Midterm WWW Compiled 2016- Atty. Espedido

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NOTES !

CORPORATION LAW (based on Atty. E. Espedido’s Discussions)

By: Batch Batang Sip-onon Compiled WWW’s of 3rd Year - LLB (Pelaez Moot Court)Class S.Y. 2015 – 2016

Compiled by: Rheland Servacio & Dana Mae de Lira As of February 4, 2016.

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& &

Differences between Corporation and Partnership. Partnership As to creation Number of incorporators Commencement of juridical personality

By mutual agreement At least two or more Execution of contract of partnership

Powers

Effect of mismanagement

Any powers authorized by the partners provided it is not contrary to law, morals, customs, public order, or public policy Every partner is an agent of the partnership A partner can sue a co-partner

Right of succession

None; dissolution if a partner dies

Liability to 3rd persons

Liable personally and subsidiary

Transferability of interest

Requires consent of all the partners (delectus personarum)-right to select their partners Depends on the agreement by partners

Management

Duration Firm’s name Dissolution

In a limited partnership, there must be “Ltd.” added May be dissolved any time

Governing Law

Civil Code

Corporation By a law creating the corporation At least five Date of issuance of certificate of incorporation by the Securities and exchange commission (SEC) Exercise powers expressly granted by law or impaired from those granted or incidental to its existence Vested in the board of directors or trustees Suit against a member of the board of directors/trustees must be in the name of the corporation Heirs may succeed rights of the stockholder Stockholders are liable only to the extent of the shares subscribed by them Does not require prior consent of the other stockholders A corporation must not exceed 50 years Any name provided it is not the same to any registered firm name Can only be dissolved w/ the consent of the state Corporation Code

Advantages and Disadvantages. Partnership

Corporation

More personal relations among the people, based on the principle of trust and confidence

Not based on such principle and may admit any person to have a share without the need of consent of other shareholders

Liable up to the separate properties

Shareholders liable only up to the extent of their investment

Less people to deal with

No limit

Limited capitalization because of the principle of trust and confidence, only chosen may invest or be a partner

Acquire more investments by mere subscription of shares up to the extent of authorized

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Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & potential liability would be, one would rather opt to invest in a corporation.

1

Advantages of a Business Corporation.

(4) Corporation has a legal capacity to act and contract as a distinct unit in its own name (1) Right of Succession In a corporation it has the right of succession, when a partner dies, partnership will be dissolved, in a corporation, when a shareholder dies, their heirs will succeed. Hence, there is more stability. E: if you are a creditor, you don't have to take care of all the stockholders, just because when a stockholder dies, they might not be able to pay anymore; whereas in a partnership, the moment partner dies, the creditor should be quick enough to collect, otherwise, partnership will be dissolved upon the death of a partner therefore if he is not quick enough, he might be unable to collect what the partnership owes him. (2) Credit is strengthened continuity of existence.

by

virtue

of

(5) Its creation, organization, management, and dissolution are standardized as they are governed under one general incorporation law. (6) It makes feasible gigantic financial undertakings since it enables many individuals to invest their separate funds in the enterprise to produce large amounts of capital which of course big businesses depends on. (7) Shareholders are not general agents of the business (8) Shares of stocks can be transferred even without the consent of the other shareholders. Delectus personarum does not apply.

such

Incorporator - Requirements.

(3) The shareholders have limited liability A limited partnership is one formed by two or more persons under the provisions of the following article, having as members one or more general partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of the partnership. The law requires at least 1 general partner The problem comes now because an entrepreneur may not want to become a general partner. There is a small chance of having a brave soul of assuming all the liabilities of the partnership personally

Having decided the corporation route, do you think you can be a incorporator, how do you know? Yes, provided that they are at least 5 incorporators, majority of whom are residents of the Philippines. SITUATION: Together with you are 4 Iranian who wanted to form a corporation here in the Philippines. With you only as a Filipino, 80% of capital of such corporation to be owned by foreign citizens, could you from a corporation? A: Yes, as long as the other 4 are residing in the Philippines. Such that all the other 4 are residents of the Philippines. Or the majority should residents of the Philippines.

Difference between limited partnership and a corporation. Sir: In limited partnership, liability of the LP could be to the extent of their investment. However, since the law requires not only limited partners but also at least one general partner, the GP will have unlimited liability. The GP would have to shoulder the liability of the other partner insofar as the limited partnership is concerned, and because of this concept people might be scared because no one is brave enough to assume the position of a general partner. Because the bigger the business, the bigger the

Q: I thought the Constitution does not allow the corporation to engage in businesses unless 60% are owned by a Filipinos. Do you remember that requirement? Do you think you could still form that corp. and how come could you form without violating the Constitution? Article 12, Section 2 of the Constitution provides:

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See De Leon, p. 54 (2013 ed.)

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“SECTION 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law. In cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the development of water power, beneficial use may be the measure and limit of the grant.”

A: Yes. The number of the incorporators should not be less than 5 and the majority should be residents of the Philippines. GR: As a GENERAL RULE, for the purposes of organizing no citizenship is required - only residence

different language such as Arabic, because no one would mandate them to what to do because they are the owners. That is why when it comes telecom, education, naturals dev’t, these are reserves for Filipinos, retail trade, imagine if they were no such provision, such as retail/ukay2x would be owned by foreigner. Q: So can they form a corp. with the Iranians? A: YES, provided that 60% of the stock is owned by Filipinos.

Can partnership be an incorporator? No because incorporators are natural persons? Can a corporation be a partner? No.

XPN: Citizenship is material in NATIONALIZED corporations as when a certain minimum percentage of the total capital stock is required by law or the Constitution to be owned and reserved only for Filipinos.

1.

Nationalized Corporations:

2.

These are corporations reserved for Filipinos. Here, the Corporation must be composed of incorporators whose controlling shares are Filipinos citizens - that is the requirement to engage in nationalized business (see De Leon, p. 133, 2013 ed.) With regard to the 60% provision of the Constitution: it only applies where the industry so involved is for exploitation, development, and utilization of NATURAL resources.

3.

4.

A corporation can only act thru its duly authorized and elected directors and officers, and no one else. If it is allowed to enter into a partnership, then it is allowing the corporation to be bound, directed, and governed by the hands of other persons not sanctioned by the law to do so. It is repugnant to public policy. It shall be bound by the acts of the other partners which is inconsistent with the policy of the law – that the corporation will be exclusively managed by its BOD and corporate officers. The corporation shall be exposed to risks and liabilities not contemplated by the stockholders at the time they bought shares of stocks issued by the corporation. It cannot participate in the management because it does not act as individuals; rather it acts as a unit, as a corporation because of the veil of corporate entity

SITUATION: If that were so do your corp may engage in telecommunications? A: If we assume that each incorporator will have equal number of shares in the corporation, then NO. Art. 12, Sec. 11 of the Constitution requires for Public Service Corporations to have at least 60% of their capital owned by Filipinos. In this case, only 20% is owned by a Filipino citizen. The controlling interest is composed of foreign citizens (80%). Because they are industries that are reserve for Filipinos, because if we allow that the corp of yours and they decided to engage in telecomm would that all the tv channels and radio stations would be using

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Can a partnership be a stockholder? We distinguish. If the partnership is becoming a stockholder by being an incorporator, then NO. However, if the partnership merely buys shares of stocks as an ordinary stockholder, then YES - the limitation imposed as who can be an incorporator is not available to those who can be a stockholder. An incorporator must be a natural person Can a partnership be elected to the board? If yes who sits on the board? NO, to become a member of the board you must have a working mind which a juridical person does not have

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & because in the board there are deliberations which require thinking.

Who compose the corporation? 1.

2. 3. 4. 5. 6.

Incorporators - these are the persons that appear in the articles of incorporation as the persons that started or initially subscribe on the shares of the corporation. Their names will FOREVER be there. Stockholders – stockholders are persons that own at least one share of stock in a stock corporation. Subscribers – subscribers are persons that make themselves liable to invest in the corporation up to the amount they subscribe. Members - members are persons that own an interest in a non-stock corporation. Promoters - persons who bring about or cause to bring about the formation and organization of a corporation by bringing together the incorporators. Underwriters – a person usually an investment banker, who has agreed, alone or with others, to buy at stated terms an entire issue of securities.

How about the underwriters? -They will market the shares. They will assure the corporation, “give us the authority to sell your shares and we will go around the entire market and we will be selling this to the people.” They are actually brokers, they are agent who has the authority to sell the shares of a corporation. But they are special type of brokers, because they assure the corporation that they would sell the shares but if they cannot sell it to another people, and then they have to buy it. Alright, there is a commitment. They tell the corporation, give us the authority to sell. We will be acting as your agent or broker but for every share we sell, you have to pay us. The agreement is for a fee. This is done usually by the banks because banks have a complete record of those people who have idle funds in the bank. They have a list of the people who have money and capacity to buy. And on big corporations who also share abroad looking for capital. If they cannot sell, they will buy themselves. The underwriter therefore guarantees sale of the shares of 2 stocks.

Rights of a Corporation. What rights do persons enjoy?

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This is just one kind of underwriting agreement, called a Firm Commitment. In Finance courses, we would know that in reality there are also other forms of underwriting agreements. We also have Best Efforts Commitment, All-or-Nothing Commitment, and Standby Commitment (see De Leon, p. 123, 2013 ed.).

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Natural: All enumerated in the bill of rights Juridical: property, to sue and be sued, due process and equal protection of the laws, against unreasonable search and seizure Q: Does it enjoy the right to life? No. It is only accorded to natural persons who are a product of biological birth. Q: In what way do corporations have life? That it has juridical personality which has a term of 50 years Q: How about right to liberty? Likewise, it is not accorded to corporations because such right means that a person shall not be detained arbitrarily and a corporation, not being a corporeal being, cannot be detained.

A Corporation, as a General Rule, cannot Commit a Felony. Q: Since it does not enjoy the right to liberty, do you think it could commit a crime? Why? GR: No, it cannot because to be guilty of a felony, the criminal intent (mens rea) must be established and this criminal intent only comes from the mind. A corporation, being a juridical person, does not have a mind of its own. XPN: It could commit when: 1. 2. 3.

The crime is a mala prohibita (special laws) • Here, criminal intent is immaterial. If the crime is punishable only by fines Under the Anti Money Laundering Act (AMLA) (specifically provides that any person, whether natural or juridical, may commit a violation of said statute)

Q: If you penalize a corporation’s officers for crimes the corporation committed will that case prosper? A: NO, because the officers are separate and distinct from the corporation and in criminal law, guilt of the accused must be proven beyond reasonable doubt. Furthermore if the law does not provide that you can prosecute the officers, then you must move to dismiss There are acts which, even if there was no intention, resulted in the injury or damage of someone else which a person could be liable, under what circumstance?

Negligence Negligence is punishable so beware. So goes back to the corporation, since it has no mind on its own, so generally it

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & cannot commit a crime. A corporation cannot act, it cannot drive a car, hold a car, and if something explodes and someone dies, there could be negligence there and since it does not have a mind on its own, it cannot act and commit negligence. Q: However there are instances where a corporation can be criminally liable, and these are? A: Instances are: (exception) 1. If penalty is a fine; 2. If punishable by a special law; (mala prohibita) 3. If the law violated is Anti-Money Laundering Act (AMLA); Under many laws it provides any person could be held criminally liable, however under AMLA it specifies that “any person, natural or juridical shall be liable” so another exception again. So a corporation can be held liable under this law and the fines is huge, the penalties are sometimes non bailable.

Corporation, defined. “Sec. 2. Corporation defined. - A corporation is: • an artificial being • created by operation of law, • having the right of succession • and the powers, attributes and properties expressly authorized by law or incident to its existence.”

Q: Alright, artificial being as distinguished from a natural being, so what is an artificial being?

Q: So if it enjoys certain rights and privileges, on the other hand, corollary to those rights what is the reverse side? It could assumes obligations, and incur liabilities and these are distinct and separate from those of the stockholders and members Q: So the moment it exists, it assumes separate personality, enjoys certain rights, incurs liabilities separate and distinct from the natural person, and this is what we called? A: Corporate fiction It is a fiction so this is not really true, these are the same people who organize, the only thing is because of the law, the law creates a fiction pretends that it is a separate person where in fact they are exactly the same. And when you say it is a fiction, it refers to a VEIL, the law places a veil on top of the heads of the stockholders so that the people could not see who the stockholders are, they only have to deal with that group (aggregation) covered by that corporate veil. So there is no way we could deal directly with those people covered by the veil, so we only have to deal with the group as a juridical person. So that’s the corporate fiction. Although we deal with the stockholder who is a natural person the law deals with them as a corporation. As Distinguished from a person, Juridical persons are created by whom? They are created by operation of law Natural Persons?

An artificial being is a person created under the fiction of the law, and has a juridical personality distinct and separate from the one who organize it.

By God.

Q: So that if there were 5 incorporators and the corporation now exist, how many corporation do we now have?

There are natural rights from God, while there are also civil rights from law. And since a juridical person is created by law, the rights thereof can only be determined through law. And only the law can take back such juridical personality.

6 sir --- namely: the 5 incorporators and the corporation Q: So the moment therefore, the corporation begins to exist, what could happen? It has now a separate and distinct juridical personality and act as a corporation, thus, entitled to enjoy those: 1. certain rights; 2. privileges; 3. assumes obligations; 4. incur liabilities

So who decides what rights to give to a natural person?

So therefore you can only exist within the limits of the law and a juridical person cannot assume powers which the law did not give. And what what did we say about these incorporators? They are the persons who initiate the creation of a corporation.

Doctrine of Piercing the Veil of Corporate Entity:

Doctrine of Corporate Entity (Fiction).3 """"""""""""""""""""""""""""""""""""""""""""""""""""""""""""" 3

p. 15 onwards, De Leon (2013 ed.)

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1.When it is used to defeat public convenience, as when the corporate fiction is used to avoid and existing obligation

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Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & 2.Fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime.

Examples where the corporate veil was pierced: 1.

3.) Alter ego cases, as when the corporation is a mere farce since it is a mere alter ego or business conduit of a person, a mere instrumentality, agency, conduit, or adjunct of another corporation.

2.

Three-Pronged Test in Corporate Alter Ego cases

3. 4.

In alter ego cases, the Supreme Court applied the three-pronged test to determine the applicability of 4 piercing the corporate veil. NOTE that absence of ANY of the three will cause the piercing to fail. 1.

Instrumentality or control Test – COMPLETE dominion or domination of the finances, policymaking and business with respect to the transaction attacked, the conduit corporation having no separate mind and existence on its own.

2.

Fraud Test – such control was used by the defendant to commit the fraud or wrong.

3.

Causal Connection Test - the control must be the proximate cause of the injury, the wrongful act being made possible thru the instrumentality of the corporate alter ego.

An example would be a situation where there are two corporations owned by exactly the same shareholders, wherein probationary employees in one corporation are transferred to the other corporation on the fifth month i.e. prior to regularization (and transferred again back to the prior corporation after the same period of time). In this case, both corporations could be treated as a single entity in order to allow regularization to the employees concerned. Thus, the veil of corporate fiction can be lifted since the goal of having such corporations was to violate the law. In this case, the shareholders can be held liable. As was held in Bogo-Medellin Sugarcane Planters Assoc. v. NLRC, “In cases of illegal dismissal, corporate directors and officers are solidarily liable with the corporation, where terminations of employment are done with malice or in bad faith.”

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See PNB v. Hydro Resources Contractors Corp (2013) (cited in De Leon, p. 42).

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5.

6. 7. 8.

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Where the transaction was entered into by the President who was also the treasurer and general manager of a Closed Family Corporation (wherein the incorporators and directors just belong to one single family) Where a corporation functions for the benefit of a single person who has complete dominion over the 6 funds and that said person is the sole owner thereof. Where the corporation is a mere instrumentality of the individual stockholders Where the corporation is a mere instrumentality, a business conduit, or alter ego of another corporation. ! to evade taxes ! to avoid regularization of employees and circumvent labor laws ! illegal dismissal where a corporation is dissolved and its assets are transferred to another corporation to avoid a financial liability of the first corporation to its employees and defraud its creditors, both firms being owned and controlled by the same persons with the result that the second corporation should be considered a continuation and successor of the first entity. All stockholders acting as individuals, and not under a formal corporate action, enter into an illegal act Where properties of the estate are transferred to a corporation to avoid payment of estate taxes. To confuse legitimate issues

Right of Succession. A corporation has a capacity of continuous existence irrespective of the death, withdrawal, insolvency, or incapacity of the individual stockholders or members and regardless of the transfer of their interest or shares of stock. In a partnership, what happens when a partner dies? The partnership is dissolved.

In a corporation? If a stockholder dies, his heir/s will replace him and the corporation continues to exist.

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"De"Leon,"p."29." "Be"careful"though.""The"mere"fact"that"all"of"the"capital" stock"is"owned"by"a"single"stockholder"does"not"necessarily" follow"the"piercing"of"the"corporate"veil"in"corporate"alter" ego"cases.""To"properly"invoke"it,"the"threeEpronged"tests" must"be"complied"with." 6

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Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & 2.

Articles of incorporation – the agreement between and among the ! incorporators and the State; ! stockholders/incorporators themselves; ! incorporators and third parties/public

3.

By-laws – internal rules and regulations that bind the stockholders themselves and in certain instances, bind third parties Ex: Meeting, Manner by which directors are elected

SITUATION: 5 stockholders went on vacation in Palawan. While they are inside the cave somebody closed the cave and nobody see them again. What happens to the corpo? A: The Corporation will continue to exist because their heirs will succeed. If they are minors, they will be represented by guardians.

Corporate Powers.

Test in determining whether the power could be consider incidental:

In partnership - powers of the partners are agreed by partners provided it is not contrary to law, morals, customs, public order, or public policy In a Corporation - powers are expressly granted by law (express powers) or incidental to its existence (implied powers)

Express powersincorporation(AOI)

You just have to check the AOI to know the purpose of the corporation. If not within the purpose, ULTRA VIRES ACT! SITUATION: USC, to maximize assets and gain more profit, hold other classes after the 8:30 classes, holding ballroom classes in every room. Answer: •

•

•

Check the purpose of the University if the dance lessons are expressly provided within the stated purpose in the articles of incorporation If the dancing lessons can be aligned in the educational/academic purpose of the University, then can be allowed as incidental activity. However, since the University is an educational/academic institution, the dance courses pertain solely to academic, not purely for social and entertainment objectives. Hence, in the example, ballroom dancing is not allowed.

2 powers of the Corporation: 1. Expressly provided by law 2. Incidental to its existence (see p. 46, De Leon) Powers are defined in: 1.

The Law – the Corporation Code.

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2.

Whether it is necessary to pursue the business

Necessity of the business vs. Furtherance of business7 Necessity of business- In the articles of incorporation, it is stated therein the primary purpose of the corporation. And so, the corporation is authorized to do those activities that are necessary to carry on the business and achieve the primary purpose. (Capital Maintenance) Furtherance of business- When the corporation is planning to expand its operation, it is allowed to exercise powers which may not be in line with the primary purpose in order to expand its business. (Expansion & Growth) Situation: A corporation put up a factory far from the city and there was a necessity in maintaining a power plant. In setting up the power plant, the local power supplier protested because the corporation does not have the authority to operate a power plant (corporation is engaged in mining business). The power plant is for the operation of the business and is given freely to the employees residing within the compound. Answer: The electricity provided by the mining company is limited only to the employees living within the compound of the company. Even in taxation, a corporation giving housing benefits to its employees within a specific radius from the company is not taxable because the law considers it as necessary. By analogy, the electricity provided by the corporation is also necessary.

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Whether it is for the furtherance of the business EX: engaged in agricultural business, you have the power to buy agricultural lands

EX: engaged in agricultural business, you have the power to buy heavy equipment, fertilizers and other similar expenses

stated in the law or articles of

Incidental powers – those related to the business

1.

For more examples, see p. 46, De Leon (2013 ed).

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Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& &

Classes of Corporations.8

Public v. Private Corporations.

[Sec. 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations.]

Public Corporations - formed by the government for the common good and public welfare; Made by or is instituted by the government or the state to govern a portion of a state such as municipality, cities, and barangays.

1. Under the Corp. Code: Stock Corporation – has capital stock divided into shares and are authorized to distribute to the holders of such shares dividends and allotments of surplus profits on the basis of the shares held; Non-stock Corporation – all other corporations are non-stock corporation.

Q: What about PAGCOR?

2. As to number of corporators: Corporation Sole – one member or corporator; Corporation Aggregate – consisting of more than one corporator or member. 3. As to legal or corporate existence: De jure Corporation – corporation existing in fact or in law; De facto Corporation – existing in fact but not in law. 4. Whether it is private or public: Private Corporation – formed for some private purpose; Public Corporation – formed to organize for the government of a portion of the State. 5. Whether it is open or close: Open Corp – open to any person who may wish to become SH; Close Corp – limited to selected persons or members of a family. 6. Whether it is for religious purposes or not: Ecclesiastical Corp – for religious purposes; Lay Corp – purpose other than religion. 7. As to formation: Domestic Corp – incorporated under the laws of the Philippines; Foreign Corporation – formed under any laws other than those of the Philippines. 8.As to purpose: Public Corporations - formed by the government for the common good and public Welfare; Private Corporations - are those organized for private purposes and/or profit. 9. As to Existence: True Corporation Quasi Corporation a. By Prescription b. By Estoppel

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A: PAGCOR is a GOCC and is a private corporation. PAGCOR has a special charter. Province, municipality and barangays, these are public corporations. And what is the purpose? The purpose is intended for the general welfare of the public. What about PSCO? PCSO is a GOCC and is a private corporation. Like PAGCOR it has a special charter and it is a special corporation. Q: What about the Dept. of Agriculture? It is a government agency, it is not a public corporation. Like DENR & DEP-ED these are branches of agencies of the state, they carry out the executive functions and it is a part of the state and of the executive department. It does not govern a portion of a state. The Legislative department and the judiciary departmentthese are branches or agencies of the state. These are not corporations. Land Bank of the Philippines. It is privately owned by the government. It is a Government-owned and controlled corporation (GOCC) which the government owns majority of the shares of the corporation. GOCCs are private corporations.

GOCCs and Corporations made thru Special Charters are governed by the law that created them; Corporation Code applies Suppletorily. Q: Do we take them here? Do we discuss them here? A: No, because these are covered by their special charters, the Corporation Code is important because it can be applied suppletorily , anything missing in their special charters, the provisions of the Corporation Code will apply. The charters do not provide much; these simply provide for how they earn, where do they get their capital and how much do they pay their director. If you are an officer of PAGCOR, PCSO , MCWD, they are enjoying huge amount of bonuses. But when Pnoy came over, he cut all these benefits.

See Sec. 3, Corp. Code; p. 55, De Leon (2013 ed).

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Private Corporations - are those organized for private purposes and/or profit.

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Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & GSIS, SSS, these are government owned corporations. They are special corporations governed by their special charters although the provisions of the Corporation Code will be applied suppletorily.

Quasi-Public Corporations

A: P125K paid up x 5 inc. = P625K Paid up capital Total Capital of that corporation is 2.5M because although you were only required to pay 25% (P625K ) of subscribed capital, you are liable for the balance because you committed to pay that amount. To Summarize:

A: They are private corporations performing public functions. An example would be VECO, MERALCO, MCWD, Smart, PLDT, SkyCable. They are private corporations which have accepted from the State the grant of franchise or contract involving the performance of public duties, but which are organized for profit.

Publicly-listed Corporations. Publicly-listed corporations are corporations which are listed in the Philippine Stocks Exchange where the shares are being sold in that stock market. That’s why they’re called as such because they are listed there. Some people, however, simply call them, public corporations. You now know, as good corporate lawyers, that it’s not actually the right term because we learned that public corporations are those intended to govern a portion of the State. Here, they are just publicly listed corporations. You will see in your TV tonight the gainers and the losers. The gainers are those whose shares of stocks went up; it started with a low price in the morning and went up in the evening. The losers are the reverse. Now, we have public corporation, quasi-public corporation, and publicly listed corporation. You should be able to distinguish one from the other.

Stock Corporations. Stock corporation- a corporation where the capital stock is divided into shares and is authorized to distribute dividends. A stock corporation has authorized capital stock which is the amount specified in the articles of incorporation wherein the stockholders may subscribed wholly or partially.

ACS………………………….… 10,000,000 Subscribed CS………………. 2,500,000 (Min) Paid-up capital………………... 625,000 (Min) [NOTE: Per Sec. 13, the Paid-Up Capital should not be lower than Five Thousand Pesos (P5,000.00)] Q: When must it be paid? -The date indicated in the subscription agreement -If no agreement, board can decide when ( will be paid later or when needed). Q: Why does a Stock corporation divide Capital into shares of stocks? A: To be able to measure how much your share of the profit is - DIVIDENDS. That is why once the Corp is profitable and authorized to distro div, the board will declare dividends and your dividends will depend on the number of shares you have so that if its cash dividends: amount of dividends per share X No. of shares Non-stock corporations – NO DISTRIBUTION OF PROFITS AND DIVIDENDS among its members, hence, no need to measure the number of shares. - the profits earned are used to expand or improve its facilities for the benefit of its members. - also called non-profit corporations. - ex: membership clubs - other non-profit corporation for other purpose: Church - religious.

Q: Why divide the corporation into shares? A: basis for the distribution of the dividends. SITUATION: Corporation has 10M authorized capital stock (maximum amount that corporation could invest). But it need not be fully subscribed (investing). The Corporation Code only provides to have an initial investment of 25% or 2.5M. As a matter of fact, the 2.5M did not be fully paid immediately. The initial payment required is only 25% of the subscribed capital stock which is 625T. Q: So if the SHs agreed to equally invest how much do you think will the paid up capital that must be paid by the incorporators?

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Classification relationship.

of

corporations

as

to

Holding/Parent – a corporation which has the power, either directly or indirectly, through one or more intermediaries, to control or to elect the majority of the directors of such other corporations (called subsidiaries) Subsidiary – a corporation whose majority of its directors can be elected either directly or indirectly, by such other corporation which thereby becomes its parent corporation.

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & What the holding Company wants, the holding Company gets, because it controls the subsidiary’s majority directors. Example: You are a shipping company. Once you arrive in port, “kargadors”/stevedores try to board vessels and grab cargoes of passengers. This might cause disorder or trouble because these people will just carry the cargoes without agreeing on the price and afterwards, charge the passengers with huge fees. So it’s a must for the shipping company to impose order, and it can only do that if it can organize the people there. So how may the shipping company organize? It may have to organize an Arrastre Company wherein all the “kargadors” will become employees of the company. Once you become an employee, you are under rules and regulations of Arrastre Company. Only employees could get inside the pier. So you have imposed discipline and order inside the pier because the shipping company controls/organized the corporation. To make sure that management of Arrastre Company is controlled by shipping company, the shipping company must own the majority, if not all stocks of that Arrastre Company. If you have enough shares of stock to elect the board, then shipping company could be sure that that Arrastre Company would follow its orders. Parent Company Subsidiary Company

- shipping corporation - arrastre corporation

Every time they are in port, they will have to make repairs within a limited time. But every time, the marine engineers are busy with the other vessels. We resolve this by making another corporation composing of marine engineers and dealing with repairs and improvements of the vessel. Now, you have TWO SUBSIDIARIES and ONE PARENT. What do you call this group of company? They are all affiliates. They have a relationship among the three of them. Relationship between the Arrastre Corporation and the corporation composing of engineers? They are sister companies because they have a common parent.

De Jure v. De Facto Corp. 1.

2.

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De jure – existing in fact and in law; one created in strict or substantial conformity with the mandatory statutory requirements for incorporations and the of which to exist as a corporation cannot be successfully attacked or questioned by any party even in a direct proceeding for that purpose by the State De facto – existing in fact but not in law; one which has not complied with all the requirements necessary to be a de jure corporation but has complied sufficiently to be accorded corporate status as against third parties although not against the State

Requisites: 1. A valid Law under which a corporation with powers assumed might be incorporated 2. A bona fide attempt to organize a corporation under such law 3. Actual use or exercise in good faith of corporate powers.

What is the importance in complying with the law when, after all, you will still be recognized as a corporation? The government can attack or question the existence of the corporation since such a corporation did not comply with requirements provided for by law under a quo warranto proceeding. However, a private third person cannot invoke, as a defense, the fact that a corporation is a de facto corporation to avoid complying with its obligations to the latter.

Since the de facto corporation failed to comply with the government requirements then it is only the government or the state that can question its existence, no one else. As a matter of fact if a case were filed against or by a de facto corporation to demand payment of an obligation can the defendant say “motion to dismiss” on the ground that the plaintiff has no personality to sue? May the court dismiss? No, since the law still recognizes a de facto corporation as possessing its own juridical personality and, as such, in such a case, its personality cannot be subjected to collateral attack by the defendants. Only the state can ask that the said de facto corporation comply with the requirements since it is only the state which is aggrieved or offended.

Corporation by Estoppel v. De Facto. Corporation by estoppel happens when persons assume to act as a corporation even if they knew that they do not have the power to do so. They pretend to possess that power and that is why they are now prevented from denying the fact of their being a corporation Corporation de Facto former acted as a corporation even though from the beginning that they were not a corporation and did not possess the power to act as such while the latter acted as a corporation because they honestly thought that they have the authority and the power. If a case will be filed by that de facto corporation, the other party can’t seek the dismissal on the ground that there is no personality. It has. As a matter of fact, the law recognizes the de facto corporation as existing. And as to intents and purpose, very close to a de jure corporation. Only the state can question its existence and not

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & anyone else. Otherwise, if anyone can question, there will be disruption of the flow of business. Every person might ask to see and ask for documents required by law in order to exist as a corporation, although this level of scrutiny and precaution is exercised in big transactions. Corporation by estoppel - only exercises corporate powers without any law authorizing or vesting them It exist when persons who does not have the authority to act as a corporation acted as such. This also happens when a de facto corporation does not comply with the requirements provided by law. Requirements to exist as corporation by estoppel 1. 2. 3.

Representation by a group to the public Knowing that they do not have the authority to act as a corporation Third parties contracting with them are induced to believe that they have the authority to act as a corporation

Can that existence of the corporation by estoppel attacked collaterally? YES. The state and the third parties can attack them collaterally since the law did not recognize their existence.

The SEC may have the authority over these corporations. What could the powers of the SEC be? What can they do on these corporations? There are reportorial requirements. You have to make a report to the SEC from time to time. Usually every year you submit to the SEC the general information sheet (GIS), for example, where it is indicated among others that there are changes in the stockholders, changes in the officers, changes in the directors, if there was any amendment to the articles, or the results of the election. So, the SEC has the authority to monitor, supervise, administer. In consonance with this authority, what can SEC do to corporations who failed to comply? They do not immediately dissolve the corporation, but they may suspend or impose a fine, maybe for 150 pesos per day. It may even dissolve if the violation is very serious. NOTE: Dissolution may also be imposed if the corporation was granted certificate of incorporation and it failed to operate as a business within 2 years. It can also be dissolve if the corporation has started operating its business, but it did not 9 operate for continuous period of 5 years.

(NOTE: Corporation by estoppel exist only between the contracting parties with regard to a particular transaction.)

SITUATION:

Classes of Shares.

There is a group of 5 individuals representing themselves as corporation and went to a supplier. The supplier extended credit and gave them the stocks and start with their business, however they never paid the supplier. Supplier filed a case for collection. If you were the lawyer of that group, what would you do? Can you also move for the dismissal of the case on the ground that the corporation does not exist? A: No, because there is a corporation by estoppel which binds the contracting parties insofar as that particular transaction is concerned. They are estopped from denying that they are a corporation for it was they themselves who represented that they are a corporation. No one under the law on equity can take advantage from their own folly. There was fraud. They were guilty. Why would the law allow the deception of the party? This is the concept of estoppel. This was taken from the law of equity. Only the contracting parties are involve in the concept of estoppel. If no one was damaged, there is no estoppel at all.

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1. 2. 3. 4. 5. 6. 7.

Par value or no par value Voting or non voting shares Common or preferred shares Promotion shares Founder’s share Redeemable share Treasury share

Par Value Shares; Non Par Value Shares. Par Value Shares are those that carry with it a value of a particular share. Non par value shares do not carry with them a fixed value of a particular share.

“Section& 6.& …& Shares& of& capital& stock& issued& without&par&value&shall&be:&&

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"Administrative"power"given"to"the"SEC"by"Sec."22"of"the" Corporation"Code."""

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& &

1.

2. 3.

•

•

•

deemed& fully& paid& and& non3assessable& and& the&holder&of&such&shares&shall¬&be&liable&to& the& corporation& or& to& its& creditors& in& respect& thereto:&& Provided;&That&shares&without&par&value&may& not&be&issued&for&a&consideration&less&than&the& value&of&five&(P5.00)&pesos&per&share:&& Provided,) further,& That& the& entire& consideration&received&by&the&corporation&for& its& no3par& value& shares& shall& be& treated& as& capital& and& shall& not& be& available& for& distribution&as÷nds.”& Here, the shares do not represent a fixed proportionate interest in the capital stock measured in value, but rather expressed in an aliquot part of the entire number of shares of the issuing corporation. They have no stated value appearing on the face of the certificate of stock but they always have an 10 “issued value” which is the consideration fixed by the corporation for its issuance. Once NPV shares are issued, they shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or its creditors insofar as the unpaid portion of the subscription is concerned. o

If there is a non-par value share issued, creditors could no longer expect that there are some receivables from the shareholders. There are no more receivables because it is deemed fully paid.

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Voting and Nonvoting Shares. Voting Shares- those shares with right to vote. Non Voting Shares- shares with no voting rights. As an owner of the thing, what are your rights over such? • • • •

Right to dispose it Right to use Right to sell Right to the fruits of the thing

The Fruits of the thing (share of stock) is called the DIVIDENDS. And by exercising his right to vote, a shareholder exercises his right to the fruits of his property - his right to dividends. ! You invest because you expect fruits and your expectations to these fruits will depend on how the corporation is organized and managed. (Otherwise if you put this corporation into the hands of crazy directors, do you think the corporation will earn profits? So you have to make sure that before the directors will be able to manage this corporation, they are those that are qualified and competent. You should vote only those that are qualified and competent directors. The only way to ensure that your share will bear fruit is to make sure that the corporation will be managed in the hands of good BOD and corporate officers.

Furthermore, the minimum issued value as required 11 by law is P5.00. It cannot go lower than that.

•

The entire consideration received by the corporation for its no par value shares shall be treated as capital, and therefore cannot be used for 12 dividend distribution.

•

Banks, trust companies, insurance companies, and building and loan associations are prohibited from issuing NPV shares

•

Preference shares always have a stated par value. There is no such thing as NPV Preference shares.

*****

SITUATION

Apart from the right to votes, there are also other issues in Corporation which may involve the SH themselves. Although we said generally directors manage the corporation, there are issues that must be referred back to the SH for ratification and approval. It is during this instance that the SH could participate directly in the Management of the Corpo.

"Sec."62,"Corp."Code;"see"De"Leon,"p."82"(2013"ed.)" "Sec."6,"par."3,"Corp"Code;"see"statutory"restrictions" regarding"issuance"of"NPV"shares,"De"Leon,"p."91"(2013"ed.)" 12 "The"theory"is"that"the"shareholders"intended"that"all"of"the" paid"up"capital"for"the"no"par"value"shares"are"to"be" employed"permanently"for"the"execution"of"the"business" venture"(see"De"Leon,"p."91)" 11

Q: If we issue such NPV share, will that share have any value? A: Yes, called the “issued value” as agreed by the issuing corporation and the subscriber, provided that it will not be less than P5.00.

•

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If we have 10 million authorized capital stock divided into 10 Million shares. No par value was mentioned in the Articles of Incorporation. Q: , do we have a par value of 1 peso? A: No. what is being issued by the corporation is a Non Par Value Share.

GR: The Board of Directors have the sole discretion and control over the management of the corporation. XPN: When it involves issues that need to be referred back to the stockholders for ratification and approval.

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& -

& Decisions made by the board are controlling whether or not the stockholders agree. But there are instances when the stockholders can directly participate in the management by way of exception.

performance of certain condition (usually payment of full subscription price) or happening of certain event contained in agreement Certain shares are transferred from one party to another. The transferee might not be ready for the payment or might have to inquire to some other matters related to the ownership of the share. So pending final verification or pending payment of the balance, the shares cannot be transferred yet to the assignee because of some concerns. While waiting for these concerns to be verified, parties agreed to deposit the share to the bank. Such share cannot be released by the bank unless the parties agree. These shares should be held by the bank in trust or under escrow.

Remedy of the stockholder when the BOD's decision is not to his liking: If not profitable: Sell his shares and get out of the corporation (appraisal right). If profitable: Stay in the corporation but not vote for the said director(s) in the annual election of BODs. GR: Whenever a vote is necessary to approve a particular corporate act, such vote refers only to stocks with voting rights. XPN: Cases when even non-voting shares may also 13 vote : 1. 2. 3. 4. 5. 6. 7. 8.

Amendment of the articles of incorporation; Adoption and amendment of by-laws; Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; Incurring, creating or increasing bonded indebtedness; Increase or decrease of capital stock; Merger or consolidation of the corporation with another corporation or other corporations; Investment of corporate funds in another corporation or business in accordance with this Code; and Dissolution of the corporation

Once the conditions are fulfilled, then the transfer may be completed. Meanwhile, while under escrow, nobody has the right to withdraw. If there are dividends meanwhile, they are to be placed too under escrow. 3.

Promotion Shares – shares issued to promoters or in some way interested in the company, for incorporating the company or services rendered for launching or promoting welfare of company such as advancing fees for incorporating, advertising, atty’s fees, surveying, etc.

4.

Founder’s Shares – shares issued to organizers and promoters (simply, the founders) of corporation where they enjoy certain privileges such as the right to vote and the exclusive right to be voted for. This right is limited only for a period of 5 years from the existence of the corporation and preference in case of dissolution of the corporation.

In other words, even if your share is a non-voting share, you still have that right to vote if it involves the issues above. These issues are so important that a stockholder should exercise his right to vote.

Because being founders of the corp, they must have in mind the plans of the corp. the concept of the corp that it entails to pursue, how should the business be managed, what is supposed to be done. So these are the people who knew the plan. So the law requires that they be given enough time to make the corp stand on its feet, start in a right manner and pursue the way it was planned so that it will be profitable.

***** Other shares: 1. Common or Preferred Shares Common Shares – entitle holder to pro rate division of profits without any preference over other stockholders or class of stockholders but equally with all except preferred stockholders Ordinary shares entitled to basic rights under the Code Preferred Shares – entitle holder certain preferences over holders of common stock (division of dividends/profits or rate of dividends, priority of payment of dividends) (depends on type of share you subscribed) 2.

Shares in escrow – shares subject to agreement by virtue of which share is deposited by grantor or his agent with third person to be kept depository until

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5.

Treasury Shares–shares lawfully issued by corporation and fully paid for and later reacquired by it either by purchase, redemption, donation, forfeiture or other lawful means

6.

Redeemable Shares – shares usually preferred which are redeemable at fixed date or at option of either issuing corporation or stockholder or both at certain redemption price

"Par."6,"Section"6,"Corp."Code."

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Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& &

Sources of Capital.

corporation) to pay the amount you lent plus interest at the full amount, whether the corporation enjoys profit or not.

IOWs, when the corporation is in need of cash or capital, the options of the corporation are: 1. 2. 3. 4.

LOAN - Get a loan from the bank; BOND ISSUANCE STOCK ISSUANCE - Encourage the existing stockholders to subscribe for more, so that they will invest some more; or The corporation will issue REDEEMABLE SHARES—If the existing stockholders are no longer interested or no longer in the position to invest some more, they will encourage capital from the public.

Redeemable Shares, Advantages. Stockholder’s Viewpoint: Remember, when you are a stockholder you invest in a corporation but you cannot just get back your investment anytime you want you have to go through the corporation, to stay with the corporation thru thick and thin. So once you put your money there, then that money should remain, you cannot get it back. That investment will become petrified and untouched, being placed permanently in the Trust Fund of the corporation to secure the payment of its obligations. So that, because this is offered as a security of whatever the corporation has borrowed from third parties or offered as security to answer for any liability, stockholders cannot any longer withdraw their investment - these are reserved for the creditors; otherwise if you are allowed to withdraw your investments anytime and all the stockholders are getting poorer every day and more liabilities than assets now, what could happen to the creditors rd rd or 3 parties? The 3 party-creditors will be jeopardized. Don’t rd touch it because these are reserved for the 3 party- creditor. And this is what we call the Trust Fund Doctrine.

When you buy shares, you are an investor and you will have a share in the corporation unlike being a creditor. However, investing involves risk and you cannot get back the money which you invested because of the Trust Fund Doctrine; However, there is a compromise between lending and buying shares and that is through availing of redeemable shares. Through availing of redeemable shares, you can still compel the corporation to buy back the redeemable shares within a certain period plus a premium (like a creditor) , while being entitled to dividends (like an investor) An investor takes a risk but let it be noted that it is a compromise between the lender and an investor, while an investor takes the risk and the lender does not, while the investor enjoys the profit, unlimited or not fixed dividends, but the lender has a fixed interest, there is a compromise in between, and what is that compromise? Redeemable shares is a compromise. Why? In redeemable shares, the shareholder is both an investor and a creditor because a certain period the stock holder is assured that he is paid for he fixed period on a certain price. It also is an exception to the Trust Fund Doctrine. Because this doctrine protects the creditors and holders of redeemable shares are all intents and purposes, creditors. They did not really intend to become stockholder this is merely an incident to the transaction. In the strict sense of the word they are not stockholders they are creditors.

IOWs, the assets of the corporation should be left there in trust for third party-creditors because you cannot catch them (refers to stockholders, I think).

Treasury Shares.

If you are offered to be a stockholder, would you easily agree? You have to think twice. Unless you are really convince that the business of the company is very profitable then to think twice.

Once reacquired the redeemable share will be considered as part of the treasury share of the corp.. They will become therefore treasury shares.

Q: Which of the options would be attractive to you? Would you like to lend to the corporation? Or invest as a stockholder? Or buy redeemable shares?

They are called as Treasury Shares because they are already issued by the corp and later on are back in the treasury or coffers of the corporation. It now again forms part of the asset of the corp.

To avail or buy Redeemable shares. Why? What is the advantage of buying redeemable share? In lending, it is a debtor-creditor relationship. if you are a creditor you can[not immediately] compel the debtor (i.e. the

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Treasury Shares have NO voting rights. The treasury share has no voting rights, because treasury share are now within the corp; if such is given voting right, the BOD might abuse their position, using these TS as a means to perpetuate their position in the corp. Treasury Shares cannot receive any dividends while still being held by the Corporation. The treasury share has no

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & voting right and dividends. Because it is owned by the corp, it is as if putting money to another pocket.

Articles of Incorporation. It constitutes the agreement of the incorporators between themselves, between the state, and between the public. It contains the following14: 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such; 3. The place where the principal office of the corporation is to be located, which must be within the Philippines; 4. The term for which the corporation is to exist; 5. The names, nationalities and residences of the incorporators; 6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); 7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; 9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and 10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient.

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"Sec."14,"Corp"Code."

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The AOI must be filed with the SEC together with sworn statement of the Treasurer elected by the subscribers showing that a.

b.

c.

at least twenty-five (25%) percent of the authorized capital stock of the corporation has been subscribed, and; at least twenty-five (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation for; which is equal to at least twenty-five (25%) percent of the said subscription, such paid-up capital being not less than five thousand (P5,000.00) pesos.

Once found in order? The SEC will now issue a certificate of incorporation. It is important because it is the time the corporation will acquire its separate and distinct juridical personality. Thus can now engaged in business

Corporate Name. The name is important because the corporation acts under this name (enters into contracts under said name) and also for identity purposes because it is a juridical entity thus it needs to be identified with particularity. It is the identification of the corporation which should be established as early as the filing of the filing of the articles so that should any liability accrue the public will be able to pursuit the right person. The name of the corporation must be approved by the SEC and must be checked and compared with the other names of existing corporations whether or not the proposed name is being used by other existing corporations. The purpose is important because at the moment the corporation acquires its personality it can only act within its purpose. It will be pursuant to that purpose that the corporation acquires its powers expressly through the law or incidental to its existence, otherwise, it will be considered as an ultra vires acts and it will not bind the corporation. The intention of providing the purpose in the articles is to guide the public and the State (and monitor) to determine whether or not a particular act performed still falls within its power and authority as granted by the State otherwise if the act is no longer within the authority granted by law it may not bind the stockholder or the parties to a particular transaction One of the things that SEC will examine is the name of the corporation and the law requires that it must not be identical or confusingly similar with the name of the other corporation. So the law on patents and its principle that we learn might be applied since there are case in the past that the SC will intervene in determining whether or not such particular

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & name has violated the copyright or patent of another. One case for example is Planters Peanuts the best peanut until somebody else that it is making a lot of money, somebody came out like Planters Growers which came out a little late but crunchier so the Planters Peanuts wasn’t able to catch up. Also EFFICACENT OIL and the other is EFFICIENT OIL, same bottle, form and color.

Address. It is necessary to facilitate governmental monitoring of corporations and sending of notices. It should be specific and easily located so that the SEC would be able to communicate with them, being subject to supervision, control and administration of the SEC. SITUATION

Purpose Clause. In case for its purpose, the AOI must clearly and specifically determine the purpose of the corporation in order for the public to be appraise whether or not the corporation is acting within the bounds in which it was created and determine if they perform an ultra vires act which is beyond the scope of their authorized powers. The purpose clause defines the extent and limitations of the powers which a 15 corporation may exercise. SITUATION: So if the purpose of the corporation said we deal, sell, trade, promote joy, fun, and happiness what do you think? A: It is not allowed because it so broad and joy, fun and happiness is subjective. It is so broad that it might cover large varieties of activities. The purpose should be definite and concrete. It did not specifically state the purpose of its creation and joy, fun and happiness is not concrete. The purpose must be concrete in order for the SEC to determine whether or not if you enter into transactions it can easily be determined if you are acting within its purpose. If it is not concrete there is no way that SEC could determine whether you are acting within the bounds of the purpose. That is why the NAME and PURPOSE is very important.

So the name of your corp is Abusayaff, Incorporated. Address: somewhere in the interlands of Mindanao, would that be ok? A: No, because the address is not specific.

Amendments to AOI Once the articles of incorporation have been filed, you will be issued the certificate of incorporation. It is essential for the life of the corporation to begin. Does it stay like that forever? No. The life of a corporation must be extended. To put this into effect, the AOI must be amended to extend the corporate term, approved by the majority vote of the VOD and ratified at a meeting of the stockholders representing at least 2/3 OCS 16 [Maj. BOD, 2/3 OCS]. The amended AOI is submitted to SEC for approval.

Management is vested to the board. How come this (referring to amendment) is presented to the stockholders for their approval? Because this amendment results to a change of several agreements made by the corporation. Even non-voting shares can decide the amendment of AOI because it does not only affect the BOD but the corporation as a whole including stockholders. The stockholders who are parties in the articles should be consulted because this is now a change in their fundamental agreement.

SITUATION: One of the purpose is to provide WELLNESS to the customers and clients, what do you think?

Articles of Incorporation is a contract among whom?

A: It still too vague and broad because WELLNESS could be emotional, social, physical, psychological, etc. It is not definite and concrete. Q: must it be in English or what? A: It must be in official languages, English or Filipino

•

State and the Corporation

•

Corporation and stockholders

•

Stockholders and other stockholders

What does novation mean? It is the change in the subject matter of the contract

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"De"Leon,"p."157."

17" "

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"Sec."37,"Corp."Code."

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & What are the 2 kinds of novation?

These are the rare occasions when the stockholders are consulted and are given opportunity to review and approve decision of the board. Otherwise?

1.

Real – change in the res (thing)

2.

Personal – change in the persons involved rd

Here we said that there is a 3 contract, one between the stockholders. If there is any change, we will have to require all the parties to participate in the change. The changes will have to affect all the stockholders. The board exercises the powers of the corporation. However, there are occasions when these directors cannot just decide among themselves. Generally, the stockholders do not have the right to investigate, intervene, or interfere or even change the decision of the BOD because it is the BOD which is given the sole discretion by law to manage the affairs of the corporation. Also, the power of the board is not given by the stockholders; the latter merely placed/elected the former to their positions. Who gave them the powers? The law defines the powers of the board. It is, therefore, not appropriate to claim that they got their power from the stockholders. They got their power from the law itself. And, thus, it is only the law that can change that power XPN: However, there are occasions when the board will have to consult the stockholders. What are these occasions?

Decisions of the board are to be respected because they are the ones given the authority to manage the business of the corporation and their power is derived from the law itself Once the directors are there, there is nothing the stockholders can do and their only remedy is? Not to elect the same persons in the next elections So the law requires every corporation to conduct an annual meeting for the purposes of electing new members of the board of directors.

Concept of Capital. In ACCOUTING PARLANCE it is the assets minus the liabilities Assets = Liability + Capital (or Shareholders’ Equity) So you are now talking about the legal capital, is it the same capital you mentioned assets minus liabilities? No. That is simply Capital (Capital per se). How do we now distinguish legal capital and capital?

1.

amendment of the AOI

2.

adoption and amendment of the by-laws

3.

sale, lease, exchange, mortgage, pledger or other disposition of all or substantially all of the corporate property

While capital per se, fluctuates as it varies with the current financial standing of the corporation. It may also be increased by the appreciation of the fair value of its assets or the depreciation of the same.

4.

incurring, creating indebtedness

Sir: all right the legal capital is fixed unless of course?

5.

increase or decrease of capital stock

6.

merger or consolidation of the corporation with another corporation or other corporations

7.

investment of corporation corporation or business

8.

dissolution of the corporation

or

The legal capital, it is fixed.

increasing

funds

bonded

They sell and issue more shares of stock.

in

another

[NOTE: Legal Capital is the amount that cannot be touched by the Corporation because this forms part of the Trust Fund for its creditors. It cannot be used for dividend distribution. The amount of the Legal Capital will vary, depending on whether the shares are issued with par or without par. a. b.

Merger.

With Par: LC = only the Aggregate PAR value (consideration in excess of par is not added). Without Par: LC = ENTIRE consideration (both 17 issued value + in excess of issued value) ]

Two corporations are combined and only one corporation survives XXX

Consolidation. Two corporations combine wherein they create a new corporation

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"De"Leon,"p."75."

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Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & In the articles you will the authorized capital stock (ACS) of the corporation that at least 25% of ACS is subscribed and at least 25% of the subscribed is paid up, provided it is at least P5,000.00. Which is the FIXED capital?

concern. And since capital fluctuates book value also fluctuates. Alright so we divide this into number of shares and then we get the book value. So that if you intend to buy shares of stock from another person you may buy it according to its par value or you may buy it according to its book value.

It is the 1.) authorized capital if the articles of incorporation is not amended and also the 2.) subscribed capital On the other hand, the PAID-UP capital? On the other hand the paid up capital is the amount that the subscriber has paid upon subscription which is at least 25% of the subscribed capital and the remaining balance to be paid: a. b.

according to their agreement and in the absence of which, upon the decision of the board of directors

So if you intend to buy, on what value will you buy it in accounting parlance? I will buy it in par value or fair market value because it would depend on the agreement of the parties. If the share is initially issued by the corporations you cannot buy it lower than the market value. Of course it cannot be sold lower than par value if it is initially issued by corporation, otherwise? It becomes a watered stock.

Capital Per Se. The capital in accounting parlance is fluctuating depending on the performance of the corporation. Alright it may fluctuate daily, try to look at your books capital may rise or fall depending on the performance of the corporation or the business of the corporation. So we also have par value and non-par value share. What do we mean? PAR VALUE SHARES – have a specific value fixed in the Articles of Incorporation and appearing in the Certificate of Stock. (NOTE: it may be issued for less than P5.00.) NON PAR VALUE SHARES – do not have a fixed capital stated in the certificate of stock but it should be issued not less than 5 pesos.

So where can we find the price of the par value of the share? It can be found in the AOI Indeed it can be found in the AOI because as we said the authorized capital can be divided into shares of stock and the par value should be indicated there. Of course par value in accounting parlance is not the same as book value. Why? Par Value is fixed in amount as stated in the AOI, while; Book value fluctuates; it is the value which is capital over no. of shares. This is more accurate because it indicates the actual situation of corporation so far as the assets are

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It may become a watered stock and it might affect the capital of the corporation in what way? It might deceive the public; a buyer might believe that the value of the shares is 1 peso but in fact the amount that the subscriber paid is only 50 cents so what goes to the corporation is only ½ of the stated par value, where in fact under the trust fund doctrine, the funds of the corporation is reserved to the creditors and here the trust fund doctrine is being violated because the capital of the corporation is not really there because the truths is the subscriber only paid the lesser amount. Alright it did not only reflect the real value of the share rather it allows the share to presumed paid or fully subscribe where in fact it was issued by the corporation lesser in par so that here we cannot buy the share lower than par.

Subsequent Sale or Transfer of Shares. On the other hand if it is subsequent sale or transfer you can now sell it to another lower than par depending on your agreement. You can even give it away or donate it. Would it affect the capital? No, it will not because at the time it was issued, its par value has already been paid in full. The statutory prohibition of selling it at a price lower than the par value applies to first-time issuances of shares of stocks. So the money is already in or even if it is not in at least the subscriber is bound to pay it afterwards.

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & So finally if you were to sell or buy a share and the corporation is profitable, you will not even sell it in par value or book value. At what value would you sell it? I would sell it in fair market value which means the value which a seller is willing to sell and the buyer is willing to buy depending on the market circumstance.

Power of the BOD is granted by law. Law is the source of the power.

Delegation of Powers by the BOD Can the BOD delegate its power?

Non-use of Corporate Franchise

General rule: The BOD cannot delegate its power. Exceptions: Those powers that involves:

Once you received the certificate of incorporation, what should be done? The Corporation should operate and formally organize as early as possible, because if a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation.

Board Of Directors

Qualifications Can you be a director? Yes provided that I hold at least one share of the Company’s stocks, legally capacitated and a natural person. So why are you required to be a holder of at least of least one share? This applies only insofar as stock corporations are concerned because non-stock corporations do not have shares of stocks. It is required only that one be a member of the non-stock corporation. It is important that a director of a corporation be a holder of at least of least one share because it would encourage him to perform better his task as a director since has a vested interest in the corporation. How does one become a director? Upon election by the stockholders in the annual stockholders meeting. Members of the BOD are elected by SH themselves. Management is vested in the BOD. From whom did the Board derive its power?

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1. 2.

Exercise of purely ministerial functions Matters relating to day to day activities and does not need any discretion

So that, if you are part of the BOD and you got sick. The by-laws requires you to submit a medical certificate, can you send someone else to participate in the Board meeting, bringing with him the medical certificate. No, proxy is not allowed. Is there any instance wherein a director can delegate his power? No. There is an absolute prohibition. A director cannot delegate because his function and duty is purely personal. One is elected precisely because of his skills, values, integrity, credibility and even one’s relationships. Sir: BOD can delegate in instances where the delegated power is merely ministerial or matters relating to day to day activities and does not need discretion. So when the BOD appoints Ms. Yap to decide whether the corporation should sell 50% of the corporation properties, it is not allowed since it is not ministerial, it requires discretion. But if the BOD delegates to Ms. Yap the act of signing the Deed of Sale of 50% of the property of the corporation, it is a valid delegation because the act of signing is merely ministerial. The BOD has already deliberated and decided to sell the property and what’s left for Ms. Yap to do is to sign the Deed- purely ministerial. So if the corporation intends to have telephone lines for its office with PLDT, and PLDT requires the corporation to submit a Board Resolution containing that the corporation in fact is subscribing with PLDT, and the BOD appoints in the Board Resolution that the BOD designates Mr. Tejano, the corporation’s janitor, to sign in behalf of the corporation, is that allowed? YES. The law only requires the nature of the delegated power and not the person to whom it is delegated. As long as the power is ministerial it does not matter that the person delegated is not an officer of the corporation, as long as the BOD appoints him/ her as such.

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & Situation: Authorizing to engage services of a janitorial company The board need not meet for matters that pertain to day to day activities, otherwise, they will not be able to discuss on the more important matters. The Vice President for Sanitation and Environmental Activity is in a proper position to be delegated as such. This can be delegated because these are simple matters; these are day to day activities like janitorial services. However, authorizing a Vice President for Financial Concern to borrow 10 Million from the Land Bank of the Philippines, it cannot be delegated because it involves a huge amount of money and involves a contract that a corporation would enter into.

Management of a Corporation Again the law says management is vested in the board, where there are 50 stockholders and the board is composed of 5, does it now protect the interest of the corporation if the management of the corporation composed of 50 stockholders is vested in the board composed of 5 members? For proper management of the corporation, it needs to be given to a certain number of people; it might create chaos in creating decisions if they are too many. The main purpose of this is efficiency. What do we consider as the power of the board, as part of the management? 1. 2. 3.

Administer the properties and assets of the corporation Determine the conduct of the corporation Represent the corporation. (Exercise the powers of the corporation itself; only the board can act for the corporation)

To be a member of the board, you must own at least one stock in that corporation. The purpose of the requirement is the member may have a desire to make the corporation profitable. And if you are part-owner, you will be serving better. The moment you cease to be a stockholder? You cease to be a director Situation: You are a holder of one share. You went to the bank to loan money. The bank is asking you to assign your share. If you did? If you assign your only share, you are no longer a shareholder and can be ousted as a director. Situation: You bargain with the bank and ask that you’ll just pledge your share. In pledge, you remain to be the owner of the thing. However, possession of the certificate is transferred to the bank. The

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pledgee cannot cast his vote during the elections. In other words, in case of pledge, the pledgor still votes. In case of trust, who becomes the legal owner? The legal trustee, because in a trust, legal ownership is transferred to the trustee although beneficial ownership is retained by the trustor. He may now be nominated in the board and legal ownership is transferred to trustee but beneficial ownership like payment of dividends retains in the trustor. Situation: There are occasions where you have to execute a deed of trust over your shares. For example, a stockholder cannot occupy a government position, just to illustrate. Because he cannot occupy a government position, being a stockholder of a particular corporation, what he has to do is to transfer his shares of stock to another person. So for all intents and purposes, for the record, the owner is already the third person. However, to protect the interest of the real stockholder, they will execute a deed of trust. This document is treated as confidential. The trustee signs, and acknowledges the fact that he’s not the true owner that and he’s only holding the certificate in behalf of the true owner. And when the time comes that the true owner will demand the return of the shares, the trustee is willing to immediately and voluntarily return the share. Who is now the legal owner in the story? The third person. Therefore during elections in the corporation, it is the trustee who is entitled to vote because in this case he is the legal owner of the share. Situation: If the corporation needs additional capital, what can they do? 1.

Obtain a loan from the bank

2.

Ask investors to subscribe to more shares

3.

Issue redeemable shares

One option is to borrow money, and this might involve several millions of loan but the bank is willing. The bank extends P200M loan however the bank wants to be sure that the P200M will be devoted to the projects the corporation has presented. The bank is not interested to recover your property or to foreclose the collateral, the bank is interested to let the money grow and earn interest so that whenever the bank extends or grants a multibillion loan, it wants to be sure that the amount granted by the bank is used for the purpose for which the loan was granted. To be sure that the corporation will prudently use that money for the purpose it was granted, the bank will have to require the corporation to provide a seat in the board for the bank to represent. That is a bank requirement whenever a huge loan is granted and to be sure that the bank could monitor the application of the money, the bank says that the corporation will have to provide one seat in the board for its representative so that

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & every board meeting, the bank will send its representative. How do you think does that bank representative sit in the board?

persons or corporation as trustee or trustees voting or other rights pertaining to the shares for a certain period not exceeding that fixed by the Code and upon terms and conditions stated in the agreement)

By getting at least one qualifying share in his name. Sir: The corporation necessarily will have to issue one share for that bank representative with the agreement that during election, that bank representative should represent the bank. So he now sits in the board, every board meeting, he receives the report, he has access to the financial status of the corporation, he has access to the application of the borrowed money where it went, access to records on the development and progress of the corporation. So the bank will be able to know whether or not the money was used for the purpose for which it was granted. To be sure that the project is carried out so that if it is carried out the expected profits of that project will be realized. And if realized, the bank can be assured of being able to collect the amount that was loaned. The bank representative can vote in board meetings, he is a real member of the board. Hence, he will be there so long as the loan remains outstanding. Once, the borrowed amount is fully paid however, the bank has no more interest in the corporation so the bank will now return the share that was lent to it and the bank representative may now resign from the board. So that when there is now vacancy in the board, a special election will be held for the purpose. How long shall the director sit in the board? 1 year, that’s why there is an annual election so that the board will be subjected again to the decision of the stockholders. And during the annual election, this is the time that the stockholder may replace a member of the board who misbehaves. That’s the only way that the stockholders may control the management of the corporation because they cannot intervene with the decision of the board. So we have the powers of the board. What are the limitations of such powers? Those that may be found in the laws, articles of incorporations, by-laws, and the corporation code. Beside these limitations, the board has the absolute right to manage the corporation.

Voting Trust Agreement The trust agreement is different from a voting trust agreement. What is a voting trust agreement? It is an agreement among some or all of the stockholders on how they will vote on a particular issue. (Defined as an agreement in writing whereby one or more stockholders of a stock corp transfer their shares to any person or persons or to a corporation having authority to act as trustee for the purpose of vesting in such person or

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The stockholder remains the holder of the stocks but he has surrendered his right to vote. Since he remains to be the owner, who can exercise the right to vote. It is the trustee who may exercise the right to vote, because in so far as the corporation is concerned, he is the stockholder although the beneficial ownership is retained by the original 18 stockholder or the trustor) (Besides, Sir, himself, said that the stockholder remains to be the holder of the stocks but the” right to vote is surrendered.” So logically, it is the one upon whom the right to vote was surrendered who should be allowed to exercise the right to vote.) The law requires that the stockholder must hold at least one share of stock. Can the by-laws require that a stockholder may be elected as a director only if he owns 15 shares of stock? Yes. Such provision does not violate the Code because the Code only requires that the director must hold “at least” 1 share, so the by-laws may require for more. He tried to organize another corporation also to manufacture the best beer. After operating for quite a time, the best beer that he promoted was actually not the best because the old one remained the best. So he asked himself, what he should do to defeat the old one. His consultants told him that the best thing to do is to buy shares of stocks of that old beer company and make sure that he’ll be elected to be a member of the board. So he did. The other members of the current board noticed that he’s buying a lot of shares of stock which would give him a sure seat in the board. So before he could even start campaigning for the board, the members of the board in the old beer company wanted to amend the by-laws. Can the board amend? Yes, provided it is ratified by the stockholders by a vote of 2/3. So the amendment was passed. The amendment said that no stockholder, who is at the same time, a stockholder of up to 10 percent of any beer company in competition to our company, can qualify as a director of our company. So the director of the new beer company questioned this. He went to court, and said that he has a lot of shares of stock in the new company but they amended the by-laws in such a way that he could no longer use his shares of stock to protect his right to vote and be voted upon in that board of the new corporation. It is unfair, according to him, and thus violates his right as a stockholder. So he went to the SC contending that the amendment was for him alone because there’s no other person who holds 10 percent of a company that competes with their company. He said he’s singled out, thus there’s no equality. If you

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"De"Leon,"p."230,"2013"

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & were the SC, would you allow the amendment or would you agree with the director of the company so that the amendment would be considered illegal? The amendment should be allowed. Otherwise, to sustain the contention of the director of the new beer company will endanger the old beer company. Thus, it would be for the best interest of everyone if the amendment of by-laws will be retained. Sir: Imagine if the new director of the new corporation would be a director of the old corporation. During one board meeting, he can summon the brew master, an expert insofar as the mixture of the beer is concern, and asked for the formula of the beer or asked for the list of the top customers of the old corporation. Thus, the Supreme Court says that is a valid amendment of the bylaws. It just happened that such person was affected by the provision but it was not intended for him alone. It could apply to anyone who is in the same situation. Amendment to the by-laws can be done and approved by the board with the ratification and confirmation of the stockholder.

First, there will be a meeting, the time the elections will be held. Requirement of a valid meeting: 1. Quorum – required number of persons to hold a valid meeting. If there are 10, quorum is 6. (50+1: stock, majority of the outstanding capital stock; non-stock, majority of the members) Question: Can 5 hold a valid meeting in a group of 10? Yes, if it is provided in the by-laws that such will constitute the quorum. Simple majority- the minimum majority, one-half plus one Qualified majority – that majority reflected in the articles of incorporation or the by-laws (based on de Leon) that is higher than simple majority. It is not only what the parties agreed upon but even the code sometimes refers to it as 2/3, 3/4 (5/6). Plurality – it is the highest number acquired of a given situation. It could either be lower or higher than majority Where would the directors derive their power? The directors derived their power from the law

Election of the Board of Directors Section 24. Election of directors or trustees. – At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there are not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote.

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“In other words they are elected by the stockholders but once elected, it is not the stockholders who give them power it’s the law that gives them power”.

Business Judgment Rule Likewise we said that the stockholders cannot review the decision of the board because? This is the business judgment rule. And so far as the business is concerned, they decide. That is their decision, their judgment and so far as business judgment is concerned it cannot be reviewed by the stockholders. However, there may instance wherein stockholders may review the decision of the BOD? 1. Changes in the AOI 2. Amendments or adoption of the by laws 3. Merger of one corporation to another corporation 4. Increase of capital stock 5. Increase of bonded indebtedness 6. Dissolution of corporation 7. Disposition of all or substantially all corporate properties So that if you are one of the members of the board and there was already a resolution drafted because the president instructed the secretary to draft a resolution which was urgent. He wanted to borrow 5 million from the bank because there was an immediate need for cash. But there are directors who did not signed yet and so it was very urgent and almost (10) ten o clock the bank were

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & already open. The secretary went to your hows early in the morning and you were in the shower at that time. And miingun ang secretary, Mr X. ang secretary ni naa koy papirmahan. Tubag pod kag unsa mana hala basaha. Manghuwam kuno ug 5M sa banko. So you signed and in fact all the directors signed. And so the secretary was able to borrow money from the bank, 5 million. Until the day some of the stockholders questioned, “there was no need, in fact no meeting was done how come the resolution was approved. So was the resolution valid? Not valid because in order to pass a resolution, it needs a deliberation between the members of the board, deliberations of the body is necessary because it allows the directors to discuss and exchange ideas between themselves. Valid or not? Not valid Why not? There should be a meeting

Because there has to be a deliberation for there to have a valid resolution What happens during deliberation? There will be exchange of ideas; they share their expertise, ideas, to choose the best option for the company That’s why in every meeting, there has to be the minutes, so that the various ideas presented may be reviewed. Of course, is this an absolute rule? No there are, however, exceptions to the rule: director happens to be the sole stockholder a matter of general practice, custom and policy ratification of acts in a subsequent board meeting apparent authority inherent authority waiver delegation of management to the creation of an executive committee entering into a management contract close corporations

So if the directors themselves are the stockholders? There is no need to protect the interest of the shareholders because they themselves are the shareholders. So that if a stockholder subsequently questions the passage of that resolution, can that stock holder object if directors themselves are the stockholders? Master cogue says! I object, others says, but master cogue, during the meeting, you approved the resolution, master cogue says

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No In a family corp for example, SH are the directors, ther will be no need of that meeting, so that if father mother son and 2 daughters are SH themselves, during breakfast, can the father just say primahi! Meeting sa ta pa! Aassssosss meeeting2x ba oi! -it’s ok!

How Voting is Conducted In an election, how is voting conducted? Voting by the directors may be done by the show of hands or by ballot if such was requested by the stockholders. If done by ballot, the stockholders will vote in a piece of paper and there will be ballot box. After all stockholders who are present have voted, then the presider will now determine who won the elections. If there are only 6 stockholders and 5 are to be elected as directors, how many votes are required to win?

Why?

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

"yes i approved as a DIRECTOR, now I object as a STOCKHOLDER!" can you do that?

It depends if it is a stock corporation or a non-stock corporation. If it is a stock, the number of votes will depend on the number of directors to be voted for each share. So 1 share has to be multiplied by 5 (number of directors to be voted), and he can vote by straight voting or he can have cumulative voting to one candidate or cumulative voting by distribution. If it is a non-stock corporation, cumulative voting does not apply. Cumulative voting allowed only in Stock Corporation. So if there are 6 stockholders to elect 5 directors, how many votes needed to win as a director? It will depend on the number of shares. Example, if the a SH has 100 shares of stock and there are 5 directors to be voted upon, he has a total of 500 votes. He has the option on either to distribute that vote by straight voting (100 votes for each of the 5 directors), or he can have a cumulative vote for 1 candidate (500 votes to just 1 candidate), or he can have cumulative voting by distribution (500 votes will be distributed to maybe only 3 directors). The intention of the law in cumulative voting is to have the minority stockholders to have a say in the policy or that they can have a seat in the board. If there is no cumulative voting, they can always be overpowered by those who have controlling interest. Illustration: There are only 100 shares, the owner of the 60 shares pertaining to the majority SH and the 40 shares pertain to the minority. The minority shares are distributed to several individuals. During the election, the minority can only vote as much. They will always lose

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & because they only have less than the majority of shares if there is no cumulative voting.

No, he is not. It is only optional for the corporation to have a Vice President.

(Please refer to your notes for the illustration nga gisuwat ni sir.pasaylua kai wala ko nakacopy)

However, it is always almost in every corporation that a Vice President is present. Why is that?

100 shares, 5 SH. Each has 20 shares. If there are 5 directors to be elected, how many votes do each need to win? There is no problem here. Everybody can be a director. The problem is if A, B, C, D, does not like the face of E. And so they agreed to exclude E (who only have a total of 100 votes, so as ABCD) as director and include S, a stranger, to become a director.

He is a president in waiting. He succeeds the President when he dies, resigns, abandons, is removed or becomes incapacitated to conduct his duties.

Can S become a director? No. If they want S to be a director, they will give S 1 share each. S now has 4 shares for a total of 20 votes. Sir changed the number of shares in an attempt of A, B, C and D to exclude E Do you think S could now qualify? Can he win? Yes. Him alone, he cannot win. ABCD will have to give him some more shares. How many more? A, B, C, and D can give 5 each to S. Or total of 20 shares. He now has 100 votes. He now has very good chance to win. A, B, C, and D now has 75 shares.

Where is the Vice president? Does the law mention about the VP? No, because it is optional on the part the corp if it is provided in the by-laws, IOW it is not necessary. He is like a president in waiting, he succeed when the president dies or incapacitated or abandoned his position or removed. Vice president but not a holder of a single share does he become a president? No, he does not become the president because as provided by the corp code that the president must own at least one share, IOW no person shall be a president at least she holds one share. Sir: what section is that that provides that the president shall have at least one share? The corp law does not provide.

Can E still win? Yes. His 100 votes are solid. He is the minority of the 5. Even if the 4 will do something, he is still assured. That is the purpose of cumulative voting. To make sure that the minority will be represented in the Board. Who will the stockholders elect in the stockholders meeting? The Board of Directors. Once instituted, they will now elect for the officers. It is not the stockholders will elect the officers.

(transcriber own opinion: as provided by the section 25 of the corp code, that the president, who shall be a director, it is interesting to note that to be a director you must have a legal ownership of at least one share, and applying it by analogy that you cannot be appointed as president if you are not a director of which a holder of at least one share.) Please correct if mali.. hahaha ktnxbye 3 Steps for the VP to succeed as President: IOW the vice-president must: i.

Officers Who are the officers?

ii.

As provided in the code, the officers are the President, Treasurer, and the Secretary. If you are the Secretary, can you be at the same time the Treasurer? Yes, there is no prohibition. What are prohibited is being the President and Secretary or President and Treasurer at the same time. Where is the Vice President in the Code? Is he mentioned there?

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19

iii.

must be a member of the board because the law provides that the president must be a director; have at least on share because you cannot be elected as a member of the board without having at least one share; and the board shall elect him as a president, you must have all these so that there will no legal

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"See"however"Sec."25"of"the"code,"it"provides"that"for"one" to"be"a"member"of"the"BOD,"he"must"be"a"holder"of"at"least"1" share"of"stock,"and"one"cannot"be"elected"as"President"if"he" is"not"a"member"of"the"BOD."So,"logic"dictates"that"a" President"must"be"a"holder"of"at"least"1"share"of"stock."

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & impediment for you, once you succeed as president when such situation arises.

•

Was it proper for him to be elected as VP without having at least one share?

•

Yes, because there is no law that requires the VP to be stockholder and there is no law either requiring him to be director. But the corp is not precluded of requiring these under the by-laws.

•

De Facto and De Jure Officer/Director However in electing a director or officer, one might not be qualified but yet erroneously or otherwise somebody was not qualified but was elected as a officer? He is considered as a de facto officer, since he was erroneously voted to be director or officer, to distinguished a de jure vis-à-vis de facto, the de facto officer’s position can be questioned in a quo warranto proceeding while that of a de jure officer, his position cannot be question. What is the effect of the action or decision de facto officer? The decision or action of the de facto officer will bind third persons or the corporation, that is, it is as if he still considered as a de jure officer.

Vacancy in the Board; how filled How does vacancy occur in the board? 1. 2. 3. 4. 5. 6.

Death; Abandonment; Resignation; Removal; Incapacity; and Disqualification.

2.

If the vacancy occurs other than by removal or by expiration of term, such as death, resignation, abandonment, or disqualification, if the remaining directors or trustees do not constitute a quorum for the purpose of filling the vacancy. If the vacancy may be filled by the remaining directors or trustees but the board refers the matter to the stockholders or members. If the vacancy is created by reason of an increase in the number of directors or trustees

By the members of the board If still constituting a quorum, at least a majority of the members are empowered to fill any vacancy occurring in the board other than by removal by the stockholders or members or by expiration of term The power of the BOD/BOT is not suspended by vacancies in the board unless the number is reduced below a quorum. The phrase “may be filled” in Section 29 indicates that the filling of vacancies in the board by the remaining directors constituting a quorum is merely permissive. Corporations may choose how vacancies in their boards may be filled up, either by the remaining directors or trustees constituting a quorum or by all stockholders or members in a meeting called for the purpose. However, if the bylaws prescribe the specific mode of filling up existing vacancies, the provisions of the by-laws should be followed. It is well-settled that the bylaws are part of the fundamental law of the corporation and its directors, officers, and members are bound to comply with them.

If there is vacancy, what shall we do? 2 ways to fill in vacancies 1.

If vacancy occurred through:

Expiration of term Removal was by the stockholders Increase in the number of slots for directors It is filled by the stockholders in regular or special meeting called for that purpose • • •

How can an increase in the number of seats for directors happen? Happens when the AOI is amended, increasing the number of seats for directors So if vacancy occurs, what do we do?

2. 1. 2. 3. 4.

If vacancy occurred through: Death Abandonment of office Incapacity Resignation It is filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorom

2 ways of filling up vacancies:

How should that meeting be done?

1.

It is done in a regular or special meeting called for that purpose.

By the stockholders or members •

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If the vacancy results from the removal by the stockholders or members or the expiration of term

So a vacancy can be filled up by the stockholders or filled up by the remaining board of directors if still constituting

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & a quorum depending on how the vacancy was created. So, if it is to be filled up by the stockholders, how would that vacancy be filled up? Call a regular or special meeting, and, before the meeting is convened, there should be a proper notice to the stockholders or members. And when we say proper notice this means that it should contain the date, place and purpose of the meeting. This is necessary to indicate the agenda and what is to be discussed in the meeting.

(Maybe called by any stockholder or member of the corporation signing the demand)

Will the president be removed from office even in the absence of demand or notice from the stockholders? No. The following must be carried out: a. Notice from the stockholders for a meeting

So that if the purpose is to remove the president, do you think the president will send that notice?

b. Meeting must be attended by at least majority of the stockholders

No. He will not.

c. A temporary or acting president can be elected among the stockholders to preside the meeting in the absence of the officer of the Company (i.e., president, vice president), wherein the role of the acting president is limited to the purpose agreed among the stockholders.

So what do we do? If the purpose is to remove the president and the secretary. A notice can still be sent on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. So if there is no written demand by the majority stockholders or members, would there still be a chance? Sec. 28. Removal of directors or trustees. - Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code.

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The officers of the Company, particularly the secretary, refuse to send the notice, given that the officer in question is the president. Hence, a few of the stockholders agreed to send notice to all stockholders.All summoned stockholders attended the meeting. A temporary or acting president was elected among the stockholders in order to preside the meeting and carry on the motions being decided. Will the motion to remove the president from office be carried out if the stockholdersattendees do not reach majority? No. The law provides the minimum requirement of at least majority of the stockholders. Non-appearance means no election to carry out the motion. Can the board of directors put into effect any decision (i.e., termination of all employees who are on strike) in its collective authority of the corporation? No, if the decision of the board of directors violates the law or the Code.

Whether or not the stockholders can review/inquire into the decision of the corporation? Answer: No, it is the court’s jurisdiction to review such act. Probably, the stockholders can file a case in court in behalf of the corporation. It is the court who will ultimately determine whether the action of the directors is unlawful. In our problem (termination of all employees), it is unlawful so the court may consider that act as invalid.

Liability of Directors When are directors liable? Answer:

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & The directors are jointly and severally liable for all damages if they: 1. willfully and knowingly vote for or assent to patently unlawful acts of the corporation; or 2. who are guilty of gross negligence or bad faith in directing the affairs of the corporation; 3. acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees

In another instance, the board came up with a resolution that it will postpone the payment of its loan of P5 million so that the directors who approved this resolution were sued and their justification was that they cannot pay at that time. Are they liable for postponing the payment? No. They had to postpone because they had no other choice because they had no funds to pay the said loan. There was no negligence nor bad faith in this case, therefore they cannot be made liable for their decision to postpone the payment. So if the bank sues the BODs for approving the act of postponing the payment, do you think they can be made liable? No. There was no showing of bad faith or gross negligence when the BODs made their decision. Also, it was the corporation who took that loan and benefited thereof and since it is a separate juridical entity, the bank cannot go after its BODs directly.

Alright. So this particular provision on the liabilities of BODs would refer to what situation? Under the law, the directors are jointly and severally liable for all damages if they: 1. willfully and knowingly vote for or assent to patently unlawful acts of the corporation; or 2. who are guilty of gross negligence or bad faith in directing the affairs of the corporation; 3. acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees

there might be more problem caused to that corporation and if they agreed to that situation, then they will be considered as acting with gross negligence because of the fact that they were just adding more problems to the corporation.

Atty: In other words, this liability is not the liability of the corporation , rather it is the personal liability of the director, therefore, even if the resolution is disapproved or approved, it is immaterial. The thing is, if a director votes for something that is patently unlawful, then he should be personally liable for his acts. That’s the point here; we should not refer to the liability of the corporation because as you said, what is contemplated under the law is the personal liability of the directors.

Atty: You were a director in a company and you have 5000 employees and you are now deciding to have a party for the employees as well as their families. Your board appropriated P 5,000 per head for the Christmas party alone. That’s excluding give awaysand raffles. It will cost a total of P25Million. After the meeting, you contacted your friend who was engaged in catering. “Party mi, 5000 katawo. Why don’t you bid and offer your services as a catering service business?” Following the business requirements your friend bid. The board required tasting. We don’t want anyone complaining about food, so the testing done in the Board Room heard you are while tasting. You are the most talkative, oikalami!Because of your comments, the board decided, then we engae the service of this catering. We would like to make it on record to thank director Menesesto clap their hands for introducing this caterer. However, after the board decided to hire your friend for the catering, you called up your friend. “Oi, sakobayanakwartaha.Akobayanagpailailanimodidto. Ayawjudkokalimti ha, 10%” . Is there anything wrong with the contract? As regards the phone call made by Director M., I would consider that as a disloyalty sir because she obtained a business opportunity that belongs to corpo. She should account secret profits to corpo even when sourced from acts not harmful to the corpo or when its acts are ultra vires. Lets try to hear another Director… Is there a business opportunity?

So, in that resolution of the 10 directors, only 7 approved to postpone the payment and the reamaining 3 did not approve it but instead suggested that they pay the said loan by borrowing from a bank. That was the business judgment and yet the bank still insists that the 7 be held liable because not paying an amount due is patently an unlawful act. It is not unlawful not to pay if you really don’t have the means. Regarding with the means Sir, the other three Board of Directors suggesting to borrow from another bank. In the first instance, it might sound a good idea but if they agreed to it sir,

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Yes. There is a business opportunity. That telephone call asking for commission would have been converted to discounts, and in that way, the corporation could have saved money. S: According to De Leon's Commentary: Secret profit, even if it was sourced from an act which is harmful or not harmful to the corporaion or even if it came from an ultra vires act, it would all go to the profits of the corporation.

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & T: But how did de Leon relate it to our answers now? De leon cannot just come out with the law. He could only speak for the law. S: He was trying to explain in connection with secret profits because the law provides that the director acting adversely to the interest of the corporation, if he has acquired profits from such transactions, he must surrender these profits to the corporation.

T: Yeah. But when you say adversely, R said there was a tasting session, there was a bidding, everybody was given the opportunity, and you were even applauded by them. Now suddenly they say: "Hoy! Hoy! Return the profits! Kadawat man diay ka. That's the problem now. See? So, would you return or would you be liable for any disloyalty according to R? Or conflict of interest? S: I think it is neither disloyalty nor conflict of interest because there was no duty to begin with to find a catering service. As I have mentioned earlier, in fact there was a bidding, particpated by catering services and the BODs gave their comsent to.chose the catering service of my friend. So there is no conflict of interest.

T: So where would that secret profit go? If there was no violation, why give that secret profit according to de Leon? How can he now say you return the secret profits and yet not cite any law? What law or provision should I be advised? He merely went back to the 2nd paragraph of Sec. 31 which says that when a director, trustee or officer attempts to acquire or acquires in violation of his duty any interest adverse to the corporation in respect with any matter which has been reposed in him in confidence, to which equity imposes a disability upon him to deal in his own behalf, he should be liable as a trustee for the corporation, and must account for the profits which would have otherwise accrued to the corporation.

In other words? S: IOW, if I were to give my meager interpretation, I would heed to de Leon's commentary. The law is clear that secret profits must stem from the transaction that was the source of the conflict of interest. But since in this situation that we have been discussing, there was no conflict of interest to begin with. So the secret profit is not really a secret profit because it was earned due to my diligence or initiative to find a catering service that, business-minded as I am, would give me an advantage.

T: So you say: "Ako pay business-minded, unya sala ni nakong magkakwarta ko sa ako pagka business-minded? So, I'll keep this 2.5M (10% of 25M). I could go back to Guam and spend the money there! Very cheap! Isaw a Samsonite bag and I have to buy that...(chika minute). But, you will agree with me, something is wrong. Was something wrong? S: Yes. T: Were you ever loyal to the corporotion whom you are to help? S: No.

T: You were not loyal. Yet disloyalty, would it fall under disloyalty? S: In my opinion, disloyaty would be tantamount to a director grabbing a business opportunity that could have accrued to the corporation. Would it fall under disloyalty? Was there a business opportunity? -Yes, there was a business opportunity. Discount is a business opportunity and any amount or benefit that you acquired because of that, which should have gone to the corporation. Because, business opportunity does not only mean that there was a business and we took that business away. Business opportunity could refer to discounts, negotiations, bargaining, these are business opportunities, not just a particular business that was intended for a corporation, any matter which you think would benefit the corporation is a business opportunity. So here, Atty. Espedido humbly believes, that this is a business opportunity so that this is disloyalty to the corporation.

SELF-DEALING DIRECTOR. You’re still a director and you’re dealing in batteries and tires and this is so much related to the corporation in which you are also a director so that every time your corporation, corporation in which you are a director, needs tires, they call on you for the supplies. Do you think that is improper to do business? -No, there is nothing improper. He can be the supplier; a director can deal with his own corporation.

So if you’re a supplier of flour and your corporation in which you were a director was engaged in bakery. Can you supply flour to the bakery of the corporation? -Yes, he can act as supplier. The law does not prohibit any director to deal with the corporation of which he is a director. T: There is nothing wrong with a director dealing with his own corporation. However?

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Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & S: In that matter, the transaction can be considered voidable unless the presence of the director is not necessary to have a quorum in a meeting wherein such transaction was approved and the vote of said director is not needed for the approval of such transaction and that said transaction was fair and 20 reasonable.

T: Can we illustrate that in the flour supply? S: In the example, in order to have that transaction-to supply flour, there must be approval by the Board. There should be quorum even if my presence is not counted and the transaction or contract is approved in that quorom and the details to said transaction can be considered fair and reasonable then such transaction or contract can be considered as valid.

T: So if there were only 5 of you as directors and that contract was presented, where you, Mr. M was allowed to supply flour to the corporation. Only 3 of you were present. Was there anything wrong? S: It depends. If the quorum is 3, and I am one of those 3, then such transaction is voidable.

T: But in fairness to you, the resolution was presented and you said:"Di lang ko mu butar ha? Kamo lng kay ako man ang supplier." The 2 remaining voted in favor of the transaction. It was approved. You will be the supplier. You were there but you did not vote. Is there anything wrong? S: Yes. Since my presence was counted to attain the quorum of 3, and without me there would only be the 2 of them, then it is as if no quorum was attained to validly hold the meeting.

given situation there were only 3 directors including M. Hence, his presence was required to constitute the quorum.

T: I thought you said he passed the test? S: He passed the 2nd test because the necessary vote required is only 2 votes but not the 1st test because his presence was necessary to constitute the quorum. So taking it all together, he did not pass the whole test. Therefore, the contract is voidable. It is still valid and enforciable until and unless the contract is nullified by the corporation. What happens to the contract? The contract is ineffectual because the law requires that there should be a quorum to hold a valid meeting. Since it did not meet the required quorum, the contract is in itself void not even voidable. Exception: if the quorum has already been satisfied, then the meeting will be held even without the said director. To add, his votes are not required in the meeting during the execution of the contract.

In self-dealing directors, there is nothing wrong. He may deal with the corporation. However, the contract may be voidable if it cannot pass the test provided in the law:

First Test: Presence of the director must not be counted for to constitute a quorum for the meeting. Second Test: The vote of the director is not even to constitute the majority to approve the contract. Third Test: It must be reasonable and fair. Fourth Test: If he is an officer of the corporation, he must be previously authorized.

T: Did you here that S? S: I think that in the 2nd problem that you presented, he has passed the 2nd requirement that his presence is not required to obtain the valid vote since what is needed is the majority vote of the members who are present constituting the quorum.

T: He has passed the test. But he said he did not pass the test because although he was there he did not vote, it is as if he was not there, therefore there was no quorum. (I think na misunderstood ni sir ang answer ni M.) What do you think? S: I think there would still be a quorum but it failed the first test because under the first requirement, the presence of such director is not necessary to constitute the quorum and in the

INTERLOCKING DIRECTORS. Interlocking Director is a director of two or more corporations doing business with each other. There is nothing wrong when a person is a director of more than one corporation. Something wrong happens if such person has a substantial interest in one corporation and a nominal interest in the other corporation. Such person may give importance in the corporation which he has substantial interest. The Corporation Code believes you cannot serve two masters at the same time. In such case, the rules required in the previous example will apply.

Corporation Scenario

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""See"Sec"32"of"the"Code."

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Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Hotel

and

Corporation

Travel

Agency

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & A person is a director in both the hotel and travel agency corporations. Every time the travel agency gets tourists, it is usually booked in the hotel. Is there anything wrong? A. No, there is nothing wrong. In fact, this is scenario that normally happens. There is a complimentary service that happened between corporations. At least each corporation knows each other; any problem will be addressed immediately.

2.

Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation;

3.

To adopt and use a corporate seal;

4.

To amend its articles of incorporation in accordance with the provisions of this Code;

5.

To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code;

6.

In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation;

7.

To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution;

8.

To enter into merger or consolidation with other corporations as provided in this Code;

9.

To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity;

Compensation of directors. The directors shall not receive any compensation, as such directors, except for reasonable per diems. Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock OR when there is a provision in the by-laws fixing their compensation. *In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. While we said that the board will only act as a deliberate body, there are instances when a smaller group may be delegated the power to act as the board. What could this refer to? Executive Committee- is composed of at least three directors appointed by the board. This would come only in existence if it is specifically stated in the by-laws that it may be created. The powers that the executive committee may exercise are so broad. However, the law limits these powers as to exclude those: a. approval of any action for which shareholders' approval is also required; b. the filing of vacancies in the board; c. the amendment or repeal of by-laws or the adoption of new by-laws; d. the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and e. a distribution of cash dividends to the shareholders.

10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. Situation: There was case filed in court and you were the counsel of the defendant. During the initial hearing, you have to find out whether or not the case was duly authorized by the corporation. What will you ask for? A: I will ask for the board resolution authorizing them to sue for the corporation.

POWERS OF THE CORPORATION A:Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name;

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Situation: There was a corporate certificate which certifies that in a meeting a resolution was passed by the corporation allowing the president to file a case in court. Upon examination, you discovered that there was no certification for the authority to sign the verification as well as the certificate of non forum shopping.

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & A: I will raise as argument that he has no authority to sign the verification as well as the certificate of non forum shopping. While he may be given the authority to file the case in behalf of the corporation, said authority does not include signing in behalf of the corporation the verification and certificate of non forum shopping. Said acts require another authorization. According to Atty E.: The law provides that the authority of the officer, here the President, should be explicitly granted in the Board Resolution. Mere grant of authority to file a case does not grant the authority to sign. (MAO LANG NI ATUNG I.SUNOD PARA SAFE KAY NI EMPHASIZE MAN C SIR ANI) *According to De Leon, Citing jurisprudence decided in 2008 and 2010: The SC has declared officers of the corporation who can sign the verification and Cert of Non-forum shopping without a need for a board Resolution. This could include the Chairman, the president, or the general manager. The list is not exclusive, the main reason why such officers or employees do need an explicit authorization by the board is because these officers are in a position to be able to verify the truthfulness of the allegations in the complaint. Situation: Pre-trial. Supposing the President again appeared in the pre-trial of the case filed. But when you looked at the Board Resolution that authorized the President to file a case, it did not contain any authorization given to the President to appear in pre-trial in behalf of the corporation. Is there anything wrong with this? What is done doing pre-trial? Sec. 2.of the 1997 Rules of Court provides that in a pre-trial the court shall consider the following: (a) The possibility of an amicable settlement or of a submission to alternative modes of dispute resolution; The objective of the pre-trial is to expedite. And one of the best ways of expediting the resolution is to enter into compromise agreements. In compromise agreements, what could happen? There is the give and take process. You give some, you take some, you waive some, and you admit some. This is an act where waivers could be required. Instead of paying 10 Million, you lowered it down to 5 M and it is important. If you don’t have the authority, do you think you can appear on pre-trial? You cannot. Otherwise, if you will encounter smart lawyers, he will ask for the dismissal of the case because the authority does not give you the power to perform certain acts especially during a pre- trial conference.

What are other powers of the corporation A: *Those mentioned in Article 36* as well as those mentioned in : Art. 37 (Power to extend or shorten corporate term); Art. 38 (Power to increase or decrease capital stock; incur, create or increase bonded indebtedness);

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Art. 39 (Power to deny pre-emptive right); and Art. 40 (Sale or other disposition of assets).

Power to extend or shorten corporate term How is the power to extend or shorten corporate term done? Sec 37 provides : ! Majority vote of the directors, AND ! Ratified at a meeting by the SH representing at least two thirds of the outstanding capital stock or in the case of non-stock corporation, 2/3 of members. Provided, that the dissenting stockholders have the appraisal right which is the right granted by law to SH to demand payment of the fair market value of his shares. (A stockholder who dissents from certain corporate actions has the right to demand payment of the fair value of his or her shares. This right, known as the right of appraisal, is expressly recognized in Section 81 of the Corporation Code, to wit: Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of changing or restricting 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. (Turner V LORENZO SHIPPING CORPORATION,G.R. No. 157479)

Merger and Consolidation Merger – One corporation is dissolved, the other survives. Consolidation – There is a formation of a new entity which is distinct and different from the two corporations which formed it. The two corporations are dissolved.

Increase and decrease of capital stock Question: Increase and decrease of capital stock. A: It has the same procedure with the extension or shortening of the corporate term. 1. 2.

Majority vote of the directors, AND Ratified at a meeting by the SH representing at least two thirds of the outstanding capital stock

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Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & Decrease in the Authorized capital stock st

1 : Meeting by the board, and voted by majority of the BOD; nd

2 : Submitted for ratification to the 2/3 votes of the outstanding capital stock; rd

3 : since it is only a decrease- no need to file Treasurer’s Affidavit. There should be certification from the SEC authorizing the decrease. The decrease won’t be allowed if there are outstanding debts that will be prejudiced by the decrease. In effect, it won’t be allowed by the SEC.

Bonded indebtedness If the corporation is in need of funds, what will the corporation do? 1. Borrow from banks. 2. Ask the SH to invest more 3. Issue redeemable shares – holders of redeemable shares are both creditors and stockholders of the corporation, which is actually beneficial to the holder. Bonded indebtedness- Here the corporation undertakes to pay the price at a specific time with a specific rate. Question: Why is it required to be registered in the SEC? A: You have to register it because it is SEC who is duty bound to protect the interest of the public. In a bonded indebtedness, there are no specific creditors. The bonds are issued by the corporation and whoever is interested may buy those bonds. Those bonds are merely promissory notes with a maturity date and a guaranteed interest. And because these are promissory notes and are not secured by any collateral, unlike loans from a bank, the State is interested to protect the interest of the public through SEC by determining the financial capacity of the corporation who will issue the bonds. Once approved by SEC, the corporation can start issuing the bonds. At times it is not the corporation who will directly deal directly with the individuals; they may have to appoint a broker or an agent to sell these bonds like through the bank. Upon maturity of the bonds, the bank will recall the bonds and the holder thereof may get their capital as well as the interest guaranteed by the promissory notes. So, these are not ordinary loans because loans are usually secured by collaterals. Bonds are usually without any security because we do not know who will be the buyer.

Whenever the capital stock of a corporation is increased and new shares of stock are issued, the new issue must be offered first to the stockholders who are such at the time the increase was made in proportion to their existing shareholdings and on equal terms with other holders of the original stocks before subscription are received from the general public. When you say pre-emptive right what is its purpose? The purpose is to protect the existing SH of the corporation so that if there’s any increase in the number of stocks, their shares will not be diluted. (To safeguard the right of a SH to preserve unaltered and unimpaired his proportionate influence and interest.) Illustration: If the present Authorized capital stock wholly subscribed is 100 M and there are 10 SH who own 10M each. So that if the corporation decides to issue another 100 M Shares of stocks, what will happen? The existing 10M which is 10% of the original 100M is now down to 5% of what is now 200M. So your shareholding now is down to 5%. So that if the new 100M will be fully subscribed by a 11 new incoming SH who now owns the entire new 100M. What happens? The old SH will be less powerful in the decision making. The original 10 SH owning original 100% of the 100M now only hold 50% of the new 200M which is what the law does not want to happen. So what does the law now requires? Whenever the capital stock of a corporation is increased and new shares of stock are issued, the new issue must be offered first to the existing SH. Question: So here, when can those 11 stock holders come in? (The new stockholder’s in the preceding example.) A: They may come in when the old stockholders waives their pre-emptive right. So they will have to wait and they will have to present a proof to the Securities and Exchange Commission that these existing stockholders have waived their rights. Otherwise, the S.E.C will not allow any new stockholder to subscribe to any new share. Before allowing a stockholder to subscribe to a newly issued share, the existing stockholders MUST be given that right. Instances that where the Pre-emptive right is NOT given to the Stockholders (sec. 39): 1.

Such right is denied by the articles of incorporation or an amendment thereto; !

Preemptive right What is preemptive right?

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When a new issuance of shares are made, the existing shareholders cannot claim because in the first place the AOI provides that ‘you do not have such right’.

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& 2.

& Shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; !

IOWs, there are occasions when the law requires that a certain portion of the shareholdings should be owned by the public.

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If for example, you want to trade your shares of stocks in the stock market, well the stock market says that at least a portion of your shares should be sold to the market, you cannot register in the stock market and still prevent the public from buying. How could you sell in the stock market and every time you do not give the opportunity to the public to give any share, so I think it is 20% at this time, at least 20% of your existing shares must be offered to the public before you are allowed to trade publicly your shares of stocks.

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3.

Another example is when you want to go to the public, you want to go to the Securities Stock Market when you apply to be a publicly listed corporation, there is a requirement that at least a portion of your shares of stocks must be sold to your employees, at least 10% of your total stock holdings must be offered to your employees before you could start to be an IPO (Initial Public Offering) or a publicly listed corporation. The idea is to make your EEs owners of their own company, so that it is believed that an EE who is a part-owner of the company where he works, he is expected to work harder, he is expected to make effort to make his own company more profitable. And that is the intention of the law in requiring publicly listed corporation. And the law even requires installment payment for the shares of these EEs, not only installments, but also liberal terms, they may buy their shares through salary deductions just to induce or encourage them to buy these shares. IOWs, the existing shareholders cannot say do not sell to the employees yet before giving us the authority to buy because that is an exception.

Shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes; ! There somewhere this is the corporation

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is a very attractive property and the corporation believes that best tactical move to make the more profitable, we do not have

money to buy that property but the owner of that property is interested to buy shares. So here the corporation is authorized to issue shares without objecting these shares to the pre-emptive rights of the existing stockholders because it is for the better interest of the corporation itself. So here, the stockholders cannot say that they wanted to invest more because this is an exception. 4.

Shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock in payment of a previously contracted debt. !

Dako ta’g utang, wa’y gustong mu bayad. Sugot ang debtor na bayran lang natu cya ug shares, WHY NOT? So, ay lang mu’g reklamo sa pre-emptive2x ninyo, di lang sa ta mag pre-emptive right, basta maka bayad lang ta sa utang.

Sec. 39. Power to deny pre-emptive right " We said that there are some occasions that this preemptive right can be denied, what are these occasions? 1. When denied by the AOI; or 2. The AOI is amended to deny such right

Sec. 40. Sale or other disposition of assets " SITUATION Here’s a corporation engaged in public transportation. It operated 10 buses but it became necessary, to be able to pay off their obligations, to sell 4 out of the 10 buses. Q: What is necessary to be able to sell the 4? A: Since the sale is not of all or substantially all of the corporation’s assets then only a board resolution is necessary Q: When would it be considered a sale of substantially all of the assets? A: When what is sold is at least 80% of the assets

Sec. 41. Power to acquire own shares " Q: Why, as a general rule, is a corporation prohibited from acquiring its own shares?

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Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & A: Because it would violate the trust fund doctrine

income of 1,000,000. So if there are 900,000 as losses, then the net income would be 100,000.

In what way would such doctrine be violated? So what will they do with the net profit? Because in acquiring its own shares, the corporation would be using its capital which ought to be reserved for the corporate creditors When can a corporation acquire its own shares? When there exists unrestricted retained earnings and it is for a legitimate purpose such as: 1. To eliminate fractional shares; 2. To pay a dissenting stock holder; 3. To repurchase delinquent shares; 4. Redemption of redeemable shares Other than violating the trust fund doctrine, why should a corporation be prohibited from reacquiring its own shares? It can also prejudice the other stock holders because a partial liquidation of assets would occur Why should they shoulder? Because stock holders are investors, so they invest and if some shares of SH will be reacquired, only few stick holders will be left What will happen to the remaining stockholders? They will be at a disadvantage (They will be the only ones left shoulder the obligations (doubtful answers from classmates on red font) What does that mean? Does it mean remaining SH will be liable for obligations of the corporation? No, the SH are only liable only up to the extent of their investments and no more) SITUATION: There are 5 Shareholders Year 2015 Financial Performance Income @ 1 million expenses @ 900,000 profit @ 100,000 The remaining 100,000 which could have been a dividend to the remaining Stock holders. For example, we have a working capital (subscribed capital stock) of 5,000,000 with 5 stockholders at 1,000,000 each. In 2015 the corporation earned an

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Declare as dividends. So, if the shares of 1 of the stockholders were reacquired, then only the remaining 4 would share in the dividends or in the profit of 100,000. In this case it is advantageous to the remaining stockholders (because instead of 100,000 divided by 5 shareholders or @20,000 div per SH, the denominator will just be 4 or @25,000 div. per SH) Q: But if there were losses, and instead, in the same example, there was a loss of 1,000,000, supposedly there were 5 stockholders who would have to share in such losses. But now there are only 4, so will the remaining stockholders have to share more in the losses? A: No. And that’s where the confusion arises. Some authors forgot that the stockholders do not share in the losses. This is not a partnership. Whatever happens to the corporation the stockholder is no longer responsible for it. Maybe what the authors are referring to is that the shares corresponding to a stockholder ‘would suffer a little’. But that is not a direct loss to the stockholders anymore. They do not suffer that loss personally. Maybe they share in it indirectly but it’s too far. But one thing is clear: reacquisition of shares is an advantage insofar as the distribution of dividends is concerned.

What else? Why would a corporation be prohibited in reacquiring its shares? Insofar as the owner of the acquired share is concerned, such owner is deprived of his property right to acquire profits arising from that share because buying back the share would only be a one-time transaction. If you are a stockholder, why would want the corporation to reacquire your share? Give me a good reason. 1. 2.

If corporation offers a good price (above par?) If there is a danger that the corporation will suffer losses in the future and be dissolved

Discussion: And so the law does not allow that because if allowed, all the stockholders will sell their shares and no more investments will remain in the trust fund of the

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Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & corporation and consequently, it will prejudice the creditors. If you buy back the shares of all? It’s a disaster to the creditors If you buy back the shares of only one or two SHs, who will complain? The remaining SHs. There is already partial liquidation. And during liquidation, you should settle first your third party obligations.

If shares of other SHs are reacquired, what are the other effects? The shares becomes idle and forms part of treasury shares So just like in the previous example, if the corp. has 100K profit but this was used to reacquire shares. If you are remaining SH will you be happy? No. it was a potential dividend but was used to reacquire shares.

A corporation in reacquiring its own shares is allowed especially if these are redeemable shares. So that these redeemable once redeemed becomes treasury shares. And since we have a lot of treasury shares and profits at the same time, can the corporation declare dividends with these profits? Yes, upon the discretion of the board. If we have 1M profit, we are supposed to pay off to the SH 1M worth of cash. But because the corp needed the cash, it instead decided to distribute the treasury shares which are in their possession. So, they distributed the treasury shares, what do we have – cash, property, or stock dividends? E The treasury shares distributed are considered property dividends because these treasury shares are property of the corporation when they are reacquired by the corp. What are dividends? They are portion of the profits that the Board has decided distribute.

Improperly Accumulated Earnings (Surplus) Investing Corporate Funds in another Business Venture May a shipping company invest in a lotto business? Yes, if it is a secondary purpose provided it is approved by majority of the BODs and ratified by SHs representing 2/3 of the outstanding stock

Dividends What are dividends? Dividends are portions of the profits that are allowed and declared to be given to the stockholders based on their number of shares. Requirements: 1. Unrestricted Retained Earning 2. Distinguish if cash, stock or property a.) Cash: approval of the board b.) Stock: Approval of the board and approval of stockholders with 2/3 outstanding capital stocks Property dividends – issued by the corporation to SHs if it has available real or personal properties (e.g. warehouse receipt, stocks in another corporation)

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Since cash dividends are distributed to the SH, they are income of SH. As income, these are taxable. The corp will hesitate to declare cash dividends because this will in effect a double taxation. When the corporation acquires income, it will be taxable as corporate income and when it will be distributed to SH as cash dividends, it is income to SH and taxable as individual income tax. So, even if they have cash they will not distribute it as cash dividends. Instead, every Christmas time they will tell the SH that the next SH meeting will be in Singapore and proceed to HK, they can also bring their families. So, no cash dividends, no income tax. But, time will come that the BIR will be able to discover this scheme. So they will stop travelling and just keep the profits in the treasury of the corp. how can the BIR tax them? E The law prohibits retaining of profits in excess of 100% of their paid in capital. So, in this case, the corp is obliged to distribute. E

Under NIRC, this surplus is called improperly accumulated surplus.

The BIR can compel you to distribute dividends and can collect tax. However, if you are quick enough, what will you advice to your client?

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Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & I. II.

They can declare stock dividends (generally not subject to taxation). They can also invoke the exceptions for retention: 1. Justified by corporate expansion 2. Prohibition under loan agreement with any financial institution 3. Necessary under special circumstances for special reserve or probable contingencies

Exceptions for the retention of the surplus profits: 1. you could tell BIR, “Sorry BIR we have A LOT OF EXPANSION PROGRAMS next year. We will be buying more units; we will be acquiring more lands, so we need this cash and cannot distribute. 2.

Show to the BIR that you have a PROHIBITION IN THE TERM LOAN AGREEMENT with the bank and cannot declare dividends until fully paid.

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Contingencies. PAGASA has declared that there will be a lot of typhoons next year, hence, we cannot distribute dividends for we might need it for contingencies.

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Issuance of Stock dividends They would declare stock dividends instead of cash. Once stock dividends are declared, they are not taxable. It is not an income. It is a mere capitalization of the retained earnings of the corporation. It will become income only when they become sold. As long as they are shares, they are not income.

How to declare stock dividend? For example not all shares are subscribed; the corporation will give the unsubscribed shares to the stockholders instead of cash dividends. In this way, the corporation and the stockholders are not taxed. What happens to the profit that was not distributed? It remains with the corporation. The profits will be converted to the value of the shares/stocks that has been distributed. They are just transferring it in the books. Before, the profits are in the profit side, now they are part of the capital.

XPN: Unless there is an improperly retained surplus (dividends amount to more than 100% of the paid up capital) then the stockholders may demand for distribution. SITUATION A corporation had P100M profit. And part of this P100M was 90% cash and 10% appreciation of land. Q: If the corporation decides to declare dividends, can the corporation use the entire P100M? A: No, only up to 90% cash. The 10% appreciation of land is not yet realized profit per se. Q: When the corporation declares a dividend, a board resolution must be made declaring (1) a certain sum of profit as dividend and (2) which stockholders are entitled as of a certain period. If a stockholder of record is entitled for dividend but he only paid 50% of the entire subscription of P10M, will the stockholder be entitled to claim his dividend? A: We must distinguish. (1) Cash dividends - No, there will be an offsetting. The dividends will first be applied to unpaid subscription. (2) Stock dividends – No, these will be withheld until the stockholder pays the unpaid subscription. Q: Here are unpaid subscriptions and stockholder asks if he could subscribe to more shares and he’ll pay those shares with his future dividends, can he do it? A: No, because we’re not certain yet if dividends will be distributed or declared. Profits are uncertain because in business there is no guarantee to success there is always a risk, although risk against business is much better than risk on gambling. Point is you cannot guarantee payment and assure the lender to collect from your future earnings which are not certain yet. Q: If all of the authorized capital stock has been fully subscribed, may the corporation still issue stock dividends?

Distribution of Dividends, covered under the Business Judgment Rule.

A: Not anymore because all authorized capital stock has been fully subscribed and therefore why would you issue stock dividends when there is no more stock to be issued.

Can stockholder demand for distribution of dividends?

Q: But is there a way?

GR: No, for only the Board decide when to distribute.

A: Yes. This is by increasing authorized capital stock (ACS) by amending the Articles of Incorporation.

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Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & Q: When you increase, how much should be subscribed and how much should be paid up? A: At least 25% of ACS should be subscribed and at least 25% of SCS should be paid of the increase. Q: The existing stockholders might not have any cash to pay for subscription, can they subscribe? A: Yes, by using the unrestricted retained earnings by transferring profits as capital. Use this to pay additional subscription for increase. In this case, there is no cash involved. The intended cash dividends or profit which can be declared as dividends may be used in paying the paid up portion of the additional subscriptions of the increase in the ACS. Q: If treasury shares are distributed as dividends, do we have stock dividends or cash dividends? A: They are property dividends because no cash is involved.

Stock Split – simply put is the splitting of stocks; stock split is when there is an increase in number of shares but there is no increase in the capital value. EXAMPLE: When a stockholder holds a share with Php100 par value, the corporation can initiate a stock split by decreasing the par value to Php50.00. so what happens is, the stockholder owning one share with previously Php100 par value now becomes a holder of two shares each with Php50 par value, still totalling to Php100 for that stockholder. The purpose could be that the corporation wants to decrease the value of its stocks for it to be more attractive to investors. Reverse stock split – a reverse stock split is the actual reverse of a stock split. It is when the corporation decides to decrease the number of shares and still retain the same capital value. Example: when a stockholder holds two shares with Php50 par value and the corporation decides to declare a reverse stock split that 2 shares will be made one, then the latter stockholder will now be a holder of one share with a par value of Php100. Some corporations may do this to increase or reduce the number of shares.

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Management Contract is an agreement under which a corporation delegates the management of its affairs to another corporation for a certain period. Requirements: 1. Approved by the BOD 2. Approved by stockholders owning at least a majority of the OCS/ members I thought that we earlier agreed that management is vested in the board of directors, but here is an instance now where the corporation decides to give the management to another corporation. Is this not a violation? No, it is not a violation because what is being delegated is not the absolute power or control of the corporation. The management contracts are those instances where it requires technical skills where the corporation might have not have.

Limitations on Management Contracts

Stock Splits

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Management Contracts

1. The management contract should not exceed 5 years, and 2. There shouldn’t be a total abdication of the power of the corporation.

Additional requirements in case of interlocking shareholders or BOD. 1. Where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third(1/3) of the total outstanding capital stock entitled to vote of the managing corporation; 2. Where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation. What the law intends to avoid here is a corporation completely controlling and completely managing another corporation so that the managed corporation appears to be totally helpless. So, the law requires that if the managing corporation owns at least 1/3 of the managed corporation or if the board of directors of the managed and the managing group then, aside from the approval of the majority of the board, the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds(2/3) of the total outstanding capital stock entitled to vote/ members. So that it will not only be a transaction between the board and the corporation but also of the ratification of the 2/3 of the stockholders representing the outstanding capital stock/members.

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Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & In addition, one may also look at who the Officers and Directors of the corporation are and know the people he will be dealing with.

Ultra Vires Acts Ultra vires acts are acts not within the express, implied, incidental powers of the corporation conferred by the Corporation Code or articles of incorporation. How do we classify the Powers of the Corpo? Distinguish one from the other 1. Express – expressly provided in the AIC or the Law 2. Implied – intended to effectuate the express powers 3. Incidental –necessary. 4. Inherent – power vested for being a corporation Q: If you are a president of a corporation, what inherent power do you have? - Inherent power to preside. It goes with the office. Nobody else can preside unless in instances of absent. In the meeting there is no need to ask who will preside. Q: What example of implied power can you think of? -Corporation engaged in Construction of Subdivision. Implied power is to acquire trucks to transport materials Can a Corporation, engaged in the business comstruction, still exist even without owning trucks? => Yes. They can lease.

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Ultra Vires acts = acts of a corporation which are beyond or in excess of its express, implied, incidental and/or inherent powers. Do you have to present to every client or potential client of yours the Articles of Incorporation (AoI) in order to show them that you are authorized to engage in the construction business? => No. It is not usual in business transactions. People dealing with a corporation don't normally ask for the AoI and inspect it. Unless if you are dealing with multi-million projects, in which case, examining the AoI becomes a standard requirement in order to ascertain that the person they are dealing with is acting with authority and within the scope of the corporation's powers. Discussion: Aside from inspecting the AoI to know if one is acting within the express powers of the corporation, potential clients may also take a look at your capitalization or financial capacity. Now I am offering a 100M project, why should I deal with a corporation whose Authorized capital stock is 5,000? What could happen to this project if these people will run away from me after receiving the mobilization fee of 20% of the project? I will have to deal with them.

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In big transactions, inspecting the AoI is a standard requirement. However, the same cannot be said in small transactions like selling hopia and siopao as it is impractical to do so. Sometimes, examining the AoI becomes impractical and unrealistic because we presume that the person we are dealing with is a legitimae businessman. Otherwise, what do you think will happen if we will always require the presentation and inspection of the AoI in every transaction? => It will disturb the ordinary economic activity. It is time consuming and a waste of resources. Just imagine always carrying with you copies of the AoI to present in every transaction. It is just impractical to do so. We are discussing these because, on the principle of Ultra Vires acts, what did you notice? => Ultra vires acts are merely voidable. Q: Ultra vires act is merely voidable. It is valid until annulled by whoever will question the act. As a matter of fact, would the courts look favorably on this principle, ultra vires acts? A: No, courts do not look favorably on this principle. Because if we were to be strict about it, then we will have to carry AOI all the time just to prove that it is a legit corporation and is authorized to do such acts. It does not result to a sound business practice when people constantly questions each and every act of the corporation as this would discourage investors and those people who want to contract with a corporation. Q: Although courts do no favorably adopt the principle of ultra vires acts, yet there are some rare occasions where this principle could be very helpful, in what way? A: There could be ratification so that even if an act is ultra vires, it may be ratified even if it is outside its authority, if highly beneficial to the corporation. Discussion: In other words, there are occasions as well that this principle is abused so much so that even if a corporation clearly has violated that principle, there are occasions when the courts will have to impose strict reliance on this principle of ultra vires acts because sometimes it’s not always easy to determine an ultra vires act from a legitimate act. There is a thin line in the definitions of inherent, incidental and implied

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Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & powers of a corporation so much so that they could mean the same thing. That’s why the courts are very cautious in imposing strictly this principle. To all intents and purposes, generally, the courts will allow the performance of these acts unless there are now clear indications of fraud or abuse on the part of the corporation so much so that a corporation may be questioned in the performance of its acts. Q: So that if a corporation, for example, is engaged in subdivision development, can it buy a vessel? A: No, it’s quite far, that’s an abuse. Q: But let us assume that it did buy a vessel. It has paid the seller of that vessel and vessel has been delivered to corporation engaged in subdivision development. Can anyone question? A: No. The ultra vires contract was consummated and since this is so, neither party can set aside the contract. Only the state can question the ultra vires act. It may be ultra vires but the court says leave them alone. If the buyer was happy in paying the vessel and the seller was also happy in accepting the payment, leave them alone. Q: But here’s the creditor of that subdivision developer, he was not paid for the loan that he extended to that subdivision developer. The loan was intended for expanding the subdivision development but instead, it was used to acquire the vessel. Can the creditor question the acquisition of the vessel? A: Yes, coz there’s fraud on the part of the subdivision developer. (Wa maklaro pagkaexplain ni sir but mao ni iya sulti: The money must be returned to the creditor. But it’s a long process so the courts would say that collection of the money must be done in some other ways by not questioning the transaction.) Observation: in the present case, the contract was only partially executed by one of the parties. In such a case, the aggrieved party is allowed to recover the object of the sale.

Ultra Vires acts vs Illegal Acts " Ultra Vires – those that are beyond the express, implied, and incidental powers of the corporation which are voidable and subject to ratification

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Illegal Acts – those that are contrary to law, morals, customs, public order and public policy. They are void and not subject to ratification.

Ultra Vires Act v. Unauthorized Acts Q: Here is Ms. Abellanosa, authorized by the board, in her capacity as president of the corporation, to acquire a parcel of land, with the description and the amount. Instead of acquiring one, she acquired two. The acquisition of one was covered, but what about the acquisition of the other? Was it an ultra vires act? A: No since the acquisition was still within the power of the corporation. It is merely an unauthorized act. When we talk of ultra vires acts, these are acts of the corporation , not acts of its officers. In other words, if they are acts of the officers which are beyond the authority given to them, then they are not ultra vires acts, rather, unauthorized acts.

Business Judgment Rule - The Courts cannot question nor change the decision of the board. The Courts believe that management is vested in the board and it has the discretion of deciding what is best for the corporation. The courts believe that management is vested in the board and the board has complete discretion to determine what is best for the corporation and because of that principle, the SHs cannot even complain UNLESS of course they are one of those mentioned in the code which requires ratification or conformity by the SHs but GENERALLY the board decides and no one, not the SH, not can anyone go to court and secure an order from the court to compel the board to change its decision, perhaps if there was fraud made—not because the judgment made was wrong but because the board was guilty of fraud, if that is the ground—but never ever a mistake in its decision making, the judgment of the board is a decision that no one can change or interfere. Q: And so here, we said that the business judgment rule of the BOD cannot be questioned. If the decision of the BOD constitutes an ultra vires act, do you think it can now be questioned? What could happen? A: That act is voidable unless ratified by the SHs. So ultra vires acts can be ratified, here is a defect that can be cured by the SHs themselves and ratification may be done in order to cure a defect.

Ratification of an ultra-vires act: "

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& 1.

& Ratification cannot be made on the part of the corporation by the same persons who wrongfully assume to make the contract. Ratification must be made by the officer or governing body having authority to make the contract;

2.

If the contract is executory on both sides, it cannot be enforced by either party;

3.

If it has been fully performed on both sides, neither party can maintain action to set aside the transaction or to recover what has been parted with;

4.

If it has been performed on one side and the other party has received benefits by reason of such performance, recovery is permitted in most courts on behalf of the former on the ground that it would be unjust to sanction retention of benefits coupled with refusal to perform. (De Leon)

If you have started, and you have consummated it, stay where you are, you are good where you are. But if you have not started it yet, do not start it at all. However, if only one party has performed his obligation and the other party has benefited from such performance and the other have not yet performed his obligation yet, the party who performed such obligation can ask for the return of what he delivered or ask for the performance of the contract.

Q: Let us go back to our example of the movie house. The buyer refused to pay the balance because it only paid the partial. Now, here comes the owner of the movie house demanding the balance of the price and so the subdivision owner said “sorry, we will not pay the balance because this is an ultra vires act, the transaction is not binding to the corporation.” What do you think?

**based on 2014-2015 transcript** So once ratified, the ultra-vires act is cured, that act will become binding. However, we said that ratification can be done only insofar as ultra-vires acts are concerned.

Illegal Act cannot be ratified as they are void " If the ACT IS ILLEGAL, such that it is contrary to law, morals, public policy and etc., the act cannot be ratified and is void from the very beginning. SITUATION: Q: If the corporation, engaged in real estate business but decided to acquire a movie house, it is clearly an ultra-vires act, so that if acquisition has been consummated and as a matter of fact the family of the officers of the corporation has been watching the movie and the movie owner has accepted the payment, do you thing the SHs could still question that? A: No. Ratification can be done only IF no rights of 3rd parties are affected. Because once rights of 3rd parties will be affected and the transaction is consummated, the court says that neither party can maintain action to set aside the transaction or to recover what has been parted with. However, if not yet consummated, the parties affected by the ultravires act cannot compel to enforce the contract, IOWs if they have not started it yet DO NOT start it at all.

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A: The real estate company can still be compelled to pay the remaining balance and he is now estopped in assailing the defense that it is an ultra-vires act. IOWs, he cannot be allowed to take advantage, you know, it was he who performed an act, and now he is taking an advantage of that illegal act or unlawful act or unauthorized act just because he does not want to pay the balance. So he has to pay, it has become binding on the corporation.

By-laws. Rules of action adopted by a corporation for its internal government and for the government of its stockholders or members and those having the direction, management and control of its affairs in their relation to the corporation and as among themselves.

What are the difference between By-Laws and Articles of incorporation (AOI) By-laws Merely rules and regulations adopted by the corporation Executed usually after incorporation by the stockholders or members Filing is condition subsequent Amendment of by-laws may be delegated to the BOD

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

AOI Constitutes the charter or fundamental law of the corporation Executed before the incorporation by the incorporators Filing is a condition precedent to corporate existence Amendment of AOI cannot be delegated by the stockholders to the

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & BOD

What do you mean by condition subsequent and condition precedent? •

•

Condition subsequent (By Laws) – it means that by laws are created or adopted after the issuance of the certificate of incorporation by the SEC and By Laws should be adopted within 1 month after receipt of official notice of the issuance of its certificate of incorporation by the SEC. Condition precedent ( AOI) – means that articles of incorporation is adopted prior to the creation and existence of a corporation.

Cannot these two filed together? Yes, By Laws it can filed together with the AOI however, it shall be effective only upon the issuance by the SEC of a certification that the by-laws are not inconsistent with the provisions of the code.

Binding effect of by-laws As to third persons • Generally, the by-laws do not bind third persons since they operate merely as internal rules among stockholders. • Exception: when the third person has knowledge either actually or constructively at the time the transaction in question was entered into.

Effects of Failure to file By Laws within 1 month. 1. 2. 3.

SEC may render the Corporation liable to the revocation of its registration. After hearing for the reason of their failure, SEC may impose suspension impose an administrative fine.

SITUATION So here is a corporation who did not file their By Laws for 2 years after the issuance of the certificate of incorporation, what will happen? There will be a hearing conducted in order for the corporation to be heard whether it has a reasonable ground for their failure to file a By Law. So that after year 1 the corporation entered into a contract, so that the corporation is now insisting that

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the other party should perform their obligation, but the other party said you do not have any personality to sue me because you were dissolve when you fail to file your By Laws within 1 month. You do not have a juridical personality, because the law requires you to file your By Laws within 30 days after you receive the certificate of incorporation. And its now 2 years, so you do not have any legal standing to sue me. So what do you think? The other party cannot set as a defense that the other party has no legal personality to sue because of their failure to file their By Laws within 1 month. There is no automatic dissolution of the corporation by reason of failure to file a By Laws. There is still a hearing that will be conducted in order to determine whether it has a reasonable explanations or ground for their failure to file. So a hearing will still be conducted because if they have a reasonable ground for their failure then its okay. However? However, if it would be proven that their ground is not reasonable then a penalty will be meted out against the corporation. These penalties could either: a. Fine; b. Suspension c. Eventual revocation of their certificate of registration. So it doesn’t mean automatic dissolution. So what is the difference? In dissolution the registration is now revoked or cancelled and there will be distribution of assets, while; In suspension or revocation only the operation of the corporation is affected and they can still file their registration or comply with the requirements. Once the certificate is revoked, what will happen? Its juridical personality will now cease to exist, and it will no longer have any legal standing to sue including those rights given to them under the law by reason of its creation. So we said a corporation has a tripartite relationship, what are these? It means 3 party and these are: 1. corporation; 2. stockholders; 3. Third party which is the public Also we said, it is a tri contract relationship. What are these? These are: 1. Relationship between the Corporation and the stockholders; 2. Relationship between the Corporation and the public; 3. Relationship between the stockholders in relation with the other stockholders

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & So that here, we also said that a corporation is a creation of the state, what are the powers of the corporation again? Since it is a creation of the state, its powers are limited; the law determines the power it can exercise So it is limited by? The constitution and statutes

These are the secondary contracts as distinguished form primary contracts of loan, because the existence of these contracts depends upon the existence of the principal contract (then sir talks about gold diggers in the cemeteries- her mother's carcass already at her side, gi hilabtan in search of jewels/valuables) … So, he can foreclose and he can dispose it.

This refers to the express powers, what are the other powers?

SITUATION

The power to adopt by laws is it express or implied? Express, it is provided by corporation code

This time he wanted to assume ownership, because they were shares of stock, they wrote the secretary to effect the transfer of ownership to his name. The secretary wrote back: we’re sorry but we cannot transfer the ownership in your name because no shares can be transferred without first offering it to the corporation. That was contained in the by laws but not in the articles, not even in the certificate of shares of stock. And so she contended that she never knew about it. What do you think?

If you want changes in the bylaws, there shall be a vote by 2/3 of stock holders, in order to amend the by-laws, the power to amend is it express or implied powers? Still an express power provided in the code

A: It can be transferred to her name because as a rule the by laws are not binding with respect to third parties except when they have knowledge. Since, she does not have any knowledge, it will not bind her.

•

Implied powers- to execute the express powers of the corporation

•

Incidental

•

Inherent powers

Shares of Stock as Objects of Pledge or Mortgage. because of that relationship, the stock holder own a share of stock, and being the owner he own a stock certificate, now, because it is a property, can it mortgage and offer this security as collateral? Yes As a matter of fact, it can also be offered as pledge, and it was pledge to someone else, so that when the loan was not paid, what would happen to the pledged shares? When the loan is not paid, the collateral will be auctioned, the creditor now becomes the owner Very similar to RD pawnshop you pledge, so when you pledge? You transfer possession to the pledgee As distinguished form a mortgage? There is no transfer of possession, there is only an encumbrance, and the debtor maintains possession What are the 2 kinds of mortgages? • Real estate • Chattel mortgage

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XPN: However, if it were indicated in the AOI as well as in the certificate itself, it will now bind third person because there is already knowledge. Once the by laws are approved then the corporation can already start its operation and the stock holders will now be bound by it.

Contents of the By-Laws. " Sec. 47. Contents of by-laws. - Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees;

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. 6.

Here is the by-laws of the corporation and they wanted to amend it. The amendment was that “no stocks could be sold to anyone without securing the consent of the corporation”. Since this is an amendment, what is required? 2 modes: 1. Majority vote of BOD or trustees AND vote of owners of majority of OCS or members 2. OR it can be delegated to the BOD by 2/3 of OCS or members, provided that the delegation is authorized. However, the delegated authority may be revoked. nd

And so the amendment was done via the 2 mode. And the amendment refers to the qualifications of the members of the Board. So that the amendment now states: no person who is also a director of another corporation can be qualified to be a director of this corporation if the business of the other corporation is competitive or antagonistic to the business of our corporation. Is this amendment valid? E

E

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YES. It is a valid amendment in the by-laws. It will endanger the existence of the corporation if the amendment will not be allowed because of the antagonism that could be created or the competition that could arise (Case of Robina farms and San Miguel Corp.) Gokongwei, Rubina farms owner, was acquiring shares of stocks in San Miguel Corp. that is enough to put him in the board. Both corporations are into almost the same businesses. (Poultry, ice cream, coffee, textiles). San Miguel amended their bylaws to prohibit the director of other corp. from other corp. Gokongwei countered that it is only intended for him even if he is not named. SC ruled that it is valid for it will endanger the existence of the corp. and the antagonism could be created or the competition that will arise.

This time the amendment is now requiring all stockholders to secure the consent or conformity of the corporation before they could assign, transfer, or sell their shares of stocks. Justified by the corp. that they want know the potential buyers to protect the integrity and existence of the corp. Is this valid? E No. It is a NOT a valid amendment. This will encroach on the right of the stockholder as an owner to dispose, use, and abuse their property. If ever that the corporation will not give their consent, then it will tantamount to a prohibition of disposing their stocks. In contracts we learn, the principle on liberality of contracts, isn’t not? Such principle must be not being contrary to law, morals, public policy. And how can this be contrary to law? It will now prohibit the owner from selling the property, or in other words it will violate the right to ownership. Because in ownership, the person has the right to dispose his property.

Quorum provided for under By-Laws. " It is the required number of person in order to conduct a valid meeting, otherwise without a quorum there can no valid meeting, and any resolution passed without a a quorum will not be binding to the corp. SITUATION So that in 10 directors, how many or what would be the quorum? In the absence of the stipulation of the by-laws, then the simple majority or 50% plus 1, such that the quorum of 10 is 6. Can the by-laws provide that 4 is quorum? That the by-laws provide that there are 10 directors and that the by-laws provide that 4 will constitute a quorum. Yes, if it does not provide what the quorum is, then the majority, if it provides for the quorum then it will depend on the by-laws and not necessarily the majority because quorum provides the required number of participants to conduct a meeting. IOW in the absence of the stipulation the majority should be the quorum. However, what do we mean by majority? That’s 50% plus 1, simple majority, as distinguished to qualified majority which refers, any number greater than simple majority. And plurality means it constitute the highest

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & number obtain in any given situation, it could less than the majority not necessarily majority, in a group of 100 votes, 1 could win with 30 votes if that is the number votes acquired, as earlier said only Estrada got the majority votes in an election and only to be ousted.

Meetings. "

And may that annual meeting be postponed? GR: NO because it could be abused, by the board, and designed to perpetuate their term XPN: for valid reasons such as: 1. Erroneous date for holding the meeting stated in the notice sent out to members; 2. Natural calamity; and 3. Lack of the required quorum As early as February there was a notice from PAGASA that there will be a typhoon on April 15 so the meeting was postponed to June, valid? A typhoon is a good reason to postpone

We have regular and special meetings. A.

Meetings of stockholders or members:

1.

Regular – those held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the BOD. It is held principally for the purpose of electing another set of directors or trustees. Provided, that written notice of Regular meetings shall be sent to all stockholders or members of record at least two(2) weeks prior to the meeting, Special – those held at anytime deemed necessary or as provided in the by-laws (e.g. amendment of the AOI or by-laws) provided, however, that at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws

2.

B.

Meetings of directors or trustees

1.

Regular – those held by the board monthly, unless the by-laws provide otherwise Special – those held by the board at any time upon the call of the president or as provided in the by-laws

2.

Why is it held in the month of April? It’s the time of the passing of the ITR of the corporation by this time the corporation the financial statement of the company, reports for purposes of submitting to the BIR for the corporate income tax. Why should the stockholder’s meeting, in the absence of a provision in the by-laws for the date of the meeting, be held in April of every year? Because it is normally the filing of the ITR. This is more appropriate in April because the financial statements have been prepared in connection with the filing of the ITR. And so by this time, the financial statements are available for distribution to stockholders. There, it could be discovered whether or not the corporation has profits or losses. If they suffer losses then it has to be reported to the stockholders .

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Presider of the Meeting. Generally, the president

Deadline for notices supposed to be sent. For Stockholder’s Meetings: • If regular then 2 weeks prior to the meeting • If special then 1 week prior to the meeting

Who can vote during meetings when shares of stock are pledged or mortgaged or when the stockholder is dead. " We earlier said that these certificates of stock can be pledge and in pledging what do we do? We surrender the possession to the pledgee In pledge, who could vote during election? It is the pledger because the pledgor still retains the legal ownership of the stocks although the possession of the stock certificate is already with the pledgee unless stated or expressly agreed that the pledgee is the one who will vote If the stockholder is dead, who will vote? It is the legal representative. It could either be: • Executor – appointed by the testator in the will or • Administrator - appointed by the court in the absence of a will

Voting in Joint Owners of Stock Sir: 2 or more owners of a stock, who can vote? The consent of everyone must be secured unless 1 is authorized to be proxy by the others.

Treasury shares have no voting rights. No voting rights. Otherwise the directors will abuse this and use this in voting for themselves to perpetuate their position.

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & is!a!proxy.!Enclosed!likewise!is!a!proxy!for!you!to!be! signed.! And! in! the! proxy,! you! are! authorizing! the! president!or!whoever!is!the!officer!named!there!to! cast! any! vote! in! your! behalf! or! in! behalf! of! the! shares! mentioned! there.! So! there’s! a! proxy! form,! and! the! purpose! is! if! we! want! to! elect! somebody! else,!the!proxy!form!will!be!used!in!the!electing!the! nominees! or! if! there! are! issues! or! concerns! that! management!wants!to!be!approved,!then!that!proxy! could!help!because!that!proxy!represents!votes!and! therefore! the! votes! may! be! cast! by! the! officers! or! the! proxy! or! authorized! person! himself,! to! cast! your!vote!in!your!behalf!to!approve!or!disapprove!a! certain! management! issue.! So! that’s! a! purpose! of! the! proxy.! It’s! more! for! management! control.! Of! course,!another!possible!objective!is!to!control!the! size.! You! know! if! there! are! 5k! stockholders,! PLDT! could!have!much!more,!5k!subscribers,!imagine!all! of!you!in!the!meeting!and!served!lunch.!That!could! be! another! reason,! to! overcome! or! address! the! uncontrollable!size!that!may!be.!On!the!other!hand! we!have!other.&

Proxy, defined. In legal sense it refers to the paper/instrument.

Requirements for a Valid Proxy. 1.

2. 3.

Proxies must be in writing signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Oral proxies, therefore, are not valid. It is valid only for the meeting for which it is intended, unless otherwise provided in the proxy. A continuing proxy must be for a period not exceeding 5 years at any one time.

Purpose of Proxies. 1. 2. 3.

To acquire a quorum in meetings Exercise of right to vote even though the SH is absent Management control SIR: More importantly, it is used as a management control devise. It is intended to ensure or guarantee that a possible issue could be positively achieved/approved. Atty: Management control. Not just for a quorum, because quorum is just the number. But you know if proxy is not just for the purpose of having a quorum, being present there. More importantly, you said, as a management control device. Which means? S: Which means that the corporation will use proxy by obtaining a vote from the stockholders and so it could be used favorably Atty: More importantly, it is intended to ensure or guarantee that a possible issue could be positively achieved or approved. That’s why in big corporations for example, in a widely held corporation, proxies are necessary. So!that!here!if!you!were!a…!I!don’t!know!if! you! still! retain! your! PLDT! subscriptions,! because! each!PLDT!holder!is!a!subscriber;!that’s!why!you’re! called! a! subscriber! because! you! subscribe! certain! shares! of! the! PLDT.! You! are! an! owner! of! that! company.! You! are! a! subscriber.!From! time! to! time,! you’re! supposed! to! receive! a! president’s! report! from!the!PLDT.!And!if!there!are!dividends!issued!or! declared,! from! time! to! time! you! will! receive! a! check.! Congratulations;! attached! is! a! check! of! one! centavo.! But! you! are! a! subscriber.! But! more! importantly,!if!you!try!to!examine!that!notice,!there!

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If there are two or more proxies existing. A proxy being an authorization issued by one, generally can a stockholder change his mind? Yes. That’s revocable any time. As a matter of fact, revocation may be implied. How? By the mere presence of the stockholder himself. However we will have a problem here. If two or more proxies are issued. If two or more proxies are issued, which proxy will the corporation honor? The proxy which bears a later date. Because the presumption is, if you issued a second proxy, then the intention must be to revoke the first. However, the problem is if they bear the same date? S: I think the proxy who presents first. Depends first if the time varies, the later proxy will be honored. Atty: The proxy which bears a later time. Problem here is, if the time cast on the proxies are identical. There is a committee who decides.

Management Control Devices. E

A tool or device used by management to regulate or control the decisions of the stockholders so that this decisions will conform to the preferences of management

Examples: 1. Proxies 2. Voting Trust Agreements (VTAs)

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Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& 3. 4. E

& Voting Trusts Management Contracts.

Q: In a voting trust, the trustee becomes the stockholder. What happens to the certificate of stock earlier issued?

1. Proxy E

E

If management wants something to be achieved, votes will be cast in favor of such by getting the proxies of each stockholder (such as president) Owner of the proxy can easily anticipate the outcome of the vote

2. Voting trust agreements (VTAs) E

E E

E

agreement between a shareholder and a third person wherein the legal title of the share is transferred to the third person, including the right to vote, the right to be voted upon, the right to participate in the meeting, right to inspect corporate books; third person becomes the legal owner Agreement must be in writing and notarized and filed by Corporation to SEC Trustee has a voting trust certificate as proof of transfer of legal title; in the eyes of the Corporation, he is now the stockholder; hence, for meetings, notice will be sent to the trustee However any beneficial ownership will still redound to the original owner (trustor) Proxy vs voting trust:

E E E

E

Proxy is limited to a particular meeting but voting trust covers other purposes Proxy is short term but voting trust is long term Proxy cannot be elected as director (unless proxy is already a stockholder of such) but voting trust allows trustee to be voted upon (transfer of legal title) Proxy has no legal title but voting trust acquires legal title

E Differences between Proxy and Voting Trust Agreement (De Leon p510) Proxy Trust no legal title to the shares of the SH revocable at anytime unless coupled with interest

acquires legal title to the shares of the SH irrevocable for a definite and limited period of time

can only act at the specified SH’s meeting votes only in the absence of the owner of stock

not limited to any particular meeting can vote and exercise all the rights of the transferring SH even when the SH is present

shorter duration need not be notarized nor a copy filed with SEC no right of inspection of corporate books

longer duration notarized and a certified copy with SEC has such right

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A: The certificate of stock covered by the voting trust will be cancelled and a new certificate of stock in the name of the trustee shall be issued which shall be recorded in the corporate books, with a note that the certificate of stock is issued to the trustee is pursuant a voting trust. The trustee will then execute and deliver the voting trust certificate to the trustor. Once the trust expires, the certificate of stock in the name of the trustee shall be cancelled and a new certificate of stock in the name of the trustor shall be issued.

3. Voting Agreements. E

The stockholders agree among themselves to vote as one so they will have a unified vote as to how to decide on certain issues.

Note: Voting agreement is binding among them. If one does not comply, it depends on the agreement but it should be honored by the corporation itself.

4. Management contracts Because the BOD can enter into management contract with another corporation, they can assign the technical aspects of the management. Q: Going back to voting, we discussed that a certificate of stock may be transferred, for example, as security. In the case of pledge, who will be entitled to vote? A: It is the pledgor because he is still the owner of the stock. It is only the possession of the certificate that is transferred. In case of mortgage, it is still the mortgagor who is entitled to vote because he is the owner. Q: If stockholder is dead, who is entitled to vote? A: The legal administrator.

representative,

either

the

executor

or

Executor – is person appointed in the will Administrator – one appointed by the court

STOCKS AND STOCKHOLDERS

Stock Subscriptions It is a contract entered into by a person with a corporation still to be incorporated or an already existing corporation that the former will purchase unissued shares of the stocks from the

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & latter. It could be an existing corporation or one still to be formed.

Consideration in Cash. 1.

Pre-incorporation subscription E

one entered into before incorporation. It constitutes a binding contract among the subscribers. Sir: It is a commitment so that before actually registering as a corporation of filing the papers in the SEC, you might want to have a survey as to how many are interested and how much money will be gathered if you proceed.

Conditions: sec. 61 E irrevocable for a period of at least 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 E no pre-incorporation subscription may be revoked after the submission of the AOI to the SEC; thus permanently irrevocable even if the 6-month period has not expired so long as the AOI has been submitted to the SEC

Object of Stock Subscription Contracts. If a person enters into an agreement with another stockholder to purchase the latter’s shares of stock in a particular corporation. Is this a subscription? No. it is not a subscription because subscription has for its object unissued (virgin) shares of a corporation. The earlier transaction is simply classified as a sale of the stocks by the stockholder and not a subscription contract.

Consideration of Stock Subscription Contracts. What is the consideration for the unissued stocks? Considerations for Subscription: sec. 62 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposed at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness by the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion

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2.

Par value shares - then it should be not less than the par value, Non-par Value shares - the price should not be less than 5 pesos per share. In fact, out of the subscription of the subscriber only 25% is required to be paid by the subscriber upon subscription. The balance shall be paid on the date stipulated in the subscription contract, or if not stipulated, upon call by the BOD.

Transcribers’+Observations:+ (Ako lang ni note sa immediately preceding paragraph – for me there is really a possibility that a subscriber be not asked to pay anything upon the execution of the subscription contract, since the law provides as a minimum paid up capital to be 25% of the total subscription. So upon incorporation pwde ani ang mu happen. Name Subscribed shares Paid up in PHP in PHP Mr. X Php 20,000.00 Php 20,000.00 Mr. Y Php 20,000.00 Php 5,000.00 Mr. Z Php 20,000.00 Php 0 Mr. A Php 20,000.00 Php 0 Mr. B Php 20,000.00 Php 0 Total Php 100,000.00 Php 25,000.00 In this case, naaubanmga subscribers walagi.bayad but as you can see the provision of the law that the 25% of the total subscription be paid up is still complied. The remaining balance or the unpaid subscription shall be paid. 1. As indicated in the subscription agreement. 2. On call by the board – at any reasonable time, the Board of directors may call for the payment of the unpaid subscription. Otherwise, they will be called delinquent shares. When you say on call, it is the time when the board demands the payment of any unpaid subscription.

Pre-emptive Right v. Stock Option. Pre-emptive right refers to the first/new issuance of shares of stock. The corporation here is increasing its capital stock and has the obligation to first offer it to the existing SHs. Purpose: This is to maintain percentage of ownership in the corporation and their voting rights to be

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& & maintained. In other words: to maintain their proportionate interest in the control of the corporation.

incorporation&and&in&the&by3laws&as&well&as&in&the& certificate&of&stock;&otherwise,&the&same&shall¬& be&binding&on&any&purchaser&thereof&in&good&faith.& Said! restrictions! shall! not! be! more! onerous! than!granting!the!existing!stockholders!or!the! corporation!the!option!to!purchase!the!shares! of! the! transferring! stockholder! with! such! reasonable!terms,!conditions!or!period!stated! therein.&If&upon&the&expiration&of&said&period,&the& existing& stockholders& or& the& corporation& fails& to& exercise& the& option& to& purchase,& the& transferring& stockholder& may& sell& his& shares& to& any& third& person.&(emphasis&supplied)&

If they originally own 25% and new shares are offered, they can acquire shares in proportion to their existing ownership percentage. Stock Option is an opportunity given by corporation to someone else to allow him within a certain time within which to decide whether or not to proceed with his intended subscription. If you are an existing stockholder, you are entitled to preemptive right; you don’t need to pay for the stock option, automatically, you are entitled to exercise that right. While if you are a non-stock holder in a stock option, there is a consideration; although the corporation is free to waive for that consideration for exercising that option, but the corporation cannot waive the consideration for the stock itself. So the option may require putting up a consideration for that option. Stock option is deemed to be worth it because it is a privilege. You are given an option to something that you should take advantage because this is money, you are holding money. With a mine of an astute businessman, what can you do with that option? I can make money out of that option by selling because this option is one with value. Discussion: If you are given an option to buy shares of stocks at P10 each and you were allotted 1M shares. You are given 3 months to decide WON to buy. If you can sell it to someone at P12 pesos, you will have P2 pesos per share. That’s P2,000,000. So when given an option like that, take it and look for buyers who will be willing to buy it at higher price.

Pre-emptive Right in Close Corporations. Here, the shares are limited to certain persons and not open to the public. In that close corporation, there is a provision in the AOI, By laws and the Stock certificate that such shares cannot be sold to anyone else except present members of the corp. That’s they only way to remain close. Because when he leaves the corp, he cant just offer it to someone else before offering it first to current stockholders. NOTE: restrictions on transfer of shares is governed by Sec. 98, to wit:

Section! 98.& Validity) of) restrictions) on) transfer) of) shares.& –& Restrictions& on& the& right& to& transfer& shares& must& appear& in& the& articles& of&

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As a General Rule, Pre-emptive Right does not extend to Treasury Shares. The purpose of pre-emptive right is to protect the shareholding of the stockholder in a corporation. With this as the objective pre-emptive right, even if existing stockholders got the opportunity to buy treasury shares, is that objective achieved? Yes. There could be some authors who say that existing stockholders will be allowed to exercise their pre-emptive right of treasury shares. We say that it is not because if we go by objective, that objective is not violated or is still achieved even if the stockholder is not given the opportunity or the option to buy treasury shares.

As an exception, Pre-emptive Right extends to Treasury Shares in Close Corporations by express provision of law. " However, if this was a close corporation and we got the treasury shares, can the existing stockholders insist that they should be given the opportunity to buy that share from the other stockholder? Yes, to be able to maintain the stocks within the close corporation. Otherwise, the objective is violated. The rule therefore, if we go by objective so far as treasury shares are concerned: The existing stockholder in a close corporation may insist on exercising his pre-emptive right as to the treasury shares of a corporation while in an open/widely-held corporation, the existing stockholder cannot exercise their preemptive right as to the treasury shares.

Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

Corporation!Law! Warrior&Notes&(Batch&Batang&Sip3onon)&[Compiled&WWW’s&of3rd&Year&LLB&Pelaetch&class:&2015&–&2016]& &

Sec.!102.&Pre6emptive)right)in)close)corporations&–& The& pre3emptive& 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.& To summarize: 1) GR: there is no pre-emptive right as to the reissued treasury shares, unless otherwise provided in the AOI 2) XPN: Close corporation – there is pre-emptive right as to the reissued treasury shares, unless the AOI provides otherwise

Reclassification of shares. A corporation may reclassify its shares by amending its articles of incorporation and exchange outstanding shares of stockholders for stocks reclassified or converted from one class to another, such as from preferred share to common share. The value of one share may be used as a consideration in acquiring a new share. EXAMPLE If you are a holder of class A share, which is 50 pesos per share, and intend to acquire class B shares which is only 25 pesos per share, you could use the 50 pesos per share in paying your class B shares. SITUATION

A certificate of stock is not a negotiable instrument because it failed to comply the requisites (e.g. unconditional promise to pay a sum certain in money). There is no sum certain in money but shares of stock. Certificate of stock is transferrable. The law allows transfer of shares by indorsement with delivery of the certificate of stock. A certificate of stock is like a diploma (front: nice piece of paper, name of the corporation, authorized capital stock and number shares belonging to the holder; back: indorsement portion). SCENARIO You did not pay the entire subscription. The balance becomes due. Despite the call, you did not pay the balance. The shares become delinquent shares. In delinquent shares, the stockholder is deprived of certain rights (e.g. right to vote and be voted upon), what remains to the stockholder is the right to the dividends. Q. We have authorized capital stock, subscribed capital stock? How much do you pay? A: You only pay 25% of the subscribed capital stock. Once you paid 25% of the 100 shares you subscribed at P1000 per share, you pay P25,000. Q. If dividends are declared last December, would you be entitled to 25% of the shares or for the 100 shares? The stockholder is entitled to the dividends of the 100 shares (whole). Despite not fully paid, the stockholder owned the shares.

Can you subscribe for shares in a corporation by rendering service as an accountant for one year?

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No. For labor as payment for subscription, the labor must be a past service and not future service because a future service is uncertain, there is no guarantee that he can or will serve as an accountant and it cannot be ascertained the amount of service to render. (Some parts inaudible) The law allows only past services because they are already certain and can be estimated, while future services are uncertain and unconditional. (Transcript 2014-2015)

Certificate of Stock. " The best proof of being a stockholder is the certificate of stock.

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Compiled)by))R.)Servacio)and)D.M.)de)Lira.)

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