Corporation Law Notes - Dimaampao

Commercial Law Review Corporation Law J. Dimaampao | SBCA 17-18 Notes

R ecitation ecitation (J anuary 27, 2018): 2018): 1. What is the constitutional provision relative to the formation, organization, or regulation of corporations? Article XII, Section 16 of the Constitution states that the “Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.” 2. What is the general law referred to in Article XII, Section 16 of the Constitution? The general law referred to is Batas Pambansa Blg. 68, also known as the Corporation Code of the Philippines. 3. When did it take effect? It took effect upon its approval on May 1, 1980. 4. Since it is about time to amend this law, can you think of jurisprudential or corporate rules which must be incorporated in the Code? Just mention one. What are the rules you have learned that do not appear in any of these 149 sections of the law?

The doctrine of piercing the veil veil corporate pers pers onality onality i s alrea already dy a s ettl ettled ed juris prudence. prudence. No need to to inc lude it in the Code. The following can be added to the Code: 1) derivative suit 2) doctrine of apparent authority 3) others which we will discuss later on 5. Why does the Constitution require general law? Why not special law? The Constitution requires a general law: 1) To prevent corruption or bribery 2) To promote equality (Professor Valentin) 6. What are the two criteria in the creation of government-owned or controlled corporations? The two criteria are economic viability and promotion of common good. 7. What laws govern private corporations? Apply the Corporation Code. If the Corporation Code is silent, apply the New Civil Code. If the New Civil Code is inapplicable, apply the principles of justice and equity. 8. What laws govern public corporations? Apply the special charter. The suppletory law is the Corporation Code. In the absence of applicable provisions, apply the New Civil Code. If the New Civil Code is inapplicable, apply the principles of justice and equity. 9. Can you think of provisions of the Civil Code that may be applied suppletorily to B.P. Blg. 68? There are three: 1) Voidable contracts - when the contract entered into without the consent of the Board. 2) Unenforceable contracts - when the contract entered into by a person in the name of the corporation, acting without or in excess of authority. 3) Void contracts - when the cause, object or purpose of the contract is contrary to law, morals, good customs, public order or public policy.

10. What are examples of special corporations under the Code? Examples are educational and religious corporations (including corporation sole) under Title XIII of the Code. 11.

What laws govern special corporations?

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Apply the Corporation Code. In the absence of applicable provisions, apply the New Civil Code. If the New Civil Code is inapplicable, apply the principles of justice and equity. 12. Would you you advise your client to form a partnership or or a corporation? To answer this, you you must know the distinctions between the two. 1) As to creation, a corporation is created by law, while a partnership is created by contract. On this aspect, I would would advise my client to form a partnership because it is created merely by contract. 2) As to the number of persons required, there must be at least five persons to form a corporation, while two persons shall suffice to create a partnership. On this aspect, I would advise my client to form a partnership because it merely requires two persons. 3) As to commencement of existence, the corporation commences to exist upon the issuance of the certificate of incorporation by the SEC. Partnership commences to exist upon the meeting of the minds of the parties. On this aspect, I would advise my client to form a partnership because it commences to exist upon the meeting of the minds of the partners. Partnership is a consensual contract. There are four real contracts in the New Civil Code; the rest are consensual. What are real contracts in the NCC?

 Mutuum, C ommodatum, Pledg e, Depos it  4) As to term, a corporation has a term of 50 years, renewable by another 50 years. A partnership has no fixed term. On this aspect, I would advise my client to form a partnership because it has no fixed term and the partners can choose to dissolve the partnership anytime. 5) As to powers, a corporation is a person of special capacity because it can only exercise powers conferred upon by the Corporation Code, Articles of Incorporation or By-Laws. A partnership is a person of general capacity because it can embark/engage in any business or enterprise that is not contrary to law, morals, good customs, public order or public policy. On this aspect, I would advise my client to form a partnership because they can embark in any business or enterprise. 6) As to management, there is centralized management of the business and affairs of a corporation that is generally vested in the Board of Directors or Trustees. In partnership, there is no centralized management because every partner is an agent of the partnership. On this aspect, I would advise the client to form a corporation because they can opt not to manage the business while their money is invested. 7) As to the admission of members, a person can join a corporation without the consent of the existing stockholders or members. On the other hand, a person cannot join a partnership without the consent of the partners under the principle of delectus personarum. On this aspect, I would advise the client to form a partnership so that he can choose his own business partners. That is a Bar question. What is the principle of delectus personarum?

Delectus Delectus personarum is a princi ple ple founded upon upon trus t and confidence confidence betwee between n the partners partners . 8) As to the extent of liability, the creditors cannot go after the stockholders or members of a corporation, but can go after any of the partners in a partnership for the satisfaction of debts and obligations. On this aspect, I would advise the client to form a corporation so that he would not be personally liable for the debts or obligations of the corporation. 9) As to transferability of interest, a stockholder has the right to transfer his interest without the consent of the corporation. A partner cannot transfer his interest without the consent of his partners under the principle of delectus personarum. On this aspect, I would advise the client to form a corporation so that he can freely transfer his interest in the corporation. 10) As to dissolution, the corporation cannot be dissolved by the death, withdrawal or incapacity of its stockholders or members. The partnership can be dissolved at any time by the death, withdrawal or incapacity of any of its partners. On this aspect, I would advise the client to form a corporation because the corporation has continued existence even after the death, incapacity or withdrawal of the other stockholders or members. 13. How do you classify corporations? There are nine. (J.D. gave only four. Check pp. 212-215 of the book for more classifications.) 1) As to the number of incorporators, there may be at least 5 to 15 incorporators, except in a corporation sole where there is only one incorporator.

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Section 110 states that a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or any other presiding elder of a religious sect or church. Can you give an example of any other head of a religion? Can you apply the principle of ejusdem generis? Is this limited to religious organization identified with Christianity or Catholic organization?

No. 2) As to purpose, a corporation may be for profit or non-profit. What is a lay corporation?

It is a corporation org anized for a purpos e other than for relig ion. What is an ecclesiastical corporation?

It is a corporation organized for relig ious purpos es. What is an eleemosynary corporation?

It is a corporation org anized for charitable purposes . 3) As to creation, a corporation may be created by law, by estoppel or by prescription. What is a corporation by prescription?

It exis ts not by law but by immemorial us ag e as a corporation. E xample is the R oman C atholic C hurch . What is a corporation by estoppel?

It is a gr oup of pers ons who as s ume to act as a corporation knowing it to be without authority to do s o. Can the incorporators deny or disprove that they formed a corporation? Why or why not?

No, because applying the doctrine of es toppel, admis s ions or r epres entations are rendered conclusi ve upon the  pers on making it, and cannot be denied or dis proved as ag ains t the pers on relyi ng thereon. 4) As to the legal status, a corporation may be created be de jure or de facto. What is a de jure corporation?

It is formed or org anized in accordance with the requirements of the C orporation C ode. It therefore exis ts in law and in fact. What is a de facto corporation?

It is defectively formed or organized because it does not strictly or substantially observe or comply with the requirements of the Cor poration C ode. Therefore, it does not exi s t in law. It only exi s ts i n fact. 14. What is the distinction between a public-quasi corporation and a quasi-public corporation? GSIS, SSS, PLDT, NAWASA – Which of these is considered public-quasi or quasi-public? Public-quasi corporations are government-owned and controlled corporations that perform proprietary functions, such as GSIS and SSS. Quasi-public corporations are the so-called public utilities, such as PLDT and NAWASA. 15. SHOCKER QUESTION: Distinguish going-public corporation from going-private corporation. Going-public corporation (open corporation) is one where its shares of stocks are originally held by private persons and subsequently offer them to public or local stock exchange. Going-private corporation (close corporation), on the other hand, is an originally public corporation that is no longer available for public buying.

16. What are the distinctions between open corporations and close corporations? As to the number of stockholders, there is no limit in open corporations. The number of stockholders must not be more than 20 in close corporations. As to the shares of stocks, those shares of open corporations may be offered in a local stock exchange. The shares of close corporations cannot be offered in a local stock exchange. 17. What is another term for close corporation, taking into consideration its characteristics? The authority is J. Campos. His book is out of stock. De facto partnership with corporate shell Why is it called as such?  _______________________ *Sir did not answer this.*

1. 2. 3. 4.

18. What are the attributes of a corporation? The attributes of a corporation are as follows: It is an artificial being. It is created by operation of law. It has the right of succession. It has powers, attributes and properties as expressly authorized by law and incidental to its existence.

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19. Explain each attribute. The corporation is an artificial being because it exists by fiction of law. It is created by operation of law because the law authorizes its creation except corporation by estoppel. It has the right of succession because it does not cease to exist even after the death, incapacity or withdrawal of a stockholder or member. It has powers, attributes and properties as expressly authorized by law and incidental to its existence because the corporation cannot exercise powers except those expressly or impliedly given (consistent with the theory of special capacity). 20. What is the doctrine of corporate personality? Explain. It states that the corporation has a juridical personality separate and distinct from that of its stockholders or members. The reasons (according to Professor Valentin) are: [1] As a consequence of its juridical personality, the corporation can acquire property, whether real or personal, bring civil and criminal actions, incur obligations, and enter into contracts; (2) The assets and properties of the corporation cannot be considered as those of its stockholders or members. Neither do the liabilities incurred by the corporation be charged against its stockholders or members. 21. What are the instances, according to the Supreme Court in a long line of cases, where the corporate veil of personality may be pierced? The veil of separate corporate personality may be lifted when such personality is used to defeat public convenience, justify wrong, protect fraud or defend crime; or used as a shield to confuse the legitimate issues; or when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation. Keywords: CDDPJAB 22. What are the three tests in determining the applicability of the doctrine of piercing the veil of corporate fiction? The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows: 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 plaintiffs legal rights; and 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The absence of any one of these 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 defendants relationship to that operation. (Concept Builders v. NLRC, 257 SCRA 149) Keywords: CFI How do you establish the link there? “ C ontrol

has been us ed to commit or perpetuate fraud, res ulting in i njury .”

This is the simplest way to understand this. 23. What are the probative value/factors of identity of corporations? The factors are as follows: 1) When two corporations have the same directors, officers or employees. ( Tan Boon Bee and Co. v. Jarencio, 263 SCRA 205) 2) When both predecessor and successor corporations are owned and controlled by one person. It is very clear that the latter corporation was a continuation and successor of the first entity. (Claparols v. Court of Industrial Relations, 65 SCRA 613) 3) When the records of a corporation are kept by another corporation. (Yutivo Sons Hardware Company v. CTA, 1 SCRA 160) 4) When the methods of conducting business in the two corporations are the same. (Commissioner vs Norton and Harrison Company, 11 SCRA 714) Keywords: DORM Same directors, officers, or employees Same owner Same records Same methods of conducting business

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 A s s ig nment: Let us follow this outline next week, so that you will clearly understand the rules. The sequence of the sections is inaccurate; that's why you can hardly understand the application of the rules. I. Stages of corporate life  A. Promotional stage We do not have existing jurisprudence on this, so we really have to refer to American jurisprudence. It is o in effect the promotional stage. We will discuss the meaning of promoters, the contracts they entered into, their liabilities, as well as the o compensation that may be due to them. B. Pre-incorporation proper Let us collate all those sections: Sections 10-19 - conditions sine qua non or precedent. Failure to comply o with one or more of these requirements will prevent the existence of a corporation. Section 20 on de facto corporations (defective corporations) may be discussed along that line. As to Section 14 (10), the other matters as are not inconsistent with law and which the incorporators may o deem proper and convenient are in: Sections 6 (6 instances), 7, 8, 24, 25, 39, and 62 (2 instances). As to Section 47 (10), such other matters as are necessary and convenient for the conduct of its o corporate business and affairs are in: Sections 24 (mentioned by-laws twice), 25 (thrice), 30, 35 (twice), 50 (five times), 52, 53 (four times), 54, 62, 63, 66, 67, and 74. Remember: by-laws must not be inconsistent with the Articles of Incorporation. After that, filing of the articles of incorporation, paying the filing fees, and the issuance of the certificate of o incorporation under Section 19. C. Post-incorporation stage We call these as conditions subsequent. Even if these conditions have not been complied with, that will o not prevent the legal existence of a corporation. It will just result in the imposition of penalties or sanctions in Section 144. This stage includes the adoption of by-laws (Sections 46, 47 and 48), election of board of directors and o trustees (Section 24), election of corporate officers (Section 25), minimum qualification rule, and dissolution of corporation. By-laws must first be adopted before the election because of Section 47 (6) of the Corporation Code. o There it stated that the by-laws must contain the manner and time of holding the election of directors and trustees. II. Level of Management  A. Express, implied, incidental powers Read Section 23 in relation to Section 36 o Try to learn which of the express powers in Section 36 may require the approval of the stockholders or o members of a corporation. According to Justice Vitug, if the approval is not obtained, the exercise of power (the contract arising from such exercise) is voidable. What are the incidental powers? You can only answer this if you have mastery of these express powers. o B. Executive Committee (Section 35) C. Residual powers of a stockholder or a member Sections 17, 37 (2 corporate proposals), 38 (5 corporate proposals), and other provisions. Memorize o those that require majority vote. There are seven, and the rest of these require ⅔ vote. NOTE: Try to memorize Sections 14, 36, and 47. III. Others: Shares of stocks, subscription Winding up, dissolution Foreign corporations Corporate rehabilitation (Read the last chapter of your book at least two times.) Read all the cases in the book under Corporation Law.     

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24. We forgot to mention this: In Section 3, there are two classifications of corporation. What are the differences between the stock and non-stock corporations? 1) As to capital, a stock corporation issues capital stock divided into shares of stocks, whereas a non-stock corporation does not issue capital stock. 2) As to distribution of profits or dividends, a stock corporation allows distribution of profits or dividends. A nonstock corporation does not. 25. Is a government-owned and controlled corporation a stock or non-stock corporation? This can be answered by Manila International Airport Authority v. Court of Appeals, 495 SCRA 591. It can be either. Administrative Code of 1987 defines a government-owned or controlled corporation as “any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities…” A government-owned or controlled corporation must therefore be "organized as a stock or non-stock corporation."

26. Is MIAA a stock or non-stock corporation? It is neither. It has neither capital stock nor members. At the outset, MIAA is not a government-owned or controlled corporation but an instrumentality of the National Government. (Manila International Airport Authority v. Court of Appeals, 495 SCRA 591) 27. The doctrine of corporate personality is based on which well-known theory? Explain this theory. It is the theory of concession which states that a corporation cannot exist without the imprimatur of the State. That is why it has to be organized in accordance with law. 28. What is the opposite of the theory of concession? It is the genossenschaft theory. It states that a corporation may exist independently of State’s recognition. 29. What are founder’s shares? The share that may be issued in favor of these person (promoter/s) who founded such corporation. They also called promoter ’s shares of stocks. 30. What do you mean by promoter or promoters? Sec. 3.10 of the Securities Regulation Code, a promoter is a person acting alone or with others who takes initiative in founding and organizing a business or enterprise for the issuer and upon payment of compensation therefor. We can adopt that. This one who founded or takes initiate to organize a business, he convinces persons interested in the enterprise, he procures, he aids in procuring subscriptions. He sets in motion the machinery in the formation of corporation. 31. There are contracts that may be executed by promoters. Before the incorporation of a corporation, are these contracts binding upon such corporation, which has been subsequently incorporated? Theory of Continuing Offer applies. As a corporation subsequently incorporated is concerned, that is just an offer. A continuing offer. 32. How do you explain the Theory of Continuing Offer? Corporation may either approve or ratify such contract or reject or disapprove the same. It’s not binding upon the corporation for the simple reason that during such period, the corporation is not capacitated to enter into contract since it’s not yet incorporated. 33. What about the liabilities of the promoters? Can they be held liable for damages?  Yes. Promoters may enter into such contract, for and in behalf of the incorporators, as there is no corporation organized at that stage. Jurisprudence tells us that such relationship is founded on trust and confidence which is fiduciary in character. If there is a breach of trust and confidence, the promoter can be held liable for damages. It’s possible that they obtain profits there to the prejudice of the corporation that will be formed or organized.

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34. Promoter renders services, he convinces investors, he aids in procuring subscriptions, so, no doubt services are rendered Are promoters entitled to compensation?  Yes. The principle of quantum meruit applies. That is when we allow such compensation in order to avoid unjust enrichment. 35. What do you mean by quantum meruit? It means that the extent of the services rendered in favor of such undertaking must be considered, then pay the promoters a reasonable amount on the basis of that . 36. What are the qualifications of an incorporator? The incorporators must be natural persons. They must be of legal age. Majority of them must be Filipino citizens, and they must own at least 1 share of stock.

37. What are the distinctions between corporators and incorporators? As to the number, there should be at least 5 incorporators and a maximum of 15 incorporators, while in corporators, there are no limits. An incorporator remains to be an incorporator even though it loses its shares while a corporator ceases to be a corporator upon losing all its share because incorporators are signatories to the Articles of Incorporation. The only way of removing the incorporators is to amend the Articles of Incorporation or they would continue as such . 38. What are the corporation that must be 100% owned by Filipino citizens? 1. Media Corporation – the basis is Art. XVI, Sec. 11 of the Constitution 2. Rice and Corn - BP 194 3. Rural Bank - RA 7353 4. Security Corporation - RA 5487 Retail Trade Corporations used to be one of them but it was strike out because of the law on Trade Liberalization or RA 8763. 39. What are the two acknowledged tests with regard to the nationality of a corporation? (Narra Nickel Mining & Development Corporation v. Redmont Consolidated Mines Corporation) 1. Control Test – the liberal test 2. Grandfather Rule – the strict or stringent test 40. When will you apply the Control Test? When will you apply the Grandfather Rule? (Opinion No. 20, par. 7 of the DOJ Series of 2005, it has adopted the same opinion in 1967. So, it’s a revival of the 1967 decision of the SEC) The control test applies if 60% of the capital of such corporation or partnership is owned by citizens of the Philippines. It means that under the control test, the rule is a corporation or partnership shall be considered as of Philippine nationality if 60% of its capital stock is owned by a Filipino citizen. The strict rule (Grandfather Rule) applies if the Filipino ownership is less than 60% of the requisite capital. 41. What is that situation wherein the grandfather rule is applied? Corporate Layering wherein the corporation involves are 4 or more. Example: Let’s have A corporation. It is owned by B and C corp. Let us say B owns 60 % and B is owned by 100% Filipinos, you apply the control test. But if it’s less than that, B is owned by D and E, in which case you really have to check the nationality of that. So, you must know the Grandfather and the grandson. So A, B and C; B D and E. So, E is the son of B in effect, B of A. So in effect, A is the grandfather of E. That’s the grandfather rule. If Less than 60%, E company is an investor of B company, investee B is an investor of A company. So, literally, A is the father, B is the son, but at far as E is concerned, since E is the son of B company, E is the grandson and  A must be the grandfather. T hat is when you only apply corporate layering, with more reason, if F owned this and so forth. 42.

What is the meaning of capital in Art. XII, Sec. 11 of the Constitution? Are over-all shares of stock covered?

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No, only those shares of stockholders, which have voting rights. Preferred share of stocks have no voting rights. (Gamboa v Teves) 43. What are the 3 reasons cited by the SC? 1. Based on Sec. 6 of the Corporation Code. What are shares of stocks which may be denied or deprived of voting rights? Preferr ed and redeemable. Corporation may classify shares of stocks into voting or non-voting. And it made mention of redeemable and preferred shares of stock. So, depriving holders of share of stock or voting rights is allowed by the Corporation Code. So, it would appear that the corporation will not deny holders of common shares of stock of voting rights because this will violate Section 6. 2. What is the purpose of the framers of the Constitution? The citizens in fixing the Filipino ownership at 60%, the intent of the framers of the Constitution really is to place the control of the corporation in the hands of Filipino citizens. That’s the nationalistic intent of the Constitution. 3. In Sec. 6, the Articles of Incorporation may confine that only holders of common shares of stocks are entitled to hold. The Articles of Incorporation may deprive such holders of preferred stocks such right to hold. Why? They are investors, unlike in the case of holders of common shares of stocks, these preferred stocks holders are only after investors, the return of their investment. 44. Memorandum Circular No. 8. What does it states? It should be applied to both the outstanding shares of stock entitled to vote in the election and outstanding shares of stock whether they are entitled to vote or not in the election which covered preferred . 45. Is that consistent with the Gamboa doctrine? Nov. 22, 2016 GR No. 27246, Quseroy vs SEC, PSE, it contravenes the Gamboa doctrine law. It will even strengthen the Gamboa. The full beneficial ownership test. (Read the case) 46. What are the conditions sine qua non for the incorporation of corporation? 1. Five but not more than 15 incorporators are ready to sign the Article of Incorporation. Prepare the Article of Incorporation (AOI). 2. File the AOI with Sec. Pay the filing fee, another legal fee. 3. Issuance of certificate of incorporation – Sec. 19 47. In sec. 15, what is that doctrine that may be a guide in drafting the AOI? The Doctrine of Substantial Compliance. It need not strictly complied with Sec. 4. It has something to do with compliance or observance of AOI. 48. Item #1, name of the corporation. What is the reason/purpose for it? Why is there a need to indicate in the AOI the corporate name? In relation to Sec. 18. What is the problem that may come up, assuming that corporation has no corporate name? For business convenience 49. Sec. 18, you cannot just adopt a name. What are those name that may not be adopted? 1. Existing name 2. Contrary to law, protected by law 3. Name that is confusingly similar, deceptively identical 50. Universal Textile Mills Corp. 78 SCRA 62 They are not exactly similar but they are confusingly or deceptively similar. Reason? Considering the business engage in, this will mislead the public. 51. Lyceum of The Philippines v CA, can that be adopted? It is a generic name. Generic name may acquire secondary meaning. Read the case of Refractories Industrial Corp. Recent case about corporate name. Sec. 18. (midterm exam coverage) 52. What do you mean by the Doctrine of Secondary Meaning? What does it require? What is the operative word there?

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The Doctrine of Secondary Meaning may confer upon that corporation such right to use such name to the exclusion of others. It must be shown that such name has been used by such corporation for a long time . 53. Item #2, Purposes. It must specifically state the purpose or purposes. What must be the purpose/rationale behind this? It is a guide to the corporation. The corporation can only enter into such contract based on the purpose, otherwise, it may become ultra vires act. 54. Item #3, Principal Office. What must be the importance of that? In acquiring jurisdiction over the corporation, summons should be served on the principal office. Venue and  jurisdiction. That is the place where corporate books and records are kept. That is the place where stockholders and members hold office, Sec. 46, the place where the by-laws and AOI may be kept. 55. In relation to Sec. 11. What is the legal significance of term? What does Art. 11 require? Is there a limit?  Yes. 50 years 56.  Yes.

Can it be extended?

57. Can it be further extended? No. Act 1459 only one extension is allowed. That is the amendment there. You cannot extend a term that has already expired. Extension must be made before expiration. Item #4, Incorporators, you comply with Sec. 10. There you can find the names, nationalities, residencies. Directors and Trustees. 58. In a stock corporation, the authorized capital stock must be stated therein. What about in a non-stock corporation? This has no capital stock. It lieu of that, what must be stated therein? Amount of contribution 59. Explain this 25% percentage requirement which must be stated in the Treasurer’s Affidavit. Sections 12 and 13. 25% of the total stock of the corporation should be subscribed and 25% of such subscribed shares of stock should be paid. For example: 50, 000 total stock of corporation 25% of 50k is how much? 12, 500 25% of 12,500 is how much? 3, 125. 60. What is the limitation provided therein in Sec. 13? Does that comply with the Corporation Code? No. The Corporation Code provides that it should not be less than 5, 000 . 61. There are special laws that require more paid up capital, higher paid up capital. Under the new law in Insurance, RA 10607, there is now a new provision on the paid up capital of insurance companies. Sec. 193, is now 1 billion. In case of reinsurance companies, it is 1.5 billion pesos. 62. What is the legal importance of Certificate of Incorporation? It is a proof or evidence of the juridical existence of such corporation 63. What is that issue that will address that? Issue that may be raised in court? The corporation has no legal capacity to sue.

64. How do you counter that? Present the Certificate of Incorporation to prove that the corporation has legal personality 65. What is the difference between the Article of Incorporation and the Certificate of Incorporation? As to the probative value, where lies the distinction?

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The Article of Incorporation addresses the issue regarding the contents of the Articles of Incorporation while the Certificate of Incorporation addresses any issue regarding the existence of the corporation. 66. When may de facto corporation emerge? It may emerge when a corporation is defectively formed from a bona fide attempt to incorporate under a valid law, and there is actual exercise of corporate powers by such corporation. 67. Can you give an example of a de facto corporation? A common example is when the corporate organizer has been told by an attorney that the articles of incorporation have been filed, but because of some clerical error they actually have not. 68. How do you challenge the status of a de facto corporation? The due incorporation of a de facto corporation shall not 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. Why is it a Solicitor General?

It is because there is an alleg ed violation of the law of the land (that is , the Corporation Code). 69. What is the status of a contract entered into by a de facto corporation? Valid? Voidable? Unenforceable? Or Void ab initio? It is as valid as contract entered into by de jure corporation. 70. What are the requisites of a de facto corporation? The requisites are as follows: (1) a bona fide attempt to incorporate; (2) existence of a valid law; (3) exercise of corporate powers; and (4) issuance of the certificate of incorporation. Section 46 allows the filing of by-laws. For practicability, it is done before the election of directors. When may by-laws be adopted? Can it be filed before the incorporation of a corporation? Or together with the articles of incorporation? By-laws may be adopted within one month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission. 71. What are the requisites of valid by-laws? By-laws, to be valid: (1) must be consistent with the Corporation Code and the Articles of Incorporation; (2) must not disturb vested rights or impair contract or property rights of stockholders or members; (3) must be reasonable and not arbitrary or oppressive; and (4) must be duly approved by the SEC. 72. What is the Gokongwei ruling? A provision in the by-laws that a director is prohibited from being a director in another corporation is valid because it seeks to prevent conflict of interests or possible disclosure of trade secrets or information. One cannot serve two masters at the same time. 73. When will such by-law provision, having the same prohibition, amount to undue restraint of trade? It will amount to undue restraint of trade when such director is engaged in different business. 74. Explain e Let us have correlation here. What are the other matters that may be included in the by-laws? Refer to Sections 50 and 53. Section 50 states that the by-laws may provide only the time and manner of holding the meeting of the stockholders or members. The place cannot be provided in the by-laws because Section 51 already provides that the stockholders’ or members’ meeting shall be held in the principal office of the corporation. On the other hand, Section 53 states that the by-laws may provide for the place, time and manner of holding the meeting of the board of directors or trustees. 75.

What else may be included in the by-laws? Could there be a greater majority in the quorum?

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 Yes. Section 52 states that t he by-laws may provide that a qu orum shall consist of greater majority. What is the meaning of quorum by default?

It means s imple majority. If there are 15 stockholders, what is the quorum?

The quorum is 8. 76. How are proxies made? Refer to Section 58. Proxies shall be in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. It cannot be made orally. What is the term? Is there a maximum term?

Unles s otherwis e provided in the proxy , it s hall be valid only for the meeting for whic h it is intended. Yes , no prox y s hall be valid and effective for a peri od longer than five years at any one time. 77. Item 9 of Section 47 (stating that a private corporation may provide in its by-laws for the manner of issuing stock certificates) has been the subject of three cases. Can this be a valid provision in the by-laws: Certificate of stock may be issued for partially paid subscription? We said by-laws must not be inconsistent with the Corporation Code. What do you think? It is not a valid provision because it is in contravention of Section 64 of the Corporation Code which states that no certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses, if any is due, has been paid. 78. What is the Fua Cun v. Summers (1923) doctrine? What is the Baltazar v. Lingayen Gulf doctrine (1965)? What is the Nava v. Peers Marketing doctrine (1976)? The Fua Cun doctrine states that a subscriber for a certain number of shares of stock does not, upon payment of one-half of the subscription price, become entitled to the issuance of certificates for one-half of the number of shares subscribed for; the subscriber's right consists only in equity entitling him to a certificate for the total number of shares subscribed for by him upon payment of the remaining portion of the subscription price. The Baltazar doctrine states that a certificate of stock may be issued for partially paid subscription, provided that there is no prohibition of the same in the by-laws and the same is a corporate practice. The Nava doctrine states that certificate of stock may not be issued for partially paid subscription. Please go over the other matters to be included in the by-laws. There are 24 sections. It will be included in the quiz. Try to memorize them. 79. Regarding amendment or repeal of by-laws, what does Section 48 require? Amendment and repeal of the original by-laws or adoption of the new by-laws requires a majority vote of the board of directors or trustees, and vote of 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.

80. When can the power to amend or repeal by-laws be delegated? The owners of two-thirds of the outstanding capital stock or two-thirds 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. 81. When can the delegated power be revoked? 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. 82. What are the qualifications of directors or trustees? Refer to Sections 23 and 27. The qualifications are as follows: (1) They must be of legal age. (2) In case of directors, they must own at least one share of stock. In case of trustees, they must be members of the corporation.

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(3) A majority of them must be residents of the Philippines. (4) They must not be convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years or a violation of the Corporation Code committed within 5 years prior to the date of election or appointment. (5) They must be Filipino citizens if the corporation is engaged in a nationalized industry. What are these 100% nationalized industries again?

 Mass media, S ecur ity corporation, R ic e and cor n corpor ation, and R ural banks . 83. Subscriber has not fully paid his subscription. Can he vote or be voted as a director?  Yes, as long as he is not a delinquent stockholder. Section 72 states that holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. Who is a delinquent stockholder? Refer to Section 67.

 A s tock holder is cons ider ed delinquent if he fails to pay any unpaid s ubs cr ipti on within 30 days from the due date thereof.  Assuming there is a fixed pa yment and there was no payment made on such date, is t he stockholder delinquent?

No. There is a 30-day grace period under Section 67 before he becomes delinquent. Section 68, moreover,  prov ides another 30-day g race peri od within whi ch to pay before the delinquent s tock s s hall be s old at public auction. 84. What is the manner of voting in the election of directors or trustees? It may be straight voting or cumulative voting. May the by-laws deprive the stockholders of this cumulative voting as a method of voting? Why?

No, because it will contravene Section 24. It will deprive the minority stockholders of their right to collate all their votes and cast their votes to a minori ty candidate. 85. Let us go to election of corporate officers. Refer to Section 25 and other related sections. Who are the corporate officers? Corporate officers include the President, the Secretary, and the Treasurer. Is Section 25 a complete provision?

No. It shall be supplemented by the by-laws . The by-laws may provi de for additional corporate officers , the duties of thes e corporate officers , their c ompensation and gr eater quorum. Take note of Items 5 and 6 of Section 47. 86. What are the minimum qualifications of these corporate officers? The President must be a director. Necessarily, he must be a stockholder. The Corporate Secretary must be a citizen and a resident of the Philippines. There is no such minimum qualification for a Corporate Treasurer. The by-laws may provide for such qualifications. Can you explain the minimum qualification rule?

The rule applies to the qualifications of the corporate officers such as the President, the Secretary and the Treas urer. This means that thes e qualifications cannot be reduced or dis pensed with by the by-laws . A dditional requis ites, however, may be inc luded in the by-laws. There is a provision in the by-laws stating that the President must be a male stockholder. Is that valid?

It is not valid becaus e it is dis cri minatory. 87. What is a valid corporate act, as provided in the second paragraph of Section 25? 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. There are 15 members of the Board. When will there be a valid corporate act?

There will be a valid corpor ate act when at leas t 8 members are pres ent in the meeting , and at leas t a majority of those pres ent in the meeting vote for its validity. If 8 members attend the meeting, what is the required number of votes?

 A t least 5 members mus t vote in favor of the corporate act. Before the directors may be elected, how many must vote if there are 15 stockholders?

 A t least 8 s tock holders mus t vote.

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88. Are proxies allowed in the meetings of directors or trustees? No. Directors or trustees cannot attend or vote by proxy at board meetings. (Section 25) What do you think is the reason?

It is not allowed becaus e a corporation acts throug h the directors or trus tees. They make in effect decis ions for the corporations . If they c an be represented by prox ies , it will bring problems in the corporation. Their pers onal expertis e is requir ed in the approval of corporate propos als . That is why they cannot delegate that. They have been elected by the stock holders or members to make s uch decis ions . 89. Why is it required that directors or trustees must be of legal age? It is because a corporation enters into contracts through the Board. Necessarily, the members of the Board must be legally capacitated to enter into contracts. 90. By-laws have been adopted; the directors or trustees are elected; the officers are likewise elected; the Board can now exercise its powers under Section 36. Where lies the distinction between the powers of the Board and the powers of the corporate officers? These are the words you need: formulate, implement, enforce. In case of the powers of the Board, Section 36 enumerates the so-called express powers. In case of the powers of the corporate officers, the by-laws provide for them. The Board formulates corporate policies and practices. The corporate officers implement or enforce such corporate policies. 91. The Old Corporation Code made no mention about executive committees. B.P. 68 provides for that. Why is there a need for such new provision? The Board only meets once a month. There may be problems that arise within a month. The executive committee may address these problems. 92. What is the composition of an executive 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. 93. What is the role or function of these executive committees? Their role is to help the Board in the discharge of its corporate powers. 94. Can the executive committee exercise all the powers of the Board? No, only those delegated. 95. Which of the corporate proposals cannot be delegated to the executive committee? The following cannot be delegated to executive committees: (1) approval of any action for which shareholders’ approval is also required; Can you think of a corporate proposal that requires the approval of the shareholders, and therefore cannot be acted upon by the executive committees? These are really the residual powers of the stockholders.

These a) b) c) d) e)  f)  g ) h) i)  j) k) l) m) n)

include: E xtend or s horten the cor porate term Incr eas e or decreas e capital s tock Incur , create or incr eas e bonded indebtednes s S ell, dis pose, leas e, encumber, or dis pos e all or su bstantially all corporate ass ets Inves t in another corporation, bus ines s other than the primary purpos e Dec lare stoc k dividends E nter into merg er or cons olidation A mend the articles of incor poration A dopt by-laws E lection of di rectors or trus tees E nter into management contract Fix ing of compens ation of directors Fix ing the is s ued price of no-par value s hares Di s s olve the corporation

(2) the filing of vacancies in the board;

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(3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment 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. 96. Which corporate proposals can be acted upon by the executive committees? Think of routinary work. The following may be acted upon by the executive committee: (1) to supply raw materials (2) to hire employees (3) to supervise employees 97. Why are the powers in Section 36 described as express powers of the corporation? They are explicitly provided in the Corporation Code. 98. What does Item 11 of Section 36 state? Every corporation incorporated under this Code has the power and capacity 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. What do you understand by that?

The corporation can exercise not only powers that are expressly enumerated but also those implied or incidental thereto in order to carry out the purpos e/s as s tated in i ts articles . 99. Corporate powers may be express, implied or incidental. What do you mean by implied powers? What about incidental powers? Implied powers are those that are reasonably necessary in carrying out the purpose of the corporation as stated in its articles of incorporation. Incidental powers are those that are reasonably indispensable in carrying out the purpose of the corporation as stated in its articles of incorporation. 100. Can you pinpoint incidental powers in Section 36? They are the right to sue and be sued and the right of succession. 101. Can you pinpoint implied powers of a corporation? These are the implied powers according to jurisprudence: 1) An act to embark on different business designed to protect debts owing to the corporation. 2) An act to increase or promote the business. 3) An act which would aid or benefit the employees. Examples: Post office and hospital to cater to the needs of the employees 4) Acts that are usual in the course of business. 102. How do you describe such a corporate act which is within the express/implied/incidental powers of the corporation? It is called an intra-corporate act or intra vires act. How do you describe such a corporate act which is outside the express/implied/incidental powers of the corporation? It is an ultra vires act. 103. How is an ultra vires act ratified? Apply what you have learned in Civil Law. To ratify an ultra vires act: 1) The contract must not be illegal, immoral, unconstitutional or contrary to any of the express provision of the articles of incorporation. 2) It must not prejudice the rights of corporate creditors or third persons. 3) It must be a fully executed contract. 4) It must have the approval of all the stockholders. This is an exception to the doctrine of corporate democracy. 5) It must not prejudice the rights of the State. (Vol. 7, Fletcher Cyclopedia, Section 3432, p. 585, as cited in Pirovano v. De La Rama, 96 Phil. Reports 321) 104. What is the doctrine of corporate democracy? It enunciates that a corporation is always presumed to operate upon the democratic principle that the rule of majority prevails, in the absence of clear and express statutory provisions.

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105. Let us examine Section 36. Out of these 10 corporate powers, can you tell us those that still require the approval of the stockholders or members, as the case may be? The following require the approval of the stockholders or members: 1) Item No. 4 because of Section 16 To amend the articles of incorporation in accordance with the provisions of the Corporation Code 2) Item No 5 because of Sections 46 and 48 To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with the Corporation Code 3) Item No. 7 because of Section 40 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 4) Item No. 8 because of Section 77 To enter into merger or consolidation with other corporations as provided in the Corporation Code The rest of Section 36 merely requires the resolution of the Board. 106. Item No. 9 is a new provision. The corporation has the power 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, shall give donations in aid of any political party or candidate or for purposes of partisan political activity. What is the doctrine upon which this provision is based? It is the doctrine of corporate social responsibility. It promotes expanded social stewardship by businesses and organizations. When one forms a corporation, he has to make an impression to investors that there will be a return of their profits. This power shows that a corporation not only incurs profit but is also able to share a portion of its profits to the social welfare, hospital, charitable, cultural, scientific, civic organizations. *Improve this answer, according to Sir.* MEMORIZE SECTION 36. Regarding item no. 6, read Sections 60 and the subsequent sections. Those are the set of provisions that may discuss subscriptions or issuance of shares of stocks.

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 A s s ig nment: J. Campos of the UP Law said that there is this term in legal parlance: residual powers of the stockholders or members. Try to read these sections. You will find provisions relative to the approval of stockholders or members. Read in the order as stated: Section 16. Amendment of Articles of Incorporation. Section 28. Removal of directors or trustees. Section 29. Vacancies in the office of director or trustee. Section 30. Compensation of directors. Section 32. Dealings of directors, trustees or officers with the corporation. (Ratification of such voidable contract) Section 33. Contracts between corporations with interlocking directors. (Ratification of such unenforceable contract) Section 34. Disloyalty of a director. Section 37. Power to extend or shorten corporate term. (There are two corporate proposals here.) Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. (There are three corporate proposals here.) Section 39. Power to deny pre-emptive right. (There are two corporate proposals here. You mark this as favorite bar question.) Section 40. Sale or other disposition of assets. (This was asked in the last bar examination. Read this case: 15 SCRA 415 (1965) to answer what are the exceptions to the Nell doctrine.) Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. Section 43. Power to declare dividends. Section 44. Power to enter into management contract. Section 46. Adoption of by-laws.         

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Section 48. Amendments to by-laws. The last part of Section 62. Consideration for stocks. Section 77. Stockholder’s or member’s approval of the plan for merger or consolidation. Section 118. Voluntary dissolution where no creditors are affected. Section 119. Voluntary dissolution where creditors are affected.

The majority vote of the stockholders or members may be required. There are seven of these. The 2/3 vote may also be required for the rest. All you have to do is to memorize the seven. All the rest necessitate 2/3 vote. Find out whether the right of appraisal under Section 81 may be exercised. Read every provision there. You should know by now that in addition to Section 39 on pre-emptive right, another favorite bar question is Section 81. What may be the distinctions between Sections 39 and Section 81? We can finish Corporation Law next week. Liabilities of directors/trustees/off icers – Breach of OLD - Obedience, Loyalty and Diligence. Business Judgment Rule (This was not asked in the last bar exam. The question may be waiting for you in the next bar exam.) Doctrine of corporate opportunity – Section 34 Doctrine of apparent authority – Sections 23 and 36 (First thing to be discussed next week.)   Dissolution  

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R ecitation (February 17, 2018): Let us follow this sequence: Sec. 36 (6) - set of provisions on subscription are from Sec. 60-72. Sec. 36  - The enumeration is not exclusive. Such other powers as may be essential or necessary to carry on the purpose/s as stated in the articles of incorporation. Mark Sec. 41, it’s not mentioned therein, that was asked already in the bar, the corporation has the power to acquire its own shares of stocks. Sec. 9 and 39  - Make a correlation. The power to acquire its own shares of stock is not mentioned in 36, and there is such power, you mark section 41 as bar question. That shares of stocks referred to in section 41, are the subject of Sec. 9. Then you read in sec. 39, it’s also there. 107.

It is clear that the corporation may acquire its own shares of stock, under what condition/s?

1. presence of unrestricted retained earnings; and 2. for legitimate purposes 108.

What are these instances? There are 3 in sec. 41, and 1 in sec. 8, assume that you are taking the bar.

1. to eliminate fractional shares arising out of stock dividends; 2. to collect or compromise shares that were not acquired. Jump to sec. 68, to purchase or acquire shares of stocks. Shares of stocks sold at public auction sale, last par. of sec. 68; 3. you correlate with sec. 82, to eliminate, to collect, or to pay dissenting stockholder; 4. to redeem shares of stock classified as redeemable, include sec. 8. The enumeration is not exclusive. Include sec. 8, to redeem shares of stocks classified as redeemable.

 S ec. 41. Power to acquire own s hares . - 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: 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

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3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. 109.

How to do you call that shares of stocks? Treasury shares

110.

What are the features of treasury shares of stock?

Sec. 9. Treasury shares. - Treasury shares are shares of stock which have been issued and fully paid 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. 111.

Do they have voting rights? No.

112.

Are they entitled to dividends? No.

113. One of the indispensable requirements is the presence is the unrestricted retained earnings. What do you mean by unrestricted retained earnings? There are 2 features/characteristics. (mentioned in 41, 82, and sec. 8  –  these are the definition given by the SEC) Unrestricted retained earnings are undistributed earnings/profit which are not allocated for managerial, legal, or contractual purposes and are free for distribution as dividends to the stockholders. 114. What is the doctrine that requires that? That’s the oldest doctrine in corporation law. Trust fund doctrine. Trust fund doctrine requires the presence of unrestricted retained earnings. 115.

What do you mean by trust fund doctrine (asked several times in the bar exams)

Question no. 65 in the book. CPA - capital stock, property, and other assets are regarded as equity in trust for the payment of the claims of the corporate creditors. Let’s have this definition in the black’s law dictionary in 1892. You incorporate this - paid and unpaid subscription of the capital of the corporation held in trust which the creditors of the corporation have the right to look for the payment of their obligations. 116.

Justice Vitug asked this, “what is the exception to the trust fund doctrine?”

Trust fund does not allow disbursement of corporate funds if it will prejudice the rights of corporate creditors precisely we have this unrestricted retained earnings. The Corporation Code, however, allows the disbursement of corporate funds under the following instances: 1. 2.

Amendment of the Articles of Incorporation to reduce the authorized capital stock; Purchase of redeemable shares by the corporation regardless of the existence of unrestricted retained earnings; 3. Dissolution and eventual liquidation of the corporation; 4. Dividends from investments in wasting asset corporation (one solely or principally engaged in the exploitation of “wasting assets”, distributing net proceeds from exploitation of their holdings, such as mines, oil wells, without allowance, or deduction for depletion; 5. In close corporation, where there is a deadlock; 6. Purchase own shares of stock; 7. Payment for the fair value of the shares of dissenting stockholders Sec. 41, once they are acquired they become treasury shares of stock, Sec. 9  (Treasury Shares), then Sec. 8 (Redeemable Shares). In Sec. 9, these treasury shares of stock may subsequently be disposed of, the word “dispose” that’s the one you should look into in Sec. 39 (power to deny pre-emptive right). 117. Is pre-emptive right available? Can that be exercised when treasury shares of stock are subsequently disposed of?

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That’s the amendment in Sec. 39, other disposition of shares of an y class, meaning, disposition of shares of any class. The pre-emptive right of stockholders extends “to all issues or disposition of shares of any class” (such as treasury shares) unless denied by the articles of incorporation or an amendment thereto. 118.

What are the 4 cases/ instances wherein trust fund doctrine may be invoked?

1. Distribution of capital, may include stock dividend, among the stockholders without providing sufficient payment for claims of the corporate creditors. (Sec. 8, 41, 43, 82 you will find these unrestricted retained earnings, the exception in sec. 8.) 2. Incorporate in pre-week review, release of the subscribers of this obligation to pay the subscription.  You cannot release the subscribers from this obligat ion to pay the unpaid subscription 3. Transfer of assets of the corporation in fraud of corporate creditors; 4. The corporation is insolvent. Sections 41, 9, 8, 82 - Trust fund doctrine is always asked in the bar exam (definition of trust fund doctrine) Subscription – subject = shares of stocks It’s a contract, civil law tells us that it must have consideration; Sec. 62  enumerates 6. There is that special consideration, then, payment may either be full payment or instalment. If there is full payment, you will be entitled to the certificate of stock, if the payment is in instalment, that’s when you need to discuss Sec. 64, 66, 67, 68. In 63 that’s one of the rights of the stockholders, transferability of shares of stock or interest, which is the opposite rule that delectus personarum/personae  (selection or choice of the person) in Art. 1804 of the Civil Code Art. 1804 (Every partner may associate another person with him in his share, but the associate shall not be admitted into the partnership without the consent of all the other partners, even if the partner having an associate should be a manager. (1696)). Now, if the payment is in instalment, it may either fix the date there in Sec. 67 or no date that is all there be made, and at that juncture, you should know when to declare shares of stock as delinquent, Sec.67, and when they are delinquent, they may be sold at public auctions, Sec. 68. Interest may be imposed. 119.

What are the effects of shares of stocks declared delinquent? 72, 71

 S ec. 71. E ffect of delinquency . - No delinquent stock shall be voted for be entitled to vote or to representation at any stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any. (50a)

 S ec. 72. R ig hts of unpaid s hares . - Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. (n) 120. It’s one of the powers of the corporation, considered as an express power in Sec. 36 (6)  that a corporation may issue shares of stock, inevitably it has to enter into a contract, how do you consider such a contract? Subscription contract 121.

What may be the subject of that? Shares of stock

122. What about corporation that has yet to be incorporated, can that be the shares of stock of that corporation yet to be incorporated, can that be the subject of such contract?  Yes 123.

When do you consider such contract as irrevocable?

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 S ec. 61. Pre-incor poration s ubs cr ipti on. - A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission. (n) 124.

What is the exception to the exception? When can it no longer be revoked?

No pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission. 125.

Under Sec. 62, what may be the consideration of that subscription contract? ABBLES

A- Actual cash P- Property previously contracted L- labor performed for or services rendered E- exchange, that may happen in case of merger or consolidation, change of shares of stock S- stated capital, the amount, transfer, that may amount to stock dividend Promissory notes are not considered as legal tender. 126. Consider Section 65, trust fund doctrine does not allow the issuance of the shares of stock below its par value, why? The capital is held as trust fund that should not be diminished, that’s what the trust fund doctrine requires. So that’s a diminution of the trust fund, that’s the reason why it’s not allowed. That would become watered shares of stocks. 127.

What are watered shares of stocks?

Stocks issued for no value at all or for a value less than its equivalent either in cash, property, shares, stock dividends, or services (see Sec. 62) Read this in relation to Sec. 6. 128.

There are limitations on issuance of no par value shares of stocks, what’s the limitation?

It should not be less than 5 pesos. Correlation. 129.

Who may be held liable for the issuance of watered shares of stock? Sec. 65 answers that.

Sec. 65. Liability of directors for watered stocks. - Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. (n) 1. Directors who assented to that; 2. Officers, directors, who knew of such issuance did not report the issuance; 3. Stockholders to whom these watered shares of stocks are issued. . What is the nature of their liability? Solidary liability Having known the subject, consideration, the term may either be in cash or instalment. If payment is in cash, or if full payment is made, the stockholder has the right to be issued certificate of stock under Sec. 63, mark that. Problem may arise when the payment is in instalment. Interest may be imposed.

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130.

What is the rule on imposition of interest?

That may only apply if the payment is in instalment. The by-laws may fix the interest otherwise, the legal rate of interest applies. 131.

What is now the legal rate of interest?

6% under Central Bank Circular No. 799 dated July 1, 2013. So, if full payment has been made, Sec. 64 says one is entitled to the issuance of certificate of stock. You can exercise the right under Sec. 63 (Certificate of stock and transfer of shares). Once paid you are issued certificate, the one mentioned in sec. 64, you are entitled to that, you can exercise this right and you can freely transfer the same to another. 132.

What is the rule regarding the declaration of delinquent shares of stocks?

Recall in Sec. 24 that delinquent shares shall not be voted upon and Sec. 71. Correlate with Sec. 67 (Payment of balance of subscription), once they are declared delinquent, public sale will follow, Sec. 68 (Delinquency sale). Recall, always add 30days. 133. The subscription contract fixes the date of payment, or if it does not fix the date of payment. If payment has been fixed in the subscription, when will shares of stocks become delinquent? Not on the maturity date, always add 30 days. 134. If no date has been fixed? There has to be a board, the board will fix that. It will not become delinquent on the days.

fixed date. Again add 30

135. These will eventually be sold at public sale. In the public sale, the unpaid subscription, ICE –  interest, cost of advertisement and expenses, who may be considered under Sec. 68 as the highest bidder? The highest bidder is the person offering at the sale “to pay the full amount of the balance on the subscription together with accrued interest, cost of advertisement and expenses of sale, for the smallest number of shares or fraction of a share.” (Sec. 68, par.3) Correlate with Sec. 41. Just read Sec. 73.  As long as the shares of stocks the shares of stock are not declared delinquent, Sec. 72 may be applied. 136. Corporate proposals that require majority of the vote stockholders/members or the 2/3 votes of the stockholders or members; there are 19 sections. Determine what are those which require majority votes or 2/3 votes of the stockholders/ members as the case may be, exceptions to the voting requirements, meaning, it may be dispensed with, and whether appraisal right may be exercised. These will capture 20-30 points of the questions in the bar. a. Sec. 16 (I hold you responsible) speaks of the amendment of the Article of Incorporation; b. Sec. 24 Election of directors/trustees; c. Sec. 28 Removal of directors/trustees; d. Sec. 29 (bar question) Filling of vacancies in the board - stockholders may fill such vacancy; e. Sec. 30 Grant of compensation; f. Sec. 32 Ratification of voidable contracts; g. Sec. 34 Ratification of unenforceable contract; h. Sec. 37 (there are 2 here) To extend corporate term and to shorten corporate term;

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i. Sec. 38 (there are 3) Increase, Decrease capital stock, Incur, create, increase bonded indebtedness;  j. Sec. 39 (covers 2 cases or situations where the stockholder will ratify) Power to deny pre-emptive right; k. Sec.40  The sale of all or substantially all the assets (this came out in the last bar exams, take note of the Nell vs. Pacific Farms 15 scra 415 (1965), that’s the Nell doctrine; l. Sec. 42 Investment in another corporation; m. Sec. 43 Declaration of dividend; n. Sec. 44 To enter into management contract; o. Sec. 46 and 48 Adoption, amendment of by-laws; p. Sec. 62 Stockholders may fix the par value, issued value of no-par value shares of stock; q. Sec. 77 Merger or consolidation; r. Sec. 118 Dissolution of the corporation where no creditors are affected; s. Sec. 119 Dissolution of corporation where creditors are affected 137.

What are the instances of appraisal right?

Sec. 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 the 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. RESIDUAL POWERS OF THE STOCKHOLDERS What do you mean by the residual powers of the stockholders? Why residual? Stockholders or members elect directors or trustees. This board of directors/trustees is taken to manage the corporation, so the stockholders/members entrusted in effect the management of the corporation to the directors/trustees. However, this does that mean that they have totally relinquished their right to participate in the management of the corporation. The CCP allows them to participate in the management through their votes in certain corporate actions/proposals. What are the common provisions in these corporate changes? (1) There has to be notice of such meeting (2) Place  – Principal place of business in the case of stockholders/members (3) Agenda/Purpose Sec. 16. Amendment of the Articles of Incorporation Is written assent sufficient?

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Yes. The stockholder need not be present. He will just send his vote of approval. NOTE: Not all amendments can be the subject of appraisal rights. Only those amendments which restrict rights, limit the rights, or grant preferences. Sec. 28. Removal of Directors or Trustees The director that may be removed may either be a majority director or a minority director. What is the limitation? Majority directors may be removed with or without cause. However, minority directors may only be removed with cause because it might deprive them of their right to representation. Sec. 29. Vacancies in the Office of Directors/Trustees What are instances wherein the vacancies may be filled by the remaining members of the Board? (DIAL)

What are the instances wherein the stockholders may fill the vacancies in the Board? (REIN)

Death Incapacity Abandonment Legal Disqualification

Removal Expiration of term Increase of the number of directors Not constituting a quorum

What is the doctrine enunciated in Valle Verde vs. Africa? “When an incumbent member of the board of directors continues to serve in a holdover capacity, it implies that the office has a fixed term, which has expired, and the incumbent is holding the succeeding term. The vacancy referred to in Section 29 contemplates a vacancy occurring within the director’s term of office. When a vacancy is created by the expiration of a term, logically, there is no more unexpired term to speak of. Hence, Section 29 declares that it shall be the corporation’s stockholders who shall possess the authority to fill in a vacancy caused by the expiration of a member’s term.” What is the distinction between the term and tenure? Term is defined as the time during which the officer may claim to hold the office as of right, and fixes the interval after which the several incumbents shall succeed one another. Term is distinguished from tenure in that an officer’s tenure represents the term during which the incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the term for reasons within or beyond the power of the incumbent. Sec. 30. Compensation of Directors What is the limitation? The compensation must not be unreasonable. The total yearly compensation of directors must not exceed 10% of the net income before income tax of the corporation during the preceding year. Sec. 32. Dealing of Directors, Trustees, or Officers of Corporations When is the contract entered into by the corporation with its director, trustee, or officer voidable? (1) The presence of the director/trustee was necessary to constitute a quorum (2) The vote of such director was necessary for the approval of the contract

Sec. 34. Disloyalty of a Director

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What is the contract that in effect unenforceable and may be ratified by the stockholders?  A contract entered into by a director of a corporation with thir d persons which resulted in secret prof its. NOTE: The director takes advantage of his office. He must account for such profit and bring that to the corporation. Sec. 37. Power to Extend or Shorten Corporate Term Does the appraisal right pertain to both the proposal to extend and to shorten corporate term? Yes. Sec. 37 only mentioned the exercise of appraisal right in case of extension of corporate term. However, Sec. 81 provides for the exercise of appraisal right in case of extending and shortening of corporate term. Sec. 37 is a general provision while Sec. 81 is a special provision. Special Provision must prevail over the general provision. Sec. 38. Power to Increase or Decrease Capital Stock; Incur, Create, or Increase Bonded Indebtedness May the appraisal right be exercised? It depends on whether it may confer preferential rights, impose restrictions or limitations. When there is an increase in capital stock, it necessitates an amendment because you are changing an item in the  Articles of Incorporation. There are 3 ways of increasing capital stock. (1) Increase the number of shares of stock (2) Increase par value (3) Increase both How do you decrease capital stock? (1) Decrease the number of shares of stock (2) Decrease par value (3) Decrease both To decrease capital stock, it requires amendment of the articles of incorporation. What does Sec. 38 require in deference to the Trust Fund Doctrine? It must not impair the rights of the creditors. Explain impairment. Decrease in capital stock corresponds to a decrease in corporate property or asset. What does Trust Fund Doctrine mandates or dictates? The capital stock is considered a trust fund for the payment of the debts of the corporation which the creditors have the right to look into to satisfy their credits. That’s why that can only be done if it will not prejudice the rights of the corporate creditors. To incur, create, or increase indebtedness  – does it require amendment to the Articles of Incorporation? No. It’s not one of the matters mentioned in Sec. 14. Sec. 39. Power to Deny Pre-Emptive Right Pre-Emptive Right may be denied. There are Four Instances where pre-emptive right may be denied. Exchange for Property Needed for Corporate Purposes Payment of Previously Contracted Debt  Articles of incorporation. AO I may expressly deny.

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Law. There may be a law requiring minimum ownership. The first two can be ratified by 2/3 vote. Sec. 40. Sale or other disposition of assets What do you mean by “substantially all”?  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. Will the sale of all or substantially all of the property or assets result to dissolution? No. It is not one of the grounds of dissolution.

When will it result in de facto merger? Bank of Commerce vs. RPN. Explain de facto merger.  A de facto merger can be pursued by one corporation acquiring all or substantially all of the properties of another corporation in exchange of shares of stock of the acquiring corporation. What is the inevitable consequence of that? The acquiring corporation would end up with the business enterprise of the target corporation; whereas the target corporation would end up with basically its only remaining assets being the shares of the acquiring corporation. What is the Nell Doctrine? The Nell Doctrine dictates that when the transferor/seller corporation conveys all its assets to the buyer corporation, the latter does not assume the debts and liabilities of the former. What are the exceptions to the rule? (1) When there is an agreement, express or implied (2) The buyer/transferee corporation continues the business of the seller/transferor (3) There must be fraud employed to evade obligations (4) When there is merger or consolidation

Sec. 42. Power to Invest Corporate Funds in Another Corporation

R esearch about this . It may be included in the exam. In the exception - It may be possible that it is covered by the primary purpose. It may be covered by the secondary purpose. Or it is different from the primary/secondary purpose. What are the requirements? Is majority vote of the board of directors sufficient here? Does that require amendment of the articles of incorporation? Sec. 43. Power to Declare Dividends In paragraph 2, there is that provision to the effect that stock corporations are prohibited from retaining surplus profits in excess of 100% of the paid-up capital. What are the exceptions to the rule? (1) When justified by definite corporate expansion projects or programs approved by board of directors (2) When the corporation is prohibited under any loan of 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 (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

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Example of probable contingencies  Actual Case: The President allowed a Chinese Corporation to invest in telecommunication business. It will compete with Globe, Smart, and PLDT. The three corporations are faced with a probable contingency. NB: According to sir, he will ask those vague provisions of the law such as examples of probable contingencies Dividend may either be cash, property, stock, indirect, liquidating but only cash, property and stock are mentioned under Sec. 43. What is that dividend which may not require unrestricted retained earnings? Liquidating Dividend Sec. 44. Power to Enter into Management Contracts To enter into management contracts, it may either be majority or 2/3 vote. Explain. When there is such Interlocking Directors/Trustees/Stockholders/Members, the vote required is 2/3. Corporate Changes/Proposals/Purpose  Amendment of the Articles of Incorporation (Sec. 16) Election of Directors/Trustees (Sec. 24) Removal of Directors/Trustees (Sec. 28) Filling the vacancies in the Board (Sec. 29)* Grant compensation of directors (Sec. 30) Dealings of Directors, Trustees, or Officers (Sec. 32) -Ratification of Voidable Contract Disloyalty of a Director (Sec. 34) -Ratification of Unenforceable Contract (1) Extend Corporate Term (2) Shorten Corporate Term(Sec. 37) (1) Increase Capital Stock (2) Decrease Capital Stock (3) Incur, Create or Increase Bonded Indebtedness (Sec. 38) Deny pre-emptive rights (Sec . 39) Sale of All or Substantially All of Corporate Property or Assets (Sec. 40)

Investment of corporate funds in another corporation or business or for any other purpose (Sec. 42) Declaration of Dividends (Sec. 43) Enter into Management Contract (Sec. 44)  Adoption of By-Laws (Sec. 46)  Amendment of By-Laws (Sec. 48) Fixing of Value of No Par Value Shares of Stock (Sec. 62) Merger/Consolidation (Sec. 77) Dissolution (Sec. 118/Sec. 119)

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Voting Requirement 2/3

Exception XXX

Appraisal Right Yes

Majority

XXX

No

2/3 Majority Majority 2/3

XXX XXX XXX XXX

No No No No

2/3

XXX

No

2/3

XXX

Yes

2/3

XXX

It depends

2/3 2/3

XXX (1) It is made in the ordinary course of business (2) If the proceeds shall be used to continue the remaining business Where the investment by the corporation is reasonably necessary to accomplish its primary purpose XXX XXX

No Yes

No

Majority

Adoption/Amendment of Original By-Laws XXX

2/3 2/3

XXX XXX

Yes No

2/3

2/3 Majority 2/3 Majority

Yes

No No

No

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138. Let us summarize. How many of these corporate proposals require only majority vote of the stockholders or members? *There are twenty-three corporate proposals there. Seven of them require majority vote. The rest require twothirds vote.*  Enumerate them. They are as follows: 1) Section 24 – election of directors 2) Section 29 – fill in the vacancies of the Board 3) Section 30 – fix the compensation to directors 4) Section 44 – enter into management contracts 5) Section 46 – adopt by-laws 6) Section 48 – amend or repeal by-laws, or adopt new by-laws 7) Section 62 – fix the issued price of no-par value shares Develop your own keywords. 139. What are those corporate proposals where the voting requirements may be dispensed with? They are as follows: 1) Section 40 – sale or disposition of all or substantially all of corporate assets 2) Section 42 – invest corporate funds in another corporation or business or for any other purpose 3) Section 48 - amend or repeal by-laws, or adopt new by-laws Develop your own keywords. 140. When may appraisal right be exercised? Appraisal right may be exercised in the following instances: 1) Section 16 – amendment of the articles of incorporation 2) Section 37 – extend or shorten corporate term 3) Section 38 – increase capital stock (involves an amendment to the articles of incorporation) 4) Section 40 – sale or disposition of all or substantially all of corporate assets 5) Section 42 – invest corporate funds in another corporation or business or for any other purpose 6) Section 77 – merger or consolidation Develop your own keywords. 141. 2000 BAR QUESTION: What are the rights of the stockholders? The rights of the stockholders are as follows: 1) voting rights 2) appraisal right 3) management right 4) pre-emptive right 5) right to inspect corporate books and records 6) right to dividends 7) right to assets upon liquidation, if there is any excess after paying the liabilities or obligations of the corporation 8) right to be issued a certificate of stock 9) right to transfer interest Keywords: VAMPIDACT But Sir said you may add R for remedial rights  Alternative Keywords: VAMPIDRACT On voting rights, read Sections 55, 56 and 59. On appraisal right, read Sections 38, 42 and 81. Management rights are basically residual powers of the stockholders. On the right to inspect corporate books and records, read Section 74. On the right to be issued a certificate of stock, read Section 64. On the right to transfer his interest, read Section 63. 142.

Compare Section 39 and Section 81 of the Corporation Code.

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The distinctions are as follows: 1) As to nature, pre-emptive right under Section 39 is a right to capital, while appraisal right under Section 81 is the right to dissent from a contrary proposal and demand thereafter the fair value of his shares. 2) As to cases covered, pre-emptive right may be exercised with respect to all issues or disposition of shares of any class; on the other hand, appraisal right may be exercised in cases of amendment of the articles of incorporation, extending or shortening the corporate term, increase in capital stock, sale or disposition of all or substantially all of corporate assets, investment of corporate funds in another corporation or business or for any other purpose, and merger or consolidation. 3) As to denial thereof, pre-emptive right is denied when the shares are issued in good faith in exchange for property needed for corporate purposes or in payment of a previously contracted debt, or when the articles of incorporation or an amendment thereto denies such right, or when the shares are issued in compliance with laws requiring stock offerings or minimum stock ownership by the public. Appraisal right is denied when the demand for payment is withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the Securities and Exchange Commission where approval is necessary, or if the SEC determines that such stockholder is not entitled to the appraisal right, or in case of nonexistence of unrestricted retained earnings. Under the Old Corporation Code, pre-emptive right can only be exercised when there is an increase in capital stock. The rule has been amended. Before, if unsubscribed shares of stocks issued at the time of incorporation are subsequently reissued, you cannot exercise the pre-emptive right. To understand what Sir said, read this: Pre-emptive right shall be exercised only with respect to the new issues of shares, and not with respect to additional issues of originally authorized shares. This is on the theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. An original subscriber 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 later reoffered, he cannot claim a dilution of interest. (Benito vs. SEC, et al., 123 SCRA 722) *Sir did not provide when pre-emptive right may be exercised under the New Corporation Code. I just construed what he said.* Today, I think there is no longer a distinction between newly issued shares of stock and re-issued shares of stock. I may be wrong. Check the following provisions for your own statutory construction: SEC. 39. Power to Deny Pre-emptive Right.— All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings x x x. SEC. 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 or for property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise.

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Keywords: Denial of pre-emptive right – EPAL (add another ground provided by Fletcher) when the shares are issued in good faith in exchange for property needed for corporate purposes when the shares are issued in good faith in payment of a previously contracted debt when the articles of incorporation or an amendment thereto denies such right when the shares are issued in compliance with laws requiring stock offerings or minimum stock ownership by the public Denial of appraisal right – WANU when the demand for payment is withdrawn with the consent of the corporation if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the Securities and Exchange Commission where approval is necessary if the SEC determines that such stockholder is not entitled to the appraisal right in case of non-existence of unrestricted retained earnings. 143. What are the remedial rights of a stockholder? The remedial rights of stockholders are: 1) Individual suit 2) Representative suit 3) Derivative suit 144. What are the requisites of a derivative suit? Let us complete the requisites on p. 292 of your book. Read Pascual v. Orozco, 19 Phil. Rep. 82 (1911) and Everett v. Asia Banking Corporation, 49 Phil. Rep. 512 (1926).

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The requisites are as follows: 1) It is founded upon any of these grounds: Mismanagement of the corporation Commission by the corporation of ultra vires acts (illegal or wrongful acts) 2) There is a refusal on the part of the Board to act on the complaint of the stockholder. 3) There must be injury or damage that the corporation might sustain. 4) Before the suit is filed, there has been exhaustion of intra-corporate remedies. This requirement may be dispensed with. Everett case answers that --- where the controlling directors are the ones charged or responsible for such ultra vires, illegal or wrongful acts. 5) The suit is filed by a stockholder on record at the time that event or transaction complained of occurred. It is brought in the name of the corporation. The real-party-in-interest is the corporation; the stockholder is merely a nominal party. Keywords: CRIES Cause of action is mismanagement or commission of ultra vires acts Refusal to act on the part of the Board Injury or damage on the part of the corporation Exhaustion of intra-corporate remedies Suit filed by stockholder on record Do not cry when you cannot answer this in the Bar. 145. What are the so-called ABC Principles in corporation law? Explain each in not more than three sentences. The doctrines in corporation law are as follows: 1) Doctrine of Apparent Authority (Section 84) 2) Business Judgment Rule (Section 70) 3) Doctrine of Corporate Opportunity (Section 77) Doctrine of apparent authority dictates that a corporation will be estopped from denying the agent’s authority if it knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, and it holds him out to the public as possessing the power to do those acts. The corporation may still be held liable by third persons, even if such officer has exceeded his authority. It is therefore designed to protect corporate officers. Business judgment rule holds that decisions when the Board and the officers render decisions, it must be in the best interest of the corporation. Decisions arrived at in good faith with prudence based on consideration independent of any personal interest, must be respected by the courts. Consequently, the Board and the officers may not be held personally liable for acts or contracts done in the exercise of their business judgment. Doctrine of Corporate Opportunity mandates that a self-dealing director, who takes advantage of his position to procure business opportunity whereby secret profits are obtained, must, under the duty of loyalty, first bring to the corporation such profits for its use or exploitation. Read MAM Realty and Laborte cases, which can be found in the book. 146. Regarding the shares of stocks, (other than common/preferred, par value/no-par value shares) what are the other shares of stocks issued by the corporation? They are as follows: 1) convertible shares of stocks 2) redeemable shares of stocks under Section 8 3) shares of stocks held under escrow 4) founder’s shares of stocks under Section 7 5) treasury shares of stocks under Section 9

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Sir holds us responsible for the other topics. Read provisions on non-stock corporation: Sections 87 to 95. Develop 10 characteristics or features of non-stock corporation. Examples are: The corporation is non-profit. The incorporators are all members. It does not issue capital stock.

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Close corporations are a potential bar question. Read Sections 96 to 105. Point out or mark that distinction regarding the exercise of pre-emptive right in Section 102.

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Dissolution of the corporation is Question No. 1 in 2000. Let us collate all these. Section 22 provides two grounds: Failure to organize within 2 years from the issuance of the certificate of incorporation, and Inoperation for 5 years. What is the difference? The first ground is for automatic dissolution; the second requires notice and hearing. Section 118 refers to voluntary dissolution where no creditors are affected Section 119 refers to voluntary dissolution where creditors are affected Section 120 refers to the shortest way to dissolve a corporation – by shortening the corporate term Section 121 refers to illegal acts. Include legislative dissolution. Include expiration of corporate term. On liquidation, read Gelano v. CA, 103 SCRA 90. “If the three-year extended life has expired without a trustee or receiver. having been expressly designated by the corporation within that period, the board of directors (or trustees) itself may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation.”

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On foreign corporations, read Section 133. Recall the basic rules. You must know whether the corporation is resident or non-resident. If it is a resident, license must be obtained. If no license is obtained as required, these are the legal consequences: It can be sued. It cannot sue. There lies the importance of doing business or engaging in a business. Turn to pages 313-314 of your book. These are the potential bar questions. These are the jurisprudential tests whether a corporation may be sued. 1) Substance test – continuity in commercial dealings and arrangements Read Mentholatum v. Mangaliman, 72 Phil. Rep. 524 (1941) 2) Contract or perfection test – contract is perfected here Read Pacific Vegetable Oil Co. v. Singson, 96 Phil. Rep. 986 (1955) 3) Intention test – intent to carry out a continuous business here Prepare for this case because Mentholatum and Pacific Vegetable cases have already been asked in the Bar. Read Eriks PTE Ltd. v. Court of Appeals, 267 SCRA 567 (1997) 4) Actual performance of commercial transactions test Read this well-written decision of J. Carpio: B. Van Zuiden Bros., Ltd. v. GVTL Manufacturing Industries, Inc., 523 SCRA 233 (2007)

RE: MIDTERMS Exclude corporate rehabilitation in the examination. Coverage is Nego and Corpo. There will be four problems on Negotiable Instruments Law and six on Corporation Law. Nanganganak yan. RE: QUIZ ON SATURDAY It will be in the form of Multiple Choice Questions, 25 to 30 items on Nego and Corpo. It will be equivalent to one recitation grade. Just encircle the best answer there.

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