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Corporation Law

Lex Centurion Notes


Sherryl Anne Balane Sarmiento
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The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

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1. Marking the close is the placing of purchase or sale order, at or near the close of the
trading period.

2. Watered Stocks may be defined as one which is issued by the corporation as fully paid-
up shares, when in fact the whole amount of the value thereof has not
been paid.

3. Trust Fund Doctrine is a legal proposition that a subscription to the capital stock of a
corporation constitute a trust fund which the creditors have the
right to look upon to for the satisfaction of their claims and that their
assignee in insolvency can maintain an action upon any unpaid
stock subscription in order to realize assets for the payment of its
debts.

4. Fraud or Misrepresentation Theory is a theory that liability is based on the false
representation made by the corporation and the
stockholder concerned to the creditors that the true
par value or issued price of the shares has been paid
or promised to be paid in full.

5. Transfer is the act by which the owner of a thing delivers the same to another with the
intent of passing the rights which he has in it to the latter. It contemplates an
absolute transfer of dominion and ownership.

(Note: a chattel mortgage is not within the meaning of such terms
inasmuch as a chattel mortgage is not a complete and absolute
alienation of the dominion and ownership thereof)

6. Voting Trust Agreement is an agreement in writing whereby one or more stockholders
transfer their shares to a trustee or trustees, the right to vote and
other rights pertaining to the shares for a period not exceeding 5
years at any one time. The voting trustee, in reality becomes
merely a sham owner with a colorable and fictitious title for
the purpose of voting upon stocks that he does not actually
own.

7. Define and state whether they are illegal per se or when they may become illegal.
a. Wash Sale any transaction in a security which involves no change in the
beneficial ownership thereof.

b. Matched Order order or orders for the purchase or sale of security with the
knowledge that a simultaneous order or orders of substantially the
same size, time and price for the sale or purchase of such security
has or will be entered by or for the same or different parties.

Wash sale and matched orders are not illegal per se. They only
become illegal when they are used as a means to create a false
or misleading appearance of active trading in the security
concerned.
Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------
The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

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c. Short Sale refers to the selling of security which the vendor does not own. It is
illegal per se, unless it is done in accordance with the rules and
regulations of the SEC.

8. Insider Trading the act of an insider to buy or sell security of the issuer while in
possession of material information with respect to such security that is
not generally made known to the public, unless:
(a) the insider proves that the information was not gained from such relationship;
or
(b) if the other party selling to or buying from the insider (or his agent) is identified,
the insider proves:
i. that he disclosed the information to the other party, or
ii. that he had reason to believe that the other party otherwise is also in
possession of the information.

9. An Isolated Transaction may be defined as an occasional, incidental or casual act or
transaction of a foreign corporation in the Philippines, which
does not indicate an intent on the part of the corporation to
engage in a continuity of transaction in the country, and
hence does not fall under the category of doing business.

10. doing business in the Philippines a series of commercial dealings which signify an
intent on the part of a foreign corporation to do
business in the Philippines as judged in the light of the
peculiar circumstances of the case.



Voting rights of stockholders in a stock corporation vs. Voting Rights of members in a non-stock
corporation.

1. In a stock corporation, stockholders have the right to cumulative voting which may
not be withheld from them; whereas
In a non-stock corporation, members generally have no such right because they are
entitled only to one vote each, unless the by-law of the corporation limits or broadens
their right to vote.

2. In a stock corporation, proxy voting may not be denied to any stockholder entitled to
vote; whereas
In a non-stock corporation, proxy voting may be denied to members pursuant to
Section 89 of the Corporation Code.



1. The statement that the transferability of shares in an advantage as well as a
disadvantage in the corporate form of business.
The statement that the transferability of share is an advantage of corporate form
of business because unless reasonably restricted, shares of stock, being personal
properties, can be transferred by the owner without the consent of the other
stockholders.
Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------
The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

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The same is however a disadvantage, because transfers of share may result to
uniting incompatible and conflicting interests. An example of this is the case of
Gokongwei, wherein John Gokongwei purchased shares of stocks of San Miguel
Corporation, a competitor of his own corporation.


2. The Doctrine of Secondary Meaning
In Philippine Nut Industry vs. Standard Banks (65 SCRA 575), the doctrine of
secondary meaning was defined as a word or phrase originally incapable of
exclusive appropriation [usually generic] with reference to an article in the
market, because of geographically or otherwise descriptive, might nevertheless
have been used so long and so exclusively by one producer with reference to his
article that, in that trade and to that branch of the purchasing public, the word
or phrase has become to mean that the article was his product. This definition
was likewise cited in the case of Lyceum of the Philippines vs. CA.


3. Corporate Entity Theory
Under Section 19 of the Corporation Code, a corporation comes into existence
upon the issuance of the certificate of incorporation. Only then will it acquire a
juridical personality to sue and be sued, enter into contracts, hold or convey
property or perform any legal act, in its own name.

As a legal entity, the corporation is possessed with a personality separate and
distinct from the individual stockholders or member and is not affected by the
personal rights, obligation or transactions of the latter. Meaning, the properties it
possesses belongs to it exclusively as a separate juridical entity, such that the
personal creditors of its stockholder or members cannot attach corporate
properties to satisfy their claims.


4. Piercing the Corporate Veil
The doctrine of piercing the corporate veil is the exception to the general rule on
corporate entity, that personal creditors of is corporations stockholder or
members cannot attach corporate properties to satisfy their claims, the
corporation having a juridical personality separate and distinct from it
stockholders.

This doctrine is resorted to in cases where the corporation is used or being used to
defeat public convenience, justify wrong, protect fraud, defend crime, confuse
legitimate issues, or to circumvent the law or perpetuate deception, or an alter-
ego, adjunct or business conduit for the sole benefit of a stockholder or a group
of stockholders or another corporation.

In such cases, the law will regard the corporation as a mere association of
persons, or in the case of two corporations, merge them into one, the one being
merely regarded as part or instrumentality of the other.



Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------
The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

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5. Corporate Opportunity Doctrine
Corporate Opportunity Doctrine as cited in one case decided by the Supreme
Court, is a legal proposition that places a director of a corporation in the position
of a fiduciary and prohibits them from seizing a business opportunity and/or
developing it at the expense and with the facilities of the corporation. He cannot
appropriate it to himself a business opportunity which in fairness should belong to
the corporation.


6. Business Judgment Rule
The Business Judgment Rule, as enunciated in the case of Montelibano vs.
Balolod Murcia Milling, is that questions of policy and management of the
business are left solely to the honest decision or judgment of officers and directors
of a corporation, and the court is without authority to substitute its judgment of
the board of directors. The board is the business manager of the corporation, and
so long as it acts in good faith, its orders are not reviewable by the courts.


7. Pre-emptive Right
Pre-emptive right is a right granted by law to all existing stockholders of a stock
corporation to subscribe to all issues or disposition of shares of any class, in
proportion to their respective stockholdings, subject only to the limitations
imposed under Section 39 of the Corporation Code.


8. Ultra Vires Acts
Ultra Vires Acts are those that can not be executed or performed by a
corporation because they are not within its express, inherent, or implied powers as
defined by its charter or articles of incorporation, thus allowing a collateral attack
upon the authority of the corporation to engage in such particular endeavor.

Mere ultra vires acts, which are not illegal per se, may become binding and
enforceable, either by ratification, estoppel or on equitable grounds, unless the
public or third parties are thereby prejudiced.


9. Non-filing of by-laws will not result to the automatic dissolution of the corporation
Non-filing of by-laws will not result to the automatic dissolution of the
corporation as explained in the case of Loyola Grand Villa Homeowners (South)
Association, Inc. vs. CA, means that there must first of all be a hearing to
determine the existence of the ground of failure to file by-laws within the required
period, and secondly, even assuming such finding, the penalty is not necessarily
revocation, but may only be suspension of the charter. In fact, under the rules
and regulations of the SEC, failure to file the by-laws on time may be penalized
merely with the imposition of an administrative fine without affecting the
corporate existence of the erring firm.





Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------
The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

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1. Kinds of Business Organization

(1) Sole Proprietorship
A one-man form of business entity and is defined as one conducted for profit
by a lone or single individual who owns all the assets, personally owes and
answers all the liabilities or suffers all the losses and enjoys all the profits to the
exclusion of others

(2) Partnership
Composed of 2 or more persons who bind themselves to contribute money,
property or industry to a common fund, with the intention of dividing the
profits among themselves.

(3) Joint Venture
Partakes the nature of a partnership contract and it is created for the purpose
of prosecuting a particular business transaction. It is a one time grouping of
two or more persons, natural or juridical, in a specified undertaking.
An organization formed for some temporary purpose.

(4) Corporation
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.
Corporation plays the most important role in the economic development of a
country.


2. Attributes of a corporation:

(1) It is an artificial being
It has a personality, juridical at that, separate and distinct from the
persons composing it.

Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------
The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

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(2) It is created by operation of law
the formal requirement of the States consent through compliance with
the requirements imposed by law is necessary for its creation. Mere
agreement of the parties intending to organize it is not enough
(3) it has the right of succession
death, incapacity or civil interdiction of one or more of its stockholders
does not result in its dissolution
(4) it has the powers, attributes and properties expressly authorized by law or incident
to its existence
it can only exercise only such powers and can hold only such properties
as are granted to it by the enabling statutes unlike natural persons who
can to anything as they please

3. Exceptions to the General Rule that corporations can never enter into a contract of
partnership:

(1) when expressly authorized by the Articles of Incorporation (AOI)
(2) the agreement of the articles of partnership must provide that all the partners will
manage the partnership
(3) the article of partnership must stipulate that all the are and shall be jointly and
severally liable for all obligations of the partnership.

4. Purposes or Reasons for classification of shares:
(1) To specify and define the rights and privileges of the stockholders;
(2) For regulation and control of the issuance of sale of corporate securities for the
protection of purchasers and stockholders;
(3) As management control device;
(4) To comply with statutory requirements particularly those which provide for certain
limitations on foreign ownership of shares;
(5) To better insure return on investment; and
(6) For flexibility in price, particularly no par shares.


5. Requirements for a valid stockholders meeting:
(1) It must be held on the date fixed in the by-laws or in accordance with the law;
(2) Prior notice must be given;
(3) It must be held at a proper place;
(4) It must be called by the proper party;
(5) Quorum and voting requirement must be met


Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------
The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

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6. Instances when the stockholder cannot avail of its voting rights:

(1) Non-voting shares are not entitled to vote except in those instances provided for
in the last paragraph of Section 6;
(2) Treasury shares have no voting rights while they remain in the treasury;
(3) Shares of stock declared delinquent are not entitled to vote at any meeting;
(4) Unregistered transferees of shares of stock.


7. Generally, where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor, except
where:
(1) The purchaser expressly or impliedly agrees to assume such debts;
(2) The transaction amounts to a consolidation or merger of the corporations;
(3) The purchasing corporation is merely a continuation of the selling corporation;
(4) The transaction is entered into fraudulently in order to escape liability for such
debts.


8. A corporation may be dissolved in any of these three ways:
a. by expiration of its term;
b. by voluntary surrender of its primary franchise (voluntary dissolution); or
c. by the revocation of its corporate franchise (involuntary dissolution).


9. The three modes of Voluntary Dissolution under the Code are:
a. Voluntary dissolution where no creditors are affected;
b. Voluntary dissolution where creditors are affected; and
c. Shortening of Corporate Term


10. Enumerate Grounds for Involuntary Dissolution:
Sec 6 of PD 902-A provides for the grounds for involuntary dissolution as follows:
1. Fraud in procuring its cert of registration;
2. Serious misrepresentation as to what the corporation can do or is doing to
the prejudice or damage of the general public;
3. Refusal to comply or defiance of any lawful order of the Commission
restraining commission of acts which would amount to a grave violation
of the franchise;
4. Continuous inoperation for a period of at least 5 years;
5. Failure to file its by-laws within the required period;
6. Failure to file required separate reports in appropriate forms as
determined by the Commission within the prescribed period.
Other grounds provided for in the Corporate Code itself:
1. Violation of any provision of the Code under Section 144;
Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

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The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

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2. In case of a deadlock in a close corporation as provided for in Section
105;
3. In a close corporation, any acts of directors, officers or those in control of
the corporation which is illegal, or fraudulent or dishonest or oppressive or
unfairly prejudicial to the corporation or any SH or whenever corporate
assets are being misapplied or wasted under Section 105.
Other grounds can be found in other special laws like the Securities Regulation
Code and the General Banking Act.


11. VTA limitations, restrictions, etc.
Under Section 59 of the Corporation Code, the following are the requisites and
limitations of a voting trust agreement:

(1) It must be in writing and duly notarized, and shall specify the terms and
conditions thereof;
(2) A certified true copy must be filed with the Securities and Exchange
Commission;
(3) The voting trust shall not exceed 5 years at any one time, except if it is
specifically required under a loan agreement, in which case, the period
may be more than 5 years, but it shall automatically expire upon full
payment of the loan;
(4) Unless the voting trust is renewed, all rights granted in the agreement
shall automatically expire at the period agreed upon, and the voting
trust certificates and the stock certificates issued in the name of the
trustee shall be deemed cancelled, and new stock certificates issued in
the name of the transferors.
(5) No voting trust agreement shall be entered into to circumvent laws
against monopolies and illegal combinations in restraint of trade or used
for purposes of fraud.


12. Rights of unpaid shares
Section 72 of the Corporation Code substantially provides that holders of
subscribed shares not fully paid which are not delinquent shall have all the rights
of a stockholder.

Such rights include the right to vote and be voted for, the right to receive
dividends and other rights of a stockholder, except the right to be issued
certificate of stock.


13. Instances when a foreign corporation with no license to do business in the Philippines can
sue:

(1) Where the act or transaction involved is an isolated transaction or the
corporation is not seeking to enforce any legal or contractual rights arising from,
or growing out of, any business which it has transacted in the Philippines;

Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

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The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

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(2) Where the purpose of the suit is to protect its trademark, trade name, corporate
names, reputation or goodwill;

(3) Where it is based on a violation of the Revised Penal Code;

(4) Where the foreign corporation is merely defending a suit filed against it; or

(5) Where a party is estopped to challenge the personality of the corporation by
entering into a contract with it.


14. The three methods of liquidation and their effects on the 3-year period to liquidate the
corporate affairs:

(1) By the corporation itself through the Board of Directors
If this method is resorted to, the board will only have a period of 3 years to
finish the task of liquidation. Claims for or against the corporation not filed
within the period become unenforceable as there exists no corporate
entity against which they can be enforced.

(2) By a Trustee (legal owner) appointed by the corporation
If this method is used, the 3-year period limitation imposed will not apply,
provided the designation of the trustee is made within that period.

During the period of liquidation, but before completion thereof, a
corporation, as represented by its trustee, can sue and be sued even
beyond the 3-year period fixed by law.

(3) By Appointment of a receiver (liquidator)
If a receiver is appointed, the 3-year period fixed by law within which to
complete the task of liquidation will not likewise apply because the
dissolved corporation is substituted by the receiver who may sue or be
sued even after that period.


15. Distribution of assets upon dissolution of non-stock corporations:

Section 94 of the Corporation Code provides that in case of dissolution of a non-stock
corporation in accordance with the provisions of this Code, its assets shall be applied
and distributed as follows:

1. All liabilities and obligations of the corporation shall be paid, satisfied and
discharged, or adequate provision shall be made therefore;

2. Assets held by the corporation upon a condition requiring return, transfer
or conveyance, and which condition occurs by reason of the dissolution,
shall be returned, transferred or conveyed in accordance with such
requirements;

3. Assets received and held by the corporation subject to limitations
permitting their use only for charitable, religious, benevolent, educational or
Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
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The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

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similar purposes, but not held upon a condition requiring return, transfer or
conveyance by reason of the dissolution, shall be transferred or conveyed to
one or more corporations, societies or organizations engaged in activities in
the Philippines substantially similar to those of the dissolving corporation
according to a plan of distribution adopted pursuant to this Chapter;

4. Assets other than those mentioned in the preceding paragraphs, if any,
shall be distributed in accordance with the provisions of the articles of
incorporation or the by-laws, to the extent that the articles of incorporation
or the by-laws, determine the distributive rights of members, or any class or
classes of members, or provide for distribution; and

5. In any other case, assets may be distributed to such persons, societies,
organizations or corporations, whether or not organized for profit, as may be
specified in a plan of distribution adopted pursuant to this Chapter. (n)


16. Suspension of Payments Rules of Thumb for the guidance of the Bench and Bar:
a. All claims against corporations, partnerships, or associations that are pending
before any court, tribunal or board, without distinction as to whether or not a
creditor is secured or unsecured, shall be suspended effective upon the
appointment of a management committee, rehabilitation receiver, board or
body in accordance with the provisions of PD 902-A.

b. Secured creditors retain their preference over unsecured creditors, but
enforcement of such preference is equally suspended upon the appointment of
a management committee, rehabilitation receiver, board or body. In the event
that the assets of the corporation, partnership or association are finally liquidated,
however, secured and preferred credits under the applicable provisions of the
Civil Code will definitely have preference over unsecured ones.


17. Two requisites for a valid appointment of management committee:
a. Imminent danger of loss, wastage or destruction of assets or other corporate
properties;
b. Serious paralysis of business operations.


18. To have a valid corporate act, there must be:
a. a quorum, which is the majority of the number of the board as fixed in the articles
of incorporation; and
b. a decision of at least a majority of the directors or trustees present at the meeting

Expect in the case of election of officers where the voting requirement would
ordinarily be a majority of all the members of the board.


18. Consequences / Effects of Ultra Vires Act: ***
a. On the Corporation Itself
The proper forum may suspend or revoke, after proper notice and hearing, the
franchise or certificate of registration of the corporation for serious
Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------
The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

11
misrepresentation as to what the corporation can do or is doing to the great
damage or prejudice of the general public.

b. On the Rights of the Stockholders
A stockholder may bring either an individual or derivative suit to enjoin a
threatened ultra-vires act or contract. If the act or contract has already been
performed, a derivative suit for damages against the directors may be filed, but
their liability will depend on whether they acted in good faith and with
reasonable diligence in entering into the contract.

c. On the Immediate Parties
i.) If the contract is fully executed on both sides, the contract is effective and
the courts will not interfere to deprive either party of what has been acquired
under it;

ii.) If the contract is executory on both sides, as a rule, neither party can maintain
an action for its non-performance; and

iii.) Where the contract is executory on one side only, and has been fully
performed on the other, the courts differ as to whether an action will lie on the
contract against the party who has received benefits of performance under it.
Majority of the courts, however, hold that the party who has received benefits
from the performance is estopped to set up that the contract is ultra vires to
defeat an action on the contract. This is more in conformity with the doctrine that
no person shall be allowed to enrich himself at the expense of another.


19. Reasons for increasing its capital stock:
a. To generate funds;
b. For business expansion;
c. For payment of liabilities; or
d. For purpose of acquiring other business.


20. The three modes of decreasing capital stock are:
a. Decreasing the par value of the existing number of shares without decreasing the
numbers of shares;
b. Decreasing the number of existing shares without decreasing the par value
thereof; and
c. Decreasing the number of existing shares and at the same time decreasing the
par value of the shares.



1. Explain the effects of declaration of delinquency vis--vis the rights of the stockholder.
a. To vote and be voted upon
Section 71 of the Corporation Code provides that no delinquent shares
shall be voted for or be entitled to vote or to representation at any
stockholders meeting.

Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------
The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

12
Delinquency occurs when a stockholder is called to pay for his
subscription but failed to pay on the time he is expected to do so.

b. To receive cash and stock dividends
Section 43 of the Corporation Code provides 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.

Delinquency occurs when a stockholder is called to pay for his
subscription but failed to pay on the time he is expected to do so.


2. Explain the following statements:
a. The right of a stockholder to compel the corporation to pay the value of his
shares is broader in a close corporation than in an ordinary stock corporation.
In a close corporation, a stockholder may withdraw and compel the
corporation to purchase his shares for any reason with the limitation only
that the corporation has sufficient assets to cover its liabilities exclusive of
capital stock, whereas, in an ordinary stock corporation, unless he sells his
shares, a stockholder cannot get back his investment not compel the
corporation to buy his shares except in the exercise of his appraisal right.

b. In cases of deadlocks in a close corporation, the courts can interfere in the
management of corporate affairs.
In case of deadlocks, the courts can interfere in the management of a
close corporation, even if the directors or stockholders are acting in good
faith.

Section 104 of the Corporation Code gives the SEC a very wide discretion
in respect to management of a close corporation in the event of a
deadlock. It may:

1. Cancel or alter any provision in the articles of incorporation,
by-laws or any stockholders agreement;
2. Cancel, alter or enjoin any resolution or other act of the
corporation or its board of directors, stockholders or officers;
3. Direct or prohibit any act of the corporation or its board of
directors, stockholders, officers, or other persons party to the
action;
4. Require the purchase at their fair value of shares of any
stockholder, either by the corporation regardless of the
availability of unrestricted retained earnings in its books, or by
the other stockholders;
5. Appoint a provisional director;
6. Dissolve the corporation; or
7. Grant such other relief as the circumstances may warrant.
Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
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The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

13
c. Subscriptions to shares of stock of a corporation are indivisible.
The statement that Subscriptions to shares of stock of a corporation are
deemed indivisible means that the payment made by the subscriber
shall be applied pro-rata to the entire number of shares.

d. Certificates of stock are merely quasi-negotiable and are non-negotiable.
Certificates of stock are not regarded as negotiable in the same sense
that bills or notes are negotiable, even if they are endorsed in blank.

Thus, while a certificate of stock may be transferred by endorsement,
coupled with delivery thereof, and therefore, merely quasi-negotiable, it is
nonetheless non-negotiable, in that, the transferee takes it without
prejudice to all the rights and defenses which the true and lawful owner
may have, except in so far as the principles governing estoppel may
apply.

e. A director / stockholder whose shares are declared delinquent is not
automatically disqualified to be and act as a director.
The only qualification to be a director is that he must own at least 1 share
standing in his own name in the books of the corporation. And since the
shares of a director although declared delinquent, still stand in his name
pending the sale, he remains to be and act as a director. And even if
there is a sale, he may still be a director because the winning bidder may
not bid or pay for all the shares or there might be remaining shares, which
would be credited in favor of the delinquent stockholder.



3. Can the court determine the rules in the Corporation Sole when there are no rules on
discipline? Explain.
No, because a corporation sole is by its very nature, ecclesiastical and religious,
and under the Doctrine of Separation of Church and State, the State, through the
courts, may not interfere with the rules on discipline of the church.



4. Explain the Service of Summons under the 1997 Rules of Civil Procedure.

Section 11 Rule 14 of the Revised Rules of Civil Procedure which took effect on
July 1, 1997 repealed the provision of Section 13 Rule 14 of the Rules of Court.

The changes introduced include the general manager instead of manager, the
corporate secretary instead of secretary, the in-house counsel as may be
distinguished from an outside counsel, treasurer instead of cashier, the managing
partner in case of partnership.

The new rules brushed aside the relaxation of service of summons upon a
corporation which, through the years was liberalized by the Supreme Court. The
resultant effect of the new rules would thus render the service of summons upon
persons other than those named thereat to be without force and effect.

Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

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The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

14
In one decided case by the Supreme Court after the effectivity of the new rules, it
was said that strict compliance with the mode of service is necessary to confer
jurisdiction of the court over a corporation. Service must therefore be made on
the one named by the statute.


1. What does it mean by the provision that directors / trustees shall hold office for one (1)
year, until their successors are elected and qualified?
It means that the directors / trustees have one year to serve. However, they can
continue their office, in a hold-over capacity, as directors / trustees if there is no
successor duly elected and qualified in accordance with law. For instance, Director
X, after his one year term, shall continue to serve as director of Corporation Y if any
aspiring nominee for his position is not qualified.

2. Can a corporation extend its corporate term after the expiration of its term originally
indicated in its Articles of incorporation?
A corporation can no longer extend its corporate term after the expiration of the
term of existence originally fixed by its charter or the general law, since as a rule, the
corporation is ipso facto dissolved as soon as that time expires, which means that
there would really nothing to extend. However, upon reaching said expiration of the
term, it may be thereafter continued to act for 3 years for the purpose of closing up
its business, but only for that purpose. This is the ruling in Alhambra Cigar vs. SEC.

3. Why is it important to state the purpose for which the corporation was organized?
It is important to state the purpose / purposes for which a corporation is organized
because it will be the basis for determining the scope of the corporate powers and
authority. It will define the rights and powers that a corporation and its officers and
members / stockholders can perform. It will also provide for the limitations in the
exercise of the said rights and powers.

4. What is the test to be applied in determining whether a corporation has implied power to
do a certain act?
In determining whether a corporation has implied power to do a certain act, it is
important to look into the purpose clause indicated in its articles of incorporation,
and check whether the questioned corporate act has a logical relation with the
purpose or purposes of the corporation.

In the Montelibano vs. Bacolod Murcia Milling Co, Inc., the Supreme Court said that
the test to be applied is whether the act in question is in direct and immediate
furtherance of the corporations business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the corporation has the power to do it,
otherwise, not.

5. Can a director be removed for any cause?
It depends. If the removal is without cause, the board of directors cannot do so if it
will deprive the minority stockholders or members of their right to representation. If it is
with cause, the board can remove a director even if it will prejudice the rights of the
minority, provided that the requirements set forth in the corporations articles of
incorporation and by-laws are properly complied with.


Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------
The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

15

6. May the vacancy in the board of directors be filled at the same meeting?
If the vacancy in the board of directors is due to removal, it may be filled up by
election of a replacement at the same meeting even without further notice. If
vacancy id due to increase in number of directors, such vacancy may be filled up in
the same meeting authorizing the increase in directors or trustees, provided that it is
so stated in the notice of the meeting.

7. May common shareholders be possibly denied the right to vote?
Under Section 6 of the Corporation Code, only preferred and redeemable shares
may be deprived of voting rights, unless otherwise provided in the Code. The phrase
unless otherwise provided in the Code may be applied in case there are founders
shares issued, as said shares may be given certain rights and privileges not enjoyed
by the owners of other stocks. This means that even common shareholders may be
deprived of voting rights, 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 5 years subject to the approval of the SEC.

8. Where should the suit against a corporation be filed?
Under the Rules of Court, when the action is not upon a written contract, the same
must be filed in the municipality where the defendant or any of the defendants
resides or may be served with summons. Settled is the principle that the residence of
a corporation is the place where its principal office is established.

The term may be served with summons in the Rules of Court does not apply when
the defendant resides in the Philippines for, in such case, he may be sued only in the
municipality of his residence regardless of the place where he may be found and
served with summons.

The facts that a corporation maintains a branch office in some parts of the country
does not mean that it can be sued in any of there places. To allow otherwise would
create confusion and work untold inconveniences to the corporation.




1. A director whose shares are declared delinquent does not automatically cease to be a
director. True
Reason: The only qualification to be a director is that he must own at least 1
share and since his shares stand in his name pending the sale, he remains to be
and act as a director. And even if there is a sale, he may still be a director
because the winning bidder may not bid or pay for all the shares or there might
be remaining shares, which would be credited in favor of the delinquent
stockholder.


2. Cumulative voting is generally not allowed in non-stock corporations. True
Reason: In non-stock corporations, cumulative voting is generally not available,
as each member is entitled only to one vote, unless the right of the members to
vote is limited, broadened or denied to the extent specified in the articles of
incorporation or the by-laws.
Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------
The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

16

3. Non-filing of by-laws within the period of time provided for by laws results to the
automatic dissolution of the corporation. False
The Supreme Court ruled in the case of Loyola Grand Villa Homeowners (South)
Association, Inc. vs. CA, that non-filing of by-laws will not result to the automatic
dissolution of the corporation. There must first of all be a hearing to determine the
existence of the ground of failure to file by-laws within the required period, and
secondly, even assuming such finding, the penalty is not necessarily revocation,
but may only be suspension of the charter. In fact, under the rules and regulations
of the SEC, failure to file the by-laws on time may be penalized merely with the
imposition of an administrative fine without affecting the corporate existence of
the erring firm.

4. The by-laws of a stock corporation may provide that stockholders meeting may be held
anywhere within the Philippines. False
Only non-stock corporations may provide that members meeting may be held
anywhere within the Philippines. In case of stock corporations, stockholders
meetings, whether regular or special, shall be held in the city or municipality
where the principal officer of the corporation is located, and if practicable, in the
principal office of the corporation.

5. Any meeting of stockholders/ members irregularly held or called is necessarily without
force and effect. False
An irregularly held stockholders or members meeting is subject to ratification,
either expressly or impliedly, as the last paragraph of Section 51 of the
Corporation Code provides that, all proceedings had and any business
transacted at any meeting of the stockholders or members, if within the powers or
authority of the corporation, shall be valid even if the meeting be improperly held
or called, provided all the stockholders or members of the corporation are
present or duly represented at the meeting.

6. A trustee in a voting trust agreement can vote by proxy. True
Reason: So long as a person is the legal owner of a share or shares, he has the
right to vote by proxy.

A proxy holder may vote by proxy. False
An agent can have no other agent, unless he is specifically allowed by the
principal.

7. An educational institution can have nine (9) members. True
Reason: It is true that non-stock educational institutions should only have
members whose number is 5, 10 or 15. However, in case of stock educational
institutions, they may consist of members whose number is anywhere between 5
and 15.

All educational corporations must have a governing board of only either 5, 10 or 15
members. False
In case of stock educational institutions, they may consist of members whose
number is anywhere between 5 and 15.


Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------
The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

17

8. In all cases, dissolution is followed by liquidation and winding up. False

All corporations dissolved necessarily undertake liquidation and winding up of their
corporate affairs. False

The dissolved constituent corporation in a merger should necessarily liquidate its
corporate affairs. False

Section 80 subparagraph 4 of the Corporation Code substantially provides that in
case of merger or consolidation, the surviving or the consolidated corporation
shall thereafter possess all the rights, privileges, immunities and franchises of each
of the constituent corporations, and all property, real or personal, and all
receivables due on whatever account, shall be deemed transferred to and
vested in such surviving or consolidated corporation without further act or deed.
The phrase without further act or deed means that there is no need for
liquidation. The transfer of rights and properties shall be automatic.


9. Purchase of treasury shares is equivalent to subscription. False
The basic distinction between the purchase of treasury shares and subscription is
that, while the former refers to purchase of issued shares which have been fully
paid, the latter refers to the acquisition of unissued stock of a corporation.

There is no distinction between a purchase / sale and subscription of the unissued
stocks of a corporation. True
Reason: Under Section 60 of the Corporation Code, the distinction between a
purchase and subscription of unissued stocks of a corporation has been
eliminated. So long as the shares to be acquired from the corporation are
unissued stocks of the latter, the contract will be deemed a subscription contract.


10. A corporation is a close corporation if 2/3 of voting rights is owned by another
corporation. False
Section 96 of the Corporation Code also requires that the corporation which
owns 2/3 of the voting rights of the close corporation must likewise be a close
corporation.


11. In amendment in the by-laws, appraisal right is available. False
Appraisal right may be exercised only on certain instances. Section 81 of the
Corporation Code does not include amendment of by-laws in its enumeration of
the instances when appraisal right may be exercised by a stockholder. Although
said enumeration is not exclusive, a by-law amendment may not still fall under
these instances because it does not result in the changing or restricting the rights
of the stockholders, but merely affects the internal governance of the
corporation.




Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------
The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

18

12. Pre-emptive right is available to shares issued in exchange for corporate property.
False. Section 39 of the Corporation Code expressly provides that pre-emptive
right shall not extend to shares to be issued in good faith with the approval of the
stockholders representing 2/3 of the outstanding capital stock in exchange for
property needed for corporate purposes.

True Reason: In case of close corporations, pre-emptive right of stockholders is
broader as it include all issues without exception.


13. The power and authority of a corporation sole to own, dispose and alienate real
properties is the same as in any other corporation. False
A corporation sole can acquire, alienate and / or dispose of its real properties in the
same way and manner as any other ordinary corporation. False
Under Section 113 of the Corporation Code, for a corporation sole to own,
dispose or alienate real properties, it must first secure a court order for that
purpose, except when there is a regulated method, in which case, a court order
may be dispensed with. This requirement is not imposed upon other corporations.


14. All religious corporations commence to exist and are vested with juridical personality
upon filing of the Articles of Incorporation with the Securities and Exchange Commission.
False
Only a Corporation Sole commence to exist and is vested with juridical
personality upon filing of the verified Articles of Incorporation with the Securities
and Exchange Commission. Other religious corporations such as religious societies
acquire juridical personality, only upon the issuance of the certificate of
incorporation by the SEC or the appropriate government agency.
15. A religious society does not commence to have a juridical personality until the issuance
of the certificate of registration / incorporation by the SEC. False
Other government agencies may also issue in favor of a corporation, a certificate
of registration or incorporation, such as the bureau of cooperatives for
cooperatives, and homeowners, for home insurance guaranty corporations.


16. The mere appointment by a foreign corporation of a distributor domiciled in the
Philippines necessarily implies doing business in the country. False
In Communication Materials & Design, Inc. vs. CA, the Supreme Court ruled that if
the distributor or representative appointed by the foreign corporation has
maintained an independent status during the existence of their contract, the
mere appointment of such distributor or representative will not constitute doing
business in the Philippines. Such independent status may be determined by the
provisions of the contractual agreement entered into by the foreign corporation
and its representative.

The appointment of an exclusive dealer domiciled in the Philippines by a foreign
corporation does not necessarily imply doing / transacting business. True


Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------
The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

19
17. It is not the lack of the requisite license, but doing business without a license that bars a
foreign corporation from access to our courts. False
The statement is a general rule, which is subject to certain exceptions. In the
following instances, a foreign corporation can sue before the Philippine courts
even without a license:

1. Where the act or transaction involved is an isolated transaction or the
corporation is not seeking to enforce any legal or contractual rights arising
from, or growing out of, any business which it has transacted in the Philippines;

2. Where the purpose of the suit is to protect its trademark, trade name,
corporate names, reputation or goodwill;

3. Where it is based on a violation of the Revised Penal Code;

4. Where the foreign corporation is merely defending a suit filed against it; or

5. Where a party is estopped to challenge the personality of the corporation by
entering into a contract with it.



18. The remaining assets of a dissolved non-stock corporation may be distributed among
themselves, absent a by-law provision or articles of incorporation to that effect. False
This act is prohibited by law in order to avoid fly by night foundations.


19. The averment of a foreign corporations capacity to sue is not necessary for it to gain
access to our court if it is merely defending a suit filed against it. True.
Basis: Time, Inc. vs. Reyes
20. In a corporate controversy, service of summons upon a corporation is valid if made upon
any of its directors / trustees. True
Basis: Under Section 5(a) Rule 1 of the Interim Rules of Procedure on Intra-
corporate Controversies, if the defendant is a domestic corporation,
service shall be deemed adequate if made upon any of the statutory or
corporate officers as fixed by the by-laws or their respective secretaries. A
director or trustee is necessarily a statutory officer.

21. No corporation can be formed / organized unless there are at least 5 incorporators
creating it. False
An exception to the rule that corporations must have at least 5 incorporators is
the corporation sole which consists of one person or individual only.

22. Minors are not qualified to become incorporators. True
Minors are not qualified to become incorporators as the law requires that the
incorporators must be of legal age.

23. Corporations are not allowed to be corporators or stockholders in a corporation. False
The law does not preclude firms and other entities from becoming stockholders or
subscribers to the shares of stock of a corporation. Neither are they prohibited
from joining the corporation, after incorporation, as stockholders thereof.
Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------
The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

20
Corporations are not allowed to be incorporators in a corporation. False
Section 10 of the New Civil Code substantially provides that only natural persons
can be incorporators. This implies that corporations and registered partnerships
cannot become incorporators because they are not natural persons, but are
juridical entities. Exceptions to this rule are cooperatives and corporations
primarily organized to hold equities in rural banks and may rightfully become
incorporators thereof.


24. A corporation whose stockholders consist solely foreigners is necessarily a foreign
corporation. False
Under the incorporation test, the nationality of a corporation follows that of the
country under whose laws it was incorporated. This is the test applied in our
jurisdiction as can be determined from the definition of foreign corporation under
Section 123 of the Corporation Code. This implies that nationality of stockholders,
subject to some constitutional limitations, is immaterial in determining the
nationality of a corporation.


25. A government-owned or controlled corporation, is for all intents and purposes, a public
corporation. False
Not all government-owned or controlled corporations are necessarily public
corporations. The true test to determine the nature of a corporation as public or
private is found in relation of the body to the State. Strictly speaking, a public
corporation is one that is created, formed or organized for political or
governmental purposes with political powers to be exercised for purposes
connected with the public good in the administration of civil government.


26. It is the NLRC that is possessed with jurisdiction to hear and decide cases involving
employer-employee relationship in corporations created/ organized under the
Corporation Code. True
Employees of corporations created or organized under the Corporation Code
are subject to the provisions of the Labor Code. Under the Labor Code, cases
involving employer-employee relationship in such corporations are under the
jurisdiction of the NLRC.


27. A corporation can not exist as such without the consent of the State thru its authorized
agency. False
Not all corporations in order to exist, need prior consent, clearance and/or
approval of the State through its authorized agency. Only those corporations
whose purpose or objective includes any purpose under the supervision of
another government agency need prior consent of the concerned government
agencies or instrumentalities, pursuant to the provisions of the Corporation Code.


28. Common shares can never be denied the right to vote. False
In case of founders shares, a common stock may be deprived of voting rights,
subject to a limited period.

Corporation Law
Lex Centurion Notes
Sherryl Anne Balane Sarmiento
--------------------------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------------------
The contents of this compilation are based on Atty. Ladias Lectures during the 2
nd
Semester of S.Y. 2009-2010.

21

29. All corporations de jure can come into existence upon the issuance of the certificate of
registration by the SEC. False
As a general rule, corporations de jure can come into existence only upon the
issuance of the certificate of registration by the SEC. An exception to the rule is
corporation sole, where it comes into existence upon the filing of the verified
articles of incorporation. Once filed, it is vested with a juridical capacity.

30. Corporation by Estoppel will apply if there are no third persons prejudiced by the
questioned act of the person who have represented himself as an agent of the
corporation. False
Corporation by Estoppel will not apply if there are no third persons involved in the
conflict.
Corporation by Estoppel will only apply if there are third persons involved in the
conflict.

31. In all cases, filling up of vacancy of the Board of Directors must be based on the election
held for its purpose by the stockholders representing 2/3 of the outstanding capital stock.
False
If the vacancy in the board of directors or trustees occur by virtue of a removal,
Section 28 authorizes the filling of vacancy by the election of a replacement at
the same meeting, without further notice. If the vacancy is due to an increase in
number of directors, it may likewise be filled up in the same meeting authorizing
the increase in directors or trustees, provided that it is so stated in the notice of
the meeting.

32. The approval by the SEC is not necessary for an amendment of the by-laws to be valid
and effective. False
The Corporation Code provides that there should be an approval by the SEC for
a by-law amendment to become valid and effective. It will not become valid
and effective if the SEC fails to act on it within 6months from filing. It is the
amendment to the articles of incorporation that will become valid if the SEC fails
to act on it within 6months.

33. An ultra vires act is illegal per se. False
An ultra vires are not illegal per se. They may become binding and enforceable
either by satisfaction, estoppel ot equitable grounds.

34. Declaration or payment of stock dividends results in a decrease in corporate assets. False
The declaration or payment of stock dividends does not result in a decrease in
corporate assets. It gives the stockholders nothing in the way of distribution of
assets but merely divides his existing shares into smaller units.


- End -

Study for Atty. Ladias hypothetical questions. Review Codal Provisions.
Good luck and God bless Brothers and Sisters. Soli Fortis Survivit!