Corporation Last Meeting Discussion

 There are various ways in which corporations may enter into unions, or sale of assets as
the case may be. There are two major corporate combinations, but there are three other
corporate combinations recognized by the Supreme Court.
 The two basic corporate combinations include merger and consolidation under Section 76
of the Corporation Code.
 The three recognized corporate combinations which may include:
1) Sale of assets – talks about transfer of ownership of the assets of the selling
corporation and to and in favor of the purchaser corporation. The primary
franchise that the State would grant in favor of the seller corporation shall be
made, it will be just assets that shall be transferred. Consequently, since only
assets are transferred, the general rule is that liabilities of the corporation
shall not be assumed by the purchaser corporation, UNLESS there is
agreement that the purchaser corporation shall become liable and will
reundertake to assume the obligations of the selling corporation.
2) Sale of business enterprise – it is wider in scope, as opposed to assets. It
includes the transfer of goodwill, the transfer of the business operation
including management of employees. Because what is to be transferred is
ongoing concern or the economic unit of the selling corporation, then the
purchaser corporation shall become liable for the obligations of the selling
corporation. In other words, what is to be sold under this sale is not just the
assets of the corporation, but the earning capacity or the business capacity of
the selling corporation. Precisely the reason why by the nature of the
transaction, the purchaser corporation shall assume the obligations of the
selling corporation.
3) Sale of equity – this has for its purpose acquisition of the majority
shareholdings of the selling corporation. And what the purchaser corporation
would seek to acquire would be the voice of the majority of the BOD. That
being the case, the purchaser corporation shall NOT become liable for the
existing obligations by the selling corporation. BUT, generally, in case of
corporate combinations, obligations of the selling corporation shall NOT be
assumed by the purchaser corporation but this is subject to certain exceptions
wherein the purchaser corporation shall be deemed to have assumed the
obligations of the selling corporation: a) where there is agreement or express
stipulation in the contract for such a corporate combination; b) when the
selling corporation and the purchaser corporation are guilty of conspiracy in
entering into that corporate combination for purposes of defrauding creditors;
and c) in case of merger or consolidation [therefore, this gives us the idea that
in merger and consolidation, the surviving corporation or the consolidated
corporation will have to assume the existing obligations of the constituent
corporation]; and d) when the purchaser corporation assumes the continuation
of the business operations of the selling corporation. All these instances
liability shall have to be paid and shall be for the account of the purchasing
corporation.
MERGER AND CONSOLIDATION

 Section 76. Merger is simply a union of two or more constituent corporations with one
of these constituent corporations to exist later on, which is according to the Corporate
Code, is to be called the surviving corporation.
 Consolidation, on the other hand, is a union between two or more corporations which
will result into a new corporation, which we call as the consolidated corporation.
 What are the requirements for purposes of merger and consolidation under Section 77 of
the Corporation Code?
1. There has to be plan for merger/consolidation
2. Such plan must be presented to the BOD and the stockholders of both constituent
corporations
3. It has to be approved by the BOD and ratified by the stockholders representing 2/3 of
the outstanding capital stock.
4. If the plan is approved, it has to be submitted to the SEC.
5. SEC is duty-bound to examine the propriety of the planned merger and consolidation
AND at times may call for a hearing for that purpose. Once the documentary
requirements are sufficient in form and substance, then SEC may grant the
application for merger and consolidation. However, does that not give the surviving
corporation or the consolidated corporation separate juridical personality. ONLY
when SEC issues the certificate of merger or certificate of consolidation will the
surviving corporation or the consolidated corporation be treated as separate entity.
(Minandao Savings and Loan Association Case – in this case, First Iligan and
Davao Savings planned merger, but it did not become effecetive. Therefore, the
properties of First Iligan that were levied on execution could not be considered as the
properties of Davao, later on made as Mindanao Savings and Loan Association.
When the latter questioned the propriety of the auction sale on the ground that there
was no notice given to it as well as to PDIC, the SC said it has no standing because in
the first place, there was no valid merger between First Iligan and Davao Savings.
According to the Supreme Court, all requirements must be followed and more
importantly, there must be a certificate of merger to be issued by SEC.)

 The constituent corporation in case of merger, which does not survive, and the constitute
corporations in case of consolidation, will seize to exist and therefore, will lose their
separate juridical personality. However, the cessation of the separate juridical personality
will not lead to dissolution and winding up of the affairs precisely because it is now the
surviving corporation and the consolidated corporation which will continue the business
operations of the constituent corporations.
DIFFERENT KINDS OF CORPORATION

 Non-stock corporation (Section 3) as opposed to Stock Corporation

 A stock corporation is one which is authorized to have a capital stock and is authorized to
distribute dividends. Conversely stated, under Article 87 of the CC, a non-stock
corporation is one which is not authorized to distribute its dividends to its members. And
the net of its income shall be distributable to its members. With that definition, a non-
stock corporation may engage into business. BUT there is a qualification: If at all, a non-
stock corporation would engage into business, it must not be in their regular conduct of
operations of a non-stock corporation. It must just be purely incidental.

GENERAL RULE: Non-stock corporations are

prohibited from conducting business because that will run
counter to the purpose for which they are organized.
What’s their purpose under Section 88? (check) Not for
profit generating purposes.

EXCEPTION: They conduct business incidental in

nature. For example, if you have a charitable institution
which would sell t-shirts for purposes of generating
income, the proceeds of which will be applied to its
charitable or outreach programs, the selling of the t-shirts
is not voided simply because the corporation is a non-stock
corporation. It is merely incidental, and therefore, allowed.

 Differences between a stock corporation and non-stock corporation.

6. Section 89. The right to vote of members can be lifted, expanded or even denied in
the Articles of Incorporation or in the by-laws. There may be restrictions on the right
to vote. BUT it is not allowed in stock corporations. In fact, Section 6 of the CC, a
corporation cannot issue purely non-voting shares. If at all, a corporation would issue
non-voting shares, there should always be voting shares.
7. But there are non-stock corporations where members are deprived of the right to vote.
8. With respect to the number of votes that may be cast, in Non-stock Corporation, each
member is entitled to just one vote. BUT in stock corporation, the number of votes
that may be cast each stockholder generally shall be computed by determining the
number of shares held multiplied by the number of directors to be elected to the
board. In other words, each stockholder is entitled to more than one vote. But that is
not true when we talk about a non-stock corporation.
9. Can a stockholder assign or transfer his sharehodlings in a stock corporation? Yes.
There is no prohibition. After all, under Article 48 of the Civil Code, that is a right of
an owner. But in case of a non-stock corporation, membership in the corporation is
not transferable.
CLOSED CORPORATIONS (Section 96)

 A closed corporation is some sort of an organized partnership which is founded solely

based on trust and confidence among the stockholder-incoprorator. Principle of delictus
personae (check, not sure).

 What’s the nature of an association among family members forming a corporation but
whose Articles of Incorporation does not list the restrictions under Section 96? It could be
a de facto closed corporation or
 Under Section 96 there are there specific requirements that for a closed corporation to be
treated as such: 1) the Articles of Incorporation must specify that the shares of stocks
must be held only by specified number of persons not to exceed to 20; 2) there must be a
restriction on the transfer of shareholdings; and 3) prohibition to list the shareholdings in
the stock exchange.
 What if the Articles of Incorporation only lists one of this restriction? According to the
Supreme Court in the case of San Juan vs. CA, that corporation is treated as a de facto
closed corporation. In other words, there can be a de facto corporation under Section 96.
If you do not comply with all the requisites, there can still be a de facto closed
corporation.
 What’s the difference between a closed corporation which complied strictly the
requirements of Section 96 and de facto corporation? In those corporation strictly
following Section 96 of the CC will be treated of course as a separate entity, distinct from
the individual persons opposing the same such that if there is liability, the doctrine of
piercing the veil of corporate entity shall not be automatically be applied. And only when
the elements on the application for piercing the veil of corporate entity are present will
that be applied. But in case of de facto closed corporation, general rule is to apply the
doctrine on piercing the veil of corporate entity (Section 96).
 What should be the peculiar circumstances, other than those already mentioned, that may
be written in the Articles of Incorporation of a closed corporation under Section 97?
1. There can be a provision that provides for the rights, privileges and
qualifications of stockholders;
2. There may also be qualifications that may be required upon the BOD;
[NOTE: Items 1 and 2 shall not be applicable in widely open
corporation].
3. Closed corporations may require a greater number of quorum or
additional voting requirements. [This item applies to both widely open
and closed corporations.] Under Section 24, greater quorum may be
provided by the by-laws of the corporation.
4. The management of the corporation may be in the hands of the
stockholders. Unlike in widely open corporations, which under Section
23, have to be governed by the BOD. In other words, in the closed
corporations, the identity of the stockholders may be the same as in
the BOD. In such case, the liability of the BOD is also the liability of
stockholders. (record)
 5. It may be the stockholders who will act as BOD that will have the right
to appoint officers, directors, officials, or employees of the
corporation.

Other matters peculiar to closed corporations:

10. Appraisal Rights
Question: Do stockholders in a closed corporation have appraisal rights?
Answer: Yes, Section 85. Instances wherein stockholders can exercise their
appraisal rights in a closed corporation as opposed to appraisal
right in widely own corporation under Section 81? Under Section
81, there’s a list of instances wherein stockholders may exercise
their rights to appraisal: 1) in case of amendment of the Articles of
Incorporation for purposes of restricting the rights of the
stockholders or extending or shortening the corporate term; 2) sale,
exchange, mortgage or disposal of all the assets or all the
substantial assets of the corporation; 3) if the corporation invests
its fund in another corporation or in case of merger or
consolidation.

Question: Should we follow Section 81 for a closed corporation?

Answer: No. Because there’s no requirement under Section 85 indicated for
such exercise. In other words, there are no requirements to be
complied with at any time. Therefore, stockholders of a closed
corporation may exercise their appraisal rights.

11. The case of deadlock. Deadlock is a situation wherein the stockholders are so
divided that they cannot come up with a decision for the approval or disapproval of a
certain corporate act such that a corporate act can no longer be for the best interest of
the corporation.
Question: What is the remedy of a closed corporation in case of deadlock?
(NOTE: There’s no deadlock in widely open corporation. It is
specifically for closed corporations only—peculiar to closed
corporations.)
Answer: Any of the stockholders can petition the SEC and therefore, SEC
shall have the right to intervene or arbitrate the stockholders.

Question: Aside from intervening and arbitrating, what are the specific
actions that SEC can do?
Answer: It can cancel specific provisions of the Articles of Incorporation; or
cancel specific provisions in the by-laws which is prejudicial to the
interest of the corporation. And also, it has the power to appoint a
special director or provisional director, which of course, has to be
fair. The powers of the special or provisional director shall be the
same of the powers of all directors. And the termination of the
services will depend on the discretion of the SEC.
 Defining Basic Concepts of a Foreign Corporation (FC)

 Foreign Corporation is simple a corporation organized other than Philippine laws. That’s
the only requirement. But for purposes of granting license to foreign corporations, one of
the important requirements will be the host country of the FC shall have allowed Philippine
Corporations to conduct business in their country.
 Foreign Corporations, of course, are generally residents of a foreign country. But what if
it transacts business in the Philippines? Are they always required to secure license from the
government to conduct business? It depends. You have to distinguish. If a FC is conducting
business in the Philippines, that’s the time when license is necessary. And only then will
that FC be allowed to sue before Philippine Courts. FC which conduct business in the
Philippines without a license do not have any legal standing to sue before Philippine
Courts. The only instance wherein such FC may maintain an action or sue before Philippine
Courts is when transaction is isolated.
 What is isolated transaction? According to the SC, isolated transaction is a transaction
which is not falling under the concept of regular in nature. Which is to say that it is possible
that there may be two or more transactions but not regular, and NOT an ongoing business
transaction within the Philippines. Otherwise, a FC may deem to conduct business in the
Philippines in which license is necessary. In fact, in Lorenzo Shipping case, there were two
bills of lading, and since there were two bills of lading then, the transaction of the insurer
before Philippine courts is not isolated because it is conducting business and therefore,
license is necessary. But if you look at the facts, the SC noted that 1) the two bills of lading
only stemmed from one marine insurance, and 2) even if it does not stem from one marine
insurance, it was not regular or repeated, hence, considered as isolated. In the case of
Steelcase, we have to remember according to the SC that Design International was
distributing furniture to Steelcase in its own capacity. It was NOT dependent on the supply
provided by Steelcase. Second, the distribution agreement was not exclusive. In fact, there
were other domestic corporations which were also distributing furniture of Steelcase in the
country.

All Other Kinds of Corporation

1. Religious Corporations – to be composed of at least one or at least five

- Corporation sole and corporation aggregate
2. Educational Corporations – engaged in providing educations to be governed by the rules
or laws authorizing their creation.
- Composed of at least 15 trustees or members provided that the number
is in the multiple of five

Dissolution
There are two general kinds of dissolution:
1. Voluntary
Kinds:
- Voluntary where no creditors are affected
 - Voluntary where creditors affected

 Requirements: a) approval of BOD for voluntary dissolution as

well as ratification by the stockholders and the difference lies in
the notice/publication. In case of voluntary where no creditors are
affected, it will be the corporation which will cause the publication
in a newspaper of general circulation. In case of voluntary where
there are creditors affected, there must be a decision to be filed
with the SEC which shall be published in a newspaper of general
circulation.

2. Involuntary by the term itself is dissolution enunciated by SEC.

- Grounds: a) insolvency or b) that corporation can no longer be a
subject of rehabilitation where receivership has failed