid-up capital being not less than five thousand (P5,000.00) pesos. CorpCode, 15. Forms of Articles of Incorporation. - Unless otherwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the following form: ARTICLES OF INCORPORATION OF __________________________ (Name of Corporation) KNOW ALL MEN BY THESE PRESENTS: The undersigned incorporators, all of legal age and a majority of whom are residents of the Philippines, have this day voluntarily agreed to form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines; AND WE HEREBY CERTIFY: FIRST: That the name of said corporation shall be ".............................................., INC. or CORPORATION"; SECOND: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one purpose, indicate primary and secondary purposes); THIRD: That the principal office of the corporation is located in the City/Municipality of ............................................., Province of .................................................., Philippines; FOURTH: That the term for which said corporation is to exist is ................ years from and after the date of issuance of the certificate of incorporation; FIFTH: That the names, nationalities and residences of the incorporators of the corporation are as follows: NAME NATIONALITY RESIDENCE ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... SIXTH: That the number of directors or trustees of the corporation shall be .............; and the names, nationalities and residences of the first directors or trustees of the corporation are as follows: NAME NATIONALITY RESIDENCE ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... ..................................... SEVENTH: That the authorized capital stock of the corporation is ................................................. (P......................) PESOS in lawful money of the Philippines, divided into ............... shares with the par value of ................................... (P.......................) Pesos per share. (In case all the share are without par value): That the capital stock of the corporation is ........................... shares without par value. (In case some shares have par value and some are without par value): That the capital stock of said corporation consists of ........................ shares of which ....................... shares are of the par value of .............................. (P.....................) PESOS each, and of which ................................ shares are without par value. EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated has been subscribed as follows: Name of Subscriber .................................. .................................. .................................. .................................. .................................. Nationality .................... .................... .................... .................... .................... No of Shares ........................ ........................ ........................ ........................ ........................ Amount Subscribed ....................... ....................... ....................... ....................... .......................

NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of the total subscription as follows: Name of Subscriber ................................... ................................... ................................... ................................... ................................... Amount Subscribed ...................................... ...................................... ...................................... ...................................... ...................................... Total Paid-In ............................... ............................... ............................... ............................... ...............................

(Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock, Nos. 7, 8 and 9 of the above articles may be modified accordingly, and it is sufficient if the articles state the amount of capital or money contributed or donated by specified persons, stating the names, nationalities and residences of the contributors or donors and the respective amount given by each.) TENTH: That ....................................... has been elected by the subscribers as Treasurer of the Corporation to act as such until his successor is duly elected and qualified in accordance with the by-laws, and that as such Treasurer, he has been authorized to receive for and in the name and for the benefit of the corporation, all subscription (or fees) or contributions or donations paid or given by the subscribers or members. ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following):

6 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
"No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to recorded in the proper books of the corporation and this restriction shall be indicated in all stock certificates issued by the corporation." IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this ................... day of .............................., 19 ........... in the City/Municipality of ........................................, Province of ................................................., Republic of the Philippines. ............................................ ............................................. ............................................ ............................................. ................................................ (Names and signatures of the incorporators)

SIGNED IN THE PRESENCE OF: ............................................ ............................................. (Notarial Acknowledgment) REPUBLIC OF THE PHILIPPINES ) CITY/MUNICIPALITY OF ) S.S. PROVINCE OF ) I, ...................................., being duly sworn, depose and say: TREASURER'S AFFIDAVIT

That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as such until my successor has been duly elected and qualified in accordance with the by-laws of the corporation, and that as such Treasurer, I hereby certify under oath that at least 25% of the authorized capital stock of the corporation has been subscribed and at least 25% of the total subscription has been paid, and received by me, in cash or property, in the amount of not less than P5,000.00, in accordance with the Corporation Code. ....................................... (Signature of Treasurer) SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality of .................................. Province of .........................................., this ............. day of ........................., 19 ........; by ............................................ with Res. Cert. No. ..................... issued at ................. on ......................, 19 .......... NOTARY PUBLIC My commission expires on ..........................., 19 ........ Doc. No. ...............; Page No. ...............; Book No. ..............; Series of 19..... (1) Corporate Name The name of a corporation is essential to its existence since it is through it that the corporation can sue and be sued and perform all legal acts It is the only means of identifying it not only from its members or stockholders, but also from other entities and corporations The code therefore does not allow it to adopt a name identical or confusingly similar to that of any existing corporation or to any other name already protected by law or which is patently deceptive, confusing or contrary to existing laws CorpCode, 18. Corporate name. - No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. A corporation should transact business only in its corporate name. it may amend such name provided it is done in accordance with the procedure laid down by the Code for amendments of AOI, and the SEC approves such change (2) Purpose Clause Significance: it congers as well as limits the powers which a corporation may exercise A corporation has only such powers are as expressly granted to it by law and by its AOI, those which may be incidental to such conferred powers, those reasonably necessary to accomplish its purpose and those which may be incident to its existence Reasons for requiring a purpose clause (Ballantine) (1) So that a prospective stockholder who is contemplating an investment in a business enterprise shall know within what lines of business his money is to be risked; (2) So that the management may know within what lines of business it is authorized to act (3) So that anyone who deals with the corporation may ascertain, if he wishes, whether a contract or transaction into which he contemplates entering is one within the general authority of the management Under Sec. 14(2), a corporation may have as many purposes as it wish to include, subject to the ff. conditions: (1) The articles of incorporation must specify which is the corporations primary purpose and which are the secondary purposes. - It should be noted that the Code does not require that the secondary purpose or purposes be related to the main purpose (2) Corporations for which special provisions are made in the CorpCode or which are governed by special laws, can have only the purpose peculiar to them and no other - E.g. educational corporations cannot engage in the export/import business nor an insurance corporation be at the same tiem a commercial bank (3) The purpose/s must be lawful - The SEC, before it issues a certificate of incorporation, not only has the power but the duty to determine the legality of the corporate purpose stated in the AOI - CorpCode, 17(2). Grounds when articles of incorporation or amendment may be rejected or disapproved. - The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval: 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations - But, if the purpose stated is lawful, the SEC has no authority to inquire whether the corporation has purposes other than those stated, and mandamus will lie to compel it to issue a certificate - A corporation may not be formed for the purpose of practicing a profession CorpCode, 88. Purposes. - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations.

7 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
(3) Principal Office of the Corporation Only requirement: within the Philippines Articles should specify not only the province but also the city/town where such is located Establishes the residence of the corporation may prove important in determining venue in actions, etc. (4) Term of existence The original term specified in the AOI should not exceed 50 years although this may be extended in an unlimited number of times by amendment thereof, as long as such extension does not exceed 50 years CorpCode, 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission. (5) Incorporators and Directors; number and qualifications The AOI must give the names, nationalities and residences of the incorporators as well as of the directors or trustees who will act as such until the first regular directors or trustees are elected Directors used in reference to stock corporations, and trustees to non-stock Code sets the limit to not less than 5 but not more than 15 But, except in educational corporations, the AOI or BL of a non-stock corporation may provide for more than 15 trustees Another exception: merger of banks May AOI of a stock corp be amended after incorporation to increase the number of directors to more than 15? Old law prohibits, new law is silent (6) Capital Stock; subscription; payment Capital stock the amount fixed in the AOI to be subscribed and paid in or secured to be paid in by the shareholders of a corpora tion, at the organization of the corporation or afterwards, and upon which it is to conduct its operations - Thus sets the limit to the total par or issued value of the shares which a corporation may issue Subscription the mutual agreement of the subscribers to take and pay for the stock of a corporation - Pre-incorporation subscription is the amount which each incorporator or stockholder agrees to contribute to a proposed corporation - The AOI must state the amount of the authorized capital stock and the number of shares into which it is divided - Par value one in the certificate of stock of which appears an amount in pesos as the nominal value of the sgares] Must be state in the AOI Shares Cannot be issued at less than such par value - The consideration for which no par value shares may be issued is referred to as its issued value; may be fixed in any of 3 ways: (a) By the AOI (b) By the Board of Directors when so authorized by said articles or by the by-laws (c) By the stockholders representing at least a majority of the outstanding capital stock - If no par value share will be issued, such fact must be stated in the articles, and the consideration for their issuance cannot be less tahan the issued value, which in turn cannot be less than 5 pesos for each CorpCode, 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. - 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, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. These requirements are to insure to some extent the adequacy of corporate capitalization for the protection of 3 rd persons who may deal with the corporation The treasurer must make a sworn statement that these minimum requirements of subscription and payment have been complied with, otherwise the AOI will not be accepted by the SEC The SEC requires that the paid-up capital at time of incorporation must be in the form of cash deposited in a bank or in property which may be used or actually needed by the corporation in its operations , and cannot consist nor be invested in money market placements (7) Other Matters AOI may include such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient Should include the classes of shares into which the shares of stock have been divided as well as the preferences of and restrictions on any such class Any denial or restriction of the preemptive right of stockholders should also be expressly stated (8) Close Corporations CorpCode, 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, 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 classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public 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 apply suppletorily except insofar as this Title otherwise provides. In addition, the Code allows a close corporation to provide in its AOI special provisions which would exclude it from the operation of some of the requirements and prohibitions imposed on corporations in general, and in effect make it an incorporated partnership Filing of Articles; payment of fees After the AOI and the treasurers affidavit have been duly signed and acknowledged, these must be filed with the SEC and the correspondi ng fees must be paid The AOI of corporations governed by special laws will not be accepted for filing unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles are in accordance with the law Failure to file the articles of incorporation will prevent due incorporation of the proposed corporation and will not give rise to its juridical personality. It will not even be a de facto corporation Examination of Articles; approval or rejection by SEC After the AOI have been filed, the SEC shall examine them in order to determine whether they are in conformity with the law. If they are not, the SEC must give the incorporators a reasonable time within which to correct/modify the objectionable portions. CorpCode, 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. - The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval: 1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations;

3.

4.

8 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
3. 4. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if false; That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. 5. Issuance of Certificate of Incorporation If upon examination, the SEC is satisfied that all the legal requirements as outlined above have been complied with and that there are no reasons for rejecting or disapproving the articles of incorporation, it will issue a certificate of incorporation It is onlyupon such issuance that the corporation acquires a juridical personality distinct and separate from its members or stockholders, with the power to sue and be sued and to perform all other legal acts. CorpCode, 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. Defective Attempts to Incorporate; De Facto Corporations As long as the mandatory requirements for incorporation are substantially complied with, a corporation de jure will e formed When there is no substantial compliance, the following must concur un order that a corporation be deemed to exist as such: (1) That there is an apparently valid statue under which the corporation with its purposes may be formed (2) That there has been colorable compliance with the legal requirements in good faith (3) That there has been user of corporate powers, i.e. the transaction of business in some way as if it were a corporation CorpCode, 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. If a corporation is de jure, its due incorporation cannot be successfully attacked even in a quo warranto proceeding by the state The de facto doctrine grew out of the necessity to promote the security of business transaction and to eliminate quibbling over irregularities (1) Use of corporate powers just a slight evidence of conducting business as a corporation will be deemed sufficient (2) Law subsequently declared void although the prevailing view is that there can be no de facto corporation under a statute subsequently declared unconstitutional, there has been an increasing tendency to recognize its existence where the corporation in good faith did al that is required under said statute to form a valid corporation (3) substantial or colorable compliance Although our SC stated that unless the certificate of incorporation has been issued there can be no de facto corporation, this is not an absolute principle While the corporation is still in the process of formation, it is quite clear that there can be no substantial nor colorable compliance and therefore, there cannot be at such stage a de facto corporation Corporation by Estoppel Although there may not be a corporation de facto because of serious defects in incorporation, it is still possible that a party may be precluded or estopped from denying corporate existence CorpCode, 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. This doctrine may apply to a third party or the alleged corporation It is based on equity considerations, and as in the case of the de facto doctrine, is resorted to in fairness to all parties concerned. When business associates fraudulently misrepresent the existence of a corporation and a 3 rd party contracts with the association as a corporation, without knowledge of the serious defect in its incorporation, such third party may bring a suit against the associates as if they were general partners and the latter cannot claim that the plaintiff-third party is stopped from asserting liability because he had recognized the corporations existence they cannot profit by their own misrepresentation Even for torts International Organization of Corporation 1. By Laws the product of the agreement of the stockholders or members and establish the rules for the internal government of the corporation - Subordinate to the AOI as well as to the Corp Code and related statutes and should therefore not be inconsistent with any of these; otherwise, they would have no binding effect CorpCode, 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into merger or consolidation with other corporations as provided in this Code; 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. CorpCode, 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation.

9 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. CorpCode, 47. Contents of by-laws. - Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. Election of directors and officers; commencement of business CorpCode, 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. - If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission. Formally organize includes not only the adoption of by-laws but also the establishment of the body which will administer the affairs of the fcorporation and exercise its powers i.e. the board of directors CorpCode, 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) 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. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings.

2.

Chapter IV. The Corporate Entity Theory of Corporate Entity: Its Effects The issuance of the certificate of incorporation marks the beginning of the corporations existence as a legal entity As such, it acquires the right to sue and be sue, to hold property in its own name, enter into contracts with third persons, and to perform all other legal acts. It is well-settled doctrine both in law and in equity, that as a legal entity, a corporation has a personality distinct and separate from its individual stockholders or members, and is not affected by the personal rights, obligations and transactions of the latter Since corporate property is owned by the corporation as a juridical person the stockholders have no claim on it as owners, but have merely an expectancy or inchoate right to the same should any of it remain upon dissolution of the corporation after all corporate creditors have been paid A stockholder can therefore not bring an action for replevin to recover property of the corporation Although his interest in the corporation may be attached by his personal creditor, the latter cannot use corporate property to satisfy the same A corporation, as a juridical person, is entitled to immunity against unreasonable search and seizure, and can therefore question the admissibility of evidence obtained through such search and seizure Corporations may be civilly liable for torts in the same manner as a natural person Disregarding Corporate Entity The privilege of being treated as an entity distinct and separate from the stockholders is confined to legitimate uses and is subject to equitable limitations to prevent its being exercised for fraudulent, unfair, or illegal purposes If evidence of any such purpose is present, the courts will pierce the veil of corporate entity and disregard t he corporate fiction Aside from this general guideline, no hard and fast rule can be laid down to cover all cases where the corporate entity theory cannot be availed of, and each case will have to be considered on its merits If any general rule can be laid down in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears, but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Main effect of disregarding the corporate fiction: stockholders will be held personally liable for the acts and contracts of the corporation whose existence is ignored In this case, it is not the due incorporation which is questioned but its use of the privileges which attach to the corporate entity Therefore, when a court disregards the corporate entity in a proper case, it is not denying corporate existence for all purposes, but merely refuses to allow the corporation to use the corporate privilege for the particular purpose involved in the case before it GR: separate personality Exception: cases where veil may be pierced o There was a violation of rights or injury in all these cases where veil was pierced o Elements of ownership, control, mgt in the corporate entity Inevitable that these will exist All elements have to be satisfied so the corporate veil can be pierced o What determines pierceability? Motive/intention Liability arising Injury or damage or loss Estate planning: o No impediment to use corporate as vehicle for estate planning o Corporation can be put up by a single person o Nothing prevents an individual from funding a corporation o To meet requirements of code, assign nominal shares to persons o If it is money, can be used to acquire assets; still corporate-owned o Even a 99.9% owner cannot distribute the property, only the shares

10 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
Cease: ideal, but there was a dispute Marvel had no compulsory heirs Delpher ruling on transfer is obiter Just defer: use corporate as a vehicle to distribute what appears to be the estate o But: you still have to distribute the shares (dispose or donate) o Mechanism to ensure that once you die, corporation is dissolved Otherwise: Cease case Exit mechanism for those who want out Parent-Subsidiary Relationship The general principles outlined in the preceding section apply to the relationship of parent-subsidiary corporations The mere fact that a corporation owns all or substantially all of the stocks of another corporation, taken alone, is not sufficient to justify their being treated as one entity If used to perform legitimate functions, a subsidiarys separate existence may be respected, and the liabilities of the paren t corporation as well as the subsidiary will be confined to those arising in their respective business The courts in the exercise of judicial discretion will step in to prevent abuses orf the separate entity privilege, and in proper cases will pierce the veil of corporate entity No definite test of general application can be laid down as to when this privilege will be lost and each case should be determined by its merits Nationality of Corporations A corporation can have no citizenship since this is a privilege which can possibly belong only to natural persons A corporation, however, may either be domestic or foreign Domestic: one organized under Philippine laws Foreign: one organized under foreign laws But a foreign corporation may be licensed to do business in the Philippines, un which case it will be governed by Phil. Laws, except those which refer to the creation, formation, organization or dissolution thereof or those which fix the relations, liabilities and responsibilities of the SHs or officers to each other or to the corporation The privilege of engaging in a nationalized business depends not only on whether a corporation is domestic or foreign, but on the citizenship of its stockholder Thus, even a domestic corporation cannot engage in common carrier business or mining or agriculture unless at least 60% of its capital stock is owned by Filipino citizens CorpCode, 15 par. 11. "No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to recorded in the proper books of the corporation and this restriction shall be indicated in all stock certificates issued by the corporation." Chapter V. Promoters Contracts Prior to Incorporation Liability of Corporation for Promoters Contracts As previously seen, a promoter may find it necessary, in the process of forming the corporation, to enter into contracts on behalf of the proposed corporation. He may have to contract for options on rights or propwerties which may otherwise be lose if postponed till after incorporation Since the corporation did noy yet exist at the time of the contract, it could not have been a party to it and could not possibly have had an agent who could legally bind it o However, the corporation may make the contracts its own and may become bound on such contracts if, after incorporation: (1) It adopts or ratifies the same (2) It accepts its benefits with knowledge of the terms thereof o Such ratification/adoption need not be by express resolution of the board and may be implied from the acts of responsible officers of the corporation o But a corporation cannot adopt only the part of the contract which may be beneficial or desirable and discard that which is burdensome o The contract must of course be one which is within the powers of the corporation to enter Corporate Rights Under Promoters Contracts Upon adoption or ratification of pre-incorporation contracts, the corporation becomes liable thereon It is only logical and fair that it should also acquire rights thereunder Therefore if the other contracting party fails to perform his part of the bargain, the corporation which has adopted or ratified the contract may sue for specific performance or for damages resulting from breach of contract And the fact of bringing an action on the contract has been held to constitute sufficient adoption or ratification Personal Liability of Promoter on Pre-Incorporation Contracts 3 possible situations which may be intended by the promoter and the other party to a pre-incorporation contract: (1) The promoter may take a continuing offer on behalf of the corporation, which if accepted after incorporation, will become a contract - In this case, the promoter does not assume any personal liability, whether or not the offer is accepted by the corporation (2) The promoter may make a contract at the time binding himself, with the understanding that if the corporation, once formed, accepts or adopts the contract, he will be relieved of all responsibilities (3) The promoter may bind himself personally and assume the responsibility of looking to the proposed corporation, when formed, for reimbursement Unless either of the first 2 situations was agreed upon by the parties, the 3 rd situation will be presumed to exist In the absence of any express or implied agreement to the contrary, a promoter is personally liable for contracts made by him on behalf of the proposed corporation The fact that the corporation when formed has adopted or ratified the conjtract does not release him from responsibility, unless a novation was intended Compensation of Promoters Aside from sharing in the corporate earnings as future stockholders, they may be expecting compensation for their services Whether porters are entitled to such compensation has been the subject of conflicting opinions Prevailing view: the corporation is NOT liable to pay such compensation because this would be an imposition on innocent investors The promoter is deemed as having given his service on the chance of his being able to get a reward from the corporation after it is formed However, the corporation may become liable to pay such compensation if after it is formed, it expressly promises to do so Or, where the promoters services are performed partly before and partly aft er incorporation, and the corporation takes the benefits thereof liable for all Securities Act, Sec. 7: promotion fees Compensation may be in cash or shares of stock, in which the fair value of the service should at least be equal to the par/issued value of the shares, otherwise they are watered stocks Fiduciary Relationship between corporation and promoter The promoters of the corporation are mainly responsible for its financing and organization and as such, are under duty to exercise good faith and fairness in al their acts and transactions. Because of the power that they have over the investments of others, they are often open to temptantion of making inequitable profits at the expense of investors

11 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
Chapter VI. Corporate Powers General Powers of Corporation CorpCode, 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into merger or consolidation with other corporations as provided in this Code; 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. CorpCode, 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. 2 general restrictions on the power of any corporation to purchase and hold properties (1) Such property must be reasonably and necessarily required by the transaction of its lawful business (2) Such power be subject to the limitations prescribed by law and the Constitution The general powers granted by Section 36 are, under Section 23, to be exercised by the Board of Directors, unless otherwise provided by the Code CorpCode, 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, 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. Trustees of non-stock corporations must be members thereof. a majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. Specific Powers 1. Extend or shorten the corporate term CorpCode, 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. 2. Increase or decrease capital stock CorpCode, 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. 3. Incur, create or increase bonded indebtedness 4. Deny preemptive right CorpCode, 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right 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 purposes or in payment of a previously contracted debt.

12 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
5. Sell or otherwise dispose of substantially all its assets CorpCode, 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. 6. Acquire its own shares CorpCode 41. Power to acquire own shares. - 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. 7. Invest in other corporation or business CorpCode, 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the provisions of this Code, 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 approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. 8. Declare dividends CorpCode, 43. Power to declare dividends. - The board of directors 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 them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. 9. Enter into management contracts CorpCode, 44. Power to enter into management contract. - No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. The provisions of the next preceding paragraph shall apply to any contract whereby 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: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. Sec. 36 par 7 should be read with Sec. 42. As long as the stocks bought by the corporation are those of another corporation engaged in a business which is allied or important to the business of the first corporation, the act would be within the powers of such corporation Implied Powers Although under section 45 all acts other than those specified in Sec. 36 and other special provision would be ultra vires, the broad qualification except such as are necessary or incidental to the exercise of the powers so conferred as well as paragraph 11 of section 38 granting powers as are essential or necessary to carry out its purpose/s as stated in the AOI, in effect give rise to such a wide range of implied powers that it would normally not be too difficult to defend a corporate act against an ultra vires allegation a corporation is presumed to act within its powers and when a contract is not on its face necessarily beyond its authority, it will, in the absence of proof to the contrary, presumed to be valid The Ultra Vires Doctrine where the acts are clearly beyond the powers of the corporation, what are the legal consequences? (1) On the corporation itself - May be dissolved under a quo warranto proceeding SC reluctant to impose; in most cases merely enjoined further commission of ultra vires acts - SEC may suspend/revoke the cert. of registration (2) On the immediate parties to the ultra vires contract - Where contract fully executed on both sides: parties will be left as they are and no resolution/rescission will be granted - If contract executor on both sides: neither party can ask for specific performance

13 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
- Where one party has performed his part, and the other has not: latter is estopped from claiming that the contract is ultravires (3) On the rights of stockholders - SH may bring either an individual or derivative suit to enjoin a threatened UV act/contract - If the act/contract has already been performed, a derivative suit for damages ahainst the directors may be filed, but their liability will depend on whether they acted in GF and with reasonable diligence - Where suit is based on tort, it cannot set up defense of UV against injured party who had no knowledge that the act was UV - UV acts may become binding by ratification of all stockholders, unless 3rd parties are prejudiced thereby, or unless the act is illegal

Chapter XI. Financing the Corporation; Capital Structure Sources of Financing 3 main source (1) Contributions of its stockholders = equity of the stockholders/equity investment a. Investor making equity investments expects that his returns shall be tied up with the success or loss of the operations of the corporation i. Return of equity investor is intricately woven into the business affairs of the corporation and participates in the income ii. Investor/SH is given a say in the managementhe is entitled to participate in the election of the board and cast votes on corporate matters where SHs are required to give ratificatory action iii. Absence of carrying cost since corporation is not bound to pay any return on investment unless there are profits and subject to business judgment of the board in declaring dividends b. Equity investment generally non-withdrawable for so long as the corporation has not been dissolved c. Investors of equity can only receive a return of their investment only from the remaining assets after payment of creditors (2) Loans or advances by creditors a. Person extending a loan or debt looks at the financial condition and operations of the corporations as a means of gauging capacity to pay i. Creditor puts no stake on the operations of the business; his relationship to the corporation is based on contract ii. Contractual obligation of corporation to pay the stipulated return (in the form of interest) remains even when losses are incurred b. Expected return: creditor can only demand the stipulated fixed return/interest c. Legal preference in payment from corporate propertiesonce insolvent, the corporation shall devote and prefer all corporate assets towards the payment of creditors (3) Profits which the corporation may earn Initial financing can possibly involve only (1) and (2) Promotion of corporation oftentimes involves only equity interest because of the high risk involved when the business venture still has to prove its worth debt financing: may be resorted to by organizers who may want control of the corporation but do not have sufficient resources of their own after the business has become a going concern, profits, instead of being distributed as cash dividends, may be capitalized to increase the capital of the corporation if more is needed, contributions of stockholders may be increased and debt financing, if feasible, may be resorted to Capital Structure Refers to the aggregate of the securities issued by the corporation Two classes of securities: o Shares of stock o Debt securities o Senior securities: those which have a prior but limited claim upon corporate earnings (such as debt and typical PS) o Equity securities: those which have the residual interest in corporate earnings (such as CS and participating PS) Important characteristics of securities as forms of investments: o Right to any early claim on the income before other security holders o Right to residual income o Right to vote Only 25% of authorized capital stock need be subscribed initially o Promoters are not bound to limit the starting capital needed by the business o Other sources of capital may be tapped, at the initial stages or when the corporation is already a going concern Two questions to consider: o What should be the relation between basic equity interests and senior securities o What type of senior securities should be issued? Capital and Capital Stock Distinguished Capital Capital Stock Actual property of the corporation, including cash, real and personal The amount fixed, usually by the corporate charter, to be subscribed and property paid in or secured to be paid in by the shareholders of a corporation, either in money or property, labor or services at the organization of the corporation or It therefore includes all corporate assets contributions of stockholders, afterwards, and upon which it is to conduct its operations loans by 3rd persons, and earnings less losses Example: Corporation has Authorized Capital Stock of 500,000 divided into 5,000 shares with a par value of 100 each - Corporation can issue as many as 5,000 shares at 100 each to represent the contribution of subscribers - It does not have to issue all such shares at one time, but once it reaches that number, it can no longer issue new shares without amending its AOI so as to increase its capital stocks When it has not yet issued all such shares, then its outstanding or subscribed capital stock is only the amount subscribed, which may be less than the authorized capital stock as stated in the AOI - If only 2,000 out of 5,000 have been subscribed, the subscribed capital stock is 200,000 - It still has 3,000 shares with a total par value of 300,000 which it can issue later without any amendment of its AOI Legal/stated capital: aggregate par/issued value of subscribed capital stock - Sets the minimum limit of corporate assets that should be retained as protection to creditors, and which amount as a rule may not be withdrawn by, nor distributed to, shareholders Remains the same unless AOI amended

It fluctuates depending on the current profits obtained or losses suffered by the business

Shares of Stock; Kinds When a person contributes capital to a corporation by way of equity, he acquires a unit or several units of interest therein called shares of stock Shares of stock units into which capital stock is divided

14 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
o Represents the interest of the holder thereof to - participate in the management of the corporation - share proportionally in the profits of the business - upon liquidation, obtain an aliquot part of the corporate assets after all corporate debts have been paid o but it does not make him the owner of any specific property of the corporation o but his shares of stock are his own personal property which he may transfer, mortgage, pledge or otherwise dispose of o Certificate of stock merely evidences the interest of the shareholder in the corporation CorpCode, 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock. Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. There seems to be a minimum of restrictions on the classification of shares, provided only that there be a class with complete voting rights Rights of the corporation with respect to shares: a) To call for payment of unpaid subscriptions subject to contrary stipulation in the subscription agreement (67) b) To impose interest on unpaid subscriptions (66) c) To refuse to issue certificates covering shares where subscription has not been fully paid (64) d) To refuse to recognize and register the sale or assignment of any share where subscription is not fully paid (63) e) To refuse to recognize a sale or assignment which has not been duly registered in the stock and transfer book (63) Corporation does NOT have the power to: a) demand for the repurchase of shares unless classified as redeemable in the AOI (Sec 8) b) refuse to pay dividends to SHs as declared and not been declared delinquent in order to apply to the unpaid subscription (Sec 71) c) bid delinquent shares and obtain greater profit for itself (68) Power to issue shares: Power to issue shares or sell them inherent and express in the corporation, lodged with the board o SH meeting not required on the issuance of unissued authorized capital stock (first issuance from corporation to SH) Limitations on power to issue shares: o 62: Cannot be issued for a consideration less than the par or issued value Sec 9: except treasury shares so long as the price is reasonable o 62: Cannot be issued in exchange for PNs or future services o 59: if consideration not in cash: value shall be determined by the incorporators or the board subject to SEC approval Power to classify shares Sec 6: shares may be divided into classes or series or both, any of which may have rights, privileges, or restrictions stated in the AOI o No share may be deprived of voting rights except those classified and issued as preferred and redeemable shares o Any or all shares or series of shares may have par or no par value Code adopts presumption of equality of the rights and features of shares when nothing is expressly provided to the contrary in the AOI or when AOI is silent o In the absence of restrictions in the AOI, PS shall would be voting shares having the same rights as CS Code provides for voting rights for all types of shares on matters of fundamental importance; Sec 6: non-voting shares shall be entitled to vote on: o Amendment to the AOI o Adoption and amendment of by-laws o Sale, lease, exchange, mortgage, pledge or any disposition of all or substantially all corporate property o Incurring, creating or increasing bonded indebtedness o Increase or decrease of capital stock o Merger or consolidation o Investment in another corporation or another business o Dissolution of the corporation All other corporate acts: non-voting shares not entitled to vote Minimum restrictions on classification, provided that there be a class with complete voting rights NOTE: rights of PS and bondholders are a matter of contract Trust relations on shares of stock A trust relationship may be created involving shares of stock of a corporation Sec 10: each incorporator must own or be a subscriber to at least one (1) share Sec 23: every director must own at least one (1) share of stock, which shall stand in his name on the books of the corporation of which he is a director

15 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
Nominal ownership in shares is all that is required under Sec 23 even when it is shown that the registered SH is only a nominee or trustee of another person Nominee and trustee arrangements do not violate public policy but such nominees and trustees must still comply with the applicable legal restrictions and formalities 1. Common stocks 2. Preferred stocks a. Preference as to dividends - Participating and non-participating - Cumulative and non-cumulative - Discretionary dividend type - Mandatory dividend type - Earned cumulative or dividend credit type b. As to voting rights c. Preference upon liquidation d. Preference stockholder is not a creditor 3. Par or no par shares 4. Treasury shares CorpCode, 9. Treasury shares. - Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. 5. Redeemable shares CorpCode, 8. Redeemable shares. - Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares. 6. Founders shares CorpCode, 7. Founders' shares. - Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. Common stocks Preferred Stocks Par and no-par Treasury Shares Redeemable Shares Founders shares Shares Most commonly issued Entitles the holder Par value: the See Corp Code, 9. Corp Code, 8. Corp Code, 7. by corporations thereof to some minimum issue price of preference either in the a share dividends or in the o Must be stated distribution of assets in stock upon liquidation, or in certificate, both, or to such other which cannot preferences not be issued until inconsistent with the paid in full by code subscriber o Shares cannot be sold at less than par; otherwise they would be watered stock and SH would still be liable for the difference Entitles the owner to Limitations: No par value: issued No voting rights Redeeming shares: Sec 7: founders shares an equal pro rate (a) They can be issued price is not stated in classified as such in the nor preemptive shares issued by a division of profits, if only with a stated the stock certificate, AOI may be given rights corporation which there be any, one par value but may be fixed in the certain rights and the corporation Not entitled to stockholder having no (b) The preferences AOI or by the board or privileges not enjoyed can purchase or dividends advantage, priority or must be stated in in the by-laws, or by by owners of other take up from May be sold for preference over any BOTH the AOI and the SHs themselves shares holders as any amount the other stockholder in the stock cert. o Sec 6: no par If it involves the expressly board may fix the same class Code allows the AOI to value shares shall provided for in the exclusive right to vote SEC: treasury authorize the BOD to be deemed fully and be vote for in the AOI and stock shares have no fix the terms and paid and nonelection of directors, it certificates effect on the conditions of assessable and the shall not exceed 5 Redemption: stated capital of preferred stocks, holder thereof years repurchase, the corporation provided these shall shall not be liable reacquisition of until and unless become effective only to the corporation stock by a they are cancelled upon filing of a or to its creditors corporation which or retired certificate with the o Subscriber must issued it in Acquisition of SEC pay its full exchange for treasury shares consideration property, whether does not reduce o Such or not the stock is the number of consideration canceled, retired, issued shares nor shall be treated as or held in the the amount of capital and is not treasury stated capital and available for Corporation gets their sale does distribution as back some of its not increase the dividends stock, distributes number of issued o Delpher case: no cash or property shares or amount par value share as payment, and of stated capital does not continues its represent any business as before stated May be purchased proportionate or taken up by the

16 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
interest in the capital stock, but only an aliquot part of the whole number of such shares issued Capital stock of a corporation issuing no par shares is not set forth by a stated sum of money, but is expressed to be divided into a stated number of shares By removing the par value, the attention of persons interested in the financial condition of the corporation is focused upon the value of the assets and debts corporation upon the expiration of a fixed period, regardless of unrestricted retained earnings May be redeemed regardless of whether or not there are unrestricted retained earnings, provided the corporation has sufficient assets in its books to cover debts and liabilities SEC Rules: in issuing redeemable shares, corporations must set up and maintain a sinking fund If the option to redeem is clearly vested in the corporation, the redemption is an optional one and the SH is without right to either compel or refuse the redemption Amount of unrestricted retained earnings equivalent to the cost of treasury shares held shall be restricted from being declared and issued as dividends

In the presence of preferred stocks, common stocks are usually vested with the exclusive rights to vote and have the residuary rights to the profits and the net assets upon liquidation, after the preferences have been complied with

Preference as to dividends - Dividends payable only when there are profits earned by the corporation - GR: even if there are existing profits, BOD has discretion to determine w/n dividends are to be declared - Contract of preferred SH may give him the privilege of being paid first before any dividend is paid to common stocks - Amount of preference stated in his contract Participating stocks after getting their fixed dividend preference, they share with the common stocks the rest of the dividends Cumulative/ noncumulative: - Presumption: cumulative in any given

Limitations on the issuance of no-par value shares: a) Once issued, are deemed fully paid and therefore nonassessable b) Consideration cannot be less than P5.00 c) Entire consideration for the issuance constitutes capital d) Cannot be issued as PS e) Cannot be issued by banks, trust companies, etc

AOI must state the fact that no-par shares were issued

17 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
year/years no dividends are declared, the arrears have to be made up in subsequent years before any dividends can be paid to common stocks Discretionary or mandatory as what is expressed in the contract Voting rights: usually denied But unless such right is clearly withheld, a contingent right to vote would be provided Preferences upon liquidation Preferred stockholder is not a creditor he is an equity holder His investment is subject to all risks of ownership. He can get it back only upon liquidation, if there are enough assets left Nature of Subscription Contract One may become a stockholder in a corporation in either of 2 ways: (1) Subscription to shares before or after incorporation (2) Acquisition of already issued shares from an existing stockholder A subscription is a contract for the acquisition of unissued stock of a corporation whether existing or still to be formed In effect, is a contribution of a person to the capital of the corporation Subscription price need not e paid in full at the time of the contract Although the law does not expressly require a written agreement, the implication from the various provisions is that it should be Once perfected, the stockholder becomes a debtor of the corporation and may be liable to pay any unpaid portion thereof upon call by the BOD Note the no interest is payable unless the by-laws so provide With respect to any unpaid portion of his subscription, a stockholder is personally liable for the financial obligations of the corporation to the extent of said unpaid portion CorpCode, 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. 1. Pre-incorporation subscription Since a stock corporation is formed for business purposes, it cannot come into being without some starting capital CorpCode, 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. - 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, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. o Under this provision, it is possible for a corporation to have an authorized capital stock and subscriptions much higher than the actual starting capital it needs for the business o Philippine law: when a group of persons sign a subscription contract, they are deemed not only to make a continuing offer to the corporation but also to have contracted with each other as well. Thus, no one of them may revoke the contract even prior to incorporation without the consent of all the others CorpCode, 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission. 2. Post-incorporation subscription Previous to the CorCode, SC followed viw that subscription differs from purchase of shares from the corporation depends on the intention of the parties CorpCode, 60. Subscription contract. - Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. CorpCode, 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. The Preemptive Right to Shares 1. Basis of right; common law rule Preemptive right is the option privilege of an existing stockholder to subscribe to a proportionate part of shares subsequently issued by the corporation, before the same can be disposed of in favor of others. Unless the right is recognized, his interest in the corporation would be diluted by the subsequent issuance of shares Economic aspect: right to invest capital o The right becomes valuable when the enterprise has demonstrated that it will earn a higher rate of return on the capital than the stockholder could get x x x where he to invest it in the open market x x x corporations which continually use additional capital and have demonstrated their ability to earn a high rate of return on it are likely to be constantly seeking additional capital for investment

18 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
Common law rule: preemptive right is limited to shares issued in pursuance of an increase in the ACS and does not apply to additional issues of originally authorized shares Theory: corporation presumed to have offered all of those which it is authorized to issue 2. Extent of limitations under Code CorpCode, 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right 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 purposes or in payment of a previously contracted debt. The law includes all issues or disposition of shares of any class 3. In close corporations - Control is the main factor to most stockholders - Balance of power may be disturbed by an indiscriminate issuance of new shares without regard to the preemptive right of existing stockholders CorpCode, 102. Pre-emptive right in close corporations. - The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise. 4. Waiver of preemptive right - It is to be noted that any prior waiver or denial of the preemptive right SHOULD appear in the AOI - A waiver through an amendment to the articles would need only a 2/3 vote of the outstanding capital stock, and would bind not only the other 1/3 who may have dissented, but also all subsequent SH - If all the existing SH unanimously agree to a waiver, although for some reason no amendment is made, no one among them can later complain since they are all bound by their private agreement, but it would not bind future stockholders 5. When issue is in breach of trust - Even if the preemptive right does not exist, either because the issue comes within the exceptions or because it is denied/limited in the AOI, an issue of shares may still be objectionable if the directors have acted in breach of their trust and their primary purpose is to perpetuate or shift control of the corporation, or to freeze out the minority interest 6. Remedies when denied - Injunction against issue - Mandamus to allow him to exercise the right - SEC or Court may order cancellation, provided no innocent 3 rd parties are prejudiced - Suit, as a rule, should be individual and not derivative, because the wrong is done not to the corporation but to the stockholders indiviedually Debt Securities 1. Forms of borrowings - Second main source of capital of a corporation, represented usually by promissory notes, bonds, or debentures. - Long term loans obtained by the corporation may be private, as one from a bank or other financial institutions 2. Bonds and debentures - Subject to prior approval of and registration with the SEC + vote of 2/3 of outstanding capital stock - Corporation may incur bonded indebtedness by issuing bonds which are offered to the public or to a specified group of lenders - These debt securities are a series of instruments representing units of indebtedness and regarded as one entire debt - Debentures: issued on the general credit of the corporation, not secured by any collateral (no need for SHs approval - Under Sec. 38, bonds issued by a corporation shall be registered with the SEC which shall have the authority to determine the sufficiency of the terms thereof - Although bond holders usually see only the bond, the latter is always governed by a trust indenture bet. The corporation and a trustee, who in law represents all the different bondholders - Interest must be paid whether there are profits or not - Must be paid at the stipulated period, as opposed to SH who has to wait for dissolution 3. Convertible securities; stock options - Contract of the security holder may give him the privilege to exchange his class of securities with another class - Conversion usually from a senior security, i.e. bonds and preferred stocks, to common stock - Contract will usually specify not only the security to which it may be converted, but also the ratio of conversion and the period within which to exercise - Stock option warrants options to purchase stocks in the corporation at a specified price not lower than par, exercisable by the grantee at any time within a specified period - Oftentimes redeemable, but the conversion privilege continues after notice of redemption is given until the date fixed for actual redemption Warrants: a type of security which entitles the holder the right to subscribe to the unissued capital stock of a corporation or to purchase issued shares in the future, evidenced by a warrant certificate which may be sold or offered for sale to the public o Who may issue? Two (2) types of issuers recognized by SEC a domestic corporation duly registered a person or group of persons who issues or proposes to issue warrants o Two types of warrants: Subscription warrant-- entitles the holder the right to subscribe to the unissued capital stock of a corporation Covered warrant-- entitles the holder the right to purchase issued shares in the future Stock options: a privilege granted to a party to subscribe to a certain portion of the unissued capital stock of the corporation within a specified period and under terms and conditions of the grant, exercisable by the grantee at any time within the period granted o No corporation shall grant any stock option unless approved by the SEC o Formal board resolution + detailed statement of the stock options plan o No exercise shall be valid unless accompanied by payment of not less than 40% of the total price of shares issued 25% for employees/officers not directors initial payment not required for services already rendered o guidelines on stock options (SEC) may be granted on the basis of proportionate interests of SHs in the capital stock those granted to employees/officers not directors/board members allowed after review of the stock options scheme those granted to non-SHs allowed upon showing that the board is duly authorized to grant the same by its AOI or resolution of SHs 2/3 OCS granted to directors/mgt groups/corporate officers must be approved in a SH meeting, vote of at least 2/3 OCS exercisable within a period of 3 years from SEC approval no transfer without SEC approval 4. Hybrid securities 5. The trust indenture Requirements under Revised Securities Act not included Underwriting Securities not included Can never create preferences where SHs would have attributes of creditors over other SHs Debtor-creditor= SH-corp? yes as to unpaid subscription

19 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
Preemptive right: benefits orig subscriber Pay up, or lose whole subscription (min 25%) Once paid, rights accrue If business is profitable, orig subscribers should have 1st crack at additional issuances Dilution: noone can exercise preemptive right o Consequences: shift in control/management o Usually denied in listed corporations o Immediate opportunity to raise funds o Otherwise deprive corporation of opportunity 89: contractual arrangements o public offering o opportunity to corporation for financing denial would also benefit SHs! o Might enhance value of subscription o Merger o Bigger business, more clients Read dissent in Hay: more reasonable Merritt Chapman: consideration for warrant is separate and distinct from the shares Holders of stock options are not owners of the stock; no stock has been issued or purchased by them, thus not entitled to dividends paid Prior to exercise of warrant, there is not SH-corporation relation! Whether equity or loans, these funds end up ultimately as assets of the corporation Investment and credit are two separate and distinct sources of funds Loans/debt: Creditors have a lien on corporate assets Revenues that ff will be earmarked for payment of obligations SHs do not have any definite right over the amount loaned or assets earmarked An indebted corporation is not barred from declaring dividends Creditor has fixed return based on interest due Lien on corporate assets o w/n corporation is healthy, I still get paid o I get paid 1st before everyone else o Secured/unsecured= preference is undistinguished as to SHs Equity: Expectancy/inchoate: no guarantee to SHs Risk involved; be prepared to lose Recoverability of investment depends on viability of business But SHs can get dividends resulting from revenues SHs: not fixed return, so long as company is healthy Depends on profitability= unrestricted retained earnings Dividends, but more onerous risk Preferences: control (board seats, voting), or economic benefits (depends on extent of contribution and unrestricted retained earnings) Givens: No guarantee on investment Cannot be same stature among them Consideration Proprietary rights Money o SH prerogative of paying in full or hope that the business will be good and pay dividends to take care of business o Min paid up: 25% o If I dont pay and business is bad (i.e. no dividends), I am suspended, I cannot exercise my rights as SH Sec 7: founders shares: mayayabang lahat Market price may be higher than issued value For those who want control, economic benefits, and bragging rights Sec 6: classifications CS: control through common shares Voting for BOD and corporate acts Same or different par values Same voting rights regardless of value PS: Preference on dividends Coupon returns/year 10-redeemable convertibleright to convert at a certain time preferred to convertible (changes the control structure significantly) Chapter XII. Consideration for Issuance of Shares whenever a corporation issues shares, it must receive a consideration equal to at least their par or issued value although such consideration need not be paid in full at the time of the issuance, the unpaid portion is a debt and must be paid by the subscriber at a later date Form of Consideration CorpCode, 62. Considering for stocks. - Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation.

20 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. The consideration for the issuance of a particular cash may be in cash or in any form allowed by the above provision When a business has become a going concern, profits earned by it may be capitalized to form part if its ACS instead of distributing them among the SH shares of stock will be issued in place of cash dividends and distributed pro rate among the existing SH [stock dividends] Property includes services which have already been performed as long as they are capable of valuation and are fairly valued Under Sec 62, stocks shall not be issued for a consideration less than the par or issued price thereof, and shall not be issued in exchange for PNs or future services, but only for cash actually paid, property actually received and necessary to the business, or services actually rendered to the corporation o Whenever a corporation issues shares, it must receive a consideration equal to or at least their par or issued value o Such consideration need not be paid in full at the time of issuance, but the unpaid portion shall be a debt and must be paid Consideration may be in any two or more of the ff forms: o Actual cash paid to the corporation Villanueva: it is not required that there be actual payment of cash consideration in order to make the subscription agreement valid and binding Subscription agreement is a consensual contract, which is perfected and valid and binding upon meeting of the minds on the subject matterthe shares itselfand the consideration Non-payment of the consideration does not render the subscription contract void Only upon call by the board or when the terms of the subscription agreement makes payment due and demandable, would the SH be legally required to pay actual cash to the corporation Failure to do so would subject the shares to a delinquency declaration and suspend the rights of the SH Notes receivable vs. subscription receivable as consideration: notes would be counted as an asset by the corporation, subscription receivables as deductions from SHs equity o Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes Requisites: must lawfully acquired and held must be necessary and proper for it to own in carrying on its business must be of substantial nature, having pecuniary value capable of being ascertained must be real and tangible must be of a nature that it can be delivered instead of being merely communicated to the officers includes services which have already been performed as long as they are capable of valuation and are fairly valued receivables may be accepted as valid payment must be subject to verification by the SEC shares to be held in escrow until actual payment of the amount o Labor performed for or services actually rendered to the corporation Must be actually rendered and value ascertainable Must be in GF and no fraud is perpetrated Future services not allowed as consideration and such agreement is VOID (62) Villanueva: Corporation should not be estopped to deny that the services constituted payment of the stock subscription even though it has received the benefit thereof a corporation under a management contract may be issued shares in payment for the reasonable value of its services; but since it is not a SH of the managed corporation, such shares must come from the unissued shares of the latters original authorized capital sto ck and not in the form of stock dividends (Nielson case) o Previously incurred indebtedness by the corporation May either be accounts payable or notes payable Valuation must have been established prior to even negotiating on the subscription agreement Set-off of corporate indebtedness: also covered by 62 o Amounts transferred from unrestricted retained earnings to stated capital Covers the declaration of stock dividends and has the effect of capitalizing unrestricted retained earnings Consideration therefor is merely book entries o Outstanding shares exchanged for stocks in the event of reclassification or conversion Changes the composition or manner of classification of the capital stock and should not affect its integrity

Liability on Watered Stocks Watered stocks are those which are issued as fully paid up in consideration of property at an overvaluation Bonus shares are those issued gratuitously Discount shares are those issued as fully paid up in consideration for cash at less than par Evils: Injures to corporation because it is deprived of needed capital and of the opportunity to sell its securities at more advantageous prices Prejudices other stockholders, existing as well as future, because it dilutes their proportionate interest in the corporation Also injures present and future creditors because it reduces the value of the corporate assets which stand as a substitute for the SHs personal liability to them Trust Fund theory: treats the capital stock of a corporation as a trust fund for the payment of its debts, and as a substitute for the lack of personal liability of the SH for such debts Fraud or misrepresentation theory: More favored one liability is based on the false representation to creditors that the par value has been paid or agreed to be paid in full o Only creditors subsequent to the issuance of the watered stocks and without notice are protected by this theory CorpCode, 65. Liability of directors for watered stocks. - Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. How Payment of Shares Enforced When a person subscribes to shares in a corporation, he oftentimes does not pay for his subscription in full Any unpaid balance would then be a debt owed by the subscriber to the corporation, for which he may be liable to pay interest He may not be released from such obligation to pay the unpaid balance, unless it is with the consent of all the stockholders, without prejudice to creditors, and upon adequate consideration CorpCode, 13, supra. CorpCode, 67. Payment of balance of subscription. - Subject to the provisions of the contract of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from

21 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
such date until full payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. CorpCode, 68. Delinquency sale. - The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code. CorpCode, 69. When sale may be questioned. - No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a complaint within six (6) months from the date of sale. CorpCode, 70. Court action to recover unpaid subscription. - Nothing in this Code shall prevent the corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and expenses. 1. Delinquency sale; requisites - The right of the corporation to sell stocks is applicable only to sale of stocks for unpaid subscription and such right cannot be used to satisfy other indebtedness of the stockholder to the corporation - Amount may be payable in installments and may specify the date or dates when payments are to be made - If any installment is not paid on the agreed date acceleration clause - But until such agreed date arrives, no demand or call for payment may be validly made by the board - If contract does not specify date of payment, BOD may AT ANY TIME declare all or any part of the subscription due and payable - Power to make a call is discretionary; cannot be made ministerial by the by-laws 2. Court action Board need not resort to a delinquency sale but may seek payment through court action Where court action is the remedy, a valid call would also be a prerequisite to liability, unless subscription contract specifies a date of payment or unless the corporation has become insolvent Effect of delinquency CorpCode, 71. Effect of delinquency. - No delinquent stock shall be voted for be entitled to vote or to representation at any stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any. Once stocks have become delinquent due to nonpayment, the holder thereof loses all his rights as a stockholder except only the right to dividends, which however will be paid to him but will be applied to the unpaid balance of his subscription plus cost and expenses Such SH therefore cannot vote at the election of directors or at any meeting on any matter proper for SH action Rights and Obligations of Holders of Unpaid but Non-delinquent Stock CorpCode, 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. CorpCode, 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. CorpCode, 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. CorpCode, 64. Issuance of stock certificates. - No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid. Dock-Hop: the transferee of watered stock who takes it in ignorance of its real character cannot be compelled, even at a suit of the creditor, to pay anything more upon it o Holder in GF o Transferee steps in the shoes of the transferor as to benefits, but not to liability o Creditors clam that the alleged SHs have shares, issued as fully paid, but were issued for property not equal in value to the par value; property was overvalued o 2 contracts are involved: corporation-transferor transferor-transferee o transferees not liable to corporation if in GF Lingayen Gulf: I cannot dispose of any unsubscribed shares if I still have unpaid shares o There would be a rescission similar to Bayla Dexter & Aboitiz: no guaranteed profits in any business! Dexter: payment of subscriptions came from dividends Aboitiz: payment of subscription came from a fund o Is this violative of the principle that SHs only have an inchoate right over corporate property? Cannot negate obligation of subscriber to pay for his unpaid subscription It should be unconditional unless there are unrestricted retained earnings the payment comes out of his pocket! SHs/subscriber is NOT a creditor! GR: cannot piecemeal assign rights to the shares, if subscription not paid in full o SHs as a whole benefits o Corporation and creditors also benefit o but rights of creditor conditioned upon solvency of corporation Sec 43 allows unpaid subscriptions to be paid out of dividends

22 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
Exceptions: delinquent shares; cannot pay out as stock/property dividends Fua Cun and Nava: indivisibility of shares o Payments applied to all shares covered by the subscription Fua Cun: contract of subscription is indivisible, but partial payment doe not entitle SH to issuance of certificate o Payment is pro-rated among all the shares Lingayen: exception o chopped up shares o payment would be applied to the corresponding shares Issuance of Certificate Under 63: capital shall be divided into shares for which certificates signed by the Pres or VP, countersigned by the Secretary, sealed with the seal of the corporation Under 64: no certificate of stock shall be issued until the full amount + interest has been paid o But an unpaid subscription NOT declared delinquent can be voted upon in meetings and are entitled to collect dividends Issuance is not necessary to constitute the subscriber of shares as a SH of the corporation o But delivery is an essential element of the issuance itself (an endorsement for negotiability) Nature of certificate: o The best evidence of the acquisition of rights and status of a SH, but NOT required for rights to vest o Convenient for purposes of transfer by way of collateral or absolute sale But SH not entitled to certificate until he has fully paid the subscription o Certifies that the person named is a holder or owner of the stated number of shares in the corporation Indicates the kind of shares issued to him, date of issuance and par value or no par value of the shares Signed by the proper officers of the corporation and bears the corporation seal o Should not be issued for more than the number of shares authorized by the AOI Any stock certificate which represents an over-issue of shares would be void and no rights or liabilities can arise therefrom in favor of or against holders thereof Bona fide purchasers would only have the right to damages for misrepresentation against the corporate but cannot acquire the rights of SHs o Not a negotiable instrument (De Los Santos v Atty General supra) o but quasi-negotiable; endorsement and delivery of certificate may be for any of three purposes: sale and assignment of shares pursuant to a trust or nominee agreement pledge or encumbrance of the shareas o Sale of shares, even with endorsement and delivery of the certificates, shall not be valid, except as between the parties, until it is entered and noted in the books and the sale is not absolutely void 63: every SH has a right to demand the issuance of a proper certificate when requirements of 64 have been complied with Remedies available to a SH for wrongful non-issuance by the corporation: o Suit for specific performance o Alternative relief by way of damages Petition for mandamus to compel the issuance Lost or Destroyed Certificate CorpCode, 73. Lost or destroyed certificates. - The following procedure shall be followed for the issuance by a corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed: 1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares represented by such certificate, the serial number of the certificate and the name of the corporation which issued the same. He shall also submit such other information and evidence which he may deem necessary; 2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for three (3) consecutive weeks at the expense of the registered owner of the certificate of stock which has been lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner and the serial number of said certificate, and the number of shares represented by such certificate, and that after the expiration of one (1) year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock, unless the registered owner files a bond or other security in lieu thereof as may be required, effective for a period of one (1) year, for such amount and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one (1) year period provided herein: Provided, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed. Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described. Money or property rights o Ownership/title o Use o Proper valuation, but subject to SH approval and SEC approval to eliminate watered stock Who determines if money or property dividends Default of unpaid subscribers? Liability of corporation and other subscribers as well Beneficiaries of subscription: corporation, SHs, creditors I pay subscription due: I am not a creditor/debtor o In no way will my rights be impaired o Limited liability o Stock certificate; can be disposed/transferred (cf Fleischer) o Right to dividends All these are not enjoyed by subscriber NOT paid fully o Partial payment: cannot get any part of shares o Delinquency sale: all of the subscriptions What should be bought? Only what is due. Purchaser would appear to have bought at a discount Delinquent party gets a free ride but in reality, it never really happens that way! Inimical effects of non-paying subscriber: o suspension of voting and economic rights o Danger that he loses everything

23 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
o No bidder: shares go back to corporation o No incentive for corporation in delinquency sale Sec 73: obscure provision o Holding period o Benefits stems from issuance of stock certificate; can assert ownership rights o Negotiable instruments rules apply Property Valuation Payment Warranties Subject to dispute Necessary/essential to business Yes In full Yes Yes Yes Registration of property in corporate name Cash No need Partial; installment None No No necessary Ownership of shares

Chapter XIII. Dividends and Purchase by Corporation of Its Own Shares Sec 43 Sec 43: power of the corporation to declare dividends-only the board may declare dividends and only out of unrestricted retained earnings, payable in cash, property, or stock to SHs of OCS Most important rights of a SH: o Right to vote o Right to proportional share of the corporate assets upon liquidation o Right to share in the corporate profits

Concept of Dividend o A dividend is that portion of the profits of a corporation set aside, declared and ordered by the directors to be paid ratably to the SHs on demand or at fixed time. o It is payment to the SHs as a return upon their investment o All SHs of the same class share in it is proportion to the respective amounts of stock which they hold Defn of Dividend: portion of corporate profits which is set aside for distribution to the SHs in proportion to their subscription to the capital stock of the corporation Power of the corporation to declare a dividend only out of unrestricted retained earnings on the basis of outstanding capital stock held by SHs Form of Dividends Cash, property, or stock dividend Cash: most common form o May be declared by the board under a formal resolution and does not require the approval or ratification of the SHs o Amount to be received by SH as his share of the dividends would depend on the amount of stock held by him, regardless of whether or not he has paid his full subscription But if shares become delinquent, any cash dividends due will first be applied to the amount of the delinquency (if stock dividends, he cannot get them until he has fully paid his subscription) Cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses o Revocable before the announcement to the SHs of the declaration of dividends; as soon as cash dividends are publicly declared, SHs have the right to their pro rata shares o No par shares: must be fully paid to be considered as issued Thus holders of no par shares not fully paid are not entitled to dividends Property: SEC rules Stock: distribution to the SHs of the companys own stock o Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings converted into equity in the corporations books o It is actually two (2) things: A dividend, and the enforced use of dividend money to purchase additional shares of stock at par o stock dividends require: board resolution ratification of SHs representing 2/3 OCS o Villanueva: stock dividends, unlike cash or property dividends, may be declared out of premium surplus or paid-in capital o Corporate profits are transferred to capital stock and shares representing the increase in capitalization are distributed o Stock dividends cannot be declared without first increasing the capital stock, unless there are still unissued shares o Although number of shares increase, their investment and proportional interest remain the same o Cannot be issued ifo persons not SHs Liquidating dividends: form part of the capital, and cannot be declared from the unrestricted retained earnings Source of Dividends CorpCode, 43. Power to declare dividends. - The board of directors 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 them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. Source: unrestricted retained earnings Defn of unrestricted retained earnings: the undistributed earnings of the corporation which have not been allocated for any managerial, contractual, or legal purposes and which are free for distribution to the SHs as dividends (property or cash)

24 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
Any and all items included in retained earningsincome of all types, prior period adjustments, net income, special distribution to SHs can be declared as dividends, unless restricted All other items not falling within the term retained earnings are necessarily included in capital and are unavailable for dividend declarationdonated assets or funds, paid-in surplus arising from issuance of no-par stock, premium paid on par value shares, revaluation surplus created to write-ups of assets, etc o Difference between the total present value of its assets after deducting losses and liabilities and the amount of its capital stock o Balance of net worth or net assets after deducting the value of the corporations outstanding stock o Refer to the undistributed earnings or profits realized by the corporation from its business o If not reserved or not set aside by the board for some corporate purpose or for some other legal or contractual purpose, such retained earnings are unrestricted o There must be an actual bona fide surplus to justify declaration of dividends Defn of retained earnings: the net accumulated earnings of the corporation out of transactions with individuals or firms outside of the corporation; sometimes referred to as earned surplus. Includes: o earnings from sales of goods and services of the corporation in the ordinary course of business o earnings from sale of corporate property other than stock trade o does not include premium on par value stock where par value shares are issued and SHs pay a premium therefor over par, a paid-in surplus results. RP law does not allow paid-in surplus to be declared as dividends either as cash or property, because 43 requires dividends be paid out of unrestricted retained earnings Paid-in surplus is considered paid-in capital o does not include treasury stockconsidered as contractions or expansions of paid-up capital o does not include donations Sec 6: consideration for no-par value stock must be treated as capital and is not available for distribution as dividends o This is because SHs intended that the consideration for no par value shares shall constitute the basic business fund of the corporation to be permanently devoted to the corporate business o Retained earnings = Assets (Liabilities + Legal capital) If subscribed shares have not been fully paid, the unpaid portion is a receivable and is an asset of the corporation o Any excess would be surplus or earnings for dividend declarations o Net assets(+unpaid portion of subscribed shares) total par value of subscribed shares = earnings =dividends If watered stock exists, subscriber would be liable for the difference between what he paid and the par value o This liability of the SH is a receivable of the corporation o Net assets (+receivable from SH) - total par value of subscribed shares = earnings = dividends o Board has discretion to appropriate retained earnings for designated purposes Agreements with creditors may also provide for restrictions on dividends distributions

Dividend Declaration Discretionary with Board CorpCode, 43, supra. GR: The decision to declare dividends are matters addressed to the business judgment of the board o The fact that profits have accrued does not necessarily impose upon the directors the duty to declare them as dividends o Courts have no power to compel them to make the distribution of dividends in the absence of BF or fraud or clear abuse of discretion o Unless tainted with BF, fraud, or gross negligence, courts will not interfere, and SHs will be bound If for expansion of business, SH cannot complain If board capitalizes profits instead of distributing them (i.e. issues stock dividends), requires approval of at least 2/3 OCS o But the board cannot abuse their discretion and accumulate profits unreasonably o Remedy of SH: file an action in court to compel payment of dividends Burden of proof lies with the SH Mandamus is not a proper remedy since the SH has no individual interest in the profits of a corporation until and unless a dividend is declared Retention of excess profits 43: stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock Exceptions: o When justified by corporation expansion projects approved by the board o When corporation is prohibited under any loan agreement with any financial institution or creditor and without the latters consent o When such retention is necessary under special circumstances Preference as to Dividends When Right to Dividends Vests; Rights of Transferee Right vests as soon as the dividends have been lawfully declared by the board; from that time on, it becomes a debt owing by the corporation to each SH and no revocation can be made Whenever such dividend is declared, or the declaration of dividends is made, the corporation becomes a debtor and the right of the SH to distribution, unless a record date is specified, becomes fixed by the declaration. o The amount due to a SH belongs to him and it cannot without his consent be reverted to the surplus account of the corporation Whoever owns or is the SH-of-record of the stocks at the time of declaration also own the dividends o GR: Subsequent transfer would not carry with it the right to dividends Liability for Illegal Dividends 1. Directors GR: not liable personally Exception: BF, negligence, willful violation of the law If liable: liable to corporation and creditors upon insolvency 2. Stockholders GR: in the absence of an express provision of law, an innocent SH is not liable to return the dividends received by him out of capital, unless the corporation was insolvent at the time of payment SHs who received wrongfully or illegally declared dividends can be held liable to refund them to the corporation or its creditors o Why? In receiving the dividends, they do not act in a corporate capacity and is not a ratificatory act of the SHs Purchase by Corporation of Its Own Shares 1. Limitations on Power: Proper Purposes and Existence of Surplus CorpCode, 41. Power to acquire own shares. - 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

25 Corporation Law Midterms reviewer (Campos Annotations) Prof. Jacinto 2 Semester A.Y. 2011-2012
nd

Janz Hanna Ria N. Serrano


For Cases: see separate case reviewer
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code.

Sec 41: expressly empowers the corporation to acquire its own shares for a legitimate corporate purpose, provided it has unrestricted retained earnings to cover the shares to be purchased. o So long as the acquisition of shares does not exceed the unrestricted retained earnings, the corporate creditors are deemed protected o Equivalent to subjecting dividend declaration to the extent of unrestricted retained earnings o Acquired shares by the corporation become treasury shares Corporate purposes: To eliminate fractional shares To collect or compromise an indebtedness to the corporation arising out of an unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold To pay dissenting or withdrawing SHs entitled to payment (appraisal right) 1. Limitations on power: proper purposes and existence of surplus

A corporation has the power to purchase its own stocks, provided o that payment is made out of surplus profits, i.e. unrestricted retained earnings, and o it is for a legitimate purpose o subject to appraisal right of SH under 81 shares reacquired by the corporation become treasury shares, which may be declared as property dividends to be issued out of retained earnings previously used to support their acquisition, provided that the amount of the retained earnings has not be impaired by losses reasons for purchase of own shares: o deadlocks in close corporations (no need for unrestricted retained earnings) o SHs may want to keep the corporation close and prevent unwelcome strangers Corporation may want to exercise contractual right to redeem PS or bonds, regardless of URE (Sec 8) 2. Remedies in case of Improper Purchase As to creditors: those prejudiced by the repurchase by an insolvent corporation can recover against the selling SHs by recovering the consideration paid o Directors can be personally liable for approving the repurchase in BF or with negligence (Sec 31) As to SHs: it reduces what is due them as dividends o Repurchase can be discriminatory to the other SHs o Shift in voting control o Remedy: right of action against the directors under Sec 31 Dividends: cashdirectors approval sufficient; stock/property2/3 approval OCS GR: only those who contributed are entitled to dividends; contributions become part of corporate assets; no declaration of dividends, still corporate property GR: dividend declaration discretionary with the board (23) Why? Unrestricted retained earnings are owned by the corporation Cash v stock/property dividend; willing to risk a stock dividend (more often than not, stock prices drop when stock dividends are declared) Unrestricted retained earnings represent fruits of the investment money; corporation doesnt need the money. As an investor, I am entitled to return! Services rendered can be used as consideration for subscription If 100% paid up capital, declare dividends! But it does not mean that the capital stock is fully-paid up (could only be 25%) 43: limitationsneeds of company, contractual obligation (ex IPO) but need not comply w/ 43; other ways to do it but corporation has to contend with an opposing SH cash: just board approval required stock: deferring dividends; plowed back as corporate funds; cannot yet be enjoyed and possibility that it can never be realized property: same as stock divs; risk that it could be 0% book value Berks: relate to Strong v Repide; psychic return? Must be realized first! Mandatorily declare dividends when unrestricted retained earnings are 10% of paid-in capital stock; does not include unpaid and outstanding stocks St Paul Milk: earmarking for benefit of directors: illegal St Paul-Dodge-Burk: comparable cases involving declaration of dividends and right to compel declaration by the SHs; expansion, nondeclaration, board discretion After declaration: debtor-creditor relationship created but conditions in 43 must still be satisfied! Prior to declaration, verify if any retained earnings form part of the assets of the corporation GR: disposition of corporate assets= authority of the board Reasonable exercise of judgment= board may opt not to declare Remedy of SH: mandamus Burden of proof: SH to prove corporate does not need it Declaration of dividends: once declared, SH does not obtain shares of ordinary creditor Cash: results in recovery of investment SH need not wait for dissolution but does not guarantee that it will be paid non-cash: SH conformity must be secured why? Deferring payment of cash prolongs exposure to risk of SHs dividends stock dividends: plowed back into corporation