Corporation Law Outline (Jacinto)

CORPORATION LAW Chapter I. INTRODUCTION (1) Definition and attributes of a corporation (2) Kinds of business organizations and their differences (3) Jurisdiction of the SEC

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Union Glass v. SEC Abejo v. De la Cruz SEC v. CA Magalad v. Premiere Financing

Chapter II. CLASSIFICATION OF PRIVATE CORPORATIONS (1) Stock v. Non-Stock Corporations

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CIR v. Club Filipino

(2) Other Matters

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NDC v. Phil. Veterans Bank Pioneer Insurance v. CA

Chapter III. FORMATION AND ORGANIZATION OF CORPORATION (1) Requirements in the formation of a corporation (2) Steps in the formation of a corporation (a) promotion (b) drafting of articles of incorporation (i) Corporate Name

• Lyceum of the Phils. V. CA Purpose Clause Principal Office Term of Existence Incorporators and directors; numbers and qualifications Capital stock; subscription; payment (c) filing of articles; payment of fees (d) examination of articles; approval or rejection by SEC (e) issuance of certificate of incorporation (ii) (iii) (iv) (v) (vi)

(3) De Facto Corporations: Requisites (a) User of Corporate Powers (b) Formation under apparently valid statute

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Municipality of Malabang v. Benito

(c) Colorable compliance with the legal requirements in good faith

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Bergeron v. Hobbs Harril v. Davis Hall v. Piccio

(4) Corporation by Estoppel

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Empire Mfg. V. Stuart Page 1 of 16

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Lowell-Woodward v. GR Woods Asia Banking Corp. V. Standard Products Cranson v. IBM Salvatierra v. Garlitos Albert v. University Publishing Co., Inc.

(5) Internal Organization: By-Laws

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Fleischer v. Botica Nolasco Gov’t of the Phils. v. El Hogar

Chapter IV. THE CORPORATE ENTITY (1) The Theory of Corporate Entity

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Stockholders of T. Guanzon v. Register of Deeds Caram v. CA Palay v. Clave Magsaysay v. Labrador

(2) Disregarding Corporate Entity

(a) Contrary to law / public policy; evasion of liability to government • State v. Standard Oil • Laguna Trans. v. SSS • Marvel Bldg. Corp. v. David (b) Evasion of liability to creditors

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Tan Boon Bee v. Jarencio Namarco v. Associated Financing Jacinto v. CA

(c) Evasion of liability / obligation to employees

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Claparols v. CIR Indophil Textile Mills v. Calica NAFLU v. Ople

(d) Evasion of liability on contract

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Villa-Rey Transit v. Ferrer

(e) Close Corporations

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Cease v. CA Delpher Trades v. CA

(3) Parent-Subsidiary Relationship

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Garrett v. Southern Railway Koppel (Phils.) v. Yatco Liddell v. CIR Yutivo v. CTA Page 2 of 16

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Philvidec v. CA La Campana Coffee Factory v. Kaisahan

Chapter V. PROMOTER’S CONTRACTS PRIOR TO INCORPORATION (1) Liability of Corporation for Promoter’s Contracts

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McArthur v. Times Printing Co. Clifton v. Tomb Cagayan Fishing Co. v. Sandiko (Also see Caram v. CA)

(2) Corporate Rights under Promoter’s Contracts

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Builders’ Duntile v. Dunn Rizal Light & Ice Co. v. PSC and Morong Electric

(3) Personal Liability of Promoter on Pre-Incorporation Contracts

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Wells v. Fay & Egan Pioneer Insurance v. CA How & Associates, Inc. v. Boss Quaker Hill v. Parr

(4) Compensation of Promoters (5) Fiduciary relationship between corporation and promoter

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Old Dominion v. Bigelow

Chapter VI. CORPORATE POWERS (1) (2) (3) (4)

General Powers of Corporation Specific Powers of Corporation Implied Powers The Ultra Vires Doctrine • • • • • •

Republic of the Phils. V. Acoje Mining Co. Carlos v. Mindoro Sugar Co. Govt. of the Phils. v. El Hogar Bissel v. Michigan Southern Pirovano v. De la Rama Steamship Harden v. Benguet Consolidated Mining

Chapter VII. CONTROL AND MANAGEMENT OF CORPORATION (1) Allocation of Power and Control

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Citibank NA v. Chua

(2) Who Exercises Corporate Powers (a) Board of directors or trustees • • • •

Ramirez v. Orientalist Co. and Fernandez Lopez v. Ericta Zachary v. Milin PNB v. CA

(b) Corporate officers and agents • • • •

Yu Chuck v. Kong Li Po The Board of Liquidators v. Heirs of Maximo Kalaw Zamboanga Transportation v. Bachrach Motor Co. Acuna v. Batac Producers Cooperative Marketing Assoc.

(c) Board Committees •

Hayes v. Canada, Atlantic & Plant S.S. Co., Ltd.

(d) Stockholders or members • • • • • • • • • •

BOD and Elec. Comm. of SMB v. Tan Johnston v. Johnston Ponce v. Encarnacion Detective & Protective Bureau v. Cloribel Gokongwei v. SEC Roxas v. dela Rosa Angeles v. Santos Campbell v. Loew’s Inc. Dela Rama v. Ma-ao Sugar Central Gokongwei v. SEC

(3) Devices Affecting Control (a) Proxy Device • • • •

In Re Giant Portland Cement Co. State ex rel. Everett Trust v. Pacific Waxed Paper Alejandrino v. De Leon Duffy v. Loft

(i) Who pays? • •

Campbell v. Loew’s Inc. Rosenfeld v. Fairchild Engine

(b) Voting Trust Page 4 of 16

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Abercrombie v. Davies Everett v. Asia Banking Mackin v. Nicollet Hotel, Inc. NIDC v. Aquino

(c) Pooling and voting agreements • • • •

Ringling v. Ringling Bros. Buck Retail Store v. Harkert McQuade v. Stoneham Clark v. Dodge

(d) Cumulative Voting (e) Classification of Shares •

Gottschalk v. Avalon Realty

(f) Restriction on transfer of shares (g) Prescribing qualifications for directors; founder’s shares cf. Gokongwei v. SEC (h) Management contracts •

Sherman & Ellis, Inc. V. Indiana Mutual Casualty

(i) Unusual voting and quorum requirements •

Benintendi v. Kenton Hotel

Chapter VIII. DUTIES OF DIRECTORS AND CONTROLLING STOCKHOLDERS (1) Duty of Diligence: Business Judgment Rule • • • • • • • • • •

Otis & Co. V. Pennsylvania Railroad Montelibano v. Bacolod-Murcia Milling Litwin v. Allen Walker v. Man Steinberg v. Velasco Barnes v. Andrews Pool v. Pool Foster v. Bowen Lowell Hoit & Co. V. Detig Bates v. Dresser

(a) The self-dealing director Page 5 of 16

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Palting v. San Jose Petroleum, Inc. Mead v. McCullough Piccard v. Sperry Corporation

(b) Fixing compensation of directors and officers • • • • •

Govt. v. El Hogar Barreto v. La Previsora Central Coop Exchange v. Tibe Fogelson v. American Woolen Co. Kerbs v. California Eastern Airways

(c) Using inside information • • •

Strong v. Repide Taylor v. Wright Gokongwei v. SEC

(d) Seizing corporate opportunity • • •

Singer v. Carlisle Irving Trust v. Deutsch Litwin v. Allen

(e) Interlocking directors Globe Woolen Co. V. Utica Gas & Electric (2) Close Corporation (3) Duty of Controlling Interest Insuranshares Corp. V. Northern Fiscal Corporation (4) Duty to Creditors Chapter IX. THE RIGHT OF INSPECTION (1) Basis of Right (2) What Records Covered (3) Extent of and Limitations on Right (4) Who may exercise Right (5) Remedies available if Inspection Refused • •

Pardo v. Hercules Lumber Gonzales v. PNB Page 6 of 16

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Veraguth v. Isabela Sugar Co. Gokongwei v. SEC Cojuangco v. Roxas

Chapter X. DERIVATIVE SUITS (1) Nature and Basis of derivative suit: distinguished from individual and representative suit (2) Requirements relating to derivative suits • • • •

Evangelista v. Santos Republic Bank v. Cuaderno Reyes v. Tan SMC v. Kahn

Chapter XI. FINANCING THE CORPORATION (1) Sources of Financing (2) Capital Structure (3) Capital and Capital Stock Distinguished (4) Shares of Stock: Kinds (a) Common stocks (b) Preferred stocks (i) Preference as to dividends • • • • •

Participating v. Non-participating Cumulative v. Non-Cumulative Discretionary Dividend Type Mandatory Dividend Type Earned cumulative or dividend credit type

(ii) As to voting right •

Ellingwood v. Wolf’s Head Oil Refining

(iii) Preference upon liquidation •

Hay v. Hay

(iv) Preference stockholder is not a creditor •

Augusta Trust Co. V. Augusta Hallowell

(c) Par or no par shares

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(d) Treasury Shares (e) Redeemable Shares (f) Founder’s Shares (5) Nature of Subscription Contract •

Garcia v. Lim Chu Sing

(a) Pre-incorporation subscription • •

Utah Hotel Co. V. Madsen Wallace v. Eclipse Pocahontas Coal Co.

(b) Post-incorporation subscription •

Bayla v. Silang Traffic Co.

(6) The Pre-Emptive Right to Shares (a) Basis of Right (b) Extent and limitations under Code (c) In close corporations (d) Waiver of pre-emptive right (e) When issue is in breach of trust (f) Remedies when denied • • • • •

Stokes v. Continental Turst Co. Thom v. Baltimore Trust Co. Fuller v. Krogh Dunslay v. Avenue M. Garage & Repair Ross Transport Inc. v. Crothers

(7) Debt Securities (a) Form of borrowings (b) Bonds and Debentures (c) Convertible Securities; stock options •

Meritt-Chapman & Scott Corp. v. New York Trust Co.

(d) Hybrid Securities •

John Kelley Co. v. CIR Page 8 of 16

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Jordan Co. v. Allen

(e) The Trust Indenture •

Aladdin Hotel Co. v. Bloom

Chapter XII. CONSIDERATION FOR ISSUANCE OF SHARES (1) Form of Consideration (2) Liability on Watered Stocks • • • •

Triplex Shoe Co. V. Rice & Hutchins, Inc. McCarty v. Langdeau Rhode v. Dock-hop Co. Bing Crosby Minute Maid Corp. V. Eaton

(3) How Payment of Shares Enforced (a) Delinquency sale; requisites (b) Court Action • • • • • •

Velasco v. Poizat Lingayen Gulf Electric v. Baltazar Miranda v. Tarlac Rice Mill Co. Da Silva v. Aboitiz National Exchange v. Dexter Lumanlan v. Cura

(4) Effect of Delinquency (5) Rights and Obligations of Holders of Unpaid but Non-delinquent Stock • • •

Fua Cun v. Summers Baltazar v. Lingayen Gulf Electric Power Nava v. Peers Marketing

(6) Issuance of Certificate (7) Lost or Destroyed Certificate Chapter XIII. DIVIDENDS AND PURCHASE BY CORPORATION OF ITS OWN SHARES (1) Form of Dividends •

Nielson & Co. v. Lepanto Consolidated Mining Co.

(2) Source of Dividends •

Berks Broadcasting Co. v. Crammer Page 9 of 16

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Lich v. United States Rubber

(3) Dividend Declaration discretionary with Board *0 *1

Keough v. St. Paul Milk Co. Dodge v. Ford Motor Co.

(4) Preference as to Dividends *2 *3

Wabash Railway Co. V. Barclay Burk v. Ottawa Gas & Electric Co.

(5) When Right to Dividends Vests; Rights of Transferee *4

McClaran v. Crescent Planning Mill

(6) Liability for Illegal Dividends (7) Purchase by Corporation of its own shares Chapter XIV. AMENDMENTS OF CHARTER (1) Amendment by Legislature (2) Amendment by Stockholders (a) Limitations on power (b) Grounds for rejection of amendment (c) Amendment changing stockholder’s rights *5

Marcus v. RH Macy

(d) Effectivity of amendment (e) Special amendments (1) Increase of capital stock (2) Decrease of capital stock *6

Philippine Trust Co. V. Rivera

(3) Change in corporate term (f) Amendments in close corporations Chapter XV. TRANSFER OF SHARES (1) Manner and Effectivity of Transfer (a) Indorsement of stock certificate; registration in corporate books

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(b) Effect of lack of registration

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Uson v. Diosomito

(c) No registration of transfer of unpaid shares (d) Remedy if registration refused

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Rivera v. Florendo

(2) Restrictions on Transfer; Close Corporations (a) General rule: free transferability of shares (b) Exceptions: in close corporations (c) Intrinsic validity of various kinds of restrictions (1) Consent restriction (2) Option restriction (3) Prescribing qualifications of stockholders (4) Redeemable common stock

(d) Formal validity of restrictions (3) Unauthorized Transfers (a) Certificate indorsed in blank; when quasi-negotiable (b) Forged transfers • •

Santamaria v. Hongkong & Shanghai Banking De los Santos v. McGrath, Atty. General

(4) Collateral Transfers •

Chua Guan v. Samahang Magsasaka

(5) Non-transferability and termination of membership in non-stock corporations Chapter XVI. DISSOLUTION (1) Cause of Dissolution (a) Expiration of original, extended or shortened term (b) Voluntary dissolution when no creditors affected

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(c) Voluntary dissolution when creditors affected (d) Dissolution by minority in close corporations

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Financing Corporation v. Teodoro

(e) Failure to organize and commence business; cessation of business for 5 years (f) Involuntary dissolution (1) Revocation of certificate of registration by SEC (2) Quo Warranto proceedings

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Republic v. Bisaya Land Trans. Co.

(2) Effects of Dissolution; Winding up and liquidation (a) Loss of juridical personality *7

National Abaca Corp. v. Pore

(b) Executory contracts (c) Methods of liquidation (d) Distribution of assets after payment of debts • • •

China Banking Corp. v. Michelin & Co. Republic v. Marsman Development Tan Chiong Bio v. CIR

(3) Distribution of Assets of Non-stock corporations Chapter XVII. CORPORATE COMBINATIONS (1) Purposes of Combinations; Methods (2) Merger and Consolidation (a) Nature and distinction (b) Only de facto merger under Corporation Law (c) Express authority to merge granted by code; requirements (d) Remedies of creditors and dissenting stockholders; appraisal right (3) Sale of substantially all assets (a) Legal requirements Page 12 of 16

(b) No assumption of liabilities; exceptions (c) Remedies of dissenting stockholders; appraisal right (d) Compared with merger and consolidation • •

Reyes v. Blouse Edward J. Nell Co. v. Pacific Farms

Chapter XVIII. FOREIGN CORPORATIONS (1) Definition, Status (2) Methods of Entry of Investment (3) Permitted Areas of Investment (a) Partially nationalized areas (b) Preferred areas; incentives for investment therein (c) Non-preferred areas of investment (4) Legal Requirements Prior to Transaction of Business (a) BOI certificate (b) SEC license to do business (c) Certificate from appropriate government agency (5) Effects of Failure to Secure SEC license • • • • •

Marshall Wells v. Elser Atlantic Mutual v. Cebu Stevedoring General Garments Corp. v. Director of Patents Le Chemise Lacoste v. Fernandez Home Insurance v. Eastern Shipping

(6) What Constitutes Transacting Business • • • • • • •

Mentholatum v. Mangaliman Facilities Management Corp. v. de la Osa Merryl Lynch Futures v. CA Pacific Vegetable Oil v. Singson Aetna Casualty & Surety Co. v. Pacific Star Line Topweld Manuel v. ECED Antam Consolidated v. CA

(7) How Courts Acquire Jurisdiction over Foreign Corporations Page 13 of 16

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General Corp. of the Phils. v. Union Insurance

(8) Laws Governing Licensed Foreign Corporations (9) Merger of Licensed Foreign Corporation (10) Withdrawal of Foreign Corporation (11) Revocation and Suspension of License (12) Existing Licensed Foreign Corporations Chapter XIX. SPECIAL AND MISCELLANEOUS PROVISIONS (1) Educational corporations (a) Stock or non-stock (b) Temporary permit (c) Government recognition (d) Special requirement to be University (e) Incorporation under the Code (f) Educational foundations (2) Religious corporations (a) Corporation sole (b) Religious societies (3) Close Corporations (4) Miscellaneous Provisions

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GUIDE QUESTIONS: Chapter I. INTRODUCTION (1) What are the kinds of corporations? Differentiate them from each other. (2) What advantages does a corporation have over other kinds of business organizations? What are

the disadvantages of a corporation? Chapter II. CLASSIFICATION OF PRIVATE CORPORATIONS (1) Differentiate stock and non-stock corporations. (2) What is the restrictions of the different provisions of the Corporation Code with respect to these 2

corporations? (e.g., by-laws, quorum, etc.)

--- Make a table.

Chapter III. FORMATION / ORGANIZATION (1) What are the statutory requirements in the formation of a corporation? (2) What are the steps in the formation of a corporation? (a) What are the required contents in the articles of incorporation (AOI)?

(3) What is a de facto corporation? Distinguish this from a corporation by estoppel. (4) Can a corporation transact business as a de facto corporation while the application is still pending at the SEC? (cf. Hall v. Piccio) (5) What corporate officers are required by law? (6) When does a corporation’s corporate powers cease? Chapter IV. CORPORATE ENTITY (1) (2) (3) (4) (5)

What is the theory of corporate entity? When can the veil of corporate entity be pierced? What are the effects of piercing the veil of corporate fiction? What is a parent-subsidiary relationship? When may it be disregarded by the courts? What are the criteria by which a subsidiary can be considered a mere instrumentality of the parent company? (cf. Garrett v. Southern Railway)

Chapter V. PROMOTER’S CONTRACTS PRIOR TO INCORPORATION (1) Under what circumstances can a promoter be held liable? When is he exempt from liability? (2) When can a corporation assume the obligations and liabilities of a promoter?

Chapter VI. CORPORATE POWERS (1) (2) (3) (4) (5)

What are the corporate powers conferred by law? What are the implied powers? What is the ultra vires doctrine? What are the legal consequences of ultra vires acts? What is the quorum requirement for: (a) Board meetings Page 15 of 16

(b) Stockholders’ meetings (6) What is the numerical requirement for: (a) Election of directors (b) Removal of directors (c) Merger and consolidation (d) Amendment of by-laws (7) What are the devices affecting control of the corporation? Distinguish them from each other. Chapter VII. CONTROL AND MANAGEMENT OF CORPORATION (1) (2) (3) (4) (5)

What are the 3 “levels” of corporate control / power? What are the powers of the BOD? What are the powers of the corporate officers? What are the powers of the stockholders? What are the various devices used to wrest/preserve control? Differentiate them from each other. What are their advantages / disadvantages?

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