CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 1

11/11/11 - Friday

Section 1. Title of the Code. - This Code shall be known as "The Corporation Code of the Philippines".

Story of Genesis:
Before God created man, he prepared the birds in the sky, the land...etc. to create the world. When everything was ready, from out
of mud he created Adam, but finding Adam very lonely, despite all that he created to make him happy. God being wise, he knows
what Adam exactly needed. He put him to sleep and out of his ribs, he made a woman.
Then, the woman found out from the snake and was deceived by him that if they ate the fruit from the Garden, they would become
like God. They then, realized that it was a deception from the devil, and when God, he said “uyy, what happened?”
They passed on the blame, from Adam to Eve and then to the snake. ;)

So that if you will compare genesis from the course, business organization, exactly the same. The basic form of business organization
is sole proprietorship where only one person carries on his business. And when God created man out of mud, then he whispered
into that mud, Adam came out. Like Genesis, it’s like the sole proprietorship.

Sole proprietorship needed a partner, and so partnership came out. Just like the Genesis, when God found out Adam lonely, he
made him a partner from his ribs named Eve. Everytime Eve gets home, he counted the ribs of Adam, to make sure there’s no other
woman in this world. That’s the beginning of their quarrel.

Now, because of the investment of Adam, the partnership flourished, that’s why Cain and Abel came out because of their industry.
DOING OVERTIME, NIGHT & DAY WORKING, DAY & NIGHT! ;) THEN, THE corporation was born.

PARTNERSHIP CORPORATION
-at least 2 -at least 5; not less than 5 and not more than 15
-contract and perfected by mere consent -a creation of law; derives its power & existence from law; law
provides for the requirements of a juridical person and how that
juridical person would carry out its power by electing its officers;
who has the sole authority to manage the corporation

The corporation is different from the partnership. It is a contract and perfected by mere consent. A corporation is not just a contract
among its stockholders, it is a tripartite agreement.
1. Contract between stockholders and corporation;
2. Contract between corporation and the state;
3. Contract between corporation and the public.

Sec. 5. Corporators and incorporators, stockholders and members. - Corporators are those who compose a corporation, whether
as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as
originally forming and composing the corporation and who are signatories thereof.

Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called
members.

STOCKHOLDERS & CORPORATION
The corporation exist because the law has granted it the power to exist, and not because the stockholders wanted to. And the law
would grant if the corporation would comply with the requirements and other terms and conditions under which the authority and
the power was connected. Thus, THE CORPORATION DOES NOT DERIVE ITS POWER FROM STOCKHOLDERS, BUT FROM THE LAW.
SO that it’s not accurate to say, that stockholders have authority over the corporation, although they would constitute the
corporation.
This is the reason why once the stockholders elect the board of directors which actually manages the corporation, the stockholders
cannot say that you’re decision as a board will not be approved by us.

Once the board is elected, it is answerable to the state.
The decisions of the board are not subject to the whim of the stockholders.
So long as the board complies with the law of the state who granted them the powers.
The decision of the board will stand, regardless of what the stockholders will decide.

But there are certain acts where the stockholders can opt to review the decisions of the BOARD, by way of exception. Although the
stockholders elect the members of the board, the board is not answerable to the stockholders but to the LAW.

Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5) but not more than
fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful
purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least one (1) share o f the
capital stock of the corporation.

The people who organized the corporation are called incorporators. Each incorporator is a stockholder. One may be a stockholder,
but not necessarily an incorporator. But an incorporator is necessarily a stockholder.
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Incorporators refer to those who started and pioneered the corporation. What they execute would be the articles of incorporation.
Article of incorporation – describes the substance of the corporation itself; basic info about corporation
- with the name of the corporation; how long will it intend to exist; to be learned later that max of 50 years and
extension of another 50 years. The name of the incorporators is important because they would be the one to sign the
articles of incorporation.
- the portion where the state can identify who are responsible for these corporation. The incorporators will invest and
these will represent the stockholdings. The stocks will then form part of the capital of the corporation.
- in the article of incorporation, the authorized capital stock will be indicated which is actually the maximum amount
that the corporation intends to invest and the maximum amount that the law will allow the corporation to have as
capital.
- It does not mean that whatever is the maximum authorized capital amount, that will be the amount immediately
invested. It is just a maximum. It may be fully paid or subscribed later and may not be.
- The law only requires that out of the authorized capital stock, only 25% may be subscribed which refer to the contract
of the corporation.
- SUSCRIBED refers to the contract with the corporation. Out of how much the individual incorporator stockholder would
be willing to invest. That investment of the individual incorporators and the total of all the actual subscription should
not be less than 25% of the authorized capital stock. Does not mean that if they make that commitment they will
immediately pay.
- The law only requires that out of the subscribed capital stock, only need 25% of that subscription to be actually paid as
capital.
o Ex: out of the 100,000 shares, I need not come out w/ the 100,000 shares. Law requires that at least only
20,000 or 25%. So of out of your subscribed capital stock, you need to subscribed, then out of your
subscription only 25% will have to be paid.

CORPORATION & THE STATE
- AFTER THE ARTICLES OF INCORPORATION, we go to government/state through Securities and Exchange Commission. It
processes, monitors, regulates and even disciplines corporations and officers.
- You have to file AOI to the SEC, have an option to file it by itself or already include the articles of incorporation & by-
laws of the corporation.
- BY-LAWS: rules of procedure among and within the corporation. Rules as to whom and what officers to elect, how
elected, number of votes required, when meetings held (monthly, annual, special), how are meetings called and who
will call. The officers, their duties and functions as President, VP, chairman. Election process, votes required.
- By laws may accompany the articles of incorporation.
- SEC will check WON the contents of Art of Incorporation are true and correct, whether the amounts are correct.
o What is proof that payments of subscription are made?
 The treasurer’s affidavit.
Appoint a temporary or active treasurer who will deposit it to the bank and bank will issue an
acknowledgement receipt stating that the amount of payments of the subscription is on deposit with
them. The certificate will be incorporated with the treasurer’s affidavit.
o Once established, the SEC will issue the Birth certificate of the corporation. The SEC will issue the certificate of
incorporation. The official document that shows the existence of a duly organized corporation under
Philippine law.
o Once given, officers will call all the stockholders. In that meeting, they will elect board of directors. It will
depend on how many is indicated in the articles of incorporation. Also, they may invite other parties to
become stockholders. The parties may subscribe for certain shares, but no longer incorporators because their
names are fixed.
o The board of directors once created will have to organize themselves.
o BOARD OF DIRECTORS MEETING:
 Members of the board will organize themselves. Elect the chairman, president, secretary, treasurer
and other officers mentioned in the by-laws.
o Once organized, they are now ready to function. Now have the BOARD to whom management is given, then
board may appoint other officers mentioned in the by-laws.
- Needs secretary, whom must be under ATTY.E, 10,000 per meeting! (haha)
- Function of secretary: guide the board in meeting, assist stockholder in meeting, prepare the issuances, stock
certificates.
- Now that you are issued the certificate of incorporation. SEC will tell you, that this is already approved.
o Required to submit 2 books:
 Stock and transfer book - record of every movement of stocks; one portion has ledger which contains
names of all stockholders, certificate number issued to them; whenever you’d like to
assign/transfer/sell stocks, you’ll have to endorse the certificates, and the endorsement will be
reflected in this book
 Who is the previous holder, whom the certificate was issued, number of stocks indicated, or
carried in the certificate
 Book of stocks certificates - like diploma, used as proof that one is a stockholder.

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o So, as a corporate secretary, you’ll have to maintain these books and coordinate with SEC and submit the
annual reports of the corporation. Annual reports include financial statements, general info sheet (an update,
showing the basic info of the corporation, officers, stockholders, directors, capitalization)

- MONEY MART/ STOCK MARKET
o AS distinguished from Private Corporation, they are called Publicly Listed corporation. Because the corporation
is listed with the Phil stock exchange, which means that stock is for sale to anyone interested.
o The Phil stock exchange is just a stock market where the sellers & brokers, buyers and agents are there.
 LIKE if they buy certain stocks today, sell it tomorrow or wait until price go up. Later the broker would
call back, that he has already purchase 1,000 stocks at a certain price. Following day, if price go up,
5cents, then you sell stocks that have been brought yesterday. Brought 100,000 shares and gain of
5cents, you’ll have 500,000.
o Not just any corporation can sell their shares in stock market, but has to register with the Philippine stock
exchange. It’s not a public corporation, but a publicly listed corporation because there’s a different public
corporation which has purpose to govern certain portions of the state like the barangays, municipalities, cities,
province., countries, states.
o There are several types of other corporations:
 1. Private corporations
 Publicly listed corporation
 Corporations engaged in public service or quasi-public corporation – they render public
service; telecommunications, power corporations, transportations,; governed by Public
Service Act;
 Profit/non profit
o Non-profit does not mean that you have to sell without profit, simply means that all
profits will not be distributed as dividends, but only be used for that corporation to
enhance and improve the facilities. The members will get their share not in the
guise of profits but in the facilities for their convenience and comfort.
 Non-stock/stock
o Although non stock is not intended for profit, but there prices are much higher than
other corporations for profit.
 Religious corporations

11/16/11 – Wednesday

Sec. 2. Corporation defined. - A corporation is an artificial being created by operation of law, having the right of succession and
the powers, attributes and properties expressly authorized by law or incident to its existence.

Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation
unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation
may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of
incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the
original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the
Securities and Exchange Commission.

Sec. 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have
corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission
issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their
successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of
time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law.

Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. - If a corporation does not formally
organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its
incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has
commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5)
years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation.

This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its
works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities
and Exchange Commission.

Q: Definition of Corporation
A: 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. It is a creation of law, it’s the law which grants authority to exist.
Law requires for it to continue existing. It must exist in compliance with all the rules and regulations. And it is supposed to be a
separate personality.

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Q: So that one of the SH owes Mr. X, can he go to corporation and demand corporation to pay debt of SH?
A: no. corporation has nothing to do with the SH debt

Q: Rights of a corporation
A: Due process. Corporation also has the right against unreasonable search and seizure.

Q: Why this latter right? So that if an agent from DOLE wanted to search records of a corporation, can he do that?
A: Yes. That’s an exception. There is a special provision of labor code which gives DOLE the power to inspect records. Only the
records mentioned in the law, otherwise it will be violative of the right against illegal search.

Q: So that if that employee was threatened by manager and he went to labor department and claim illegal dismissal, so that DOLE
came and said, where is your gun, we want to search for the gun, can that be done?
A: NO unless DOLE secures a Search Warrant. DOLE has right to inspect and examine but this time it’s not part of your duty to look
for the gun so Search Warrant is needed.

As a juridical person, corporation is entitled to exercise its right.

Q: SH are all residing at a condominium, where should the office of corporation be?
A: Principal place of the business. That does not mean the residence of SH is resident of corporation because of their separate
personality.

Q: Right to life?
A: Corporation is not entitled to right to life. Only natural persons are entitled to right to life. Although, the corporation has its life
which refers to the term of its existence.

The corporation in so far as existence is concerned cannot be dissolved without due process of law.

Q: Liberty?
A: Corporation is not entitled to right to liberty. You cannot send corporation to jail, because it is only an artificial being. Although,
there are lots of laws which impose criminal liability not to corporation but perhaps to directors or officers.

In tax laws, there could be provision there that in case a violation is committed by corporation the officers, presidents, and directors
may be held criminally liable if they were responsible of the approval of criminal acts. It does not mean that corporation can just
violate any law with assurance that it will not be criminally liable.

Provisions are clear that should the act of corporation make that corporation criminally liable then liability may be imposed on its
officers.

Q: Damages?
A: While corporation does not suffer mental anguish because he does not have the facilities to suffer that type of damages, it may
suffer damages if its reputation is being scandalized or besmirched. Like for ex. libelous item in newspaper and due to this
corporation suffered maybe having less number of customers and less volume of sales, then corporation may file for damages. Not
sleepless nights, not untold worries and mental anguish because corporation is not capable. But besmirched reputation? yes. It
refers to the good will.

Here, when we say a separate person, we are drawing the line between SH itself and corporation. SH are mere investors of
corporation. They do not constitute the corporation itself and so that once certificate of incorporation is granted. Corporation begins
to exist, separate personality exists and separate from SH. Corporation extends veil of protection.
Veil of corporate fiction:
Corporation is covered by that veil. Once is the veil is placed by the law, that veil protects whoever is under the veil. The public will
have to rely on that veil and deal with that veil. So that any liability will not affect whoever is under that veil. Any potential
transaction that the group has entered will never involve whoever is under that veil. You are now dealing with the corporation not
the people under it.

Q: However there are instances will allow you to lift that veil, but perhaps to sue the individuals under that veil. In other words, it is
not absolute that the individuals will forever be protected. Law allows instances that we can pierce the veil of corporate fiction.
Those are occasions when individual SH composing the group supposedly protecting the veil may be personally liable:

A: 4 instances when lifting of veil is allowed:
1. When intended to cover a fraud
2. When intended to defeat public convenience
3. Justify wrong
4. Defend a crime

Under these, SH did not have an honest intention that corporation rather under these instances it could be proven. And if it could be
proven that corporation was formed to commit any of above instances, then Stockholders may become personally liable and the veil
of corporate entity that should protect them has been pierced.

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So they did. why a corporation ceases to exist because we learned in succession that everybody has an heir. Definition of a Corporation. What happens to the corporation? ANS: The corporation will still exist notwithstanding the death of the 5 stockholders since it has a right of succession. So the notice of the meeting was served. After the meeting which lasted for 1 hour they stayed for 1 more week together with their spouses. They chartered a 737. …and so. The protection extended by the law covers only legitimate objectives. Instances when the lifting of the corporate veil is allowed (4): 1. Their death does not dissolve the corporation because we learned in succession that the heir assumes the estate at the moment of death. Defeat public convenience 2. And being so successful they decided for the first time to hold their stockholders’ meeting in Singapore. they came home. a notice for stockholders’ meeting was served. Protect fraud 4. And to achieve that intention. Differentiate an executor from an administrator: 1. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 5 Q: Example of an instance to Cover Fraud? In our situation. Of course if no heir would come out. The 5 of them were necessarily the directors. D. Justify wrong 3. the pilot announced: “We wish to inform you that we are encountering…encountering…encountering… encountering…” Communications got lost and nothing has been heard of the aircraft. Here. their stockholdings would now be transferred to the heirs. even if all the stockholders would die – of course it has a right of succession – the corporation remains to exist. 2. In other words. How do we demonstrate that? 11/18/11 – Friday Doctrine of Piercing the Veil of Corporate Entity A. After going around in Singapore. even telling them to bring along their spouses. So that it does not give us any reason why. or executors. the property is escheated in favor of the state. The corporation does not die with the death of the stockholders. defeat public convenience. The eldest among the stockholders had an eldest son. An insolvent created a corporation to evade his obligations to the creditors so he transferred his properties to the corporation in order that those creditors can no longer go against the properties which were already transferred to the said corporation. Section 2 A corporation is an artificial being created by operation of law having the right of succession and the powers. Nothing has been heard of the stockholders. If all the partners died. In other words. “Anak kang stockholder X?” [Eldest Son] “OJA! OJA! OJA!” (HA! HA!) The other stockholders did not have children. we have to establish that the corporation was organized precisely to cover up fraud. The corporation is being used by the stockholders as a consignee to receive the illegal goods and they used the corporate personality as a shield for their illegal schemes or activities. for all we know there could be executors. with more reason that the partnership will be dissolved. he was asked. protect fraud. And we learned in partnership that if a partner dies. C. Executor – appointed in the will to administer the properties 2. then it has violated the very purpose for which the state has created them. the corporation continues to exist and this is another advantage of a corporation. When he was served with the notice. Right of Succession Here are five stockholders of a very successful corporation. After. Defend a crime B. But if the intention is to commit a crime. with everything taken care of by the board. there must be a clear intention of committing a crime…defrauding others…that intention is there. attributes and properties expressly authorized by law or incident to its existence. Administrator – appointed by the court if there is no will Corporate Existence cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . Examples Given (2): 1. That’s the purpose of the law in covering these stockholders with the protective mantle of corporate fiction. he decided to create a corporation to evade any personal obligation. the corporate veil may be lifted and so the officers and the directors would be personally liable. Therefore. Of course they were not required to present any marriage certificate so they would not be sure xxx. Because we said that it is created by the law or the state then its existence must be in accordance with this creation. It so happened that all of the stockholders who died were fairly young. or administrators could be designated. So who will appear in the stockholders’ meeting? ANS: A guardian may be appointed on the minor son’s behalf. the partnership ceases to exist. So guardians may be appointed. So. of course theoretically.

noticed that its assets are being underutilized. you would still be able to renew the corporation. when it is in furtherance of the business b. So it’s never in furtherance of the academic courses. Another case involving a cement corporation: Since a cement factory has a huge power requirement. but if it doesn’t seem to be good. Fr. USC offers academic courses. President would not be happy to see the building. you should worry if the ships are anchored in the pier.] So one time Father President was around after 8:30. Though none is indicated that it can expropriate land. Such is incidental only and they have the right to provide themselves with their own power. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 6 A. It is part of the HRM course. (3) In the pier. as we know. Of course while it could be renewable for another 50 years. In that case. The power to do business and manage its affairs cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . However. the purpose of the railroad company would be limited or useless since they cannot operate without the rails. all assets as much as possible must be earning 24/7. is a corporation. They could shorten their period. it should be allowed to do so. baccalaureate degree or any other four year course. plus 50 = 71. the corporation brought in and assembled a big power plant. and your garage is always filled up you cannot even park your car because all your buses are there. So that I if you were a stockholder at the age of 21. Creation Created by mere agreement of the Created by law or operation of law parties 2. Otherwise. The buses should be in the streets. you see 6 container vans. you are a shipping company. They decided to use all the rooms for KTV in line with their educational objective to teach Cebuanos not only music but dancing as well. As a business policy. Those vans are just lying in the pier. Powers of a Corporation Express – those expressly authorized by law Implied – those incidental to its existence Example: So that USC. However. USC. Management When management is not agreed upon. They have more vans than what they need. So these are the indicators. because USC having been granted to run. let’s assume. renewable for another 50 years. They are not earning as much as they should. The local power company opposed and said that the cement corporation does not have that power since they (the power company) were the ones who were granted the franchise to operate within the entire province. and the building is to be used only until 8:30. [Example where the assets of a business must be earning: (1) if you are in a transportation business. the corporation should be allowed to operate and maintain an electric plant for the purpose exclusively of supplying electricity to its cement factory. it will assure you that the company who owns those vans is not earning money. Other Examples: A If a railroad company would operate railways from Carcar to Danao. you will not be happy to see those buses in the garage. Distinctions Between a Partnership and a Corporation (13) Partnership Corporation 1. They noticed that this building for example after 8:30 becomes idle. Question. They spent millions. There you train the students. They should be moving. when it is reasonably necessary to the exercise of the business Putting a KTV is not in furtherance of the business since USC provides education. B. It is allowed since it is an activity closely related to the courses offered. This is not just a dancing or driving school. (2) If you own buses. is the KTV incidental? ANS: Apply the two tests in determining the implied powers of the corporation: a. Its main purpose is to provide education so that the students would earn a degree: a masteral degree. So he called a meeting and then somebody proposed to have a USC (Universal Songhits Corporation) KTV. They installed the power plant within the cement factory. is engaged in operating. So the courses offered should be related to the academic purpose. B. at the age of 121. courses that will give you a degree. it earns money. if the yard is empty. They have less cargoes than what they expected. it means that the van is moving. Those are the indicators that they are earning. which is the main purpose of the university. and so. It is a part of the educational purpose since the staff is composed students. If it turns out to be unsuccessful they could shorten their existence to 5 years. plus another 50. and maintain an educational institution. Number of incorporators May be organized by at least 2 persons Requires at least 5 incorporators 3. operate. Commencement of From the moment of execution of the From the date of issuance of the certificate of juridical personality contract of partnership incorporation by SEC 4. maintaining and managing a hotel (SC hotel). the building was dark and nobody was inside. it can be dissolved. they have to expropriate the parcel of land where the railways will pass. In the articles of incorporation they could designate that their existence would be for 50 years. It exists for 50 years.. that’s the only indication that it is earning. Powers May exercise any power authorized by Can exercise only the powers expressly granted the partners provided it is not contra by law or implied from those granted or incident bonus mores to its existence 5.

that’s the commitment of the incorporators.At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation. That in no case shall the paid-up capital be less than five Thousand (P5. that is their individual commitment. Capitalization Sec. Meaning. Sec. and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription. you may pay that depending on your agreement. In a non-stock corporation. So in this example. whether fully paid or not. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 7 every partner is an agent of the is vested in the board of directors or trustees partnership 6. Firm name Limited partnership is required by law to May adopt any name provided it is not the same add the word “Ltd. Rights of succession None Has 8. or in the absence of a fixed date or dates. Transferability of interest Partners cannot transfer his interest in Stockholder has generally the right to transfer his partnership so as to make the transferee shares without prior consent of the other a partner without the unanimous consent stockholders because corporation is not based on of all the existing partners because the trust partnership is based on trust 10. or according to the decision of the board. Minimum capital stock required of stock corporations. Php10M the most. it earns profits but it uses those profits to improve its facilities or services. they need not make that investment immediately.000. upon call for payment by the board of directors: Provided. the balance to be payable on a date or dates fixed in the contract of subscription without need of call. Subscribed Capital Stock (SCS) – it is the amount of the capital stock subscribed. USC for example uses its profits to construct buildings and to improve its facilities. . Dissolution May be dissolved at any time by any or all Can only be dissolved with the consent of the of the partners state 13. In a stock corporation. Governing law Governed by the NCC Governed by the Corporation Code Stock and Non-Stock Corporations Definition Stock – a corporation which has capital stock divided into shares and is authorized to distribute to the holders of such shares. Extent of liability to third Partners are liable personally and Stockholders are liable only to the extent of the rd persons subsidiarily for partnership debts to 3 shares subscribed by them persons 9. Amount of capital stock to be subscribed and paid for the purposes of incorporation. They commit that out of the Php10 million. They could increase it anytime. You are only required to pay 25% Paid-up Capital Stock (PCS). Term of existence May be established for any period of time May not be formed for a term in excess of 50 stipulated by the partners years extendible to not more than 50 years in any one instance 11. . 13. it earns profits and distributes them as dividends to its stockholders.” to its name as or similar to any registered firm name 12. The law requires the incorporators that out of the Php 10M ACS. however.5M At least 25% of the ACS Paid-up Capital Stock (PCS) Php625K At least 25% of the SCS Authorized Capital Stock (ACS) – maximum amount which the law allows that corporation to invest.00) pesos. they will subscribe only to at least 25%. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . Later on if business is good.Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law. Illustration: Authorized Capital Stock (ACS) Php10M Maximum Subscribed Capital Stock (SCS) Php2. they will commit to subscribe. Out of the entire ACS. 12. dividends or allotments of the surplus profits on the basis of the shares held Non-stock – a corporation which does not issue stocks nor distribute dividends to their members Profits of Stock and Non-stock Corporations 1. Effect of mismanagement A partner as such can sue a co-partner The suit against a member of the board who who mismanages mismanages must be in the name of the corporation 7. they could always amend the articles and maybe increase the ACS. 2. and subject to the provisions of the following section. And the law does not require you to pay that immediately.

As to governing law  a. Public – organized for the government of a portion of the State for the general good and welfare  b. there is no need for the division of capital into shares because it is useless. So. All other corporations are non-stock corporations. Because in a stock corporation. a stock corporation simply assigns a value to each share. we purposely divided it into shares to come out with the par value so that later on it would be used to measure dividends. benefit or end 3. Sec. Alta Vista.00 share of the profits or dividends. Not just anyone could be a member. In non-stock corporations. The profits of these non-stock corporations are ploughed back in terms of improved facilities for the members. As to purpose  a. When we say call. your behavioral patterns. Private – by private persons alone or with the State 2. Eventually they have to limit the number of shares. Private – Law on private corporations 4. you have to divide according to your contribution. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. There’s a membership board and the members of the board will deliberate. . so that if Php10M is the ACS. Corporations created by special laws or charters. If this is not enough to pay all the obligations. each share would be entitled to Php 1. there are shares issued for a fixed price. insofar as they are applicable. you have Php 100. when the BODs make a call. So they have to know your character. So if you have 100 shares. Example: Membership in clubs: Country Club. If after 1 year of operations. Public – by State only  b. Private – formed for some private purpose. The members will decide. But in a non-stock corporation. I have committed to pay it. NON-STOCK CORPORATION: In a non-stock corporation. Although I have not fully paid it yet (the subscription). So this is a stock corporation. 4. There is no such thing as stock partnership. we do not have to divide them into shares because we do not distribute profits. That is why even if you have all the millions. So nobody will know who objected to whom. the par value (value of the share) would be Php 10. Casino Español. 3. As to organizers  a. the white ball and black ball. Though a non-stock corporation may not distribute profits. Sec. In the bulletins of these places. better food and more options insofar as facilities are concerned. I can be compelled to pay the SCS not because I have a share in the losses but because I have earlier committed to pay the SCS. The rest depends upon their agreement or maybe depends upon the BODs. As a matter of fact. The value will be used to measure your share in the corporation. dividends or allotments of the surplus profits on the basis of the shares held. If you think you have objections on this applicant. the BODs are now requiring all the stockholders to pay off any unpaid subscription they may have. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 8 So this corporation needs only 625k to start it. STOCK CORPORATION: If this is a stock corporation. you would have to apply for membership and there is a committee on admission. you will drop your white ball. their margin of profits most of the time are much wider than ordinary stock corporations. As to legal right to corporate existence cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . Public – special laws and LGC  b. it does not mean that the corporation will not realize profits.Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them. The purpose of identifying the shares is to measure their share in the losses or their share in the profits. Classifications of a Corporation: 1. etc.00 profit (Php 1M profits / 1 million shares). you would still have to apply for membership. That’s the decision of the board. They are just shares issued to those whoever would want to avail of the facilities of the club for example. They have two balls. So each share is now given a par value. we have profits amounting to Php 1M and we wanted to distribute these assets to the stockholders. it might get crowded. Here.00 per share (Php 10M ACS divided by 1 million shares). . you drop your black ball. If you think he is to be admitted. the capital is divided into shares and such corporation is authorized to distribute to the holders of such shares. you do not have to share losses because we said that my liability is only up to the extent of my subscription. Assuming all the 1 million shares have been subscribed to.Corporations formed or organized under this Code may be stock or non-stock corporations. but they are not based on capital. and you want to divide this into 1 million shares. supplemented by the provisions of this Code. Classes of corporations. Sometimes they limit the number of members because if it becomes too many. of course. There is no need to measure because in a partnership. You don’t divide losses here unlike partnership.

As to whether they are for charitable purposes or not  a. laws  b. PCGG are NOT Public Corporations.000 500K 125. etc 11/21/11 – Monday Stock Corporations Why should divide their capital and distribute it to shares? -to determine their share in profits Authorized Capital Stock (ACS) -maximum that corporation will invest -mentioned in Articles of Incorporation (AOI) -cannot invest more.000 500K 125. how much will they have? -500K each (2. Domestic – corporation formed. DND. Ecclesiastical – one organized for religious purposes  b.000 D 500. you have a par value of 1Peso per share.5M PCS – at least 25% of SCS = 625K If we have 5 stockholders and all of them agree that they will subscribe equally. DOJ. a special form of corporation usually associated with the clergy 8. 6.000 To simplify things. So if ACS is 10M. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . De jure – corporation created in strict or substantial conformity with the mandatory statutory requirements for incorporation and the right of which to exist as a corporation cannot be successfully attacked or questioned by any party even in a direct proceeding for that purpose by the stare  b. Foreign – a corporation formed. organized or existing under any laws other than those of the Phils.5M 625K -if 500. barangays. As to laws of incorporation  a.5M divided by 5) Subscriptions SCS (25% of ACS) PCS (25% of SCS) A 500. organized or existing under Phil. C.000 E 500.000 500K 125. and supposing you divide ACS into 10M shares. the law states that in a stock corporation. Civil – one established for business or profit Public Corporations A. As to whether they are open to the public or not  a.000 is their subscription. Lay – one organized for a purpose other than for religion 9.000 C 500.000 B 500. Public Corporations are those organized for the government of a portion of the State for the general good and welfare. DepEd. DSWD. Corporation sole – a corporation consisting of only one person or member. As to number of persons who compose them  a. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 9  a. you divide your capital stock into shares. Eleemosynary – one established for or devoted to charitable purposes or those supported by charity  b.000 500K 125. Example: LGUs. As to whether they are for religious purposes or not  a.000 Total: 2. Open – one which is open to any person who may wish to become a stockholder or member thereto  b. De facto – organized with a colorable compliance with the requirements of a valid law and its existence cannot be inquired collaterally but such inquiry may be made by the SolGen in quo warranto proceeding 5. Aggregate – a corporation consisting of more than one person or member  b.000 500K 125. Close – those whose shares of stock are held by limited number of persons like the family or other closely-knit group 7. they will have to pay 25% of SCS which is 125. unless they amend the AOI Subscribed Capital Stock (SCS) -stocks subscribed by an individual/stockholder -at least 25% of ACS Paid-Up Capital Stock (PCS) -subscribed stocks that are actually paid for -at least 25% of SCS Example: ACS – 10M SCS – at least 25% of ACS = 2. B.

000 -so. aside from profits.000 x 5 = 625.000 times 5) Distribution of Losses But.000 additional stocks equals 540. only exist in fact but not in law Close: limited to certain groups of people. called Cash Dividends. or Stock Dividends. will just distribute stocks. how do we distribute losses? -not required to put up additional because there is still unpaid commitment of 1.000 shares then total subscribed capital stock is now 2.5M – 625.875.000 shares because it is at 1Peso per share If we have 200. since each stockholder has 540.e. Distribution of Profits If profit is worth 200. what happens? -no longer liable for anything more because our liability is limited to our subscriptions When will they pay unpaid subscriptions? -anytime the board calls for payment Non-Stock Corporation On the other hand. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 10 So that.000 PCS x 1Peso per share) Purpose of dividing stocks into shares: -to measure later on your dividends which will represent your share in the profits Kinds of Dividends If there are profits later.5M) Subtract PCS from SCS (2. and these dividends usually are declared in cash.7M (540. in non-stock corporation? -no need for division of shares Why no need to divide capital into stocks? -because they do not distribute profits to the stockholders -we could say that purpose of dividing capital into shares of stock is to be able to measure their share in the profits because in a non- stock corporation.000) Get total amount of SCS (500. how much share would A have? -125.000 = 1.875. use this. how many shares will this be? -200. board may decide that part of these profits may be distributed as dividends. it goes to the corporation If there are still losses after fully paying the subscriptions. we also have losses.000 X 5 = 2.000 each (200.000 stocks for each stockholder. there is no sharing of profits thus there is no need to convert or divide capital into shares Other Classes of Corporation De Jure: compliance with requirements De Facto: no compliance with requirements. Collect the unpaid commitment.000.000 shares divided by 5 stockholders) -So. family Open: open to the public Parent or holding: control member of board in that other corporation Subsidiary: other corporation held by another corporation who owns majority Affiliated: one corporation stockholder of another Sister: activities of two corporations are closely-related Parties of a Corporation Corporators: compose a corporation whether stockholders or members cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . and you have PCS of 125.000 and there is unpaid commitment of 1. If no property or cash dividends.000 plus 40. if par value is 1Peso per share.000 each. what happens? -stockholders still have to pay the unpaid commitment -use the unpaid commitment to settle the 200.000.000 shares (125. But there are occasions when corporation will not have cash but have excess properties and thus decide to distribute properties and thus called Property Dividends. we have excess shares so instead of distributing cash or property.875. their original stockholding which is 500. -Thus.000 profit equivalent to 200.875. If the loss is only 200. how much additional shares of stock will each stockholder have? -40.000 loss -if there is extra.000 How to get unpaid commitment (stocks that were not paid for): Get total amount of PCS (125.000 shares. i.000) Unpaid Commitment is 1.

On the other hand. this is the business operating with hundred units of buses. If profits are good. This is a holding company because they are not engaged in any specific business and they only holding the majority or controlling interest of all these corporations. Other than realizing profits here. so if their buses need repairs. 6. So that’s the purpose of corporations maintained by a mother corporation. Domestic – formed. and this other corporation could be entirely owned by an existing company. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 11 Incorporators: originally forming and composing the corporation Stockholders: corporators in a stock corporation Members: corporators of a non-stock corporation Promoters: takes initiative in founding and organizing the business Underwriter: guarantees distribution and sale of securities of a company 11/23/11 – Wednesday Q: Classification of Corporations as to relationship 1. So the corporation will be under the control of X and so the business of these could be very related.975. or both. they may further operate another one. other customers may avail. the thing is they control all these.000 . So there’s only 25k left for other parties. exist under Philippine Law 2. If Y corp has a subscribed capital stock of 10M.The shares of stock of stock corporations may be divided into classes or series of shares. privileges or restrictions as may be stated in the articles of cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . One owns the other and management is the same. So we have profits here and there. Mother corporation may refer to operating corporation. namely Z Corp. All these Stockholdings of these corporations are being controlled by AEV. banks. Parent-holding corporation 2. An Example could be AEV corporation which simply makes investments to other corporation. Affiliated corporation There could be several corporations operating and existing. If I’m president of many corporations. So other than selling the spare parts and tires to X incorporated. T (treasurer) owns 1. Holding corporation need not be an operation.000 . they also have profits in Y corp. they have their own shop and at the same time. So those are the related corporations. It is not engaged in specific business. meaning. Foreign – formed. Janitor owns 1. any of which classes or series of shares may have such rights. Classification of shares. M (manager) owns 2000 . condominiums and some others. So each incorporated may operate or may maintain or organize another corporation. before shipping. May be they owned 80% or 60%. . all of these shares of stock of one corporation may be owned by another corporation. perhaps X incorporated could be the owner of 9. President of one corporation could also be the president of the other but since these corporations are separate from each other. Corporation sole – only one corporator Also as to State Law/citizenship 1. Perhaps this is engaged in spare parts or tires. Y corp. It is only engaged in maintaining corporations. my influence on corporations is very critical. Affiliates and Subsidiaries are very closely related. The same stockholdings but this time operating machine shop where they have to repair trucks and buses. existing other than Philippine Law Q: Who are promoters? A: the one who initiate in founding or organizing the business. It is into power. they also sell spare parts and tires to other. S (secretary) owns 1. AEV is a publicly listed corporation. Q: Other corporations As to number of persons 1.000 pesos.000 Total = 10M These are just what we called nominees. Basically. one could be president of many corporations. Sec. it is possible that one corporation is entirely owned by another. Example: Here is X incorporated engaged in land transportation. at the same time assuring X corporation of spare parts. Corporation aggregate – more than one corporators 2. Many of these transportation corporations operate hundreds of buses and perhaps it will save you if you supply your own spare parts. namely: . Subsidiary corporation 3. All the profits go to AEV. the prices of shares of AEV will be going high and SH will be assured of returns of dividends. They only hold a very small portion of the capital. that they will never run out of tires.

They stop there. 5. . Common shares – entitled pro rata distribution of profits. Redeemable shares. mortgage. classify its shares for the purpose of insuring compliance with constitutional or legal requirements. 2. Sec. may fix the terms and conditions of preferred shares of stock or any series thereof: Provided. Investment of corporate funds in another corporation or business in accordance with this Code. Preferred shares – holder enjoys certain preferential rights or privileges. these assets could be distributed back to SH’s. Increase or decrease of capital stock. creating or increasing bonded indebtedness. trust companies. The board of directors. In time of dissolution. insurance companies. A corporation may. and 8. which terms and conditions must also be stated in the certificate of stock representing said shares. however. 6. Sec. They may be purchased or taken up by the corporation upon the expiration of a fixed period.Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. That banks. 7. 2. 3. the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. Amendment of the articles of incorporation. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided. unless otherwise provided in this Code: Provided. they do not assign any value to that share. public utilities. Such shares may again be disposed of for a reasonable price fixed by the board of directors. Fundamental forms of shares. holders of these shares may be given ahead or preferred as compared to holders of common shares. and building and loan associations shall not be permitted to issue no-par value shares of stock. redemption. Sec. exchange. but subsequently reacquired by the issuing corporation by purchase. lease. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided. that’s the par value of that share.00) pesos per share: Provided. Except as provided in the immediately preceding paragraph.Treasury shares are shares of stock which have been issued and fully paid for. In case of distribution of dividends. Q: what are the various types of shares? 1. If dividends are to be distributed then corporation may design certain preferences. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock. There could be a provision that holders of preferred shares may be given priority in so far as assets are concerned. the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. Merger or consolidation of the corporation with another corporation or other corporations. . not necessarily granted to holders of shares. .Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks. That preferred shares of stock may be issued only with a stated par value. That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. 8. where authorized in the articles of incorporation. Not only dividends. furthermore. 3. Dissolution of the corporation. That there shall always be a class or series of shares which have complete voting rights. pledge or other disposition of all or substantially all of the corporate property. 9. it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. donation or through some other lawful means. further. provided that where the exclusive right to vote and be voted for in the election of directors is granted. Incurring. each share shall be equal in all respects to every other share. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 12 incorporation: Provided. 7. further. they may also be given preferences as to distribution of assets. and upon such other terms and conditions as may be stated in the articles of incorporation. Founders' shares. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends. after dividing that share. if there are assets remaining after paying all liabilities. it may happen. or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided. 4. Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code. Q: what preferences? These preferences include distribution of dividends. Par value – we said capital is divided into shares and each share is given a certain value. Adoption and amendment of by-laws. That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares. That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. regardless of the existence of unrestricted retained earnings in the books of the corporation. Sale. That shares without par value may not be issued for a consideration less than the value of five (P5. Treasury shares.

we will buy back the shares. as long as corporation has enough retained earnings. unless the loan is so huge. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 13 Q: if that happens. So option would be for additional capital which is the normal option would be to borrow from bank. How? We issue redeemable shares. Founder’s Shares Q: Purpose of issuing redeemable shares A: this is necessary if a corporation intends to have or acquire fresh capital or additional capital Q: if the corporation needs additional capital usually want should be done? A: increase capital by increasing the capital Q: and if you increase capital. time will come the corporation cannot pay it obligations or time will come that the amount lent might have been used for something else. we will pay or return 11M. the best way. after determining liabilities. However they might not be ready to put up that additional capital. So if you need additional capital and you want to retain the same control. so any decision done. so you have to double subscriptions to be sure you retain control. the amount lent is so huge that there are occasions that bank would like to closely monitor the capital of that corporation otherwise the amount that they have lent will go to waste. each one th of you controls 20% or 1/5 of capital and in case of voting. st So Corporation needs capital. Meaning. it cannot go lower than 5. That’s why in big corporations it is not unusual that a bank representative is there every meeting of the board because it wants to monitor its financial so if there are indicators that a corporation is using money for something else. If there are 3 of you.00 4. we will issue to you redeemable share Meaning no guarantee interest. the bank as a condition of that loan will require the corporation to issue at least 1 share in the name of bank rep and require corporation to vote that bank representative in the board. the dividends you will received will be much more that you expect. So called treasury shares because it goes back to treasury of corporation and now it’s owned again by corporation. Mortgages or assets. they are now considered as treasury shares. Or they might be shares which were outstanding before. they may have been fully paid and corporation decided to buy them back. security. we have profit and we will give this back to you.00. This is guaranteed. you will always be watching if other people are investing. Redeemable shares – shares of a corporation that may be redeemed by a corporation after a fixed period or any other date specified in AOI. 6. you have 60%. the remaining option is? A: To borrow from public. Meaning? A: means we have extra. as long as we have profit we will redeem. If you borrow from bank. after you will get more. bank can always demand immediately or declare corporation in default. you have voting rights up to 20%. Once redeemed. the bank is fully aware. However if we borrow it might not be easy because 1. Its allowed but not usual. Because If there are 5 of you and you agree SCS is a certain amount. After determining our assets. but if company make good. you have the extent of your interest over the corporation. additional capital from existing stockholders. you will not think of control. And that’s very crucial in management of corporation so you must watch. because one day you might discover other investors will come in without you knowing and only to find out your 60% before has gone down to only 40% because other investors came in and acquired more stocks. Bank is not interested in control because if you pay the loan the bank will be happy. Q: Treasury shares A: they may refer any other shares which have been reacquired by a corporation most probably the redeemable share. the holder is expected to be paid by the corporation when period for payment becomes due. So there are occasions when bank wants to monitor so that when bank allows a certain loan in millions of pesos and bank wants to monitor the activities. It requires collaterals. You are happy. Q: There is guarantee so long as there are unrestricted earnings. it’s taken back by a corporation. show us redeemable share. After years. it might not have enough assets to secure payment of loan in bank Q: Other option we said is for existing stockholders is to double investments – is not available either so no bank loan. they might not have control anymore. Corp is happy. that is if they want to retain exactly the same control that they have over a corporation. say for your 10M. the thing is any share which have gotten back to corporation is called treasury shares. you can already decide on what to do with corporation and normally you want to retain this. existing corporation may not have the funds needed to increase capital. especially the 3 of you has been planning to keep that control the longest that you could. who will invest? A: the existing stockholders. So tell the public whoever would like to invest in our company. necessarily? If they issue redeemable share. the bank is a representative. we have retained something. you agree that only 5 of you will invest. because you have buy back stocks which are outstanding unless you have profits. Interest might be high 2. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . Q: what happens in redeemable share? A: when a corporation issues a redeemable share. The 1 option is to borrow. how much would that share be? A: at least the value of that share is 5. Non-par value 5.

. which must be within the Philippines. And if they are allowed to vote for themselves. the amount of its authorized capital stock in lawful money of the Philippines. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code. So no logic in giving them dividends. articles of incorporation of all domestic corporations shall comply substantially with the following form: ARTICLES OF INCORPORATION OF cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . they will just transfer it to the left pocket. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 14 Q: Founder’s Shares A: Founder shares in effect binds the other stockholders to keep on holding holders of these founders shares and let them stay there at least 5 years. Sec. while they are now on the treasury. such fact must be stated. A: What could be the reason? A: These are the people who had the vision. nationalities and residences of the incorporators.00) pesos. and 10. Q: How come? What could happen to BOD who will act and exercise the right to vote? A: if we give voting rights to treasury shares. the number of shares into which it is divided. and the amount subscribed and paid by each on his subscription. The place where the principal office of the corporation is to be located. 7. 15. That a non-stock corporation may not include a purpose which would change or contradict its nature as such. So they have the nd entire plan on how to start the corporation because if you don t give them that privilege. 14. Because if they will be given that authority to vote in behalf of treasury shares. The names. they will vote for other people and every plan is gone. nationalities and residences of the original subscribers. that’s why law says no more voting rights. when privilege expires are not disqualified to be voted again but it becomes voluntary and the rest of SH are no longer obliged to elect them. the articles of incorporation shall state which is the primary purpose and which is/are he secondary purpose or purposes: Provided. So that if the board will be given that authority to exercise votes of these treasury shares. The name of the corporation. containing substantially the following matters. Contents of the articles of incorporation. who owns them? A: The Corporation owns them as an asset and every share is entitled to voting rights but no voting shares for treasury shares. . and in case the share are par value shares. So here intention of the law is to allow corporation to grow during its initial stage and the only way to allow this is to grow is to give the management a certain group to make sure that they will be able to achieve their objectives and the law feels 5 years is enough to nurture that corporation until its ready to be on its own. Q: Going back to treasury shares. The names.All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators. 9.Unless otherwise prescribed by special law. money owned by a corporation. they will be there forever and perpetuate themselves in management. the names. 11/25/11 – Friday Sec. The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five (25%) percent of the authorized capital stock of the corporation has been subscribed. and at least twenty-five (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five (25%) percent of the said subscription. they will vote for themselves. 5. during elections. the amount of its capital. except as otherwise prescribed by this Code or by special law: 1. which shall not be less than five (5) nor more than fifteen (15). If it be a non-stock corporation. the par value of each. 3. such paid-up capital being not less than five thousand (P5. 8. who will act in behalf of corporation? The board. 2. Where a corporation has more than one stated purpose. 4. The term for which the corporation is to exist. In effect holders of founder’s share enjoy special privilege to be in the board for the next five years. and if some or all of the shares are without par value. Q: Other shares A: Outstanding shares. Q: will the treasury shares be entitled of dividends? A: NO.000. The specific purpose or purposes for which the corporation is being incorporated. they know the steps to take. 6. If it be a stock corporation. They know where to go. Forms of Articles of Incorporation. it may happen for the 2 year. If Treasury Shares were entitled of dividends. how to go there. The number of directors or trustees. the names. However FS. nationalities and residences of the contributors and the amount contributed by each.

............... years from and after the date of issuance of the certificate of incorporation................................... 7............................................................ ............... .......... ............................................................................ ......................................................) PESOS in lawful money of the Philippines............................................. ................................. ..................... ..................... .......... (In case some shares have par value and some are without par value): That the capital stock of said corporation consists of ............ ..................... ................................. SEVENTH: That the authorized capital stock of the corporation is ................. FIFTH: That the names............................................ indicate primary and secondary purposes)............................................................. ............................................................................................................................ .....) cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 .................. ...................... ........................................................ ......................... ........... and it is sufficient if the articles state the amount of capital or money contributed or donated by specified persons..................................... ..... .................. SIXTH: That the number of directors or trustees of the corporation shall be ..... ............................................................................................................................................................................... ............. ...................... ......................................................... ................... In case the corporation is non-stock....................... ............. ............ (Modify Nos.............................. Nos... have this day voluntarily agreed to form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines...... .......................................... nationalities and residences of the incorporators of the corporation are as follows: NAME NATIONALITY RESIDENCE ....... nationalities and residences of the contributors or donors and the respective amount given by each........................ . 8 and 9 of the above articles may be modified accordingly....... ... . .. .. THIRD: That the principal office of the corporation is located in the City/Municipality of .................................................. (P... .............................................. ... ..................... ........................ (In case all the share are without par value): That the capital stock of the corporation is .............. ..................... .............. .. . .................................................. .... ....... .................... AND WE HEREBY CERTIFY: FIRST: That the name of said corporation shall be "......................... ................... or CORPORATION".....) Pesos per share.............................. ................. EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated has been subscribed as follows: Name of Subscriber Nationality No of Shares Amount Subscribed Subscribed ................... and of which . SECOND: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one purpose.... .............................................................. (P............. shares are of the par value of ....... ....... ... NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of the total subscription as follows: Name of Subscriber Amount Subscribed Total Paid-In .............. stating the names...... ........................... FOURTH: That the term for which said corporation is to exist is ................ Province of ........................ INC............................................. .... ... ..........................................) PESOS each........ shares of which .................................. and the names.............. shares without par value. 8 and 9 if shares are with no par value......................................................................................................... .. nationalities and residences of the first directors or trustees of the corporation are as follows: NAME NATIONALITY RESIDENCE .......................................... .......... shares are without par value............... CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 15 __________________________ (Name of Corporation) KNOW ALL MEN BY THESE PRESENTS: The undersigned incorporators........................................................................ all of legal age and a majority of whom are residents of the Philippines...... ............................ ....................... ..... .................................................... ..................................... shares with the par value of ........ divided into ... .......................................... Philippines........... .............................................. (P............................

................. or contrary to government rules and regulations.. this ...... .. trust companies and other financial intermediaries...... this .... by . educational institutions............ depose and say: That I have been elected by the subscribers of the corporation as Treasurer thereof. banking and quasi-banking institutions............................ ........................................ ............... NOTARY PUBLIC My commission expires on ......... PROVINCE OF ) I.............. No.................................. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if false... 17................ ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following): "No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to recorded in the proper books of the corporation and this restriction shall be indicated in all stock certificates issued by the corporation..... 19 ....... (Names and signatures of the incorporators) SIGNED IN THE PRESENCE OF: .................. No articles of incorporation or amendment to articles of incorporation of banks............................................ That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment.... 4......... in accordance with the Corporation Code.............. ........ for and in the City/Municipality of .. . Republic of the Philippines.... 2. he has been authorized to receive for and in the name and for the benefit of the corporation................. ...." IN WITNESS WHEREOF................. ... . Province of .. with Res.. That the purpose or purposes of the corporation are patently unconstitutional................. Page No........ Cert. ........................................................... That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. and received by me......... day of ..... ......................... illegal... on ...... a Notary Public..................... all subscription (or fees) or contributions or donations paid or given by the subscribers or members...................... No...... insurance companies.................. Series of 19....... CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 16 TENTH: That ........ 19 ..... (Notarial Acknowledgment) TREASURER'S AFFIDAVIT REPUBLIC OF THE PHILIPPINES ) CITY/MUNICIPALITY OF ) S..... and that as such Treasurer...... day of .......................... (7a) Sec.............S.. 19 ..............The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided...... in the amount of not less than P5. public utilities.. building and loan associations............... in the City/Municipality of ........................................ has been elected by the subscribers as Treasurer of the Corporation to act as such until his successor is duly elected and qualified in accordance with the by-laws................. 19 .......... and that as such Treasurer......... That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein.........00.. Doc........................ The following are grounds for such rejection or disapproval: 1.. to act as such until my successor has been duly elected and qualified in accordance with the by-laws of the corporation....................... (Signature of Treasurer) SUBSCRIBED AND SWORN to before me.......... immoral..... 3...............000................. and other corporations governed by special laws shall be accepted or approved by the Commission unless cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 ... being duly sworn............. I hereby certify under oath that at least 25% of the authorized capital stock of the corporation has been subscribed and at least 25% of the total subscription has been paid................ Grounds when articles of incorporation or amendment may be rejected or disapproved.. .......... Book No. in cash or property.... ...... Province of .. we have hereunto signed these Articles of Incorporation. ............................. issued at ............

“HAPYUD-HAPYUD” – “HILUT-HILUT” – “HUWAP-HUWAP” – “PIK-PIK” Not confusing since they have different meanings. or even immoral. What do you think? Purpose must be specific as to what kind of business. the name is merely descriptive of the purpose of the corporation. and also to locate the corporation. If it be a non-stock corporation. The SEC will not be able to determine what kind of activity the corporation is engaged in. And that could be questioned. Names. packaging. It must be complete and specified so that the SEC will be able to monitor or regulate the corporation. and at least 25% of the total subscription (SCS) has been fully paid. Then it becomes OPEN. color schemes. he should first offer that among the incumbent stockholders in that case you can control the transfer. That’s what the law is trying to protect. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . you can sell it to the public. If you want a close corporation. The only objection insofar as names are concerned is that the name must not be identical to any existing corporation. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient Accompanied by a sworn statement of the Treasurer showing that at least 25% of the ACS has been subscribed. That’s the only way that you could make sure that the stocks will be maintained by the incumbent stockholders. or that it would not deceive or confuse the public. However the prohibition cannot be absolute. If it be a stock corporation. then of course. and if some or all of the shares are without par value. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 17 accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. the ACS. Principal place of business 4. the amount of capital. Their purpose of selling joy and fun is dangerous because it’s like an all-encompassing purpose. Is that enough? NO. The name must not also convey a purpose which is different from the purpose for which it was organized. nationalities and residences of the incorporators 6. materials. there should be a provision or paragraph in the articles of incorporation to the effect that the stockholder. 2. Number of directors or trustees. Term for which it is to exist 5. B. so that the notices or any order from the SEC will reach the corporation. “PLANTERS” was the best salted peanuts around. which shall not be less than 5 nor more than 15 7. So the public became confused. CLOSE CORPORATIONS A. CONTENTS OF THE ARTICLES OF INCORPORATION 1. NAME “HAPYUD-HAPYUD INCORPORATED” Nothing wrong with the name since what the law requires is that it must not be identical. nationalities and residences of the original subscribers and the amount subscribed. The prohibition has to be relative in the sense that you must only first offer to the other stockholders. and that could trigger controversies. EXAMPLES OF CORPORATIONS WITH CONFUSING NAMES: 1. before he transfers his shares of stocks to another person. names. So the articles of incorporation indicated that the purpose is to sell and offer to the public joy and fun. number of shares. Efficascent Oil and Efficient Oil These are similar names for basically the same product. such fact must be stated 9. PURPOSE Must be specified in order that the persons who will be transacting with the corporation would know whether or not the corporation is acting within the purpose for which it was constituted. nationalities and residences of the persons who shall act as directors or trustees until the first regular directors or trustees are duly elected 8. Here. Joy and fun might be illegal. PRINCIPAL PLACE OF BUSINESS The principal place of business of the corporation is located somewhere at the mountain barangays of Cebu City. Names. until “GROWERS” came. Specific purpose or purposes 3. par value. nationalities and residences of the contributors and the amount contributed by each 10. Name of the corporation 2. names. or deceptively or confusingly similar to that of any existing corporation. Exactly the same packaging. If none of the incumbent stockholders are interested.

You are depriving me one basic right of ownership. if it were an absolute prohibition in the sense that you cannot sell your stocks except to the incumbent stockholders. If you allow the absolute prohibition. if none of you is interested. These are companies whose business is to appraise certain properties and they could come out with some schemes on appraising. Otherwise. then you buy my stocks. B. you could not dispose it. LEGAL CAPITAL versus ACTUAL CAPITAL A. it would increase. your capital would fluctuate depending on the price paid for the personal property. E. it would refer to the subscribed capital which is such amount that the stockholders committed to the public that they would subscribe to. You could trust that they could come out with an accurate valuation report. in effect. If you want to stay by yourselves. When talk of capital. So the prohibition may be allowed so long as the prohibition is relative or qualified. transferability of the rights or stocks is the basic consideration. That prohibition should not be absolute. Otherwise. The AOI must be accompanied by a sworn statement of the Treasurer showing that at least 25% of the ACS has been subscribed. You will have to establish that that is the value of your property. We will not have any problems if the payments were made in cash. and you want to dispose the stocks but the incumbent stockholders are not willing. Cash 10K Real Property 15k Personal Property 12k Total 37k* If you sell your personal property amounting to 12k. or it goes down. that the amount is paid and is now in the bank. if you want this corporation close. you could not also prevent me from offering this to others. This is now the passbook. It deprives the corporation that basic right of succession. you have the right to use. my heirs would not be able to succeed. C. it is not always required that cash will be used in the payment of subscription. If property will be used. it would not reflect the true paid up portion. This is the ACTUAL CAPITAL. if I die. be limiting or restricting the corporation. unless the stockholders will subscribe to additional shares. he succeeds in your rights. very few will honor or recognize the values that they indicated. You would. All you have to do is to deposit the payment with the bank and the bank will issue to you a certificate of deposit. If you impose the absolute prohibition. That would show that the paid up potion is lower than what the law requires. You have to submit a proof that the paid up capital has been duly collected. there will be a certification from the treasurer that the property is being used as a mode of payment for the paid up capital stock which has the value of 25%. However. they cannot transfer because transfer is prohibited absolutely. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 18 C. F. but not absolutely. If all of the stockholders would die. And in latin. we are referring to the legal capital. B. That’s the commitment of the stockholders. the right to dispose and the right to the fruits of the property. It stays there. It goes up. Considering the deteriorating credibility of our government agencies or offices. so to whomever you should transfer. It is a specific document duly acknowledged before a notary public where the bank officer will certify that a certain amount representing the paid up capital of a corporation whose incorporation is pending approval with the SEC. D. In other words. When we say legal capital. but in the absence of any additional subscriptions. maybe you could prohibit me relatively. We could prove the value by presenting a valuation report from independent or private appraisers. jus disponendi. then I could no longer transfer this property to another and therefore. property may be used to pay that paid up portion of the subscription. It’s not a fair prohibition. Aware that these officers can be easily influenced especially insofar as monetary matters are concerned. it would violate the very essence of a corporation because in a corporation. it is fixed. and jus utendi! G. E. Relative in the sense that at least you have given the other stockholders the preferential right to acquire. you are misleading the public because the paid up portion is supposed to reflect the true value of the assets of the corporation. That’s the capital reflected on the records. F. It involves the right of succession. As the owner. D. Moreover. and at least 25% of the total subscription (SCS) has been fully paid. jus fruendi. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 .* But LEGAL CAPITAL. that legal capital is fixed. And if that happens. We have existing appraiser companies. As a matter of fact. the SEC oftentimes rely more on private appraisers. you have the right to dispose. It will remain in that amount. with an invitation to any SEC officer if it so desires to visit the bank and check whether indeed the money is there. Because if you overvalue your property. as an owner of a property. CAPITALIZATION A.

The transaction that you have entered into with the other party would remain to be a valid transaction and therefore. and its right to exercise corporate powers. 20. A bona fide attempt to organize a corporation under such law. the individuals who misrepresented themselves are not protected by the corporate fiction. B. the buyer in this case cannot file a motion to dismiss that the corporation has no personality to sue. It is already out there. C. De facto corporations. A corporation by estoppel is one which in reality is not a corporation but because of its appearance or its representations to the public it is considered as a corporation. their liability is similar to that of a general partner. Actual user or exercise in good faith of corporate powers conferred upon it by law. They were misrepresenting. D. But once outstanding. It is the state who has the authority to question. Otherwise. however. the individuals are protected by the corporate fiction. A valid law under which a corporation with powers assumed might be incorporated. then we would be flooded with complaints. then only the state can question. 2. if we allow anyone to question the existence of any corporation. and Mr. anything you did. Making it appear that they were duly incorporated when in fact they were not. 21. and 3. It’s (TS) part of the subscription because there has been an earlier issuance. liabilities and damages incurred or arising as a result thereof: Provided. it may come back as TREASURY SHARES. CORPORATION BY ESTOPPEL A. it shall not be allowed to use as a defense its lack of corporate personality. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . OUTSTANDING CAPITAL STOCK is what we also call SUBSCRIBED CAPITAL STOCK. That would signify the birth of the corporation. Sec. the law does not recognize. And so here despite the lack of legal capacity. the state feels that since it was the party who was injured by the inappropriate acts of this group. No matter what you did. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 19 C. It was bad enough that you misrepresented yourself. The effect is that the transactions that it would enter into would still be binding upon it. as counsel of the State. X said that the de facto corporation has no personality to sue since it has not fully complied with the requirements of the law. So the de facto corporation sued Mr. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. If we start operating without the certificate. So here. DE FACTO CORPORATIONS A. What do you think? The de facto corporation can sue since under the law it is given a separate juridical personality. You misled the public into believing that you are duly organized when in truth you are not.All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts. If the de facto corporation is engaged in selling trucks. B. The Solicitor General. D. and it sold a truck to buyer Mr.The due incorporation of any corporation claiming in good faith to be a corporation under this Code. So it is the state who could question the existence of that corporation in a special quo warranto proceeding. So it’s no longer outstanding. Requisites: 1. cannot resist performance thereof on the ground that there was in fact no corporation. Corporation by estoppel. may question the existence of that corporation through a quo warranto proceeding. C. It was the state whose procedure was not complied with. X for the balance. but reacquired as treasury shares. X later on refused to pay the balance. In a corporation by estoppel. Sec. X. it would be worse if we grant you certain rights. . That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such. In which case. the law says you have no right at all. It’s already outstanding. Mr. In the case of a suit. Moreover. The law says that misrepresentation has no standing in law. shall not be inquired into collaterally in any private suit to which such corporation may be a party. May the other party who is being sued by the corporation attack directly? YES. In the first place. can a corporation by estoppel file a suit as a corporation? NO. we cannot start yet because we still have to wait for the Certificate of Incorporation from the SEC. the personality of the de facto corporation cannot be subject to collateral attack. Now that everything has been submitted. In a corporation by estoppel. . you misrepresented to the public. it could be considered as a de facto corporation. People will start to hesitate entering into transactions with anyone. A de facto corporation is one which actually exists for all practical purposes as a corporation. In a de facto corporation. Nobody should profit out of their misrepresentation. What is allowed is only a direct attack. where there was misrepresentation. the law recognizes certain acts. One who assumes an obligation to an ostensible corporation as such.

Q: why do you think they cannot? A: because their purpose is to sell or delivery soft drinks. They are only into delivery of soft drinks. What should be the guide? A: purpose has to be lawful. Q: then another important thing is the principal place of business A: important so that the public would know where the corporation operates and in case of notices. Do you think they can expropriate the land? A: they could not expropriate because expropriation is the compulsory way of acquiring land. sprite. the law says you have the right. It has to be specific. why is it important to indicate the purpose? A: This is the guide. tried to expropriate several parcels of land. there was an honest intention to organize under that law. the route would manila jolo. whether or not they could expropriate and how did we do that? A: we consulted the purpose Q: what is the most important purpose of the purpose? A: the purpose of the purpose is to guide us and find out whether or not the power exercised is within the purpose. What do you think your honor? Corporation X we want to file it here in Manila for convenience and practicality. So that SEC will be able to send out appropriate communications because as we said the State monitors the corporations. So we have to expropriate the land. there was no compliance at all. the public and even the management of the corporation to determine whether or not certain acts are still within its power by consulting the purpose. bohol. Q: let’s just assume that the purpose is to distribute all types of soft drinks. Q: what about the franchise? We could say that the purpose of the corporation is to operate and maintain buses and trucks. In a corporation by estoppel where there was misrepresentation. the only thing is there is no road and so the soft drink company. although usual. manage the place where we sell unlimited joy and excessive fun. where there was noncompliance.” Q: so in the purpose. Sometimes people love their name so much that they want it the name of the corporation but sometimes the name will indicate the nature of the business as what we have indicated last time. and we said “Pekpek Corporation. It depends on the agreement. So defendant who is from Cagayan de Oro did not want to go Manila filed a motion to dismiss. Because venue can be agreed. 11/28/11 – Monday Q: The purpose must be indicated in the articles of incorporation. The name of the company is something that should describe it. They are not engaged into public service. It filed the complaint in Manila because it has a branch office there in Manila. We also sell nails. and to expropriate is not within their power. improper venue. we maintain operate. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 20 In a de facto corporation. Could it already pass the test? A: No. but not jurisdiction. So that’s the importance of the purpose. same that we have to pass here to be able to sell here. We said that’s purpose. siquijor and camiguin. pepsi. to guide the state. Q: and so the problem is settled. Q: here is corporation X whose main office or principal place of business is in Cebu City but it operates various branches in Manila and other major cities. what’s the rule on venue? Where should the complaint be filed? A: complaint must be filed where the plaintiff resides or the residence of defendant at the option of the plaintiff unless otherwise agreed. It’s not correct to say that there was no compliance. We also said the name of the corporation as well as the principal business. Q: in occasions where cases might be filed. all soft drinks. so opposition to motion to dismiss. Can they consider that as residence? Is it practical? A: convenience and practicality should be taken into consideration. In fact. We are residing here because we are residing here. so corporation X said “no you are wrong because venue means where we reside at our option. In their survey. How do you explain that? Why give the right to one and deny that right to the other? As to a de facto corporation. So at its option of plaintiff filed the case. they notice that sales in other areas is very high. coke. unlimited joy. Q: and so our business is to maintain and manage. sell soft drinks. there was substantial compliance. pandesal. That is our business. seven-up. In fact they ask what soft drink they prefer and they said they prefer sprite. In the discussing the purpose. those will be sent out to the principal place of business of the corporation. that purpose is too broad. because the moment it is no longer within the purpose it might be considered ultra vires or beyond the power of the corporation. if there was an agreement on the venue then it should be there. what do you think of our purpose? A: It should not be too specific and not too broad by expressing only the description of the business. cebu. There was a desire to comply. Everything is listed. otherwise venue is the principal place of business of the corporation 12/05/11 – Monday Contents of AOI cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 .

The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation. nationalities and residences of the persons who shall act as directors or trustees until the first regular directors or trustees are duly elected 8. between corporation and stockholders. and for legitimate purposes. Number of directors or trustees. or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. names. Name 2. what is required? -sworn statement by treasurer indicating authorized capital stock. as amended shall be indicated by underscoring the change or changes made. Amendment of Articles of Incorporation. nationalities and residences of the contributors and the amount contributed by each 10. shall be submitted to the Securities and Exchange Commission. nationalities and residences of the original subscribers and the amount subscribed. After BOD meeting. number of shares. If stock corporation. and among stockholders themselves. Term 5. any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock. without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code. Place of business: Why should it be indicated? -for SEC to send notices or communications to corporation -for purposes of filing an action. How much vote needed? -at least majority Once approved by majority of BOD? -referred to stockholders Stockholders will then discuss among themselves. they will vote. what changes to be introduced. what do we do? -amend the articles of incorporation Sec. Names. as amended. such fact must be stated 9. par value. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 21 1. how much vote is required? -not required that unanimous decision. . which shall not be less than 5 nor more than 15 7. in matters of jurisdiction Capitalization. since they are going to restructure a basic part of the corporation. Names. at least 25% is subscribed. nationalities and residences of the incorporators 6. and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members. Such articles. 16. The deliberation and decision of amending articles is not as simple as it appears because we are trying to change the basic agreement or contract. Purpose 3. shall be indicated by underscoring changes -copy thereof duly certified under oath by corporate secretary and majority of directors -submitted to SEC -effective after approval by SEC First step should be meeting by BOD. This contract is between the corporation and state. names. Amendment of Articles of Incorporation (AOI) -may be amended by majority vote of BOD and vote of stockholders (or members if non-stock) representing at least 2/3 of the outstanding capital stock -original and amended articles shall contain all provisions required by law to be set out -articles. law says at least 2/3 of stockholders will have to approve If you are not among this 2/3? -law says without prejudice to the appraisal right of dissenting stockholders cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . Such other matters not inconsistent with law and the incorporators may deem necessary and convenient Location. the amount of capital. at least 25% of subscribed is paid What happens to the unpaid? -receivable by the corporation If we want to introduce changes. will discuss what should be amended. and if some or all of the shares are without par value. If non-stock corporation.Unless otherwise prescribed by this Code or by special law. the ACS. Principal place of business 4.

CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 22 -if you do not agree with decision of majority. although not necessarily true to some By exercising appraisal right. -book value: assets of the corporation divided by outstanding shares Example: Par value: fixed P10M 10M shares = 1. it is not easy to compel corporation to pay because you have to wait for unrestricted retained earnings and it could be prolonged because corporation may have potential expenses Trust Fund Doctrine: assets of the corporation are not owned by the corporation but by the creditors. we have different value which is book value. or sell their shares to outside persons They could sell their shares with different value. we have the amendments and amendments have been approved by stockholders. Can we allow dissenting stockholder to take part of the assets? -no. sell your shares to outsiders When you exercise appraisal right. shall take effect upon approval by SEC.00/share Book value: assets P20M 10M shares = 2. which could be much higher than par value. assets minus the liabilities. he cannot demand for it right away because he has to wait until corporation has unrestricted retained earnings Unrestricted Retained Earnings: surplus profits of the corporation. they have a lot of options available. it is free from any liability or potential expense Thus. corporation may even decide to sell at a higher price which is the market value. -market value: value where seller is willing to sell and buyer is willing to buy -determined by market forces As dissenting stockholder. do you think you will immediately get the value of your shares? -no because you cannot compel the corporation -you have to wait until there are surplus profits (unrestricted retained earnings in excess of the assets of the corporation) This is important because we cannot touch the assets or allow someone to leave the corporation and take part of the assets. exercise of appraisal right b. corporation are just holding these assets in trust for the creditors Now. tell corporation that you are leaving and now will determine the value of his shares which is usually determined by book value -rights of dissenting stockholder: a. that might not be profitable because corporation may have been very successful or profitable so although the par value is fixed. what do we do next? -original and amended articles shall contain all provisions required by law to be set out -articles. as amended.00/share Market value: determined by market forces If the corporation is successful and business is good. shall be indicated by underscoring changes -copy thereof duly certified under oath by corporate secretary and majority of directors -submitted to SEC Finally. what are these? -they may opt to share these shares to other stockholders. it could simply mean that you are no longer interested and you may opt to leave. Two ways of approval: -by action: approved by SEC -by inaction: not acted upon within 6 months from date of filing for a cause not attributable to the corporation Management of Corporation To whom entrusted? -board of directors cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . because of the trust fund doctrine (corporations are just holding these assets in trust for the creditors) -after determining his appraisal right and value of his shares. you exercise what? -appraisal right: meaning. it means? -can demand payment for their shares of stocks -they may opt to leave the corporation If they decide to leave the corporation. and what are these values? -par value of shares Par value: value of shares as indicated in the articles But.

trustee or officer of any corporation. should be ratified by SH by way of specific exceptions provided by law: amendment of AOI. Once elected. cite from book) 12/07/11 – Wednesday POWERS OF CORPORATION Powers of the Board of Directors: manage and control the corporation. investment in another corporation dissolution Reason: A: these decisions involve the very existence of the corporation. decide as to which activities to undertake Sec. what policies to adopt. 27. or where there is no stock. a majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. once they are elected empowered to exercise. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director. which share shall stand in his name on the books of the corporation. Management is vested by the state or by the law which created the corporation/. Q: I thought the SH elected them? A: So that here the authority of SH is limited to electing Board. can stockholders review their decisions? A: No. adoption and amendment of by-laws. The board of directors or trustees. conduct business. 2 Americans form a corporation in the Philippines. all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks. Q: because they have to exercise these powers. Trustees of non-stock corporations must be members thereof. Disqualification of directors. once BOD has been elected. bonded indebtedness increase/decrease capital stock merger or consolidation. DIRECTORS Example: 3 japanese. The SH merely elects them. whether or not corporation should pursue certain activities Can powers of BOD be delegated? -yes Under what circumstances? (enumerate. . which way corporation should go. The SH do not vest power upon them. adopt policies. or a violation of this Code committed within five (5) years prior to the date of his election or appointment. sale or lease of corporate property. 23. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. from among the members of the corporation.No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years. SH has no authority to review and change the decision of the board. Sec.Unless otherwise provided in this Code. trustees or officers. who shall hold office for one (1) year until their successors are elected and qualified. so long as majority are residents of the Philippines Q: can they also become Board of Directors? cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 23 Powers of Board of Directors -conduct business -manage property -exercise corporate power -BOD has control over management of corporation. the corporate powers of all corporations formed under this Code shall be exercised. shall qualify as a director. Law confers powers upon the BOD. can they form a corporation? A: Yes. . MATTERS TO BE REVIEWED BY STOCKHOLDERS Decisions that according to the law as well should be incurred by the SH.

dili man jud ko kasabot ani. Said committee may act. sharing ideas. . That’s how resolutions should be passed because it is a deliberative body. (2) the filing of vacancies in the board.The by-laws of a corporation may create an executive committee. if they themselves are the ONLY stockholders. are they covered by the Executive Committee? cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . If anything happens to that resolution. and (5) a distribution of cash dividends to the shareholders. majority are residents of the Philippines. RATIFICATION Q: is there anything we can do? A: There must be ratification. so here. the Stockholders are not supposed to review but in a corporation where directors are themselves stockholders. unless? A: If the directors are themselves the stockholders. And so special election can be called. they themselves will suffer the consequences because they are the SH. amendment or repeal of board resolution which is not amendable or repealable. One director might say. to be appointed by the board. there are things or instances therefore that a board may delegate to some other parties? A: this could be done by an executive committee. part of agenda is the review of minutes and in the review you might see there that that resolution is inserted. 35. ikaw adto tunga lang sa per diem. with more reason no need for deliberation. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 24 A: yes. that formality of deliberation might be disregarded if they themselves are just family. on such specific matters within the competence of the board. bahala nag naas kan. composed of not less than three members of the board. Precisely they were elected by the board because of some skills. MATTERS THAT MAY BE DELEGATED BY BOARD Q: there could be some exceptions. even without the meeting. Executive committee. there should be free exchange of ideas. In which case any resolution. Can the director do that? Is proxy allowed? A: No. Q: otherwise if there is no ratification. Can we deliberate on this? Yes. express objections and let proponents answer. (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable. as long as requirements are complied. must be holder of once share Etc. Q: If the majority are in agreement. what happens? A: he automatically ceases to be a director Q: When he ceases to be a director. Q: what should be done? A: There should be a deliberation. these are things that a director must exercise. Therefore. if for example they are just family members. Of legal age. They just passed the resolution around through the messenger. they may pass now a resolution ratifying the resolution. filling of vacancies. A general meeting would call for discussion of the auditor’s report. Reason of vacancy is that he loses his share. so that if he loses this share. any director may request someone else to request the meeting. so that all directors can participate by giving ideas. or adoption of by-laws. There is something wrong. there was an issue to be approved and one early morning the messenger was busy hopping from residence of director to the other and then he passed around a resolution and each of the directors signed that resolution. Resolution is not valid. it shall not be an act of the board. there was no deliberation.ana or dili ebutang sa refrigerator. For Ex. what happens? A: there is a vacancy. Is that resolution valid? A: it’s not. oy accountant man ka. In that case. EXECUTIVE COMMITTEE. raising issues. except with respect to: (1) approval of any action for which shareholders' approval is also required. RESOLUTION Q: among 5 directors. Sec. repeal. in a subsequent meeting. what’s the use. what may now be done? A: then. amendment. qualifications and even competence or even integrity that is why they are elected by SH. Ila ila ra btaw na. Although we said. Q: board of directors must be a holder of a share. PROXY Q: being a deliberate body. Q: these decisions usually may include? A: routinary decisions/transactions EXCEPT: approval of any action where approval of SH is also required. A smaller group which law allows to be organized out of the bigger board and which board may from time to time allow to make decisions. distribution of cash dividends AMENDMENTS Q: amendments of the articles. If they themselves are the stockholders then there is no need. (3) the amendment or repeal of by-laws or the adoption of new by-laws. as may be delegated to it in the by-laws or on a majority vote of the board. Everyone should be heard. by majority vote of all its members. explain the validity and importance of that issue.

. What is a quorum? The purpose of requiring quorum? A: number required to hold or conduct a meeting. the owners of a majority of the outstanding capital stock. or if there be no capital stock. nationalities and residences of the directors. Candidates receiving the highest number of votes shall be declared elected. a majority of the member entitled to vote. The election must be by ballot if requested by any voting stockholder or member. except for the election of officers which shall require the vote of a majority of all the members of the board. who will be in possession of certificates? Would it the lender or borrower? A: lender. the owners of a majority of the outstanding capital stock. ELECTIONS Q: so who can vote in the election of the board? A: Generally stockholders have voting rights.At all elections of directors or trustees. Report of election of directors. the names. That no delinquent stock shall be voted. or any other officer of the corporation. his heirs in case of his death.Immediately after their election. Without a quorum. trustee or officer die. In stock corporations. I could offer my certificate of stocks because these are evidence of ownership and when I pledge these certificate of stocks. Sec. 24. the secretary. quorum. shall immediately report such fact to the Securities and Exchange Commission. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if. may he vote for those shares? Who could vote? A: stockholders Sec. Election of directors or trustees. and officers elected. and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act. Not necessarily to decide because you might not decide in that meeting but at least you can hold that meeting because you have a quorum. at the time of the election. a majority of the members entitled to vote. or if there be no capital stock. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . as a matter of fact amendments cannot be delegated to the Executive Committee because such matter requires the approval of majority of the board and thereafter. resign or in any manner cease to hold office. So that delegation may be allowed but must be limited. . we count numbers and follow rules. shall submit to the Securities and Exchange Commission. a treasurer who may or may not be a director. Any two (2) or more positions may be held concurrently by the same person. the directors of a corporation must formally organize by the election of a president. Unless otherwise provided in the articles of incorporation or in the by-laws. trustees and officers. except that no one shall act as president and secretary or as president and treasurer at the same time. Q: what else can be delegated? A: they may delegate portions of management. the pledgor who has possession. or the director. That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided. 25. a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business. or if there not present or represented by proxy. Should a director. trustees and officers of the corporation. there must be present. Total delegation could be equal to abdication or abandonment of the board’s power. in the board. 26. when we have elections. however. or any other officer of the corporation. Directors or trustees cannot attend or vote by proxy at board meetings. no election is held. and such other officers as may be provided for in the by-laws. and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. for any reason. If I’d borrow money from bank and bank would require security or collateral from me. Q: so who will vote. the secretary. For ex. QUORUM Q: in Elections. in his own name on the stock books of the corporation. at the meeting. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Q: There are occasions when the owner of share of stocks would surrender his certificate of stocks to someone else. a secretary who shall be a resident and citizen of the Philippines. what happens in pledge? A: surrender possession Q: So at time of Elections. either in person or by representative authorized to act by written proxy. or where the by- laws are silent. at the time fixed in the by-laws.Within thirty (30) days after the election of the directors. or he may distribute them on the same principle among as many candidates as he shall see fit: Provided. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 25 A: they are not one of those which are considered as powers of the Executive Committee. who shall be a director. members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Corporate officers. . Sec. trustees. there can be no meeting. trustee or officer himself. every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing. it needs to 2/3 by the stockholders. Unless the articles of incorporation or the by-laws provide for a greater majority.

it has to be unlawful act of the corporation since there is a separate personality. (effect on the stockholders) if the corporation would be penalized due to the unlawful act.has 4 shares = 20 votes (since they are to elect 5 directors) B .has 4 shares = 20 C . is there something wrong? A: There is nothing wrong with this situation as long as your dealings are fair and reasonable and you let the other cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . it is their responsibility to ensure that the corporation will not incur such unnecessary penalties. Qualified majority – specifically stated in articles of incorporation. Though most usually a quorum it is at least the simple majority and in some cases in voting for example in amending articles. Straight voting LIABILITY General Rule: the officers are not liable. Exceptions: (instances when the director can be made liable) 1. Lets chop the problems into pieces. If the articles says so they can. Liable under patently unlawful act or not? No. We are here talking about the liability of a director. the latter can still assure himself a seat in the board through cumulative voting (concentrating all the votes he has on himself) The intention of this method is to protect the minority. the corporate fund will be affected and the investments of the stockholders will be in jeopardy. are we not? We discussed that they are generally not liable for corporate actions since they are covered by the corporate veil • It is not required that damage be sustained by the corporation. in termination/removal of a director where they would not want the officer to know their votes. why not. the consenting director would be liable. • Another illustration: A resolution was passed on the importation of meat and to bribe the customs police in the process.has 5 shares = 25 F . 2 can be quorum – if that is what the articles or by laws require. The way we define quorum in a group of 5. D. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 26 Q: so a majority must be a quorum. Majority (2 types: Simple or Qualified). Because quorum is the number required to hold a meeting. where A. This could have been avoided had the board not passed the resolution. there is a conflict of interest because a buyer would definitely like to buy at the lowest possible price while a seller would like to sell at the highest possible price.g. the directors agreed to sell illegal drugs Situation provided: the wife of a director was caught by the janitor having extramarital affair with another director.(hmmm. Voting shares and Non-voting shares (when the very existence of the corporation is in issue) Ways of voting: Viva Voce or Secret Balloting . Simple majority – 50% plus one.shares that the SH have times the no. and other cases) Method of voting: Cumulative voting . In this case. B. of directors to be voted for. Conflict of interest - Another situation. Director Alcordo: if in the board meeting. and F connived to vote and get themselves in the board. In this case. he concentrates all his votes for one candidate Illustration: Stockholders: A .the latter being a means of voting where the stockholders would not want their votes to be known (e. It was just accepted as one of the grounds and then. the corporation wanted to acquire parcels of land when one of the directors have a land that he would like to sell. is it not? Quorum requires majority? A: It can be simple majority or qualified majority. In this kind of voting. 12/12/12 – Monday Quorum. in this illustration. ostracizing E in the process.has 4 shares = 20 D .has 4 shares = 20 So that. In this case. did not really discuss this part not illustrated it.has 4 shares = 20 E. they should be liable for the patently unlawful act because that is part of their job. C. Thus. 2. as long as the requisites are present: that the director consented or voted for the conduct of the patently unlawful acts. Gross negligence. When he assents or votes for a patently unlawful act Example: In a board meeting. skipped na to conflict of interest where he focused jud) 3. The SH can apportion it as he wants. how much is required to approve the amendments? In amendment – majority of the board and 2/3 Stockholders. Otherwise.

A: the contract will be invalidated if the presence of director is necessary for the quorum. gross negligence. instead of the much lower price. But even without suspicion. an example where conflict of interest occurs: Where a director conspires with the seller of a land where the corporation is wanting to buy parcels of land with a certain budget. or Attendance of the subject director is NOT necessary to form a quorum. Q: Purpose of cumulative voting A: Allow minority representation LIABILITIES OF DIRECTORS Q: when are the directors liable? A: when they assented to unlawful act. VOIDABLE CONTRACTS Q: so here. that the vote of such director was not necessary for the approval of the contract. when there is conflict of interest Q: so here. what could happen? What are the conditions? Sec32 A: the corporation can annul such contract. So. 12/14/11 – Wednesday CUMULATIVE VOTING Q: Cumulative Voting A: He has the option to cast all his votes in favor of one or some or all. these are instances when directors are liable to the corporation and when we say liable. He cajoles the seller to sell the land at the ceiling price. LIABILITY VS. Q: so under what circumstances may the corporation be denied the option to declare it annulled? A: presence of such director in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting. Remember: Generally. what has happened? A: one involves that the director entered into a contract. what is the measure of their liability? A: up to the extent of their profit which the corporation could have gained in the transaction DEALINGS WITH THE CORPORATION Q: are you saying that the director could not be allowed to deal with the corporation? What is the effect if they deal with the corporation? Is it valid transaction? A: voidable. Until the next board meeting where he pushes for/supports the transaction to gain from it personally. Q: because it is voidable. the contract is voidable. the 1 provision shall apply. it is still a voidable transaction or valid until annulled. a director can deal with or do business with the corporation. UNLESS: the presence of such director in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting. INTERLOCKING DIRECTORS Director is a director in two or more corporations. Circumstances it can be declared void or annulled: When the vote of the subject director is necessary to have the resolution passed. the contract has been previously authorized by BOD. he did not enter a contract st If he entered into a contract. with the intent to personally gain from the transaction. Is there conflict of interest already? -Not yet. the contract is fair and reasonable under the circumstances. or When the attendance of the subject director is necessary to form a quorum OR VICE VERSA: The transaction IS NOT be annulled if: Vote of the subject director is NOT necessary. while in the other. that the contract is fair and reasonable under the circumstances and that contract has been previously authorized by BOD. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 27 directors or experts assess for the fair value anyway. he is liable in the second provision but if he is guilty of fraud without entering into a contract. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . the vote of such director was not necessary for the approval of the contract. his presence is necessary to vote In those instances. we now talk of liability on one hand and voidable contracts on the other? How do we distinguish the situation? When would one fall be liable and when would one be liable on a voidable contract? If a director is made merely liable.

before elections we amend our bylaws. So that A who may be a director of airline company and at the same time director of food catering service company Q: may A be disqualified from being director of the 2 corporations? A: cannot be disqualified. A: No. a competitor to seat in the board that would be very suicidal on our part. his being an interlocking director will be questioned Q: but because it involves also a director in effect dealing with corporation where he also seats as a director. what do you think will he do? A: try steal the recipe. nothing is wrong. It will under the instance where a director will be liable for fraudulent transactions or it will fall under voidable transactions because in effect he is dealing with his own corporations and Q: if the director SH deals with his own corporation what is the effect? A: contract is voidable so here being an interlocking director. there is no such thing as preemptive right. That’s why we are not allowing anyone to come in. if he deals with either of the corporations therefore in effect we said the contract is voidable because that director is dealing with his own corporation therefore we apply the rules on a director having transaction with his own corporation. He wanted to join elections of board with big bundle of shares to support coz all he need will be enough votes through shares that he own to assure him a seat on board. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 28 Q: is this allowed? A: yes Q: is this not conflict? A: for as long as there is no fraud Q: so that if A were the director of Philippines Airlines and at the same time a director of a catering company offering in food service in airlines passengers. buy as much shares as I could which is what he did. He is qualified. there is no way they could prevent me from being voted upon. makes some decisions who is also a director of a supplier company and he tells the supplier company. that is a valid amendment. if amendment said provided Lucio Tan should not be nominated in the BOD? Would there have been a difference? if amendment specifies Lucio Tan is not allowed? cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . because he has his own beer company he was wondering what is the secret of that beer giant. Q: however. that’s clearly fraud. like a stockholder of a competitor. the corporation where he seats as a member of BOD. we provide paragraph there that any person who owns also a beer company in direct competition with our company should not be qualified to be nominated as a member of the board. Corporation C department store. they would be worried. So why are they trying to control the big company? What do you think did this businessman do? That owner of a small company. your honor if we allow anyone who holds a beer company. Lawyers said. what is the effect? Did you notice that director is a director of the same 2 corporations. is that allowed? Is there anything wrong? A: that’s allowed. if he is really planning big for a small company. corp1 and corp2 – if corp 1 deals with corp2. Q: So here is a beer company. he will go through the main gate of that beer company by buying shares of that company. this cannot be done. So he went to court and argued to court. So he tried to acquire as many shares as he could and eventually he was ready for the confrontation. I am the owner of the several shares of stocks and under corporation code. if you accept our supplies which I am also a director. among my rights as owner of these shares will be my right to vote and be voted for. they cannot be forced to allow anyone to endanger the very existence of the corporation and so Lucio Tan was not allowed to be nominated in the board of directors of San Miguel. Therefore here is a director who seats in the board. BEER giant said. once this is discovered. that competitor said but this provision is designed solely for me. Q: Do you think that SH to wanted to steal that recipe would be happy to to hear that amendment? A: No. what do we do to prevent that owner to have a seat in the board. so the beer giant consulted his lawyers. is that also valid? A: yes unless it is unreasonable. in effect is he dealing with his own corporation? in a way he is. there is no other person in the country who owns a beer company so in effect they are trying to discriminate me as SH. Q: Do you think Beer giant will be happy to welcome? His objective was to steal the recipe. it’s a starting beer company but trying to get some market shares on the existing beer giant. Those were the arguments Q: and how do you think the SC ruled? A: SC ruled San Miguel vs Lucio Tan (or is this Gokongwei? Not sure). Because this is a public corporation. And so there was no way but the lawyers came up with an idea. your honors. we will be giving you discounts and I will be receiving refunds. BEER GIANT in that country and here is someone who also operates and run another beer company. that would therefore endanger the very existence of our corporation. Unless however there is fraud or unless contract is unreasonable Q: illustrate a transaction tainted with fraud A: corporation D shoe company.

court will said discriminatory. what will happen? A: in a board meeting. imagine if he is there. instead of summons. In Other Words. We simply say anyone who also owns beer company in direct competition to the company. He must just comply with the requirement of having stocks and be a member of the board. once the vice president becomes a member of the board and acquires shares of stocks then being a vice president and being a director. stipulated that the vice president must succeed the president in case the latter dies. before acquiring his shares.applies to member who is a director of a competing corporation PRESIDENT AND VICE PRESIDENT President . so he was validly elected as a vice president. RESOLVING THE CONFLICT: The provisions of the by-laws already provide that the vice president shall succeed the president. he cannot. That way I could succeed the President since I would already qualify for the said position. there are some complaints that our beer is salty. Under the by-laws. CORPORATE OFFICERS Once organized as a corporation. One director may say that he may nominate himself to be president because he had every right to have a chance to be president since he already had shares and was already a director even before the vice president acquired his own shares and had become a director. He may not have been qualified to be President. For the second contention: SC ruled that there is no need for two elections. The law does not require that of him. As an owner he has all the rights to vote and be voted upon that is why the amendment we do not name. then submit yourself to the election of president. What do we do? There should be an election. comptroller we are trying to investigate. chemist. why do we have 80% of market. but not an election for the president. Q: What should be the rule? Interlocking directors? A: General Rule: interlocking directors are valid. but under the law. he should also buy a share in the corporation. If they are directors in 2 competitive corporations. But. why? what is really our recipe? And then he gets the recipe.he must be a stockholder and be a member of the board of director. So how may the vice president qualify if the president dies and yet he is not a director and does not have shares of stocks? FACT: requirement of VP . cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . SITUATION: An individual who was not a director and not a stockholder was elected as vice president. we would like to get 85% of the market. The by-laws on the other hand. that will have to be reviewed specifically if it will endanger the very existence of one corporation. he may now assume the office of the president. Next officer he will invite is chief cook or Chief chemist. But Lawyer of San Miguel was not that ignorant. invitations to appear. then he may assume the position of president by virtue of the by-laws.must be elected as such. He knew that if will name Lucio Tan there. but once he complies with what was lacking then he can validly assume the office of the president. and “mr. is incapacitated or resigns. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 29 A: the amendment will now be discriminatory. we hold a SH meeting to elect members of the board. could you please submit to these board a list of all our customers?” So he gets this list and use it to his own company and try to find who these customers are. UNLESS that person who is supposed to be an interlocking director comes from a corporation who is a competitor of the corporation where he intends to be director – in which case that cannot be allowed. if he succeeds in carrying a seat in the board. He will try to invite chief chemist. In that case. offer them better packages. but an election for the vice president to be a member of the board or to be a director. OTHER CONTENTION: you could buy stocks. he could easily summon some officers of the corporations. there was no requirement of being director and to own shares of stocks. since the vice president was duly elected as the vp. TWO CONTENTIONS: VICE PRESIDENT: I could now buy stocks. submit yourself for election to the board. So there is a conflict now. I could be elected to be part of the board. He was qualified for the position. offer them better price and sooner or later these customers will transfer. like we’d like to invite the comptroller of the corporation so that in that board we “Mr. others may contend that there must be an election of a new president because the vice president was not qualified to be president under the law. The Vice-president on the other hand does not need to be a member of the board of directors to become such. Q: Because that can be very disadvantageous to the SH. There is no requirement that the VP must be a director or that he must also be a stockholder. he could succeed the president. This was accepted by the corporation because to be a vice president. That is the 01/04/12 – Wednesday Disqualification of a stockholder to be nominated as a member of the BOD .

the defect can be cured by ratification. he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting. he could be liable. When a director. Some corporations elect other officers like the chairman. DEALINGS OF DIRECTORS WITH THE CORPORATION May a director of a corporation deal with his own corporation? Yes. that transaction remains binding upon the corporation. Most important: president. However. President vs. Conflict of interest If he was guilty of conflict of interest.A contract of the corporation with one or more of its directors or trustees or officers is voidable. Then the first organizational meeting of the board will commence to elect the corporate officers. . manager. of which he is a member of the board. 01/06/12 – Friday Sec. secretary. department head. 2. Can he offer and enter into a catering services agreement with the company? cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . chief officers. Sec. Dealings of directors. But at the same time. the law refers to only 3 fundamental officers . division heads. Liability of directors. who at the same time operates and runs a catering service. the contract has been previously authorized by the board of directors. That the contract is fair and reasonable under the circumstances. Some officers may not be elected but merely appointed. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 30 Once the board is elected the meeting is then adjourned. its stockholders or members and other persons. this director offered his own catering services to that airline company. That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided. . treasurer. treasurer. These 3 are sufficient. LIABILITY OF DIRECTORS Under what circumstances may a director become liable to a corporation? 1. in violation of his duty. you will already function as a corporate body. he can enter into any transaction with the corporation. Necessarily. If he enters into a transaction with his corporation. what can be done? Being voidable. Basically. even if the director was involved in the transaction. secretary. vice chairman. trustee or officer attempts to acquire or acquires. BODs would enter into illegal transactions 2. however. that would be perfectly valid. the chairman is higher than the President.Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation. trustees or officers. Where any of the first two conditions set forth in the preceding paragraph is absent. in the case of a contract with a director or trustee. Chairman may be elected because he is the eldest of the family or he has the most number of shares. at the option of such corporation. Election of corporate officers basically means electing officers for the entire corporation . So long as you have this. personnel. 3.depends on the size of the corporation. such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided. That the vote of such director or trustee was nor necessary for the approval of the contract. Corporate officers are indicated in the by-laws. Chairman Who is higher? Depends on the by-laws.president. The organization of the corporation must be tailored fit to the purpose of the corp. If it is voidable. 31. How do we reconcile that? Here is a director of an airline company. any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence. unless all the following conditions are present: 1. So here. the contract is voidable at the option of the corporation – voidable in the sense that it is valid until the corporation decides to void such transaction. That in case of an officer. and 4. trustees or officers with the corporation. When the airline company was looking for a catering service provider. SH elect the directors . as to which equity imposes a disability upon him to deal in his own behalf. Gross negligence 3. CEO. That the contract is fair and reasonable under the circumstances. 32. but again this will depend on the powers vested by the by-laws to the officers. VP of department.directors elect the corporate officers.

This beer company was just starting. the transaction is voidable. 33. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . and the BOD decided to choose this particular catering service. Would he not be guilty of conflict of interest? He would not be guilty for as long as he submits a proposition to the board. You have to show that it went through the regular process of approval.Except in cases of fraud. In the case of Gokongwei. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 31 YES. for as long as you are sure that you have not influenced the decision of your board. They learned that Gokongwei already has enough stocks to put himself in the board. Otherwise. and they think it is too much. Gokongwei bought shares of stocks left and right of SMC until he was able to accumulate enough stocks to put him in the board. and I own an insurance company offering passenger insurance. Contracts between corporations with interlocking directors. You could always let someone assume ownership of your stocks but eventually. If he can submit a proposition that is reasonable and competitive at the same time. they will have to monitor the shareholdings of every stockholder. in an election. Your presence as such director in the board meeting in which the contract was approved was not necessary to constitute a quorum b. and provided the contract is fair and reasonable under the circumstances. then that transaction is perfectly valid. even if interlocking directors are allowed. . If they availed of the catering services and the corporation would then ask for a higher price. a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided. Being an interlocking director. I am free to offer my tires to the land transportation company for as long as the transaction is fair and reasonable. SEC (89 SCRA 336 [1979]). No person was specified. So long as you are sure that you have complied with all the procedural requirements on bidding for example. Sec. if the director would not be allowed. There’s no such law. Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. INTERLOCKING DIRECTORS Who is an interlocking director? He is one who sits as a director in two or more corporations. There should not be any conflict of interest because he should submit it to the board for approval. I can also deal with the airline company. That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal. Jr. Usually. He could concentrate all his votes by cumulative voting to guarantee himself a seat in the board. no one would like to become a director. then it is no longer fair and reasonable and they could always have the transaction voided. So. So there is nothing wrong with it so long as it is fair and reasonable.” That was the provision. SMC became aware of this because during the trading of the stocks. But here. they was slowly crept into the market share of the beer giant SMC. And so. So that if I am a director of an airline company. So what makes a transaction fair and reasonable? How should a director establish that it is fair and reasonable? You show that the proper procedures were observed. v. and I am dealing with tires. then he would not be liable for conflict of interest. As a matter of fact. Is there a law prohibiting a person from becoming a director in two companies who are engaged in the same business? No. he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. you can only cast votes according to the volume of stocks listed under your name. there are ways of avoiding them. It is incumbent upon that director to prove that the transaction is fair and reasonable. the legal team decided to amend the by-laws of the corporation. If done in a legitimate way. No name was mentioned. If I happen to be a director of a land transportation company. They were able to introduce the amendment by indicating there something to this effect: “That no person who is a director of another corporation engaged in a business similar to our business should be qualified to be nominated to the board. More importantly. which they did before the elections. indeed it is advantageous. you prove that you have not influenced the decision of the board by showing that: a. there is nothing wrong with a director to entering into any transaction with the corporation. petitioner Gokongwei was a director of a new beer company. Otherwise. an interlocking director is perfectly allowed. he could share his knowledge and experience in one corporation with the board of another corporation engaged in the same business. There was a proper bidding where everybody was given an opportunity to offer their services. the legal team of SMC was consulted. but because of their price strategy. Your vote as such director was not necessary for the approval of the contract Point is. they were able to identify through the stock and transfer agents and spies. publicly listed corporations engage the services of stock and transfer agents who monitor every movement of every share of stock. They want to know what they can do to prevent Gokongwei from becoming a director. Here. However. However. there are instances wherein a director in one company cannot be allowed to be a director in another company who is a direct competitor.

saying that. nothing could prevent this guy from inviting the officers of SMC to the board meeting in the guise of inquiring. . once this guy is already in the board. it is seldom to meet and just removed somebody but law is clear. DISLOYALTY When we talk of disloyalty. notwithstanding the fact that the director risked his own funds in the venture. or it could call on the brew master and try to inquire in the board meeting under the guise of improving the quality of the beer. And this guy was a director in that corporation. he also requested that the list of customers be brought and presented to the board. That was what he questioned. Necessarily if he is removed. among others. “I’d like to invite our VP for marketing. Removal may be with or without cause: Provided. Now. “You know we should not take this opportunity because it’s bad. the distributor of beer in that city decided to give up his franchise. Removal of directors or trustees. the director. “What’s happening to the quality of our beer? Where is the formula? I’d like you to explain the formula. on the written demand of a majority of the members entitled to vote. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 32 And so this director from this new beer company questioned that amendment. He could be removed even without cause of course that there should be notice for him to be able to know the reason for the removal. he could always share that with the other company. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees. by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided. This provision shall be applicable. 28. Once you have that list of customers. But then. acquires for himself a business opportunity which should belong to the corporation. 01/11/12 – Wednesday Sec. “Now these are the customers of our competitor. It so happened that in Mandaue City. SH could move for removal. .Where a director. To remove a director what is supposed to be done? A meeting will be called and there is due process? Notice should be served. there is a possibility that the very existence of the corporation would be affected. or if the corporation be a non-stock corporation. with or without cause simply indicates that the director serves at the pleasure of fellow members of board or SH. EXAMPLE: A corporation is engaged in the distribution of beer in Cebu City. Notice of meeting is done how? that removal of director may be done with or without cause. claiming that the amendment violates his right of ownership. Would be a director would be entitled to stay like any other government official? NO. Go! Visit these customers and offer them attractive packages of our products. by virtue of his office. Notice of the time and place of such meeting. who ruled that the amendment was valid. So he used his influence to get the franchise for himself. The director tried to influence his fellow directors in the board. or if there is no secretary. Although in practice this seldom happens. unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. There was a danger that in the entry of this director. if it be a non-stock corporation.” It could be that. Disloyalty of a director.Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock. we have learned that his ownership carries. the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. by virtue of his office. why is our sales going down?” So during that meeting. as well as of the intention to propose such removal. thereby obtaining profits to the prejudice of such corporation. 34. That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose. after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. So the beer company offered the franchise to the corporation. what could happen? There could be vacancy. must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock. so he’ll inquire from the brew master. and in either case. acquires for himself a business opportunity which should belong to the corporation. thereby obtaining profits to the prejudice of such corporation. So. There is actually no cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . must be given by publication or by written notice prescribed in this Code. the next day. interlocking directorship is allowed. unless. the right to vote and to be voted upon. or any of them.” That’s what they were afraid of and so it was discouraged. he must account to the latter for all such profits by refunding the same. As an owner of stocks. he formed his own group and they took the franchise. he might just say. Because truly. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice. or. the corporation itself through its by-laws will prevent or try to prohibit the nomination of any person who could cause or jeopardize the very existence of the corporation. REMOVAL Consequence of being disloyal: suffer all the liabilities and return the profit And because of this disloyalty his behavior calls for more drastic action from the SH. the case was brought to the SC. blah blah blah…” So the board decided not to take the opportunity. Sec. That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code. Both parties presented their evidence and SMC was able to convince the SC. Notice of hearing of the possible items to be discussed and which most likely to indicate the removal of the director.

necessarily law requires that it must be the board who should elect president and law further requires that the president be elected. Executive committee was created by law and that creation must be indicated in the by-laws. they can stop corporation so long as they take care of creditors. corporation owes its existence by state. this is a limitation. removal. the power to remove a fellow director might be abused in a way that the right of the minority to be represented in the board might suffer. to compliment functions of board. state limits its powers and distinguish by partnership. . Objective of law of creating Executive committee: to give BOD opportunity to focus on more relevant matters. There is a need to amend. Other than removal or expiration. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 33 requirement to find cause for removal. expiration .a partnership theoretically holds more power than a corporation simply because the corporation is a creation of state and being a creation of state. disqualification. So when do we give it to executive committee? . . VACANCY Once vacancy occurs what could happen? .partnership is more powerful. If vacancy occurs by removal or expiration. Vacancy may be filled up by SH if there is increase in the number of directors.day to day transactions. So here. may be filled by SH. If executive committee can elect president. If board member minority is party guilty of abused. Executive committee can act in routinary matters. if there was no limitation. So how is vacancy created again? Vacancy is created when director abandons. Increase in the number of directors by the amendment of AOI. increase in number of directors Creation of vacancy would depend upon the cause so that if vacancy occurs and director is unable to finish his term. so corporation can only perform powers provided for by corporation.may be filed majority of the SH or directors. In practice. Although same with corporation.the partnership is a contract by agreement of powers. there is a cause for removal. retires. can partners stop business anytime? yes. Law requires during organizational meeting that president must be elected by the board of directors. the successor or the replacement will serve for the unexpired term. Amendment is necessary and if that creates a vacancy in the board. Removal creates a vacancy. because the number of directors are indicated in the articles. without bod abdicating their functions. that is tantamount abandonment of office as directors. Once removed there could be vacancy. When are SH required to fill up vacancy . They cannot even amend resolution unless that resolution allows amendment. As to partnership. In hiring a president? hiring a president is not a routinary act. EXECUTIVE COMMITTEE When may a matter be referred to the board. Once that minority is represented they might have one member of the board. vacancy may be filled up by BOD. protect minority at the same time members of board based on trust and confidence. They cannot do that. resignation. Exceptions: a) approval of any action for which shareholders' approval is also required b) filling of vacancies in the board c) amendment or repeal of by-laws or adoption of new by-laws d) amendment or repeal of any resolution of the board e) distribution of cash dividends to the shareholders Are we not allowing absolute delegation? NO. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . but there are certain requirements to follow.filling up of vacancy would depend upon the cause. That right should not be exercised if the minority could be deprived of his representation. he can be removed. that’s the only concern. he could be removed even w/o cause Intention of law. . when may a particular be referred to an executive committee? The executive committee can act of matters which a board which supposed to act. they are in effect amending the by-laws. removal . POWERS OF CORPORATION Which is more powerful? corporation or partnership? . vacancy is filled depends on the reason for vacancy. otherwise the consequence if there is no cause for removal.

lease. the decision making in partnership is much faster. would be more powerful than corporation. they still have to go through process. not contrary to law. as the transaction of the lawful business of the corporation may reasonably and necessarily require. 10. then the requirement are not as much and as cumbersome of that corporation. morals. To enter into merger or consolidation with other corporations as provided in this Code. . 36. to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 34 If they want to donate? Corporation can donate but not to a political party. implied powers 3. To sue and be sued in its corporate name. subject to the limitations prescribed by law and the Constitution. or public policy. 2. and to amend or repeal the same in accordance with this Code. and 11. gives tooth to the powers already exercised by the corporation 01/13/12 – Friday CLASSIFICATIONS OF POWERS The three classes of powers of a corporation: Express powers – directly conferred by law Implied powers – reasonably necessary to carry out the express powers Incidental powers – inherent to a corporation. we have to go through securing permission from SEC for issuing of shares of stock. incidental to the existence of the corporation How would we know whether or not a corporation has this certain power? Express – we just have to inquire from the law or statute that granted the express powers of the corporation Implied – the test is whether or not these powers are reasonably necessary to carry out those powers expressly conferred Sec. hold. What could be some power of corporation? 1. To establish pension. In corporation. they are allowed to donate. 8.Every corporation incorporated under this Code has the power and capacity: 1. To purchase. express powers 2. To amend the articles of incorporation in accordance with the provisions of this Code. scientific. To adopt by-laws. and to admit members to the corporation if it be a non-stock corporation. 3. 4. cultural. as long as no creditors are affected. not contrary to law. 5. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. trustees. they could donate. they exercised their power is much faster than that of a corporation. domestic or foreign. To sue and be sued in its corporate name. or similar purposes: Provided. In so far as source of capital. 2. including securities and bonds of other corporations. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . incidental to existence. To adopt and use a corporate seal. for corporation. 9. shall give donations in aid of any political party or candidate or for purposes of partisan political activity. the exercise of its power would be referred to SH most especially existence of corporation. In other aspects of donation. mortgage and otherwise deal with such real and personal property. 7. receive. and to amend or repeal the same in accordance with this Code. or public policy. Although in terms of capital. In other words. Section 36 Corporate powers and capacity 1. take or grant. A partnership may also be prohibited. In case of stock corporations. Express powers: those laid down by law Implied powers: tools to carry out what is expressly created. retirement. civic. That no corporation. POWERS OF THE CORPORATION. including those for the public welfare or for hospital. and other plans for the benefit of its directors. convey. because they decide faster. morals. In partnership. 5. To make reasonable donations. 3. To adopt and use a corporate seal. once parties agree to put in more capital. In corporation. To amend its articles of incorporation in accordance with the provisions of this Code. Theoretically partnership. pledge. unlike a corporation. partnership has the leeway to increase its capital. necessarily there are instances when you have to consult SH themselves which are inconvenient. To adopt by-laws. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation. sell. officers and employees. in corporation it is unlimited. charitable. Corporate powers and capacity. 4. 6. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation.

take or grant. or for the purposes of partisan political activity are prohibited so as the officials who would be elected sooner or later will not be given the opportunity to circumvent the law or make illegal transactions with the corporation in consideration for the help that has been given by such corporation. or similar purposes: Provided. and when the Bureau of Customs apprehended them. the effect is that the party could be declared in default. Without the resolution. lease. So. pledge. hold. Section 36(9) Why are corporations prohibited from making donations to political parties especially during election time? Such that if Estrada had won for example. If he has no authority to attend the pretrial. he has no authority to file a case. they will smuggle in some items which are not allowed. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 35 6. The pretrial is set and both parties were called for a pretrial conference. cultural. Alright. including securities and bonds of other corporations. authorizing him to represent the corporation. subject to the limitations prescribed by law and the Constitution. civic. receive. To purchase. 10. That is precisely the reason why the law does not allow it. To enter into with other corporations merger or consolidation as provided in this Code. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . mortgage and otherwise deal with such real and personal property. So now. and other plans for the benefit of its directors. So. 8. During the pretrial what could happen? There could be a stipulation of facts. 7. a simple collection case for example. the donations in aid of any political party or candidate. they will engage in smuggling. That authority must be specific. the opposing counsel should be able to present the appropriate resolution or authority from the corporation. they could not enter in to a compromise agreement because they do not have the authority during pretrial. including those for the public welfare or for hospital. so there was proper complaint. 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. So. 9. then this corporation wanted to recover what it donated to Estrada. domestic or foreign. and most importantly. The culture of corruption is deeply entrenched in the system. So. enter in to a compromise agreement or an amicable settlement. Section 36(1) If you were the lawyer of a corporation who filed a case against somebody else. To prove that we have the authority to sue and be sued. everything was already supported with proper authority. So those are the things that we have to prepare. And because the defendant was also a corporation. the case was dismissed and in another case which was re-filed. the defendant filed an answer on behalf of the corporation. the right to succession is given to those remaining Board of Directors or stockholders. POWER OF SUCCESSION. what do you think he might do? Estrada as a president might be extending them favors. the lawyer can never represent the corporation. That no corporation. and 11. trustees. Subsequently. what do you think should you first prepare? The first thing that lawyer should do is to ask for a board resolution authorizing him to represent the corporation. and let us just assume that Estrada was able to receive a donation from a big corporation. As a matter of fact. for without that authority. among others. That would be a source of corruption. we present a board resolution. he might be giving them a chance or opportunity to circumvent the law. sell. he does not have the authority to represent the corporation If you were also the adverse counsel. the counsel should be ready to participate in the pretrial conference and they should have the authority to. convey. To make reasonable donations. stipulate facts or admissions. officers and employees. scientific. what would the counsel for the defendant do (if there is no board resolution)? He can file a motion to dismiss on the ground that the counsel is the improper party – that the case was not filed on behalf of the real party. That’s in the law but whether or not the law would be able to address it is a big question. and to admit members to the corporation if it be a non-stock corporation. POWER TO MAKE REASONABLE DONATIONS. Section 36(2) What is the power of succession? Succession is one of the features of the corporation wherein in case of death or retirement. what will you do? You can inquire if the opposing counsel has with him the board resolution. in the pretrial order. Thus. retirement. the compromise agreement is not binding upon the corporation. shall give donations in aid of any political party or candidate or for purposes of partisan political activity. To establish pension. as the transaction of the lawful business of the corporation may reasonably and necessarily require. Without that board resolution. In case of stock corporations. to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code. Succession is the power of the corporation where its existence is continued despite death of its directors or stockholders. charitable. the right transmits to the heirs who will in turn become stockholders themselves POWER TO SUE AND BE SUED.

must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting. So again. creating or increasing of any bonded indebtedness. 37. If corporation A would merge with corporation B then the surviving entity would either be corporation A or corporation B. In effect. So for example if corporation A and B would consolidate. what are our concerns if we extend our term? There might be some SH who are no longer interested to remain in the corporation or who might want to disengage themselves from the corporation.No corporation shall increase or decrease its capital stock or incur. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 36 Sec. or served personally: Provided. For example you are a corporation engaged in selling cars then probably you will enter into a merger or consolidation with another corporation which is engaged in the production of cars so it would be easier to control the quality of your cars. Consolidation – is also a form of business combination wherein two or more corporations would combine and they are forming an entirely new corporation or entity. setting forth: (1) That the requirements of this section have been complied with. Power to extend or shorten corporate term. if the corporate term is reduced. create or increase bonded indebtedness. (2) The amount of the increase or diminution of the capital stock. two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock. they will dispose or distribute their assets. MERGER CONSOLIDATION When two or more corporations merge together. why is the corporation also given the power to extend its corporate term? If the business is doing well. any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. That’s why the law requires that there should be a meeting and it should be duly approved by a majority vote of the Board of Directors and ratified at a meeting by the stockholders representing at least 2/3 of the outstanding capital stock. incur. (with all of their assets and all of their liabilities) and all of these constituting corporations will be dissolved and a new one will be born or created. That in case of extension of corporate term. On the other hand. create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and. 38. These changes must also be indicated in the articles of incorporation. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid. or served personally. (n) POWER TO EXTEND OR SHORTEN CORPORATE TERM. a new corporation. So. Section 36(8) Distinguish Merger from Consolidation Merger – is a form of business combination wherein an entity is acquired by another corporation and there is only one surviving entity. there is a good reason to extend its term. Written notice of the proposed increase or diminution of the capital stock or of the incurring. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . Section 37 Why should a corporation shorten its term? The Board of Directors or the stockholders probably realized that the business is no longer profitable. . So we have to address their concerns. corporation C. one will be Two or more corporations consolidate themselves together dissolved and the other will survive. Sec. That’s why although it is allowed to shorten its corporate term. one corporation is dissolved and the other corporation survives. So. POWER TO ENTER INTO WITH OTHER CORPORATIONS MERGER OR CONSOLIDATION. It should address the concerns of the creditors first. the law requires that it should not affect or it should not prejudice the rights of its creditors. It cannot be allowed to terminate its existence without addressing its creditors’ interests or rights. And if they have to dispose their assets. then the corporate property or assets may be disposed and there is a possibility that the corporate assets would not be enough to satisfy its liabilities to the creditors. at a stockholder's meeting duly called for the purpose. or the incurring. although allowed. creating. . If they have to liquidate or dissolve. Power to increase or decrease capital stock.A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. the creditors may be affected as it involves their (the creditors’) rights. Why should corporations form mergers or consolidations? Corporations merge or consolidate probably because they want to expand their market or expand their operations. or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered. they are liquidating. is created.

Section 38 Reason for the increase of capital stock: Probably they want to acquire more capital. So if you had 30% shareholdings then by increasing the capital stock. creating or increasing of any bonded indebtedness authorized. POWER TO INCUR. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 37 (3) If an increase of the capital stock. if you have the money. as the certificate of filing may declare: Provided. OR INCREASE BONDED INDEBTEDNESS. (17a) POWER TO INCREASE OR DECREASE THE CAPITAL STOCK. (5) The actual indebtedness of the corporation on the day of the meeting. then there would be no more guarantee for the creditors. you should protect your interest. There must also be a certification signed by a majority of the BOD and countersigned by the chairman and the secretary. Problem is. There must be an approval by a majority vote of the BOD and. So by increasing their capital stock. If you increase the capital stock. a decrease or capital. Here. (6) The amount of stock represented at the meeting. you want to protect that 30. the amount of capital stock or number of shares of no-par stock thereof actually subscribed. if you don’t have the resources to buy the shares. at least these creditors’ concern has been duly addressed. at a stockholders’ meeting duly called for the purpose. On the other hand. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . which shall have the authority to determine the sufficiency of the terms thereof. be ready for a reduction of your control. created or increased. (4) Any bonded indebtedness to be incurred. the amount of capital stock or number of no-par stock subscribed by each. probably your 30 percent would now be 25 %. Why would the law allow decreasing if indeed it would jeopardize the interest of the creditors? Are there protections which would address their concerns? There are protections given by the law. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing. Either the creditors were paid. Do we have any problem there? One stockholder may not be able to maintain his interest or control in the corporation. and the amount paid by each on his subscription in cash or property. what could be the effect? Would we have a problem? The creditors would be prejudiced since we said that the capital is held in trust for the creditors. stating that no creditors would be prejudiced by such move. it should be approved by the SEC. then subsequently the corporation would issue new shares and of course being a stockholder. Section 38 This is a bonded indebtedness and not just a plain loan because the principal debt has a security which is the bond. You r shareholdings will be diluted. or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized. You have 30% holdings. Non-stock corporations may incur or create bonded indebtedness. further. The thing is you must prove to the SEC that the creditors’ concern has been addressed. you could make additional subscriptions and protect your current interest. or increase the same. Most likely. or the incurring. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. creating or increasing of any bonded indebtedness. nationalities and residences of the persons subscribing. with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. the corporation obligates itself to pay a definite sum of money at a fixed time with a fixed interest. showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided. CREATE. That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate. in violation of the trust fund doctrine. so when the corporation decides to decrease its capital. That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. by a vote of the stockholders representing at least 2/3 of the outstanding capital stock (CS). Anyway you are assured of that because of your preemptive right. the names. or that the creditor were assured of something else to protect their interest in the corporation. Maybe there were some arrangements. Any increase or decrease in the capital stock or the incurring. the capital stock shall stand increased or decreased and the incurring. So if the corporation decreases it. and (7) The vote authorizing the increase or diminution of the capital stock. then subscribe to the increase. Even if there were. they can issue more shares thereby increasing their resources to finance their operations. creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission.

the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. It does not apply to shares that are being reoffered together with all the shares. Shares issued in good faith in exchange for property needed for corporate purposes. lease. After such authorization or approval by the stockholders or members. with an undertaking to pay after a certain period with a certain interest. 3. depending on the term of these bonds. pledge or other disposition of property and assets. when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock. If you are interested to buy these bonds. in exchange for property needed for corporate purposes or in payment of a previously contracted debt. including its goodwill. exchange. The terms and conditions of these bonds are also indicated on the bond itself. without further action or approval by the stockholders or members. So these bonds are more or less mere promissory notes. exchange. you go to the bank and present the bond. So if I were the corporation needing capital. In non-stock corporations where there are no members with voting rights. nevertheless. This is what we call floating bonds. unless such right is denied by the articles of incorporation or an amendment thereto: Provided. That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. So these are what we call bonded indebtedness. Section 39 Basically. pledge or otherwise dispose of all or substantially all of its property and assets. . POWER TO DENY PRE-EMPTIVE RIGHT. the stockholders have the preemptive right which means that they have the right to initially subscribe to these shares before they are offered to the public. . in its discretion. lease. upon such terms and conditions and for such consideration. stocks. a corporation may. in proportion to their respective shareholdings. without the authorization by the stockholders or members. and the bank will pay you plus interest. or served personally: Provided. Power to deny pre-emptive right. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 .All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class. by the vote of at least to two-thirds (2/3) of the members. or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock. allowing them to issue bonds to the public. in a stockholder's or member's meeting duly called for the purpose. subject to the rights of third parties under any contract relating thereto. Nothing in this section is intended to restrict the power of any corporation. That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public. abandon such sale. mortgage. Shares to be issued to comply with laws requiring stock offering or minimum stock ownership by public 2. But there are circumstances wherein these preemptive rights are denied. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 38 The corporation might need additional cash or capital. The disposition of those assets is leading to the cessation of operations of the corporation as it already involves the capital. you just go to the corporation. and they would rather not go the bank because the bank sometimes imposes excessive charges and interests. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. Sale or other disposition of assets. to sell. and the bank will be the one to issue the bonds in the name of the corporation. mortgage. So what they usually do is borrow from the public. They would first secure authority from the SEC. and these bonds contain some serial numbers. pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. Waiver of the right by the stockholder Sec. lease. exchange. sell. bonds or other instruments for the payment of money or other property or consideration. corporations would endorse these bonds to a bank. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid.Subject to the provisions of existing laws on illegal combinations and monopolies. I would issue bonds. by a majority vote of its board of directors or trustees. perhaps after 5 years. or in case of non-stock corporation. which may be money. In case the right is denied in the articles of incorporation 5. Sec. 4. So. mortgage. the board of directors or trustees may. as its board of directors or trustees may deem expedient. 40. 39. but usually. (28 1/2a) SALE OR OTHER DISPOSTION OF ASSETS. Section 40 It involves the capital assets of the corporation. this is what we refer to when the law says bonded indebtedness. Instances when Pre-Emptive right is not available: 1. when a corporation issues shares. and so it must be approved by the BOD and ratified by the stockholders representing at least 2/3 of the outstanding capital stock.

in property. and to purchase delinquent shares sold during said sale. 41. because I thought management is vested in the board. . Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid. . 42. 43. To collect or compromise an indebtedness to the corporation. We refer to the stockholders only if we invest for other than the primary purpose. the approval of the stockholders or members shall not be necessary. Sometimes they engage the services of private aircraft companies or sometimes they have their own private planes to spread the fertilizers. In a banana plantation in Davao for example they have aircrafts spreading the fertilizers. Here we are just trying to invest but why should we bother ourselves to inform the stockholders? Here. which can be resold by the corporation back to the stockholders. Power to invest corporate funds in another corporation or business or for any other purpose. To eliminate fractional shares arising out of stock dividends. Sec. or by at least two thirds (2/3) of the members in the case of non-stock corporations. So that if the corporation is engaged in farming. Power to declare dividends. That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation. there must be a written notice to the stockholders. or served personally: Provided. That was my concern. and that is what we call redeemable shares. if they want to relieve themselves. would this already be tantamount to disposal? The disposal should be substantial and the SC in a decision stated that substantial is 80% and 6 is not 80% yet so it cannot be considered substantial disposition of the assets. at a stockholder's or member's meeting duly called for the purpose. further. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 39 If a corporation engaged in a transportation business has 10 buses. That any dissenting stockholder shall have appraisal right as provided in this Code: Provided. That’s stretching too far as it is not related at all. Of course. not all investments of the corporation should be referred to the stockholders. so he needs an aircraft to survey the area.The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash. the proceeds of the sale would necessarily go back to the corporation. it can be justified. That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. including but not limited to the following cases: Provided.A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes. then those requisites do not apply. a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock. the corporation needs additional capital. If for example there are thousands of hectares to farm and the farm manager wants to take a look at every square inch of the farm. (17 1/2a) POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION. (n) POWER TO ACQUIRE OWN SHARES. could it invest in a corporation which is engaged in airlines? The requisites under section 42 must be complied with because it is not in relation to its primary purpose. however. 2. So. Although the law says that the disposition of substantially all of its assets should be to the effect that it would not be able to pursue or perform further its business or objectives. or in stock to all stockholders on the basis of outstanding stock held by them: Provided. Its primary purpose is farming. Section 42 If we invest in another corporation. If it is for the primary purpose. the requirement is in relation to making investments for purposes other than the primary purpose of the corporation. That no stock dividend shall be issued without the approval of stockholders cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . . Section 41 Example. and 3. they could use their… (HA! HA!) Sec. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. arising out of unpaid subscription. the passengers of the aircraft would not use the fertilizers and instead of spreading the fertilizers. Sec. Power to acquire own shares. That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses. Sometimes. They spread the fertilizers in their plantation through the use of an aircraft. The corporation used its own funds to reacquire these treasury shares and if it sells back these treasury shares.Subject to the provisions of this Code. and it disposed 6 of their buses. and it must be approved by a majority vote of the BOD and ratified by a vote of the stockholders representing at least 2/3 of the outstanding capital stock. while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided. in a delinquency sale. it is required that it must be in furtherance of the primary purpose of the business but like the other powers. in a meeting duly called for the purpose. Is it related? It is still not related. they now become treasury shares. Once we reacquired those redeemable shares. so it can sell some shares with the promise that it can buy them back later with interest.

Especially if we have a lot of treasury stocks. and the stockholders decided to put it back to the corporation. If they send back part of the capital to the stockholders. The same money was again taxed by the BIR when it was distributed to the stockholders. As we said. Cash Dividends The corporation gives dividends by way of cash to the stockholders based on their shareholdings. Once the corporation declares cash dividends. Stock Dividends Stock dividends are given when a corporation wants to distribute dividends in the form of stocks. we retain the cash and issue stocks to the stockholders. it is the same money that ought to go to the stockholders. the distribution of stock dividends is simply a transfer from the profits to the capital account. the stockholders would declare in their Income Tax Return that they have received income from the corporation by way of cash dividends. from declaring dividends without its/his consent. the stockholders are richer. So. What is required in cash dividends? Only the approval of the board. That will be part of the taxable income. But when this money was earned by the corporation. But it is not fresh capital. it would be in violation of the trust fund doctrine. we could distribute them as property dividends. So double taxation. What did the BIR do there? It was already taxed by the BIR as corporate income. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock. When would the stockholders’ conformity be required? Only in case of stock dividends. or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor. but in stocks. in the filing of the income tax return. In effect we are still distributing portions of the profits but because we do not have cash but we have excess property. it will be taken from the capital and therefore. the corporation could not distribute dividends. That’s why the corporate stockholders cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . not in cash. we could decide to distribute the properties instead. you give them stocks. it will be dragged out of the profits into the assets of the corporation. are we not distributing assets in violation of the trust fund doctrine? No. it distributes cash to its stockholders. we do not need the treasury stocks. as if the stockholders themselves had invested fresh capital. And these cash will no longer be part of the profits. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 40 representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. in the books of the corporation. except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors. or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation. Every end of the year. there was income to the corporation. Types of Dividends: 1. Therefore. Instead of giving them cash. It is their share of the profits of the corporation. We cannot distribute assets which are part of the capital but sometimes these properties are considered as profits or earnings in the books of the corporation so it is lawful to distribute them. instead of distributing cash. we cannot distribute these unless we have profits. Stock Dividends 3. if they declare cash dividends without profits. Section 43 What are dividends? Dividends are given to the stockholders as a return of their investments. (n) POWER TO DECLARE DIVIDENDS. Cash Dividends Property Dividends We issue property dividends when the earnings of the corporation are not in cash so you issue these property dividends to the stockholders because the corporation cannot issue cash. Property Dividends 2. This is especially true if the corporation needs these profits to be invested again to the corporation. The source of the dividends is nothing else but the profits of the corporation and without profits. Basically. such as when there is need for special reserve for probable contingencies. So when we distribute property dividends. But this is allowed because this is income. and such consent has not yet been secured. Otherwise. whether local or foreign. they are not distributing dividends but rather they are distributing the assets.

the law allows 3 exceptions: 1. In corporation. especially the family corporations. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 41 would not be happy about this. they should not return. RULE ON SET-OFF OF DIVIDENDS WITH UNPAID SUBSCRIPTIONS: If cash dividends are issued. the corporation still survive bec of the power of succession. if the corporation was solvent. it was discovered that there was no profit at all. When the corporation is prohibited under any loan agreement with any financial institution or creditor from declaring cash dividends without securing its/his consent. they would charge those as expenses. So what happens to the cash dividends? It depends if the corporation is solvent or insolvent: INSOLVENT: If the cash dividends were declared at a point of time when the corporation was insolvent. there are conflicting views: 1. When the auditor reported for work the following year. Beyond 100%. the corporation would be penalized with improperly accumulated earnings tax. That’s what they do. BIR says. Otherwise. and you have an unpaid subscription. Stockholders do not have the right to demand as the declaration or issuance of dividends is discretionary on the part of the board. That’s the amount that the corporation will distribute. proceeding to Switzerland. the partnership is dissolved. if you do not declare. It was Christmas time and the board wanted the stockholders to be happy so they declared cash dividends. it becomes a right to the stockholders once the surplus profits exceed 100% of their paid-in capital stock. when one of the stockholders die. SOLVENT: On the other hand.In that plane crash when all the stockholders die. They would not issue cash dividends because they do not want to be subjected to double taxation. they must declare cash dividends. it was insolvent. No tax there. such stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid. passing by Rome. if they buy tickets. If stock dividends are declared instead and there is an unpaid subscription. the board declared cash dividends. 2. What happens to the stocks of the dead stockholder? . No tax. The death of the stockholder does not dissolve the corporation. Espedido is inclined to believe that it should be returned because it violates the trust fund doctrine. Not only did the corporation not have any profit. However. and then to Singapore. or 3. 1/18/12 – Wednesday Power of succession In partnership when one partner dies. As a matter of fact. its assets were less that the liabilities. they will have to return because clearly it was unfair. the corporation. When justified by definite corporate expansion projects or programs. the corporation is not dissolved. so deductible. SOLVENT VS INSOLVENT: One day.The heirs of the stockholder who dies will become the stockholders themselves. such as when there is a need for special reserve for probable contingencies. Atty. Pre-emptive rights The preferential rights of the stockholders to subscribe for new shares Purpose: to retain the extent of controlling interest Power to deny pre-emptive rights: (Instances) cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . . they become due. you are not entitled to payment unless it should be first applied to the unpaid subscription. they can now demand for the dividends. In other words. Arriving at Amsterdam. RULE ON FALSE DECLARATION OF DIVIDENDS (DECLARED BUT LATER ON DISCOVERED THAT NO UNRESTRICTED RETAINED EARNINGS). yes they should return. Once these dividends are declared. In which case. what did the code provide? The corporation code provides that corporations are now prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock. When it can be clearly shown that such retention is necessary under special circumstances. What would they do every year? The corporation will say it will not have dividends but it will have a stockholders’ meeting in Europe. as much as possible would try to avoid a second tax on the same money. 2. then on to Germany. However. Because this was already becoming an irritant. instead expense. Here. But can the stockholders demand that the board should now issue or declare dividends? No. so the corporation would not always issue cash dividends. The other says no. but the only thing was that it did not have profits. continues to exist for a period stated in the articles of incorporation. One says.

or 3. the debtor is liable whether there are profits or not. Otherwise. In this case. A debtor. but because the LAW requires them to declare. The investor is entitled only if there are profits in the same manner he is liable for losses. If in good faith and is ratified by SH representing 2/3 of the outstanding capital stock. Whatever happens. the stockholder is a debtor. such as when there is a need for special reserve for probable contingencies. The payment of unpaid subscriptions is a mandatory obligation. issuance is made in payment of a previously contracted debt Power to issue dividends 3 types of dividends: 1. In effect. the corporation now becomes the creditor. Dividends are sourced from profits. Otherwise. When you subscribed you enter into a contract with the corporation which is called the subscription agreement. But the dividends can be offsetted to the stockholder’s liability to the corporation. DEBTOR The investor took the risk of losing. The source of their obligation is the CONTRACT named as the Subscription Agreement. With respect to dividends. This is not provided in the AOI. Cash dividends . then. The moment the unrestricted retained earnings exceeds 100%. a. Declaration of dividends vs. When one entered in such agreement. They will merely rely on the declaration of dividends and apply it later in payment of unpaid subscriptions. On the other hand. their shares will be declared delinquent and offered to be sold in public. issuance is made in exchange for property needed for corporate purposes 4. While in unpaid subscriptions. WHY CAN THE CORPORATION COMPEL THE STOCKHOLDERS TO PAY UNPAID SUBSCRIPTIONS WHILE THE STOCKHOLDERS CANNOT COMPEL THE BOARD TO DECLARE DIVIDENDS? The power of the corporation to compel the stockholders to pay unpaid subscriptions because their relationship is based on a contract (the subscription agreement entered into by the stockholder with the corporation) On the part of the stockholders. They took the risk of losing or gaining profits. they cannot be compelled to pay their unpaid subscriptions. Property dividends – if no enough cash for the corporation. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . When the stockholders enter into a contract. the stockholders can compel because the LAW requires The stockholders cannot be compelled to pay unpaid subscriptions. The stockholders are now considered investors. the declaration of dividends cannot be compelled. the stockholder is an investor. it is allowed to issue property dividends in lieu of cash. He owes the corporation the remaining unpaid subscription. Stock dividends – dividend payable in unissued or increased or additional shares of the corporation instead of in cash or in property out of the unrestricted retained earnings. 2. the stockholders became the debtor. Before dividends are issued. they have made their commitment to pay their subscriptions. If in good faith and is ratified by SH representing 2/3 of the outstanding capital stock. When justified by definite corporate expansion projects or programs. 2. he has the obligation to pay. When it can be clearly shown that such retention is necessary under special circumstances. 2. While in a debtor. 3. it becomes their obligation to pay the unpaid subscriptions since at the inception of the corporation. When the corporation is prohibited under any loan agreement with any financial institution or creditor from declaring cash dividends without securing its/his consent. it is required that there must be profits. If the law requires the minimum initial public offering. there is no debtor-creditor relationship. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 42 1. Cannot compel the board to declare dividends because it is DISCRETIONARY on the part of the board GENERAL RULE: SH cannot compel the board to declare dividends EXCEPTION: When there is excess accumulated earnings or unrestricted retained earnings this is not based on the assumption that the stockholders can compel them to declare. INVESTOR vs. Exceptions if the corporation has accumulated earnings in excess of 100%: 1.dividend payable in cash 3. It is like an investment of the stockholder. they have entered in a subscription agreement. Payment of unpaid subscription Only the board may demand to declare dividends.creditor relationship arises between the corporation and the stockholders. if the stockholder refuses to pay the unpaid subscriptions. The stockholders cannot compel the board declare dividends.

YOUR GUIDE IS: WILL THAT MANAGEMENT AGREEMENT GO IN CONFLICT WITH THE PRINCIPAL BUSINESS OF THE CORP? If yes. can it engage the services of an existing bus company to manage this new venture? NO. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation. then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote. at a meeting duly called for the purpose: Provided. This is how the need to engage the services of management company may come into play. development. creditors should not be prejudiced. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 43 1/20/12 – Friday Sec. however. When the airline would require maintenance and repairs. So that if this airline company decides to engage in land transportation – buses. or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. give them the convenience while on board. So you can focus on selling your tickets. and not totally an abdication of its power. So the airline company might decide to engage the services of another company who is skilled in maintenance of aircrafts. of both the managing and the managed corporation. It has nothing to do with the airline business. If we decrease the capital. You sell tickets.implied 3. Under what circumstances can the corporation enter into management contract? as long as it is for routinary acts of the corporation. . Instead of focusing on core business your attention is shifted. or by at least a majority of the members in the case of a non-stock corporation. operating agreements or otherwise: Provided. that requires technical or special skills. No management contract shall be entered into for a period longer than five years for any one term. You cannot justify this by claiming that you are entering into a management agreement because this is a total deviation from your principal purpose as a corporation. CLASSIFICATION OF POWERS OF THE CORPORATION 1. Demonstrate how this management agreement would exist: If you are an airline company and your core business will definitely be transportation of passengers. it may enter into management contracts Power of the board may not be delegated to the managing corporation: Power to declare dividends – because this power can be exercised solely by the board.No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock. conduct the check-in process. take care of passengers.incidental cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . Is it therefore pointless for the code to say that management is vested in the board of directors? NO. Airline is totally different from land transportation. This will just divert your attention to activities which many of your people will not be able to carry out. because this is a totally foreign business. The existing SH can exercise their pre-emptive right. do you have to know how to repair your aircraft? Not necessarily. then it might not be allowed. (n) POWER TO ENTER INTO MANAGEMENT CONTRACT MANAGEMENT CONTRACT an agreement under which a corporation delegates the management of its affairs to another corporation for a certain period. That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one- third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation. You might exceed the powers or primary purpose of your company which is to engage in the airline business. Otherwise this will cause the dilution of their stockholdings if they don’t give them their pre-emptive right. exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. whether such contracts are called service contracts. Circumstances can the corporation increase its capital: If we increase our capitalization what is the effect insofar as the SH are concerned? New stocks are issued. or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation. 44. Power to enter into management contract. That such service contracts or operating agreements which relate to the exploration.express 2.

But because it is illegal. to be able to convey real property what is needed when we talk of agency? The authority must be in writing – SPA. the corporation will raise the defense of ultra vires? No! The corporation is still liable. From this therefore when we talk of ultra vires acts. Since it involves a real property. When we talk of ultra vires we refer to CONTRACTS. But was hitting a pedestrian an illegal act? YES. . because when we talk of ultra vires we always refer to acts arising from contracts. Ultra vires acts of corporations. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . yes the corporation is liable. and incidental powers of the corporation conferred by the Corporation Code or articles of incorporation. He was given the authority however the authority given was a verbal authority. That’s why we say ultra vires acts are not necessarily illegal. it is ultra vires? NO. And if this is the defect. the defect is the lack or absence of power on the part of the corporation. So here if the lack of authority was the defect. Ratification. Upon the other hand. 45. Is the sale valid? No. can it be cured? YES. In an ultra-vires acts the defect is the lack of power on the part of the corporation. Ultra vires acts are always illegal? NO. If quasi-delict is committed by its agents. Illegal acts are not necessarily ultra vires acts? NO. it is not an ultra vires act. Is the corporation liable? Ultra vires because all torts and crimes committed are ultra vires. do we talk of laibilities of quasi-delicts? NO. But if it is ultra vires why is the corporation liable? Sources of liability: Law Contracts Delicts Quasi-delicts Hitting a pedestrian is a quasi-delict.No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. Respondeat Superior. here is another director who also decided to sell another property of the corporation. This was not given. incidental powers. what is the effect? It is considered as ULTRA VIRES ACTS. So it is not ultra vires although defective. Acts of negligence are ultra vires. If it is ultra vires act. ULTRA VIRES ACTS are acts not within the express. So that if a director executes an act selling a property of the corporation without any authority. So we cannot talk of ultra vires acts if not contracts. he hit a pedestrian who died. The defect is lack of authority to sell on the part of the director. Ultra vires acts are not necessarily illegal acts? YES. rd The 3 director while driving on a client’s call. How should that transaction be treated? VOIDABLE This is not ultra vires but there is defect. Illegal acts are always ultra vires act. implied. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 44 Sec. Because ultra vires are acts of corporation beyond its express. it will not bind the corporation. (n) ULTRA VIRES ACTS If a corporation executes an act which is beyond these powers. implied. he was about to consummate a transaction that will give the corporation profits. The corporation is liable not because it was guilty of ultra vires but because of the negligence of its agent. if the parents of the deceased corporations will sue the corporation. Why? The defect is in the lack of formalities required. And because it is ultra vires.

As we said the ultimate objective of providing the law on ultra vires is TO GIVE ALL THOSE CONCERNED THE OPPORTUNITY TO SEEK JUSTICE. Ex. it should be the ultimate remedy. It is true that being a corporation. because it has already been cosummated. Can the SH still question the transaction and demand return of the money? NO. Another act could be defective because the party acting has no authority. leave them where they are. the law tells us. Stockholder – being a SH. So if we have to be very strict. But it is ultra vires. IT IS THE CORPO THAT HAS NO POWER. the powers are limited. if that is the case what’s the use of the concept of ultra vires? Especially in the situation when the transaction has already been consummated. but cannot bind the corporation but no matter how legal or praiseworthy. Inability to comply with formalities. Many transactions would be invalidated if the lack of power is discovered. They have consummated the deed. Creditors are not strangers. If we follow this there would be endless review of the transactions. If we do question. 3. = he is not guilty of laches. And the law says. Though ultra vires not just anyone can invoke this. no one can be compelled to perform. They are even admirable. If many transactions are invalidated. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 . = if he was part of the one who approved it. even if ultra vires. The corporation who paid while the other party has not done its part can demand the return of payment. although utlra vires clearly. When an ultra vires contract has been fully performed on both sides. there will be chaos in the business community. So here. this is if we strictly follow the law on ultra vires. But without necessarily causing any disruption in the business community. But they should be PREJUDICED CREDITORS in order to invoke this. there are defective acts. he has the responsibility to see to it that the corp will comply with exisitng regulations. Neither can compel the other to proceed with the transaction. RULES ON RESOLVING ULTRA VIRES ISSUES: When there is an ultra vires issue in a problem how do we resolve this? 1. or in every transaction of the corporation we always question the acts of that corporation. It cannot perform acts beyond these powers and yet from here. 3. Only certain parties can question because as much as possible we want to preserv the stability of the business commmunity otherwise there will be chaos. what happens to the transaction? It will not bind the corporation. In all of these we said in an ultra vires act what happens? How do we resolve ultra vires acts? If we simply follow. ultra vires and consummated. As a matter of fact. When an ultra vires contract has been performed on one side and the other has received benefits by reason of such performance. If one has the opportunity the question the act. leave them where they are. He should questions this only under certain circumstances: a. Donating 100M to Pnoy is very admirable. Farming and fishing are 2 different business. while executory on both sides. we have to close our eyes. NOT ULTRA VIRES ACTS An act could be defective because it did not comply formalities. 2. We cannot compel everybody to open and question. In another angle. b. what are the condiitons under which one may question the ultra vires act? Who could invoke or question an ultra vires act: State SH Prejudiced creditors Questioning an act as ultra vires is discouraged. not just any person can question the act. This can be invoked only by: 1. An ultra vires contract. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 45 Many ultra vires are not only legal but rather praiseworthy. so that in every transaction. AOI. Because these are defective transactions how can they be cured? By Ratification. Example: Fishing corp bought farming equipment and farms. the other party always has always to examine the law. As soon the opportunity to question it arises. No authority. The law leaves them as they are. When he is not guitly of estoppel. the corporation has no power. everytime a corporation does something beyond its powers. it must be PROMPTLY. So those are the rules when an ultra vires issue would arise. he has no right to question it. 2. neither party can maintain an action to set aside the transaction or to recover what has been parted with. What are these defective acts? when we say ultra vires acts the defect is lack of power on the part of the corporation. Later on a SH discovered this because they did not have power and authority to do this. state – because it was the state that created the corp. cannot be enforced by either party thereto.

They are also strangers. Competitors cannot question. If they are allowed. it will be to the detriment of the corporation. CORPORATION LAW MIDTERM REVIEWER – WWW COMPILATION AND NOTES [403 – SY 2011-2012] 46 Who cannot invoke: Stranger cannot question. They must go to the state and the state will question. cherrynotes (SPECTRA ARCHIVES) SY 2011-2012 .