Professional Documents
Culture Documents
Corporation Law
Corporation Law
INTRODUCTION
Definition and attributes of a corporation
A corporation is an artificial being created by operation of law, having the right of succession and
the powers, attributes and properties expressly authorized by law or incident to its existence.
A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent
on its will," it is "a creature without any existence until it has received the imprimatur of the state acting
according to law." A corporation will have no rights and privileges of a higher priority than that of its
creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet
Corporation)
A corporation has four (4) attributes:
(1)
(2)
(3)
(4)
It is an artificial being;
Created by operation of law;
With right of succession;
Has the powers, attributes, and properties as expressly authorized by law or incident to its
existence.
Stock
Definition
Purpose
Non-Stock
Composition
Stockholders
Members
Voting by proxy
Voting by mail
Not possible.
Governing Board
Term of
trustees
directors
Election of officers
or
Place of meetings
Transferability of interest
or membership
Transferable.
Distribution of assets in
case of dissolution
REQUIREMENTS
COMMENTS
Definition
Characteristic
natural persons
Number
residence
a
requirement;
citizenship requirement only in
certain areas such as public
utilities, retail trade banks,
investment houses, savings and
loan associations, schools
Age
of legal age
Residence
12345-
STEPS
COMMENTS
Promoter
Process:
a) SEC shall examine them in order to determine
whether they are in conformity w/ law.
b) If not, the SEC must give the incorporators a
reasonable time w/in w/c to correct or modify the
objectionable portions.
Grounds for rejection or disapproval of AOI:
a) AOI /amendment not substantially in accordance
w/ the form prescribed
b) purpose/s are patently unconstitutional, illegal,
immoral, or contrary to government rules & regulations;
c) Treasurers Affidavit is false;
d) required percentage of ownership has not been
complied with (Sec. 17)
e) corp.s establishment, organization or operation
will not be consistent w/ the declared national economic
policies (to be determined by the SEC, after consultation
w/ BOI, NEDA or any appropriate government agency -PD 902-A as amended by PD 1758, Sec. 6 (k))
e. Issuance of certificate of
incorporation.
COMMENTS
(2)
1.
Principal Office
Term of Existence
Purpose Clause
Capital Stock
Other matters
No. In the case of Hall v. Piccio (86 Phil. 603; 1950), where the supposed
corporation transacted business as a corporation pending action by the SEC on its
articles of incorporation, the Court held that there was no de facto corporation on the
ground that the corporation cannot claim to be in good faith to be a corporation when it
has not yet obtained its certificate of incorporation.
Was there colorable compliance enough to give the supposed corporation at least the
status of a de facto corporation?
No. Neither the hope, the belief, nor the statement by parties that they are incorporated,
nor the signing of the articles of incorporation which are not filed, where filing is requisite to
create the corporation, nor the use of the pretended franchise of the nonexistent corporation, will
constitute such a corporation de facto as will exempt those who actively and knowingly use s
name to incur legal obligations from their individual liability to pay them. There could be no
incorporation or color of it under the law until the articles were filed (requisites for valid
incorporation).
HALL v. PICCIO (29 SCRA 533; 1969)
In the case of Hall v. Piccio, where the supposed corporation transacted business as a
corporation pending action by the SEC on its articles of incorporation, the Court held that there
was no de facto corporation on the ground that the corporation cannot claim to be in good
faith to be a corporation when it has not yet obtained its certificate of incorporation.
NOTE: The validity of incorporation cannot be inquired into collaterally in any private suit
to which such corporation may be a party. Such inquiry must be through a quo
warranto proceeding made by the Solicitor General. (Sec. 20)
CORPORATION BY ESTOPPEL
(Sec. 21)
Distinguish a de facto corporation from a corporation by estoppel.
The de facto doctrine differs from the estoppel doctrine in that where all the
requisites of a de facto corporation are present, then the defectively organized
corporation will have the status of a de jure corporation in all cases brought by and
against it, except only as to the State in a direct proceeding. On the other hand, if any of
the requisites are absent, then the estoppel doctrine can apply only if under the
circumstances of the particular case then before the court, either the defendant
association is estopped from defending on the ground of lack of capacity to be sued, or
the defendant third party had dealt with the plaintiff as a corporation and is deemed to
have admitted its existence.
(De facto has status of de jure corpo, except separate personality against State, provided all requisites
are present)
Salvatierra leased his land to the corporation. He filed a suit for accounting, rescission
and damages against the corporation and its president for his share of the produce. Judgment
against both was obtained. President complains for being held personally liable.
He is liable. An agent who acts for a non-existent principal is himself the principal. In
acting on behalf of a corporation which he knew to be unregistered, he assumed the risk arising
from the transaction.
ALBERT VS UNIVERSITY PUBLISHING CO., INC. (Jan. 30, 1965)
Mariano Albert entered into a contract with University Publishing Co., Inc. through Jose
M. Aruego, its President, whereby University would pay plaintiff for the exclusive right to
publish his revised Commentaries on the Revised Penal Code. The contract stipulated that
failure to pay one installment would render the rest of the payments due. When University failed
to pay the second installment, Albert sued for collection and won. However, upon execution, it
was found that University was not registered with the SEC. Albert petitioned for a writ of
execution against Jose M. Aruego as the real defendant. University opposed, on the ground that
Aruego was not a party to the case.
The Supreme Court found that Aruego represented a non-existent entity and induced not
only Albert but the court to believe in such representation. Aruego, acting as representative of
such non-existent principal, was the real party to the contract sued upon, and thus assumed such
privileges and obligations and became personally liable for the contract entered into or for other
acts performed as such agent.
The Supreme Court likewise held that the doctrine of corporation by estoppel cannot be
set up against Albert since it was Aruego who had induced him to act upon his (Aruego's) willful
representation that University had been duly organized and was existing under the law.
When adopted:
(a)
No
later
than
official
Requirement:
of
Where kept:
When effective:
Contents of By-laws - Subject to the provisions of the Constitution, this Code, other
special laws, and the articles of incorporation, a private corporation may
provide in its by-laws for:
1)
the time, place and manner of calling and conducting regular or special meetings of the
directors or trustees;
2)
the time and manner of calling and conducting regular and special meetings of the
stockholders or members;
3)
the required quorum in meetings of stockholders or members and the manner of voting
herein;
4)
the form for proxies of stockholders and members and the manner of voting them;
5)
6)
the time for holding the annual election of directors or trustees and the mode or manner
of giving notice thereof;
7)
the manner of election or appointment and the term of office of all officers other than
directors or trustees;
8)
9)
officers and
10) such other matters as may be necessary for the proper or convenient transaction of its
corporate business and affairs.
As a general rule, the by-laws of a corporation are valid if they are reasonable and
calculated to carry into effect the objective of the corporation and are not contradictory to the
general policy of the laws of the land. Under a statute authorizing by-laws for the transfer of
stock, a corp. can do no more than prescribe a general mode of transfer on the corp. books and
cannot justify an restriction upon the right of sale.
GOVT. OF P.I. V. EL HOGAR
Is a provision in the by-laws allowing the BOD, by vote of absolute majority, to cancel shares
valid?
No. It is a patent nullity, being in direct conflict with Sec. 187 of the Corp. Law which
prohibits forced surrender of unmatured stocks except in case of dissolution.
Is a provision in the by-laws fixing the salary of directors valid?
Yes. Since the Corporation Law does not prescribe the rate of compensation, the power
to fix compensation lies with the corporation.
Is a provision requiring persons elected to the Board of Directors to own at least P 5,000 shares
valid?
Yes. The Corporation Law gives the corporation the power to provide qualifications of
its directors.
CITIBANK, N.A. v. CHUA (220 SCRA 75)
Where the SEC grants a license to a foreign corporation, it is deemed to have approved
its
foreign-enacted by-laws. Sec. 46 of the Corporation Code which states that by-laws are
not valid without SEC approval applies only to domestic corporations.
A board resolution appointing an attorney-in-fact to represent the corporation during pretrial is not necessary where the by-laws authorize an officer of the corporation to make
such appointment.
163 SCRA 534) Incorporators must be given the chance to explain their neglect or
omission and remedy the same.
corporation's property or the right to share in its proceeds to that extent when distributed
according to law and equity, but its holder is not the owner of any part of the capital of the
corporation. Nor is he entitled to the possession of any definite portion of its property or assets.
The act of liquidation made by the stockholders of the corp of the latters assets is not and
cannot be considered a partition of community property, but rather a transfer or conveyance of
the title of its assets to the individual stockholders. Since the purpose of the liquidation, as well
as the distribution of the assets, is to transfer their title from the corporation to the stockholders
in proportion to their shareholdings, that transfer cannot be effected without the corresponding
deed of conveyance from the corporation to the stockholders. It is, therefore, fair and logical to
consider the certificate of liquidation as one in the nature of a transfer or conveyance.
CARAM V. CA (151 SCRA 373; 1987)
The case of the unpaid compensation for the preparation of the project study.
The petitioners were not involved in the initial stages of the organization of the airline.
They were merely among the financiers whose interest was to be invited and who were in fact
persuaded, on the strength of the project study, to invest in the proposed airline.
There was no showing that the Airline was a fictitious corp and did not have a separate
juridical personality to justify making the petitioners, as principal stockholders thereof,
responsible for its obligations. As a bona fide corp, the Airline should alone be liable for its
corporate acts as duly authorized by its officers and directors. Granting that the petitioners
benefited from the services rendered, such is no justification to hold them personally liable
therefor. Otherwise, all the other stockholders of the corporation, including those who came in
late, and regardless of the amount of their shareholdings, would be equally and personally liable
also with the petitioner for the claims of the private respondent.
PALAY V. CLAVE (124 SCRA 640; 1983)
The case of the reliance on a default provision of the contract granting automatic extra-judicial
rescission.
The court found no badges of fraud on the part of the president of the corporation. The
BOD had literally and mistakenly relied on the default provision of the contract. As president
and controlling stockholder of the corp, no sufficient proof exists on record that he used the corp
to defraud private respondent. He cannot, therefore, be made personally liable because he
appears to be the controlling stockholder. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personality.
MAGSAYSAY V. LABRADOR (180 SCRA 266)
The case of the assignment by Senator Magsaysay of a certain portion of his shareholdings in
SUBIC granting his sisters the right to intervene in a case filed by the widow against SUBIC.
The words "an interest in the subject," to allow petitioners to intervene, mean a direct
interest in the cause of action as pleaded, and which would put the intervenor in a legal position
to litigate a fact alleged in the complaint, without the establishment of which plaintiff could not
recover.
Here, the interest, of petitioners, if it exists at all, is indirect, contingent, remote,
conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in
sheer expectancy of a right in the management of the corporation and to share in the profits
thereof and in the properties and assets thereof on dissolution, after payment of the corporate
debts and obligations.
While a share of stock represents a proportionate or aliquot interest in the property of the
corp, it does not vest the owner thereof with any legal right or title to any of the property, his
interest in the corporate property being equitable and beneficial in nature. Shareholders are in no
legal sense the owners of corporate property, which is owned by the corp as a distinct legal
person.
shows that other shareholders may be considered dummies of Castro. Hence, corporate veil may
be pierced.
Associated Financing Corp. (AFC), through its pres. F. Sycip (who together with wife,
own 76% of AFC) contracts with NAMARCO for an exchange of sugar (raw v. refined). N
delivers, AFC doesn't since it did not have sugar to supply in the first place. N sues to recover
sum of money plus damages.
Sycip held jointly and severally liable with AFC. AFC's corporate veil was pierced
because it was used as Sycip's alter ego, corpo used merely as an instrumentality, agency or
conduit of another to evade liability.
JACINTO V. CA (198 SCRA 211)
Jacinto, president/GM and owner of 52% of corpo, owes MetroBank sum of money, signs
trust receipts therefor. Jacinto absconds. Jacinto ordered to jointly and severally pay MetroBank.
Corpo veil pierced because it was used as a shield to perpetuate fraud and/or confuse legitimate
issues. There was no clear cut delimitation between the personality of Jacinto and the
corporation.
physical plants, officers and facilities are situated in the same compound - not sufficient to apply
doctrine.
NAFLU V. OPLE (143 SCRA 125; 1986)
Libra/Dolphin Garments was but an alter ego of Lawman Industrial, therefore, the former
must bear the consequences of the latter's unfair acts. It cannot deny reinstatement of petitioners
simply because of cessation of Lawman's operations, since it was in fact an illegal lock-out, the
company having maintained a run-away shop and transferred its machines and assets there.
Here, the veil of corporate fiction was pierced in order to safeguard the right to selforganization and certain vested rights which had accrued in favor of the union. Second
corporation sought the protective shield of corporate fiction to achieve an illegal purpose.
ASIONICS PHILS. v. NLRC (290 SCRA 164)
A corporation is invested by law with a personality separate and distinct from those of the
persons composing it as well as from that of any other legal entity to which it may be related.
Mere ownership by a single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself sufficient ground for disregarding the separate
corporate personality.
Where there is nothing on record to indicate the President and majority stockholder of a
corporation had acted in bad faith or with malice in carrying out the retrenchment program of the
company, he cannot be held solidarily and personally liable with the corporation.
Fernando, judgment debtor. During the public sale conducted, Ferrer was the highest bidder, and
a certificate of sale was issued in his name. Shortly thereafter, he sold the said CPCs to
Pantranco, and they jointly submitted their contract of sale to the PSC for approval.
The PSC issued an order that pending resolution of the applications, Pantranco shall have
the authority to provisionally operate the service under the 2 CPCS that were the subject of the
contract between Ferrer and Pantranco. Villa Rey Transit took issue with this, and filed a
complaint for annulment of the sheriff's sale of the CPCs and prayed that all the orders of the
PSC relative to the dispute over the CPCs in question be annulled. Pantranco filed a third-party
complaint against Jose M. Villarama, alleging that Villarama and Villa Rey Transit are one and
the same, and that Villarama and/or the Corporation is qualified from operating the CPCs by
virtue of the agreement entered into between Villarama and Pantranco.
Given the evidence, the Court found that the finances of Villa-Rey, Inc. were managed as
if they were the private funds of Villarama and in such a way and extent that Villarama appeared
to be the actual owner of the business without regard to the rights of the stockholders. Villarama
even admitted that he mingled the corporate funds with his own money. These circumstances
negate Villarama's claim that he was only a part-time General Manager, and show beyond doubt
that the corporation is his alter ego. Thus, the restrictive clause with Pantranco applies. A seller
may not make use of a corporate entity as a means of evading the obligation of his
covenant. Where the Corporation is substantially the alter ego of one of the parties to the
covenant or the restrictive agreement, it can be enjoined from competing with the
covenantee.
Close Corporations
CEASE V. CA (93 SCRA 483; 1979)
The Cease plantation was solely composed of the assets and properties of the defunct
Tiaong plantation whose license to operate already expired. The legal fiction of separate
corporate personality was attempted to be used to delay and deprive the respondents of their
succession rights to the estate of their deceased father.
While originally, there were other incorporators of Tiaong, it has developed into a closed
family corporation (Cease). The head of the corporation, Cease, used the Tiaong plantation as his
instrumentality. It was his business conduit and an extension of his personality. There is not even
a showing that his children were subscribers or purchasers of the stocks they own.
DELPHER TRADES V. CA (157 SCRA 349; 1988)
The Delpher Trades Corp. is a business conduit of the Pachecos. What they really did was
to invest their properties and change the nature of their ownership from unincorporated to
incorporated form by organizing Delpher and placing the control of their properties under the
corporation. This saved them inheritance taxes.
This is the reverse of Cease; however, it does not modify the other cases. It stands on its
own because of the facts.
Parent-Subsidiary Relationship
Q:
Q: What are the criteria by which the subsidiary can be considered a mere
instrumentality of the parent company?
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
the parent corp. owns all or most of the capital stock of the subsidiary.
the parent and subsidiary have common directors and officers
the parent finances the subsidiary
the parent subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation
the subsidiary has grossly inadequate capital
the parent pays the salaries and other expenses or losses of the subsidiary
the subsidiary has substantially no business except with the parent corp. or no
assets except those conveyed to or by the parent corp.
in the papers of the parent corp. or in the statements of its officers, the
subsidiary is described as a department or division of the parent corp. or its
business or financial responsibility is referred as the parents own
the parent uses the property of the subsidiary as its own
the directors or the executives of the subsidiary do not act independently in the
interest of the subsidiary but take their orders from the parent corp. in the latters
interest
the formal legal requirements of the subsidiary are not observed
GARRETT VS. SOUTHERN RAILWAY (173 F. Supp. 915, E.D. Tenn. 1959)
This case involved a Workers Compensation claim by a wheel moulder employed by
Lenoir Car Works. The plaintiff sought to claim from Southern Railway Company, which
acquired the entire capital stock of Lenoir Car Works. Plaintiff contended that Southern so
completely dominated Lenoir that the latter was a mere adjunct or instrumentality of Southern.
The general rule is that stock ownership alone by one corporation of the stock of another
does not thereby render the dominant corporation liable for the torts of the subsidiary, unless the
separate corporate existence of the subsidiary is a mere sham, or unless the control of the
subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation.
In the case, it was found that there were two distinct operations. There was no evidence
that Southern dictated the management of Lenoir. In fact, evidence shows that Marius, the
manager of the subsidiary, was in full control of the operation. He established prices, handled
negotiations in CBAs, etc. Lenoir paid local taxes, had local counsel and maintain a Workmens
Compensation Fund. There was also no evidence that Lenoir was run solely for the benefit of
Southern. In fact, a substantial part of its requirements in the field of operation of Lenoir was
bought elsewhere. Lenoir sold substantial quantities to other companies. Policy decisions
remained in the hands of Marius. Hence, the complaint against Southern Railway was
dismissed.
KOPPEL VS. YATCO (77 Phil. 496; 1946)
This case involved a complaint for the recovery of merchant sales tax paid by Koppel
(Philippines), Inc. under protest to the Collector of Internal Revenue. Although the Court of First
Instance did not deny legal personality to Koppel (Philippines), Inc. for any and all purposes, it
dismissed the complaint saying that in the transactions involved in the case, the public interest
and convenience would be defeated and would amount to a perpetration of tax evasion unless
resort was had to the doctrine of "disregard of the corporate fiction."
The facts show that 99.5% of the shares of stocks of K-Phil were owned by K-USA. KPhil. acted as a representative of K-USA and not as an agent. K-Phil. also bore alone its own
incidental expenses (e.g. Cable expenses) and also those of its principal. Moreover, K-Phils
share in the profits was left in the hands of K-USA. Clearly, K-Phil was a mere branch or
dummy of K-USA, and was therefore liable for merchant sales tax. To allow otherwise would be
to sanction a circumvention of our tax laws and permit a tax evasion of no mean proportion and
the consequent commission of a grave injustice to the Government. Moreover, it would allow
the taxpayer to do by indirection what the tax laws prohibit to be done directly.
LIDDELL & CO. VS. CIR (2 SCRA 632; 1961)
Liddel Motors Inc. was an alter ego of Liddel & Co. At the time of its incorporation,
98% of the Liddel Inc.s stock belonged to Frank Liddel. As to Liddel Motors, Frank supplied
the original capital funds. The bulk of the business of Liddel Inc. was channeled through Liddel
Motors. Also, Liddel Motors pursued no other activities except to secure cars, trucks and spare
parts from Liddel Inc. and then sell them to the general public.
To allow the taxpayer to deny tax liability on the ground that the sales were made through
another and distinct corporation when it is proved that the latter is virtually owned by the former
or that they were practically one and the same is to sanction the circumvention of tax laws.
YUTIVO VS. CTA (1 SCRA 160; 1961)
Southern Motors was actually owned and controlled by Yutivo as to make it a mere
subsidiary or branch of the latter created for the purpose of selling vehicles at retail. Yutivo
financed principally, if not wholly, the business of Southern Motors and actually exceeded the
credit of the latter . At all times, Yutivo, through the officers and directors common to it and the
Southern Motors exercised full control over the cash funds, policies, expenditures and
obligations of the latter. Hence, Southern Motors, being a mere instrumentality or adjunct of
Yutivo, the CTA correctly disregarded the technical defense of separate corporate identity in
order to arrive at the true tax liability of Yutivo.
LA CAMPANA VS. KAISAHAN (93 Phil. 160; 1953)
The La Campana Gaugau Packing and La Campana Coffee Factory were operating under
one single business although with 2 trade names. It is a settled doctrine that the fiction of law of
having the corporate identity separate and distinct from the identity of the persons running it
cannot be invoked to further the end subversive of the purpose for which it was created. In the
case at bar, the attempt to make the two businesses appear as one is but a device to defeat the
ends of the law governing capital and labor relations and should not be permitted to prevail.
It must be noted, however, that the contract must be adopted in its entirety; the
corporation cannot adopt only the part that is beneficial to it and discard that
which is burdensome. Moreover, the contract must be one which is within the
powers of the corporation to enter, and one which the usual agents of the
company have express or implied authority to enter.
McARTHUR V. TIMES PRINTING CO. (48 Minn. 319, 51 N.W. 216; 1892)
It is not a requisite that a corporation's adoption or acceptance of a promoter's contract be
expressed, but it may be inferred from acts or acquiescence on the part of the corporation, or its
authorized agents, as any similar original contract might be shown.
The right of agents to adopt an agreement originally made by promoters depends upon
the purposes of the corporation and the nature of the agreement. The agreement must be one
which the corporation itself could make and one which the usual agents of the company have
express or implied authority to enter into.
CLIFTON v. TOMB (21 F. 2d 893; 1921)
Whatever may be the proper legal theory by which a corporation may be bound by
contract (ratification, adoption, novation, a continuing offer to be accepted or rejected by
corporation), it is necessary in all cases that the corporation should have full knowledge of
facts, or at least should be put upon such notice as would lead, upon reasonable inquiry, to
knowledge of the facts.
the
the
the
the
Should the other contracting party fail to perform its part of the bargain, the
corporation which has adopted or ratified the contract may either sue for:
(1)
(2)
Specific performance; or
Damages resulting from breach of contract.
The fact of bringing an action on the contract has been held to constitute
sufficient adoption or ratification to give the corporation a cause of action.
BUILDERS DUNTILE CO. v. DUNN (229 Ky. 569, 17 S.W. 2d 715; 1929)
When the corporation was formed, the incorporators took upon themselves the whole
thing, and ratified all that had been done on its behalf. Though there was no formal assignment
of the contract to the corporation, the acts of the incorporators were an adoption of the contract.
Therefore the corporation has the right to sue for damages for the breach of contract.
RIZAL LIGHT V. PSC (25 SCRA 285; 1968)
The incorporation of (Morong) and its acceptance of the franchise as shown by this action
in prosecuting the application filed with the Commission for approval of said franchise, not only
perfected a contract between the municipality and Morong but also cured the deficiency pointed
out by the petition. The fact that Morong did not have a corporate existence on the day the
franchise was granted does not render the franchise invalid, as Morong later obtained its
certificate of incorporation and accepted the franchise.
GENERAL RULE:
EXCEPTION:
WELLS VS. FAY & EGAN CO. (143 Ga. 732, 85 S.E. 873; 1915)
Individual promoters cannot escape liability where they buy machinery, receive them in
their possession and authorize one member to issue a note, in contemplation of organizing a
corporation which was not formed. (see Campos' notes p. 258-259). The agent is personally
liable for contracts if there is no principal. The making of partial payments by the corporation,
when later formed, does not release the promoters here from liability because the corporation
acted as a mere stranger paying the debt of another, the acceptance of which by the creditor does
not release the debtors from liability over the balance. Hence, there is no adoption or ratification.
HOW & ASSOCIATES INC. VS. BOSS (222 F. Supp. 936; 1963)
The rule is that if the contract is partly to be performed before incorporation, the
promoters solely are liable. Even if the promoter signed "on behalf of corporation to be formed,
who will be obligor," there was here an intention of the parties to have a present obligor, because
three-fourths of the payment are to be made at the time the drawings or plans in the architectural
contract are completed, with or without incorporation. A purported adoption by the corporation
of the contract must be expressed in a novation or agreement to that effect. The promoter is liable
unless the contract is to be construed to mean: 1) that the creditor agreed to look solely to the
new corporation for payment; or 2) that the promoter did not have any duty toward the creditor
to form the corporation and give the corporation the opportunity to assume and pay the liability.
QUAKER HILL VS. PARR (148 Colo. 45, 364 P. 2d 1056; 1961)
The promoters here are not liable because the contract imposed no obligation on them to
form a corporation and they were not named there as obligors/promissors. The creditor-plaintiff
was aware of the inexistence of the corporation but insisted on naming it as obligor because the
planting season was fast approaching and he needed to dispose of the seedlings. There was no
intent here by plaintiff-creditor to look to the promoters for the performance of the obligation.
This is an exception to the general rule that promoters are personally liable on their contracts,
though made on behalf of a corporation to be formed.
OLD DOMINION VS. BIGELOW (203 Mass. 159, 89 N.E. 193; 1909)
A promoter, notwithstanding his fiduciary duties to the corporation, may still sell
properties to it, but he must pursue one of four courses to make the contract binding. These are:
1) provide an independent board of officers in no respect directly or indirectly under his control,
and make full disclosure to the corporation through them; 2) make full disclosure of all material
facts to each original subscriber of shares in the corporation; 3) procure a ratification of the
contract after disclosing its circumstances by vote of the stockholders of the completely
established corporation; or 4) be himself the real subscriber of all the shares of the capital stock
contemplated as a part of the promotion scheme. The promoter is liable, even if owning all the
stock of the corporation at the time of the transaction, if further original subscription to capital
stock contemplated as an essential part of the scheme of promotion came in after such
transaction.
CORPORATE POWERS
General Powers of Corporation (Sec. 36)
Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
To amend its articles of incorporation in accordance with the provisions of this Code;
To adopt by-laws not contrary to law, morals, or public policy, and to amend or repeal
the same in accordance with this Code;
To purchase, receive, take, 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;
(NOTE: There are two (2) general restrictions on the power of the corp. to
acquire and hold properties:
To make reasonable donations, including those for the public welfare of for hospital,
charitable, cultural, scientific, civic, or similar purposes:
Provided that:
To establish pension, retirement and other plans for the benefit of its directors,
trustees, officers and employees; and
To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in its articles of incorporation.
A sale is deemed to substantially cover all the corporate property and assets
if such sale renders the corporation incapable of continuing the business or
accomplishing the purpose for which it was incorporated.
Implied Powers
Under Sec. 36, a corporation is given such powers as are essential or necessary to carry out its
purpose or purposes as stated in the articles of incorporation. This phrase gives rise to such a wide range
of implied powers, that it would not be at all difficult to defend a corporate act versus an allegation that it is
ultra vires.
A corporation is presumed to act within its powers and when a contract is not its face necessarily
beyond its authority; it will, in the absence of proof to the contrary, be presumed valid.
Parties to the ultra vires contract will be left as they are, if the contract has been fully
executed on both sides. Neither party can ask for specific performance, if the
contract is executory on both sides. The contract, provided that it is not illegal, will be
enforced, where one party has performed his part, and the other has not with the
latter having benefited from the formers performance.
Any stockholder may bring 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 maybe filed, but their liability will depend on
whether they acted in good faith and with reasonable diligence in entering into the
contracts. When the suit against the injured party who had no knowledge that the
corporation was engaging in an act not included expressly or impliedly in its purposes
clause.
Ultra vires acts may become binding by the ratification of all the stockholders, unless
third parties are prejudiced thereby, or unless the acts are illegal.
A quo warranto proceeding instituted by the Gov't against El Hogar, a building and loan ass'n to
deprive it of its corp. franchise.
1. El Hogar held title to real property for a period in excess of 5 years in good faith, hence this
cause will not prosper.
2. El Hogar owned a lot and bldg. at a business district in Manila allegedly in excess of its
reasonable requirements, held valid bec, it was found to be necessary and legally acquired and
developed.
3. El Hogar leased some office space in its bldg.; it administered and managed properties
belonging to delinquent SHs; and managed properties of its SHs even if such were not
mortgaged to them.
Held: first two valid, but the third is ultra vires bec. the administration of property in that
manner is more befitting of the business of a real estate agent or trust company and not of a
building and loan ass'n.
4. Compensation to the promoter and organizer allegedly excessive and unconscionable.
Held: Court cannot dwell on the issue since the promoter is not a party in the proceeding and
it is the corp. or its SHs who may bring a complaint on such.
5. Issuance of special shares did not affect El Hogar's character as a building and loan ass'n nor
make its loans usurious.
6. Corporate policy of using a depreciation rate of 10 % per annum is not excessive, bec. accdg.
to the SC, the by-laws expressly authorizes the BOD to determine each year the amount to be
written down upon the expenses of installation and the property of the corp.
7. The Corp. Law does not expressly grant the power of maintaining reserve funds but such
power is implied. All business enterprises encounter periods of gains and losses, and its officers
would usually provide for the creation of a reserve to act as a buffer for such circumstances.
8. That loans issued to member borrowers are being used for purposes other than the bldg. of
homes not invalid bec. there is no statute which expressly declares that loans may be made by
these ass'ns solely for the purpose of bldg. homes.
9. Sec. 173 of the Corp. Law provides that "any person" may become a SH on a bldg. and loan
ass'n. The word "person" is used on a broad sense including not only natural persons but also
artificial persons.
BISSEL v. MICHIGAN SOUTHERN ( 22 NY 258; 1860)
Two railroad corporations contend that they transcended their own powers and violated
their own organic laws. Hence, they should not be held liable for the injury of the plaintiff who
was a passenger in one of their trains.
Held: The contract between the two corporations was an ultra vires act. However, it is not one
tainted with illegality, therefore, the accompanying rights and obligations based on the contract
of carriage between them and the plaintiff cannot be avoided by raising such a defense.
PIROVANO v. DELA RAMA STEAMSHIP (96 Phil 335 , 1954)
This case involved the issue of whether or not the defendant corporation performed an
ultra vires act by donating the life insurance proceeds to the minor children of Pirovano, the
deceased president of the defendant company under whose management the company grew and
progressed to become a multi-million peso corporation.
Held:
NO.
(c)
(i)
(ii)
(iii)
Nationality
(iv)
+1
By a vote of the SHs holding or representing at least 2/3 of the outstanding capital stock, or by
a vote of at least 2/3 of the members entitled to vote, provided that such removal takes place at
either a regular meeting of the corporation or at a special meeting called for the purpose. In both
cases, there must be previous notice to the SHs / members of the intention to propose such
removal at the meeting.
Removal may be with or without cause. However, removal without cause may not be used to
deprive minority SHs or members of the right of representation to which they may be entitled
under Sec. 24 of the Code.
(e) How vacancy filled (Sec. 29)
If vacancy due to removal
or expiration of term:
Note:
(f)
Directors or trustees so elected to fill vacancies shall be elected only for the unexpired
term of their predecessors in office.
Note: In no case shall the total yearly compensation of directors, as such directors, exceed 10%
of the net income before income tax of the corporation during the preceding year.
(g)
subsequent
discussion
under
Duties
of
Directors
and
Controlling
(vi)
(i)
The action was brought by the mortgagor (Tapnio) against PNB for damages in
connection with the failure of the latter's board of directors to act expeditiously on the proposed
lease of the former's sugar quota to one Tuazon.
The Supreme Court held that while the PNB has the ultimate authority to approve or
disapprove the proposed lease since the quota was mortgaged to PNB, the latter certainly cannot
escape liability for observing, for the protection of the interest of the private respondents, that
degree of care, precaution and vigilance which the circumstances justly demand in approving or
disapproving the lease of the said sugar quota.
Violation of Corporation Code committed within 6 yrs. prior to the date of election or
appointment
forward sales with business entities. Long before some of these contracts were disputed, he
contracted by himself alone, without board approval. All of the members of the board knew
about this practice and have entrusted fully such decisions with Kalaw. He was never questioned
nor reprimanded nor prevented from this practice. In fact, the board itself, through its acts and
by acquiescence, have laid aside the by-law requirement of prior board approval. Thus, it cannot
now declare that these contracts (failures) are not binding on NACOCO.
ZAMBOANGA TRANSPO V. BACHRACH MOTORS (52 Phil. 244; 1928)
A chattel mortgage, although not approved by the board of directors as stipulated in the
by-laws, shall still be valid and binding when the corporation, through the board, tacitly
approved and ratified it. The following acts of the board constitute implied ratification:
1. Erquiaga is one of the largest stockholder, and was the all-in-one officer (he was the
President, GM, Attorney, Auditor, etc.)
2. Two other directors approved his actions and expressed satisfaction with the advantages
obtained by him in securing the chattel mortgage.
3. The corporation took advantage of the benefits of the chattel mortgage. There were even
partial payments made with the knowledge of the three directors.
ACUNA V. BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION (20
SCRA 526; 1967)
Acuna entered into an agreement with Verano, manager of PROCOMA, in which the
former would be constituted as the latter's agent in Manila. Acuna diligently went about his
business and even used personal funds for the benefit of the corporation. During the face-to-face
meeting with the board, Acuna was assured that there need not be any board approval for his
constitution as agent for it would only be a mere formality. Later on, the board disapproved the
agency and did not pay him. The SC ruled that the agreement was valid due to the ratification of
the corp. proven by these acts:
1. He was assured by the board that no board approval was necessary.
2. He delivered P 20,000, performed his work with the knowledge of the board.
3. Due to acquiescence, the board cannot disown or disapprove the contract.
Board Committees
The By-laws of the corporation may create an executive committee, composed of
not less than 3 members of the Board, to be appointed by the Board. The executive
committee may act, by majority vote of all its members, on such specific matters within
the competence of the board, as may be delegated to it in either (1) the By-laws, or (2) on
a majority vote of the board.
However, the following acts may never be delegated to an executive committee:
(1)
(2)
(3)
(4)
HAYES V. CANADA, ATLANTIC AND PLANT S.S CO., LTD. (181 F. 289; 1910)
In this case, the Executive Committee:
a) removed the Treasurer and appointed a new one
b) fixed the annual salary of the members of the Executive Committee
c) amended the by-laws by giving the President the sole authority to call a stockholder's
meeting and a board of directors meeting
d) amended the composition of the ExeCom by limiting it to just 2 persons.
Was these actions valid?
No, because the Executive Commmittee usurped the powers vested in the board and the
stockholders. If their actions was valid, it would put the corp. in a situation wherein only two
men, acting in their own pecuniary interests, would have absorbed the powers of the entire
corporation. "Full powers" should be interpreted only in the ordinary conduct of business and
not total abdication of board and stockholders' powers to the ExeCom. "FULL POWERS" does
not mean unlimited or absolute power.
Stockholders or Members
In the following basic changes in the corporation, although action is usually initiated by the board
of directors or trustees, their decision is not final, and approval of the stockholders or members would be
necessary:
(1)
(2)
(3)
(4)
(5)
BOARD OF DIRECTORS AND ELECTION COMMITTEE OF SMB VS. TAN (105 Phil.
426; 1959)
Meeting was invalid for lack of notice. By-laws provide for a 5-day notice before
meeting. March 26 posting not enough for March 28 election.
Section 21 of the Corporation Law provides that a corporation may prescribe in its bylaws the qualifications, duties, and compensation of its directors.
A stockholder has no vested right to be elected director for he impliedly contracts that the
will of the majority shall govern.
Amended by-laws are valid for the corporation has its inherent right to protect itself.
VOTING
Pooling agreement
- Pooling agreements refer to agreements between 2 or more SHs to vote their
shares the same way. They are different from voting trust agreements in that they do
not involve a transfer of stocks but are merely private agreements between 2 or more
SHs to vote in the same way.
- Sec. 100, par. 2 of the Corporation Code provides for pooling and voting
agreements in close corporations. Although there is no equivalent provision for
widely-held corporations, Justice and Prof. Campos are of the opinion that SHs of
widely-held corporations should not be precluded from entering into voting
agreements if these are otherwise valid and are not intended to commit any wrong or
fraud on the other SHs that are not parties to the agreement.
- Any one of the joint owners can vote said shares or appoint a proxy thereof.
Proxy Device
Sec 58. Proxies. Stockholders and members may vote in person or by proxy in all meetings of
stockholders or members. Proxies shall be in writing, signed by the stockholder or member and
filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the
proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and
effective for a period longer than five (5) years at any one time.
Character: agency relationship; revocable at will (by express revocation, by attending the
meeting) and by death, except when coupled with interest or is a security.
IN RE GIANT PORTLAND CEMENT CO. (21 A.2d 697; 1941)
Even if stocks are sold, the stockholder of record remains the owner of the stocks and has
the voting right until the by-law requiring recording of transfer in the transfer book is complied
with. Thus, a proxy given by the stockholder of record even if he has already sold the share/s of
stock remains effective.
STATE EX REL EVERETT TRUST V PACIFIC WAXED PAPER, (159 A.L.R. 297; 1945)
The general rule is that a proxy is revocable even though by its express terms it is
irrevocable. The exceptions are: (a) when authority is coupled with interest; (b) where authority
is given as part of a security and is necessary to effectuate such a security. It is coupled with
interest when there is interest in the share themselves (such as a right of first refusal in case of
sale) and the rights inherent in the shares (such as voting rights; capacity to obtain majority).
DUFFY V LOFT (17 Del. Ch. 376, 152 A. 849; 1930)
Where a stockholders meeting was validly convened, the proxies must be deemed
present even if the proxies were not presented, provided: (a) their existence is established; (b) the
agents were so designated to attend and act in SHs behalf; (c) the agents were present in the
meeting.
Q: Is it valid for the corporation to pay the expenses for proxy solicitation?
A: In the case of Rosenfeld v. Fairchild Engine and Airplane Corp. (128 N.E. 2d 291;
1955), it was held that in a contest over policy (as opposed to a purely personal power
contest), corporate directors have the right to make reasonable and proper expenditures,
subject to the scrutiny of the courts when duly challenged, from the corporate treasury for
the purpose of persuading the SHs of the correctness of their position and soliciting their
support for policies which the directors believe, in all good faith, are in the best interests
of the corporation. The SHs, moreover, have the right to reimburse successful
contestants for the reasonable and bona fide expenses incurred by them in any such
policy contest, subject to like court scrutiny.
However, where it is established that such monies have been spent for personal
power, individual gain or private advantage, and not in the belief that such expenditures
are in the best interest of the stockholders and the corporation, or where the fairness and
reasonableness of the amounts allegedly expended are duly and successfully
challenged, the courts will not hesitate to disallow them.
Voting Trust
A Voting Trust Agreement (VTA) is an agreement whereby the real ownership of the shares is
separated from the voting rights, the usual aim being to insure the retention of incumbent directors and
remove from the stockholders the power to change the management for the duration of the trust.
Advantages
Accumulates power. Small shareholders are given the chance to have a representation in the
BOD or at least a spokesperson during stockholders meetings.
Continuity of management.
More effective than proxies because it is irrevocable.
Ensures that the required number of stockholders is met thereby facilitating smooth corporate
operations.
Disadvantages
Rights given up by the shareholder in a VTA in exchange for the fiduciary obligation of
the trustee:
Voting rights
Proprietary rights/naked title/legal ownership
Incidental rights such as to attend meetings, to be elected, to receive dividends)
Want of consideration
Voting power not coupled with interest
Fraud
Illegal or improper purpose
A VTA transfers only voting or other rights pertaining to the shares subject of the
agreement, or control over the stock. Stockholders of a corp. that lost all its assets through
foreclosures cannot go after those properties. PNB-NIDC acquired those properties not as
trustees but as creditors.
What rights does a shareholder give up/ retain with a pooling agreement?
Shareholders retain their right to vote because the parties are not constituted as agents.
However, the will of the parties may not be carried out due to non-compliance with the
pooling agreement.
If the enforcement of a particular contract damages nobody-not even the public, there is
no reason for holding it illegal. Test is WON it causes damage to the corporation and
stockholders.
Straight voting:
2.
Cumulative voting:
(one candidate)
3.
Cumulative voting:
If A has 100 shares, there are 5 directors to be elected, and he only
(multiple candidates) wants to vote for two nominees, he can divide 500 votes between the
two, giving each one 250 votes.
2.
Baker & Carys formula (minimum no. of votes needed to elect multiple directors)
X= # of shares required
Y= # of shares represented at meeting
D= # of directors the minority wants to elect
D= total # of directors to be elected
X= Y x D + 1
D' + 1
NOTES
Levels playing field or at least ensures that the minority can elect at least one representative
to the board of directors (BOD)
Cannot of itself give the minority control of corporate affairs, but may affect and limit the
extent of the majoritys control
By-laws cannot provide against cumulative voting since this right is mandated by law in
Section 24.
Common:
2.
Preferred:
share has preference over dividends and distribution of assets upon liquidation;
right to vote may be restricted (Sec. 6)
3.
Redeemable: share is purchased or taken up by the corporation upon the expiration of a fixed
period (Sec. 8); right to vote may be restricted (Sec. 6)
NOTES
Even though the right to vote of preferred and redeemable shares may be restricted, owners
of these shares can still vote on certain matter provided for in Sec. 6.
SEC requires that where no dividends are declared for three consecutive years, in spite of
available profits, preferred stocks will be given the right to vote until dividends are declared.
Provision granting right to vote to preferred stock previously prohibited from voting,
constitutes diminution of the voting power of common stock.
Provision in the articles of incorporation granting holders of preferred stock right to vote in
case of default in payment of dividends after July 1, 1951 was construed as denial by
necessary implication of the right to vote even prior to July 1, 1951.
Most common restriction: granting first option to the other stockholders and/or the
corporation to acquire the shares of a stockholder who wishes to sell them.
This gives to the corporation and/or to its current management the power to prevent the
transfer of shares to persons who they may see as having interests adverse to theirs.
As long as the qualifications imposed are reasonable and not meant to unjustly or unfairly
deprive the minority of their rightful representation in the BOD, such provisions are within the
power of the majority to provide in the by-laws.
According to Gokongwei vs. SEC, aside from prescribing qualifications, by-laws can also provide
for the disqualification of anyone in direct competition with the corporation.
Founders shares
See Sec. 7 for definition
Exception to the rule in sec. 6 that non-voting shares shall be limited to preferred and
redeemable shares
If founders shares enjoy the right to vote, this privilege is limited to 5 years upon SECs approval,
so as to prevent the perpetual disqualification of other stockholders.
Contract to manage the day-to-day affairs of the corporation in accordance with the policies laid
down by the board of the managed corporation.
BOD can and usually delegate many of its functions but it cant abdicate its responsibility to act
as a governing body by giving absolute power to officers or others, by way of a management
contract or otherwise. It must retain its control over such officers so that it may recall the
delegation of power whenever the interests of the corporation are seriously prejudiced thereby.
SHERMAN & ELLIS VS. INDIANA MUTUAL CASUALTY (41 F. 2d 588; 1930)
Although corporations may, for a limited period, delegate to a stranger certain duties
usually performed by the officers, there are duties, the performance of which may not be
indefinitely delegated to outsiders.
In exchange for the numerical majority in the BOD, minority can ask for a stronger veto
power in major corporate decisions.
A requirement that there shall be no election of directors at all unless every single vote be
cast for the same nominees, is in direct opposition to the statutory rule that the receipt of
plurality of the votes entitles a nominee to election. (See Sec. 24)
Requiring unanimity before the BOD can take action on any corporate matter makes it
impossible for the directors to act on any matter at all. In all acts done by the corporation, the
major number must bind the lesser, or else differences could never be determined nor settled.
The State has decreed that every stock corporation must have a representative government,
with voting conducted conformably to the statutes, and the power of decision lodged in
certain fractions, always more than half, of the stock. This whole concept is destroyed when
the stockholders, by agreement, by-law or certificates of corporation provides for unanimous
action, giving the minority an absolute, permanent and all-inclusive power of veto.
The requirement of unanimous vote to amend by-laws is valid. Once proper by-laws have
been adopted, the matter of amending them is no concern of the State.
Device
Favorable To:
Limitations
Cumulative voting
Classification of shares
Restriction on transfer of
shares
*applicable only to close
corporations
See Sec. 98
Prescribing qualifications
for directors; founders
shares
Qualifications must be
reasonable and do not deprive
minority of representation on the
board
Management contracts
MEETINGS
Meetings of Directors / Trustees
KINDS:
SPECIAL:
NOTICE:
WHERE:
QUORUM:
WHO PRESIDES:
KINDS:
(Sec. 49)
REGULAR:
WHERE:
QUORUM:
WHO PRESIDES:
(1) Diligence
(2) Loyalty
(3) Obedience
Obedience - directors must act only within corporate powers and are liable for
damages if they acted beyond their powers unless in good faith. Assuming that they
acted within their powers, liability may still arise if they have not observed due
diligence or have been disloyal to the corporation.
However, if due to the fault or negligence of the directors the assets of the
corporation are wasted or lost, each of them may be held responsible for any amount of
loss which may have been proximately caused by his wrongful acts or omissions. Where
there exists gross negligence or fraud in the management of the corporation, the
directors, besides being liable for damages, may be removed by the stockholders in
accordance with Sec. 28 of the Code. (Campos & Campos)
GENERAL RULE: Contracts intra vires entered into by BoD are binding upon the
corporation and courts will not interfere.
EXCEPTION:
comply with the contract, stating that the stipulations in the resolution were made without
consideration and that such resolution was, therefore, null and void ab initio, being in effect a
donation that was ultra vires and beyond the powers of the corporate directors to adopt. This is
an action by the sugar planters to enforce the contract.
The terms embodied in the resolution were supported by the same cause and
consideration underlying the main amended milling contract; i.e., the premises and obligations
undertaken thereunder by the planters, and particularly, the extension of its operative period for
an additional 15 years over and beyond the thirty years stipulated in the contract.
As the resolution in question was passed in good faith by the board of directors, it is valid
and binding, and whether or not it will cause losses or decrease the profits of the central, the
court has no authority to review them. They hold such office charged with the duty to act for the
corporation according to their best judgment, and in so doing, they cannot be controlled in the
reasonable exercise and performance of such duty. It is a well-known rule of law that questions
of policy or of management are left solely to the honest decision 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.
LITWIN (ROSEMARIN ET. AL., INTERVENORS) VS. ALLEN ET. AL.
(25 N.Y.S. 2d 667; 1940)
FACTS:
Alleghany Corp. bought terminals in Kansas City and St. Joseph. It needed to
raise money to pay the balance of the purchase price but could not directly borrow money due to
a borrowing limitation in its charter. Thus, it sold Missouri Pacific bonds to J.P. Morgan and Co.
worth $IOM. J.P. Morgan, in turn, sold $3M worth of the bonds to Guaranty Trust Company.
Under the contract, the seller was given an option to repurchase at same price within six months.
HELD:
Option given to seller is invalid. It is against public policy for a bank to sell
securities and buy them back at the same price; similarly, it is against public policy for the bank
to buy securities and give the seller the option to buy them back at the same price because the
bank incurs the entire risk of loss with no possibility of gain other than the interest derived from
the securities during the period that the bank holds them. Here, if the market price of the
securities rise, the holder of the repurchase option would exercise it to recover the securities at a
lower price at which he sold them. If the market price falls, the seller holding the option would
not exercise it and the bank would sustain the loss.
Directors are not in a position of trustees of an express trust who, regardless of good
faith, are personally liable. In this case, the directors are liable for the transaction because the
entire arrangement was improvident, risky, unusual and unnecessary so as to be contrary to
fundamental conceptions of prudent banking practice. Yet, the advice of counsel was not
sought. Absent a showing of exercise of good faith, the directors are thus liable.
WALKER VS. MAN, ET. AL. (253 N.Y.S. 458; 1931)
FACTS:
Frederick Southack and Alwyn Ball loaned Avram $20T evidenced by a
promissory note executed by Avram and endorsed by Lacey. The loan was not authorized by any
meeting of the board of directors and was not for the benefit of the corporation. The note was
dishonored but defendant-directors did not protest the note for non-payment; thus, Lacey, the
indorser who was financially capable of meeting the obligation, was subsequently discharged.
HELD:
Directors are charged not with misfeasance, but with non-feasance, not only with
doing wrongful acts and committing waste, but with acquiescing and confirming the wrong
doing of others, and with doing nothing to retrieve the waste. Directors have the duty to attempt
to prevent wrongdoing by their co-directors, and if wrong is committed, to rectify it. If the
defendant knew that an unauthorized loan was made and did not take steps to salvage the loan,
he is chargeable with negligence and is accountable for his conduct.
STEINBERG VS. VELASCO (52 Phil. 953; 1929)
FACTS:
The board of directors of Sibuguey Trading Company authorized the purchase of
330 shares of stock of the corporation and declared payment of P3T as dividends to
stockholders. The directors from whom 300 of the stocks were bought resigned before the board
approved the purchase and declared the dividends. At the time of purchase of stocks and
declaration of dividends, the corporation had accounts payable amounting to P9,241 and
accounts receivable amounting to P12,512, but the receiver who made diligent efforts to collect
the amounts receivable was unable to do so.
It has been alleged that the payment of cash dividends to the stockholders was wrongfully
done and in bad faith, and to the injury and fraud of the creditors of the corporation. The
directors are sought to be made personally liable in their capacity as directors.
HELD:
Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the BOD will not use the assets of the corporation to buy its
own stock, and will not declare dividends to stockholders when the corporation is insolvent.
In this case, it was found that the corporation did not have an actual bona fide surplus
from which dividends could be paid. Moreover, the Court noted that the Board of Directors
purchased the stock from the corporation and declared the dividends on the stock at the same
Board meeting, and that the directors were permitted to resign so that they could sell their stock
to the corporation. Given all of this, it was apparent that the directors did not act in good faith or
were grossly ignorant of their duties. Either way, they are liable for their actions which affected
the financial condition of the corporation and prejudiced creditors.
BARNES V. ANDREWS (298 F. 614; 1924)
A complaint was filed against a corporate director for failing to give adequate attention
(he relied solely on the Presidents updates on the status of the corp) to the affairs of a
corporation which suffered depletion of funds.
The director was not liable. The court said that despite being guilty of misprision in his
office, still the plaintiff must clearly show that the performance of the directors duties would
have avoided the losses. When a business fails from general mismanagement, business
incapacity, or bad judgment, it is difficult to conjecture that a single director could turn the
company around, or how much dollars he could have saved had he acted properly.
FOSTER V. BOWEN (41 N.E. 2d 181; 1942)
Cushing, a director and in charge of leasing a roller skating rink of the corp, leased the
same to himself. Minority stockholders filed suit against Bowen, the corporation's President, to
recover for company losses arising out of an alleged breach of fiduciary duty.
Bowen was held to be not liable because: (1) Cushing's acts were not actually dishonest
or fraudulent; (2) Cushing performed personal work such as keeping the facility in repair which
redounded to the benefit of the company and even increased its income; (3) Bowen did not
profit personally through Cushing's lease; and (4) the issue of the possible illegality of the lease
was put before the Board of Directors, but the Board did not act on it but instead moved on to the
next item on the agenda. Absent any bad faith on Bowen's part, and a showing that it was a
reasonable exercise of judgment to take no action on the lease agreement at the time it was
entered into, Bowen was not liable.
LOWELL HOIT & CO. V. DETIG (50 N.E. 2d 602; 1943)
Lowell Hoit filed action against directors of a cooperative grain company for an alleged
willful conversion by the manager of grain stored in the company facility. The court said that the
directors were not personally liable. There was no evidence that the directors had knowledge of
the transaction between the manager and Lowell Hoit.
The court will treat directors with leniency with respect to a single act of fraud on the part
of a subordinate officer/agent. But directors could be held liable if the act of fraud was habitual
and openly committed as to have been easily detected upon proper supervision. To hold directors
liable, he must have participated in the fraudulent act; or have been guilty of lack of ordinary and
reasonable supervision; or guilty of lack of ordinary care in the selection of the officer/agent.
BATES V. DRESSER (40 S.Ct.247; 1920)
Coleman, an employee of the bank, was able to divert bank finances for his benefit,
resulting in huge losses to the bank. The receiver sued the president and the other directors for
the loss.
The court said that the directors were not answerable as they relied in good faith on the
cashiers statement of assets and liabilities found correct by the government examiner, and were
also encouraged by the attitude of the president that all was well (the president had a sizable
deposit in the bank). But the president is liable. He was at the bank daily; had direct control of
records; and had knowledge of incidents that ordinarily would have induced scrutiny.
SC: This is in direct contravention of the Corp Law, of the traditional fiduciary relationship
between directors and the SH. The implication is that they can do anything short of fraud, even to
their benefit, and with immunity.
Note: This case was decided in 1966 under the Corporation Law, which had no
provisions on self-dealing directors.
actual and moral damages for having been in breach of the agreement which had been validly
entered into.
On appeal, the Supreme Court held that the dealership agreement is not valid and
enforceable, for not having been fair and reasonable: the agreement protected Te from any
market increases in the price of cement, to the prejudice of the corporation. The dealership
agreement was an attempt on the part of Te to enrich himself at the expense of the corporation.
Absent any showing that the stockholders had ratified the dealership agreement or that they were
fully aware of its provisions, the contract was not valid and Te could not be allowed to reap the
fruits of his disloyalty.
the
cannot
MINORITY RULE:
MAJORITY RULE:
corporation, he must account to the corporation for all such profits by refunding the
same. However, if his act was ratified by 2/3 stockholders' vote, he need not refund said
profits. This provision applies even though the director may have risked his own funds in
the venture.
Note: This provision is to be distinguished from Sec. 32 on contracts of self-dealing
directors: contracts of self-dealing directors are voidable at the option of the
corporation even if it has not suffered any injury; on the other hand, Sec. 34
applies only if the corporation has been prejudiced by the contract.
Interlocking directors
WHAT IS AN INTERLOCKING DIRECTOR?
An interlocking director is one who occupies a position in 2 companies dealing
with each other.
WHAT IS THE RULE ON CONTRACTS INVOLVING INTERLOCKING DIRECTORS?
Except in cases of fraud, and provided the contract is fair and reasonable under
the circumstances, a contract between 2 or more corporations having interlocking
directors shall not be invalidated on that ground alone. This practice is tolerated by the
GLOBE WOOLEN CO. V. UTICA GAS & ELECTRIC (121 N.E. 378; 1918)
Maynard, president and chief stockholder of Globe but nominal SH in Utica Gas,
obtained a cheap, 10-year contract for Utica to supply power. Maynard did not vote during the
meeting for the approval of the contract.
Can Globe seek to enforce contract? The Supreme Court held that Globe could not
enforce the contract and that said contract was voidable at the election of Utica. It was found
that based on the facts of the case, the contract was clearly one-sided. Maynard, although he did
not vote, exerted a dominating influence to obtain the contract from beginning to end.
The director-trustee has a constant duty not to seek harsh advantage in violation of his
trust.
(1) consenting to the issuance of stocks for a consideration less than its par
or issued value or for a consideration in any form other than cash, valued
in excess of its fair value, or
(2) who, having knowledge thereof, does not forthwith express his objection
in writing and file the same with the corporation secretary
shall be solidarily liable with the stockholders concerned to the corporation and its
creditors for the difference between the fair value received at the time of the issuance of
the stock and the par or issued value of the same.
GOV'T OF THE PHILIPPINES VS. EL HOGAR FILIPINO (50 Phil. 399; 1927)
The compensation provided in sec. 92 of the by-laws of El Hogar Filipino which
stipulated that 5% of the net profit shown by the annual balance sheet shall be distributed to the
directors in proportion to the attendance at board meetings is valid. The Corporation Law does
not prescribe the rate of compensation for the directors of a corporation. The power to fix it , if
any is left to the corporation to be determined in its by-laws. In the case at bar, the provision in
question even resulted in extraordinarily good attendance.
BARRETO VS. LA PREVISORA FILIPINA
This action was brought by the directors of defendant corporation to recover 1% from
each of the plaintiffs of the profits of the corporation for 1929 pursuant to a by-law provision
which grants the directors the right to receive a life gratuity or pension in such amount for the
corporation.
The SC held that the by-law provision is not valid. Such provision is ultra vires for a
mutual loan and building association to make. It is not merely a provision for the compensation
of directors. The authority conferred upon corporations refers only to providing compensation for
the future services of directors, officers, and employees after the adoption of the by-law in
relation thereto. The by-law can't be held to authorize the giving of continuous compensation to
particular directors after their employment has terminated for past services rendered gratuitously
by them to the corporation.
CENTRAL COOPERATIVE EXCHANGE INC VS. TIBE (33 SCRA 596; 1970)
The questioned resolutions which appropriated the funds of the corporation for different
expenses of the directors are contrary to the by-laws of the corporation; thus they are not within
the board's power to enact. Sec. 8 of the by-laws explicitly reserved to the stockholders the
power to determine the compensation of members of the board and they did restrict such
compensation to actual transportation expenses plus an additional P30 per diems and actual
expenses while waiting. Hence, all other expenses are excluded. Even without the express
reservation, directors presumptively serve without pay and in the absence of any agreement in
relation thereto, no claim can be asserted therefore.
FOGELSON VS. AMERICAN WOOLEN CO. (170 F. 2d. 660; 1948)
A retirement plan which provides a very large pension to an officer who has served to
within one year of the retirement age without any expectation of receiving a pension would seem
analogous to a gift or bonus. The size of such bonus may raise a justifiable inquiry as to whether
it amounts to wasting of the corporate property. The disparity also between the president's
pension plan and that of even the nearest of the other officers and employees may also be
inquired upon by the courts.
KERBS VS. CALIFORNIA EASTERN AIRWAYS (90 A. 2d 652; 1952)
This is an appeal filed to enjoin the California Eastern Airways from putting into effect a
stock option plan and a profit-sharing plan. The SC held that the stock option plan was deficient
as it was not reasonably created to insure that the corporation would receive contemplated
benefits. A validity of a stock option plan depends upon the existence of consideration and the
inclusion of circumstances which may insure that the consideration would pass to the
corporation. The options provided may be exercised in toto immediately upon their issuance
within a 6 month period after the termination of employment. In short, such plan did not insure
that any optionee would remain with the corporation.
With regard to the profit-sharing plan, it was held valid because it was reasonable and
was ratified by the stockholders pending the action.
Close Corporations
Sec. 97 provides that the AOI of a close corp. may specify that it shall be managed by the
stockholders rather than the BoD. So long as this provision continues in effect:
Generally, stockholders deemed to be directors for purposes of this Code, unless the context
clearly requires otherwise;
Stockholders shall be subject to all liabilities of directors. The AOI may likewise provide that
all officers or employees or that specified officers or employees shall be elected or appointed
by the stockholders instead of by the BoD.
Further, Sec. 100 provides that for stockholders managing corp. affairs:
They shall be personally liable for corporate torts (unlike ordinary directors liable only upon
finding of negligence)
If however there is reasonable adequate liability insurance, injured party has no right of
action v. stockholders-managers
A SH/director is still entitled to vote in a stockholders meeting even if his interest is adverse to a
corporation. But a stockholder able to control a corp. is still subject to the duty of good faith to the corp.
and the minority.
Persons with management control of corporation hold it in behalf of SHs and can not regard such
as their own personal property to dispose at their whim.
The ff. acts are legal:
Transfer of managerial control through BoD resignation & seriatim election of successors if
concomitant with the sale and actual transfer of majority interest or that which constitutes
voting control;
Disposal by controlling SH of his stock at any time & at such price he chooses
Selling corp. office or management control by itself, that is NOT accompanied by stocks or
stocks are insufficient to carry voting control;
Transferring office to persons who are known or should be known as intending to raid the
corporate treasury or otherwise improperly benefit themselves at the expense of the corp.
(Insuranshares Corp. V. Northern Fiscal);
The corp. is suing its former directors to recover damages as a result of the sale of its
control to a group (corporate raiders) who proceeded to rob it of most of its assets mainly
marketable securities.
Are previous directors who sold corp. control liable? Yes, they are under duty not to sell
to raiders.
Owners of corp. control are liable if under the circumstances, the proposed transfer are
such as to awaken a suspicion or put a prudent man on his guard. As in this case, control was
bought for so much aside from being warned of selling to parties they knew little about, and also
from fair notice that such outsiders indeed intended to raid the corp.
Duty to Creditors
General rule: Corporate creditors can run after the corp. itself only, and not the directors for
mismanagement of a solvent corp.
If corp. becomes insolvent, directors are deemed trustees of the creditors and should therefore
manage its assets with due consideration to the creditors interest.
If directors are also creditors themselves, they are prohibited from gaining undue advantage over
other creditors.
II.
III.
IV.
Agrees to hold himself personally and solidarily liable with the corporation;
Is made, by a specific provision of law, to personally answer for his corporate
action.
Installments paid and unpaid on all stock for which subscription has been
made, and the date of any installment;
The stock and transfer book shall be kept in the principal office of the corporation or in the
office of its stock transfer agent, and shall be open for inspection by any director or
stockholder of the corporation at reasonable hours on business days.
WHAT IS A STOCK TRANSFER AGENT? (Sec. 75)
Ordinary stockholders, the beneficial owners of the corporation, usually have no say on how
business affairs of the corp. are run by the directors. The law therefore gives them the right to know not
only the financial health of the corp. but also how its affairs are managed so that if they find it
unsatisfactory, they can seek the proper remedy to protect their investment.
WHAT IS THE NATURE OF THE RIGHT TO INSPECT?
PREVENTIVE :
REMEDIAL:
2.
By-laws
These are expressly required to be open to inspection by SH/members during office
hours (Sec. 46). Note: There is no similar provision as to AOI, but these are filed with
the SEC anyway.
3.
4.
5.
6.
1.
The exercise of this right is subject to reasonable limitations similar to a citizens exercise of the
right to information. Otherwise, the corp. might be impaired, its efficiency in operations hindered,
to the prejudice of SHs.
2.
Such limitations to be valid must be reasonable and not inconsistent with law ( Sec. 36[5] and
46).
3.
A corp. may regulate time and manner of inspection but provisions in its by-law which gives
directors absolute discretion to allow or disallow inspection are prohibited.
Limitations as to time and place:
Such business days should be THROUGHOUT THE YEAR. BoD cannot limit such to
merely a few days within the year. (Pardo v. Hercules Lumber)
4.
5.
Inspection should be made in such a manner as not to impede the efficient operations
6.
Place of inspection: Principal office of the corp. SH cannot demand that such records be taken
out of the principal office.
7.
As to purpose:
PRESUMPTION: that SHs purpose is proper. Corp. cannot refuse on the mere belief
that his motive is improper (sec 74).
BURDEN OF PROOF: lies with corp. which should show that purpose was illegal.
To be legitimate, the purpose for inspection must be GERMANE to the INTEREST of the
stockholder as such, and it is not contrary to the interests of the corporation.
Legitimate:
Not legitimate:
Belief in good faith that a corp. is being mismanaged may be given due course even if
later, this is proven unfounded.
Every director, trustee, stockholder, member may exercise right personally or through an
agent who can better understand and interpret records (impartial source, expert accountant, lawyer).
As to VTA: both voting trustee and transferor
SH of parent corp. over subsidiary:
If the two are operated as SEPARATE entities
: NO right of inspection
Writ shall not issue where it is shown that the petitioners purpose is
improper and inimical to the interests of the corporation.
Writ should be directed against the corporation. The secretary and
the president may be joined as party defendants.
(2) Injunction
(3) Action for damages against the officer or agent refusing inspection. Also, penal
sanctions such as fines and / or imprisonment (Sec. 74; Sec. 144)
What defenses are available to the officer or agent?
(1)
The law takes from the SH the burden of showing impropriety of purpose and places
upon the corporation the burden of showing impropriety of purpose and motive.
Considering that the foreign subsidiary is wholly owned by SMC and therefore under its
control, it would be more in accord with equity, good faith and fair dealing to construe the
statutory right of Gokongwei as petitioner as SH to inspect the books and records of such wholly
subsidiary which are in SMCs possession and control.
DERIVATIVE SUITS
Nature and Basis of derivative suit
Suits of stockholders/ members based on wrongful or fraudulent acts of directors or other
persons:
a.
Individual suits - wrong done to stockholder personally and not to other stockholders
(ex. When right of inspection is denied to a stockholder)
b.
c.
But since the directors who are charged with mismanagement are also the
ones who will decide WON the corp. will sue, the corp. may be left without
redress; thus, the stockholder is given the right to sue on behalf of the
corporation.
Suing stockholder is merely the nominal party and the corp. is actually the
party in interest.
A SH can only bring suit for an act that took place when he was a
stockholder; not before. (Bitong v. CA, 292 SCRA 503)
1)
Stockholder/ member must have exhausted all remedies within the corp.
2)
3)
4)
The claim that plaintiff Justiniani did not take steps to remedy the illegal importation for
a period of two years is also without merit. During that period of time plaintiff had the right to
assume and expect that the directors would remedy the anomalous situation of the corporation
brought about by their wrong-doing. Only after such period of time had elapsed could plaintiff
conclude that the directors were remiss in their duty to protect the corporation property and
business.
BITONG v. CA (292 SCRA 503)
The power to sue and be sued in any court by a corporation even as a stockholder is
lodged in the Board of Directors that exercises its corporate powers and not in the
president or officer thereof.
It was JAKA's Board of Directors, not Senator Enrile, which had the power to
grant Bitong authority to institute a derivative suit for and in its behalf.
The basis of a stockholder's suit is always one in equity. However, it cannot prosper
without first complying with the legal requisites for its institution. The most
important of these is the bona fide ownership by a stockholder of a stock in his own
right at the time of the transaction complained of which invests him with standing to
institute a derivative action for the benefit of the corporation.
Contributions (stockholders);
investment
2) Loans or advances (creditors)
3) Profits (corporation itself)
also
known
Capital Structure
WHAT IS MEANT BY CAPITAL STRUCTURE?
as
stockholder
equity/equity
This refers to the aggregate of the securities -- instruments which represent relatively
long-term investment -- issued by the corporation. There are basically 2 kinds of
securities: shares of stock and debt securities.
CAPITAL STOCK
CAPITAL
DEFINITION
CONSTANCY
FLUCTUATING
PREFERRED
PAR
NO PAR*
DEFINITION
Stock which
entitles the owner
of such stocks to
an equal pro rata
division of profits
VALUE
VOTING RIGHTS
Depends if its
common or
preferred.
Depends if its
common or
preferred.
TREASU
Shares that h
issued and fu
but subseque
reacquired by
issuing corpo
lawful means.
No voting righ
long as such
remains in the
treasury (Sec
PREFERENCE UPON
LIQUIDATION
No advantage,
priority, or
preference over
any other SH in the
same class
NOTE: Only preferred and redeemable shares may be deprived of the right to vote. (Sec. 6, Corporation Code)
EXCEPTION: As otherwise provided in the Corporation Code.
* No-par value shares may not be issued by the following entities: banks, trust companies, insurance companies,
public utilities, building & loan association (Sec. 6)
Subscriptions constitute a fund to which the creditors have a right to look for
satisfaction of their claims.
The assignee in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts.
A subscription contract subsists as a liability from the time that the subscription is
made until such time that the subscription is fully paid.
Pre-incorporation subscription
RULE: When a group of persons sign a subscription contract, they are deemed not only to make a
continuing offer to the corporation, but also to have contracted with each other as well. Thus, no one may
revoke the contract even prior to incorporation without the consent of all
the others.
WHEN IS A PRE-INCORPORATION SUBSCRIPTION IRREVOCABLE?
1)
period as
2) After the AOI have been submitted to the SEC (Sec. 61)
UTAH HOTEL CO V. MADSEN (43 Utah 285, 134 Pac. 557; 1913)
Sec 332 in express terms confers powers upon the stockholders to regulate the mode of
making subscriptions to its capital stock and calling in the same by-laws or by express contract.
Since it may be done by express contract, this shows that it was intended that a contract to that
effect may be entered into even before the corporation is organized, and the contract agreement
is enforced if the corporation is in fact organized.
Post-incorporation subscription
NOTE:
3)
payments
can be channelled
corporate activities.
to
more
productive
Note: In Nos. (2) and (3), such acts require approval of 2/3 of the OCS or
2/3 of total members.
In Close Corporations
In close corporations, the preemptive rights extends to ALL stock to be issued, including reissuance of treasury shares, EXCEPT if provided otherwise by the AOI. (Sec. 102). Note that the
limitations in Sec. 39 do not apply.
The directors were under the legal obligation to give the SH-plaintiff an opportunity to
purchase at the price fixed before they could sell his property to a third party. By selling to
strangers without first offering to sell to him, the defendant wrongfully deprived him of his
property and is liable for such damages as he actually sustained.
Debt Securities
Borrowings
Borrowings are usually represented by promissory notes, bonds or debentures.
Oftentimes, a financial institution will be willing to lend large amounts to private
corporations only on the condition that such institution will have some representation on
the Board of Directors. The role of such representative is to see to it that his institution's
investment is protected from mismanagement or unfavorable corporate policies.
MERRITT-CHAPMAN & SCOTT CORP. VS. NEW YORK TRUST CO. (184 F.
2d 954; 1950)
If the corporation is allowed to declare stock dividends without taking account of the
warrant holders (who have not yet exercised their warrant), the percentage of interest in the
common stock capital of the corporation which the warrant holders would acquire, should they
choose to do so, could be substantially reduced/diluted. Thus, the corporation is wrong in
contending that a warrant holder must first exercise his warrant before they may be issued stock
dividend.
Hybrid securities
Because preferred shares and bonds are created by contract, it is possible to create stock which
approximates the characteristics of debt securities. Hybrid securities, as the name implies, therefore
combine the features of preferred shares and bonds.
Determining the true nature of the security is crucial for tax purposes. The American courts use
the following criteria:
(1) Is the corporation liable to pay back the investor at a fixed maturity date?
(2) Is interest payable unconditionally at definite intervals, or is it dependent on earnings?
(3) Does the security rank at least equally with the claims of other creditors, or is it subordinate
to them?
WHAT IS THE NATURE OF THE SECURITY AND THE PAYMENT MADE?
BONDS
STOCK
WHAT IS PAID?
Interest
Dividends
TO WHOM PAID?
Creditor-investor
Stockholder
WHEN PAID?
NATURE
Expense
Not an expense
TAXABILITY
CANNOT be deducted
MATURITY DATE?
Yes
No
RANK ON
DISSOLUTION
Superior to stockholders,
inferior to corporate
creditors
JOHN KELLY VS. CIR TALBOT MILLS VS. CIR (326 U.S. 521; 1946)
In the Kelly case, the annual payments made were interest on indebtedness (therefore, a
bond is held) because there were sales of the debentures as well as exchanges of preferred stock
for debentures, a promise to pay a certain annual amount if earned, a priority for the debentures
over common stock and a definite maturity date in the reasonable future.
In the Talbot Mills case, the annual payments made were dividends and not interest
(therefore, shares are held), because of the presence of fluctuating annual payments with a 2%
minimum, and the limitation of the issue of notes to stockholders in exchange only for stock.
Besides, it is the Tax Court which has final determination of all tax issues which are not clearly
delineated by law.
The payments made, regardless of what they are called, are in fact dividends (on stocks)
because of the absence of a maturity date and the right to enforce payment of the principal sum
by legal action, among other factors.
The following criteria should be used in determining whether a payment is for interest or
dividends:
(1) maturity date and the right to enforce collection;
(2) treatment by the parties;
(3) rank on dissolution;
(4) uniform rate of interest payable or income payable only out of profits;
(5) participation in management and the right to vote.
It must be noted that these criteria are not of equal importance and cannot be relied upon
individually. E.g. treatment accorded the issuance by the parties cannot be sufficient as this
would allow taxpayers to avoid taxes by merely naming payments as interest.
(1) debtor-corporation
(2) creditor-bondholder
(3) trustee: representative of all the bondholders
Form of Consideration
cash;
property actually received by the corporation: must be necessary or
convenient for its use and lawful purposes;
labor performed for or services actually rendered to the corporation
(NOTE: Future services are NOT acceptable!);
previously incurred indebtedness by the corporation;
amounts transferred from unrestricted retained earnings to stated capital;
outstanding shares exchange for stocks in the event of reclassification or
conversion
future services
promissory notes
value less than the stated par value
Watered Stocks
(2)
Upon payment of less than its par value in money or for cost at a discount;
(3)
Upon payment with property, labor or services, whose value is less than
the par value of the shares; and
(4)
McCarty agreed to purchase shares of a corp. with a downpayment of only $20, with the
balance due to be evidenced by a note. McCarty failed to pay a big portion of the balance. The
Court affirmed the judgement against McCarty for the balance due on the contract.
McCarty contends that the contract is void. But the law only prohibits the issuance of stock.
If it is understood that the stock will not be issued to the subscriber until the note is paid, the
contract is valid and not illegal.
If a security such as a note, which is not a valid consideration, is accepted, the law does not
say that such note, or the stock issued for it, shall be void. What is void by express provision of law
is the fictitious increase of stock or indebtedness. The law was designed for the protection of the
corporation and its creditors. It emphasizes the stockholders obligations to make full and lawful
payment in accord with its mandate, rather than furnish him with a defense when he has failed in
that obligation. Its purpose is to give integrity to the corporations capital. None of these objects
would be promoted by declaring a note given by a subscriber for stock uncollectible in the hands of
a bona fide stockholder.
Issuance of Certificate
Certificate of stock
CONDITION FOR ISSUANCE:
BEARS:
1. kind of shares
2. date of issuance
3. par value, if par value shares
Signatures of the proper officers, usually president
or secretary, as well as the corporate seal
AMOUNT ISSUED:
Unpaid Subscriptions
Unpaid subscriptions are not due and payable until a call is made by the corporation
for payment. (Sec. 67)
Interest on all unpaid subscriptions shall be at the rate of interest fixed in the bylaws. If there is none, it shall be the legal rate. (Sec. 66)
It was held that the Board call became immaterial in insolvency which automatically
causes all unpaid subscriptions to become due and demandable.
whereby Lumanlan would directly pay a creditor of the company. In exchange, the company
would forego whatever balance remained on the unpaid subscription. Lumanlan agreed since he
would be paying less than his unpaid subscription. Afterwards, the corporation still sued him for
the balance because the company still had unpaid creditors. Lumanlans defense was the
compromise agreement.
The Court held that the agreement cannot prejudice creditors. The subscriptions
constitute a fund to which they have a right to look to for satisfaction of their claims. Therefore,
the corporation has a right to collect all unpaid stock subscriptions and any other amounts which
may be due it, notwithstanding the compromise agreement.
Note: The Camposes are of the opinion that 64 of Corporation Code makes
the Lingayen Gulf inapplicable at present.
Effect of delinquency
The holder thereof loses all his rights as a stockholder except only the rights
to dividends;
2.
Dividends will not be paid to the stockholder but will be applied to the unpaid
balance of his subscription plus costs and expenses. Also, stock dividends
will be withheld until full payment is made.
3.
4.
5.
WHAT IS THE PROCEDURE FOR THE CONDUCT OF A DELINQUENCY SALE? (Sec. 68)
(1) Issuance of Board resolution
The BOD issues a resolution ordering the sale of delinquent stock,
specifically stating the amount due on each subscription plus all accrued
interest, and the date, time and place of the sale.
Note: The sale shall not be less than 30 days nor more than 60 days
from the date the stocks become delinquent.
(2) Notice of sale and publication
Notice of the date of delinquency sale and a copy of the resolution is sent to
every delinquent stockholder either personally or by registered mail. The
notice is likewise published once a week for 2 consecutive weeks in a
newspaper of general circulation in the province or city where the principal
office of the corporation is located.
(3) Sale at public auction
If the delinquent stockholder fails to pay the corporation on or before the date
specified for the delinquency sale, the delinquent stock is sold at public
auction to such bidder who shall offer to pay the full amount of the balance
on the subscription together with accrued interest, costs of advertisement
and expenses of sale, for the smallest number of shares or fraction of a
share.
(4) Transfer and issuance of certificate of stock
The stock so purchased is transferred to such purchaser in the books of the
corporation and a certificate of stock covering such shares is issued.
If there is no bidder at the public auction who offers to pay the full amount of the
balance on the subscription and its attendant costs, the corporation may bid for
the shares, and the total amount due shall be credited as paid in full in the books
of the corporation. Title to all the shares of stock covered by the subscription
shall be vested in the corporation as treasury shares and may be disposed of by
said corporation in accordance with the Code.
Note that this is subject to the restrictions imposed by the Code on
corporations as regards the acquisition of their own shares. (See the
discussion under Dividends and Purchase by Corporation of its Own
Shares.)
CAN A DELINQUENCY SALE BE QUESTIONED? (Sec. 69)
Yes. This is done by filing a complaint within 6 months from the date of sale, and
paying or tendering to the party holding the stock the sum for which said stock was sold,
with interest at the legal rate from the date of sale. No action to recover delinquent stock
sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in
the sale itself of the delinquent stock unless these requirements are complied with.
(1) File an affidavit in triplicate with the corporation. The affidavit must state the
following:
(a)
(b)
(c)
(d)
(2) The corporation will publish notice after the affidavit and other information and
evidence have been verified with the books of the corporation, (Note however that
this is not mandatory. The corporation has the discretion to decide whether to
publish or not.)
The notice will contain the following information:
(a)
(b)
(c)
(d)
(e)
(3) SLD certificate is removed from the books if after one year from date of last
publication, no contest is presented.
NOTE: One-year period will not be required if the applicant files a bond good for
1 year.
(4) The corporation will then issue new certificates.
However, if a contest has been presented to the corporation, or if an action is
pending court regarding the ownership of the SLD certificate, the issuance of the
new certificate shall be suspended until the final decision by the court.
NOTE: Should corporation issue new certificates without the conditions being
fulfilled and a third party proves that he is the rightful owner of the shares, the
corporation may be held liable to the latter EVEN IF it acted in good faith.
NOTE: Even if the above procedure was followed, if there was fraud, bad faith,
or negligence on the part of the corporation and its officers, the corporation may
be held liable.
TRANSFER OF SHARES
HOW ARE SHARES OF STOCK TRANSFERRED?
By delivery of the certificate/s indorsed by the owner or his attorney-in-fact or
other person legally authorized to make the transfer. (Sec. 63)
WHAT ARE THE REQUISITES FOR A VALID TRANSFER?
(1) Delivery;
(2) Indorsement by the owner or his attorney-in-fact or other persons legally
authorized to make the transfer
Indorsement of the certificate of stock is a mandatory requirement of
law for an effective transfer of a certificate of stock. (Razon v. CA, 207
SCRA 234)
(3) Recording of the transfer in the books of the corporation (so as to make the
transfer valid as against third parties)
Until registration is accomplished, the transfer, though valid between
the parties, cannot be effective as against the corporation. Thus, the
unrecorded transferee cannot enjoy the status of a SH: he cannot vote
nor be voted for, and he will not be entitled to dividends.
Is a bona fide transfer of the shares of corp., not registered or noted on the books of the corp.,
valid as against a subsequent lawful attachment of said shares, regardless of whether the
attaching creditor had actual notice of said transfer or not.
NO, it is not valid. The transfer of the 75 shares in the North Electric Co., Inc made by
the defendant Diosomito as to the defendant Barcelon was not valid as to the plaintiff. Toribia
Uson, on 18 Jan. 1932, the date on which she obtained her attachment lien on said shares of
stock which still stood in the name of Diosomito on the books of the corp. Sec. 35 says that No
transfer, however, is valid, except as between the parties, until the transfer is entered and noted
upon the books of the corporation so as to show the names of the parties to the transaction, the
date of the transfer, the number of the certificate, and the number of shares transferred.
All transfers of shares not so entered are invalid as to attaching or execution creditors of
the assignors, as well as to the corporation and to subsequent purchasers in good faith, and
indeed, as to all persons interested, except the parties to such transfers.
Note: In this case, Judge Torres had no right to enter the assignments (conveyances) of
his shares himself in the corporation's stock and transfer book since he was not
corporate secretary.
to by all the stockholders of the close corporation, or if the close corporation has
amended its AOI in accordance with Title XII of the Code.
For his part, the transferee may rescind the transfer or recover from the transferor
under any applicable warranty, whether express or implied.
UNAUTHORIZED TRANSFERS
that relying on the stock certificate, the purchaser believes the possessor to
be the owner thereof or has authority to transfer the same.
This proceeds from the theory of quasi-negotiability which provides that in endorsing a
certificate in blank, the real owner clothes the possessor with apparent authority, thus,
estopping him later from asserting his rights over the shares of stock against a bona fide
purchaser.
Quasi-negotiability does not apply in cases where the real owner:
a.
b.
Forged Transfers
A corporation does not incur any misrepresentation in the issuance of a
certificate made pursuant to a forged transfer. It can always recall from the person the
certificate issued, for cancellation.
In case where the certificate so issued comes into the hands of a bona fide
purchaser for value from the original purchaser, the corporation is estopped from denying
its liability. It must recognize both the original and the new certificate. But if recognition
results to an over-issuance of shares, only the original certificate may be recognized,
without prejudice to the right of the bona fide purchaser to sue the corporation for
damages.
Santamaria secured her order for a number of shares with Campos Co. with her stock
certificate representing her shares with Batangas Minerals. The said certificate was originally
issued in the name of her broker and endorsed in blank by the latter. As Campos failed to make
good on the order, Santamaria demanded the return of the certificate. However, she was informed
that Hongkong Bank had acquired possession of it inasmuch as it was covered by the pledge
made by Campos with the bank. Thereafter, she instituted an action against Hongkong Bank for
the recovery of the certificate. Trial court decided in her favor. The bank appealed.
Issues: 1) WON Santamaria was chargeable with negligence which gave rise to the case
2) WON the Bank was obligated to inquire into the ownership of the certificate
(1) The facts of the case justify the conclusion that she was negligent. She delivered the
certificate, which was endorsed in blank, to Campos without having taken any precaution. She
did not ask the Batangas Minerals to cancel it and instead, issue another in her name. In failing to
do so, she clothed Campos with apparent title to the shares represented by the certificate. By her
misplaced confidence in Campos, she made possible the wrong done. She was therefore estopped
from asserting title thereto for it is well-settled that where one of the innocent parties must
suffer by reason of a wrongful or unauthorized act, the loss must fall on the one who first trusted
the wrongdoer.
(2) The subject certificate is what is known as a street certificate. Upon its face, the
holder is entitled to demand its transfer into his name from the issuing corporation. The bank is
not obligated to look beyond the certificate to ascertain the ownership of the stock. A certificate
of stock, endorsed in blank, is deemed quasi-negotiable, and as such, the transferee thereof is
justified in believing that it belongs to the transferor.
Lepanto in the name of Madrigal, the trustee of Matsui; that Matsui was subsequently given
possession of the corresponding stock certificates, though endorsed in blank; and, that Matsui
had neither sold, conveyed nor alienated these to anybody.
It is the rule that if the owner of the certificate has endorsed it in blank, and is stolen, no
title is acquired by an innocent purchaser of value. This is so because even though a stock
certificate is regarded as quasi-negotiable, in the sense that it may be transferred by endorsement,
coupled with delivery, the holder thereof takes it without prejudice to such rights or defenses as
the registered owner or credit may have under the law, except in so far as such rights or defenses
are subject to the limitations imposed by the principles governing estoppel.
Collateral Transfers
Shares of stock are personal property. Thus, they can either be pledged or mortgaged. However,
such pledge or mortgage cannot have any legal effect if it is registered only in the corporate books.
Where a certificate is delivered to the creditor as a security, the contract is considered a pledge,
and the Civil Code will apply.
If the certificate of stock is not delivered to the creditor, it must be registered in the registry of
deeds of the province where the principal office of the corporation is located, and in case where the
domicile of the stockholder is in a different province, then registration must also be made there.
In a situation where, the chattel mortgage having been registered, the stock certificate was not
delivered to the creditor but transferred to a bona fide purchaser for value, it is the rule that the bona fide
purchaser for value is bound by the registration in the chattel mortgage registry. It is said that such a rule
tends to impair the commercial value of stock certificates.
It is the general rule that the situs of shares is the domicile of the owner. It is also
generally held that for the purpose of execution, attachment, and garnishment, it is the domicile
of the corporation that is decisive. Going by these principles, it is deemed reasonable that chattel
mortgage of shares be registered both at the owners domicile and in the province where the
corporation has its principal office. It should be understood that the property mortgaged is not the
certificate but the participation and share of the owner in the assets of the corporation.
It is recognized that this method of hypothecating shares of stock in a chattel mortgage is
rather tedious and cumbersome. But the remedy lies in the legislature.
Note: The provision of the Chattel Mortgage Law (Act No. 1508)
providing for delivery of mortgaged property to the mortgagee as a mode
of constituting a chattel mortgage is no longer valid in view of the Civil
Code provision defining such as a pledge.
NON-TRANSFERABILITY
IN NON-STOCK CORPORATIONS
Although shares of stock are as a rule freely transferable, membership in a non-stock corporation
is personal and non-transferable, unless the articles of incorporation or by-laws provide otherwise. The
court may not strip him of his membership without cause. (Sec. 90)
Cash
2.
Property
3.
scrip - certificate issued to SHs instead of cash dividends which entitles them to
a certain amount in the future
Stock dividends
Stock dividends are distribution to the SHs of the companys own stock.
Stock dividends cannot be declared without first increasing the capital stock
unless unissued shares are available.
New shares are issued to the SHs in proportion to their interest.
No new income unless sold for cash.
Civil fruits belong to the usufructuary and not to the naked owner.
Can only be issued to SHs.
Whenever fractional shares result, corp may pay in cash or issue fractional share
warrants.
Stock Dividend
Voting requirements
for issuance
Board of Directors
Board of Directors +
2/3 OCS
Effect on delinquent
stock
premium on par stock i.e. difference between par value and selling price
of stock by corp since this is regarded as paid-in capital; but SEC
allowed declaration of stock dividends out of such premiums
If subscribed shares have not been fully paid, the unpaid portion of subscribed capital
stock is an asset, and as long as the net capital asset (after payment of liabilities)
including this unpaid portion is at least equal to the total par value of the subscribed
shares, any excess would be surplus or earnings from which dividends may be declared.
However, if a deficit exists, subsequent profits must first be applied to cover the deficit.
Restrictions on dividend distribution include:
The right to dividends is conditional upon: (1) accrual of net profits, and (2) retention in
the business.
If the annual net earnings of a corp. are justifiably applied to legitimate corp. purposes,
such as payment of debts, reduction of deficits and restoration of impaired capital, the right of
non-cumulative preferred stockholders to the payments of dividends is lost. If they are applied
against prior losses and thereby completely absorbed, there are no net profits from which
dividends may be lawfully paid.
BOD has discretion whether or not to declare dividends and in what form.
Exception:
However, such discretion cannot be abused and the BOD cannot accumulate surplus
profits unreasonably on the excuse that it is needed for expansion or reserves.
2.
BOD should declare dividends when surplus profits of the corporation exceed 100%
of the corporation's paid-in capital stock.
Exceptions:
(a) When justified by definite corporate expansion projects or programs
approved by the Board;
(b) When creditors prohibit dividend declaration without their consent as a
condition for the loan, and such consent has not yet been secured;
(c) When retention is necessary under special circumstances obtaining in the
corporation, e.g. when there is a need for special reserve for probable
contingencies. (Sec. 43)
4.
The corporation may be subjected to additional tax when it fails to declare dividends,
thereby unreasonably accumulating profits. (See Sec. 25, NIRC)
5.
The dividends received are based on stock held whether or not paid. However, if the
stocks are delinquent, the amount will first be applied to the payment of the
delinquency plus costs and expenses; stock dividends will not be given to a
delinquent SH.
a just proportion of the corporation's profit, the court may compel the corporation to declare
dividends.
DODGE v FORD MOTOR CO (170 N.W. 668; 1919)
This case involves an action against the Ford Motor Company to compel declaration of
dividends. At the time this complaint was made, Ford had concluded its most prosperous year of
business, and the demand for its cars at the price of the previous year continued. While it had
been the practice, under similar circumstances, to declare larger dividends, the corporation
refused to declare any special dividends. The Board justified its refusal to declare larger
dividends on the expansion plans of the company by erecting a smelting plant, but maintaining
the selling price of its cars (instead of reducing it as had been the practice in previous years).
The plaintiffs contend that such a proposal would be tantamount to the business being conducted
as a semi-eleemosynary (or charitable) institution instead of a business institution.
The court pointed out that a business corporation is organized and carried on primarily
for the profit of SHs. The discretion of the directors is to be exercised in the choice of means to
attain that end and does not extend to a change in the end itself reduction of profits or to devote
profits to another purpose. While the Court noted the capable management of the affairs of the
corporation and therefore was not convinced that the motives of the directors were prejudicial to
the company's interests, it likewise noted that the annual dividends paid were very small in
relation to the profits that the company had been making. It therefore affirmed the amount fixed
by the lower court to be distributed to the stockholders.
Note: Prof. Jacinto is of the opinion that what happened in this case is
possible under the present Code, even without changing the AOI.
Preference as to Dividends
BURK V. OTTAWA GAS & ELECTRIC CO. (123 Pac. 875; 1912)
An action was brought by the preferred SHs of Ottawa against the directors of Ottawa to
(1) require the directors to account for all the property and assets of the corporation, (2) declare
such dividends from the net profits of the business of such co. as should have been declared since
1 Jan. 1906, and (3) restrain the officers and directors during the pendency of the action from
paying out any of the money or disposing of the assets of the company except such amounts as
should be necessary to pay the actual necessary current expenses of conducting the business of
the corporation.
The BOD maintained that the corporation's funds were exhausted by expenditures for the
extension of the cos plant, hence it was unable to declare dividends. Expenditures were said to
be necessary and for the betterment of the plant.
Were the corp funds were wrongfully diverted, and were preferred SHs entitled to dividends?
The case was remanded to the trial court, with instructions to make further findings to
protect the preferred SHs in their rights.
The fair interpretation of the contract between Ottawa and its SHS is that if in any year
net profits are earned, a dividend is to be declared. To hold otherwise, meaning if the BOD had
absolute discretion when to declare dividends and when not to, when the corporation has funds
for such dividends, would result in temptation to unfair dealing, giving one party the option to
pay the other or not. In the case at bar, the accumulated profits would be lost forever since the
dividends were non-cumulative.
Preferred SHs, however, are not generally creditors until dividends are declared. In the
case at bar, if dividends should have been declared to such SHs, they are considered creditors
from that time.
As soon as the BoD has declared dividends. From this time, it becomes a debt
owed by the corporation, and therefore can no longer be revoked (McLaran v.
Crescent Planning).
EXCEPTION:
If the declaration has not yet been announced or
communicated to the stockholders.
NOTE: When no dividends are declared for 3 consecutive years, preferred
SHs are given the right to vote for directors until dividends are declared.
NOTE: The extent of the SHs share in the dividends will depend on
the capital contribution; NOT the number of shares he has.
FOR WHAT PURPOSES CAN A CORPORATION ACQUIRE ITS OWN SHARES? (Sec.
41)
1.
2.
3.
(1) In case any amendment to the AOI has the effect of changing or restricting
the rights of any SH or class of shares, or of authorizing preferences in any
respect superior to those of outstanding shares of any class, or of extending
or shortening the term of corporate existence (Sec. 81);
(2) In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets as
provided in this Code (Sec. 81; Sec. 40);
(3) In case of merger or consolidation (Sec. 81);
(4) In case the corporation invests its funds in any other corporation or business
or for any purpose other than the primary purpose for which it was organized
(Sec. 42)
WHAT ARE THE REQUISITES FOR THE EXERCISE OF THE APPRAISAL RIGHT?
(Sec. 82)
(1) SH must have voted against he proposed corporate action;
(2) Written demand on the corporation for payment of the fair value of his shares;
(3) Such demand must have been made within 30 days after the date on which the
vote was taken;
(4) Surrender of the stock certificate/s representing his shares;
(5) Unrestricted retained earnings in the books of the corporation to cover such
payment.
WHAT IS THE EFFECT OF DEMAND FOR PAYMENT IN ACCORDANCE WITH THE
APPRAISAL RIGHT? (Sec. 83)
All rights accruing to the shares, including voting and dividend rights, are suspended
in accordance with the Corporation Code, except for the right of the SH to receive
payment of the fair value thereof.
Such suspension shall be from the time of demand until either:
(1) abandonment of the corporate action involved; or
(2) the purchase of the said shares by the corporation.
However, if said dissenting SH is not paid the value of his shares within 30 days
after the award, his voting and dividend rights shall immediately be restored.
WHAT ARE THE DUTIES OF THE DISSENTING STOCKHOLDER IN RELATION TO
THE EXERCISE OF THE APPRAISAL RIGHT?
The dissenting SH must submit the certificates of stock representing his shares to
the corporation for notation thereon that such shares are dissenting shares within 10
days after demanding payment for his shares. Failure to do so shall, at the option of the
corporation, terminate his rights under Title X of the Corporation Code. (Sec. 86)
AMENDMENTS OF CHARTER
The charter of a private corporation consists of its articles of incorporation as well as the
Corporation Code and such other law under which it is organized.
Amendment by Legislature
Amendment by Stockholders
One of the powers expressly granted by law to all corporations is the power to
amend its articles of incorporation. This, in effect, is a grant of power to owners of 2/3 of
the outstanding stocks to change the basic agreement between the corporation and its
stockholders, making such change binding on all the stockholders, subject only to the
right of appraisal, if proper.
(1)
(2)
(3)
PURPOSE:
must be legitimate
VOTE:
The appraisal right must be recognized in case the amendment has the
effect of changing rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares
of any class, or extending or shortening the term of corporate existence.
Extension of corporate term cannot exceed 50 yrs. in any one instance
A copy of the amended articles should be filed with the SEC, and with the
proper governmental agencies, as appropriate (e.g., in the case of banks,
public utilities, etc.)
(4)
Original and amended articles should contain all matters required by law to
be set out in said articles.
(5)
(6)
ON WHAT GROUNDS
AMENDMENTS?
CAN
THE
SEC
DISAPPROVE
THE
PROPOSED
The same grounds as for the disapproval of the original articles (Sec. 17):
corpo of her objection; that her shares were voted against the amendmentthese were sufficient
to qualify her to invoke her statutory appraisal right.
Effectivity of amendment
Amendments take effect only from the approval by the SEC. However, such
approval or rejection must be made within six months of filing of amendment; otherwise
it shall take effect even w/o such approval (as of the date of filing), unless cause of
delay is attributable to the corporation. (Sec. 16)
Special amendments
(1) All issued stock of all classes should be held by not more than 20;
(2) All issued stock shall be subject to one or more specified restrictions on
(3)
If any of these are deleted, then the corporation will cease to be a close
corporation and will lose the special privileges of such corporations. Thereafter, it will
be governed by the general provisions of the Code. Since such amendment involves a
change in the nature of the corporation, even non-voting stocks are given a voice in the
decision. A stockholders meeting is required and a 2/3 vote must approve the
amendment, unless otherwise provided by the articles of incorporation.
DISSOLUTION
Modes of Dissolution
Posting:
(b) Quo Warranto proceedings (See Sec. 5b, PD 902-A and Rule 66, Rules of
Court. Previously, the SEC had exclusive jurisdiction over quo warranto
proceedings involving corporation. Under the Securities Regulation
Code or RA 8799, however, the jurisdiction of the SEC over all cases
enumerated under Sec. 5 of PD 902-A have been transferred to the
Regional Trial Courts.
The grounds for involuntary dissolution of a corporation under quo
warranto proceedings are:
(1) When the corporation has offended against a
provision of an act for its creation or renewal;
(2) When it has forfeited its privileges and franchises by
non-user;
(3) When it has committed or omitted an act which
amounts to a surrender of its corporate rights,
privileges or franchises;
(4) When it misused a right, privilege or franchise
conferred upon it by law, or when it has exercised a
right, privilege or franchise in contravention of law
(PNB v. CFI, 209 SCRA 294; 1992)
(4) Shortening of corporate term (Sec. 120)
NOTE: The simplest and most expedient way of effecting dissolution
is by shortening the corporate term and waiting for such term
to expire.
Illegal;
Fraudulent;
Dishonest;
Oppressive or unfairly prejudicial to the corporation
or any other SH;
Effects of Dissolution
Corporate existence continues for 3 years following dissolution for the ff.
purposes only:
Corporation can no longer continue its business, except for winding up.
NOTE that the subsequent dissolution of a corporation may not remove or impair any
right or remedy in favor of or against, nor any liability incurred by, any corporation, its
stockholders, members, directors, trustees or officers. (Sec. 145)
Can an action commenced within 3 years after the abolition of plaintiff corporation be continued
by the same after the expiration of said period?
The Corp. Law allows a corporation to continue as a body for 3 years after the time when
it would have been dissolved for the purposes of prosecuting and defending suits by or against
it. But at any time during the 3 years, the corporation should convey all its property to trustees so
that the latter may be the ones to continue on with such prosecution, with no time limit on its
hands. Since the case against Pore was strong, the corp.'s amended complaint was admitted and
the case was remanded to the lower court.
Liquidation
2.
3.
(3)
(4)
EXCEPTION:
TAN TIONG BIO V. CIR (G.R. No. L-15778; April 23, 1962)
The creditor of a dissolved corp. may follow its assets, as in the nature of a trust fund,
once they pass into the hands of the stockholders. The dissolution of a corp. does not extinguish
the debts due or owing to it.
An indebtedness of a corp. to the government for income and excess profit taxes is not
extinguished by the dissolution of the corp. The hands of government cannot, of course, collect
taxes from a defunct corporation, it loses thereby none of its rights to assess taxes which had
been due from the corporation, and to collect them from persons, who by reason of transactions
with the corporation hold property against which the tax can be enforced and that the legal death
of the corporation no more prevents such action than would the physical death of an individual
prevent the government from assessing taxes against him and collecting them from his
administrator, who holds the property which the decedent had formerly possessed. Thus,
petitioners can be held personally liable for the corporation's taxes, being successors-in-interest
of the defunct corporation.
All liabilities and obligations of the corporation shall be paid, satisfied, and
discharged, or adequate provision shall be made therefor.
(2)
(3)
(4)
(5)
CORPORATE COMBINATIONS
Techniques to achieve corporate combinations
(1) Merger (A + B = A)
(2) Consolidation (A + B = C)
(3) Sale of substantially all corporate assets and purchase thereof by another
corporation;
(4) Acquisition of all / substantially all of the stock of one corporation from its
SHs in exchange for the stock of the acquiring corporation
Merger or Consolidation
merger
If consolidation: the consolidated corporation designated in the plan of
Consolidation.
(2) The separate existence of the constituent corporations shall cease, except
that of the surviving or consolidated corporation.
(3) The surviving or consolidated corporation shall possess all rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of
a corporation organized under the Corporation Code.
(4) The surviving or consolidated corporation shall thereupon and thereafter
possess all the rights, privileges, immunities and franchises of each of the
constituent corporations;
(5) All property (real or personal) and all receivables due on whatever account
(including subscriptions to shares and other choses in action), and all and
every other interest of, or belong to, or due to each constituent corporation,
shall be deemed transferred and vested in such surviving or consolidated
corporation without further act or deed.
(6) The surviving or consolidated corporation shall be responsible and liable for
all the liabilities and obligations of each of the constituent corporations in the
same manner as if such surviving or consolidated corporation had itself
incurred such liabilities or obligations; and any pending claim, action or
proceeding brought by or against any of such constituent corporations may
be prosecuted by or against the surviving or consolidated corporation.
(Note: The merger or consolidation does not impair the rights of creditors or
liens upon the property of any such constituent corporations.)
state, such foreign corporation shall file a copy of the articles or merger or
consolidation with the SEC and the appropriate government agencies within
60 days after such merger or consolidation becomes effective. Such copy of
the articles must be duly authenticated by the proper officials of the country
or state under the laws of which merger or consolidation was effected.
If the absorbed corporation in such a merger / consolidation happens to
be the foreign corporation doing business in the Philippines, it shall file a
petition for withdrawal of its license in accordance with Sec. 136.
(1) If the disposition is necessary in the usual and regular course of business; or
(2) If the proceeds of the disposition be appropriated for the conduct of its
remaining business (Sec. 40)
IS THE APPRAISAL RIGHT AVAILABLE TO DISSENTING STOCKHOLDERS?
Yes. However, it must be stressed that this right is generally available only to
dissenting stockholders of the selling corporation, not the purchasing corporation. (It
can be argued, though, that in instances wherein the purchase constitutes an investment
in a purpose other than its primary purpose, stockholders' approval of such investment is
necessary, and anyone who objects thereto will have the appraisal right under Sec. 42.)
Exchange of stocks
FOREIGN CORPORATIONS
WHAT IS A FOREIGN CORPORATION? (Sec. 123)
A corporation formed and organized under laws other than those of the
Philippines, regardless of the citizenship of the incorporators and stockholders. Such
corporation must have been organized and must operate in a country which allows
Filipino citizens and corporations to do business there.
In times of war:
100% EQUITY:
Small-scale mining
Utilization of marine resources
Ownership, operation, and management of cockpits;
Manufacture, repair, stockpiling of nuclear, biological, chemical,
and radiological weapons;
Note: Retail trade is no longer required to be 100% Filipino-owned on account
of the Retail Trade Liberalization Act.
75%-25% EQUITY:
70%-30% EQUITY:
Advertising
60%-40% EQUITY:
Other industries.
Application under oath setting forth the information specified in Sec. 125;
Statement under oath of the president or any other person authorized by the
corporation showing that the applicant is solvent and in good financial
condition, and setting forth the assets and liabilities of the corporation within
1 year immediately prior to the application.
Once the licensee ceases to do business in the Philippines, these deposited securities shall be returned,
upon the licensee's application and proof to the satisfaction of the SEC that the licensee has no liability to
Philippine residents or the Philippine government.
Note: Foreign banking and insurance corporations are the exceptions to this requirement.
The designation of a resident agent is a condition precedent to the issuance of the license to
transact business in the Philippines.
WHO:
PURPOSE:
(1) The corporation will not be permitted to maintain agency in the Philippines;
(2) The corporation will be subject to penalties and fines;
(3) The corporation will not be permitted to maintain or intervene in any action before
Philippine courts or administrative agencies; it can be SUED.
Isolated transactions
that it did not show that plaintiff had complied with the law regarding corp. desiring to do
business in the Phil., nor that the plaintiff was authorized to do business in the Phil.
The Supreme Court, in ruling for Marshall Wells, stated that the object of the statute was
to subject the foreign corp. doing business in the Phil. to the jurisdiction of its courts. The object
of the statute was not to prevent it from performing single acts but to prevent it from acquiring a
domicile for the purpose without taking the steps necessary to render it amenable to suit in the
local courts. The implication of the law is that it was never the purpose of the Legislature to
exclude a foreign corp. which happens to obtain an isolated order for business from the Phil.,
from securing redress in Phil. Courts, and thus, in effect to permit persons to avoid their contract
made with such foreign corporation.
Curing of defect
to maintain an action to protect its reputation, corporate name and goodwill. The right to use the
corporate name is a property right which the corp. may assert and protect in any of the courts of
the world.
FMC had appointed Jaime Catuira as its agent with authority to execute Employment
Contracts and receive, on behalf of the corp., legal services from, and be bound by processes of
the Phil. Courts, for as long as he remains an employee of FMS. If a foreign corp. not engaged
in business in the Phil., through an Agent, is not barred from seeking redress from courts in the
Phil., that same corp. cannot claim exemption done against a person or persons in the Phil..
NOTE:
Under Sec. 12, Rule 14 of the 1997 Rules of Civil Procedure, the term
"doing business" has been replaced with the phrase "has transacted
business," thereby allowing suits based on isolated transactions.
PACIFIC VEGETABLE OIL V. SINGSON (G.R. No. 7917; April 29, 1955)
This is an action instituted by the plaintiff, a foreign corporation, against the defendant to
recover a sum of money for damages suffered by the plaintiff as a consequence of the failure of
the defendant to deliver copra which he sold and bound himself to deliver to the plaintiff.
Defendant filed a motion to dismiss on the ground that the plaintiff failed to obtain a license to
transact business in the Phil and, consequently, it had no personality to file an action.
AETNA CASUALTY & SURETY CO. VS. PACIFIC STAR LINE (80 SCRA 635;
1977)
Aetna as subrogee of I. Shalom sued Pacific Star Line (PSL), the common carrier for the
loss of Linen & Cotton piece goods due to pilferage and damage amounting to US$2,300.00.
PSL contends that Aetna has no license to transact insurance business in the Philippines as
gathered from the Insurance Commission and SEC . It also argues that since said company has
filed 13 other civil suits, they should be considered as doing business here and not merely having
entered into an isolated transaction.
Based on rulings in Mentholatum and Eastboard Navigation, the Supreme Court held that
Aetna is not transacting business in the Philippines for which it needs to have a license. The
contract was entered into in New York and payment was made to the consignee in the New York
branch. Moreover, Aetna was not engaged in the business of insurance in the Philippines but was
merely collecting a claim assigned to it by consignee. Because it was not doing business in the
Philippines, it was not subject to Sec. 68-69 of the Corporation Law and therefore was not barred
from filing the instant case although it had not secured a license to transact insurance business in
the Philippines.
incumbent upon Topweld to know whether or not IRTI and ECED were properly authorized to
engage in such agreements. The Supreme Court held that both parties were guilty of violating
RA 5445. Being in pari delicto, Topweld was not entitled to the relief prayed for.
As a rule, jurisdiction over a foreign corporation is acquired by the courts through service of summons
on its resident agent.
If there is no assigned resident agent, the government official designated by law can receive the
summons on their behalf and transmit the same to them by registered mail within 10 days. This will
complete the service of the summons. Summons can also be served on any of the corporation's officers
or agents within the Philippines. (See Sec. 128; Rule 14, Sec. 12, Rules of Court. Note that while Sec.
128 presupposes that the foreign corporation has a license, Rule 14 does not make such an assumption.)
Note that if there is a designated agent, summons served upon the government official is not deemed
a valid process.
Johnlo Trading case holds that the service on the attorney of an FC who was also
charged with the duty of settling claims against it is valid since no other agent was
duly appointed.
Failure to file its annual report or pay any fees as required by the
Corporation Code;
(2)
(3)
(4)
(5)
(6)
Failure to pay any and all taxes, imposts, assessments or penalties, if any,
lawfully due to the Philippine government or any of its agencies or political
subdivisions;
(7)
(8)
(9)
Once a school, college or university has been granted government recognition by the
DECS, it must incorporate within 90 days from the date of such recognition, unless it
is expressly exempt by DECS for special reasons. (Act 2706, Sec. 5) In addition, it
must file a copy of its AOI and by-laws with the DECS. Without the favorable
recommendation of the DECS Secretary, the SEC will not accept or approve such
articles. (Sec. 107, Corporation Code)
Religious corporations
(Sec. 109-116)
Religious corporations are governed by Title XIII, Chapter II of the Corporation Code and
by the general provisions of the Code on non-stock corporations insofar as they may be
applicable. (Sec. 109)
Close Corporations
(Sec. 96-105)
WHAT ARE THE REQUISITES OF A CLOSE CORPORATION? (Sec. 96)
A close corporation, within the meaning of the Corporation Code, is one whose
articles of incorporation provide that:
(1) All the corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a
specified number of persons not exceeding 20;
(2) All the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by Title XII of
the Code; and
(3) The corporation shall not list in any stock exchange or make any
public offering of any of its stock of any class.
Notes:
Mining
Oil
Stock Exchange
Bank
Insurance
Public Utilities
Educational Institutions
Corporations declared vested with public interest
"Regular" Corporation
No. of stockholders
No limit
Management
Managed by Board of
Directors
Meetings
Pre-emptive right
Buy-back of shares
Resolution of
deadlocks
Dissolution
corporation
Appraisal Right
Close corporation
"Regular" corporation
When availed of
Only
the
grounds
enumerated in Sec. 81
and Sec. 42
Miscellaneous Provisions
(Sec. 137-149)
The SEC has the power to issue rules and regulations reasonably necessary to
enable it to perform its duties under the Code, particularly in the prevention of fraud
and abuses on the part of the controlling stockholders, members, directors, trustees
or officers. (Sec. 143)
Whenever the SEC conducts any examination of the operations, books and records
of any corporation, the results thereof must be kept strictly confidential, unless the
law requires them to be made public or where they are necessary evidence before
any court. (Sec. 142)
All domestic and foreign corporations doing business in the Philippines must submit
an annual report to the SEC of its operations, with a financial statement of its assets
and liabilities and such other requirements as the SEC may impose. (Sec. 141)
No right or remedy in favor of or against, nor any liability incurred by, any
corporation, its stockholders, members, directors, trustees or officers, may be
removed or impaired by the subsequent dissolution of said corporation or by any
subsequent amendment or repeal of the Code. (Sec. 145)
Violations of the Corporation Code not otherwise specifically penalized therein are
punishable by a fine of not less than P 1,000.00 but not more than P 10,000.00 or by
imprisonment for not less than 30 days but not more than 5 years, or both, in the
discretion of the court. If the violation is committed by a corporation, the same may
be dissolved in appropriate proceedings before the SEC. (Sec. 144)