VACANCIES IN THE OFFICE OF DIRECTORS AND TRUSTEES

A vacancy in the office of the director or trustee may be filled as follows:

1. By the stockholders or members
2. By the members of the Board

A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office

COMPENSATION OF BOARD MEMBERS
GR:
- Directors, in their capacity as such, are not entitled to receive any compensation except for reasonable per diems.

EXP:
- When their compensation is fixed in the by-laws
- When granted by the vote of stockholders representing at least a majority of the outstanding capital stock at a regular or
special stockholders meeting

LIMITATIONS
- The amount to be given shall not exceed 10% of the net income before income tax of the corporation during the preceding
year

LIABILITY OF DIRECTORS, TRUSTEES AND OFFICERS

Three Fold Duties of Directors
1. Obedience
2. Diligence
3. Loyalty

Nature of Powers of BOD/T
1. Theory of Original Power the powers of the BOD/T are Original and Undelegated. The Stockholders or members do not
confer, nor can they revoke those powers
2. Derivative only in the sense of being received from the State in the act of incorporation

Business Judgment Rule

Personal Liability of Directors
GR
- Directors and officers are not solidarily liable with the corporation

EXP
- VAGWAS see page 116 San Beda

A directors is not liable for misconduct of co-directors or other officers unless:
o He connives or participates in it
o He is negligent in not discovering or acting to prevent it
When officers of a corporation exceeded their authority, their actions are not binding upon the corporation or is stopped
from disclaiming them
Remedies in Case of Mismanagement
1. Dissolution
2. Receivership
3. Injunction
4. Derivative Suit or complaint filed with the SEC

DEALINGS OF DIRECTORS, TRUSTEES OR OFFICERS WITH THE CORPORATION
Contracts: VOIDABLE
Ratification: 2/3

CONTRACTS BETWEEN CORPORATIONS WITH INTER-LOCKING DIRECTORS
- Valid;
o Provided:
There is no fraud
The contract is fair and reasonable under the circumstances
o If exceeds 20% of the OCS:
Ratification is needed

DISLOYALTY OF A DIRECTOR
Doctrine of Corporate Opportunity
- Applicability
o Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a business
opportunity which:
The corporation is financially able to undertake
From its nature, is in line with corporations business and is of practical advantage to it; and
The corporation has an interest or a reasonable expectancy
- Non-applicability
o A business opportunity ceases to be corporate opportunity and transforms to personal opportunity where the
corporation refuses or is definitely no longer able to avail itself of the opportunity
o Director is not precluded
o Opportunity is one not essential to the corps business

EXECUTIVE COMMITTEE
- A body created by the by-laws and composed of not less than 3 appointed members of the board which, subject to the
statutory limitations, has all the authority of the board to the extent provided in the board resolution or by-laws

Limitations on the Powers of the Executive Committee
It cannot act on the following:
1. Approval of any action for which shareholders approval is also required
2. Filling up of board vacancies
3. Amendment or repeal of any resolution of the Board which by its express terms is not amendable or repealable and
4. Distribution of cash dividends to shareholders

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TITLE IV
POWERS OF COPORATION

Corporate Powers and Capacity
1. Express
2. Incidental:
a. Succession
b. Corporate Name
c. Make by-laws
d. Sue and be sued
e. Acquire and hold properties
f. Contract
3. Implied:
a. Acts in the usual course of business
b. Acts to protect debts
c. Embarking
d. Protect or aid employees
e. Increase business

Extension/Shortening of Corporate Term
1. Approval by BOD/T: Majority Vote
2. Notice
3. Ratification by SH: 2/3
4. Copy of the amended AOI shall be submitted to the SEC for approval

- If there is no approval, the amendment is deemed approved upon inaction of the SEC for 6 months after submission due
not to the fault of the corporation

Nature of the Power
1. Power to extend term not inherent
2. Power to shorten term inherent

Power to Increase or Decrease authorized Capital Stock
- Appraisal right is not available to a dissenting SH in case of increase or decrease of capital stock

Power to Incur, Create or Increase Bonded Indebtedness
Nature of the Power inherent

Corporate Bond
- An obligation to pay a definite sum of money at a future time at fixed rate of interest, whether secured or unsecured,
evidenced by a written debt instrument called a bond or debenture

Power to Deny Pre-emptive Right
Pre-emptive Right
- Preferential right of shareholders to subscribe to all issues or disposition of shares of any class in proportion to their present
shareholdings
- Extends even to the unsubscribed portion and even to the treasury
- Can be denied if the AOI or by-laws denies
Instances the Right is not available
1. Public shares
2. Reoffered share by the corporation
3. Shares issued in good faith, ratified by SH
4. Shares issues in payment of previously contracted debts, approved by SH
5. Denied by AOI
6. Waiver
7. Non-stock corp
8. Already exercised

Sell, Dispose, Lease, Encumber all or substantially all of Corporate Assets
- Appraisal Right available
- No need SEC approval

No Ratificatory Vote from the SH/M is needed if:
1. Necessary in the usual and regular course of business
2. Proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of the remaining
business
3. The transaction does not cover all or substantially all of the assets

Power to Acquire own shares
Instances:
1. Eliminate Fractional shares out of stock dividends
- Fractional shares cannot be represented at corporate meetings
2. Collect or compromise indebtedness
3. Pay dissenting or withdrawing SH
4. Acquire treasury shares
5. Redeemable shares
6. Effect a decrease of capital stock
7. Deadlock in close corp

Invest Corporate Funds in another Corporation or for purposes other than the Primary Purpose
- Appraisal right available
- Ratification of 2/3 must be made at a meeting duly called for the purpose

Power to Declare Dividends out of Unrestricted Retained Earnings
Requirements
1. Unrestricted Retained Earnings
2. Resolution of the Board
3. 2/3 concurrence of outstanding capital stock

URE
- Retained earnings which have not yet been reserved or set aside by the board of directors for some corporate purpose

Dividends
- Corporate profits set aside, declared and ordered to be paid by the directors for distribution among shareholders at a fixed
time
FORMS OF DIVIDENDS:
1. Cash
2. Property
3. Stock

Note:
- Dividends among SH of the same class must always be pro rata equal and without discrimination and regardless of the time
when the share were acquired
- The right of the SH to be paid dividends accrues as soon as the declaration is made
- Right to dividend accrues even if there is no SEC approval. However, declaration of dividend shall be reported to the SEC
w/in 15 days from declaration
- Declaration of dividend is discretionary upon the board

GR
- Dividends cannot be declared out of the capital

EXP
- D from investments wasting assets corp
- To utilize a lease or patent
- Liquidating dividends

Requirements
- Stock Dividends: approval of 2/3
- Other dividends: Resolution by the MAJORITY of the quorum

GR
- Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital

Special Rules
1. Gain from Real property - d
2. Revaluation Surplus - d
3. Paid-in Surplus - d
4. Reduction Surplus - d
5. Sale of Treasury Shares nd
6. Indebtedness nd
7. Corporate earnings not yet received nd
8. Interim Income GR, nd esp not expired

Power to enter into Management Contract
Management Contract
- 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

Requirements
1. BOD: Majority quorum
2. SH: Majority Ratification, both managing and managed
3. SH: 2/3 Ratification, managed if:
a. Own or control more than 1/3 of the total outstanding capital stock, managing corp (interlocking SH)
b. Where a majority of the members of the BOD of the managing corp ALSO constitute a majority of the members of
the BOD of the managed corp (Interlocking BOD)
4. Period must not be longer than 5 years for any 1 term
a. Exp Contracts on:
i. Exploration
ii. Development
iii. Exploitation
iv. Utilization of natural resources

ULTRA VIRES ACTS OF CORPORATIONS
Types of Ultra Vires Act
1. Beyond the Powers
2. Acts or contracts entered into in behalf of a corporation by persons who have no corporate authority
3. Illegal or contrary to law

May be done by:
1. Corporation
2. BOD
3. Corporate Officers

Remedies in Case of Ultra Vires Acts
1. State
- Judgment of forfeiture
- SEC may suspend or revoke the Certificate of registration
2. SH
- Injunction
- Derivative Suit
3. Creditors
- Nullification of Contract

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TITLE V
BY-LAWS

By-laws
- Internal government

Adoption of By-laws
Required Votes:
1. Before Incorporation = all incorporators
2. After incorporation = Majority of SH

Failure to file the By-laws within 30 days from incorporation is a ground for suspension of revocation of its charter after
proper notice and hearings

Amendments of the By-Laws
Requirements
1. MAJORITY= BOD, regular or special meeting called for the purpose, amend
2. 2/3 = SH/M, delegate to BOD, amend
- Delegation revoked when MAJORITY if SH/M will vote in the meeting

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TITLE VI
MEETINGS

Regular and Special Meetings of SH/M
Regular = annually on a date fixed in the by-laws
= or any date in April
= Notice at least 2 weeks before the meeting

Special = any time deemed necessary or as provided in the by-laws
= at least 1 week

Where?
- City/Municipality where the principal office of the corporation is located; and
- If practicable, in the principal office of the Corporation
- MM, considered as a city or municipality


Regular and Special Meetings of BOD/T
Regular = monthly, unless the by-laws provide otherwise
= Notice, at least 1 day prior the scheduled meeting (whether regular or special)
= EXP: unless otherwise provided by the by-laws

Special = any time upon the call of the president or as provided in the by-laws

Where?
- Anywhere in or out of the Philippines, unless the by-laws provide otherwise

Person authorized to make call a meeting
1. Person or persons designated in the by-laws
2. By director or trustee or by any officer entrusted with the management of the corporation
3. SEC, upon petition of a SH/M and on the good showing of good cause, may issue an order to the petitioning SH/M directing
him to call a meeting of the corporation by giving proper notice.
4. Secretary/SH/M for the special meeting for the removal of D/T
*Notice is needed

Even if the meeting by improperly held or called, all proceedings and any business transacted at such meeting called be
valid if:
o Within the powers or authority of the corporation, and
o Provided that all the SH/M are present or duly represented at the meeting
Once a quorum is called and the meeting was called to order, even if some people left are less than the majority, the
proceedings will be valid so long as there is quorum when the meeting was called to order.

Person who shall preside
- President, unless otherwise provided by the by-laws
- Where the officer entitled to preside is not present a SH/M who takes the floor may Temporarily preside, pending the
selection of the officer

***RULES ON MEETING/VOTING APPLICABLE TO CERTAIN KINDS OF SHARES
Delinquent Shares Not entitled to vote
Treasury Shares No voting rights while they remain in the treasury
Fractional Shares Not entitled to vote
Escrow Shares Not entitled to vote before the fulfilment of the condition
imposed thereon
Unpaid Shares If Delinquent, not entitled to vote
Sequestered Shares If ill-gotten, immediate danger or dissipation

- Pledgor or Mortgagor = may attend and vote, unless pledgee or mortgagee has been given the right in writing
- Executors, Administrators, Receivers, other legal representatives = may attend and vote in behalf of the SH/M w/o need of
written proxy
- Heirs = especially when no administrator has been appointed

Shares Jointly Owned
- Consent of all the co-owners necessary
o Unless there is a written proxy, signed by all the co-owners
- If shares are owned in an and/or capacity by the holders thereof
o Any one of the joint owners can vote or appoint a proxy thereof

Proxy
- Written authorization
- instrument
Requirements:
1. It shall be valid only for the meeting which it was intended
2. Signed by the SH/M concerned
3. In writing
4. Filed before the scheduled meeting with the Corporate Secretary
5. Shall not be longer the period of 5 years in any one time

Instances for Proxy
1. Election of BOD/T
2. Joint ownership of stock
3. Trustee under voting trust agreement
4. Voting by members in a non-stock corporation
5. Pledge or Mortgage of shares
6. As provided for in its by-laws

Kinds of Proxy
1. General general discretionary
2. Limited specified matters
3. Specific particular meeting
4. Continuing any and all regular or special SH meeting

Voting Trust Agreement
- An agreement
- Title to the shares conveyed is transferred to the trustee on the books of the corporation
- The transferring SH parts with the voting power but only retains the equitable or beneficial ownership of the stock

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TITLE VII
STOCKS AND STOCKHOLDERS

Ways to become a Stockholder of a Corporation
1. Subscription contract with the corporation
2. Purchase or acquisition of shares from the existing SH
3. Purchase of Treasury Shares from the corporation
4. Buy shares traded in the stock market
5. Buy to any SH who unload his shares

Subscription Contract
- Any contract for the acquisition of UNISSUED STOCK in an existing corporation or the shares of a corporation still to be
formed shall be deemed a subscription
- Consensual
- Until the stocks are fully paid, it continues to be a subsisting liability that is legally enforceable
- Parties
o Subscriber
o Corporation
- Stocks that never been issued = made before or after incorporation
- Increase of Capital Stock = made after incorporation only

Pre-incorporation Subscription
- It shall be irrevocable for a period of at least 6 months from the date of subscription, unless:
o All the other subscribers consent to the revocation
o Incorporation fails to materialize
- It shall likewise be irrevocable after the submission of the AOI to the SEC

Stock Options

Notes:
- Subscribers who have not paid in full unless they have been validly released from their undertaking, are debtors of the
corporation for the balance and if the corporation does not enforce the liability, its creditors may do so.
- Liability of a subscriber for unpaid subscription cannot be compensated or set-off with the value of his share nor can a stock
dividends declared be applied as payment for the same.
- Accordingly, a SH who voluntarily remits an amount in excess of that stated in the call is estopped from claiming such
excess because once payment is accepted by the corporation, it becomes a part of the assets of the corporation and any
reduction thereof would necessarily constitute a violation of the 3 par of 122. Nor has the corporation of the power to grant
such refund.
- Option = within 3 years from approval

Underwriting Agreement
- Underwriter purchases a stipulated amount of stocks or bonds, specified in the underwriting agreement, if such securities
are not purchased by those to whom they are first offered.

Considerations for Stocks
Valid Considerations for Stocks
1. Cash
2. Property
a. Tangible
b. Intangible
i. Patents
ii. Copyright
iii. Intellectual Property
3. US dollars, shall be converted to Peso, otherwise they shall be considered payment by way of property
4. Notes
5. Shares of Stocks
6. Bonds
7. Labor or services actually rendered to the Corporation
8. Previously incurred corporate indebtedness, acknowledged by the Board
9. Amounts transferred from the unrestricted retained earnings to stated capital
10. Outstanding shares in exchange for stocks in the event of reclassification or conversion

Invalid Considerations
1. Promissory notes
2. Future services
However, there is no prohibition on the use of checks, bills or notes in payment of the cash consideration.

- Corp cannot issue stock as gratuity
- It is lawful for corp to issue bunos stock

Amount of Consideration
- It shall not be less than the par or issued price thereof, except treasury shares so long as the price is reasobnable
- Such as WATERED STOCK

Sources of Corporate Capital
1. Funds furnished by SH
2. Borrowings
3. Profits and stock dividends

Certificate of Stocks and Transfer of Shares
Shares of Stock
- Interest or right w/c owner has in the mgt of the corporation and its surplus profits and on dissolution, in all of its assets
remaining after the payment of its debt


Certificate of Stocks
- The paper representation or tangible evidence of the stock itself and of the various interests therein.
- Expresses the contract between the corporation and the SH
- Not essential to the ownership and/or existence of the share of stock
- It is prima facie evidence that the holder is a SH in a corporation
Note:
- In the absence of the COS, the ownership of stocks may be shown by the record thereof in the corporate books.
- But mere inclusion of a person as a SH in the General Information sheet filed with the SEC is insufficient proof that one is a
shareholder in a corp where there is no COS in his name, nor any written document such as an assignment in his favour
- A COS is a quasi-negotiable instrument.
o It may be transferred by indorsement, coupled with delivery but the holder thereof takes it without prejudice to
such rights or defenses. (page 140)

Remedies where the corporation Refuses to Issue COS
1. Mandamus
2. Specific Performance
3. Damages
4. Rescind Contract of subscription and recover the consideration paid

Issuance of the COS
Requisites:
1. Signed
2. Sealed
3. Delivered
4. Fully Paid
5. Original Certificate surrendered

Transfer of Stocks to be Valid
Requisites:
1. Delivered
2. Indorsed
3. Recorded

Actions by SH/M
Derivative Suit
- One brought by one or more SH/M in the name and on behalf of the corporation to redress wrongs committed against it; or
- To Protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue or are the ones to be sued
or hold control of the corporation
- The SH is only a NOMINAL party in a derivative suit, the real party in interest is the Corporation
- Mere trustee of shares registered in his name cannot file a derivative suit for he is not a SH in his own right

Individual Suit
- An action brought by a SH against the corporation for direct violation of his contractual rights

Representative Suit
- One brought by a person in his own behalf and on behalf of all similarly situated

Liability for Watered Stock
1. Consenting Director or officer solidary
2. Subscriber liable to contribute
3. Subsequent Transferee occupies the same position w/ the transferor, esp made himself a party
4. Transferor or party to the fraud damages

Interest on Unpaid Subscriptions
Payment of Balance of Subscription
Delinquency Sale
- If date fixed, Non payment within 30 days = delinquent
- In no date fixed, Notice of Call is mandatory to ALL SH

When call in Not Necessary
- Dates is fixed
- Corp is insolvent

Highest Bidder in a Delinquency Sale
1. Person participating in the delinquency sale who offers to pay the full amount of the balance of the subscription together
with the accrued interest, costs of advertisement and expenses of sale for the smallest number of shares
2. If there is no bidder as mentioned above, the corporation may bid for the same, and the total amount due shall be credited
as pain in full in the books of the corporation. Such shares shall be considered as treasury shares

Prescriptive period
- 10 years = based on written subscription
- 6 years = based on verbal subscription

Note:
- No delinquent stock shall be voted for nor be entitled to vote or representation at any SH meeting, nor shall the holder be
entitled to any of the rights of a SH;
o 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 cost and expenses of advertisement, if any.
- Delinquent stock shall not be included in determining the existence of quorum
- QUO WARRANTO proceedings may be instituted against directors elected by delinquent SH

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TITLE VIII
CORPORATE BOOKS AND RECORDS

Who can inspect Corporate Books?
1. Any director, trustee, SH/M
2. Voting trust certificate holder
3. SH of a sequestered Company
4. Beneficial owner of shares

- Refusal to allow such right to inspect and to demand such copy shall subject the erring officer or agent to civil and criminal
liabilities and if such refusal is by virtue of a resolution or order of the board of directors or trustees, the liability shall be
imposed upon the directors or trustees who voted thereof

What are the rights of the SH to Corporate Books and records?
1. Inspection
2. Demand list of SH
3. Demand detailed auditing of business expenditures
4. Examine books of the corps subsidiary
5. Financial Statements

What are the Extent of the Right of Inspection?
1. Right to make copies, abstracts and memoranda of their contents
2. Personal but can be made by any proper rep or atty-in-fact
3. Trade secrets not covered

What are the Limitations of the right?
1. During reasonable hours on business days
2. Info was not improperly used
3. Demand was made in good faith or for a legitimate purpose

Remedies if Inspection is Denied
1. Mandamus
2. Damages
3. Criminal Suit

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TITLE IX
MERGER AND CONSOLIDATION

Merger
- A union whereby one or more existing corporations are absorbed by another corporation which survives and continues the
combined business
- A + B = B

Consolidation
- The union of two or more existing corporations to form an new corporation called the consolidated corporation
- A + B = C

Combination
- Alliance or confideration
- Ex:
o Sales of Asset
o Lease of Asset
o Sale of Stock
o Merger
o Consolidation

Note:
- A partnership may not be allowed to merge with a corporation, but
o The partnership may transfer all its assets and liabilities to the corporation which will issue its shares of stock to be
distributed to the partners in proportion to their respective interest in the partnership. Provided the partnership
shall be dissolved in accordance with the civil code.

SH/M Approval
Articles of Merger and Consolidation
SECs approval and Effectivity of Merger or Consolidation

De facto Merger

Types of Acquisitions
1. Asset Only Level
- Raw assets and properties of the business
- Transferee not liable for the debts and liabilities of the transferor

2. Business-Enterprise Level
- Transferee continues the same business of the transferor since he obtains the earning capability of the venture
- Transferee is liable for the debts and liabilities of the transferor

3. Equity Level
- Purchasing the shareholdings of the corporate owner
- Purchased the ability to elect the members of the board of the corp who run the business


Legal Effects of Merger and Consolidation
1. Automatic assumption of the liabilities of the absorbed corporation
2. Absorbed corp ipso facto dissolved
3. Permits transfer of the assets and distribution of consideration
4. Exchanges of properties
5. Consent of the OE not necessary


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TITLE X
APPRAISAL RIGHT

Appraisal Right
- the right to demand payment of the fair value of his shares, after dissenting from a proposed corporate action involving a
fundamental change in the corporation in the cases provided by law
- not a matter of absolute right

Instances of Appraisal right
A-S-I-M-A
1. Amendment to the articles that has the effect of:
a. Changing or Restricting the Rights of SH
b. Authorizing Preferences Over those of Outstanding Shares
c. Changing the term of Corporate Existence
2. Sale, encumbrance or other dispositions of all or substantially all of the corp property or asset
3. Investment of corporate funds in another corp or in a purpose other than the primary purpose
4. Merger or Consolidation
5. In a close corporation, a SH may, for any reason, compel the corp to purchase his shares when the corp has sufficient assets
in his books to cover its debts and liabilities exclusive of capital stock

Conditions For Exercise Appraisal Right (pg 150)

Effect of Demand and Termination of Right
Payment

When Right to payment ceases
GR:
- A dissenting SH who demands payment of his shares is no longer allowed to withdraw from his decision

EXP
- Corp consents to the withdrawal
- SEC disapproved, where its approval is necessary
- Abandoned or rescinded by the corp
- SEC determines that such SH is not entitled to appraisal right

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TITLE XI
NON-STOCK CORPORATION

- No part of its income is distributable as dividends to its members
- Even if there is a statement of capital stock, for as long as there is no distribution of retained earnings to its members, the
corporation is non-stock
- Any profit which it may obtain as an incident to its operation shall, whenever necessary or proper, be used in furtherance of
the purpose or purposes for which it was organized
- Membership is personal, unless allowed by AOI or by-laws
- Juridical person may be member
- Political Purposes not included

Rules on Conversion
Stock to Non-Stock = ALLOWED
Non-Stock to Stock = NOT ALLOWED
- What the corp should do is to dissolve itself and its members may decide to organize a stock corp

Rules Applicable Only to Non-stock Corporation

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