Corporation Law Reviewer

Prepared by: Cornel and De Paz

TRANSFER AND OTHER DEALINGS OF SHARE SEC 62

One of the fundamental rights of a stockholder is his right to sell or transfer his shares of stock. The free-
transferability of the units of ownership in a corporate setting is one of the attractive features of the
corporation.

It is well-settled that shares of stock in a corporation are personal property and the owner thereof has an
inherent right, as an incident of his ownership, to transfer the same at will

Requisites under Sec 62

1. The certificate must be signed by the president or vice-president, countersigned by the secretary or
assistant secretary, and sealed with the seal of the corporation. A mere typewritten statement advising
a stockholder of the extent of his ownership is a corporation without qualification and/or
authentication cannot be considered as a formal certificate of stock;

2. Delivery of the certificate is an essential element of its issuance. Hence, there is no issuance of a stock
certificate where it is never detached from the stock books although blanks therein are properly filled
up if the person whose name is inserted therein has no control over the books of the company;

3. The par value, as to par value shares, or the full subscription as to no par value shares, must first be
fully paid;

4. The original certificate must be surrendered where the person requesting the issuance of a certificate
is a transferee from a stockholder

Sec. 62 covers only Transfers and Disposition of Shares, not Encumbrances thereof
Encumbrance is not the transfer referred to in [Section 63 of the Corporation Code], which transfer should be
entered and noted upon the books of the corporation in order to be valid, and which, as has already been
said, means the absolute and unconditional conveyance of the title and ownership of a share of stock.

When it comes to mortgages and other encumbrances covering shares of stock "which are not a complete and
absolute alienation of the dominion and ownership thereof, its entry and notation upon the books of the
corporation is not necessary requisite to its validity.

When Shares Covered by Stock Certificate

A transfer of shares covered by Stock Certificate has to be entered on the books of the corporation to be
binding to third persons. A transfer of shares that is not recorded or entered on the books are valid as
between to the parties only.

All transfers of shares should be entered, as here required, on the books of the corporation. And it is equally
clear to us that all transfers of shares not so entered are invalid as to attaching or execution creditors of the
assignors, as well as to the corporation and to subsequent purchasers in good faith, and, indeed, as to all
persons interested, except the parties to such transfers. All transfers not so entered on the books of the
corporation are absolutely void; not because they are without notice or fraudulent in law or fact, but because
they are made so void by statute.

When Shares Not Covered by Certificates

Section 62 of the Corporation Code that provides that "No shares of stock against which the corporation holds
an unpaid claim shall be transferable in the books of the corporation.
Without the stock certificate, which is the evidence of ownership of corporate stock, the assignment of
corporate shares is effective only between the parties to the transaction." and that "the delivery of the stock
certificate, which represents the shares to be alienated, is essential for the protection of both the corporation
and its stockholders

Assignment of Stock Certificate by way of Security Equitable Mortgage

A mortgage or pledge of shares of stock covered by a certificate is valid and binds third parties, when
certificate of stock has been endorsed and delivered to the creditor, notwithstanding the fact that the contract
does not appear in a public instrument.

Shares held in Trust

The approval of the beneficial owners of the shares held in trust is necessary for the validity and effectivity of
the transfer of the stock certificates.

ACQUISITIONS AND TRANSFER

Levels:

1. Asset-Only
The purchaser is only interested in the "raw" assets and properties of the business, perhaps to be used
to establish his own business enterprise or to be used for his on-going business enterprise. In such an
acquisition, the purchaser is not interested in the entity of the corporate owner of the assets, nor of
the goodwill and other factors relating to the business itself.

2. Business Enterprise
Purchaser's interest goes beyond the assets or properties of the business enterprise. The purchaser’s
primary interest is essentially to obtain the “earning capability” of the venture. However, the purchaser
in such is not interested in obtaining the juridical entity that owns the business enterprise, and
therefore purchases directly the business from the corporate entity.

3. Equity Level
Constitutes looking at the entirety of the business enterprise as it is owned and operated by the
corporation. The purchaser takes control and ownership of the business by purchasing the
shareholdings of the corporate owner. The control of the business enterprise is therefore indirect, since
the corporate owner remains the direct owner of the business, and what the purchaser has actually
purchased is the ability to elect the members of the board of the corporation who run the business.

General Rule on Obligation of Transferee for Business Debts of the Transferor

GR: Where one corporation sells or otherwise transfers all of its assets to another corporation, the transferee
is not liable for the debts and liabilities of the transferor

EX:
(a) Where the purchaser expressly or impliedly agrees to assume such debts;

(b) Where the transaction is entered into fraudulently in order to escape liability for such debts;

(c) Where the purchasing corporation is merely a continuation of the selling corporation; and

(d) Where the transaction amounts to a consolidation or merger of the corporation

The following rules apply to the enforceability of liabilities against the transferee regardless of the separate
juridical personality of the transferor and transferee:

(a) In a pure assets-only transfer, the transferee is not liable for the debts and liabilities of the transferor,
except where the transferee expressly or impliedly agrees to assume such debts or when there was fraud;

(b) In a transfer of the business enterprise, the transferee is liable for the debts and liabilities of the
transferor; and
(c) In an equity transfer, the transferee is not liable for the debts and liabilities of the transferor, except where
the transferee expressly or impliedly agrees to assume such debts.

MERGER AND CONSOLIDATION

MERGER CONSOLIDATION
A union whereby The union of two or
one or more existing more existing
corporations are corporations to form
absorbed by another a new corporation
corporation which called the
survives and consolidated
continues the corporation.
combined business.
All constituent All the constituent
corporations, except corporations are
the surviving dissolved and
corporation, are absorbed by the new
dissolved consolidated
enterprise

Effects of Merger/Consolidation

(a) The constituent corporations shall become a single corporation which, in case of merger, shall be the
surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated
corporation designated in the plan of consolidation;

(b) The separate existence of the constituent corporations shall cease, except that of the surviving or the
consolidated corporation;

(c) The surviving or the consolidated corporation shall possess all the rights, privileges, immunities, and
powers and shall be subject to all the duties and liabilities of a corporation organized under this Code;

(d) The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and
franchises of each constituent corporation; and all real or personal property, all receivables due on whatever
account, including subscriptions to shares and other choses in action, and every other interest of, belonging
to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and

(e) The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of each
constituent corporation as though such surviving or consolidated corporation had itself incurred such
liabilities or obligations; and any pending claim, action or proceeding brought by or against any constituent
corporation may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors
or liens upon the property of such constituent corporations shall not be impaired by the merger or
consolidation.

Effects of Merger/Consolidation on Employees of Constituted Corporations

To Asset-Only Transfer
The transferee is not bound to retain the employees of the transferor, since the former does not really step
into the shoes of the latter. In addition, the transferee is not liable for any of the claims against the transferor,
even if the sale of the business assets of the transferor should result in the shutting down of the transferor's
operations and the laying-off of the transferor's employees.

The rule that unless expressly assumed, labor contracts such as employment contracts and collective
bargaining agreements are not enforceable against a transferee of an enterprise, labor contracts being in
personam, thus binding only between the parties. A labor contract merely creates an action in personam and
does not create any real right which should be respected by third parties.

To Business Enterprise Transfer

In a business-enterprise transfer, the transferee should be bound to retain the services of the employees of
the business that it has acquired, although it is not liable for the violations that the transferor had committed
in the past and for which the transferor remains solely liable.

To Equity Transfers
Since the only result of the transaction is a change in the ownership or control of the corporate employer, the
employees remain with the corporate employer in exactly the same manner as before the equity transfer, and
therefore the purchaser does not assume any personal liability to the employees.

Spin Offs
A spin-off has the opposite effect of merger or consolidation, whereby a department, division or portions of the
corporate business enterprise is sold-off or assigned into a new corporation that will arise by the process
which may constitute it into a subsidiary of the original corporation.

NON-STOCK CORPORATION

Definition under Sec 86

One where no part of its income is distributable as dividends to its members, trustees, or officers: Provided,
That any profit which a nonstock corporation may obtain incidental to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was
organized, subject to the provisions of this Title.

Eleemosynary Purpose under Sec 87

Nonstock corporations may be formed or organized for charitable, religious, educational, professional,
cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title
governing particular classes of nonstock corporations

Nature of Membership
Membership in a non-stock corporation, and all rights arising there from, are personal and non-transferable,
unless the articles of incorporation or the bylaws provide otherwise.
Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or
the by-laws.

Termination of membership shall have the effect of extinguishing all rights of a member in the corporation or
in its property, unless otherwise provided in the articles of incorporation or the by-laws.

The SEC has rendered an opinion that juridical persons may be members of a non-stock corporation,
provided that a provision for the classification of members shall include duly designated or authorized
representatives of juridical persons as members of the corporation, for purposes of qualifying them as
incorporators.

Right to Vote under Sec. 88

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 bylaws. Unless so limited, broadened, or denied, each member,
regardless of class, shall be entitled to one (1) vote.

Unless otherwise provided in the articles of incorporation or the bylaws, a member may vote by proxy, in
accordance with the provisions of this Code. The bylaws may likewise authorize voting through remote
communication and/or in absentia.

Election and Term of Trustees under Sec. 91

The number of trustees shall be fixed in the articles of incorporation or bylaws which may or may not be more
than fifteen (15). They shall hold office for not more than three (3) years until their successors are elected and
qualified. Trustees elected to fill vacancies occurring before the expiration of a particular term shall hold office
only for the unexpired period. Except with respect to independent trustees of nonstock corporations vested
with public interest, only a member of the corporation shall be elected as trustee. Unless otherwise provided
in the articles of incorporation or the bylaws, the members may directly elect officers of a nonstock
corporation.

Place of Meetings under Sec 92

The bylaws may provide that the members of a nonstock corporation may hold their regular or special
meetings at any place even outside the place where the principal office of the corporation is located: Provided,
That proper notice is sent to all members indicating the date, time and place of the meeting: Provided, further,
That the place of meeting shall be within Philippine territory.

Rules of Distribution under Sec 93

The assets of a nonstock corporation undergoing the process of dissolution for reasons other than those set
forth in Section 139 of this Code, shall be applied and distributed as follows:

(a) All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate
provision shall be made therefor;

(b) Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which
condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with
such requirements;

(c) Assets received and held by the corporation subject to limitations permitting their use only for charitable,
religious, benevolent, educational or similar purposes, but not held upon a condition requiring return,
transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one (1) or more
corporations, societies or organizations engaged in activities in the Philippines substantially similar to those
of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter;

(d) Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance
with the provisions of the articles of incorporation or the bylaws, to the extent that the articles of
incorporation or the bylaws determine the distributive rights of members, or any class or classes of members,
or provide for distribution; and

(e) In any other case, assets may be distributed to such persons, societies, organizations or corporations,
whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this
Chapter.

CONVERSION OF NON-STOCK CORPORATION

TO STOCK CORPORATION

Rule: an existing stock corporation may be converted into a non-stock corporation by mere amendment of its
articles of incorporation, an existing non-stock corporation cannot be converted into a stock corporation by
the simple process of amending its articles of incorporation.

The SEC has held that for purposes of transformation, it is fundamental that the non-stock corporation must
be dissolved first under any of the methods allowed by law and thereafter, the members may organize a stock
corporation directed to bring profits or pecuniary gains to themselves.

The Corporation Code prohibits a non-stock corporation during its corporate life from distributing any part of
the profit or dividends to the members, officers or trustees; and the remaining assets of the corporation can
only be distributed to the members only upon dissolution.
The amendment of the articles of incorporation to convert the non-stock corporation does not seek to dissolve
the corporation but to change it nature to stock corporation, the crediting of the member's equity to
stockholders' equity would constitute a distribution of the profits or dividends of the corporation to the
members which is prohibited by the Corporation Code.

Foundation
Foundations are essentially non-stock corporations governed by the same Title XI of the Code. What therefore
makes foundations different from regular non-stock corporations are the privileges granted to it by special
laws, essentially in the field of Taxation.

With respect to corporate powers and capabilities, and rules on internal management and membership
relations, there are no distinctions between foundations and regular non-stock corporations, and there is no
advantage enjoyed in this realm by foundations over regular nonstick corporations. In fact, a foundation
would suffer a diminution of the extent of power by which to distribute its net assets in the event of
dissolution, as compared to a regular non-stock corporation.
In the realm of income taxation, both a foundation and a non-stock corporation can equally enjoy tax-exempt
status.
When it comes to charitable contributions, a foundation is limited in the manner by which it disburses the
same by the 30% limitation on its administrative expenses, whereas no such limitation applies to regular non-
stock corporations.

In addition, both the donors to, and the management of, foundations are saddled with reportorial
requirements on donations given and received, as the case may be. On the other hand, because donations to
foundations which have qualified as donee-institutions are deductible in full, there may be greater motivation
from benefactors to give to foundations rather than to a regular non-stock corporation.