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1.

Q: What are the disqualifications of the Directors?


A: Section 27. Disqualification of directors, trustees or officers. No person convicted by final judgment of an offense
punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5)
years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.

2.

Q: What is the effect if the stockholders do not know of the conviction of the director, and the latter has already
participated in various meetings and voted on different issues? What could be the effect of those decisions or resolutions
that have been approved by the disqualified director?
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3.

Q: A situation where the vote of the a disqualified director was included in a decision to borrow money from the bank, and
when the loan becomes due and demandable the corporation refuses to pay the bank saying that the resolution was
defective because without the vote of the disqualified director, the resolution would not have been passed.
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4.

A: The decisions or resolutions made will be considered as valid because the directors disqualification is not yet known at the
time those resolutions were made. Thus, he becomes a de facto director.

A: The Corporation cannot escape its liability on the ground of defective resolution because at the time it was made, the
disqualified director was acting under the colorful authority.

Q: Difference between de facto and de jure director


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A: The difference lies in its ability to remain.

A de jure directors position or existence cannot be questioned while a de facto director, his position may be questioned, but until that
happens he remains to be a director. So the votes he has made will remain binding.
5.

What is the difference if a de facto officer votes as compared to a de jure officer? Where does the difference lie?
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6.

Practically is there such thing as a de facto director? In so far as binding effect is concerned?
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7.

A de jure directors position will always remain as such while a de facto directors existence will continue until he is disqualified.

No, the difference lies in his ability to remain also the difference lies in being subject to disqualifications until this happens he is
just like any other de jure officer. Unless in public corporations, de facto officers are different so that if the judge is discovered
to be a BAR flunker his decisions may be questioned. The decision may be nullified because the qualification of the Judge is
important. He cannot assume authority or jurisdiction unless he has proper qualification. Thus it makes a big difference in a
private corporation director and in a public corporation officer.

What is disloyalty?
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8.

In disloyalty as compared to conflict of interest, it is not necessary that you have that duty to perform, however the director is
taking advantage of such business opportunity towards his own advantage.
If the stockholders cannot review the decision of the BOD, can the courts do?
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9.

GENERAL RULE: The courts have no power to review the decisions of the BOD. We have this what we call BUSINESS
JUDGMENT RULE. So far as business is concerned their decision is the rule. Nobody could tell them how to manage the
corporation or tell them that their decision was wrong. Otherwise, what is the point of electing the BOD when as a matter of
fact their decision is subject to review by someone else. The courts cannot even question the decision of the BOD if that is
how they think the business should be conducted and how the corporation should be managed. Courts have nothing to do with
their judgment.

When can the courts question the decision of the BOD?


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we discussed FOUR main topics


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liabilities of the directors (instances when a director could be held liable)

assent to patently unlawful acts

gross negligence

conflict of interest

self-dealing directors

the corporation has a contract with the business of the directors


generally, it is voidable and annulled if the presence of the director was necessary to constitute a quorum, if
the vote was necessary for the approval and if its unfair and unreasonable.

disloyal directors

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o

interlocking directors

generally, this is valid unless the provision of self-dealing directors will be applicable

Sec.31 . Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for
or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty
as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered
by the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquire, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation. (n)
Section 32. Dealings of directors, trustees or officers with the corporation. A contract of the corporation with one or
more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following
conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a
director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting:
Provided, however, That the contract is fair and reasonable under the circumstances. (n)
Section 33. Contracts between corporations with interlocking directors. Except in cases of fraud, and provided the
contract is fair and reasonable under the circumstances, a contract between two or more corporations having
interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking
director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he
shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are
concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for
purposes of interlocking directors. (n)
Section 34. Disloyalty of a director. Where a director, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he
must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be
applicable, notwithstanding the fact that the director risked his own funds in the venture. (n)
10. In all these instances, there are circumstances to be determined before the director will be liable, who will determine
whether or not these circumstances are met?
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The Court

11. Powers of the Corporation


Section 36. Corporate powers 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;

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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.

12. Can the corporation call VP Binay, who has already announced his intention to run as president in 2016, NayBi, I
understand youre running as President and here is a good exposure for you: I will donate P10M to victims of Typhoon
Yolanda. Is this valid?
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The law provides that the prohibition is a donation for partisan political activity. Since the purpose is for the Yolanda victims,
then it should be valid.

I am inclined to agree with Mr. Robles because there is no election yet. If you talk about partisan politics, it is only during election. Well
the fact that Binay has declared his intention to run for President, we still do not know whether he will file a certificate of candidacy or
whether he will use the amount directly for that purpose. But I am inclined to believe, even if he is exposed to that kind of money but is
used for the Yolanda Victims, there is a good purpose. But if in that case Binay will be given good exposure because of his pictures
distributing noodles, bottled water and two kilos of rice, that may be however this is merely theoretical because there is no case filed
yet. But in this case, I am inclined to call it a valid donation because the Yolanda Victims are real. Just food for thought.
Sec. 36 Corporate powers and capacity Every corporation incorporated under this Code has the power and
capacity:
2. xxx
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 of for purposes of partisan political activity;

13. One of the powers is to shorten or extend the term of the corporation, how is this done?
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It may be shorten or extended by amending the articles of incorporation, with a majority vote of the board of directors and at
least 2/3 vote of the outstanding capital stock.
Sec. 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. (n)

You have to process the amendment. It starts with the decision of majority of the directors, with ratification from 2/3 of the stockholders
if it is a stock corporation or 2/3 vote of the members if it is a non-stock corporation. So you have to amend the articles or the by-laws

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and
and

with

Current

Increase

Decrease

Decrease

Authorized

1,000,000

2,000,000

500,000

200,000

Subscribed

250,000

500,000

125,000

50,000

Paid up

62,500

125,000

31,250

12,500

14.

go through the
proper
process
submit
your
required
documentations
the SEC.
Another power is

to increase or decrease capital stock, how is this done?


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There should be a majority vote by the board of directors and should be ratified by 2/3 vote of the stockholders. There should
be sworn statement from the treasurer that 25% of the authorized capital stock is subscribed and 25% of the subscribed
capital stock is paid.

with only 250k subscribed, and there is still 750k unsubscribed, is this allowed?

14.

Valid since it is intended for

Increase corporate assets

Issuance of stock dividends

This can be done, sometimes however, SEC does not follow the law since they will require you to subscribe the entire authorized
capital stock first sir thinks this is crazy.
This is the law, there is no prohibition here, but wa tay mahimo because they will tell us that mao may ingon sir. Its only under SEC
rules that they will require you to consume ACS first, apply subscription to old authorized before asking for an increase.
When you say increase, you increase the capital stock. But, you could also decrease capital stock.
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So, can the corporation decrease its ACS?

o
o

Yes, provided that its creditors will not be prejudiced


If ACS will be decreased to 200k, it will not be allowed because of the trust fund doctrine, creditors would be
prejudiced because the decrease to 200k would amount to a waiver on the corporation to collect the unpaid
subscribed capital stock

If allow your decrease from 1M to only 200k, your SCS will only be 50k instead of 250k. the creditors will be prejudiced.

15. What is covered by the trust fund doctrine?


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The subscribed capital stock. Because we said, this is the asset of the corporation. And therefore, you should not touch that bec
that is intended to protect the creditors. SO if the authorized capital stock now is 200k, necessarily, now the subscribed capital
stock is only 50K. they were protected before up to 250k but now they are just protected only to 50k.

16. So can they do that?


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No, the law said you are allowed to decrease but you should not jeopardize your creditors.

Sir: You are allowed to decrease your authorized capital stock but you should not jeopardize your creditors. If you allow the decrease
from one million to 200,000, then the assets will now only be 50,000 but your creditors are supposed to be protected up to 250,000,
and so they cannot decrease up to that point.
17. Sir: Pre-emptive right.
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A: Pre-emptive right refers to the right granted to the stockholders to purchase or subscribe to all issues or disposition of shares of
any class in proportion to their respective shareholdings.

Sir: Alright, this is intended to maintain the interest of the stockholders, the extent of their hold in the corporation.

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18. So here, you must enjoy that right. So that Robles, I sold to you my shares and I told you, you buy the shares Robles I
have 100 shares and I still have 200 shares with me, if you buy this 100 shares, I will give you the right of first refusal to
buy my 200 shares. Is that pre-emptive right?
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A: No sir because the pre-emptive right of a shareholder is only where the whole share is being sold. That is not an illustration of a
pre-emptive right.
Instead, this is an example of an agreement with right of first refusal

19. Sir: So, whats the difference then? Right of first refusal or an option given or pre-emptive right?
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A: The difference lies sir when the stockholder tries to sell his shares as a stockholder of that company, you have the right to buy
first the shares being sold, in that case that was just an option given by the stockholder. On the other hand, in the illustration, it was
just an option because in a pre-emptive right there is no qualification as to when you can exercise that right sir.

pre-emptive right
o in order for stockholder to protect his interest in the corporation

first refusal
o

a business option, it is different from pre-emptive right

20. Q: What is then (the purpose of) option to buy?


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A: It is purely a business deal to encourage you to consummate the sale.

21. Q: Generally, a stockholder enjoys the pre-emptive right. Can it be denied?


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A: Generally, they cannot be denied their pre-emptive right. It can be denied under the following exceptions:
Sec. 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.

Sir: So here are the instances. First, when the corporation is in the process of going IPO. When you go public, the law requires that you
must allot at least 10% of your shares to your employees. The purpose is to make your employees feel that they are owners of the
company and that they are expected to work harder because not only to they get salaries, but they can now get dividends. So that is
the purpose of allotting at least 10%. So these employees may be encouraged to buy them because these stocks may be offered to
them in very soft terms: salary deductions, monthly deductions, even sometimes at a discounted price. Again, the idea is to make them
feel that they own the company, and as owners, they will trying hard to make the company more profitable so that in the end, they will
enjoy the fruits of their industry by gaining dividends.

22. What is bonded indebtedness?


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Bonded indebtedness is when a corporation acquires fresh funds from the public secured by bonds or notes with fixed rates of
interest and maturity date. When maturity date comes, the corporation will just redeem these bonds by paying these off

23. Difference between a PN and a redeemable share?


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PN
o

One is a Creditor. Holds no equity in corporation. Not entitled to dividends but is entitled to interest by virtue of the
promissory note.

Redeemable share
o You are an investor, holds equity in corporation. Other than payment, you may also be entitled to dividends.