Pre-week

Kinds of Corporations

1. Stock Corporations

Nature:

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. (Sec. 3, R.A. No. 11232)

Those who compose:

Stockholders who may be:

Corporators – those who compose a corporation, as stockholders or shareholders are or

Incorporators - those stockholders members mentioned in the AOI as originally forming

and composing the corporation and who are signatories thereof. (Sec.5, R.A. No. 11232)

Governing Body: Board of Directors

Shares of Stocks: Yes. The shares in stock corporations may be divided into classes or
series of shares, or both. The shares or series of shares may or may not have a par value.

Classes of Shares:

Preferred shares of stock are those which may be given preference in the distribution of
dividends and in the distribution of corporate assets in case of liquidation, or such other
preferences. (Sec.6, R.A. No. 11232)

NOTE: Common Shares are one issued by the corporation as voting shares.

Founder’s Shares may be given certain rights and privileges not enjoyed by the owners
of other stocks. (Sec. 7, R.A. No. 11232)

Redeemable shares are those shares which may be purchased by the corporation from
the holders of such shares upon the expiration of fixed period, regardless of the
existence of unrestricted retained earnings in the books of the corporation. (Sec. 8, R.A.
No. 11232)

Payment Dividend

Yes. Dividend payment may be in the form of :

Cash
Property
Stock

Before a stock corporation can pay dividend, the following requirements must be
complied:

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 For Cash Dividend - there must be approval by a majority of the board of directors;

For Stock Dividend – there must be approval by a majority of the board of directors; and

There must be approval of stockholders representing at least two-thirds (2/3) of the

outstanding capital stock at a regular or special meeting duly called for the purpose.

NOTE: The law provides that board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings of the corporation.

Basis of dividend payouts shall be the stockholder's outstanding stock held by him as
appearing in the books of the corporation. (Sec. 42, R.A. No. 11232)

2. Non-stock Corporation

Nature: is a corporation where no part of its income is distributable as dividends to its

members, trustees, or officers. (Sec. 86, R.A. No. 11232)

Those who compose: Members

Governing Body: Board of Trustees

Shares of Stocks: None

Payment of Dividend: No

3. Educational Corporations

Nature: those established for the purpose of providing educational or academic

services. Education corporations shall be governed by special laws and by the general
provisions of the Revised Corporation Code. (Sec. 105, R.A. No. 11232)

Those who compose:

Members (for Non-Stock)

Stockholder for stock corporations

Governing Body:

Board of Trustees for educational institutions organized as non-stock corporations

Board of Directors for educational institutions organized as stock corporations

Shares of Stocks:

Yes (for educational institutions organized as stock corporations)

No. (for educational institutions organized as non-stock corporations)

Payment of Dividends:

Yes (for educational institutions organized as stock corporations)

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 No. (for educational institutions organized as non-stock corporations)

4. Close Corporation

Nature:

A corporation whose articles of incorporation provides that:

a) 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);

b) all the issued stock of all classes shall be subject to one (1) or more specified
restrictions on transfer permitted by law; and

c) the corporation shall not list in any stock exchange or make any public offering of its
stocks of any class. (Sec. 95, R.A. No. 11232)

Those who compose: Stockholders

Governing Body: Board of Directors

Shares of Stocks: Yes

5. Corporation Sole

Nature:

A corporation established for the 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.

(Sec.108, R. A. No. 11232)

Corporation Sole vs. Corporation Aggregate

A corporation sole is "one formed by the chief archbishop, bishop, priest, minister, rabbi
or other presiding elder of a religious denomination, sect, or church, for The purpose of
administering or managing, as trustee, the affairs, properties and temporalities of such
religious denomination, sect of church."

A corporation aggregate formed for the same purpose, on the other hand, consists of
two or more persons.

(Iglesia Evangelica Metodista en las Islas Filipinas vs. Lazaro, G.R. No. 184088, July 6,
2010)

Shares of Stock : None

Payment of Dividend: No

6. One Person Corporation

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 Nature:

A corporation with a single stockholder.

(Sec. 116, R.A. No. 11232)

Those who compose: Single Stockholder

Peculiarity

The single stockholder shall be the sole director and president of the OPC. (Sec. 121 R.
A. 11232)

Only a natural person, trust, or an estate may form a One Person Corporation. (Sec. 116,
R. A. No. 11232)

Not allowed to Form an OPC

Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed companies,
and non-chartered government-owned and -controlled corporations may not
incorporate as OPC.

A natural person who is licensed to exercise a profession may not organize as a OPC for
the purpose of exercising such profession xxx". (Sec. 116, R.A.11232)

Liability of Single Shareholder

If the single stockholder cannot prove that the property of the One Person Corporation
is independent of the stockholder' personal property, the stockholder shall be jointly
and severally liable for the debts and other liabilities of the One Person Corporation.

The principles of piercing the corporate veil applies to One Person Corporations.
(Sec.130, R.A.11232)

Governing Body : Single Stockholder/Director

Shares of Stocks : Yes

Payment of Dividend: Yes (to insure independence of property)

Board of Directors/ Trustees

Composition

1. Stock Corporations

Regular Directors
Independent Directors

2. Non-stock corporations

Regular Members of the Board of Trustees

Independent Trustees

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 Independent Directors

An independent director is a person who, apart from shareholdings and fees received
from the corporation, is independent of management and free from any business or
other relationship which could, or could reasonably be perceived to materially interfere
with the exercise of independent judgment in carrying out the responsibilities as a
director.

In what corporations are independent directors required?

The board of corporations vested with public interest shall have independent directors
constituting at least twenty percent (20%) of such board.

What corporations are deemed vested with public interest?

a) Corporations under the SRC namely:

1) corporations listed with an exchange (listed under the stock exchange) or

2) with assets of at least Fifty Million Pesos and having two hundred or more
holders of shares, each holding at least one hundred (100) shares of a class of its
equity shares;

b) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service

business, pre-need, trust and insurance companies, and other financial intermediaries;
and

c) Other corporations engaged in business vested with public interest as may be

determined by the SEC. Sec. 22 RCC

Membership

Board of Directors

>Only for stock corporation

>Each of the directors must be elected from among the holders of stocks
registered in the corporation's books

>Each has a term of one (1) year

>a director shall cease to be such when he ceased to own at least one (1) share
of stock

Board of Trustees

> only for non-stock corporations

> each of the trustees shall be elected by the members of the non-stock
corporation

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 > each has a term not exceeding three (3) years

> a trustee shall cease to be such when he ceased to be a member of the

corporation.

Disqualification of Directors, Trustees or Officers

If, within five (5) years prior to the election or appointment as such, the person
was:

(a) Convicted by final judgment:

1) Of an offense punishable by imprisonment for a period exceeding six

years;
2) For violating the RCC; and
3) For violating R. A. No. 8799, or the SRC;

(b) Found administratively liable for any offense involving fraudulent acts; and

(c) By foreign court or equivalent foreign regulatory authority for acts, violations
or misconduct similar to those enumerated in pars. (a) and (b) above.

(Sec. 26, R.A. No. 11232)

Can directors or trustees be removed even if there is no just cause?

Yes, directors or trustees be removed with or without cause. However, removal

without cause may not be used to deprive minority stockholders or members of
the right of representation to which they may be entitled under Section 23 of the
law. (Sec. 27, R.A. No. 11232)

Procedure in removing directors or trustees by stockholder or members vote

A directors or trustee may be removed from office

1. There must be a special meeting of the stockholders or members for the

purpose of removing any director or trustee .

2. There must be a notice of the time and place of such meeting, as well as of
the intention to propose such removal, must be given by publication or by
written notice prescribed by law.

3. There must be a vote of the stockholders holding or representing at least 2/3

of the outstanding capital stock or a vote of at least 2/3 of the members of a
nonstock corporation entitled to vote, must be obtained approve the
removal of a director or trustee. (Sec. 27, R.A. No. 11232)

***Powers, Duties and Prerogatives

Statutory Basis for the powers of the Board

The board of directors or trustees shall exercise the corporate powers, conduct
all business, and control all properties of the corporation.

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 (Sec. 22, R.A. No. 11232)

Acts of Officers Not Authorized by the Board

Acts of an officer that are not authorized by the board of directors/trustees do

not bind the corporation, unless the corporation ratifies the acts or holds the
officer out as a person with authority to transact on its behalf.

(University of Mindanao, Inc. vs. Bangko Sentral ng Pilipinas, G.R. Nos. 194964-
65, January 11, 2016)

Extent of the Power

The business of a corporation is conducted by its board of directors, and so long

as the board acts in good faith, the State, through the courts, may not interfere
with its management decisions.

(Ago Realty & Dev't. Corp. v. Ago, G.R. Nos. 210906 & 211203, October 16, 2019)

In what instances will directors or trustees be liable jointly and severally for
damages suffered by the corporation, its stockholders or members and other
persons?

Directors or trustees shall be liable jointly and severally for all damages suffered
by the corporation, its stockholders or members and other
persons in cases:
> When directors or trustees who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or

> When directors or trustees are guilty of gross negligence or bad faith in
directing the affairs of the corporation or

> When directors or trustees acquire any personal or pecuniary interest in

conflict with their duty as such directors or trustees.
(Sec. 30, R.A. No. 11232)

State the rule when a director, trustee, or officer acquired an interest adverse
to the corporation in respect of any matter which has been reposed in them in
confidence by the corporation?

The law provides that a director, trustee, or officer shall not attempt to acquire,
or acquire any interest adverse to the corporation in respect of any matter which
has been reposed in them in confidence, and upon which, equity imposes a
disability upon themselves to deal in their own behalf.

If the said director, trustee, or officer have acquired an interest adverse to the
corporation, such director, trustee, or officer shall be liable as a trustee for the
corporation and must account for the profits which otherwise would have
accrued to the corporation.

(Sec. 30, R.A. No. 11232)

Rule in case of disloyalty of a director

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 The rule is that "where a director, by virtue of such office, acquires a business
opportunity which should belong to the corporation, thereby obtaining profits to
the prejudice of such corporation, the director must account for and refund to
the latter all such profits even if that the director risked one's own funds in the
venture. Sec. 33 RCC

Exception :

Yes, the rule will not apply if the act has

been ratified by a vote of the stockholders owning
or representing at least two- thirds (2/3) of the
outstanding capital stock of the corporation.

(Sec. 33, R. A. No. 11232)

Duties of the Board

***Special Fact Doctrine

Special Fact Doctrine is a doctrine holding that a corporate officer with superior
knowledge gained by virtue of being an insider owes a limited fiduciary duty to a
shareholder in transactions involving transfer of stock.

Test on the Applicability of the Special Fact Doctrine

> That the material fact or information was peculiarly within the knowledge of
one party; and

> That the information was not such that could have been discovered by the
other party through the exercise of ordinary intelligence.

Application:

In the sale of certain shares of the corporation, the president and corporate
Secretary deliberately withheld certain information and to disclose certain
documents concerning adverse contract information known to them to the
buyer. Can they be held liable for damages?

Answer:

Yes, the "special facts" doctrine holds that "absent a fiduciary relationship
between parties, there is nonetheless a duty to disclose when one party's
superior knowledge of essential facts renders a transaction without disclosure
inherently unfair".

Articles of Incorporation and By-Laws

Articles of Incorporation

Nature:

The articles of incorporation has been described as one that defines the charter of the
corporation and the contractual relationships between the State and the corporation,
the stockholders and the State, and between the corporation and its stockholders.
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 (Lanuza vs. Court of Appeals, G.R. No. 131394, March 28, 2005)

Adoption:

> The articles of incorporation shall be adopted and filed by the incorporators.

> All corporations shall file with the SEC AOI in any of the official languages, duly signed
and acknowledged or authenticated, in such form and manner as may be allowed by the
SEC. (Sec. 13)

> Should be filed with the SEC prior to incorporation

Approval by SEC:

When the AOI and other pre-incorporation documents are in order, the SEC shall issue
the certificate of incorporation.

Grounds for Disapproval:

(a) The articles of incorporation or any amendment thereto is not substantially in

accordance with the form prescribed by law;

(b) The purpose or purposes of the corporation are patently unconstitutional, illegal,
immoral or contrary to government rules and regulations;

(c) The certification concerning the amount of capital stock subscribed and/or paid is
false;

(d) The required percentage of Filipino ownership of the capital stock under existing
laws or the Constitution has not been complied with. (Sec. 16, R.A. No. 11232)

Amendment of the AOI

Requirements:

For Stock Corporation:

a. approval by a majority vote of the board of directors; and

b. the vote or written assent of the stockholders representing at least two-thirds (2/3) of
the outstanding capital stock

For Non-Stock Corporation:

a. approval by the vote or written assent of majority of the trustees; and

b. the vote or written assent of the at least two-thirds (2/3) of the members.

Effectivity of the Amendment

1) upon their approval by the SEC; or

2) from the date of filing with the SEC if not acted upon within six (6) months from the
date of filing for a cause not attributable to the corporation.

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 (Sec. 15, R.A. No. 11232)

By-Laws

Nature:

A corporation's by-laws is a legal document setting forth key rules and regulations
governing the corporation's day-to-day operations. It is designed for the internal
governance of the corporation.

Requirement for Adoption

If adopted pre-incorporation

Such by-laws shall be approved and signed by all incorporators and submitted to the
SEC, together with the articles of incorporation.

If adopted post-incorporation

The affirmative vote of the stockholders representing at least a majority of the

outstanding capital stock, or of at least a majority of the members (in case of non-
stock) in case on nonstock corporations, copy thereof, duly certified by a majority of the
directors or trustees and countersigned by the secretary of the corporation, shall be
filed with the SEC. Sec. 45 RCC

Effectivity:

By-Laws shall be effective only upon the issuance by the SEC of a certification that the
by- laws are in accordance with law. Sec. 45 RCC

Amendment to the By-laws

Requirements:

1) Approval by a majority of the board of directors or trustees, and

2) Ratification by the owners of at least a majority of the outstanding capital stock, or
at least a majority of the members of a nonstock corporation.

The owner of two-thirds (2/3) of the outstanding capital stock or two-third (2/3) of the
members in a nonstock corporation may delegate to the board of directors or trustees
the power to amend or repeal the bylaws or adopt new by-laws.

Any power delegated to the board of directors or trustee to amend or repeal the bylaws
or adopt new bylaws shall be considered as revoke whenever stockholders owning or
representing a majority of the outstanding capital stock or majority of the members
shall so vote at a regular or special meeting. (revoke delegation) Sec. 47 RCC

Effectivity of Amendment

The amended or new by-laws shall only be effective upon the issuance by the SEC of
certification that the same is in accordance with the Revised Corporation Code and
other relevant laws. Sec. 47 RCC

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 ***Business Judgment Rule

Its decision to continue a part of its previous operations did not negate good faith in its
decision to close shop, but is seen as an exercise of its right to continue its business.

As long as no arbitrary or malicious action on the part of the employer is shown, the
wisdom of a business judgment to implement a cost saving device is beyond the court's
determination. After all, the free will of management to conduct its own business affairs
to achieve its purpose cannot be denied.

(Unera V. Shin Heung Electro, Inc., G.R. No. 228328 March 11, 2020)

Is a complaint filed by a stockholder without a resolution emanating from the

corporation's board of directors valid?

No. One of the powers expressly granted by law to corporations is the power to sue. As
with other corporate powers, the power to sue is lodged in the board of directors,
acting as a collegial body. Thus, in the absence of any clear authority from the board,
charter, or by-laws, no suit may be maintained on behalf of the corporation. (AGO
Realty & Devt. Corp. vs. Dr. Angelita Ago, et. al., G.R. No. 210906, Oct. 16, 2019)

Liability of Directors for Watered Stocks

A director or officer of corporation who:

a) Consents to the issuance of stocks for a consideration less than its par or issued
value;

b) consents to the issuance of stocks for, a consideration other than cash, valued in
excess of its fair value; or

c) having knowledge of the insufficient consideration, does not file a written objection
with the corporate secretary

In this instance, the director or officer shall be liable to the corporation or its creditors,
solidarily with the stockholder concerned for the difference between the value received
at the time of issuance of the stock and the par or issued value of the same.

(Sec. 64, R.A.11232)

***Intra-Corporate Dispute

A. Concept

An intra-corporate dispute is understood as a suit arising from intra-corporate relations

or between or among stockholders or between any or all of them and the corporation.

(Strategic Alliance Dev't. Corp. vs. Star Infrastructure Dev't Corp., et. al., G.R. No.
187872, November 17, 2010)

B. ***Tests to Determine Existence of Intra-Corporate Dispute

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 Tabang vs. NLRC, 334 Phil.424, (1997)

An intra-corporate controversy is one which arises between a stockholder and the

corporation. There is no distinction, qualification nor any exemption whatsoever. The
provision is broad and covers all kinds of controversies between stockholders and
corporations.

DMRC Enterprises vs. Esta del Sol Mountain Reserve, Inc., G.R. No. L-57936 Sept. 28,
1984

The Court introduced the nature of the controversy test. It was declared that it is not
the mere existence of an intra-corporate relationship that gives rise to an intra-
corporate controversy.

To rely on the relationship test alone will divest the regular courts of their jurisdiction
for the sole reason that the dispute involves a corporation, its directors, officers, or
stockholders. There is no legal sense in disregarding or minimizing the value of the
nature of the transactions which gives rise to the dispute.

Speed Distribution Inc. vs. Court of Appeals, G.R. No. 149351, March 17, 2004

***To determine whether a case involves an intra- corporate controversy, x x x , two

elements must concur:
(a) the status or relationship of the parties, and
(b) the nature of the question that is the subject of their controversy.
Belo Medical Group, Inc. vs. Santos, G.R. No. 185894, August 30, 2017

A conflict between two (2) stockholders of a corporation does not automatically render
their dispute as intra-corporate. The nature of the controversy must also be examined.

San Jose v. Ozamiz, G.R. No. 190590, July 12, 2017

To determine whether or not a case involves an intra-corporate dispute, two tests are
applied the relationship test and the nature of the controversy test.

Under the relationship test, there is an intra-corporate controversy when the conflict is
(1) between the corporation, partnership, or association and the public; (2) between the
corporation, partnership, or association and the State insofar as its franchise, permit, or
license to operate is concerned; (3) between the corporation, partnership, or
association and its stockholders, partners, members, or officers; and (4) among the
stockholders, partners, or associates themselves.

On the other hand, in accordance with the nature of controversy test, an intra-
corporate controversy arises when the controversy is not only rooted in the existence of
an intra-corporate relationship, but also in the enforcement of the parties' correlative
rights and obligations under the Corporation Code and the internal and intra-
corporate regulatory rules of the corporation.

Intra-Corporate Dispute Involving the Dismissal of Corporate Officer

To be considered an intra-corporate controversy, the dismissal of a corporate officer

must have something to do with the duties and responsibilities attached to his/her
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 corporate office or performed in his/her official capacity. (Manager, not a corporate
officer)

(Real vs. Sangu Phils, Inc., 655 Phil. 68 [2011])

The Court consistently ruled that a corporate officer's dismissal is always a corporate
act, or an intra-corporate controversy which arises between a stockholder and a
corporation. (Executive Vice President in by-laws)

(Cacho v. Balagtas, G.R. No. 202974, Feb. 7, 2018)

The mere designation as a high-ranking employee, however, is not enough to consider

one as a corporate officer.

(Malcaba vs. ProHealth Pharma Phils., Inc., G.R. No. 209085, June 6, 2018)

While a corporate office is created by an express provision either in the Corporation

Code or the By-laws, what makes one a corporate officer is his election or appointment
thereto by the board of directors.

(Cacho V. Balagtas, G.R. No. 202974, Feb. 7, 2018)

C. Jurisdiction and Venue

All actions involving intra-corporate disputes shall be commenced and tried in the
Regional Trial Court which has jurisdiction over the principal office of the corporation,
partnership, or association concerned.

(Sec. 5, Interim Rules of Procedure Governing Intra-N Corporate Controversies)

D. Importance of Determining Existence of Intra- Corporate Dispute

An intra-corporate controversy within the jurisdiction of the regular courts or an

ordinary labor dispute that the Labor Arbiter may properly take cognizance of.

(Cacho v. Balagtas, G.R. No. 202974, Feb. 7, 2018)

Post-Examination Tips

After each examination, do not discuss your answers with your fellow examinees.
Discussing them will not alter the results of your examination. Focus on your next exam.

After the morning exam, rest and forget about the exam that was.

Regain your physical and mental energy. If time a permits, a quick nap will help a lot.

Finally, before each and every exam, the rule allows you to call on HIM. Don't mind
begging.

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 He will be your greatest ally in your lonely and treacherous journey towards the
destination you all want to be.

My Final Words Before You Become Lawyers

You have all gone this far.

You have endured all the

pains, humiliations, embarrassments, and hardships that law school has to offer.

Now is the time for you to shine. Success is at hand.

Welcome to the Legal Profession!!!

Dean Serge

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