Arellano University School of Law NOTES ON CORPORATION LAW Atty. Ruben C. Ladia Week 1: Chapters 1 and 2 Corporation is one of the types’ of business organizations. It is also the most important in economic development. Sec. 2. Corporation Defined. - A corporation is an artificial being, created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to is existence. INTRODUCTION Sole Proprietorship * One man form of business entity, personally answers all liabilities, but enjoys all the profits with the exclusion of others + Limited shareholders responsibility + Paid subscription in full, you are no longer liable Partnership + Based on mutual trust and confidence Joint venture * one time grouping of persons whether they be natural or juridical = does not entail continuity because after the undertaking is. completed it is already the end + particular partnership and joint venture would be similar, but there is already a decision of the Supreme Court declaring them as different when they do not register, it does not exist * Foreign corporations enters into an agreement with a domestic corporation, it must be registered. Generally they do not need to be registered. Corporations * They may enter into joint venture, but generally they cannot enter into a partnership, but there are exceptions allowed by the SEC: the 3 exceptions must go hand in hand * The articles of incorporation expressly authorized the corporation to enter into contracts of partnership; * The agreement or articles of partnership must provide that all the partners will manage the partnership; and * The articles of partnership must stipulate that all the partners are and shall be jointly and severally liable for all obligations of the partnership.Arellano University School of Law Definition and Attributes 4 Attributes of a Corporation Axtificial being — it has personality, juridical at that, separate and distinct from the persons composing it. It exists independently from the stockholders, members or its officers. Created by operation of law - this is so because the formal requirements of State’s consent through compliance with the requirements imposed by law is necessary for its creation such that the mere agreement of the persons composing it or intending to organize it does not warrant the grant of its independent existence as a juridical entity. Right of succession ~ unlike the partnership, the death, incapacity or civil interdiction of one or more of its stockholders does not result in its dissolution. It persists to exist independently of the individuals or person composing it. Powers, attributes and properties expressly authorized by law or incident to its existence - this presupposes that it can exercise only such powers and can hold only such properties as are granted to it by the enabling statutes unlike natural persons who can do anything as they please. Doctrine of limited capacity Only such powers as are expressly granted to it by law and by its articles of incorporation including others which are incidental to such conferred powers, those reasonably necessary to accomplish its purpose and those which may be incidental to its existence Can do things as the law asks or allows it to do If it does anything beyond, it shall be considered as ULTRA VIRES General rule: Moral damages cannot be granted to corporations Exception: Filipinas Broadcasting Network Inc. vs. Ago Med Ih cases of slander, libel and other- forms of defamation (should not qualify because the code does not qualify whether natural or juridical) Art. 2219 of the civil code: Moral damages may be recovered in the following and analogous case: (1) A criminal offense resulting in physical injuries; (2) Quasi-delicts causing physical injuries; : (3) Seduction, abduction, rape, or other lascivious acts; (4) Adultery or concubinage; (5) Mlegal or arbitrary detention or arrest; (6) Illegal search; (7) Libel, slander or any other form of defamation;Arellano University School of Law (8) Malicious prosecution; {9) Acts mentioned in Article 309; 110) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35. ‘The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of this article, may also recover moral damages. The spouse, descendants, ascendants, and brothers and sisters may bring the action mentioned in No. 9 of this article, in the order named. Advantages: 1. Capacity to act as a single unit 2, Limited shareholder's liability 3. Continuity of existence 4. Feasibility of greater undertaking 5. Transferability of shares 6. Centralized Management 7.Standardized method of organization, management, and _ finance. 5. No. 2 may also be a disadvantage 6. No. 5 may also be a disadvantage Disadvantages: 1, Formal proceeding (such as board of meetings) are required; 2. Business transactions limited to the State unless authorized by foreign State; 3. Credit is limited in view of shareholder's limited liability; 4. Unity of incompatible and’ conflicting elements in view of transferability of shares; 5. Minority shareholders have practically no say in the conduct of corporate affairs; 6. In large scale enterprises, stockholders’ voting rights may become merely fictitious and theoretical because of disinterested in management, wide-scale ownership _ and inaccessible place of meeting; 7. "Double taxation” may be imposed on corporate income; 8. Corporation are subject to many legal controls and restrictions. A corporation is a person, therefore protected by the due process clause and equal protection clause of the ConstitutionArellano University School of Law Week 2: Classifications of Corporation ‘The importance of knowing whether a corporation is a stock or non-stock is that it determined what provisions of the code or the law may be applicable. Example: Under Section 51, “stockholder's or member’s meetings (of a stock corporation), whether regular or special, shall be held in. the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation. However, under Section 93, the by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place within the Philippines. Section 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares AND are authorized to distribute to the holders of such shares dividends or allotments of the ‘surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. Stock Corporation Note the conjunctive “AND*, which denotes that, for a corporation to be considered a non-stock corporation, both requisites must be satisfied. And these conditions are: 1. Its capital stock divided into shares; and 2. It is authorized to distribute (to the holder of such shares) dividends or allotments of the surplus profits on the bases of the shares held. If one condition is not satisfied, then it is not a stock corporation (see case of CIR v. Club Filipino de Cebu). In the case at bar, it is concocted that the Club derived profits from the operation of its bar and restaurant, but such fact does not necessarily convert it into a profit making enterprise. The bar and restaurant are necessary adjunct of the Club to foster its purpose and the profits derived therefrom are necessarily incidental to the primary object of developing and cultivating sports for the healthful recreation and entertainment of the stockholders and members. That a club makes some profit does not make it a profit-making club. Under Sec. 24, cumulative voting is a matter of right granted to stockholders of a stock corporation a may not therefore be denied by provisions in the articles of incorporation or by-laws, wiere as in the case of a non-stock corporation, under Sec. 89 of the code, they are entitled to cast only one vote for candidate.Arellano University School of Law However, it may be allowed in the provisions in the article of incorporation or by-laws. Non-stock Corporation Under Section 3, “All other corporations are non-stock corporations” The term “non-stock corporation” is actually a misnomer since a non-stock corporation could actually have its stock divided into shares, except that its by- laws do not allow the distributionof dividends or allotments of the surplus profits to its stockholders. This is common to couiitry clubs. Under Section 87, non-stock corporations are “those where no part of their income is distributable as dividends to its members, trustees or officers subject to provisions on dissolution.” Non-stock corporation can earn profits but these profits cannot be distributed as dividends but are used merely :for the furtherance of its purpose or purposes Section 4. Corporations created by special laws or charters. - Corporations created by special laws or charters shall be governéd primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. (n) There are corporations created by special laws. If it is crated by a special law, they have their own character. They are not immune from suit unless provided by the law of their creation. According to Section 4, these corporations are primarily governed by the law creating them (that is, their own charter). Corporations operate under the special law or charter such that registration with the SEC is not required for them to acquire a legal and juridical personality. Officers and employees of government-owned and controlled corporations with their own charters are governed by Civil Service Law. Their subsidiaries organized under the provisions of the Corporation Code are governed by the Labor Code. Note: This came out in the bar exams. |'In' Gase-of government-owned or -controlled corporations, how do you ‘determine if the law applicable is the civil service laws or the Labor Code? ‘Answer: The manner of their/creation.Arellano University Schoo! of Law Gonzales vs PNB One of the stockholders wanted to examine (a matter of right for every stockholders) the financial records of the PNB (bank). But the bank has its own charter which provides that the financial books and records are subject to inspection only by the Monetary Board of the Central Bank. Therefore, a stockholder cannot examine the subject records because it was specifically provided in the charter. PNOC-ENERGY DEVELOPMENT CORP vs NLRC Facts: Petitioner Mercado was employed by PNOC-EDC, a subsidiary of PNOC. He was dismissed on the grounds of dishonesty and violation of company rules and regulations. He then filed a complaint before NLRC. PNOC-EDC filed a motion to dismiss on the ground that the CSC, not the NLRC has jurisdiction over the case. Ruling: PNOC-EDC having been incorporated under the General Corporation Law was held to be GOCC whose employees are subject to the provisions of the Labor Code. Note: PNOC is a 100% GOCC having its own charter. Employees of PNOC are subject to the provisions of CSC laws. Other Classifications of Corporations: + Public corporation and Private Corporations Public corporation - those formed or organized for the government or a portion of the State or any of its political subdivisions and which have for their purpose the general good and welfare. Private corporation - those formed for some private purpose, benefit, aim or end. ‘The true test to determine the nature of a corporation as public or private is found in the relation of the body to the State. In the case of National Coal v. CIR, 99% of the stocks of National Coal Company are owned by the government. But that fact does not make National Coal Company a public corporation. If it is not established for gover.mental purposes, it is a private corporation.Arellano University School of Law " Ecclesiastical and Lay Corporations. Ecclesiastical or religious corporations — are composed exclusively of ecclesiastics organized for spiritual purposes or for administering properties held for religious ones. They are organized to secure public worship or perpetuating the right of a particular religion. Under the Code religious corporation are further classified either as religious societies or corporation sole. Lay Corporation ~ are those established for purposes other than religion. They exist for secular or business purpose and may further be classified as eleemosynary or civil. Eleemosynary corporations - are created for charitable and benevolent purposes such as those organized for the purpose maintaining hospital and houses for the sick, aged or poor. Civil corporations ~ are organized not for the purpose of public charity but for the benefit, pecuniary or otherwise, if its members. * Aggregate and Sole Corporations Aggregate corporations ~ are those composed of a number of individuals vested with corporate powers (except corporation sole, consists of not less than five but not more than 15), Corporation sole ~ are those that consist of one person or individual only and who are made as bodies corporate and politic in order to give them some legal capacity and advantage which, as natural persons, they cannot have. Sec. 110. Corporation sole. - for purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder of such religious denomination, sect or church. Corporation sole may be formed (only) by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. Allowing them to form a corporation sole gives them the right to exist in perpetuity. * Close and Open CorporationsArellano University School of Law Close corporation ~ are those whose shares of stock are held by limited number of persons like the family or other closely-knit group (see Section 96 of the Corporation Code). Open Corporation - are those formed to openly accept outsiders as stockholders or investors. They are authotized and empowered to list in the stock exchange and to offer their shares to the public such that stock ownership can widely be dispersed. A close corporation shall not list in any stock exchange or make any public offering of any of its stock of any class, and this must be stated in the Articles of Incorporation. This rule is absolute. + Domestic and Foreign Corporations The test for determining whether a corporation is domestic or foreign is the incorporation test. If incorporated under the laws of the Philippines it is a domestic corporation Domestic corporations - are those that are organized or created under or by virtue of the Philippine laws. Foreign corporations ~ are those formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. " Parent or Holding Companies, Subsidiaries, and Affiliates What is the difference between subsidiaries and affiliates? In the case of a subsidiary, the parent company owns a controlling interest. In the case of an affiliate, no one company owns a controlling interest. For example, Coca Cola Bottlers Philippines is 12% owned by San Miguel, 12% owned by Hershey’s, 12% owned by Kirin, and the rest are owned by individual stockholders. It is subject to “common control” by San Miguel Herhey’s and Kirin. SMC 12% Others 64% Hershey's 12% Kirin 12%Arellano University School of Law Parent or holding company — when one «corporation controls another corporation, or when one corporation controls several other corporations known as its subsidiaries. Holding companies — corporations that confine their activities to owning stock in, and supervising management of other companies. These usually own a controlling interest (more than 50% of the voting stock) in the companies whose stocks it holds, thus it controls the latter by the power and authority to elect management. Investment companies ~ are those active in the sale or purchase of shares of stock or securities, parent or holding companies have a passive portfolio and hold the securities merely for purposes of control and management. Subsidiary corporations- are those which another corporation (i.e. parent) owns a majority of the shares, and thus have control. These have an independent and separate juridical personality, distinct from that of its parent company, hence any claim or suit against the latter does not bind the former and vice versa. : Affiliates - are those corporations which are subject to common control and operated as part of a system. They are sometimes called “sister companies” since the stockholding of corporation is not substantial enough to control the former, = De Jure, De Facto, and Corporation by Estoppel De Jure - are juridical entities created or organized in strict or substantial compliance with the statutory requirements of incorporation and whose rights to exist as such cannot be successfully attacked even by the State in a quo warranto proceeding. De facto — are those which exist by the virtue of an irregularity or defect in the organization or constitution or from some omission to comply with the conditions precedent by which corporations de jure are created, but there was colorable compliance with the requirements of the law under which they might be lawfully incorporated for the purpose and powers assumed, and user of the rights claimed to be conferred by law. Its existence can only be attacked by a direct action of quo warranto proceedings. ‘The doctrine of corporation by estoppels is recognized under Sec. 21 of the Corporation Code when it provides that “all person who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof.”Arellano University Schoo! of Law Under Section 20, de facto corporations cannot be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. Under Section 21, when a corporation by estoppel is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. Formation and Organization of Corporation ‘There are three (3) stages in the life of a corporation: 1. Creation a. Promotion b. Incorporation c. Organization and commencement of business 2. Re-organization or quasi-reorganization 3. Dissolution and winding-up Promotion At the promotion stage, the corporation is not yet existing since, under Section 19, the existence of a corporation commences from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal. Hence, a promoter will be held personally liable on contracts made by him for the benefit of the corporation he intends to organize Unless there is novation of the agreement, personal liability will continue even after the contemplated corporation is formed. Why? Because an agent acting without a principal is himself the principal. What can the promoter do? 1. Continuing offer on behalf of the corporation 2. Novation ~ Original contract binds the promoter. Once the corporation is formed, it adopts the contract and the promoter is released 3. Promoter binds himself personally and assume responsibility, without prejudice to reimbursement from the corporation. This third option is the default. IncorporationArellano University School of Law Drafting of the Articles of Incorporation requizes knowledge and expertise in corporation law. There are a lot of things you need to consider, e.g., restrictions on foreign equity for nationalized industries, minimum capitalization, ete. Contents of the Articles of Incorporation Purpose Principal office Term Incorporators (names, nationalities, and residences) Number of Directors Directors (names, nationalities, and residences) Authorized capital stock SP ENOMAYNE contributed by contributors) 10. Treasurer 1. No transfer clause 12. Treasurer's affidavit Prefatory Paragraph Capital (including the names, nationalities, residences and amount Must specify the nature of the corporation being organized in order to prevent difficulties of administration and supervision The corporation should indicate whether it is stock or non-stock corporation, a close corporation, corporation sole or a religious corporation, Note: There are other two government agencies that may give birth to a corporation, not only SEC. Pursuant to an EO (early 80s), the Home Insurance Guarantee Corporation (HIGC) is the one that gives birth to home owners associations, and Bureau of Cooperatives for the creation of cooperatives. Corporate Name Section 18. Corporate name. - No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical _or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patenth deceptive. confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. The name of the corporation designates the corporation in the same manner as the name of an individual designates the person. This is so because theArellano University Schoo! of Law corporate name is the principal means of distinguishing it not only form its stockholders or members but also from other firms and entities. Red Line Transportation Co. vs Rural Transit Co. A corporation, once formed, cannot use any other name, unless it has been amended in accordance with law as this would result in confusion and may open to fraud and evasion as well as difficulties of administration and supervision. ‘Universal Mills Corp. vs. Universal Textile Mills, Inc. Was there confusion in this case? Yes. The corporate names in question aré riot identical but they are undisputably so similar that even under the test of reasonable care and observation as the public are generally capable of using and may be expected to exercise as invoked by the appellant. Universal Textile Mills, Inc. has been engaged in the business for more than a decade ahead of Universal Mills. 1. The word “corporation” or “incorporated” in full or in abbreviated form must be appended to the name. Why? To distinguish from partnership or any other business organization. 2. If the name or surname of a person is used, example, Imelda Marcos Foundation, Inc., there must be a basis for the use of such name. 3. If the corporation is a subsidiary of a foreign entity, the word “Philippines” or “Phils” in parenthesis should be affixed 4. For commercial or business purposes, the use of words “United Nations” or “Bureaw’ in their full or abbreviated forms are prohibited. 5. Words “finance” or “financing” prohibited unless the entity is to be organized under the Financing Company Act or RA No. 8556 Lyceum of the Philippines vs. Court of Appeals Lyceum of the Philippines filed a petition to prohibit other educational institutions from using “Lyceum” from their corporate names and to permanently enjoin them from using the word as part of their respective names. Ruling: The policy underlying the prohibition in Sec. 18 against the registration of a corporate name which is “identical or deceptively or confusingly similar” to that of any existing corporation or is “patently deceptive “ or “plainly confusing” or “contrary to existing law” is the avoidance of fraud upon the public whichArellano University School of Law would have the occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations. ‘The corporate names of private respondents all carry the word “Lyceum” but confusion or deception are effectively precluded by appending of geographic locations to the word “Lyceum”. What is the “doctrine of secondary meaning”? It is when a word or phrase originally incapable of exclusive appropriation is used for so long and so exchisively by one-producer with reference to his article such. that the word or phrase has become to mean that the article was his product. Why was the doctrine not applied? Because the Western Pangasinan Lyceum was already using the word “Lyceum” for 17 years prior to the’ use of the same by the Lyceum of the Philippines. If it was the Western Pangasinan Lyceum who invoked the doctrine, will you decide in its favor? No. Because the confusion or deception is effectively precluded by the appending of geographical locations to the word “Lyccum.” aArellano University School of Law Philips Export vs. Court of Appeals What are the two requisites for Section 18 (prohibition on the use of corporate name) to apply? 1. The complainant acquired a prior right over the use of the corporate name 2. The proposed name is either: (a) identical; (b) deceptively or confusingly similar to that of the existing corporation; or (c) patently deceptive, confusing, or contrary to existing law. In this case, Philips is the dominant word. They are in the same line of business. Finally, only one word is different. ‘The court ruled that proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur. Assuming that Philips included Philips Sardines, can the Court validly ask to change its name? No, not the same line of business. There is no confusion. What about the claim of use of two words? Standard Philips Corporation actually contains only a single word, that is, STANDARD different from that the petitioner inasmuch as the inclusion of the term Corporation or Corp. merely serves the purpose of distinguishing the corporation from partnership and other business organizations. Will Sec. 18 apply to foreign corporation? Yes. Sec. 18 has been held to apply for or against foreign corporations. Thus, it has been ruled that a foreign corporation which has never done business in the Philippines, but is widely and favorably known in the country through the use therein of it product bearing its corporate and trade name has a legal right to maintain action to maintain action to protect its name or good will. Purpose Clause Defines the scope of authority of the corporate enterprise or undertaking. This statement both confers and also limits the actual authority of the corporate representatives. Under Section 45 of the Code, a corporation, thus, has only such powers as are expressly granted to it by law and by its articles of incorporation including those which are incidental to such conferred powers, those reasonably necessary to accomplish its purpose and those which may be incidental to its existence. If an act is not within the scope of authority, it is ultra vires or beyond corporate powers.Arellano University School of Law Special laws prohibit certain business from having any other purpose, For example, insurance companies cannot engage in commercial banking and vice versa. Why is there BPI and BPI Insurance? Because these are two (2) separate and distinct corporations. Four Limitation of Purpose Clause 1. Lawful - 2. Specific or stated concisely, 3. If more than one, primary and secondary purposes must be specified. 4. Purposed must be capable of being lawfully combined Reasons for requiring a statement of the purpose or objects in the charter are threefol 1. In order that the stockholder who contemplates on an investment in a business enterprise shall know within what lines of business his money is to be put at risks; 2. So that the board of directors and management may know within what lines of business they are authorized to act; and 3. So that anyone who deals with the company may ascertain whether a contract or transaction into which he contemplates entering is one within the general authority of the management. Principal Office * Sec. 14 (8) This should be distinguished from the place of operations. Principal office can be in one place, and place operations can be in another place or places. * Principal office establishes the residence of thé corporation. * It may also serve important in determining: the venue of actions for or against the corporation; venue of meetings of stockholders or members; service of summons; where chattel mortgage of shares should be registered (under the mortgage law, if the shares of stocks are mortgaged, it must be registered in the registry of deeds of the city or municipality where the principal office of the corporation is located or established in order to be valid and binding against. third parties) (if the owner resides in a different place, the mortgage must also be registered in the place of the owner’s residence) Again, for stock corporations, venue-of meeting should be in the principal office (under Section 51). For non-stock corporation, it could be anywhere in the Philippines (under Section 93). ooo°o 1sArellano University School of Law Clavecilla Radio System vs Antillon If the action is not based upon a written contract, the corporation can only be sued in the City or Municipality where it has its principal office, because it is its residence. Settled is the principle in corporation law that the residence of a corporation is the place where its principal office is established. ‘Term of Existence Section 11. Corporate term. - A'corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission. * Corporation shall exist for a period not exceeding fifty (50) years. This may be extended (do not use the term “renewal” or “renewed”) for an unlimited number of times. What is your basis for saying that it may be extended for an unlimited number of times? ‘The provision says “may be extended for periods (with an s, plural) not exceeding 50 years. San Miguel Corporation exists for 110 years now, is that possible? Yes If a corporation plans to have an extension, when it should be made? Five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission What if the corporation is already existing for 45 years and exactly 5 years from today the existence will expire, may it be extended today? ‘Why of why not? What if the term already expired, may it still be extended? No, there is nothing to extend, for it no longer has a juridical personality.Arellano University School of Law Once the term expires, without any extensions having been made by way of amendment of its article of incorporation, the corporation will cease to exist as a body politic and losses it juridical personality for the purpose of prosecuting the business for which it was organized. There will be no need for any proceeding, administrative or otherwise, to determine what point in time the corporation cease to exist because the period of existence is indicated in the articles of corporation. Note: It can be reincorporated but with different date. PNB vs CFI Under Sec 122, a dissolved corporation shall nevertheless be continued as a body corporate for three (3) years, after the time when it would have been so dissolved, for purposes of liquidation and winding up of its affairs, not for the purpose of continuing its business for which it is incorporated. » For religious corporations and corporation sole, there is no need to indicate the term as they are supposed to exist in perpetuity. * Extension partakes of an amendment to the Articles of Incorporation. = If the term expires, a corporation can no longer request for extension because it has not more personality to make such request. * If the term expires, the corporation will exist for another 3 years only for purposes of liquidation (Alhambra Cigar vs. SEC) Class falls on a weekend: If a corporation’s term expires today, can you apply for an extension? No. The SEC is closed on weekends Can a request for extension be made earlier than five (5) years prior to original or subsequent expiry date? Yes, provided there are justifiable reasons for an earlier extension as maybe determined by SEC. Incorporators Section §. Corporators and incorporators, stockholders and members. - Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the ‘articles of incorporation as originally forming and composing the corporation and who are signatories thereof. 7Arellano University School of Law Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. * Incorporators are those that satisfy these two (2) requisites: (1) mentioned in the articles of incorporation as originally forming and composing the corporation; and (2) are signatories thereof. They should not be less than five but not more than 15. * Corporators are those persons who compose the corporation at any given time (originally or subsequently) and need not be among those who execute the articles of incorporation at the start of its formation and organization. » All incorporators are corporators, but not all corporators are incorporators. Section 10. Number and qualifications of incorporators. - Any number of natural persons not Jess than five (5) but not _more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. ‘How many incorporators should there be? 5 to 15 May a corporation be an incorporator? As a general rule, only natural! persons, according to Section 10. This implies that corporations and registered| partnerships cannot be incorporators because they are not natural persons, i.e., they are juridical entities. This, however, admits exception that is for the case of cooperatives and corporations primarily organized to hold equities in rural banks and may rightfully become incorporators thereof (Section 4 of the| Rural Banks Act or RA No. 720 provides that “duly established cooperatives and corporations primarily organized to hold equities in Rural Banks may) organize a Rural Bank"). It must be noted likewise that the law does not| preclude firms and other entities from becoming stockholders or subscribers to! the shares of stock of a corporation. Neither are they prohibited from joining, the corporation, after incorporation, as stockholders thereof. Thus, while they| may not qualify as incorporators, they can become corporators or stockholders. How about minors? Can they be incorporators? No, because according to Section 5 they must be of legal age. Can they be corporators? Yes, provided they are legally represented by their! parents. May a corporation be organized by incorporators consisting solely of foreigners? Yes, there is no nationality requirement. The code requires only that the majority of the incorpcrators are residents of the Philippines.Arellano University School of Law It is important to note that although the law does not provide for any citizenship requirement but only residency requirement, i.e., majority of the incorporators must be residents of the Philippines, there are certain areas of activity or industry wherein ownership of shares of stock are reserved wholly or partially to Filipino citizens. Thus, the maximum limit of stockholdings of aliens in a domestic corporation must be taken into account. ‘Take for instance the case of Trade Liberalization. Law, if the paid-up capital in the retail trade business is at least 2.5 million US dollars or its peso equivalent, all the shares of the stock may be held by foreigners. Republic Act no. 8762, which was passed and enacted on February 15, 2000, for instance mandates that the retail-trade business shall exclusively belong to Filipinos if the capital thereof is less than 2.5 million US dollars. What is required of all incorporators? Incorporators must own or subscribe to a least one (1) ‘share of the capital stock of the corporation. May a corporation be a corporator? Yes. There is nothing in the code preventing corporations from becoming stockholders of corporations. + Note the nationalization laws that limit foreign equity in certain businesses. Directors and Trustees Section 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed Under this Code shall be exercised, all: business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the ‘owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to _be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. = General Rule: 5 to 15 9Arellano University School of Law = Exceptions: 1. Trustees of non-stock educational corporations should be divisible by five (5), i.e, they have either 5, 10, or 15 trustees and no other (Sec. 108}; 2. In the case of close corporations, all stockholders may be considered as directors as provided in Section 97 (‘The articles of incorporation of a close corporation may provide that the business of the corporation. shall be managed by the stockholders of the corporation rather than by a board of directors.”) 3. Under Section 92, the trustees of a non-stock corporation may be more than 15. For stock corporations, the board is called “Board of Directors.” However, for non-stock and other special corporations, Section 138 provides that the governing board may be designated by other names, ¢.g., “Board of Trustees” or “Board of Regents” or “Board of Governors.” What is the qualification to be a director? A director is only required by Section 23 to be an owner of at least one (1) share. ‘The IBP National Chorter has a governing body of 21 members, is it valid? Yes, (sec. 92) as provided by BP 68, 1.E., National Public Schools Teachers Association. Sec, 92. Election and term of trustees. - Unless otherwise provided in the articles of incorporation o the by-laws, the board of trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall as soon as organized, so classify themselves that the term of office of one-third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising one- third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period. XxX May a corporation do away with their Board of Directors other than close corporations (Sec. 97) ? Yes, corporation sole for it only consist of one person. No nationality requirement, but majority-of the directors must be residents of the Philippines. The Code thus requires mere residency, i.e., majority of them, in order to qualify to the office of the director, provided of course, that each of them holds at least one share and in their own names, of the capital stock of the corporation. Such being ‘the case, even aliens may be elected as directors 20Arellano University School of Law provided that the residency requirement of the Code is met. It should be noted, however, that aliens, whether or not residents of the Philippines, may not be qualified or be elected as such, in any activity or business undertaking exelusit served to Filipino citizens like jonal-, ‘institutions and those governed by the Retail Trade Law. Nevertheless, if the business undertaking or activity is only partially nationalized, aliens can be elected as such directors, unless the law provides otherwise, but their number Shall only be in proportion to their equity or participation in the capital stock of the corporation, Article 15 of the Philippine Constitution - management of educational institutions shall be vested to Filipino citizens. Generally therefore, no foreigner can sit as a member of the board fo directors in an educational institutions. Directors are the corporate managers and therefore by virtue of the law of the land, they cannot be members of the board, even if they hold particular share or stocks in a corporation. Exception: if they are created by charitable organizations, mission boards, or religious order. May a domestic corporation have a governing board consisting solely of foreigners? Yes, Section 23 only requires that majority of directors must be residents of the Philippines. No natiotiality requirement. Maya foreigner be a director in the mass media outfit? No, the law mandates that the mass media be reserved exclusively to Filipino citizens. No foreigner will qualify since they have no share. One must be as stockholder to qualify as a director. ‘With regard to the qualifications, Sec. 23 provides that one must have at least one:share of the: capital stock of the-corporation, which he is a director, which share shall stand in his name in the books of the corporation. Should the ‘stockholder be the beneficial and equitable owner of the share in order for him to qualify as a director? No, it suffices that he possesses legal title. The material fact is the legal title and not the beneficial ownership (see Lee vs CA). in his own right ~ holding both legal aiid beneficial right Nominees PBN has a subsidiary called PNBIFL which is a finance company based in Hongkong. All of the shares of.the stock are owned by PNB holding company. In order to have board: of directors in the subsidiary, they appoint nominees (bigyan sila ng one share each in trust of the PNB). 2Arellano University School of Law Section 27. Disqualification of directors, trustees or officers. - No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation. ‘The qualifications under Section 23 and disqualifications under Section 27 are absolute and cannot be done away with. The by-laws of a corporation may provide for additional qualifications and disqualifications of its members of the board of directors or trustees. However, it may not do away with the minimum disqualifications lay down by the Code. Under the Anti-Dummy Law, if the business undertaking or activity is only partially nationalized, aliens can be elected as such directors, (unless the law provides otherwise) but their number shall only be in proportion to their equity or participation in the capital stock of the corporation, e.g., If the law requires that it be 60% owned by Filipinos, 6 of 10 members of the board should bg, Filipinos. In the case of Gokongwei vs SEC, Gokungwei has business interest directly in competition with the San Miguel Corporation. He was able to acquire sufficient number of shares that by himself alone he can elect himself as member of the board. San Miguel amended the by-laws to provide for a Disqualification for membership of the board: Disqualifying a stockholder from being elected as a member of the board, if he happens to own a controlling interest in another business or enterprise directly in competition with San Miguel. ‘The SC upheld the validity of the by-laws, inserting said disqualification as being reasonable, as t prevents the uniting of incompatible interests in one single enterprise. Other Allied Laws to Consider for Purpose of Disqualification (1) Central Bank Banking Laws. A person charged with an offense involving Financial Fraud cannot be a director in a financial institution. This is an exception from the law requiring conviction by final judgment, under Section 27. (2) Financial Company Act of the Philippines. You have to submit NBI and Police Clearance of Directors applying in a financial company. How can he be a director therefore if he is charged with an offense? (3) Additional qualification, a stockholder must own at least 500 shares in order to qualify as a member of the board (see Government vs El Hogar Filipino).Arellano University School of Law Capitalization Article 7 - for non-stock, sufficient to mention the operating capital, contributors, and contributions. For stock corporations (under Sec. 14 {8}), the Corporation Code requires that ALL domestic corporation provide the following in the Articles of Incorporation: 1. Authorized capital stock . 2. Number of shares and/or kind of shares into which authorized capital stock is divided 3. Par value of each share, if any (Note: there are such a thing as no par value sales) 4. Names, nationalities, and residences of the original subscribers and the amount subscribed and paid by each Sec. 13 requires. that at least 25% of the authorized capital stock must be subscribed. And at least 25% of the total subscription must be paid. There is nothing of course prevents the stockholders from fully subscribing the entire authorized capital stock or from fully paying up their particular subscription to the capital stock. ‘The law does not require that each and every subscriber must pay at least 25% of their respective subscription. Thus any one or two of the subscribers may pay in the minimum while others did not shed out any single centavo. Authorized Capital No. of Shares Par Value iM iM P1.00 Subscribed: A~ P50k (fully paid) B — P50k (fully paid) C~ P50k (not paid) D - P50k (not paid) BE - P50k (not paid) ‘Total Subscribed: P250k (satisfies the minimum required subscription) Paid-up/Paid-in: P100k (satisfies the minimum requirement - 62, 500) Authorized Capital Stock Authorized capital stock - the maximum amount fixed _in_the Articles of incorporation to be subscribed and paid-in. If authorized stock is 1M, it cannot exceed it. The Articles of Incorporation has to be amended. “Stated capita ~ maximum number of shares that the corporation can issue.” Over-issuance is a violation of the Corporation Code. 2BArellano University School of Law Subscribed capital stock - Part of the authorized stock ,which has been subscribed or that has been paid or promised to be paid. Section 13 of the Corporation Code requires that at least 25% of the authorized capital _stock must have been subscribed at the time of incorporation. How much should be subscribed? At least 25%. It can be 100% It can be 90% Paid-up capital - the actual amount or value which have been actually contributed or paid to the corporation in consideration for the subscriptions made thereon. How much should be paid-in? At least 25% of the total subscription. Does the law require that each subscriber pay at least 25% of their respective subscription? No. Is there a minimum amount? Not less than P5,000. What kind of business can you put up with P5,000? Is there a minimum authorized capital? Also P5,000 (by inference). Paid-up capital comes from subscription. Subscription comes from the authorized capital stock. Logic dictates that minimum authorized stock should also be 5,000. ‘There are instances when a higher paid-up capital is imposed by virtue of existing laws, rules and regulations. Hence, capital structure must be taken into account in drafting the Articles of Incorporation. Example, minimum paid- up capital for financing companies in Metro Manila is P10 million. Investment houses, minimum paid-up capital is P350 million. Employment agencies, now P2 million. Does it have to be in cash only? No. According to Article 62, it could be in: 1. Cash (hindi pwedeng promissory note!) 2. Property 3. Labor performed or services actually rendered to the corporation (hindi pwedeng future services) 4. Previously incurred indebtedness by the corporation 5. Amounts transferred from unrestricted retained earnings to stated capital 6. Outstanding shares in exchange for stocks in the event of reclassification or conversion In not paid in actual cash, valuation shall be initially determined by the board, subject to the approval of the SEC. Requirement: capable of valuation.Arellano University School of Law Section 13 of the Corporation Codé-requires that at least 25% of total subscription must have been paid upon subscription, but in no case shall it be less than P5,000. What about the balance, when should it be paid? On a date or dates fixed in the contract of subscription without need of call or, in the absence of a fixed date, upon call for payment by the board of directors. Is there a minimum authorized capital imposed by ihe code? If there is minimum paid-up logically there should also be a minimum capital =5000 Note that the minimum paid-up capital for a financing company is P10 miltion if located in Metro Manila. Nw and Classes of Shares Ie Shares - designate the units into which the proprietary interest in a corporation is divided. The sum of the shares is the authorized capital stock. If you own 10%, you are entitled to 10% of dividends. Certificate of Stock - the document or instrument evidencing the interest of a stockholder in a corporation. It is a piece of paper, which can be transferred by endorsement and delivery (under Section 63). Under Sec. 6, a corporation may issue classes of shares as its articles of incorporation may provide. Are corporations authorized to classify their shares? Yes. In SMC, they have Common A and Common B. One is only for Filipinos. What advantage one has over the other? Absent any specification in the Articles, they are presumed to be equal in all (Doctrine of Equality of Shares of Stocks). Is there a distinction between subscribed capital and outstanding capital stock? There is. Subscribed capital includes treasury shares. Outstanding capital stock, as defined in Section 137, excludes treasury shares. Section 137. Outstanding capital stock defined. - The term "outstanding capital stock", as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares. ‘Treasury shares are subscribed, fully paid, but not entitled to vote and to dividends because they are not outstanding. 25Arellano University School of Law Balance of the unpaid capital stock must be paid on a date or dates fixed in the contract of subscription without need of call or, in the absence of a fixed date, upon call for payment On a date or dates’ fixed in the contract of subscription without need of call or, in the absence of a fixed date, upon call for payment by the board of directors. If after call, subscriber did not paid, corporation may hold an auction. If the corporation buys them, they become treasury shares. 1. No share may be deprived voting rights except preferred and redeemable shares : 2. There should always be a class of shares with complete voting rights 3. Shares may have par or no par value 4. Banks, trust companies, insurance companies, public utilities, and building and loans association shall not be permitted to issue no par value shares. What are the purposes of the classification of share: 1. To specify and define the rights and privileges of the stockholders (like voting and non-voting shares, or preferred shares and common shares) 2. For regulation and control of the issuance of sale of corporate securities for the protection of purchasers and stockholders. Especially true for close corporations or family corporations. Example: Only original stockholders or relatives up to the third degree may hold Class A shares. As a management control device. Example: Founder’s shares may be issued. They may be granted the exclusive right to vote and be voted upon for a period of five years; they have the management control for a specific period of time. 4. To comply with statutory requirements particularly those which provide for certain limitations on foreign ownership and shares like overseas employment agencies requiring to own at least 75% of the shares of stock thereof. 70% Pawnshop 700,000 Class A may be held by Filipinos only. Holders thereof cannot sell to foreigners as per the no transfer clause of the Articles of Incorporation. 300,000 Class B may be held by any person 5. To better insure return on investment which can be affected through the issuance of redeemable shares or preferred shares, i.e., granting the holders thereof, preference as to dividends and/or distribution of assets in case of liquidation; andArellano University Schoo! of Law 6. For flexibility in price, particularly, no par shares may be issued or sold from time to time at different price depending on the net worth of the company since they do not purport to represent an actual of fixed value. Common Stock ~ entitles its owner to an equal pro-rata division of profits, if there are any, but without any preference or advantage in that respect over any other stockholder or class of stockholder. What are common shares? Usually carries with it the right to vote, and frequently, the exclusive right to do so. What are preferred shares? Those-giving the holder preference over the holder of common shares with respect to distribution of capital during liquidation or payment of dividends. Limitations: (1) Must be a par valile share; and (2) Preference must be stated in the articles of incorporation and it the certificate of stock, otherwise it will be treated equal to other shares. A~ 200k (Preferred) - Dividend: First P100K B — 200k (Preferred) — Dividend: First P100K C- 200k D~-200k E-200k Total = 1 million ‘The board of dirctors has the discretion to determine whether or not dividends are to be declared out of the unrestricted retained earnings if the incorporation. ‘The amount of the preference is states in the contract of subscription and is usually on a fized percentage or by specified amount indicated therein. If after paying the preferred stocks are more surplus profits remain, the holders of other stocks, not so preferred, have no recourse. On the other hand, if the remaining surplus profits after “paying the preferred stockholders is substantial, the other shareholders, being entitled to the residuary rights, can possibly receive higher or bigger dividends than the preferred holders of stock. ‘Thus, if the contract of subscription provides that preferred stockholders shall be entitled to receive that first P100,000 of the unrestricted retained earnings of the corporation as dividends and the corporation earned only the said amount and declares it as dividends, the preferred shareholders will receive the entire P100,000 to the exclusion of the others. On the other hand, if the corporation declares P500,000 as dividends (assuming it has such amount as unrestricted retained earnings), only P100,000 shall be distributed to the holders of preferred shares as dividends. The remaining 400,000 will be paid to other stockholders thereby earning more than the preferred stockholders. 2Arellano University Schoo! of Law In effect, where there is no stipulation in reference to the participation in the surplus profits, preferred shareholders are entitled to its fixed priority or preference only. It would seem a reasonable implication that in consideration of his preferential right, the preferred shareholders agree to accept his priority as to dividends at a fixed rate in lieu of future participation with the common stockholders. Such is the common understanding of the investing public, especially in view of the fact that participating preferred stock is an unusual type of security, with a special feature which would naturally be specified and defined. As to dividends, they may be preferred a certain percentage or amount. It is possible that the common shares receive more than the preferred. This is only true if the preferred are non-participating. If they are participating, preferred shares can still participate in the share of dividends. Presumption, however, is that they are non-participating. Preferred stocks could be: 1. Participating - may participate with the common stockholders in dividends beyond the stated preference 2. Non-participating - cannot participate with the common stockholders in dividends beyond the staved preference Preferred stocks could also be: 1, Cumulative - entitles the owner thereof to payment not only of current dividends but also back dividends not previously paid whether or not, during the past year, dividends were declared or paid. * back dividends not paid, even for those years where no dividends declared. + that in order that a preferred stock may be considered cumulative, the same must be provided for and specified in the said instrument. 2. Non-cumulative ~ those which grant the holders of such shares only to the payment o of current dividends but not back dividends, when and if dividends are paid, to the extent agreed upon before any other stockholders are paid the same. «not entitled to back dividends. Current year only, no arrearages. 2013 2014 2015 2016. 150K 200K 0 S0O0K 100K 100K 100K 100K ~ if cumulative O 0 0 100K - if non-cumulative 100K 100K 0 100K ~ mandatory if earned 100K 100K 0 100K ~ dividend credit 28Arellano University School of Law What if the corporation did not declare dividends even if there exist rights for the previous years? May they be denied dividend rights because they are holders of non-cumulative preferred shares? It depends. There are three-types of non-cumulative. 1. Discretionary dividend type - gives the holder of such shares the right to have dividends paid thereén in a particular year depending on the judgment or discretion of the board of directors who might be subject to possible bias. 2. Mandatory if earned — impose a positive duty to the board to declare dividends every year when profits are earned. 3. Earned cumulative or dividend credit type — (back dividends even if not declared) give the holder thereof the right to arrears in dividends if there were profits earned during the»previous years but dividends were not declared. In effect, their right to receive dividends earned in previous years but not later date. The moment dividends are declared, back dividends carned in previous years but not declared as such much to be paid to the holders of this type of preferred shares before the common stockholders receive theirs. What is the difference between cumulative preferred shares and dividend credit type? In cumulative, arrearages apply even in years when profit was not earned. In dividend credit, arrearages apply only in years when profit was earned. What are par and no-par value shares? 1. Par—with stated par value 2. No-par ~ no stated par value Par value shares are those whose value are fixed in the articles of incorporation. Its primary function is to fix a minimum subscription or original issue price of the shares and ‘indicates the amount which the original subscribers are suppose to contribute to the capital as the basis of the privilege of profit sharing with limited liability. The par value indicated in the articles of incorporation and in the stock certificate may not, however, be the true value of the shares because the same may fluctuate depending on the liability and the networth of the enterprise. Thus, it may not in any way represent its fair market value especially where the corporation has been in operation for sometime. To arrive of the true or book value of the shares, determination of the networth of the company must’ made and dividing the same by the number of outstanding shares. Par value shares cannot be issued nor sold by the corporation at less than par. To do so would violate the provisions on “watered stocks” which are shares 29Arellano University School of Law issued at less than par value where the stockholders will remain liable for the difference between what he paid and the actual par value thereof. No par value shares are those whosc issued price are not stated in the certificate of stock but which may be fixed in the articles of incorporation, or by the board of directors when so authorized by the said articles or by the by- laws, or in the absence therof, by the stockholders themselves. They do not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of such shares of the corporation issuing it. Are there limitations in the issuance of no par value shares? 1. Such shares, once issued, are deemed fully paid and thus, non- assessable; 2. The consideration for its issuance should not be less than five (5) pesos; 3. The entire consideration for its issuance constitutes capital, hence, not available for dividend declaration; 4. They cannot be issued as preferred stock; and, 5. They cannot be issued by banks, trust companies, insurance companies, public utilizes and building and loan associations. Advantages attached to the issuance of no par value share: 1. The issuance of no par value shares gives the advantage of flexibility in price. No par shares may be issued from time to time at different prices with the exception only that it shall not be issued at less than 5 pesos. The price thereof, may therefore vary depending on the viability of the corporate undertaking or the networth of the company. 2. The issuance of no par shares practically results to the evasion of the danger of liability upon watered stock in case of overvaluation of the consideration paid for it. 3. Since they are deemed fully paid and on-assessable there is disappearance of personal liability on the part of the holder thereof for unpaid subscription. Paano naging management control mechanism yung no-par value shares? 1M PV 100.00 P100M 2M No par P10.00 P20M (They control the corporation.) ‘They are equal in all respects! ; ‘They have same dividend rights. Corporation law can be used for estate planning. Voting and Non-voting 30Arellano University School of Law 1. Voting shares — gives the holders thereof the right to vote and participate in the management of the corporation through the exercise of such right, cither at the election of the board of directors, or in any matter requiring stockholders’ approval. 2. Non-voting shares ~ do not grant the holder thereof, a voice in the lection of directors and some other matters requiring stockholders’ vote. May common shares be denied the right to vote by a provision in the Articles of Incorporation? ry, Doctrine of limited capacity in the corporate form. Gamboa vs Teves. Section 6. Founders’ Shares (Section 7) - common shares may be denied right to vote for 5 years. For purposes of compliance with nationalization laws, are non-voting shares counted? 600K shares for Filipinos 400K shares - any other person Capital increased by 200K preferred non-voting. 600K now held by foreigners. Is there a violation? Cite basis. Original decision in Gamboa vs Teves. When the law speaks of outstanding capital stock, it refers only to shares with voting rights. Stupid justices! Section 137 is clear in its definition of outstanding capital stock. There are three (3) special laws that defined “Philippine national” ~ outstanding capital stock and entitled to vote. 1. Foreign Investments Code 2. Omnibus Investments Code of 1981 3. Omnibus Investments Code of 1987 Non-voting shares nevertheless entitled to vote on eight (8) matters enumerated in Section 6. If the Outstanding Capital Shares is 1,000,000.00, what would be the voting requirement for the following? Majority of the voting shares to approve ordinary contracts — Majority of 600,000 voting shares = 600,001 2/3 of all voting and non-voting shares to amend the articles of incorporation — 1,000,000 / 3 x 2 = 66,666.666 Majority of all voting and non-voting shares to amend the by-laws ~ Majority of 1,000,000 = 500, 001 31Arellano University School of Law Founders’ Shares. The articles of incorporation of a domestic corporation may provide for the issuance of founders’ share which may be given certain rights and privileges not enjoyed by other stockholders. These refer to shares of stock which are issued to the founders of the corporation. Sec, 7, Founders’ shares - Founders’ shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five (5) year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. The period of five (5) years fixed by the law is non-extendible because it may result in the almost perpetual disqualification of other stockholders to elect or be elected as members of the board of directors resulting to the lack of proper representation thereat. Redeemable shares are those issued by a corporation subject to redemption as may be provided by the terms of the subscription contract. Sec. 8. Redeemable ‘shares - Redeemable shares are those issued by a corporation subject to redemption as may be provided in the articles of incorporation. They may be purchased or:taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as maybe stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares (a). Depending on the terms of the contract, redeemable shares (which usually attach to preferred shares and other debt securities like bonds and debentures} grants the issuing corporation the right to purchase or reacquire the shares at its option or at the option of the holder thereof based on the face or issued thereof plus a specified premium. Redemption may either be optional or mandatory either at a fixed or future date. ‘The right of a corporation to redeem shares “regardless of the existence of unrestricted retained earnings” is a departure from the established rule that a corporation may acquire its own shares if it has unrestricted retained earnings. Redemption of redeemable shares is not covered by the said rules and thus, an exception. What are the kinds of Redeemable shares? What are treasury shares?Arellano University School of Law ‘Treasury Shares are shares of stock which: (1) Has been issued as Fully Paid (2) Subsequently Reacquired by the issuing corporation either by Purchase, Redemption, Donation or any Other Lawful Mode of Acquisition. Sec, 9. Treasury shares ~ treasury shares are shares of stock which have been issued and fully pad for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. (n}.” Apparent from the foregoing is that treasury shares may again be issued for a price, even for less than par, and the purchaser will not be liable to the creditors of the corporation for the difference of the purchase price and its par value since the full value had previously been paid in full. While in the possession of the corporation, however, treasury shares have no dividend or voting rights since, in all instances, voting and dividend rights are granted only to outstanding shares of stock. Treasury share may, however, be declared ad dividends since they are properties of the corporations. They have no voting rights while they remain in the treasury, because Treasury Shares are not Outstanding Stocks. Section 137. Outstanding capital stock defined. - The term "outstanding capital stock", as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares. (n) When the law speaks of Voting and Dividend Rights, it speaks only of Outstanding Stocks. So, the Treasury Shares have no right to vote and to receive dividends, while they remain in the treasury of the corporation. ‘Treasury shares may be subsequently re-issued by the corporation. It becomes the Property Right of the corporation and they can thus sell or dispose of them again. When Re-lIssued, they would REGAIN BACK—their status as Outstanding Stocks. They are Treasury Shares only while they are in the treasury of the corporation. i May the treasury shares be released? Commission vs. Manning NOTE: YOU CANNOT COMPEL THE CORPORATION TO DECLARE DIVIDENDS UNLESS IT EXCEEDS 100 % PAID UP CAPITAL SEC. 43 33Arellano University Schoo! of Law Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, ‘That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n) Capital Requirement Section 12. Minimum capital stock required of stock corporations. - Stock corporations incorporated under this Code shall not be required to have_any minimum authorized capital _stock except as otherwise specifically provided for by special law, and subject to the provisions of the following section. Section 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. - At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. Restrictions and Preferences on Trazisfer of Shares Refer to Section 96. 34Arellano University School of Law To be valid and binding: 1. In the Articles 2. In the stocks certificate In the case of close corporations, it will be valid if: 1. In the articles 2. In the stock certificates 3. In the by-laws The Code does not require corporations registered under this provision to provide a statement of restrictions «ind transfers of shares. However, there is also likewise nothing in the law which should prohibit the corporation from providing reasonable restrictions, such as, Options and the Right of First Refusal in the articles of incorporation. If that be the case, it must be proyided for in the Articles of Incorporation and in all of Stock Certificates to be issied by the Corporation in order to be validly binding against 3“ persons. This is only directory. They may or may not provide restrictions or transfers of shares. Will this apply to close corporations? No, it is not only permissive, but mandatory for the case of close corporation. Sec. 96 provides that the Close Corporation must provide, among others, in the Articles of Incorporation that all of its shares of stocks of any class, shall be subjected to one or more specified restrictions and transfers of shares allowed by the Code. No Transfer Clause Guarantees full compliance with the Nationalization Law. Every stock corporation shall provide the no transfer clause in the articles of incorporation. It bars the corporation from registering transfers of shares of stock if it is violative of the Nationality Requirements imposed by the Code. Only for nationalized, but SEC still requires for other corporations as a matter of policy. ‘Treasurer. The Sec. 15 requires the corporation proposing to organize under the Code to indicate the name of the treasurer of the corporation who has been elected as such until his successor has been elected and qualified in accordance with the corporate by-laws and who is authorized to receive for 38Arellano University Schoo! of Law and in the name of corporation all subscriptions, contributions, or donations paid or given by the subscribers or members. ‘Treasurer’s affidavit is part and parcel of the Articles of Incorporation. Execution Clause is the part of the articles of incorporation where the incorporators sign the documents with an indication as to where it was signed and when the same was executed. The signatures of the incorporators as witnessed by two disinterested persons ate important as the articles of incorporation serves as a contract between the signatories thereof, by and among themselves, with the corporation, and the latter with the State. Contract: 1. Between incorporators 2. With the corporation 3. Corporation with the state Acknowledgment. The notarial acknowledgement is that part of articles of incorporation where the incorporators, signatories thereof, acknowledge before a notary public that they have executed and signed the same in their own free, voluntary act and deed. Grounds for Disapproval After the filing of the articles of incorporation and its supporting documents, the SEC will examine and process them to determine compliance with the requirements. Only substantial and not strict compliance, is required. May the SEC refuse registration? Yes. The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval: 1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; 36Arellano University School of Law 3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid is false; 4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. * The above grounds for rejection is not exclusive. There may be other reasons for such rejection or disapproval such as the corporate name is not legally permissible or that the minimum capital requirement for the undertaking is not sufficient. When will the corporation commence to exist? Section 19. Commencement .of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personal is deemed incorporated from_the dat: ecurities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (n) Concerned government agencies = SEC and others A corporation de jure can come into existence only upon the issuance of the certificate of registration by the SEC? Yes. © Exception: 1. Corporations created by law 2. Corporations registered with the Home Insurance Guaranty corporation (for homeowners association) 3. Cooperatives registered with the Bureau of Cooperatives 4. Corporation by estoppel (not issued a certificate but considered corporation with respect to certain people) 37Arellano University School of Law 5. In the case of a corporation sole (corporation sole commences to exists upon the filing of articles of incorporation with the SEC, the stamp of the SEC will not be required): Section 112. Submission of the articles of incorporation. - The articles of incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public. From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi_or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof. Upon filing of the verified articles of incorporation, once filed it is vested with a judicial personality. Sec. 22 Effects on non-use of corporate charter and continuous inoperation of a corporation. — if a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. ‘This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission. After it is incorporated, Sec. 22 provides: 1. Every corporation registered under this general provision that it must organize and commence the transaction of its business within two (2) 38Arellano University School of Law years, from the date of its incorporation. Its FAILURE to do so would result to the Automatic Dissolution of the corporation. 2. If it commence the transaction of its business but subsequently becomes inoperative continuously for at least five (SO years. It will be a ground for the suspension or revocation of the corporate franchise. Thus, proper notice and hearing must be had: 3. If its failure to organize or commence the transaction of its business or to continuously operate is due to causes beyond the control of the corporation, as may be determined by the SEC, Automatic Dissolution, or suspension of revocation will not ensue. Cagayan Fishing Development vs Sandiko Sale to Cagayan is not valid. Sale by Cagayan not valid. Transfer were made when it was not yet possessed with juridical personality, it did not validly acquire the propérty. It follows also that it did not have the right to dispose the same. Defectively-Formed Corporations Sec. 20 De facto corporation. — the due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (n) * The due incorporation of any corporation claiming in good faith to be a corporation under the Code and its right to exercise corporation powers shall not be inquired collaterally in any private suit to which such corporation may be a party. Said inquiry may be made by the Solicitor General in a Quo Warranto Proceeding. A De Facto corporation however, is'one that is so defectively formed or created, so as not to be considered as a De Jure corporation, one that is formed or organized in strict compliance with the requirements of the law, it nevertheless exist for all practical intents and purposes as a corporate body by virtue of its bona fide attempt to incorporate under existing statutory authority coupled with the exercise of corporate powers in good faith. 1. De facto - See Section 20 (all must concur) a. There is a valid statute under which the corporation could have been created as a de jure corporation. b. An attempt, in good faith, to form a corporation according to the requirements of law, which goes far enough to amount to a “colorable compliance” with the law; 39.Arellano University School of Law c. A user of corporate powers, the transaction of business in some way as if it were a corporation; and, 4. Good faith in claiming to be and doing business as a corporation * All of these requirements must be present. They must go hand in hand. Otherwise, it cannot exist as a corporation at all. Example: Misrepresentation by some incorporators that they are residents of the Philippines even if they are not. This is a defect. De facto corporation if all requisites are present. Absent any, it cannot be a de facto corporation. Are the rights and obligations between officers and directors of a de jure and de facto the same? ‘YES. Governed by the same law, mules and regulations. What is the importance in knowing if a corporation is de facto or de jure? The distinction is only important in determining which rule will apply to question the existence, direct or collateral attack. Note that: 1, The existence of a de jure cannot be questioned even by the State, either directly or indirectly (quo warranto) 2. Existence of a de facto can be questioned only by the State directly in a quo warranto proceeding only Municipality of Malabang vs. Benito Why can it not exist as a de facto corporation? No valid statute (first requisite). Cite the Pelaez doctrine. Insofar as the stockholders concerned, can a de facto corporation exist even if the certificate of corporation is concerned? No. They know the certificate has not yet been issued. Fourth requisite not present, ie., good faith in claiming to be and doing business as a corporation. What is corporation by estoppel? One that is so defectively formed so that they are not to be considered a de jure or de facto and exists as a corporate body only insofar as the contracting parties are concerned by virtue of their admission, agreement, or conduct. In this case, limited shareholder liability is concerned, it will not apply in the case of corporation by estoppel is concerned. Instead, they will be liable as general partners and thus, will be answerable even beyond his contributions. Even personal properties not contributed may be subject to foreclosure and attachment. 40Arellano University School of Law Know what is a general partner’s' liability. Someone who will be held for all debts and liabilities of the enterprise: May a corporation by estoppel exist insofar as the members are concerned? No. Corporation by estoppel is designed to prevent injustice. When there is no third persons, there is no corporation by estoppel. Lozano vs. Delos Santos No corporation by estoppel. No third persons. Corporation by estoppels is founded. on principle of equity and is designed to prevent injustice and unfairness. It applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Where there is no third person involved and the conflict arises only among those assuming to form a corporation, who therefore know that it has not been registered, there is no corporation by estoppel. Albert vs University Publishing May the President of the University Publication, which is unregistered, be held Hable? Yes. Apply rule on agency that an agent without a principal is himself a principal. This is an old case. Now, you can cite Section 21. The corporation by estoppels doctrine has not been invoked. At any rate, the same is inapplicable here. Aruego represented a non-existent entity and induced not only the plaintif but even the court of belief in such representation. He signed not only the plaintiff but even the court of belief in such representation. He signed the contract as “President” of University stating that “this was a corporation duly organized and existing under the laws of the Philippines” and obviously misled the plaintiff into believing the same. One who has induced another to act upon his willful misrepresentation that a corporation was duly organized and existing under the law, cannot, thereafter set up against his victim the principle of corporation by estoppel. Chang Kai Shek School vs Court of Appeals Decision that the school can be sued as a corporation is based on a law that every learning institution recognized by government to be incorporated within 90 days. School cannot invoke non-compliance with the law. Assuming there was no law mandating incorporation, would the court have allowed the school to be sued as a corporation? aArellano University School of Law No. For the past 32 years, the school has been contracting as a corporate body. It is estopped from denying such personality. There should also be no question that having contracted ,with the private respondent every year for thirty two years and thus represented itself as possessed of juridical personality to do so, the petitioner is now stopped from denying such personality to defeat her claim against it. According to Article 1431 of the Civil Code, “through estoppels an admission or representation is rendered conclusive upon he person making it and it cannot be denied as against the person relying on it’. Asia Banking vs Standard Products General Rule: In the absence of fraud, a person who has contracted with an association in such a way as to recognize its legal existence is estopped from denying such existence. Is there an exception to this rule? If the third-party did not benefit, and is actually the one claiming from the contract. International Express Travel and Tours vs. Court of Appeals Henri Kahn, not the Philippine Football Corporation (Not a national sports association with jurdical capacity), was sued by International Express Travel. Henri Kahn said that it is not the proper party. Rule that a third-party entering into a contract with an ostensible corporation cannot deny its existence was not applied by the court. General rule applies only when the party is trying to escape from its obligation to the ostensible corporation on the irrelevant ground that the corporation hes no personality. This is not so in this case. Would you know of any other exception? When fraud takes part in the transanction. Salvatierra vs Garlitos Is Salvatierra dealt with PFPC as a corporation, is he not estopped from denying its existence? Why did the court not apply the general rule? General rule will not apply if fraud takes part in the transaction. In this case, Salvatierra was really made to believe that it is existing as a corporation. Corporation by estoppel also applies to foreign corporations.Arellano University Schoo! of Law In Georg Grotjan GMBH vs Isnani, the court applied the rule on corporation by estoppel notwthstanding the rule that a foreign corporation cannot gain access to our courts unless they attain a license to engage in business in the Philippines. It received the received the benefit of the contract ‘Three (3) Remedies for Parties Contracting with Ostensible Contract 1. File a suit against the supposed corporation to recover from corporate properties 2. If properties are not sufficient, file a case against the persons composing the ostensible corporation. ' 3: File a suit against both, jointly and severally. Who should bear the loss? All of the associates or only the active ones? Only those who. actively participate in holding out the associations as a corporate body should be held liable by virtue of the express provision in Section 21. ‘This would be more in conformity with the rules governing agency under the Civil Code which would hold out: An ‘agent personally liable to the party with whom he contacts in cases he exceeds the limit of his authority without giving the other party sufficient notice of his powers. Thus, the Passive Shareholders or supposed stockholders or associates should be limited in their liability only to their agreed contribution. Commencement of Business What would be the effect if the corporation failed to commence transaction? Automatic 2 years Operated but becomes subsequently inoperative CONTINUOUSLY for 5 years only a ground for suspension, proper notice and hearing Commencement Dissolution Or revocation should not happen if. beyond the control of the corporation. Formal organization refers to the process of structuring the corporation to enable it to effectively pursue for which it was organized. It includes the following: 1, Organizational meeting of the' stockholders to elect its board of directors; 2. Adoption of by-laws, if not simultaneously filed with the articles of incorporation, and its subsequent filing with the SEC which must be within one (1) month from the issuance of the certificate of incorporation. 43Arellano University School of Law 3. Organizational meeting of the board of directors elected to elect the corporate officers, adoption of corporate seal, accepting pre-incorporation subscriptions, establishing the principal office and such other steps necessary to transact the legitimate business for which the corporation was formed. Only substantial compliance is required, not strict compliance. Example realty company: Hiring of geodetic engineer. Indication of commencement, Organization as used in reference of corporation, as the election of officers, providing for the subscriptior: and payment of capital stock, the adoption of the laws, and such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which it was created Commencement of the transaction of corporate business means that the corporation has actually functioned and engaged in the business for which it was organized. This may take form of entering into contracts which tend to pursue its business undertaking or other acts related thereto. CORPORATE CHARTER AND ITS AMENDMENTS ‘Triple Contract 1. Between corporation and state 2. Between corporation and stockholders or members 3. Between and among the stockholders or members Charter is broader than the articles of Incorporation 1, Articles 2. Corporation Code 3. By-laws 4. Pertinent statutes Franchise ~ privilege to be and act as a corporation 1. Primary - right of being a corporation, e.g., the certificate of incorporation 2. Secondary - right or privilege to do certain acts, e.g., license to engage in a specific business Dapat, existing na yung corporation before makakuha ng secondary franchise. What do you understand by the word charter? Is it the same as articles of incorporation? Charter consist of the articles of incorporation and the relevant “4Arellano University School of Law laws under which it is created, or: the Corporation Code itself inclusive of the by-laws adopted thereunder and all pertinent provisions of any statute governing them. Corporate entity = Corporation exist separately and independently from the stockholders * Stockholders cannot bring an action, to bring back the properties of a corporation + Corporation has no interest in the individual properties of its members ‘There is an asterisk below the certificate specifying that the corporation shall not engage in business requiring a secondary franchise. Under Section 19, corporation commences to exist upon issuance of the Certificate of Incorporation. Corporate Entity Theory The corporation is possessed with a personality separate and distinct from the individual stockholders or members and is not affected by the personal rights, obligations or transactions of the latter Exception: Members with unpaid subscriptions may be sued up to the extent of their unpaid subscriptions. ‘Trust Fund Doctrine. Subscriptions constitute a trust fund which creditors can rely upon for the satisfaction of debts. Sulo ng Bayan vs. Araneta Corporation cannot bring an action for the recovery of the properties of its members A corporation is a distinct legal entity to be considered as separate and apart from the individual stockholders or members who compose it, and is not affected by the personal rights, obligations and transactions of its stockholders or members. The property of the corporation is its property and not that of the stockholders, as owners, although they have equities in it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. Conversely, a corporation ordinarily has no interest in the individual property of its stockholders unless transferred to the corporation.” Caram vs. CA. Stockholders cannot be held liable for the legitimate obligations of the corporation, they exist separately and independently from one another 45Arellano University School of Law Cruz vs. Dalisay Final judgment against a corporation cannot be enforced against stockholders. ‘The respondent chose to pierce the veil of corporate entity, usurping a power belonging to the court and assumed improvidently that since the complainant is the owner/president, they are one and the same. It is well-settled doctrine, both in law and in equity, a corporation has a personality distinct and separate from its individual stockholders or members. The mere fact that one is president of a corporation does not render the property he owns or possesses the property of the corporation, since the president, as individual, and the corporation are separate entities. Rustan Pulp vs. CA Corporation exist separately and independently Corporation are juridical entities, they exist only in legal contemplation, can act only through its authorized representatives Soriano vs. CA ‘They are not personally liable They were signed for and in behalf of the corporation Palay inc. vs. Clave Liabilities incurred by the corporation cannot be enforced against stockholders, etc., even if stockholders, etc. happens to own a substantial interest in the corporation, mere ownership does not disregard the corporate entity theory - Corporate entity for legal or legitimate purposes only - Two or more corporations, one of them will be treated as a mere alter- ego - You cannot pierce the veil of corporate fiction when there are no facts attendant in the case Instrumentality rule Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality” may be disregarded Courts are concerned with reality and not form 46Arellano University School of Law Mere ownership of all or substantially all of the shares of stock of a corporation is not, in itself, insufficient ground for disregarding the separate corporate personality. And for the separate personality of the corporation to be disregarded, the wrong doing must be clearly and convincingly established Fraud must be proven by clear and convincingly, evidence amounting to more than preponderance. It cannot be justified by speculation and can never be presumed. And only if it sought to hold the stockholders liable directly for corporate debt Palacio vs. Fely Piercing the veil of corporate fiction Fely trans and the other corporation is one and the same Isabelo Calingasan and defendant Fely Transportation may be regarded as one and the same person. It is evident that Calingasan’s main purpose in forming he corporation was to evade his subsidiary civil liability resulting from the conviction of his driver. This conclusion is borned out by the fact that the incorporators of the Fely Transportation are Isabelo, his wife, his son, and two daughters. The Court believe that this is one case where the defendant corporation should not be heard to say that it has a personality separate and distinct from its members when to allow it to do so would be to sanction the use of the fiction of corporate entity as a shield to further an end subversive of justice. Furthermore, the failure of the defendant corporation to prove that it hhas ocher property other than the jeep strengthens the conviction that its formation was for the purpose above indicated. Marvel bldg. vs. David ‘There must be facts before the court will be justified in piercing the veil of corporate fiction Corporation was a mere extension of the personality of the person Yutivo and sons vs. Court of Tax Appeals / What where the facts or circumstances arrived by the court here? 1. Southern motors (SM) is under the management control of Yutivo by virtue of the management contract entered into between the two parties; 2. The controlling majority of the Board of Directors of Yutivo is also the controlling majority of the Board of Directors of SM; 3. The principal officers of both corporations are identical; 4. Both corporations have a common comptroller; and among others. 47Arellano University School of Law Commissioner of Internal Revenue vs. Norton and Harrison It has been settled that the ownership of all the stocks of a corporation by another corporation does not necessarily breed an identity of corporate interest between the two companies and be considered as a sufficient ground for disregarding distinct personalities. However, in the case at bar, the Court find sufficient grounds to support the theory that the separate identities of the two companies should be disregarded. a, Norton owned all the outstanding stocks of Jackbilt; b. Norton constituted Jackbilt’s directors; c. Norton financed the operations of Jackbilt; d. Norton treats Jackbilt’s employees as its own; e. Compensation given to board members of Jackbilt’s indicate that Jackbilt is merely a department of Norton; {. The offices of Norton and Jackbilt are located in the same compound; g. Payments were effected by Norton of accounts for Jjackbilt and vice versa; and h. Payments were also made of Norton of accounts due or payable to Jackbilt and vice versa. La Campana Coffee Factory, Inc. vs. KKM ‘Two corporations managed by the same family, workers were made interchangeably Emilio Cano vs. CIR anos were indicated in the case, not in their personal capacity, but as president and manager of the corporation. Having been sued officially, their connection with the case must be deemed to be impressed with the representation of the corporation. In fact, the court’s order is for them to reinstate Cruz to her former position in the corporation and incidentally pay her the wages she had been deprived of during the separation. Verily, the order against them is in effect against the corporation. Tesco vs. WCC ‘The two corporations where located in the same office Claparols vs. CIR Same as NAFLU and A.C. Ransom 48Arellano University School of Law It is very clear that the latter corporation was a continuation and successor of the first entity, and its emergence was skillfully timed to avoid financial liability that already attached to its predecessor, Claparols Steel and Nail Plant. (1) both predecessor and successor were owned and controlled by the petitioner; and (2) there was no break in the: succession and continuity in the same business. This avoiding-the-liability scheme is very patent, considering the (3) 90% of the subscribed share of stock of the dissolved Claparols was owned by Claparols himself; and (4) all assets of the dissolved Claparols were turned over to the emerging Claparols Steel Corporation. Concept builders vs. NLRC Instrumentality rule. What is the instrimentality rule? Where one corporation is so orgaitized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality” may be disregarded. 1) Has no separate mind of its own. What is the degree of control? Control Test 1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that-the corporate entity as to this transaction had at the time no separate mind, will or existence of its own. 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty or dishonest and unjust ‘act in contravention of plaintiff's legal rights; and, 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. ‘The absence of one of the elements prevents “piercing the corporate veil.” In applying the “instrumentality” or “alter ego” doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation. ‘There must facts and circumstances before warrant piercing the veil of corporate fiction > The control necessary does not mean stock ownership MCConnel vs. CA 48Arellano University School of Law were located in the same floor “while the mere ownership of all or nearly all of the capital stock of a corporation docs not necessary mean that it is a mere business conduit of the stockholder, that conclusion is amply justified where it is shown, as in the case before us, that the operations of the corporation were so merged with the stockholders as to be practically indistinguishable from them. To hold the latter liable for the corporation's obligations is not to ignore the corporation's separate entity, but merely to apple the established principle that such entity cannot be invoked or used for purposes that could not have been intended by the law that created that separate personality.” ‘Tan boon bee vs. Jarencio Why would a drug company need a printing machine ‘The property must be in pursuance of a company business Cease vs. CA Alter-ego or the extension of the person of forest ware does the court pierced the veil of corporate fiction As to not deprive the holders of their successional rights Mere ownership of all or substantially all is not a justification of piercing the veil of corporate fiction 1, Fraud must be proven by clear and convincing evidence cannot presume or speculate, there must be facts and circumstances 2. Fraud must be clear and convincing evidence more than preponderance - End of Lecture - When Piercing the Veil is Not Justified ONLY WHEN: 1. The corporation is being used to (a) defeat public convenience (b) justify wrong (c) protect fraud (d) defend crime (e) confuse legitimate issues (0) circumvent the law (g) perpetuate deception. 2. An alter ego adjunct or business conduit is being used for the sole benefit of a stockholder or a group of stockholders or another corporation. Remo vs. Intermediate Appellate Court 50Arellano University School of Law The Board of Akron Corporation approved a resolution authorizing the corporation to secure of a loan for the purpose of purchasing trucks for use of the business. On the basis of said resolution, Akron Corporation purchased 13 trucks from EB Marcha Corporation. Akron Corporation paid a down payment and the President of the Corporation, Feliciano Coprada, also executed on behalf of the corporation a promissory note to in favor of EB Marcha promising to pay the balance within 60 days from the proceeds of a loan obtained from DBP. After the lapse of 90 days EB Marcha tried to collect from Akron Corporation but the latter promised to pay only upon release of its loan from DBP. Later, it was found out that no loan application was ever filed by Akron Corporation with DBP. ‘The Board also later approved a resolution authorizing the sale under a pacto de retro sale of two trucks to a certain Mr. Bais. EB Marcha filed a complaint for the recovery of payment or the return of the trucks against the corporation and its directors and officers. Remo Jr. (on of the directors) alleged in his answer to the complaint that Akron Corporation has a distinct personality. During the pendency of the action, Remo Jr. sold his shares to Feliciano Coprada. After trial, the court decided to pierce the corporate veil and ordered the directors and officers of Akron to be jointly and severally liable. Held: No cogent basis to pierce the corporate veil. It does not appear that the resolution was intended to defraud anyone. Remo Jr. is not signatory to the promissory note which misrepresented a loan with DBP. Only Feliciano Coprada should account for the misrepresentation. ‘There is also nothing inherently fraudulent on the sale of the two (2) trucks to a third party. Reo Jr. also has the inherent right to sell his shares of stock anytime he desires. Del Rosario vs. National Labor Commission Leonaldo Atienza filed with the PEOA a complaint for money claims against PHILSA Construction and Trading Company (Recruiter) and Aricb Enterprises (Employer). The POEA dismissed the compiaint but after appeal to the NLRC, it reversed the decision of the POEA and ordered PHILSA and Arieb to jointly and severally pay Leonaldo Atienza his salary differentials and leave benefits. The writ of execution issued by POEA was returned unsatisfied because PHILSA was no longer operating and financially incapable of satisiying stArellano University School of Law judgment. POEA, upon motion by Leonaldo Atienza, issued an alias writ ‘against the officers of PHILSA and ordered the sheriff to execute against the properties of Francisco del Rosario. It was the conclusion of the POEA that PHILSA allowed its license to expire to evade payment. To disregard the juridical personality of the corporation, the wrongdoing must be clearly established. The conclusion of the POA that PHILSA allowed its license to expire to evade payment is not supported by the facts since when said license expired, there was yet no judgment on case filed by Leonaldo Atienza, hence, intent to evade payment cannot be implied. There was an allegation that PHILSA created a second corporation, PHILSA International Placement and Services Corporation, and it was suggested that this creation of a second corporation, whose incorporators are the same as the incorporators of PHILSA, is indication of fraud. However, this second corporation was organized four years before Leonaldo Atienza filed his complaint with POEA. Therefore, it could not be concluded that such second corporation was in anticipation of an adverse judgment. Substantial identify of incorporators also does not necessarily imply fraud. It was not established that Francisco del Rosario is the corporate officer that caused Atienza’s predicament. Claim was directed at the foreign employer, with the recruiter only made liable by virtue of its undertaking to be jointly and severally bound with the foreign employer as required by POEA rules. Note: 1. In La Campana, they had one office and the laborers are the same 2. In Claparols, the corporation ceased operations but immediately succeeded the following day by another corporation (no break) 3. In AC Ransom, the corporation foresaw the possibility of payment of back wages. Indophil Textile Mill Workers Union vs. Teodorico Calica Indophil Textile Mills, Inc. is a corporation engaged in manufacture and sale of years. In 1967, it formed another corporation, Indophil Acrylic Manufacturing Corporation. Indophil Acrylic became operational and hired workers according to its own criteria and standards. The union of Indophil Textile claims that the facilities of Indophil Acrylic should be considered an extension of the facilities of Indophil Textile, pursuant to the provision of its CBA. It alleged that some employees of Indophil Textile are the same persons manning and providing auxiliary services to Indophil Acrylic, both corporations are in same compound, and the creation of Indophil Acrylic was a devise to evade the application of the CBA to Indophil Acrylic employees. 2Arellano University School of Law Indophil Textile opposed this contefition and maintained that Indophil Textile and Indophil Acrylic are two separate and distinct corporations. Teodorico Calica, the Voluntary Arbitrator, declared that the CBA with Indophil Textile does not extend to the employees of Indoptil Acrylic. ‘The fact that some employees of Indophil Textile are the same persons manning and providing auxiliary services to Indophil Acrylic, and that both corporations are in same compound are not sufficient to pierce the corporate veil. The complaint does not seek to impose a claim for a corporate debt against the corporations. Note: In La campana, one payroll, employees were made interchangeable. Acrylic had its own standards. PNB vs. Ritratto Group PNB International Finance extended’ a letter of credit in favor of Ritratto Group, Ritratto International and Dadason General Merchandise, secured by real estate mortgage. When outstanding obligations stood at almost USD1.5 million, PNB, as Attorney-in-Fact of PNB International Finance, notified the respondents of the foreclosure of the mortgage and the sale of the properties at a public auction. Respondents filed a complaint for injunction. Among others things, it asked the court to order PNB to recompute the rescheduling of interest, while at the same time acknowledging that PNB is only an agent of and not privy to their loan contract with PNB International Finance. Trial court ruled that since PNB International Finance is a wholly-owned subsidiary of PNB, the suit against PNB is a suit against PNB-International Finance. It justified that corporate entity may be disregarded where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agent, conduit, or adjunct of another. Mere fact that a corporation owns all the stocks of another corporation is not sufficient to justify their being treated as one entity. If they perform legitimate functions, their separate existence must be respected. Test for applicability of piercing the veil: (1) Control, ic., complete domination of finances, policy, and business practices (2) Control was used to commit fraud, to violate a legal duty or commit acts of injustice or dishonesty (3) Control and breach of duty were the proximate cause of the injury or unjust loss complained off. be 53Arellano University School of Law Yu vs NLRC ‘Tanduay Distillery terminated the services of some employees for reasons of retrenchment. Affected employees filed a complaint. During the pendency of this complaint, Twin Ace Holdings bought Tanduay’s assets and took over its business and assumed the business name Tanduay Distillers. The Labor Arbiter decided in favor of the retrenched employees and ordered their reinstatement and payment by Tanduay of their backwages up to the time of change of management. It appears that, based on the decision, Tanduay Distillers is not obligated to reinstate the employees, and said obligation was only imposed on Tanduay Distillery up to the time of change of ownership. However, the order of execution in effect amended this decision by imposing the obligation to reinstate employees on Tanduay Distillers. According to the Supreme Court, this cannot be done because Tanduay Distillery and Twin Ace are two separate and distinct corporations. Twin Ace was not a party to the case, and it did not take over the corporate personality of Tanduay distillery. It only purchased its equipment and machinery although it manufactured the same product in the same plant. Amendment of the Corporate Charter Section 36. Every corporation incorporate under the Code has the power and capacity to amend its articles of incorporation in accordance with the provisions of this Code. Section 16, Amendment of Articles of Incorporation. - Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by: 1. A majority vote of the board of directors or trustees AND 2. The vote or written assent of the stockholders representing at least two- thirds (2/3) of the outstanding capital stock, (without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code), OR the voteior written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. Such articles, as amended shall be ited by underscoring the ¢ yr changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. $4Arellano University School of Law The amendments shall take effect: 1. Upon their approval by the Securities and Exchange Commission OR 2. From the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation. Steps to Amend Articles (Page 142)" 1. Resolution by at least a majority if the board of directors or trustees 2. Vote or written assent of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporation 3. Submission and filing of the amendments with the SEC as follows: a. The original and amended articles together shall contain all the provisions required by law to be set out in the articles of incorporation. Such articles, as amended, shall be indicated by underscoring the change or changes made. b. A copy thereof, duly certified under oath by the corporate secretary and a mejority of the directors or trustees stating the fact that such amendment have been duly approved by the required vote of the stockholders or members c, Favorable recommendation of the appropriate government agency concerned in the case where the corporation is under its supervision stich as banking and insurance companies, etc. Special Amendments Appraisal right - Section 81 to object on certain acts and transactions Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of changing or restricting thé rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and 3. In case of merger or consolidation. (n) - Right granted only in specified instances Are non-voting shares included in amending the articles of incorporation? 58Arellano University School of Law Under Section 6, where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation. > 100/s > 100/s To 10 100/s =1M/S what would be the 2/3? Section 6 last paragraph Voting shares are excluded except the foregoing instances 1 i 2 2 3 3 4 4 5 8 y) 6 1 & 2=absent 1&2=absent but gave their written assent 3 & 4= objected 3&4-objected 5 & 6= approved the amendment 5&6=approved Would there be a valid amendment a. Special amendments 37 & 38 shortening that would result to dissolution require prior approval by the SEC Section 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two- thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n) Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shal! increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors 56Arellano University School of Law and, at a stockholder’s meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at bis place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A cértificate in duplicdté must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders" ineeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (8) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of .no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the leapital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and, attached to the original articles of incorporation. From and after, approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of 37Arellano University School of Law the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. (17a) b. The vote must be cast at the meeting called for that purpose c. Written assent would not suffice When do amendments become valid .and effective? Only upon the approval of the SEC TRUE OR FALSE? FALSE because it can be valid upon the date of filing if not acted upon within 6 months without fault attributable to the corporation Why is it retroactive? What provision may be amended, altered or repealed Can you change name, address for example she married or changed address? NO. you cannot change that. Fait accompli, are beyond the powers or authority of the corporation to change, alter or modify. These would include the following: Names of the incorporators and ‘The incorporating directors or trustees, The name of the treasurer originally or first elected by the subscribers or members to act as such until his successor has been duly elected and qualified, The number of shares and amount originally subscribed and paid out of the original authorized capital stock of the corporation, The date and place of execution of the articles of incorporation, The signatories and acknowledgment thereof. All other provisions or matters stated or contained in the articles are subject to amendment.Arellano University School of Law Founder’s or signatories hindi pwede palitan Names, nationalities- you cannot Capital- right granted by law to all corporation Paid up capital- NO Restriction and transfer of shares in ordinary stock corporations You can, but close corporation cannot Section 96, otherwise it will not be a close corporation vv Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides. Transfer clause, executor clause, acknowledgment, treasury aflidavit-NO Philippine First Insurance case Mere change in the name of a corporation or by merely complying with the law is general amendment It does not change its personality. It is the same person in a different name. the charter is the same Amendment of a corporate term Extending the same can never be made 7 years prior? TRUE or FALSE 59Arellano University School of Law FALSE. It can be if there are justifiable reasons for earlier extension as may be determined by the SEC Can you extend the corporate term if it has already expired? Once the term expires without an amendment having happen it ceases to exist as a body politic. It is dissolved automatically on the day it expires. Alhambra cigar and PNB case Instances when the SEC allowed extension whose term has already expired All of them involved are institutions of learning, it was the case in order to avoid confusion that would arise later on. BOARD OF DIRECTORS/TRUSTEES nee Section 23 Section 23. The board of directors or trustees. - Unless otherwise provided in this Code,’ the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. Controlled by the board of directors Authority are however restricted to the day to day Stockholders may have all the profit but will turn over:the management to the governing board But unless the law provides the power may be delegated General rule Corporations must sit and act as a body Will be bound by corporate officers if they acted within the 5 classification page 150 Ramirez vs. Orientalist co What was the position of Fernandez in this case? TREASURER Why did the court rule that actions of Fernandez bound the corporation when he is not even a board of director? “if a man is found acting for a corporation with the external indicia of authority, any person not having notice of want of authority, may usually rely upon those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby held him 60Arellano University School of Law out as a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted.” ' + Contracts must be made by the director and not the stockholders - Actions of the stockholders in such matters is only advisory and not in any way binding in the corporation > Barreto vs. La previsora Filipina - Everything emanates from the board of directors + Stockholders action is merely advisory except their approval or vote is necessary to prove a valid corporate act > Qualifications: ‘ - No citizenship requirement, at least majority must be residents - Can have a governing board consisting solely of foreigners - But we have to take into consideration partiy nationalized industries and other laws which prohibits or limits foreign ownership - Anti-dummy act - Utilization development of natural resources 60% must be owned by Filipino citizens, therefore they only own 40%---10 members they can only have 4 seats, but not eiitirely correct because the law may provide otherwise; educational institutions restricted to Filipinos, but there are exceptions when created by religious and charitable institutions. - By-laws may provide additional qualifications and disqualifications - To qualify as a director he must own at least 1 share > Should the stockholder be the equitable ur beneficial owner in order to qualify as a director? - NO, it is not necessary, as long as you are listed in the books as owner of one share > Lee vs. CA As long as you are listed in the books as owner of one share = Under the old law he must be the beneficial owner and legal owner thereof but in the new law it is not required as long as it stands in his name he is qualifies 1 A-100t/S B (own in the trust of X) is B qualified to be a director? 2 3-10 2- transferring there voting rights in favor of VT Other rights will accrue in favor of them, but not the voting rights voting rights must be recorder in the books of the corporation that it is transferred PNB-IFL- wholly owned subsidiary of PNB PNB will assign to PNB-IFL nominal shares and PNB-IFL now will be able to be nominated > Gen, Rule: + Term of one year who will serve as such until there successors are elected and qualified aArellano University Schoo! of Law > Exception: - Non-stock corporation can serve for a term of 3 years - Educational non-stock- term of the governing board can be 5 years May this term exceed one year? = Yes, they may serve in a hold over capacity until their successors have been duly elected and qualified v > Detective and protective bureau vs. Cloribel - In the by-laws, managing director must be elected from among themselves » - Must be duly elected and qualified How are the directors clected? 1-100T/S 2-100T/S 3-100T/S to 10=1M/S % Do you include the vote of 1 & 2 to have a quorum to have a valid meeting? - NO, quorum requirements is 401,000 Quorum requirement is SO Lk Holders of non-voting shares are only entitled to vote in last par. Of section 6 1-200k 2-200k 3-200k 4-100k 5-100k 6-100k =1MS 1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10, tumakbo and ninominate nila yung sarili nila and cast all their shares on themselves > Who wins? Or who gets elected? - No vote requirement, the one who gets the most number of votes gets elected, section24 > What is cumulative voting? - Process of multiplying the number of shares to the number of director to be elected - Matter of right granted to stockholders in a stock corporation 1 to 5 has 200k/s and members of the same family- majority 800k they have 4M votes they are guaranteed 4 seats 6 to 10 are not related- 1 seat 1M votes > Cumulative to allow the minority to have a rightful representation in the board > Is it allowed in a non-stock corporation? 2Arellano University School of Law - Not generally available - Section 89 unless the articles or by-laws allow cumulative voting Section 89. Right to vote. - The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote. Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code. (n) * Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission. > Other corporate officers other than the governing board section 25 Section 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shali be a director, a treasurer who may or may not be a director, a Secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings. (33a) Is the president required to be a stockholder? YES The chairman may be another person ‘The president may also be another person Prohibited is president to be secretary or treasurer at the same time Board of director must sit and act as a body to arrive at a corporate act What would constitute-a quorum if 5 then 3 must be present May the vote of 2 members past a 5 man governing board pass a valid corporate act? YES. Voting requirement is majority of directors present at which there where a quorum 1 and 2 present=valid voting requirement 1 and 2 voted yes vvvVvvY 6are vot y ve hayes y Arellano University School of Law 3 voted no Is it absolute? NO, except in the election because it requires the majority of all the members of the board If by-laws or articles provide a higher voting requirement Artificial beings must act through its members and act as a body to have a valid corporate act Exception: Delegation Expressly conferred Where the officer or agent is clothed with actual or apparent authority Otherwise it will not bind the corporation Yao Ka Sin Trading case “already asked in the bar” Only bind the corporation to the extent of authority confined to him or virtue of customs, usage and policy Must pass first the controller and counsel What if the notice requirement is not complied with? Lopez Realty vs. Fotencha Notice requirement must be complied with hence it should have been with force and effect, but according to the SC, it may be ratified expressly if there is a subsequent meeting called for that purpose Impliedly through acts Asuncion was aware of the corporations obligation ‘There was implied ratification or she was estopped Pua Casim & Co. vs. W. Neumark and Co. Considered 3 circumstanced Check which was the proceed of the loan which was endorsed and deposit in the corporate account W. Neumark as president and also stockholder Yu Chuck vs. Kong Li Po General manager usually has the power to hire but the SC said the contract must be reasonable ‘The contract here is so onerous that it would throw the corporation into insolvency Francisco vs. GSIS GSIS cannot evade the binding effect of the telegram Only 15 months later that the corporation said there was a mistake The silence coupled with the unconditional acceptance of the other subsequent remittances is binding to the corporation Board of Liquidators vs. Kalaw “Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of general practice, custom and policy, the general manager may bind the company without formal authorization of the board of directors. In varying language, existence of 64Arellano University School of Law such authority is established, by proof of the course of business, the usages and practices of the company and by the knowledge which the board of directors has, or must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. So also, “xx authority to act for and bind a corporation may be presumed from acts of recognition in other instances where the power was in fact exercised.” “xx Thus, when, in the usual course of business of a corporation, an officer has been allowed in his official capacity to manage its affairs, his authority to represent the corporation may be implied from the manner in which he has been permitted by the directors to manage its business.” In the case at bar, the practice of the corporation has been to allow its generai manager to negotiate and execute contracts in its copra trading activities for and in NACOCO’s behalf without prior board approval. If the by-laws were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that Board itself, by its acts and through acquiescence, practically laid aside the by-law requirement of prior approval. Kalaw signed alone and said contracts were submitted to the board of directors after its consummation and not before Buenaseda vs. Bowen Express ratification is made through a formal board action Implied ratification is through: silence or acquiescence, acceptance benefits and lastly recognition or adoption An unauthorized act may nevertheless be binding either by express or implied by estoppels By virtue of silence the board had impliedly accepted the act By recognition or adoption By virtue of payment of obligations arising therefore- Lopez realty May directors or trustees be disqualified to act as such? YES, crime, etc. disqualifications in book Possess or dispossess any of the qualifications or disqualifications , cease to hold at least one share May directors be ousted from office? At least 2/3 of members representing outstanding capital stock. Again notice requirement must be complied with 1-200 1-5 same family 2-200 3-200 4-100 5-100 electing 6-100 6 to 10 not related 7-50 8-40 9-5 10-5 outstanding director 65Arellano University School of Law Meetings called by the president or the secretary ordered by the president It depends if the removal is without cause they cannot do so because removal without cause shall not deprive the minority stockholders or members of the right of representative > If with cause they can even if it will prejudice the rights of the minority, provided of course additional requirements by-laws’ and articles of incorporation > Who will fill up the vacancy created due to the ouster of a member of the board of directors

Section 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board: of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in office. Any directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. (n} % Other than by removal or expiration of term they do not have the power > When will the vacancies Ue filled up? > Is notice required, to fill up vacancies due to removal? > What if the vacancy is due to an increase, can it be filled up in the same meeting where in the number is increased? > Blection due to removal-in the same meeting notice is not required > Election duc to increase in number- it must be so stated in the meeting > Section 30 Section 30.Compensation of directors. - In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders’ meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. (n) - Generally not entitled to receive compensation because they render it gratuitously ~ Unless the by-laws allows + Stockholders may also grant pursuant to a majority vote - Must not exceed net income of 10% tax of the preceding year 66tyviwv vy Arellano University School of Law Acting in special capacity In, sum directors may receive compensation when. there is a provision in the by-laws to that effect When the stockholders, by a majority vote of the outstanding capital stock grant the same; and, If the director renders extra-ordinary or unsual service Central Cooperative Exchange vs. Tibe By-laws may allow, stockholders may also allow such What do you understand by the phrase “as such directors” Western Institute vs. Salas Compensation was granted without by-laws authority Prohibition is not a sweeping rule Members of the board may receive when they receive in a special capacity Mere act of the board will suffice Is the 10% ceiling applicable to other officers? NO. the phrase “as such director” was used twice

The SC ruled that the 10% ceiling will not likewise apply if they acted in a capacity other than “as such directors” Government vs. El Hogar Judicial intervention is not proper The appropriates remedy is to those who can make or unmake the by- laws Liability of corporate officers Obligations incurred by those'acting for ard in behalf of the corporations are not there’s BUT there ere exceptions even if they are acting for and in behalf of the corporation Tramat vs. CA General rule was applied in the case Ong acted as officers and acted within the scope of his authority Court laid down 4 instances when even if acting within the scope of his authority he is held solidarily liable He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; He agrees to hold himself personally and solidarily liable with the corporation; He is made, by a specific provision of law, to personally answer for his corporate action. Watered stocks- issued, fully paid up when in fact they have not been fully paid or promised as such Liamado vs. CA 6Arellano University School of Law The corporate entity theory cannot be used as a defense to escape liability in violation of B.P. 22 Where the check is drawn by a corporation the persons who signed the check shall be liable Uichico vs. NLRC Labor case corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employee done with malice and bad faith 3 fold duty of directors obedient diligent loyal Business judgment rule I. Questions of policy and management are left solely to the honest decision of the board of directors and the courts are without authority to substitute its judgment as against the former. The directors are the business managers of the corporation and as long as they act in good faith, its actuations are not subject to judicial review. Montelibano vs. Bacolod Murcia Milling questions of policy and management are left solely to the board of directors BOD, business manager of the corporation and as long as they act in good faith, its actuations are not subject to judicial review ‘They are not insurer of the property of the company, they were guarantors that the enterprise undertaken by the corporation shall be successful Montelibano vs. Bacolod Murcia Milling Co. Directors are not liable due to imprudence or honest error of judgment Duty of loyalty of corporate directors 31,32,33,34 31,32,33- specific instances when corporate officers may violate loyalty 32,33 self-dealing and interlocking director Corporate opportunity doctrine It places a director of a corporation in the position of a fiduciary and prohibits him form seizing a business opportunity and/or developing it at the expense and with the facilities of the corporation. He cannot appropriate to himself a business opportunity which in fairness should belong to the corporation. Last paragraph of section 31 and the provision of section 34 make reference to recovery of “forbidden profits” Distinction between section 31 and 34 relative to the ratification by the stockholders The second paragraph of section 31 which makes a director liable to account for profits if he attempts to acquire or acquires any interest adverse to the corporation in respect to any matter reposed in him in confidence as to which equity imposes a disability upon him to deal in 68Arellano University School of Law his own behalf is not subject to ratification by the stockholders. Whereas, in section 34 if a director acquires for himself a business opportunity which should belong to the corporation, he is bound to account for such profits unless his act is ratified by the stockholders owning ore representing at least 2/3 of the outstanding capital stock. If reposed in him in confidence, not sudject to ratification If the acquisition is merely that of a business opportunity which has not been reposed in him in confidence, the same may be subject to ratification by the stockholders, Director x co. vv A-REALTY B : c Z owns property and is going abroad never to Return, he wants to sell for 25M the fair market value is 30M D E E goes to Z and offers to pay the property for 26 M and later he sells it for 30M making 4M profit, one of the stockholders learned and complains that he should submit the profits. E said that he will move for ratification of his actuation. Can it be ratified? - It can be ratified he meiely acquired a business owning to the corporation -_ It would be different if it was entrusted in his confidence Another scenario: Had A not attended the meeting he would not have known of the sale it is then a matter reposed in him in confidence - Accorporation cannot reaquire its share if it has no restricted unretained carnings > Strong vs. Rapide - What duty did he violate? = He violated his duty of loyalty - The law would be impotent if the sale were not invalidated Self-dealing director and interlocking é:rector What is a self-dealing director? = Director of a corporation dealing or transacting business with his corporation Are the contracts and dealing of a self-dealing director valid? > General rule: voidable May the contracts of a self-dealing director be valid per se. = YES. If all the 4 conditions are present they will be valid per se a, That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; b. That the vote of such director or trustee was not necessary for the approval of the contract; ; 6Arellano University School of Law c. That the contract is fair and reasonable under the circumstances; and d. That in case of an officer, the contract has been previously authorized by the board of directors. When do they become voidable? ae When any of the two requisites are absent it is voidable, but subject to ratification by 2/3 of the outstanding capital stock or 2/3 of the member Requisites for ratification (subject to ratification by .the stockholders holding or representing at least 2/3 of the outstanding capital stock or 2/3 of the members.) it must be at a meeting called for the purpose full disclosure of the adverse interest of the director concerned must be made the contract is fair and reasonable under the circumstances Problem if self-dealing director involved owns all or substantially all of the shares of stock of the corporation thereby making it easily possible to have the contract ratified last sentence of section 32 should be made to apply by determining the reasonableness and fairness of the contract Section 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved. was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in case of an officer, the contract has been previously authorized by the board of directors. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances. (n) Prime White Cement vs. IAC a director of a corporation owes a position in trust in case of conflict between himself and that of the corporation, he cannot sacrifice the interest of the corporation to his own advantage as a director he should have acted in a manner as not to unduly prejudice the corporation he cannot be allowed to enrich himself 70Areliano University School of Law 3. May corporate directors purchase the corporate property? Mead vs, Mccullogh interlocking director- a director of one corporation who deals and transacts business with another corporation who is himself a director director of X company also a director of Y corporation Both companies enter into a contract and A sits, is the contract valid? = Yes on the ground of fraud or if it is unfair - May be subject to the provision of section 32 - Section 32 contract may become voidable, hence it may also be ratified XCo, Y Co. A owe 20% A owe 20% Is it generally valid or voidable? VALID 25% 25% VALID 15% 25% VOIDABLE SUBJECT TO section 32 More than 20 substantial BOD mismanages corporate officers. Who may file a suit? - General rule: BOD which can institute a case because it has all the powers. To allow stockholders to file would violate the doctrine of corporate entity and may result to multiplicity of suits - Stockholders cannot therefore generally file a case EXCEPT of course in DERIVATIVE SUIT Derivative suit - An action based on injury to the corporation-to enforce a corporate right- wherein the corporation itself is joined as a necessary party, and recovery is in favor of and for the corporation. - Remedy granted by law to stockholders to institute a case to remedy a wrong done directly to the corporation and indirectly to the stockholders, if the board refuses to do so. Otherwise if not they would be left without any recourse Available suits Individual or Personal - Wrong done against his person as a stockholder * Class suit - Filed by a stockholder in representation of other stockholders - Avwrong or redress done, a derivative suit in nature Intra-corporate remedies - Demand to the BOD to institute such action, nArellano University School of Law Negated by the BOD ‘The one who instituted must be a stockholder at the date when the act was done, must have been a stockholder by that time Demand will not be required if the majority of the BOD are the one’s guilty of the wrong charged ‘The corporation must be made a party in the case whatever side will not matter because under Philippine law misjoinder is not a ground for dismissal Non-joinder is a ground for dismissal 4, 5. Any benefit should inure to the corporation Stockholder bringing the action is entitled to reimbursement such as attorney’s fee ONLY IF the case is SUCCESSFUL to avoid harassment suit to their management Pascual vs. Orozco By virtue of the fact that he is a stockholder, may maintain a derivative suit Depend on how, when and what reason Seeking for the years 1898 all the way 1907 Only became a stockholder in 1903 He can sue only in 1903 forward because he must be a stockholder The right of action is personal in nature. He became a stockholder only in 1902 Derivative suit : By a stockholder to address a wrong done against the corporation and the stockholder indirectly Essential requisite must have been a stockholder from the time the act complained of took place Cannot institute an action from the years he was still not a stockholder Everett vs. Asia Banking Stockholders cannot ordinarily commence suit in equity and such is in the hands of its BOD however there are exceptions when the BOD will not sue since they are themselves principals to the fraud. Republic vs. Cuaderno The facts constitute sufficient cause of action It is not the corporate interest to shield one from criminal prosecution which is personal interest Perez is not suing in his behalf, but in behalf of the corporation Western Institute vs. Salas Assuming it was filed in the proper forum would there argument that it is a derivative suit prosper? NO. it is people of the Philippines vs. individual director, it must be stated in the complaint that it is being instituted as a derivative suit and for and in behalf of the corporation Granting arguendo, that this is a derivative suit, the same is still outrightly dismissible for having been wrongfully filed in the regular nv Arellano University School of Law court devoid of any jurisdiction to entertain the complaint. The case should have been filed with the SEC which exercises original and exclusive jurisdiction over derivative suits, they being intra-corporate disputes, per Section 5 (b) of P.D. 902-A San Miguel vs. Khan . Was a demand made? NO It is not necessary because he objected in the board meeting, but still it was adopted therefore it was useless Chase vs. Buencamino i Argument that he should be in estoppels since he filed in the U.S. Assuming the case prospered in the U.S. would not estoppels apply as against him? NO for estoppels to step in it must be a case by the corporation Reyes vs. Tan Corporate director are guilty of breach of trust A stockholder may institute an action to remedy a wrong done Fraud in the conduct of corporate affairs Gamboa vs. Victoriano ws Is derivative suit appropriate iri'this case They are not vindicatory damage done to the corporation, but rather they where vindicating damage against him Violation of their rights as individuals, hence derivative suit is not the remedy Evangelista vs. Santos Derivative suit is not proper Claim is not for the benefit of the corporation, but rather his individual benefit From the cases above cited, these are the requirements and the procedures that must be followed in order that a derivative suit may prosper ‘That the party bringing the suit should be a stockholder as of the time the act or transaction complained of took place, or whose shares have evolved upon him since by operation of law. This rule, however, does not apply if such act or transaction continues and is injurious to the stockholder or affect him specifically in some other way. ‘The number of his hares is immaterial since he is not suing in his own behalf or for the protection or vindication of his own right, or the redress of a wrong done against him, individually, but in behalf and for the benefit of the corporation. He has tried to exhaust intra-corporate remedies, he has made a demand on the board of directors for the appropriate relief but the latter had failed or refused to heed his plea. Demand, however, is not required if the company is under the complete control of the directors who are the very ones to be sued (or where it becomes obvious that a demand upon them would'have been futile and useless) since the law does not require a litigant to perform useless acts; B°) dy vvvv . v Arellano University School of Law ‘The stockholder bringing the suit must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated, otherwise, the case is dismissible. This is because the cause of action actually devolves on the corporation and not to a particular stockholder. The corporation should be made a party, either as party-plaintiff or defendant, in order to make the court’s judgment binding upon it, and thus, bar future litigation of the same issues. On what side the corporation appears loses importance when it is considered that it lay within the power of the court to direct the making of amendment of the pleading, by adding or dropping parties, as may be required ir. the interest of justice. Misjoinder of parties is not a ground to dismiss action; and, Any benefit or damages recovered shall pertain to the corporation. This is so because in all instances, derivative suit is instituted for and in behalf of the corporation and not for the protection or vindication of a right or rights of a particular stockholder, otherwise, the aggrieved stockholder should institute, instead, an individual or personal suit to vindicate his personal or individual right. Or, for that matter, representative or class suit for all other stockholders whose rights are similarly situated, injured or violated, personally or individually. Executive committee Not allowed under the OLD law How may executive committee created and constituted? Section 35 Section 35. Execitive committee. - The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders’ approval is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the ameadment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders. Said committee may act and bind the corporation by the majority vote of all its members except with respect to those matters provided for in sec. 35 these are: Approval of any action for which shareholders’ approval is also required The filing of vacancies in the board; Amendment or repeal of by-laws or the adoption of new by-laws; Amendment or repeal of any resolution of the board which by its express terms is not so amenable or repealable; and, Distribution of cash dividends to the shareholders. ”Arellano University School of Law ) May the board alone create an executive committee without any authority provided for the by-laws? - NO board of directors must sit and act as a body to have a valid transaction : f) May a non-member of the board of directors be a member of the executive committee? - NO, all of them must be members of the board of directors - BOD cannot act by proxy it would be abdication of powers 8) Purpose clauses necessary because it confers and also limits the actual authority of the corporation CORPORATE POWERS AND AUTHORITY h) Corporate authority may be classified into three classes namely: > Those expressly granted or authorized by law inclusive of the corporate charter or articles of incorporation; > Those impliedly granted as are essential or reasonably necessary to the carrying out of the express powers; > Those that are incidental to its existence. i) Section 36 to 45- POWER GRANTED BY LAW Section 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in accordance with the provisions of this Code; : 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 7. To purchase, receive, take or grant, hold; convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction. of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into merger or consolidation with other corporations as provided in this Code; 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shail give donations in aid of any political party or candidate or for purposes of partisan political activity; 6Arellano University Schoo! of Law 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. (13a) Section 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its ‘term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two- thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n) Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder’s meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation:and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders’ meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the..persons subscribing, the amount of capital stock or number of no-par.stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; 16Arellano University School of Law (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commissién, One of the duplicate certificates ‘shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. (17a) Section 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt. Section 4¢. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments ”Arellano University School of Law for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder’s or member's meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and- deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right ‘under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, ‘That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: L. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (a) Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified 78Arellano University School of Law by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non= stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stocicholders or members shall not be necessary. (17 1/2a) Section 43. Power to decldré dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on. the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two- thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the ‘board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n) Section 44. Power to enter into management contract. - No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1)'where a stockholder or stockholders representing the same interest of ‘both the managing and the managed corporations own: or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of theArellano University School of Law total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. ‘The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. () Section 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (n) Section 36 id ) y Where should the corporation be sued? principal office is important because it establishes the residence of the corporation and determining service of summons, venue of action it can be sued in the city or municipality where its principal office is found Principal office is also important for venue of meetings Non-stock corporation may provide in its by-laws that the venue of meeting be anywhere in the Philippines m) Upon whom service of summons be made? ad avyvv' Section 11. Service upon domestic, private juridical entity- when the defendant is a corporation, partnership or association organized under the laws of the Philippines with a juridical personality, service may be made upon the president, managing partner, general manager, corporate secretary, treasurer, or in house counsel, Delta motor vs. Mangosing strict compliance is necessary should be served to those named in the statute secretary of a dep't are not those inchided in the statute E.B. Villarosa vs. Benito decision En Banc repeals all other pronouncement section 13 Rule 14 was repealed the old rules was ambiguous and broad and at all time illogical the particular revision under Section 11 of Rule 14 was explained by retired Supreme Court Justice Florenz Regalado, thus: “soo the then section 13 of this Rule allowed service upon a defendant corporation to “be made on the president, manager, secretary, cashier, agent or any of its directors.” The aforesaid terms were obviously ambiguous and susceptible of broad and sometimes illogical interpretations, especially the word “agent” of 80‘ vv vo VYSVEVeVYN YE vy Arellano University School of Law the corporation. The Filoil case, involving the litigation lawyer of the corporation who precisely appeared to challenge the validity of service of summons but whose very appearance for that purpose was seized upon to validate the defective service, is an illustration of the need for this revised section with limited scope and specific terminology. Thus the absurd result in the Filoil case necessitated the amendment permitting service only on the in-house counsel of the corporation who is in effect an employee of the corporation, as distinguished from an independent practitioner.” notes: additional knowledge special appearance enter for that particular appearance you are not the counsel in the case would apply only if it does not involve an intra-corporate controversy (controversy between and among the stockholders) upon any of the statutory officers or officers fixed in the by-laws any secretary, any of the directors; any managers in the by-laws Seal merely ministerial or permissive Power to amend section 16 special 37,38,120 Power to adopt by-laws section 46-48 Power to issue or sell stocks and to admit members stock of stockholders and provision governing non-stock Power to acquire or alienate real or personal property is there any limitation? YES ‘Two specific limitation Section 36, as lawful transactions of business of the corporation may reasonably and necessarily require Constitution and law Luneta vs, A.D. Santos Importance of the purpose clause It confers and determine the limits the actual authority of the corporation. vv VV VvVVY vo Cannot have the power to acquire Cannot engage in land transportation Doctrine of limited capacity Gov't vs. El Hogar As the lawful transaction of its business may reasonably represent Director of Lands vs. CA Exception to the rule in the constitution, Alienable public land Converts the property to a private land automatically once converted it can now be registered Power to make donation Limitation Section 36 par.9 alArellano University School of Law Provided, That no corporation, domestic or foreign shall give donations in aid of any political party or candidate or for purposes of partisan political activity. > VVYVVVVVVVV @ 2 These are circumstances, however, under which a donation by a corporation may be to its benefit as a means of increasing its business or promoting patronage. Thus, paragraph 9 of section 36 expressly authorizes a corporation to make donations. The only limitations imposed are the following: ‘The donation must be “reasonable”; : It must be for public welfare, or for hospital, charitable, scientific, cultural or similar purpose; and, It shall not be in aid of political party or candidate, or for purposes of partisan political activity. Power to establish pension Include any act to promote and improve the convenience, welfare and benefit of the employees or offices Republic vs. Acoje While as a rule an ultra-vires act is one committed outside the object for which a corporation is created as defined by law, there are however certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation. Thus, it has been held that “although not expressly authorized to do so a corporation may become a surety where the particular transaction is reasonably necessary or proper to the conduct of its business,” and here it is undisputed that the establishment local post office is a reasonable and proper adjunct to the conduct of the business of appellant company. Indeed, such post office is a vital improvement in the living condition of its employces and laborers who came to settle in its mining camp which is far removed from the postal facilities or means of communication accorded to people living in a city or municipality. Power to exercise such other powers essential or necessary to carry out its purpose {implied power) Acts in the usual course of business; Acts to protect debts owing to the corporation; Embarking in a different business; Acts in part or wholly to protect or aid employees; and, Acts to increase business Teresa Electric and Power Co. vs. P.S.C. Examined the articles of incorporation to arrive at its decision National Power vs. Vera For purpose of prohibiting the NAPOCOR ‘The court must decide whether or not a logical and necessary relation exists between the act questioned and the corporate purpose expressed in the NPC charter Importance of PLACE of registration Residence 2Arellano University School of Law - Venue - Place of meetings -_ Place or registration of chattel mortgage 10. Powers vs. Marshall ae Power to extend its terms - Once its term expires, already dissolved automatically, thus can no longer ask for extension -_ After dissolution, it has 3 years to windup 12. What are the modes of increasing capital stock? 1, Increasing the par value of the existing number of shares without increasing the number of shares; 2. Increasing the number of existing shares without increasing the par value thereof; and, 3. Increasing the number of existing shares and at the same time increasing the par value of the shares. 13. Why a corporation increases it capital stock? - Generate funds, business expansion, or payment of liabilities, purposes of acquiring other business. (example: to buy cars for the officers, purpose of acquiring other business, expansion, other valid reasons) 14 How do you decrease capital stock and why a corporation decreases? - Reduce or wipeout existing deficit where no creditors would thereby be effected - When capital is more than ‘necessary to procreate the business or reduction of capital surplus - To write down the value of its fixed assets to reflect those present and actual © NOTE: any increase or decrease of capital stock requires approval of government agency like SEC it can never take place unless SEC approves the same 15. Relevance of decrease of capital? 1. To reduce or wipe out existing deficit where no creditors would thereby be affecte 2. When the capital is more than what is necessary to procreate the business or reduction of capital surplus; or, 3. To write down the value of its fixed assets to reflect there present actual value in case where there is a decline in the value of the fixed assets of the corporation. - Examples: Php 10M capital for grocery business, mayor didn’t want to issue license/permit because mayor has 3 other grocery stores, only allowed sari-sari store permit, reduce capital for sari-sari so that the money will not sleep in bank - Example: car rental agencies-Php 10M capital for 20 taxi’s, after some time each taxi is only 250K, nagmura ang taxi, to reduce capital is to show actual assets 16. Limitation imposed by law 3Arellano University School of Law = Decrease shall not in any way affect the rights of the creditors 17. Philippine Trust Company vs. Rivera = Without the appraisal of SEC, a decrease in capital stocks has no effect, ‘TRUST FUND DOCTRINE: - Subscription to capital stock of a corporation constitute a fund to which the creditors have a right to look upon for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. > Madrigal vs. Zamora - Decrease in capital has a subterfuge to evade payment - Thus not valid and effective - Must not prejudice creditors which includes the employees 18. Bond > Commonly understood as an obligation of a state, its subdivision or a private corporation, represented by a certificate or an instrument for the principal and by detachable coupons for the payment of interests. In its simplest term, it is one where an obligor obliges himself to pay a certain sum of money to another at a day named. > There are different kinds of bond but before they may be issued or floated by the corporation, the same must be registered and approved by the SEC subject to the rules and regulations that may be adopted by that agency. The procedure and requirements set forth in section 38 is the same as in increasing or decreasing the capital stock except that the certificate docs not have to state the matters required in sub-section 2 & 3 thereof. 19, Pre-emptive rights 1. A right granted by law to all existing stockholders of a stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective stockholdings, subject only to the limitations imposed under section 39 of the Code. - Internationally granted 20. Pre-emptive rights, why it is granted? - In order that the existing stockholders may maintain their proportionate right as not to dilute their right 21. Power to deny pre-emptive rights Section 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares’ of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt. 84Arellano University School of Law 22. May it be denied? How? - Yes, if provided by articles of incorporation or by an amendment - However, pre-emptive rights is unavailable to shares in trading in stock exchange otherwise stockholders must waive first their right before they may sell such. 23. Exceptions 1. When the shares to be issued is in compliance with laws requiring stock offerings or minimum stock ownership by the public 2. Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock either - In exchange.for property needed for corporate purpose or, - In payment of a previously contracted debt + The exceptions, however will not apply to stockholders of a close corporation by virtue of a subsequent and specific provision of the Code which provides that the “pre-emptive right of a stockholder in a close corporation shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services or in payment of a corporate debt, unless the articles of incorporation provide otherwise, if not entirely absolute, in that it extends to all issuance and disposition of shares - Such right of pre-emption miay be lost by waiver of the stockholder, expressly or impliedly by his inability or failure to exercise it after having been notified of the proposed issuance or disposition of shares 24, When is it unavailable? = In shares traded openly ‘in stock exchange/market 25. Is it applicable to close corporations? + See section 96, close corporations must provide it first on its articles of incorporation, that its articles does not really deny such pre-emptive rights. 26. Section 102, will not apply to close corporations ‘The right of pre-emptive rights is absolute in close corporations “All issues or depositing shares of any class” form part of ACS > Certain instances when a stockholder may nevertheless be unable to exercise this right + Issued for public ownership - Issued in good faith, with approval of 2/3 of outstanding capital stock either a) in exchange for property needed or b) for payment of a previously contracted debt > Pre- emptive rights of stockholders in ordinary stock corporations may be denied - if the shares are to be issued in compliance with laws requiring stock offering or minimum stock ownership by the pubic ~ In exchange for property needed for corporate purposes - In payment of previously contracted debtsArellano University School of Law > This rule, however, does not apply in a close corporation as the pre- emptive rights of the stockholders thereof is broadened to include all issues without exceptions unless, of course, denied or limited by the articles of incorporations. Section 102 provides: Section 102. Pre-emptive right in close corporations. - The pre- emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise. > Denial will not apply to a close corporation, ABSOLUTE section 96 - Definition and Applicability of Close Corporation. May a stock holder in a close corporation insist in the exercise of his pre-emptive rights? Yes, section 102 What type or shares are covered by pre-emptive rights? Does it include those originally unsubscribed? NO. Benito vs. SEC - Will the stockholders be able to exercise their pre-emptive right with respect to the old unissued shares? No. - Pre-emptive rights is applicable only to new issued shares and not to the old unissued shares because it is presumed that the original subscribers is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares - When the shares, left unsubscribed are re-offered, he cannot therefore claim. DILUTION OF INTEREST - Will the acquiring purchaser be liable for debts of the former corporation? - Generally no, corporate entity theory because there may be instances when purchasing corporation may be held liable - May a corporation acquire its own shares? - Yes - Is there any restriction provided for by law in reacquiring its own shares? - Yes, it must have been unrestricted retained earnings appearing in the books of corporation - A corporation can never acquire its own shares if it has no unrestricted retained earnings - False, exception close corporation and redeemable shares v tyyve EXAMPLE: ACS 2M SUBSCRIBED 1M. PAID UP 1M 1. 100K 2. 100K 86Arellano University School of Law TO 10 100K > If 1-5 became 200K each, may 6-10 demand the exercise their pre- emptive right? - YES > May 1-5 subscribe to the unsubscribed capital stock to the exclusion of 6-10? - Ifa corporation makes 2M unrestricted retained earnings, it is the shares and not the number of persons that matters > May 6-10 complain for a dilution of their interest? - YES, it’s an internationally recognized right because it includes “all issues and disposition of shares of any class” and all kinds of shares new or old - If the remaining unsubscribed shares are issued, it’s an issuance of any class > May a corporation sell/dispose all or substantially all of its corporate assets and liabilities? - YES - 1) RESOLUTION 2) AUTHORIZATION 3) RATIFICATION 4) PRIOR WRITTEN NOTICE 5) SALE SUBJECT TO PROVISIONS OF EXITING LAWS 6) DISSENTING STOCKHOLDERS HAVE THE RIGHT TO EXERCISE THEIR APPRAISAL RIGHT > Ifa corporation sells substantially all of it assets and properties, will the buyer assume liability? - NO, EXCEPT “ 1. Express or implied agreement to the purchase 2. Where the transaction amounts to consolidation or merger of the corporations 3. When purchasing corporation is merely a continuation of the selling corporation 4. Where the transaction is entered into fraudulently in order to escape liability for such debt > Legitimate purpose: for a corporation to reacquire its own shares - Limitation: it must have surplus/unrestricted retained earnings ~ Exception: may redeem irrespective of unrestricted retained earnings 1. Exercise of stockholders’ right to compel “close corporation” to purchase his shares 2. Where corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock ACS 1M SUBSRIBED 1M PAID-UP 4M. ‘ASSETS 500K 1M PROFITS - 500K LIABILITIES a7Arellano University Schoo! of Law 500K RESERVES IN A CLOSE CORPORATION IT CAN USE THIS TO REACQUIRE ISSUED STOCKS X- REALTY CORPORATION vvv v twiv vovvy * THE ONLY PROPERTY OF THE CORPORATION = BOARD OF DIRECTORS DECIDED TO SELL IT * Will it need the approval of the stockholders? NO, if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business If X is a manufacturing company, then it can sell its only property upon approval of the stockholders because it will render itself capable of continuing its business, BUT if the proceeds will be used to purchase a better one for the continuance of its business, then it does not need the approval of the stockholders Conditions for the valid exercise of this power are the following Resolution by the majority vote of the board of directors/trustees Authorization from the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members; ‘The ratification of the stockholders or members must be made at a meeting duly called for that purpose Prior written notice of the proposed action and of the time and place of meeting must be made addressed to all stockholders of record, either by mail or personal service; The sale of the assets shall be subject to the provisions of existing laws on illegal combinations and monopolies Any dissenting stockholder shall have the option to exercise his appraisal right DP vs. CA Consent of the members was not secured Edward Nell Co. vs. Pacific Farms Generally where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor, except: Where the purchaser expressly or impliedly agrees to assume such debts; Where the transaction amounts to a consolidation or merger of the corporations; Where the purchasing corporation is merely a continuation of the selling corporation; Where the transaction is entered into fraudulently in order to escape liability for such debts. Power to acquire own shares . Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to 88Arellano University School of Law the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1, To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (a) B. The corporation must at all times have “unrestricted retained earnings” te exercise this corporate power C. Steinberg vs. Velasco - For as long as there are debts and liabilities, a corporation may not reacquire its shares (subject to exceptions) - Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare dividends to stockholders when the corporation is insolvent. > Power to invest funds Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a) + For any other purpose other than the primary purpose, stockholder’s consent or approval is necessary - Thus, if it’s for the secondary purpose, it is necessary - If it’s in connection with the primary purpose, only board resolution is necessary > Requirements and steps to be followed for a valid investment of corporate funds are: 1, Resolution by the majority of the board of directors or trustees; 89ae v tyye Arellano University School of Law Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations; ‘The ratification must be made at a meeting duly called for that purpose; Prior written notice of the proposed investment and the time and place of the meeting shall be made, addressed to each stockholder or member by mail or by personal service, and; ‘Any dissenting stockholder shall have the option to exercise his appraisal right Dela rama vs. Ma-ao Sugar There is a substantial and not remote connection between the sugar bags and the sugar manufacture, thus stockholder’s approval is not necessary for validity A private corporation, in order to accomplish its purpose as stated in its articles of incorporation, and imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge, or dispose of shares bonds, securities and other evidences of indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not need the approval of the stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary. Gokongwei vs. SEC Investments made by SMC is necessarily connected with its primary purpose and this was ratified in a meeting Submission of previous action is a sound corporate practice Redeemable shares ~ Closed corporation (see section 105) For any reason, compel the value of shares “withdrawal shares” provided corporation has sufficient funds to cover its debts and liabilities Section 105. Withdrawal of stockholder or dissolution of corporation. - In addition and without prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution of such corporation whenever any of acts of the directors, officers or those in contro! of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted. If shares are reacquired, what happens? It becomes treasury sharesArellano University School of Law + Stockholder’s consent/ approval is not necessary and mere board action is sufficient if in accordance with primary purpose + The logical relation of act done and primary purpose of corporation and ‘between the board of directors to undertake submission of acts is a sound corporate practice > Dividends Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n) > What are dividends? - Corporate profits set aside, declared and ordered by the Board of Directors to be paid to the stockholders. - What are property dividends? - Those paid in property surplus - Like tables and chairs? Can tables and chairs make surplus profits? - No, they do not make surplus, bonds, etc. - Where should dividends come from? + Stock dividends are declared as stocks coming from corporation - Who declares dividends to be declared? Do stockholders have any say? = Board of Directors, if stock approval of 2/3 outstanding capital stock ACS-1M SUB-IM P.U.-IM IM-U.RE. (surplus profits of the corporation) 1-100k 2-100k To : aArellano University School of Law 10-100 1M Board decides to declare 1M, how much will each receive? May the board declare stock dividend NO. that would be over issuance of shares, violation of securities regulation code It must have a free portion The corporation may increase its capital Z co. 1M to X Co. is 2/3 of X Co. Stockholders reacquired? No, because in property 2/3 is not required What is the effect of declaration of dividends with regards to the assets of a company? As compared to stock dividends, the declaration of cash or property dividends have the effect of reducing corporate assets to the extent of dividends declared. Neither would stock dividends increase the proportionate interest of the stockholders of the corporation although it will have the effect of increasing the subscribed and paid-up capital of the corporation. It gives the stockholders nothing in the way of distribution of assets but merely divides his existing shares into smaller units. Earnings belong to the corporation until declared or given Revocation No revocation of dividend may be has unless it has not been officially communicated to the stockholders or is in the form of stock dividends which is revocable at any time prior to distribution. Stock dividends- no reduction, you capitalize your restricted retained earnings, what is issued is a piece of paper. The restricted earnings remain in the corporation Cash and property- reduces corporate assets Stock dividends increase corporate assets? No, it will only have the effect of increasing the subscribed and paid-up capital of the corporation Will there be a corresponding increase in their proportionate interest? REMAINS THE SAME Exception: when stock dividends will result in a fractional share ACS-2M 1-100K 200 (10%) *VOTING AND DIVIDEND RIGHTS STILL THE SAME SUB-IM TO 10% PU-1M 10-100K ACS 2M SUB 1M PU 1M IM RE 1 100K 2 100KArellano University School of Law TO 10 100K 1M > May they be compelled? - NO. You cannot declare if it does not come from unrestricted retained earnings. > 1M-U.R.E. (is it true there is no way to compel?) > 2M-U.RE. > May they be compelled to declare dividends - Mandatory if earned, the board iriéy be compelled to declare dividends - ifexceeds 100% of the paid-up capital the boards may be compelled ACS 2M IM URE. SUB 1M PU 800K 1-100K SOK PU 2-100K 50K TO 10-1L00K 1M > Will 1 and 2 receive full amount of dividends? - YES. They are entitled however if they are declared delinquent, the amount due them shall first be applied to his delinquency plus expenses. > Delinquency occurs, you are called to pay, but you failed to pay. In case of stock dividend, the delinquent stock holder will not be entitled thereto until he has paid his subscription in full. > Are non-stockholders éntitled to receive dividends? + No, tock dividends are civil fruits of the original investment, and to the owners of the shares belong the civil fruits. >» How did the court decide dividends in the case of Neilsen - Stock dividends cannot be issued to a person who is not a stockholder in payment of services rendered. - Whether cash, property or. stock, only stockholders may receive dividends. Dividends are fruits of investments. They come from the U.R.E. or surplus profits of the corporation. ACS 2M 1M U.RE. SUB 1M JULY 24 DECLARATIONJULY 31 PU 1M - 100K 100T JULY 26-Y (NEW ONE WAS DECLARED TO Y) JULY 30- 100K TO HAVE THE TRANSFER RECORDED 10 100K 1M 1. Insofar as 1 and Y who has a better right? Already declared, but not yet paid?Arellano University School of Law Right to receive vest upon declaration. Who ever owns at the time of declaration owns the dividends Unless there is a stipulation to the contrary 2. TRUST FUND DOCTRINE ‘The power to declare it if paid-up capital is not maintained or is impaired Trust fund must be kept intact for the protection of creditors who have the right to rely on such subscription and the paid-up capital for the satisfaction of their claims Cannot accumulate surplus unreasonably Basis is the paid-up capital Entitled to dividends Irrespective of whether the subscription is full Illegally declared Declare dividend with the belief that it formed part of the U.R.E., but yun pala sa capital Directors are not liable, unless sec31 acted in bad faith or gross negligence in the conduct of corporate affairs Directors even if acting in behalf of the corporation, may still be held solidarily liable Power to enter into management contract New provision Section 44. Power to enter into management contract. - No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock ccrporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two- thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. ‘The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of 94vvv Arellano University School of Law natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. (n} ‘The requirement for a valid management contract are as follows: Resolution of the board of directors Approval by the stockholders holding or representing a majority of the outstanding capital stock or majority of the members in case of non- stock corporation of both the managing and the managed corporation The ‘approval of the stockholders or members must’ be made at the meeting called for that purpose ‘The contract shall not be for a period longer than 5 years for any one term, except those which relate to exploration, development or utilization of natural resources which may be entered into for such periods as may be provided by pertinent laws and regulations Every corporate act emanates from the BOARD Is the voting requirements ofa majority stockholder ABSOLUTE? Not only a majority but 2/3 of the dutstanding capital stock or 2/3 of the members in a non-stock corporation would be required for the approval of a management contract in the following instances: Where the stockholders representing the same interest of both the managing and managed corporation own or control more than 1/3 of the total outstanding capital stock of the managing corporation; and Where a majority of the members of the board of directors of the managing corporation also constitute a majority of the directors of the managed corporation Where the contract would constitute the management or operation of all or substantially all of the business of another corporation, whether such contracts are called service contracts. If it will not constitute the management of all or substantially all of the business of another corporation the first paragraph of section 44 will apply and not that of the second, that is, only the vote of the stockholders holding or representing at least a majority of the outstanding capital stock or majority of the members in ‘the case of non-stock corporation will be required. How long? Not longer than 5 years for any one term Exception: exploration, development or utilization of natural resources What is an ultra-vires act or contract? Doctrine of limited capacity. Corporation can do such acts and things as it is allowed to do Acts beyond it will be ultra vires, allowing a collateral attack If not illegal per se merely voidable. Can be ratified expressly or impliedly or even stopped as equitable grounds Ultra-vires acts which are not illegal per se may become binding and enforceable either by satisfaction, estoppels or equitable grounds 95Arellano University School of Law Consequences of ultra-vires acts? On the corporation itself The proper forum, in accordance with the provisions of PD 902-A, as amended and R.A, No, 8799 may suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of the corporation for serious misrepresentation as to what the corporation can do or is doing to the great damage or prejudice of the general public On the rights of the stockholders A stockholder may bring either an individual or derivative suit to enjoin a threatened ultra-vires act or contract. If the act or contract has already been performed, a derivative suit for damages against the directors may be filed, but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into the contract. On the immediate parties ‘The courts have not agreed as to the legal effect of a corporate contract outside of its authorized business but Ballatine gives the following summary of the doctrines evolved: If the contract is fully executed on both sides, the contract is effective and the courts will no interfere to deprive either party of what has been acquired under it If the contract is executory on both sides, as a rule, neither party can maintain an action for its non-performance Where the contract is executor on one side only, and has been fully performed on the other, the courts differ as to whether an action will lie on the contract against the party who has received benefits of performance under it. Majority of the courts, however, hold that the party who has received benefits from the performance is estopped to set up that the contract is ultra-vires to defeat an action on the contract. This is more in conformity with the doctrine that no person shall be allowed to enrich himself at the expense of another Privano vs. Dela Rama Court looked into the purpose clause ‘The purpose clause empowers and limits Articles likewise provide that it may deal with any of its money “deal” broad enough to cover the donation it is not then ultra-vires Not illegal per se hence (law of agency) excess powers are subject to ratification Ratified by passing the resolution in question Carlos vs. Mindoro sugar Co. PTC- trust company as such, it also has implied powers as to make them more attractable Not ultra-vires in pursuance of its legitimate business Japanese war notes vs. SEC Non-stock corporations cennot make profits and distribute profits to its shareholders Ultra-vires because Japanese war notes is a non-stock corporation 9%BY. Arellano University School of Law > Crisologo-Jose vs. CA (ALWAYS ASKED BY DEAN SUNDIANG) ~ The negotiable instruments law which holds an accommodation party liable on the instrument to a holder for value, although such holder at the time of taking the instrument knew him to be only an accommodation party, does not include nor apply to corporations which are accommodation parties. This is because the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation of another is ultra-vires - Corporate officers may guarantee or endorse an accommodation only if specifically authorized Section 36 paragraph 11 Section 10 Section 14 and 15 4. Corporate powers depend on the agreement of the stockholders rather than any director > It may sell and it may guarantee, contract not necessarily illegal, it will in the absence of proof to the contrary presumed within its power. Corporations are presumed to contract with in its powers- CARLOS CASE - Purpose clause may be stretched to cover PLDT internet. It may be within its business. + May it sell computers? NO! other line of business. Its trading! -LAWS: 5. By-Laws = Rule adopted by the corporation for its internal governance 6. Is the adoption of by-laws mandatory? 7. When should the by-laws be adopted or filed? Can it not be adopted earlier? ~ After incorporation- within 1 month (emanates from the BOARD) + Prior-more convenient (signed by the incorporators) > Who will sign the adoption clause? + Majority of the stockholders or members attested to by the corporate secretary > What happens if the corporation fails to adopt the by-laws from the tie provided by the law? Would there be an automatic revocation or suspension? > Proper notice and hearing, must first be complied with > Loyola grand villas vs. CA + Not the SEC, but the HIGC - Must - not always imperative + Filing of by-laws mandatory - Empowered by SEC + Merely a ground, there must be proper notice and hearing - Not affect the status of the corporation as a juridical person = Subject the corporation to a fine, as may be issued by the SEC > When do by-laws become effective? 7Arellano University School of Law Until and unless the SEC gives it stamped of approval Suspension of any government agency. The permission must first be secured- section 46 Elements of a valid by-law It must not be contrary to law, public policy or morals; It must not be inconsistent with the:articles of incorporation; It must be general and uniform in its effect or applicable to all alike or those similarly situated; It must not impair obligations and contracts or vested rights; and’ It must be reasonable. Must not be inconsistent with existing laws. Not be inconsistent with articles of incorporation By-laws None filing would not affect the status of the corporation, Loyola grand villas case ‘The word “must” is not always imperative Stockholders are conlusively presumed to know the provisions of the by- laws : How about 3 persons? NO. unless there is actual knowledge of the same they are not presumed to know of the provisions of the by-laws Fleischer vs. Botika Nolasco Shares of stock are personal properties Shares of stock may transfer to whom ever he wishes ‘The by-laws is contrary to law Articles of incorporation May provide reasonable restriction By-laws merely internal laws Articles is the contract between and among the parties and corporation Gov’t vs. El Hogar Did the court categorically ruled here that the provision in the S® cause of action is valid? i Rules governing equity, considering the fact that there was always lack of quorum Section 29 BOD if still constituting a quorum may fill up a vacancy other than by removal, etc. Gokongwei vs. SEC Section 48 allows a corporation to amend it by-laws Section 47 of the code, the by-laws may provide for the qualification and disqualification It cannot be said Gokongwei has a vested rights Prevent directors from taking advantage of position to promote his individual interest to the damage of others ‘The validity or reasonableness of a by-laws is a question of law 8Arellano University School of Law - Subject to the limitations that reasonableness of a by-law is a mere matter of judgment = Rule of the majority and not the tyranny of the minority > May the by-laws be amended altered or appealed? YES. HOW? Two modes a. By a majority vote of the directors or trustees and the majority vote'of the outstanding capital stock or members in a non-stock corporation, at a regular or special meeting called for that purpose; b. By the board of directors alone when delegated by 2/3 of the outstanding capital stock or 2/3 of the members in a non-stock corporation. - This delegated power, however, is considered revoked whenever a majority of the outstanding capital stock or members shall so vote at a regular or special meeting. > If it is to be amended what is the proceeding? - Section 48 2°4 paragraph provides: Section 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. ‘The owners of two-thirds (2/3) of the outstanding capital stock or two- thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by- laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenevér any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. (22a and 23a) > Baretto vs. La Previsora = Any corporate act emanates from the board - Directors themselves cannot amend the by-laws if they were not granted the same é > Section 48 > The power granted is not subject to revocation T or FP - FALSE : _ 99Arellano University School of Law If the by-laws are amended when will they become valid? Upon issuance of the SEC that they are not inconsistent What if the SEC failed to act within 10 months without fault attributable to the corporation? T or F any amendment of the by-laws will never become valid until it gives its stamp of approval even after 1 year TRUE. Articles of incorporation and by-laws are different MEETINGS Meetings Meetings of stockholders 1. Date fixed in the by-laws or by-law Meetings of director or trustees Mectings are regular and special Meetings of stockholders What is regular and what is special? When are regular meetings of the stockholders held? Fixed date provided by the by-laws What if there is no date? April Why april? Point in time the audited financial statement have been prepared 100