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CORPORATION LAW REVIEWER—DEAN CLV—C2019 TRI LEVEL RELATIONSHIPS

DEFINITION OF CORPORATION 1. JURIDICAL ENTITY LEVEL


a. Relationship with the state
1. Artificial being
b. Regulates corporation law
2. Created by operation of law
c. Only Constitution is higher
3. Right of succession
2. INTRA-CORPORATE LEVEL
4. Powers, attributes and properties expressly/incidentally authorized by law
a. Four levels
➔ Relationship of corporation with the state
i. Corp with Agents/representatives – governed by LAW ON
➔ Legal fiction to do business
AGENCY
CORPORATE ATTRIBUTES (ELEMENTS) ii. Corp with Shareholders/members – governed by
SUBSCRIPTION AGREEMENT
1. Artificial being – capacity to contract and enter into legal relationships iii. Shareholders with Representatives – governed by LAW ON
a. Separate and distinct from its stockholders/officers TRUST
b. Officers are mere agents of the corporation iv. Among shareholders – governed by BY-LAWS
c. Concession theory – State grants the personality if complied with 3. EXTRA-CORPORATE LEVEL
procedure a. Most important; takes precedence over corporate law
2. Creature of the law – created by law, not by agreement b. 3 levels
a. Needs consent of the State (theory of concession) this is the nexus i. Corp with employees – governed by LABOR LAW and
of the separate juridical personality sometimes BJR
3. Strong juridical personality ii. Corp and contracting parties – governed by
a. Existence continues despite death/replacement of shareholders or MUTUUM/CREDTRANS LAW
members iii. Corp and public it affects – governed by TORTS
b. This, coupled with doctrine of limited liability make the corporate
vehicle attractive THEORIES ON FORMATION OF CORPORATIONS
4. Creature of limited powers – has only such powers as are expressly,
➔ In present day Philippines, Theory of Enterprise Entity does not exist
impliedly, incidentally authorized by law
o CLV: Theory depends on level of relationship
a. Buttressed by the ultra vires doctrine
▪ JE level: Concession theory
b. Corp can only act through BoD
▪ Intra level: Enterprise entity theory
c. Concession theory – corporation has only such powers as are
▪ Extra level: Contract law
granted by law
1. Theory of Concession – creatures of the state, adhere to State laws
d. Theory of Creature of Unlimited Powers – corporation is organized
a. Cannot be used to refuse obedience to the state
with full powers to undertake any venture and engage in any
b. Also has constitutional rights, because corporation is also a group
business not contrary to law, morals, public policy
of natural persons
TRI LEVEL EXISTENCE c. Stock certificates cannot be invalidated without steps required by
law
➔ Defines the subject matter in a transaction 2. Theory of Enterprise Entity – corporate entity takes it significance from the
1. ASSETS ONLY – Corporation as an aggregation of assets and resources underlying enterprise formed
2. BUSINESS ENTERPRISE – Corporation’s existence purely as a business a. Where a corporate entity is defective, its existence may be
3. JURIDICAL ENTITY – corporation is a medium of pursuing business determined by the actual existence/operation of the underlying
enterprise
b. Any state grant presupposes existence of consent/venture among iii. Corporate governance
those who will form the corporation d. Double taxation
c. Covers situations where i. Income tax, corporate tax, accumulated earnings tax
i. Erected a juridical personality without State grant
NATURE AND ATTRIBUTES
ii. Disregarded juridical personality when granted by state
POWER TO CREATE A CORPORATION IS LEGISLATIVE IN CHARACTER
ADVANTAGES and DISADVANTAGES
a. Private corporations may only be created by congress by general law
1. Advantages
b. GOCC’s may be created by special charters
a. Strong juridical personality
i. Legal capacity to act AND continuity of existence CORPORATION AS A PERSON BEFORE THE LAW
ii. Governed by a special law; more established and reliable
compared to other media a. Entitled to due process and equal protection
b. Centralized management b. Protected against unreasonable searches and seizures
i. Shareholders are not agents; contrary to MUTUAL c. Not entitled to right against self-incrimination
AGENCY
NOT ENTITLED TO PRACTICE A PROFESSION
ii. Board has power (sec. 23 of CC); binds stockholders
iii. Stockholders own the equity, but do not manage – a. Lacks the moral and technical competence required by PRC
contrary to property principles
iv. More efficient manner of running big businesses LIABILITY FOR TORTS
c. Limited liability a. Follows the rule on agency: acting officer is solidarily liable with corporation
i. When used for legitimate purposes, investors are limitedly for damages resulting from his negligence
liable b. GR: Directors/officers cannot be held personally liable for loans extended to
ii. Unlimited liability lies where there is mutual agency; the corporation
Corporation follows centralized management a. EXCEPT: officers acted in BF or with GROSS NEGLIGENCE
iii. Defeated by PIERCING DOCTRINE i. Corporation has a right to recover from the agent
d. Free transferability c. IF what is committed by agent is criminal negligence, it would make the
i. Shares of stock may be transferred; impersonal corporation liable for the criminal negligence, but not the criminal liability,
ii. Allows people to come and go by way of investment which is personal. Agents would be criminally liable
iii. Contrary to DELECTUS PERSONAE
2. Disadvantages CORPORATE CRIMINAL LIABILITY
a. Agency cost
a. No criminal suit can lie against a corporation
i. Abuse of corporate mgmt.
a. Public policy – crime is actually committed by individuals
ii. Breach of trust
b. Separate juridical personality is not a criminal defense
iii. Lack of personal element due to free transferability
c. Criminal intent cannot be attributed to a corporation
b. Abuse of limited liability
d. No criminal procedure to govern criminal cases against
i. Avoiding liability from victims of the venture entered into
corporations
c. Cost of Maintenance
b. Stockholders cannot be held liable for corporate crimes
i. Greater degree of control and supervision from
a. Passive role in corporate management
government
b. Liable if they personally took part in the crime
ii. Reports/record keeping requirements
c. Acting officers shall be criminally liable
a. Criminal statutes that prevent corporation from doing an act, ii. If the latter’s ownership is less than 60%, Filipino, use this
actually extends to the the BoD, and individual directors formula: [Filipino ownership of latter] x [latter’s
d. Physically impossible to punish a corporation ownership of the former] = Filipino ownership of the
a. If a corporation is convicted under the AMLA/Trust receipts law, it former (because it being less than 60% does not make the
is the agents who personally committed the crime who will be liable corporation automatically a foreign corp, but it
i. Corporation is liable for fines or possible dissolution disqualifies the corporation from nationalized activities)
iii. This computation is used only for purposes of investment,
CORPORATIONS NOT ENTITLED TO MORAL AND OTHER DAMAGES
and not operation, which is limited in relation to
a. Moral damages can only be suffered by moral persons nationalized activities
iv. No distinction between voting and non-voting stocks
CORPORATE NATIONALITY b. New SEC control test: Strict Grandfather Rule: required Filipino
ownership applies to both (a) the total number of outstanding
1. Place of Incorporation Test – corporation is a national of the counter under
voting shares and (b) total number of voting and non-voting shares
whose laws it is organized or incorporated
i. (a) is the voting control test while (b) is the beneficial
a. Applied primarily
interest test
b. Relates to the Juridical entity level
ii. If (a) is met but (b) is not met, corporation may still be
2. Control Test – If incorporated in the Philippines, nationality of a corporation
Filipino, but disqualified to engage in nationalized
is determined by the nationality of the controlling stockholders in cases
activities
involving properties, businesses and industries reserved for Filipinos
iii. This is applied when there is doubt as to the nationality of
a. Exception: for purposes of investment, a corporation organized
the investee corporation
abroad doing business in the Philippines, 100% of the capital stock
iv. Applies only when there are voting and non-voting shares;
of which is owned by Filipinos, is Filipino
otherwise use the liberal grandfather rule
b. Filipino first policy applies to the Nationalized activities:
c. Roy v Herbosa
i. Exploitation of natural resources: 60% capital
i. Beneficial test should also apply to voting shares
ii. Public Utilities:60% capital, 100% managing officers
ii. If legal title to a voting share is vested with a Filipino but a
iii. Mass media: 100% ownership and management
foreigner actually votes for that share, such share is a non-
iv. Advertising: 70% capital, 100% managing officers
filipino share for purpose of computing nationality of
c. When it comes to ownership of capital:
voting shares
i. 50% below = minority
4. Application of the Control test
ii. 51-59% = management
a. Wartime Test – domestic corporations under the control of
iii. 60% above = control (minimum of 5 board members, so
nationals of the enemy country are deemed foreign enemy
control can be had through at least 3 members, so we use
corporations
60%)
b. Exploitation of national resources – state may enter into
d. Control test refers to the Business enterprise level
agreements with domestic corporations 60% of the capital of which
3. Sub-sets of Control Test
is owned by Filipinos
a. Original DOJ-SEC: Liberal Grandfather rule: when a corporation is
i. Foreign corporations are disqualified
owned by a corporation, at least 60% of which is owned by Filipino,
ii. Both voting and non-voting shares must be 60% owned
the latter corporation is deemed 100% Filipino
iii. Limited to 25 years; renewable
i. When ABC corp is 60% owned by 123 corp, the latter being
c. Ownership of private land – same requirements as for exploitation
owned by 60% Filipinos, 123 corp is deemed 100% Filipino
of resources
owned for purposes of determining ABC corp’s nationality
i. When donated to unincorporated religious organizations, ii. The following facts, by themselves or in combination,
trustees must be Filipinos would not warrant a disregard of the SJP, in the absence
d. Public utilities – 60% capital owned by Filipinos; no longer than 50 of fraud or violation of public policy:
years 1. Mere ownership of a single
i. Participation of foreign investors limited to their stockholder/corporation of all or nearly all the
proportionate share capital stock of a corporation
ii. Executive and managing officers must all be flipinos 2. Having the same address
e. The secondary franchise, or the business enterprise, is given the 3. Interlocking incorporators
authorization to engage in nationalized activity 4. Interlocking directors
i. Required to operate public utilities, but not to merely own 2. Application of Main Doctrine
facilities needed to operate such public utilities, which a. Majority equity ownership and interlocking directorship – do not
refers to the assets level warrant piercing the veil of corporate fiction, by themselves
f. Mass media – 100% owned and managed by Filipinos i. Not about control of the shares, but the control of the
i. Includes all forms of print and broadcast media, any business enterprise that warrant piercing
medium that involves the dissemination of information to ii. Must be coupled with other factors: fraud or public policy
the public considerations
ii. Includes cable TV operations b. General rule: Corporate representatives not personally liable for
g. Advertising – same as for public utilities corporate contracts except when the representative:
i. Willfully assented to an unlawful corporate act
ii. Is guilty of gross negligence or bad faith in directing
PIERCING THE VEIL OF CORPORATE FICTION corporate affairs
iii. Acquired personal or pecuniary interest in conflict with his
MAIN DOCTRINE: Corporation has a personality separate and distinct from its duties as representative
directors or trustees, officers, stockholders (SJP) c. Being a corporate officer – does not make one’s property a
property of the corporation and vice versa
1. Importance of main doctrine
d. On privileges enjoyed – tax exemption clause cannot be extended
a. Corporation may not be made to answer for acts and liabilities of
to stockholders
its stockholders
e. Obligations and Debts – corporate debts are not debts of the
i. Stockholders cannot intervene in collection suits against
stockholder, vice versa
their corporation & vice versa
ii. Officers cannot be held personally liable for judgments PIERCING THE VEIL DOCTRINE – make the active or intervening stockholder or officer
against the corporation liable for corporate debts and obligations; sets aside the corporate fiction only for
b. The SJP is merely a fiction created by law to promote convenience the purpose of that litigation and the parties involved therein
and achieve the ends of justice or to achieve commercial ends
i. SJP may be disregarded if it is used: 1. Source of incantation – US v Milwaukee: “corporate entity will be
1. As a means to perpetrate fraud/illegal acts disregarded if it is used as a cloak for fraud or illegality”
2. As a vehicle to evade obligations or 2. Attitude of the court —must be certain that corporate fiction was misused
circumvention of statutes to such an extent that injustice, fraud, or crime was committed against
3. To confuse legitimate issues another
3. Objectives and effects of applying the piercing doctrine—equitable remedy,
last resort, to thwart fraud and illegal schemes
a. Allowed only if the remedy sought is to make the officer/other CORPORATE CONTRACT LAW
corporation pecuniary liable for corporate debts
Three levels of corporate contract law
i. CLV: This applies to fraud piercing, and not alter ego or
public convenience sceneario, where relief sought may not 1. Pre-Incorporation
only be to make a stockholder/corporation liable 2. Post-Incorporation
b. Applicability to third parties – may apply to sister companies 3. Dissolution
4. Nature as an equitable remedy
a. Last resort – not available when other remedies are available Pre-incorporation contracts – entered into with a corp without juridical personality
i. Fraud itself is a remedy of first resory
Who is a PROMOTER?
b. Availed to prevent, not perpetrate fraud or a wrong – cannot be
invoked by someone not a victim of fraud ➔ Person who takes initiative in founding and organizing the business
c. Not applicable to create new rights or interests – cannot be used to enterprise of the issuer and receives consideration therof
build other legal theories; must be invoked for its own sake o Promoter’s contracts are entered into in behalf of a corp which is
d. Must be based on clear evidence – party seeking to pierce the veil in the process of organization and incorporation
must bear the burden of proving the fraud/illegality o Parties are aware that corporation does not exist yet
e. Power belongs to the courts – sheriff cannot pierce the veil in ▪ As opposed to corporation by estoppel doctrine
levying execution of a party’s properties o Agency principles apply
f. Res Judicata – pierced only for that certain case/parties/issue ▪ Agent is not liable for contracts entered into in the name
5. Classification of Piercing cases – important to distinguish consequences of the principal UNLESS he expressly agrees to be liable or
a. EQUITY PIERCING – application of SJP would be inconsistent with exceeds the limit of his authority
business purpose or would merely confuse legitimate issues ▪ If entered into outside the scope of his authority, it is void
i. Goal: to achieve an equitable end to the third party who knows of the limits of the agent’s
ii. There is inequity but no fraud powers
iii. Most dangerous, because only standard is public ▪ Third party cannot invoke the excess of authority when
inconvenience principal ratifies the contract
b. FRAUD PIERCING – SJP is used to commit crime/fraud/wrong or as o Binds himself to ensure that the corp, once formed, will ratify the
a means to evade liability, there must be: contract
i. Fraud or evil motive in the transaction ▪ Becomes personally liable when corp is formed but does
ii. Corporate entity has been used to perpetrate it not ratify; void as to the principal (corporation)
iii. Relief sought must be to enforce pecuniary claims against ▪ Corp may be bound to accept the promoter’s contract
the perpetrator/s when it has ratified by receiving benefits from it
c. ALTER EGO PIERCING – corporate entity is merely an
instrumentality of a person or another entity NATURE of pre-incorporation agreements
i. Corporation/person will try to raise the SJP of its alter ego ➔ Two pre-incorporation agreements that are VALID without ratification;
to avoid liability constitute as a continuing offer, which does not ripen into a contract until
ii. There is disrespect in the use of SJP, used for personal accepted by the corporation, when formed:
purposes o SUBSCRIPTION AGREEMENT -- contract where person undertakes
iii. Aggrieved parties may treat the interests of the to take and pay for original unissued shares of a corp, formed or to
corporation/person and the alter ego as the same be formed
iv. Recover from whoever has actual control of the business
enterprise, and not the alter ego corporation/medium
oPRE-SUBSCRIPTION AGREEMENT – subscription for shares of stock o Enterprise enters into a contract with outsider; outsider later brings
of a corp still to be formed an action vs the enterprise as though it was a corp; enterprise is
▪ Irrevocable for at least 6 months from date of subscription held liable
• Unless all other subscribers consent to o Enterprise enters into a contract with outsider; enterprise later
revocation or when corporation fails to brings an action in corporate form vs the outsider; outsider is held
materialize within said period liable
• If articles of incorporation is submitted within o Enterprise enters into a contract with outsider; outsider later brings
such date, subscription may not be revoked an action vs against the component individuals; they are absolved
anymore and the outsider is limited in his remedy against the enterprise only
➔ Other Promoter’s Contracts o Enterprise enters into a contract with outsider, component
o Those entered into in establishing the corporate business individuals seek to hold the outsider liable; individuals are not
▪ Ex. Contracting services to draw up feasibility studies, allowed to recover, which must be brought by the enterprise
leasing of premises, hiring of key employees, etc.)
Elements of a De Facto Corporation
▪ Validity relies on common law doctrines
1. Law which creates the corporation
Theories on Liability on Promoter’s contracts
2. Attempt in good faith to incorporate/colorably comply with provisions of
➔ GR: As long as the corp has ratified the contract entered into by the agent incorporation
at the pre incorporation, the contract is valid a. Defects that would PRECLUDE application of DFC
o E: Where the corporation does not ratify, contract is void as to the i. Absence of Articles of Incorporation
corporation; but valid to such agent who misrepresented ii. Failure to file AoI with the SEC
(unenforceable) iii. Lack of certificate of incorporation with SEC
▪ E: When the contract is a SUBSCRIPTION or PRE 3. Representation of the DFC to the public as a corporation
SUBSCRIPTION AGREEMENT, in which case, it is valid a. User of corporate powers
o Before corporation ratifies, it Is unenforceable (void as to the i. Taking subscription for & issuing shares
principal) ii. Electing directors/officers
➔ Promoters can be held liable when corporation is not incorporated iii. Adopting by-laws
o Incorporating incorporators who are mere passive investors cannot iv. Buying a lot/constructing a building thereon
be held liable
CORPORATION BY ESTOPPEL DOCTRINE – persons who assumes to act as a
➔ Corporation may be held liable when it impliedly ratifies the contract by
corporation, knowing it to be without authority to do so, shall not be allowed to use
receiving benefits from it
as a defense its lack of corporate personality
DOCTRINE OF DE FACTO CORPORATION – due incorporation of any corp claiming in
➔ Enforces a contract even if element of CONSENT IS LACKING (because
good faith t bringo be a corporation under the corporation code, its right to exercise
corporation does not actually exist)
its corp powers, shall not be inquired into collaterally
➔ Defies corporation law, because third parties must be protected when
➔ May be inquired into only by the SolGen in a quo warranto proceeding dealing in good faith
➔ Issue of apparent authority ➔ However, when a person makes a fraudulent misrepresentation that there
➔ Prevents a party from raising the defect of authority as a means of avoiding is a corporation to avoid liability, when in fact there was none, he cannot
the fulfillment of a contract entered into in good faith invoke corporation by estoppel, and shall be held personally liable
➔ Applies in the extra coporate level ➔ Elements
➔ MAIN SEQUENCE:
o
One who assumes an obligation to an ostensible corporation as ➔ Singe proprietorship basis – though the corporation’s contracts are personal
such cannot resist performance thereof on the ground that there in character, the exactions are real in character – it is the property of the
was in fact no corporation corporation that answers for debts
o At least one of the parties should be under the impression that the ➔ Partnership law – obligations incurred in the business are incurred in the
corporate entity party was duly incorporated new medium, having a SJP
➔ Where no third person is involved in the conflict, there is no CbE application o When the SJP is insolvent or dissolved, the assets will first be
applied to debts of creditors
Two Levels Of Corporation By Estoppel
➔ Corporate setting – although owners are equity holders, they hold only
1. With Fraud – person acting for the purported corporation is personally liable beneficial title to corporate assets;
on the contract as a general partner ➔ Following acts by a corporation would be VOID:
a. Hence, he is unlimitedly liable o To RETURN MONEY to stockholders when it exceeds capital stock
2. Without Fraud – person acting for the purported corporation is not o For the BoD to say that the stockholders need not pay the
personally liable receivables constituting the capital stock
a. Both parties are prevented from raising the non-existence of the o Agreement which makes payment a suspensive condition –
corporation to avoid enforcement of the contract payment is valid but not the condition
➔ Stockholders bear the rise and fall of profits and losses
Can a defective attempt to form a corporation result at least in a PARTNERSHIP? o They risk that what they invest may never get back; but in terms of
profits, sky is the limit
1. Active participation – there is a clear intention to form a partnership
➔ Any disposition of corporate funds to the prejudice of creditors IS VOID
through the corporate vehicle
a. Even those who did not directly participate in the contract but Coverage of Trust Fund Doctrine
benefited therefrom is liable as general partner
b. Partnership is established as to such partners 1. Where there has been a distribution of corporate assets or an attempt
2. Passive participation – investors in the defective corporation who thereof to stockholders, without payment to creditors
intended only to invest without intention to participate 2. Where it had released the subscribers of capital stock from their
a. Cannot be held liable for contracts entered into in the name of subscription without valuable consideration
the defective corporation 3. Where it has transferred the corporate property in fraud of its creditors
b. No partnership is deemed established 4. Where the corporation is insolvent
➔ Funds received by the corporation to cover subscription payments on
TRUST FUND DOCTRINE – all the assets of a corporation emanating from the capital increase of capital stock prior to SEC approval would not be covered by Trust
stock constitute a TRUST to be held by the corporation for the benefit of the creditors Fund doctrine
➔ Not limited to capital stock; extend to other property regarded as a trust
➔ After a stockholder delivers property to the corporation in payment of his
fund for payment of corporate debts
subscription, corporation owns the land
➔ Violation of terms in a subscription agreement do not constitute legal
o Stockholder will have no proprietary claim over the land
ground to rescind the agreement, which will result in the unauthorized
o Board cannot give back the land, even by agreement
distribution of the capital assets
▪ Would result in the REDUCTION OF CAPITAL STOCK which
➔ Trust Fund applies in all situations that involve the capital stock
is not allowed
o If corporation becomes insolvent, the receivables (from the unpaid Purchase of own shares
subscription) shall immediately become due and demandable
despite an agreement to the contrary ➔ Redemption of redeemable shares are allowed
o Will not prejudice creditors, since such shares are indicated in AoI
➔ Corporation’s purchase of own stocks is allowed if it does not prejudice 1. No need to amend by laws
creditors 2. Purpose for incorporation
o Acquisition of shares should not exceed the retained earnings a. If there is more than more than one purpose, state which is the
➔ Stock dividends cannot be declared if the fund will be depleted primary, secondary, etc. purpose
o Cash dividends should be first applied to unpaid subscription b. If the investment of the corporation is necessary to achieve its
o Stock dividends are withheld until unpaid subscription is paid\ primary purpose, there is no need for approval of stockholders
c. Protection of shareholders to know the main business, as basis for
ARTICLES OF INCORPORATION
institution of derivative suits
NATURE of CHARTER d. Confers and limits corporate powers
e. Must be lawful
➔ the charter is in the nature of a contract between the corporation and the 3. Place of principal office, which must be within the Philippines
state 4. Term
➔ Solemn contract; must be approved by the SEC a. Maximum of 50 years
➔ Contents of AoI are jurisdictional b. May be extended for periods not exceeding 50 years by amending
➔ Governs relationship between: the AoI
o State and Corporation i. Must be made no earlier than 5 years from expiration of
o State and Stockholders first term
o Corporation and Stockholders 5. Incorporators’ names, nationalities, addresses
➔ Prevail over conflicting by-law provision; yields to statutes a. Must be at least 5; at most 15; majority must be residents
➔ To amend AoI, there must be: b. Must own at least 1 share of stock
o SEC approval c. Will remain an incorporator even if he ceases to be a stockholder
o 2/3 vote of the whole BoD 6. Number of directors or trustees; must be at least 5 but not more than 15
o 2/3 ratificatory vote of stockholders 7. Directors/Trustees names, nationalities, residences
➔ Effective upon: 8. Amount of authorized capital stock, number of shares into which it is
o Approval of SEC divided, par value of each, original subscribers, amount of paid subscriptions
o 6 months from filing when there is SEC inaction NOT through the by each [FOR STOCK CORPORATION]
fault of the corporation a. SEC may reject application if capital is too thin when compared to
maximum capital (even if 5k requirement is met)
Commencement of Corporate Existence
9. Amount of its capital, contributors name, address, residences, amount of
➔ Upon filing, registration, and certification by the SEC contribution [FOR NON STOCK]
➔ For banks, they will not be certified unless the AoI are accompanied by a 10. Other matters
favorable recommendation from appropriate agencies ➔ Accompanied by sworn statement of the corporate treasurer
o Showing that at least 25% of the authorized capital stock has been
CONTENTS of AOI subscribed
The AoI shall contain the following matters, except as otherwise provided o At least 25% of the total subscription has been paid, which must
not be less than 5000 pesos
1. Name of the Corporation ▪ Capital stock – amount fixed procured to be subscribed
a. Name is not allowed if and paid
i. Identical or deceptively similar to any existing corp or any ▪ Outstanding stock – total shares of stock issued to
name protected by law subscribers, whether fully or partially paid
ii. Amendment in name must be coursed through the SEC
▪ Subscribed CS – portion of the CS subscribed 8. Penalties for violation of by-laws
(fully/partially paid) 9. Manner of issuing stock certificates
➔ Certificate of deposit 10. Other matters
➔ Letter granting SEC authority to examine bank deposits ➔ Corporations have the immediate power to enact by-laws for self protection
➔ Undertaking to change corporate name if there is already a similar one o This power is inherent and incidental

GROUNDS FOR DISAPPROVAL RULES FOR BY-LAWS

1. AoI or any amendment thereto is not in accordance with the form prescribed 1. Cannot contravene the AoI and laws; otherwise VOID
2. Purpose/s are unconstitutional/illegal/immoral/contrary to gov’t rules a. Cannot circumvent rules on qualifications, elections, tenure, etc.
3. Treasurer’s affidavit contains falsity 2. Must treat the shareholders equally
4. Capital stock does not meet the nationality requirement 3. Provisions cannot be unreasonable or contrary to the nature of by-laws
5. Lacking favorable recommendation [FOR BANKS] a. Must not disturb vested rights of stockholders or members
b. Question of law
AMENDMENTS TO THE AOI
BINDING EFFECTS ON THE DEALING PUBLIC
Requisites:
GR: not binding on third parties who deal in good faith
1. Legitimate purpose
2. Majority vote of the BoD/BoT E: where the third party has knowledge of the provisions
3. 2/3 vote of OCS
ADOPTION OF BY-LAWS
Matters that CANNOT be amended
Requisites:
1. Names of incorporators
1. Vote of stockholders representing majority of OCS
2. Names of incorporating directors/trustees
2. Signed by such stockholders
3. Names of original subscribers of the CS
3. Copy thereof shall be filed with SEC
4. Treasurer in trust elected
➔ May be adopted prior to incorporation
5. Members who contributed to the initial capital of a non-stock corp
➔ Effective only upon issuance of SEC certification
6. Witnesses and the acknowledgment thereof
➔ Failure to file by-laws shall not result in immediate dissolution
BY-LAWS o Notice and hearing

NATURE, FUNCTIONS, CONTENTS AMENDMENTS AND REVISIONS

Contents: Requisites to amend, repeal, adopt:

1. Time, place, manner of conducting regular or special meetings of BoD/BoT 1. Majority vote of BoD/BoT
2. Time and manner of conducting regular or special meetings of stockholders 2. Majority vote of stockholders of OCS
3. Required quorum in meetings of stockholders and manner of voting 3. In a meeting called for that purpose
4. Form for stockholder proxies and manner of voting them 4. Filed with SEC
5. Qualifications, duties, compensation of Directors/Trustees/officers ➔ May be delegated to BoD/BoT via 2/3 vote of OCS
6. Time for holding annual elections and manner of giving notice thereof o Considered revoked when stockholders vote anyway
7. Manner of election or appointment and the term of all officers other than
the directors/trustees
CORPORATE POWERS AND AUTHORITY 2.Ratified by stockholders representing 2/3 of OCS
3.Prior approval of SEC
CORPORATE POWER AND CAPACITY
a. Must not prejudice corporation’s creditors
➔ Conferred by Sec. 36 ➔ Indebtedness must be secured by mortgage or real or personal property
o Without sec. 36, corporation will still have powers incidental to its
Sell or Dispose ALL OR SUBSTANTIALLY ALL Corporate Assets
existence, like power to sue and be sued, enter into transactions
necessary to conduct business 1.Majority vote of BoD/BoT
➔ Contracts entered into outside the express, implied, incidental powers are 2.Ratified by stockholders representing 2/3 of OCS
ULTRA VIRES for lacking the element of consent a. Dissenting stockholders may exercise appraisal right
➔ Classification of powers: ➔ A disposition shall be deemed to cover substantially all corporate assets if:
o EXPRESS – those found in the corporation code, AoI o Corporation would be rendered incapable of continuing business,
o IMPLIED – intrinsically tied with its purpose or
o INCIDENTAL – granted by virtue of the existence of its juridical o Accomplishing the purpose for which it was incorporated
personality ➔ If disposition is necessary in the usual course of business or the proceeds
➔ Corporation exercises its powers through the BoD/BoT and its officers thereof be appropriated for the conduct of its remaining business, NO
RATIFICATORY VOTE NEEDED
EXPRESS POWERS
Invest corporate funds for non-primary purpose
Sec 36:
1. Majority vote of BoD/BoT
1. To sue and be sued in its corporate name
2. Ratified by stockholders representing 2/3 of OCS
2. Succession
➔ Where the investment is necessary to accomplish the primary purpose,
3. Corporate Seal
approval of stockholders is not necessary
4. Amend AoI
➔ All businesses have a right to make investments to obtain best returns for
5. Adopt By-Laws
their investible funds
6. To issue or sell stocks to subscribers/admit members
➔ If investment was made without the needed ratificatory vote, it is VOID
7. Enter into transactions reasonably necessary to conduct business
➔ When the investment would imply that the investor would take part in the
8. Enter into merger/consolidation
active management of the investee company, there needs to be ratificatory
9. Make reasonable donations
vote
10. Establish pension/retirement benefits
11. Exercise other powers necessary to carry out its purpose Declare dividends

Extend or shorten corporate term ➔ No stock dividends shall be issued without approval of stockholders
representing at least 2/3 of the OCS
1.Majority vote of BoD/BoT
2.Ratified by stockholders representing 2/3 of OCS Management contracts
a. Any dissenting stockholder may exercise his appraisal
1. Approved by BoD/BoT
b. right
2. Stockholders representing majority OCS
➔ Power to extend is not an inherent power; power to shorten is inherent
➔ These two requisites apply to BOTH the MANAGED AND MANAGING CORP
Increase or decrease capital stock or Incur, create, increase bonded indebtedness ➔ PROVIDED:
o Where a stockholder/s representing the same interest of both
1. Majority vote of BoD/BoT
corporations own more than 1/3 voting OCS of the managing corp
o Or where a majority of the members of the BoD of the managing Make donations
corp also constitute a majority of the BoD of the managed corp
➔ Board may discharge of certain social responsibilities towards society
➔ Then the contract must be approved by the STOCKHOLDERS of the
➔ Donations must be REASONABLE – of such nature that promotes best
MANAGED corp owning at least 2/3 of the voting OCS
interest of the corporation and its stockholders
➔ No management contract shall be entered into for a period longer than 5
years for any one term Enter into a partnership or JVA
IMPLIED POWERS ➔ Corporation may enter into a JVA without an enabling clause
o It’s a particular project so the Board can evaluate risks and
➔ Flow from the nature of the underlying business enterprise
responsibilities
➔ Exist as a necessary consequence of the grant of express powers
o As opposed to a partnership, where there will be unforeseen risks
INCIDENTAL POWERS ➔ SEC RULE: corporation can enter into a limited partnership; there must be
an enabling clause
➔ Attach to the corporation at the moment of its creation
➔ Flow from the nature of the corporation as a juridical person ULTRA VIRES DOCTRINE

OTHER POWERS Types of ultra vires cases

Sell land and other properties 1. Entered into beyond the powers of the corp as provided by law and its AoI
a. Unenforceable; thus, ratifiable
➔ An express and inherent power
b. Violates theory of concession/creature of limited powers
➔ There must be a board resolution if sale involves real property
2. Entered into in behalf of the corporation by persons who have no authority
Borrow funds a. Unenforceable, ratifiable
b. Void as to the corporation because agent acts without consent of
➔ GR: discretion of the board the corporation
➔ E: bonded indebtedness require stockholder ratification and SEC approval c. Violates doctrine of centralized management
3. Acts or contracts which are illegal per se as being contrary to law
Power to sue and be sued
a. Violates contract law
➔ GR: business discretion of the board b. If a natural person cannot do it, more so a juridical person
➔ E: stockholder can file derivative suit without prior authority from board
DIRECTORS, TRUSTEES, OFFICERS
Hire employees and appoint agents
BoD is the body which:
➔ Officer having general control and management powers may employ such
1. Exercises all powers provided for under the corporation code
agents and employees as are usual and necessary in the conduct of such
2. Conducts all business of the corporation
business
3. Controls and holds all property of the corporation
➔ Contracts must be reasonable
➔ Source of power: Corporation code
Provide gratuity pay ➔ Separate entity from the corporation
➔ In relationship with the stockholders, BoD is more like a trustee
➔ Favoring officers/employees: no stockholder ratification needed ➔ In relationship with the corporation, BoD is the agent
➔ Favoring directors/trustees: stockholder ratificatory vote of majority of OCS
GR: an act done by a corporate officer without a board resolution authorizing him to c. If the cause of the losses is merely error in business judgment, not
act for and in behalf of the corporation is NOT binding against the corporation amounting to bad faith or negligence, directors are not liable
i. For them to be accountable, mismanagement and
➔ Centralized management is necessary for efficiency in any large organization
resulting losses should be showing to be attended with
Theories on source of Board Power bad faith, or with malice

1. DIRECTLY VESTED – source of power is the law COUNTER VEILING DOCTRINES TO PROTECT CORPORATE CONTRACTS
a. Stockholders have little to no power in running the affairs of the
1. ESTOPPEL/RATIFICATION – precludes a corporation and its Board from
corporation
denying the validity of the transaction entered into by its officer with a third
b. BoD has naked title to the properties while stockholders are the
party who, in good faith, relied on the authority of the former as manager
beneficiaries
to act on behalf of the corporation
c. Not essentially revocable in character; there must be substantial
a. If the corporation has accepted the benefits gained from the invalid
breach
act of an officer, the contract is ratified
d. Derivative suit: exception to the general rule that all powers are
b. May be ascertained through:
vested in the BoD
i. The GENERAL MANNER in which the corporation holds out
2. DELEGATED POWER – BoD is a creation of the stockholders and controls and
an officer or agent as having the power to act, with which
directs the affairs of the corporation by delegation of the stockholders
it clothes him; or
a. Notion of agency
ii. The ACQUIESCENCE in his acts, with knowledge thereof,
b. Stockholders are the real owners of the corporation and hold the
whether within /beyond the scope of his ordinary powers
ultimate power
c. The substance of this doctrine is CONFIRMATION AFTER CONDUCT,
c. Grants stockholders right to file derivative suits since they are the
amounting to a substitute for prior authority
principals
d. Ratificatory act must come from the BoD or a properly authorized
d. Relationship is fiduciary; as such, the agency is essentially revocable
representative
e. Stockholders’ right to vote gives them voice in the management
i. Can never be made by the same persons who wrongfully
BUSINESS JUDGMENT RULE assumed the power to enter into the transaction
2. LACHES – failure or neglect, for an unreasonable and unexplained length of
1. FIRST BRANCH: resolutions approved, transactions entered into by the BoD time, to do that which by exercising due diligence could or should have been
within the powers of the corporation cannot be reversed by the courts or done earlier, warrants a presumption that the party entitled to assert it
stockholders, even if they cause damage to the corporation either has abandoned or declined it
a. Resolution/transactions entered into must be in GOOD FAITH 3. APPARENT AUTHORITY – if a corporation knowingly permits one of its
b. Questions of policy or management are left solely to the honest officers to act within the scope of an apparent authority, it holds him out to
decision of officers and directors of a corporation the public as possessing those kinds of powers
i. Court is without authority to substitute its judgment for a. The corporation will, as against any third party who has in good
that of the BoD faith dealt with such agent, be estopped from denying the latter’s
c. Whether the act in question is in direct furtherance of the authority
corporation’s business b. Determined by the acts of the PRINCIPAL
2. SECOND BRANCH: Directors and officers acting within such business c. Third persons have little or no information as to what occurs
judgment cannot be held personally liable for the consequences of such acts intramurally; he must necessarily rely upon external manifestations
a. It is the stockholder who must bear the losses of corporate consent
b. Consistent with agency law – agents are not liable except when
they act in excess of authority, with negligence, in fraud, bad faith
d. Even a single isolated agreement prior to the subject contract can o Y axis: competing blocs
lead to the application of apparent authority o Fill up the table using the following formula:
e. The party invoking apparent authority must prove: ▪ ((number of stockholders in the bloc) x (directors to be
i. The acts of the purported officer justifying belief in the elected))/number specified in the x axis
agency by the corporation o Enlarge the x largest numbers representing the number of directors
ii. Knowledge thereof by the principal corporation which is to be elected
sought to be held liable
iii. Reliance thereon by the third party consistent with 1 2 3 4 5
Bloc 1
ordinary diligence
Bloc2
QUALIFICATIONS OF DIRECTORS/TRUSTEES

1. Must own at least 1 share of the capital stock VOTING FOR TRUSTEES
a. Only legal title is necessary
➔ ALWAYS straight voting
b. Registered owner
o Possible to provide for other types of voting thru AOI or By-laws
2. Share shall stand in his name in the books
o There must always be an election by the entire membership of the
3. Trustees must be members thereof
the association, even in a non-stock corporation;
4. Not convicted of an offense punishable by more than 6 years
▪ Pre-designation as president/nominee is VOID
5. No violation of the corporation code within 5 years prior to his election
➔ By laws can provide additional qualifications and disqualifications
➔ Ownership of shares do not give a vested right to be elected in the BoD
➔ Law does not require that a VP be a stockholder TERM OF OFFICE, VACANCY, HOLDOVER PRINCIPLE

ELECTION OF DIRECTORS AND TRUSTEES GR: If vacancy is NOT via removal by stockholders, position may be filled up by
MAJORITY VOTE of remaining BOD/BOT, if still constituting a quorum
1. Owners of a majority of the OCS must be present, in person or through
representative ➔ Stockholders may still be the ones to vote if provided in the by-laws
2. Must be by ballot if requested E: If BY REMOVAL, must be filled by the stockholders in a regular or special meeting
3. Every stockholder has the right to vote the number of shares in his own
name ➔ In both instances, the director/trustee elected shall only serve the unexpired
4. Two ways of casting votes term of his predecessor
a. Direct – vote for the number of shares for as many persons as there
If vacancy is cause by an INCREASE in the number of directors/trustess, vacancy shall
are directors to be elected
be filled by an ELECTION by the stockholders
b. Cumulative – cumulate shares and give one candidate as many
votes as the number of directors to be elected multiplied by Directors may lawfully fill vacancies occurring in the board, who shall hold over until
number of his shares, or he may distribute them among as many qualification of their successors
candidates as he sees fit
➔ Those holding seats in a holdover capacity may still seek another term
CUMULATIVE VOTING – gives minority a mathematical chance to elect a board ➔ If no new board is elected after the original 1 year term of the BOD, the
member existing Board if still constituting a quorum, is still the legitimate BOD
capable of binding the corporation (HOLD OVER PRINCIPLE)
➔ USE D’HONDT TABLE
o X axis: number of directors to be elected (start from 1 onwards)
REMOVAL OF DIRECTORS OR TRUSTEES OBEDIENCE – shall direct the affairs of the corporation only in accordance with the
purpose for which it was organized
GR: Any director, WITH OR WITHOUT CAUSE, may be removed by a STOCKHOLDER
VOTE representing 2/3 of the OCS ➔ ultra vires of the first type is committed outside of the object for which a
corporation is created and therefore beyond the power conferred to it by
➔ EXCEPTION: When the minority stockholders elected said director, he can
law
only be removed WITH CAUSE
o Not alive in this jurisdiction because of contractual expectations of
o WITH CAUSE means a breach of BOD DUTIES – loyalty, obedience,
third parties
diligence
o Relevant only in the JURIDICAL ENTITY level and INTRA-CORPORATE
BOARD itself cannot remove or discipline its members level
➔ Following agency law, agents are personally liable when acting without
➔ At most, it can call a stockholders meeting to consider removal of the erring authority
director
➔ If the meeting was called but not for such purpose, the stockholders vote IS DILIGENCE – directors shall not willfully and knowingly vote for or assent to patently
VOID unlawful acts of the corporation or act in bad faith or with gross negligence in
directing the affair of the corporation
DIRECTORS/TRUSTEES MEETINGS
➔ in a business, risk is expected; for as long as Board members act in good
1. Regular – held monthly, unless by-laws provide otherwise faith. Even if there is negligence and fault on their part, they will not be liable
2. Special – any time upon the call of the president/by-laws ➔ Liability arises when they act in bad faith or gross negligence
Directors/Trustees cannot attend by proxy LOYALTY – directors shall not acquire any personal or pecuniary interest in conflict
with their duty as such directors
➔ They may teleconference/videoconference but NOT via email
➔ it is within the power of the board to ratify a contract violative of sec 31
Quorum – stockholders representing a majority of the OCS or majority of members
➔ to forgive or to sue or not to sue, collect or not collect is within the power
Abstention – presumed to be counted as an affirmative vote, but may be rebutted of the board, due to the first branch of the BJR
➔ SELF-DEALINGS: A contract of the corporation with its directors is voidable
Minutes of Meetings – statement of what transpired at a meeting (not required) at the option of the corporation UNLESS the following concur:
COMPENSATION OF DIRECTORS o Presence of such director/s in the board meeting in which the
contract was approved was not necessary to constitute a quorum
GR: Not entitled to salary/compensation when they only perform ordinary duties o Vote of such director was not necessary for the approval of the
because their services are founded on gratuity except in the ff instances: contract
o Contract is fair and reasonable
1. Reasonable per diems
o In case of an officer, contract has been previously authorized by the
2. By-law provision fixing compensation
board
3. Stockholders representing majority of OCS decide otherwise ( cannot exceed
➔ INTERLOCKING DIRECTORS: A contract between two or more corporations
10% of the net income)
having interlocking directors shall not be invalidated UNLESS
4. Compensation given as corporate officers
o There is fraud
FIDUCIARY DUTIES OF DIRECTORS AND OFFICERS o Contract is not fair nor reasonable
➔ When a director acquires for himself a business opportunity which should
Duty of the board to stockholders (governed by trust) and corporation (agency) belong to the corporation, obtaining profits to the prejudice of the
corporation, he must account to the latter all such profits UNLESS his act is ➔ Includes the power to enter into contracts for the corporation, when the
ratified by stockholders representing at least 2/3 of the OCS conduct of the part of the president and the corporation shows that he had
been in the habit of acting in similar matters and that the company had
DUTY TO CREDITORS – under the trust fund doctrine, it would be a violation of the
authorized him so to act (apparent authority)
right of creditors to allow the return to the stockholders of any portion of their capital
o CLV: apparent authority applies to both ordinary and extraordinary
or declare dividends outside of the unrestricted retained earnings
course of business;
➔ Upon the corporation’s insolvency, the BOD/BOT are duty bound to hold its ▪ For ordinary, the fact of appointment of the officer is
assets primarily for the creditors enough to create the apparent authority
➔ If the directors are the creditors themselves, they will not be permitted to ▪ For extraordinary, apparent authority comes in only when
secure for themselves any personal advantage over the creditors by the there is a previous act which is extraordinary, and the
purchase of corporate property board, without prior approval, allows it to pass through via
acquiescence or ratification
COPORATE GOVERNANCE – system whereby the shareholders, employees, creditors o Apparent authority cannot apply to benefit a party who deals with
and other stakeholders of a corporation ensure that the management enhances the the corporation aware of the corporate representative’s lack of
value of the corporation as it competes to an increasingly global market place authority
➔ Stakeholder theory: Governance is not limited to maximizing profits CORPORATE SECRETARY – unless otherwise provide, shall be the custodian of
o Corporate social responsibility – corporations that are vested with corporate records, with the duty to register valid stock transfers in the books of the
public interest assume certain responsibilities to all stakeholders corporation
who are affected by the business enterprise
o Applies only to publicly listed companies, because they are built on ➔ Cannot be compelled to do so when the transferee’s title to said shares has
public reliance no prima facie validity
➔ Stockholder theory: bottom line is maximizing profits ➔ A secretary’s certificate which is regular on its face can be relied upon by a
o BOD was granted legal title to corporate property by the third party who does not have to investigate beyond such certification
stockholders, who themselves have beneficial title or interest in the
CORPORATE TREASURER – to receive and keep funds of the corporation; unless duly
corporate enterprise
authorized, he cannot bind the corporation in a sale of its assets
o Applies to corporations in general
POWER OF THE BOARD TO APPOINT AND TERMINATE COPORATE OFFICERS
CORPORATE OFFICERS
Who is a corporate officer? Those who are given that character by the corporation
BOD may validly delegate some of its functions and powers to officers – the authority
code, or by the by-laws → PRESIDENT, TREASURER, SECRETARY
of such individuals to bind the corporation is derived from law, by-laws or board
authorization, expressly or impliedly or by habit, custom or acquiescence in the ➔ Every officer is a de jure agent, but not all de jure agents are officers
general course of business. ➔ Being an officers means that you are bound by the 3 duties
➔ Can be removed based on the business judgment of the board
➔ When such individuals exceed their authority, their actions cannot bind the
o Those not listed are protected by security of tenure clause of the
corporation, unless ratified or by estoppel
constitution
PRESIDENT – unless otherwise provided in the charter or by-laws, he is presumed to o Those who are not officers may be removed only FOR CAUSE
have authority to act within the domain of the general objectives of the corporation’s ➔ Removal is deemed and intra-corporate dispute (labor dispute if not an
business and within the scope of his or her usual duties officer)
LIABILITIES OF CORPORATE OFFICERS c. Default rule is that each member is entitled to one vote per share
d. ENTITLEMENT TO VOTE:
When officers breach their fiduciary duties, they become jointly and severally liable
i. Amendment of AoI – 2/3 of OCS
for all damages resulting therefrom suffered by the corporation, stockholders,
ii. Election of BoD/BoT – majority of OCS must be present
members and other persons
iii. Investment in another business or corporation – 2/3 OCS
➔ As a general rule, officers are not liable for corporate debts UNLESS there iv. Increase/decrease of capital stock – 2/3 OCS
was bad faith or wrongdoing by him established clearly and convincingly v. Incurring/increasing bonded indebtedness -- 2/3 OCS
vi. Sale/disposition of all/substantially all assets – 2/3 OCS
Liability also arises when: vii. Declaration of stock dividends – 2/3 OCS
viii. Management contracts – Majority of OCS of both
1. He consents to the issuance of watered stocks or who, having knowledge of
corporations or 2/3 OCS of both when exceptions apply
such, does not forthwith file with the corporate secretary his written
ix. Adoption, amendment, repeal of by-laws – 2/3 OCS
objection thereto
x. Fixing consideration of no par value shares – majority OCS
a. Watered stock – stock that was issued for:
xi. Merger and consolidation – 2/3 OCS
i. Less than its par or issued value
e. In case of joint ownership of stock, consent of all co-owners are
ii. Consideration other than cash, valued in excess of its fair
necessary UNLESS one has been authorized in writing to vote
value
f. If a stock has been pledged/mortgaged, creditor shall have the right
2. Agrees to hold himself personally and solidarily liable with the corporation
to attend/vote UNLESS creditor has given the right to the debtor
3. He is made, by law, to personally answer for his corporate action
g. Voting rights of members of non stock corporation may be taken
away by provision of AoI or bylaws
2. Receive dividends – shall only be borne by the corporation’s UNRESTRICTED
RIGHTS OF STOCKHOLDERS AND MEMBERS RETAINED EARNINGS upon approval of stockholders representing 2/3 of the
GR: all stockholders have equal rights OCS at a meeting called for that purpose
a. Any cash dividends due on delinquent stock shall first be applied to
E: any preferences or restrictions applied to a class of stockholders will be valid if: the unpaid balance plus costs and expenses
i. Dividends are withheld until subscription is fully paid
1. Expressly provided in the AoI
b. 3 types of dividends
2. Expressly provided in the certificate of stock
i. Cash – BOD approval
E: When authorized by the AoI, board may fix the terms and conditions of preferred ii. Property – BOD approval
shares or classify share for the purpose of insuring compliance with constitutional iii. Stock – majority of the board + 2/3 of OCS
and legal requirements c. RETAINED EARNINGS – accumulation of net profits of the
corporation; if accumulation results in net loss, it’s called DEFICIT
➔ Such terms will only be effective upon formal registration with the SEC i. Deficit means that capital has been impaired
RECOGNIZED RIGHTS OF THE STOCKHOLDERS: ii. Even if profits are realized in succeeding years, no
dividends can be declared until deficit is wiped out
1. Right to vote – way by which a stockholder participates in the control and iii. RESTRICTED RE – portion that is earmarked for a specific
management of the corporation purpose and cannot be declared as dividends
a. Inherent and incidental to the ownership of corporate stocks iv. UNRESTRICTED RE – portion that is free and can be
i. Only a stock actually issued and outstanding may be voted declared as dividends
b. may be limited, broadened or denied to the extent specified in the d. Declaration of dividends is under the business judgment of the
AoI or bylaws board BUT SH’s may sue the BOD to compel them to pay out
dividends if they unreasonably accumulate profits of the ii. Indorsement
corporation (such as in excess of 100% of the capital initial paid up iii. Registration
capital) b. Restrictions on free transferability of shares:
i. Excess profits may be retained in the ff. instances: i. Right of first refusal – SH must first offer shares to
1. Corporate expansion projects corporation or to other existing SHs before selling to third
2. Loan agreement forbidding dividend declaration parties
3. Special circumstances ii. Right of first option – Grants to the corporation the right
4. SEC restriction to buy the shares at a fixed price
3. Receive distributions upon liquidation of corporation – in the liquidation iii. Right of prior consent – SH who wants to sell or dispose of
process, after the payment of all corporate debts and liabilities, the his shares may do so only when consented by BOD and
remaining assets, if any, must be distributed to the stockholders in other SHs -- VOID
proportion to their interests in the corporation (liquidation dividend) iv. Buy-back agreement – shares given to officers/employees
4. Inspect books of the corporation under the condition that should they resign/be
a. Common law right; exists even in absence of provision terminated; the corporation shall have the right to buy
b. Stockholders are owners who must protect their interests back the shares
c. Limitations: v. Prohibition to transfer – VOID if unreasonable
i. Reasonable hours vi. Non-competition clause – stockholders cannot invest in
ii. Person demanding has not improperly used any info competing corporations
secured through any previous inspection of books c. Restraint of trade – an agreement by which a person obliges
iii. Demand is made in good faith or for legitimate purpose himself not to engage in competitive trade for five years
1. Ascertain whether corp is being mismanaged i. Valid, provided that terms are reasonable
2. Ascertain financial condition of the corporation 8. File derivate suit – suit by a shareholder to enforce a corporate cause of
3. Ascertain value of shares of stock action, exercised to vindicate corporate rights whenever the corporate
4. Obtain mailing lists of shareholders officers refuse to sue or they are the ones to be sued
d. May be enforce via mandamus when impropriety of shareholder’s a. It must be shown by the stockholder that the board is not in a
request is not yet established position to exercise its business judgment
e. Violations of right to inspect books is criminally punishable i. Where board is guilty of breach of trust, not mere error in
i. Director/trustee/stockholder has made a prior demand in judgment; intra-corporate remedy would be futile
writing for a copy of records or minutes b. Requisites
ii. Officer refused to allow such examination i. Party suing must be a stockholder during the time of the
iii. If such refusal was made pursuant to a resolution of the act complained of and throughout the suit
board, members who voted for refusal shall be liable ii. Party has exerted reasonable efforts to exhaust intra
iv. Defense of prior improper use of info must be proved corporate remedies
5. Registration of the shares in the stockholder’s name 1. No need for this if remedy would be useless
a. Mandamus will not lie to compel the corporate secretary to register iii. No appraisal right is available for the act complained of
the transfer of shares when the petitioner is not the registered iv. That the suit is not a nuisance or harassment suit
stockholder nor does he hold a power of attorney from the latter v. Must be filed in the name of the corporation
6. Issuance of stock certificates 9. Appraisal right – right to demand payment of the fair value of his shares,
7. Transfer and dispose of his fully paid share after dissenting to a proposed corporate act involving fundamental change
a. Stocks are personal property that may be transferred by: in the corporate setting; common law right
i. Delivery
a. Radical change in the contractual relationship by the stockholder ➔ May be waived, but only individually
and the corporation that could not have been anticipated
All stockholders shall enjoy pre-emptive right to subscribe to all issues or disposition
b. There must be enough UNRESTRICTED RETAINED EARNINGS
of shares of any class, in proportion to their respective shareholdings UNLESS such
c. Only prejudiced stockholders can exercise the right
right is denied by the AoI PROVIDED such right shall not extend to shares to be:
i. He must have dissented in the meeting, and
ii. Voted against the transaction 1. Issued in compliance with laws requiring stock offerings or minimum stock
d. Available in the following instances: ownership by the public
i. Amendment to the AoI has effect of 2. Issued in good faith with approval of the stockholders representing 2/3 of
1. Changing rights of stockholders or class of shares the OCS in exchange for:
2. Authorizing preferences to any shares or classes a. Property needed for corporate purposes
3. Extending corporate term b. In payment of a previously contained debt
ii. Sale or other disposition of all or substantially all of
corporate assets CONDUCT OF STOCKHOLDER MEETINGS – may be called by a person designated in
iii. Merger and consolidation the by-laws; in absence of designation, director/trustee/officer may do it
iv. Investing in another corporation/business outside of its
➔ Place and time must be mandatorily dictated
primary purpose
➔ QUORUM – stockholders representing majority of OCS
e. May be denied by the corporation when:
i. Demand for payment is withdrawn with corp’s consent AGREEMENTS AFFECTING SHAREHOLDINGS
ii. Proposed action dissented is not implemented
iii. Proposed action dissented is disapproved by SEC PROXY – stockholders may vote in proxy provided:
iv. If SEC determines that such stockholder is not entitled to 1. Agreement in writing
appraisal right a. Good for 5 years max
Proprietary character of shares – transferrable in character; heirs do not succeed in 2. Signed by stockholder
the rights of a deceased stockholder 3. Filed before scheduled meeting with the corporate secretary

➔ Must first be distributed in estate proceedings and transfer recorded in the Proxy relationship is governed by the law on agency; proxy must act in accordance
books of the corporation with the instructions given to him by the shareholder

SHARE OF STOCK – represents an aliquot part of the corporation’s property, or the VOTING TRUST AGREEMENT – Stockholder parts with the voting power but retains
right to share in its proceeds to that extent when distributed according to law and beneficial ownership
equity ➔ Naked title and beneficial title is split; Trustee has powers of ownership
➔ The holder is not the owner of any part of the capital, nor entitled to the ➔ Requisites:
possession of any definite portion of its assets o In writing and notarized; otherwise, unenforceable
o Specify terms and conditions
PREEMPTIVE RIGHTS – right to be granted the first option to subscribe to any opening o Copy shall be filed with the SEC; otherwise, unenforceable
of the corporation’s unissued capital stock, or to any increase in the corporations o Must be registered in the books of the corporation
ACS. ➔ Officer cannot enter into a VTA; otherwise he would cease to be a naked
title owner, divesting him of his title as officer; summons upon him invalid
➔ Protection against the dilution of equity of interest of stockholders which
affects their voting power and right to dividends POOLING AGREEMENTS – SH’s agree that their shares shall be voted as a unit
➔ Exists even in the absence of a statutory grant
SHARES OF STOCK AND CAPITAL STOCK o Other preferences as may be stated in the AoI

Nature – shares of stock are intangible personal property with intrinsic pecuniary Holders of non-voting shares shall nevertheless be entitled to vote on:
value, representing aliquot portion of of corporation’s capital
1. Amendment of AoI
➔ Stockholder’s interest is limited to: 2. Adoption/amendment of by-laws
o Their right to the proportionate share of the profits whenever 3. Sale or other disposition of all/substantially all corporate assets
dividends are declared 4. Incurring/creating/increasing bonded indebtedness
o Proportion of the property remaining on the termination or 5. Increase or decrease of capital stock
dissolution of the corporation 6. Merger or consolidation
7. Investment in another corporation or business
The power to issue shares is lodged with the board; no stockholder approval needed
8. Dissolution
➔ Limitations:
Presumption of equality – when nothing has been provided in AoI, no presumption
o cannot be issued for consideration less than the par or issued price
should exist to distinguish one share from another
o cannot be issued in exchange for debt instruments or future
services 1. COMMON – basic class of stock issues without extraordinary rights or
o if consideration is other than cash, value shall be initially privileges, entitles the shareholder to a pro rata share in the profits
determined by the board of incorporators, subject to SEC approval 2. PREFERRED – entitles holder to certain preferences listed in AOI or
authorized by the board
CAPITAL STOCK
a. Must be issues only with a stated par value
Outstanding capital stock means the total shares of stock actually issued under b. Preferences include: participating, cumulative, par value, etc.
binding subscription agreements whether fully paid or not EXCEPT treasury shares 3. REDEEMABLE – may be purchased by the corporation after a fixed period,
regardless of the existence of unrestricted retained earnings
Authorized capital stock is the amount fixed in the AoI that may be subscribed and a. Exception to the trust fund doctrine
paid by the stockholders b. Considered retired after redemption by the corporation
c. Redemption feature must be stated in the AoI + certificate of stock
➔ issuance of shares beyond the ACS is VOID
d.
➔ holders do not become stockholders to the extent over the ACS
4. FOUNDER SHARES – given exclusive rights not given to other shares
Par value stock is the aggregate par value of all shares issued and subscribed 5. TREASURY SHARES – shares which have been issued, fully paid, but
subsequently reacquired by the corporation by purchase/redemption or
Non par value stock is the total consideration received for the shares of stock some other lawful means
Book value per share amount that would be paid on each share to retiring a. No effect on the stated capital UNLESS they are cancelled or retired
stockholders on in the event the corporation is liquidated b. May be declared as property dividends
c. May be sold at any amount so long as it is sold at a gain
CLASSIFICATION OF SHARES – shares may be divided into classes or series or both, d. Loses the status of being outstanding share
which may have such rights, privileges or restrictions as may be stated in the AOI 6. STOCK WARRANTS
provided that no share may be deprived of VOTING RIGHTS except those classified 7. STOCK OPTIONS
and issued as PREFERRED or REDEEMABLE, unless otherwise provided
HYBRID SECURITIES
➔ Preferred shares may be given preference:
o In the distribution of assets upon liquidation 1. Equity securities – represent an ownership interest in the corporation and
o Distribution of divdidends include both common and preferred stock
a. Not tax deductible to the corporation PRE-INCORPORATION SUBSCRIPTION – subscription to a corporation yet to be
b. Grants a voting right to the holder formed shall be irrevocable for a period at least 6 month from date of subscription,
c. Dividends are subject to zero rate of income tax UNLESS:
2. Debt securities (bonds) – do not represent an ownership interest in the
1. All of the other subscribers consent to the revocation, OR
corporation, but rather create a debtor-creditor relationship between
2. The incorporation fails to materialize within said period
corporation and bondholder
a. Interest paid on the bond are deductible to the corporation for In a normal subscription agreement, you cannot revoke UNLESS it is with the consent
income tax purposes of all stockholders
b. Allows a return to the investor whether or not the corp has
unrestricted retained earnings (cos it’s a creditor of the corp) CONSIDERATION – stocks shall not be issued for a consideration less than the par or
c. Interest paid on debt securities are taxable to the holder issued price thereof; consideration may be in the form or combination of the ff:

QUASI REORGANIZATION – used usually in relation to fixing the financial condition 1. Cash
of a particular corporation, through the use of re-appraisal surplus to wipe out 2. Property, that is related in carrying out the business of the corporation
negative restricted earnings, or through reduction of corporation’s capital stock 3. Labor
4. Previously incurred indebtedness of the corporation
REDUCTION OF CAPITAL STOCK – must be approved by majority of BOT/BOD and 2/3 5. Dividends – effect of capitalizing the restricted earnings
OCS; also requires prior approval of the SEC provided that no decrease of capital stock
shall be approved if its effect shall prejudice the rights of corporate creditors ➔ UNLAWFUL CONSIDERATION – considered void, but subscription agreement
remains valid
STOCK SPLITS vs STOCK CONSOLIDATIONS
WATERED STOCKS – stocks that were:
1. STOCK SPLITS – each of the issued outstanding shares is broken up to greater
number of shares, representing a smaller interest in the corporation 1. Issued for less than par or issued value or
a. Purpose is to lower the price per share to a more marketable price, 2. Issued for overvalued consideration (other than cash)
thus encouraging investment
b. Makes more room for authorized capital stock to be issued Any director or officer consenting to issuance of watered down stocks, or had failed
2. STOCK CONSOLIDATION – new shares are issued in replacement of old to object to the same after having knowledge thereof, shall be SOLIDARILY LIABLE
shares with a higher par or issued value without affecting the total value of WITH THE STOCKHOLDER CONCERNED to the corporation and its creditors for the
the issued shares difference between the fair value received and the par/issued value of the same
a. Purpose it make each share have a higher par or issued value,
1. Subscription contract theory – subscription contract is the source of the duty
making them more expensive in acquiring, and to bring the stock
of the subscriber to pay his shares; if the contract releases him from further
within higher end of the market
liability, he ceases to be liable
SUBSCRIPTION CONTRACT – contract for the acquisition of unissued stock in a 2. Fraud theory – wrong done to the creditor is deceit in falsely representing
corporation or one that it yet to be formed; binding even if orally entered into that the par value was paid in full
3. Trust fund doctrine
➔ Creditors are protected, since they may enforce against one purchaser, even
if share is not fully paid UNPAID SUBSCRIPTION – subscriber is liable to pay interest on unpaid subscription
➔ Subscriber or the purchaser of the share becomes the stockholder even if from the date of subscription
subscription is not yet paid
➔ BOD may at any time declare due and payable the unpaid subscriptions and
o Unpaid subscription is a debt of the stockholder to the corporation
may collect the same as deemed necessary
➔ Entering into the subscription agreement IS THE TRADITION of ownership
➔ If within 30 days from date of demand (THE CALL) and no payment is made, CORPORATION DOES NOT HAVE TO POWER TO –
all stocks covered by the subscription agreement shall become delinquent
1. Demand for the repurchase of its shares of stock UNLESS classified as
and shall be subject to sale
redeemable
➔ Payables may be cancelled when there is a REDUCTION OF CAPITAL STOCK
2. Refuse to pay stockholders dividends on shares that are not delinquent to
DELINQUENCY ON SUBSCRIPTION – there is delinquency when: apply them to the unpaid balance
3. Bid delinquent shares for a value greater than the balance on the unpaid
1. Upon call, stockholder is not able to pay, OR
subscription
a. Call is not necessary when
4. Offset a money claim of the employee-stockholder against the employer-
i. Corporation is insolvent OR
stockholder using unpaid subscription of the stockholder
2. Stockholder does not pay within period stipulated in the subscription
agreement Nature of Certificate – prima facie evidence that holder is a stockholder; does not in
itself represent the ownership
Delinquency sale – board may order the sale of delinquent stock and shall state
Quasi Negotiable Character – quasi since all the defenses available against the
1. The amount due on each subscription plus all accrued interest, and
assignor will still apply to the assignee
2. The date, time, and place of sale which shall not be less than 30 days nor
more than 60 days from the date the stocks became delinquent ➔ Requisites for effective transfer of title of shares in the name of the buyer:
o There must be deliver of the certificate
Notice of sale shall be sent to every DS, and shall be published
o Certificate must be endorsed by the owner
Delinquent stock may be sold to the highest bidder who shall offer to pay the full o To be valid against third parties, transfer must be recorded in the
amount of the balance on the subscription plus interests and costs books of the corporation

No delinquent stock shall be voted for or be entitled to vote at any stockholders Right to Certificate for Fully Paid Shares
meeting, nor entitled to any rights of the stockholder EXCEPT right to dividends
Lost or Destroyed Certificates
CERTIFICATE OF STOCK
Forged or Unauthorized Transfers
MODES OF DELIVERY
TRANSFERS, ENCUMBRANCES AND OTHER DEALINGS WITH SHARES
1. Not capable of ACTUAL or PHSYICAL delivery since they are intangible
2. Transfer can only be effected through CONSTRUCTIVE delivery
a. Execution of public instrument ACQUISITIONS, MERGERS, CONSOLIDATIONS
b. Transfer or negotiation of the titles
Rules would depend on the subject matter
c. Use & enjoyment of the rights and privileges of a stockholder
1. Assets level sale – property of the corporation is sold, the raw assets and not
RIGHTS OF THE CORPORATION WITH RESPECT TO SHARES OF STOCK
the juridical entity or the goodwill
1. Call for the payment of unpaid subscription a. Governed by law on sales and contract law
2. Impose interest on unpaid subscriptions i. Novation would require consent of both creditor and
3. Refuse to issue certificates of stock to unpaid subscriptions debtor
4. Refuse to recognize a sale or assignment of stock that has not been 2. Business enterprise sale – sale of all or substantially all of the assets
registered in the stock and transfer book constituting the business
a. Constitutes the goodwill, the customer lists and all that makes the Merger – union whereby on or more existing corporations are absorbed by another
business profitable corporation that survives and continues the combined business
3. Equity sale – sale of controlling equity
➔ Re-organization of corporations, retains its identity, retains rights,
Succession of liability rule – transferee corporation is liable if the transferor priveleges, properties of other corporations
corporation is selling to the transferee the means by which it makes profits
Procedure
ACQUISITIONS AND TRANSFERS
1. Plan of M/C
1. Assets level transfer – transferee is not liable for the liabilities of the 2. Approval
transferor, except a. Majority of Board, 2/3 OCS of each corporation
a. Transferee agrees to assume the debts b. Dissenting stockholder has right of appraisal
b. When it is effected in fraud of creditors i. Extinguished if plan is abandoned
i. No contractual privity between creditors of transferor and c. May be amended, subject to ratificatory vote
the transferee 3. Articles
2. Business enterprise transfer – transferee shall be liable for the liabilities of 4. Submission of financial statements
the transferor arising from the business enterprise transferred 5. Approval by SEC (and by PCC for mergers exceeding 1 Billion pesos)
3. Equity transfer – transferee is not liable UNLESS agrees to assume the debts
De Facto Merger – one corporation acquiring all or substantially all of the properties
TYPES OF ACQUISITIONS/TRANSFERS of another corporation, ending up with the BE of the target corp

GR: corporation that purchases the assets of another will not be liable for the debts EFFECTS ON EMPLOYEES
of the selling corporation, provided the buyer acted in good faith and paid adequate
1. AO transfers – no requirement to absorb employees
consideration for such assets EXCEPT when:
2. BE transfers – no requirement to absorb, but may be pierced to make it
1. Buyer expressly or impliedly agrees to assume the debts – assets only level liable for labor claims
2. Where seller enters into the transaction in fraud of creditors 3. Equity transfers – deemed to have absorbed when change in ownership was
a. Creditors are protected in transactions intended to defraud them done in bad faith
b. Assets only level
CORPORATE DISSOLUTION AND LIQUIDATION
3. Buyer is merely a continuation of the selling corporation
a. Business enterprise transfer Voluntary
b. Will make the transferee liable for existing liabilities via common
law lien 1. No creditors affected
c. Goes against principle of relativity 2. Creditors affected
d. Developed to protect the creditors of the transferor 3. Shortening of corporate term
4. Where transaction amounts to a consolidation or merger of the
Involuntary
corporations
1. Quo warranto
MERGERS AND CONSOLIDATIONS
2. Non-user of charter
Consolidation – Union of two or more existing entities to for a new entity called the 3. Expiration of term
consolidated corporation