Notes in Corporation.zarah

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro CORPORATION CODE (BP BLG 68) *Corporation Code is the general law on Private Corporation regarding to its creation, formation and powers. INTRODUCTION: A. Historical Background Effectivity: May 1, 1980 Article XII Section 16 of the 1987 Constitution: “The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.” *Congress has limited powers in the formation, creation and regulation of a private corporation. Purposes: 1. Uniformity 2. To avoid corruption General Rule: Congress is prohibited to enact a law directly forming a private corporation. Exception: GOCC may be created by special charter. *GOCC is a private corporation with regard to function and in the meantime a public corporation with regard to ownership. Twin Conditions must be present in forming a GOCC: 1. Interest in the common good 2. Subject to the test of economic viability - Means can survive alone in the market; can generate income which they can use for their operating expenses

CONCEPT AND CORPORATION:

ATTRIBUTES

OF

A

A. Statutory definition of a Corporation Section 2 of the Corporation Code: “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.” B. Attributes of a Corporation •

Artificial Being -

It exist by fiction of law only, hence it is subject to limitations that are inherent because of its nature

-

A corporation is a juridical person which exists by process of legal fiction Doctrine of Corporate Entity/Doctrine of Separate Personality - A corporation is a legal or juridical person with a personality separate and apart from its individual stockholders or members and from any other legal entities to which it may be connected Consequences/Implications of Separate Personality: 1. It is entitled to own properties in its own name and its properties are not the properties of its stockholders, directors and officers. Cases: MagsaysayLabrador v CA; Sulo ng Bayan v Araneta *The interest of the stockholders over the properties of the corporation is merely inchoate.

1

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *Merely inchoate because there are still condition precedents before the shareholders get their share, viz, in Asset, there are dissolution and satisfaction of claims; in profit-sharing, there are unrestricted retained earnings and declaration by the Board of Directors. 2. It can incur obligations and its obligations are not the obligations of its stockholders, directors and officers. Case: Francisco v CA 3. The rights belonging to the corporation cannot be invoked by the stockholders, directors and officers and vice versa. 4. Corporations are entitled to certain constitutional rights, i.e., right against unreasonable searches and seizure, due process clause. *It is not entitled to certain constitutional right, i.e., right against self-incrimination particularly production of corporate documents. *Right against selfincrimination is applicable only to natural persons. General Rule: Constitutional guarantees are applicable to corporations. Exceptions: 1. Right against incrimination 2. Freedom to travel

self-

Case: Bataan Shipyard v PCGG 5. It is liable for tort. It is liable when the act was committed by the officer or agent under express direction or authority from the stockholders or members acting as a body or generally from the directors as the governing body. 6. Generally, the corporation is considered a national of the country where it was incorporated (Place of incorporation test) *Exceptions: 1. In times of war, the nationality of a corporation is determined by the nationality of the controlling stockholders; 2. Under the Foreign Investment Act of 1991 7. Corporations are incapable of intent, hence, they cannot commit felonies that are punishable under the RPC. They cannot commit crimes that are punishable under special laws because crimes are personal in nature requiring personal performance of overt acts. In addition, the penalty of imprisonment cannot be imposed. *Criminal liability falls upon to responsible officers. *Responsible officers cannot invoke the doctrine of separate personality. *Corporations incarcerated.

cannot

be

8. Moral damages cannot be awarded in favor of corporations because they 2

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro do not have feelings and mental state. *Corporations can claim damages such as actual, compensatory, exemplary, loss of earning capacity. General Rule: Corporation cannot claim moral damages. Exception: If the corporation has a good reputation and such reputation was destroyed. Case: Coastal Pacific Trading v Southern Rolling Mills, Co. *In Filipinas Broadcasting Network Inc. v. Ago Medical and Educational Center, the SC ruled that a corporation can recover moral damages under Article 2219(7) if it was the victim of defamation. Doctrine of Piercing the Veil of Corporate Entity – The doctrine that a corporation is a legal entity distinct from the persons composing it. It is a theory introduced for the purposes of convenience and to serve the ends of justice. But when the veil of corporate fiction is used as a shield to perpetuate fraud, to defeat public convenience, justify wrong, or defend crime, this fiction shall be disregarded and the individuals composing it will be treated identically. Cases: Times Transportation Co. v Santos Sotelo; Concept Builders v NLRC *The doctrine of piercing the veil of corporate entity is the exception to the doctrine of corporate entity. *The users of this doctrine are: 1. Stockholder; 2. Group of stockholders; 3. Another corporation. Effects: 1. Stockholders, officers and corporation are in effect jointly liable; 2. In case of two corporations, they will be treated

as one wherein they will be both solidarily liable. (Instrumentality rule) *There is no effect on the existence of each corporation as long as their separate entity is used for legitimate purposes. Instrumentality Rule – When one corporation is so organized and controlled and its affairs are conducted so that it is in fact a mere instrumentality or adjunct of the other, the fiction of the corporate entity to the instrumentality may be disregarded. *The user is another corporation. Keyword: CONTROL Requisites: 1. Control, not mere majority or complete stock control, but complete dominion, not only of finances but of policy and business in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; 2. Such control must have been used by the defendant to commit fraud or wrong in contravention of plaintiff’s legal rights; 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. Three cases of piercing the veil: 1. Fraud Cases – when a corporation is used as a cloak to cover fraud, or to do wrong; 2. Alter Ego Cases – when the corporate entity is merely a farce since the corporation is an alter ego, business conduit or instrumentality of a person or another corporation; 3. Equity cases – when piercing the corporate fiction is necessary to achieve justice or equity. Probative Factors of Identity: 1. Identical shareholders; 2. Same set of officers, directors, or trustees; 3. Use of same premises, properties, tools and equipments; 4. Engage practically in the same business; 5. The same manner of keeping books and records. *The probative factors of identity are not conclusive but may be considered as strong evidence. 3

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro •

•

Creature of Law Article XII Section 16 of the 1987 Constitution: “The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.” Concession Theory – It is a principle in the creation of corporations, under which a corporation is an artificial creature without any existence until it has received the imprimatur of the State acting according to law, through the SEC. The life of the corporation is a concession made by the State. Right of Succession -

-

Capacity to have continuity of existence despite the changes on the persons who compose it. Thus, the personality continues despite the change of stockholders, members, board members or officers; death or disability. Also known as Principle Perpetual Succession

of

Reason: To make the corporation more stable •

Creature of enumerated powers, attributes and properties Doctrine of Limited Capacity – No corporation under the Corporation Code, shall possess or exercise any corporate powers, except those conferred by law, its Articles of Incorporation, those implied from express powers and those as are necessary or incidental to the exercise of the powers so conferred. The

corporation’s capacity is limited to such express, implied and incidental powers. *Corporation may be restrained from engaging a particular transaction because it is beyond their powers. *General Capacity – a corporation can perform any act for as long as it is lawful, moral and not contrary to public policy or order. Ultra Vires Doctrine – Even if the act is lawful, moral and not contrary to public order or policy but such act is not within the express, implied and incidental powers of the corporation such act shall be void for being ultra vires. *These doctrines are based on Section 2 and Section 45 of the Corporation Code.

C. Classification of Private Corporations: 1. As to existence of Stocks: Stock Corporation – Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. (Sec. 3) Non-stock Corporation – A corporation where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution. (Sec. 87) Q: Is it correct to say that a Non-stock corporation cannot generate income on their own? A: NO 2. As to function/organizers: Public Corporation – for public purpose and organized by the State. 4

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Private Corporation – for profit making functions and organized by private persons alone or with the State

-

3. As to laws of Incorporation (Place of Incorporation) :

Can be compared to a voidable contract, i.e., valid until annulled. *Can be challenged by the State later on. Cases: Hall v Piccio; Seventh Adventist v Northeastern Mindanao Mission *The filing of the Articles of Incorporation and the issuance of the certificate of registration are the essential requisites for the existence of a de facto corporation. Requisites: 1. The existence of a valid law under which it may be incorporated; 2. An attempt in good faith to incorporate; 3. Use of corporate powers; 4. Filing of the Articles of Incorporation; 5. Subsequent compliance with the requirement of law. *In both corporations, there must be a certificate of registration issued.

Domestic Corporation – corporation formed, organized or existing under the Philippine Laws. Foreign Corporation – corporation formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. (Sec. 123) *License is necessary for; 1. Regulation purposes and 2. Access to local courts. 4. As to legal status: De Jure Corporation – corporation created in strict or substantial compliance with the mandatory requirements for incorporation and the right 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 Corporation – the due incorporation of any corporation claiming in good faith to be a corporation under the Corporation Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by Solicitor General in a quo warranto proceeding. (Sec. 20) -

organized with a colourable compliance with the requirements of a valid law and its existence cannot be inquired collaterally.

There is an irregularity or defect in the constitution or organization.

Doctrine of Corporation by Estoppel – All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as an result thereof: Provided, however, that when any such ostensible corporation is sued on any transaction entered into by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack or corporate personality. (Sec. 21) - Group of persons which holds itself out as a corporation and enters into a contract with a third person on the strength of such appearance cannot be permitted to deny its existence in an action under said contract. Case: Lim Tong Lim v CA 5

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *Lim is stopped because he benefited from the transaction. Remedy: To ran after those persons responsible for the representations Essence: They are precluded from denying their existence by their previous act or conduct Holding Corporation – it is one which controls another as a subsidiary by the power to elect management. It is one that holds stocks in other companies for purposes of control rather than for mere investment. Affiliate – one related to another by owning or being owned by common management or by a long-term lease of its properties or other control device. It may be the controlled or controlling corporation, or under common control. Subsidiary Corporation – one which is so related to another corporation that the majority of its directors can be elected either directly or indirectly by such other corporation. It is always controlled. Open Corporation – one which is open to any person who may wish to become a stockholder or member thereto. Close Corporation – those whose shares of stock are held by limited number of persons like the family or other closely knit group. (Sec. 96) FORMATION AND ORGANIZATION OF A PRIVATE CORPORATION: A. Submission of Articles of Incorporation; contractual significance *The life of a corporation commences from the issuance of the Certificate of Registration by the SEC upon filing of the Articles of Incorporation and other documents. Article of Incorporation – is the charter of the corporation, and the contractual relationships between the State and the corporation, the stockholder and the State, and

between the stockholders.

corporation

and

its

Contractual Significance: 1. The issuance of a certificate of incorporation signals the birth of the corporation’s juridical personality; 2. It is an essential requirement for the existence of a corporation, even a de facto one.

B. Contents and Form of the Articles of Incorporation (Secs. 14 and 15) Contents of Incorporation:

Articles

of

1. Corporate Name; 2. Purpose Clause; 3. Principal office; 4. Term of existence; 5. Incorporators; 6. Directors or trustees; 7. Capitalization; 8. Shares of stock; 9. Treasurer’s Affidavit.

•

Corporate Name Purpose: Identification *Corporation can not adopt any name or group of words at its pleasure because of statutory limitation, viz., Sec. 18 of the Corporation Code which provides that: “No corporate name may be allowed by the SEC if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently 6

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name.

the word or phrase has come to mean that the article was his product. Requisites: 1. Period of use; 2. The use must be exclusive.

SEC Guideline ”x x x b. In order to prevent confusion and difficulties of administration, supervision and control, if the proposed name contains a word already use as a part of the firm name or style of a registered entity, the proposed name must contain two other words different and distinct from the name of the company already registered or protected by law. x x x”

Case: Lyceum Philippines

*In case of change of name, the corporation is not dissolve nor create a new corporation; it also does not extinguish the corporate liability. *Change of name can be done by amending the Articles of Incorporation.

*The phrase “Ang Mga Kaanib” are words merely descriptive of membership while the phrase “Sa Bansang Pilipinas” are merely descriptive of the place. are

Procedure: 1. Obtain approval of majority of the Board and 2/3 stockholders;

religious

*Both use the acronym H.S.K.

2. Submission approval. •

As a rule, generic name or descriptive word may be used as a corporate name.

to

the

SEC

for

Purpose Clause *Only one primary purpose. Primary purpose defines the business activities of the corporation. It is the ordinary course of business of the corporation.

Reason: public domain; can be used by anyone; public use. Exception: Doctrine of Secondary Meaning – a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that in that trade and to that branch of the purchasing public,

the

*The exclusivity requirement was not satisfied by Lyceum of the Philippines.

Case: Ang Mga Kaanib Ni Jesus Cristo

*Both parties institutions

of

*Secondary Purpose is for future expansion. There is no limit on the secondary purpose. *In case the primary purpose is not viable then secondary purpose may be used. •

Principal Office *The principal place of business may determine the venue of court 7

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro cases involving corporations. It may also determine if service of summons and notices was properly made. It is also important for tax purposes (local taxation).

Reason: extend.

*It is the residence of the corporation. It is where the corporation maintains its books and records and where normally the bulk of its business is being conducted or undertaken. *For personal action, venue is the residence.

*The delay in application for justifiable.

Term of Existence *A corporation has a maximum term of 50 years. It may be extended for a period not exceeding 50 years in any single instance. As a rule, no extension can be made earlier than 5 years prior to the expiration of the term. *No limitations regarding number of extension can apply. Reason: To compel stockholders to meet corporation’s term.

the the

Exception: If for compelling reasons, earlier extension will be allowed. *During the three year winding up period, the corporation still has personality but activities are limited to the liquidation of the corporation affairs and not to transact further business. As a rule, after the term has expired, no more extensions be allowed or entertained by the SEC.

more

period

to

Exception: Doctrine of Relation – The filing and recording of a certificate of extension after the term cannot relate back to the date of the passage of the resolution of the stockholders to extend the life of the corporation. However, the doctrine of relations applies if the failure to file the application for existence within the term of the corporation is due to neglect of the officer with whom the certificate is required to be filed or to wrongful refusal on is part to receive it.

*The SEC requires the exact address to be indicated in the Articles of Incorporation.

•

No

submitting the extension is

Keywords: 1. Excusable delay; 2. Beyond the control of the corporation (insuperable intervening causes) •

Incorporators *Once an incorporator always an incorporator. (Fait accompli – an accomplished fact which cannot be altered) *They are the signatories to the Articles of Incorporation. *They are originally forming the corporation Q: What is the reason behind the phrase that an incorporator is not always a corporator? A: To be an incorporator it is not necessary to own a share unlike as a corporator. *Number is limited to 5 to 15. *They must have a contractual capacity. 8

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *Juridical person cannot another juridical person.

create

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.”

*There is no citizen requirement but special laws may require otherwise.

*It is required that at least 25% of the subscribed capital must be paid and in no case may be paid-up capital be less than P5,000.

*Majority must be a resident of the Philippines. •

Directors and trustees

Authorized Capital Stock – the amount fixed in the articles of incorporation to be subscribed and paid by the stockholders of the corporation.

*The Board of Directors is the governing body in a stock corporation while Board of Trustees is the governing body in a nonstock corporation.

*Shows the total number of shares

*They exercise the powers of the corporation.

Subscribed Capital – that portion of the authorized capital stock that is covered by subscription agreements whether fully paid or not.

Qualifications: 1. Every director must own at least one (1) share of the capital stock;

Paid-Up Capital – the portion of the authorized capital stock which has been subscribed and actually paid.

2. Majority of the directors or trustees must be residents of the Philippines. *Any director who ceases to be the owner of at least one share of the capital stock of the corporation of which he is a director shall thereby cease to be a director.

Outstanding Capital Stock – the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid except treasury shares so long as there is a binding subscription agreement.

*Trustees of non-stock corporations must be members thereof. *Initial directors/trustees shall hold office for one year until their successors are elected and qualified. •

Capitalization Section 14(8) states that: “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

•

Shares of stock Q: Why shares of stock? A: Because there is a share on the capitalization. Economic Value: 1. expectancy on the share in the profits 2. expectancy on the share of assets in case of dissolution/liquidation. Political Value: 9

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 1. vote 2. control in the management of the corporation. Doctrine of Equality of Shares – “Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.” - Provides that where the Article of Incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities. Classes of Shares: 1. Par Value Share – shares that have a nominal value in the certificate of stock. Contractual Significance: The minimum price at which the shares are to be issued. *The price is fixed. It is stated in the Articles of Incorporation. 2. No Par Value Share – those shares which do not have nominal value. However, they have issued value stated in the certificate or articles of incorporation. *There is flexibility in the price. *The price is determined by the Board. Limitations: 1. No par value shares cannot have an issued price of less than P5.00; 2. The entire consideration for its issuance constitutes capital

so that no part of it should be distributed as dividends; 3. They cannot be used as preferred stocks; 4. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan association (Reason: imbued with public interest); 5. The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares; 6. Once issued, they are deemed fully paid and nonassessable. 3. Voting Shares – shares with the right to vote. They have the right to participate in the management of the corporation through the exercise of such right. 4. Non-voting Shares – shares without the right to vote. *Has only a limited right to vote. General Rule: Shareholder owning non-voting shares has no right to vote. Exceptions: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;

10

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 4. Incurring, increasing indebtedness;

creating or bonded

5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with the Corporation Code; 8. Dissolution of the corporation. *The exceptions are exclusive; the list is a closed list Statutory Constraint: Sec. 6 of the Corporation Code *The corporation cannot provide for shares with no voting right General Rule: Only redeemable and preferred shares are deprived of voting right. Exception: Common shares may be denied of its voting right in the following instances: 1. Delinquent in paying the subscription; 2. If there was a founder’s share where it was given the right to vote exclusively for 5 years (Sec. 7). 5. Common Shares – the most common type of shares which enjoy no preference. *The basic class of stock ordinarily and usually issued without extraordinary rights and privileges, and the owners thereof are entitled to a pro rata share in the profits of the corporation and in its assets upon dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever.

6. Preferred Sharesshares which enjoy preference as to dividends or assets upon dissolution as stated in the Articles of Incorporation. Reason: To attract investors. *Preference does not give them a lien upon the property nor make them creditors of the corporation. *Characterized as redeemable shares. Kinds: 1. Preferred shares as assets – share which gives holder thereof preference in distribution of the assets of corporation in case liquidation;

to the the the of

2. Preferred shares as to dividends – share which gives the holder thereof preference in the distribution of the dividends to the extent agreed upon before any dividends at all are paid to the holders of common shares; 3. Participating preferred shares – the holders thereof are still given the right to participate with the common stockholders in dividends beyond their stated preference; 4. Non-participating preferred shares – where there is no such participation; 5. Cumulative preferred shares – the shareholder is entitled to recover dividends in arrears. While dividend declaration may not be compelled, once it is declared, the shareholder is entitled to the said arrears; 11

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 6. Non-cumulative preferred shares – not entitled to arrears only to present dividends.

- Shares which are previously issued by the corporation but subsequently reacquired by the corporation.

7. Redeemable Shares – are those which permit the issuing corporation to redeem or purchase its own shares.

*Retired thus can no longer be re-issued. *They are dividends.

Limitations: 1. Redeemable shares may be issued only when expressly provided for in the Articles of Incorporation;

9. Founders’ Shares – classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for the limited period not to exceed 5 years subject to the approval of the SEC. The 5 year period shall commence from the date of the approval by the SEC.

4. The corporation is required to maintain a sinking fund to answer for redemption price if the corporation is required to redeem;

8. Treasury Shares – shares which have been earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, donation, redemption or through some lawful means.

to

*These shares may again be disposed of for a reasonable price fixed by the Board of Directors.

3. Redeemable shares may be deprived of voting rights in the Articles of Incorporation, unless otherwise provided in the Corporation Code;

6. Unrestricted retained earnings is not necessary before shares can be redeemed but there must be sufficient assets to pay the creditors and to answer for operations.

entitled

*They are not entitled to voting rights. Rationale: to prevent abuse by the management.

2. The terms and conditions affecting said shares must be stated both in the certificate of stock representing such share;

5. The redeemable shares are deemed retired upon redemption unless otherwise provided in the Articles of Incorporation;

not

•

Treasurer’s affidavit *The SEC shall not accept the Articles of Incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least 25% of the authorized capital stock of the corporation has been subscribed, and at least 25% of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least 25% of the said subscription, such paid up capital being not less than P5,000. 12

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *If the Treasurer’s affidavit is false such act is tantamount to fraud. (PD 902-A) *Fraud on the part of the corporation is a ground for revocation or suspension of license depending upon the extent of the violation committed. *If there’s no Treasurer’s Affidavit, the first ground shall apply, i. e., noncompliance with the minimum requirement. General Rule: 25% must be subscribed and 25% must be paid. Exception: If the law provides otherwise, i.e., special laws.

C. Grounds for rejection of the Articles of Incorporation 1. The articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2. The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; 3. The Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false; 4. The percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. Dual Franchise Requirement: No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries,

insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favourable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. D. Commencement Existence

of

Corporate

Sec. 19 of the Corporation Code states that “ A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the SEC issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law.” *For purposes of determining whether a corporation enjoys the status of a de facto corporation, it must have been at least issued a certificate of registration.

E. Amendment Incorporation

of

the

Articles

of

Sec. 16 of the Corporation Code states that: “Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least 2/3 of the outstanding capital stock, 13

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least 2/3 of the members if it be a non-stock corporation.” *It is effective upon the approval of the SEC. *There may be an amendment by inaction. Amendment by Inaction – Upon filing with the SEC of the amendment and the Commission failed to act on it within 6 months from the date of filing for a cause not attributable to the corporation.

*Automatic dissolution is not contemplated under Section 22. (SEC Opinion). *Section 22 must be read in conjunction with Sec 6(1) of PD 902-A which requires that the corporation must be given the opportunity to be heard in compliance with the requirement of due process before the revocation of its license.

CONTROL AND CORPORATION:

MANAGEMENT

OF

A

A. Levels of Corporate Control 1. By Stockholders/Shareholders;

F. Effects of Charter

Non-Use

of

Corporate

Sec. 22 of the Corporation Code states that: “If a corporation does not formally organize and commence the transaction of its business or the construction of its work within 2 years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if the corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least 5 years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the SEC.” *The period must be counted from the issuance of the Certificate of Incorporation.

2. By Corporate Officers; 3. By Directors/Trustees

B. Board of Directors/Trustees •

General Powers of the Board Sec. 23 of the Corporation Code states that: “Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one year until their successors are elected and qualified.” Powers of Directors:

the

Board

of

1. Corporate Powers; 2. Manage the Corporation; and

14

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 3. Control over and hold properties of the Corporation.

the

the corporation or decrease the profits of a department.

*Board of Directors/Trustees is the statutory representative of the corporation.

*Great respect is accorded to the decisions of the Board of Directors/Trustees.

General Rule: All corporate powers emanate from the Board of Directors/Trustees.

*The directors are not liable to the stockholders in performing such acts.

Exception: Unless otherwise provided in this Code. (Limiting Clause) The limiting clause means that there are certain corporate matters that cannot be done by the Board by reason that such matters fall upon the shareholders; or corporate matters that cannot be resolved by the Board alone, i.e., it must be done with the approval of the shareholders. •

Business Judgment Rule Business Judgment Rule – questions of policy or management are left solely to the honest decision of officers and directors of a corporation and the courts are without authority to substitute their judgment for the judgment of the board of directors; the board is the business manager of the corporation and so long as it acts in good faith its orders are not reviewable by the courts or the SEC. - A resolution or transaction pursued within the corporate powers and business operations of the corporation, and passed in good faith by the board of directors/trustee, is valid and binding, and generally the courts have no authority to review the same and substitute their own judgment, even when the exercise of such power may cause losses to

•

Qualifications Members

of

the

Board

Sec. 23 of the Corporation Code states that: “Every director must have at least one share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.” *In order to be eligible as director, what is material is the legal title to and not beneficial title or ownership of the stocks appearing on the books of the corporation. *The directors/trustees natural persons.

must

be

*They must also be of legal age. *He must possess other qualifications as may be prescribed in the by-laws of the corporation. *Under Sec. 27 of the Corporation Code: “No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years, or a violation of 15

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro this Code committed within 5 years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.” Reason: The position is based on trust and confidence. *No citizenship requirement. *The By-Laws may provide additional qualifications/disqualifications. •

Election of the Board Members Sec. 24 of the Corporation Code provides that: “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 the 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 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.” *It is the stockholders or corporators who elect members of the Board of Directors. *The only procedure required by the Code is through Election. There can be no other modes. *The election must be by ballot if requested by any voting member or stockholder. *A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory right to use any of the methods of voting in the election of directors. *No delinquent voted.

stock

shall

be

*It is not required that the candidate received the majority vote, what the law provides is only plurality of votes. 16

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *Majority number is required only for the existence of a quorum.

*The elected officer must act as a body.

Not included in outstanding capital stocks: 1. Unissued stocks;

*In a stock corporation, cumulative voting is a statutory right whereas in a non-stock corporation, cumulative voting is applicable if it is provided in the Article of Incorporation.

2. Non-voting stocks; 3. Treasury Shares.

Sec. 26 of the Corporation Code provides that: Within 30 days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the SEC, the names, nationalities and residences of the directors, trustees and officers elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the SEC.”

Methods of Voting: 1. Straight Voting – every stockholder may vote such number of shares for as many persons as there are directors to be elected. 2. Cumulative Voting for One Candidate – a stockholder is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. *Example: X has 10 shares in his name; there are 5 numbers of directors to be elected. X has 50 votes (10x5) available to him. X may opt to concentrate all his 50 votes to a particular candidate.

•

*The directors or trustees shall hold office for one (1) year subject to the “hold over” principle, i.e., they continue in office until their successors are elected and qualified.

3. Cumulative Voting by Distribution – a stockholder may cumulate his shares by multiplying also the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit. *Example: X has 10 shares in his name; there are 5 numbers of directors to be elected. X has 50 votes available to him. X may opt to distribute the votes to as many candidates as there are provided that the total number of votes does not exceed 50. Purpose of cumulative voting: To protect the minority stockholders.

Term of Office

*The one year period does not apply to directors initially elected for purposes of incorporation. •

Quorum Meetings

Requirement in Board

Sec. 25 of the Corporation Code states that: “Unless the articles of incorporation or the bylaws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the 17

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board.” Q: Is the director allowed to let a proxy attend a board meeting in behalf for himself? A: NO. Proxy prohibition. Reason: Because of their personal qualifications. *Quorum requirement should always be computed based on the number specified in the Articles of Incorporation regardless of ensuing vacancies. *The basis is always the number specified in the Articles of Incorporation. *The corporation can modify the number by providing a different provision in the articles of incorporation, however, the law provides that the modification must be for a number greater than that provided in the law. It cannot provide for a number less than the general requirement of the code. *For voting purposes, majority of the member present constituting a quorum. Except: election of directors. •

Removal of Board Members Sec. 28 of the Corporation Code states that: “Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least 2/3 of the outstanding capital stock, or if the corporation be a non-stock

corporation, by a vote of at least 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 Sec. 24 of this Code.” Requisites: 1. It must take place either at a regular meeting or special meeting of the stockholders or members called for the purpose; 18

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 2. There must be previous notice to the stockholders or member of the intention to remove;

in office. A directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting.”

3. The removal must be by a vote of the stockholders representing 2/3 outstanding capital stock or 2/3 of members; 4. The director may be removed with or without cause unless he was elected by the minority, in which case, it is required that there is cause for removal.

General Rule: Power directors is vested stockholders

Reason: The functions of directors are fiduciary in nature.

Exception: Vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term may be filled by the vote of at least a majority of the remaining directors or trustees if still constituting a quorum.

Requisites for the removal of minority directors are: 1. Justifiable cause; 2. Satisfaction of the voting requirements, i.e., 2/3 of OCS or members. *It is the secretary of the corporation upon order of the president or in case there is no secretary, stockholder representing majority of the outstanding capital stocks or member signing the demand who may call a meeting for the purpose of removal. •

Vacancies in the Board Sec. 29 of the Corporation Code provides that: “Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor

to elect in the

•

Compensation of Board Members Sec. 30 of the Corporation Code provides that: “In the absence of any provision in the bylaws fixing their compensation, 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 at a regular or special stockholders’ meeting. In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net income before income tax of the corporation during the preceding year.” General Rule: Directors are not entitled to receive compensation Exceptions: 19

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 1. When their compensation is fixed in the by-laws; 2. If compensation is granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders’ meeting.

authorized to do so by the ByLaws. •

General Rule: No one, even corporate officers can bind the corporation. It is only the Board of Directors who has the authority to bind the corporation.

Limitation: In no case shall the total yearly compensation of directors exceed 10% of the net income before income tax of the corporation during the preceding year. Reason: In order to avoid temptation on the part of directors to abuse powers by appropriating compensation packages since they are in control of corporate assets.

Exceptions: 1. If the By-Laws provides that such act is part of the function of such office; 2. If authorized by the Board of Directors •

Concept of Corporate Officers *Corporate powers reside on the Board of Directors; decision/policymaking resides on them. Implementation of rules/policy lies on the corporate officers Categories: 1. Statutory Corporate Officers – President (must be a stockholder); Secretary (must be a resident and citizen of the Philippines); Treasurer (must be a resident and citizen of the Philippines). 2. As provided by the ByLaws – must be clearly stated in the By-Laws that such office is a corporate office. 3. Those designated by the Board of Directors provided the Board of Directors is

Doctrine of Apparent Authority Doctrine of Apparent Authority/Doctrine of Estoppel –If a corporation, knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be stopped from denying the agent’s authority.

C. Corporate Officers •

Validity and Binding Effect of Acts of Corporate Officers

Cases: People’s Aircargo; InterAsia; Lapu-Lapu *Requires good faith on the part of third person.

D. Liability of Directors, Trustees and Officers •

Instances when Officers/Directors Solidarily Liable

Corporate are held

Sec. 31 of the Corporation Code provides that: “Directors or trustees who wilfully and knowingly 20

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.” General Rule: Directors/Trustees/Officers are not solidarily liable with the corporation. Exceptions: 1. Wilfully and knowingly vote for and assent to patently unlawful acts of the corporation (Sec. 31). Case: Carag v NLRC 2. Guilty of gross negligence or bad faith in directing the affairs of the corporation (Sec. 31). Case: David Construction Industry

v

3. Acquire any personal or pecuniary interest in conflict of their duty (Sec.31). 4. Consent to the issuance of watered stocks or having

knowledge thereof, fails to file objections with the secretary (Sec. 65). 5. Agree or stipulate in a contract to hold himself personally liable with the corporation. 6. By virtue of a specific provision of law such as BP 22; Trust receipts Law; RA 7832 (Anti-Electricity Pilferage Act of 1997); Securities Regulation Code *In Carag v NLRC, the Supreme Court held that not any violative of law, the Code means that violation must have a corresponding penalty. Patently unlawful act means that a law declares an act unlawful and that such law provides penalty for that unlawful act. •

Self-Dealing Directors/Officers Sec. 32 of the Corporation Code states that: “A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all of the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in case of an officer, the contract has been previously authorized by the board of directors. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the 21

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro stockholders representing at least 2/3 of the outstanding capital stock or of at least 2/3 of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, that the contract is fair and reasonable under the circumstances.”

3. The contract is fair reasonable under circumstances;

and the

4. In case of an officer, the contract has been previously authorized by the board of directors. Reason: A’s presence in the board meeting might affect the status of the contract.

Example: In XYZ Corporation, A is a director. The corporation acts through the Board of Directors. XYZ Corporation and A entered into a lease contract. A as the lessor and XYZ Corporation as lessee. The contract was approved by the Board of Directors. Q: What is the contract?

status

Self-Dealing Directors/Officers – directors/officers who transact business with their own corporation. - This is not prohibited by law. Interlocking Directors – those who have been elected as directors in 2 or more different corporations.

of the

- May be prohibited by the By-Laws (Gokongwei case).

General Rule: The contract is voidable. Exception: If the requisites provided in Sec. 32 are present. Exception to the Exception: If requirement number 1 or 2 is absent, in the case of a contract with a director or trustee, such contract may be considered valid by the ratification of at least 2/3 of the outstanding capital stock or 2/3 of the members. Requisites: 1. The presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. The vote of such director or trustee was not necessary for the approval of the contract;

-Not prohibited by law however there are consequences. •

Contracts Directors

involving

Inter-locking

Sec. 33 of the Corporation Code provides that: “Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding 20% of the outstanding capital stock shall 22

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro be considered substantial for purposes of interlocking directors.”

Reason: The case is analogous to that of transactions involving selfdealing directors because such director holds substantial interest with the other company.

Example: A is a director of two corporation, ABC Corporation and XYZ Corporation. XYZ Corporation and ABC Corporation entered into a lease contract where ABC Corporation is the lessor and XYZ Corporation is the lessee. Q: Can this contract be invalidated on the ground that there is an interlocking director? A: NO. Q: What contract?

is the

status

of

the

A: General Rule: Contracts between two or more corporations having interlocking directors are valid. Exceptions: 1.

Contracts are void if contracts are fraudulent or if contracts are unfair and unreasonable.

2.

If the By-Laws prohibits interlocking director. Case: SEC

Gokongwei,

Jr.

v

*The interest is nominal if his interest is 20% or less of the outstanding capital stock. The interest is substantial if his interest is more than 20% of the outstanding capital stock. *If the interlocking director has a substantial interest in one corporation and has a nominal interest in the other corporation, the director must comply with the requisites provided in Sec. 32 on self-dealing directors.

•

Doctrine of Corporate Opportunity Sec. 34 of the Corporation Code states that: “Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock. This provision shall be applicable notwithstanding the fact that the director risked his own funds in the venture.” General Rule: A director shall refund to the corporation all the profits he realizes on a business opportunity which: 1. the corporation is financially able to undertake; 2. from its nature, is in line with corporations business and is of practical advantage to it; and 3. the corporation has an interest or a reasonable expectancy. Exception: His act has been ratified by a vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock. *A business opportunity ceases to be corporate opportunity and transforms to personal opportunity where the corporation refuses or is definitely no longer able to avail itself of the opportunity.

23

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro E. Executive Committee Sec. 35 of the Corporation Code states that: “The by-laws of a corporation may create an executive committee composed of not less than 3 members of the board to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders’ approval is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders.” Keyword: BY-LAWS *It must be stated in the By-Laws. *Board Resolution is not sufficient if there is no provision in the By-Laws. *The decision of the executive committee is considered a Board Resolution. *The decision of the executive committee is not subject to appeal to the board. However, if the resolution of the Executive Committee is invalid it may be ratified by the Board. *The decision of the executive committee needs no confirmation from the Board. Case: Filipinas Port, Inc. *The corporation may create other committees.

members whereas in other committee there is no such restriction. General Rule: The executive committee may act on specific matters within the competence of the board as may be delegated to it in the by-laws or on a majority vote of the board. Exceptions: 1. Approval of any action for which shareholders’ approval is also required; 2. The filing of vacancies in the board; 3. The amendment or repeal of bylaws or the adoption of new bylaws; 4. The amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; 5. A distribution of cash dividends to the shareholders. CORPORATE POWERS: A. Doctrine of Limited Capacity; Concept of Ultra Vires Act Sec. 45 of the Corporation Code states that: “No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of powers so conferred.” Ultra Vires Acts – an act committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law. Effects of Ultra Vires Acts:

Distinction: In executive committee, there is a statutory restriction on 24

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 1. Executed Contract – courts will not set aside or interfere with such contracts. 2. Executory Contract – no enforcement even at the suit of either party. 3. Partly executed and Partly executory contract – principle against unjust enrichment shall apply.

B. Classes of Corporate Powers 1. Express 2. Implied 3. Incidental •

Express – those expressly authorized by the Corporation Code and other laws, and its Articles of Incorporation or Charter.

•

Implied – those that can be inferred from or necessary for the exercise of the express powers.

•

Incidental – those that are incidental to the existence of the corporation.

Doctrine of Necessary Implication – those which can be reasonably inferred from the express powers given since they are necessary for the corporation to perform a particular act are deemed part of such powers. C. Statutory Powers of a Corporation and the Limitations on their Exercise Sec. 36 of the Corporation Code states that: “Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name; 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 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; 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.” •

Amendment Incorporation

of

Articles

of

Sec. 16 of the Corporation Code states that: “Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of 25

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least 2/3 of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least 2/3 of the members if it be a nonstock corporation.”

*Approval of Stockholders is necessary in these changes because they are necessary for the corporation’s existence. •

Sec. 37 of the Corporation Code states that: “A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least 2/3 of the outstanding capital stock or by at least 2/3 of the members in case of non-stock corporation. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code.”

*The following are excluded in counting the outstanding capital stock: 1. Treasury stock; 2. Unissued shares. *Aside from the votes of majority of the board and assent of the 2/3 of the OCS, the approval of the SEC is necessary for the amendment of the AOI. *There is an implied approval of the SEC, i.e., failure to act on the application filed by the corporation within 6 mos. Q: How to get the approval of the stockholders? A: 1. Call for a meeting; 2. Obtain the written assent of the stockholders. *In Tan v Sycip, the Supreme Court held that in case of a non-stock corporation, membership is personal and non-transferrable unless the by-laws provides otherwise. The deceased member is not entitled to vote. Four changes in Articles of Incorporation that require the approval of the stockholders. 1. Extension of corporate term; 2. Shortening of corporate term; 3. Increase or Decrease of Capital Stock; 4. Increase or Decrease of Bonded indebtedness.

Extension/Shortening of Corporate Term

•

Increase or Decrease of Capital Stock/ Incurrence, Creation or Increase of Bonded Indebtedness Sec. 38 of the Corporation Code states that: “No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholders’ meeting duly called for the purpose, 2/3 of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written 26

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholders’ meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered , must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. xxx.” Q: When the corporation increases its capital stock, is the 25% requirement necessary? How can it be computed? A: YES. The SEC ruled that the 25% applies to the increase amount. *The corporation is required to maintain a sinking fund. Q: What does indebtedness mean?

bonded

A: Requires longer time of payment; special burden on the corporation; involves the important assets of the corporation. •

Denial of Pre-emptive Right Sec. 39 of the Corporation Code states that: “All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such preemptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings

or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.” *Coming from the increased authorized capital stock. * Similar to Right of First Refusal *It is not a matter of right. It can be denied by the corporation through denial of such right in the articles of incorporation. Purposes: 1. In order that the stockholder may be able to maintain their relative proportional voting trend and control in the corporation; 2. To avoid dilution of their proportionate voting and control in the corporation. General Rule: Pre-emptive right is available to stockholders. Exception: if it is denied in the Articles of Incorporation or through amendment. Exception to the Exception: Preemptive right shall not extend to: 1. Shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; 2. Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock, in exchange for property needed for corporate purposes; and 3. In payment of a previously contracted debt. 27

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *Pre-emptive right is satisfied as long as the corporation gives the stockholder the opportunity to buy the shares. *The offer must first be made to the stockholders. •

Sale or Disposition of Assets Sec. 40 of the Corporation Code states that: “ Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least 2/3 of the outstanding capital stock, or in case of non-stock corporation by the vote of at least 2/3 of the members, in a stockholders’ or members’ meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate

property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. xxx.” Q: What makes the disposition peculiar? A: The disposition is of all or substantially all of the corporation’s properties and assets. Q: What involve?

kind

of

disposition

A: 1. Sell; 2. Lease; 3. Exchange; 4. Mortgage; 5. Pledge. Requirements: 1. Majority vote of the Board. 2. Vote of the Stockholders representing 2/3 of the OCS. 3. The sale does not bring about the illegal combinations and monopolies. *No need for the approval of the SEC. Tests: 1. Quantitative Test – no statutory test; pertains to the disposition of all assets 2. Qualitative Test – there is a statutory test; pertains to the disposition of substantially all of its assets. *The provision is so strict because the law wants the corporation will reach its expiration term. Q: With the sale of all the assets of the corporation, will the same result to its dissolution? A: NO. Possession or continued possession of corporate properties is not a condition for the existence of a corporation. Corporation still exists despite the disposition of all its properties and assets. 28

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Q: Will the buying corporation be made answerable for the liabilities of the selling corporation?

unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code.”

A: NO. The two corporations are two separate personalities thus they are separate and distinct from each other hence the buying corporation cannot be held liable to the obligations of the selling corporation.

Requisites: 1. Unrestricted Retained Earnings 2. The acquisition must be for legitimate purpose Q: What is an unrestricted retained earnings? A: Earnings not allocated for any other purpose. Q: What happens to reacquired shares? A: General Rule: They are automatically deemed retired. Exception: The AOI provides otherwise.

General Rule: The sale of all or substantially all of the assets of the corporation does not make the buyer answerable for the obligations of the seller. Exceptions: 1. If the buyer expressly agrees to assume the obligations of the seller. 2. If sale amounts to merger or consolidation. 3. If and when application of piercing the veil of corporate entity doctrine is warranted. 4. If the purchaser becomes a continuation of the seller.

•

5. Sale was done in violation of the Bulk Sales Law. Case: PNB v Andrada Acquisition of Corporate Shares Sec. 41 of the Corporation Code states that: “A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of

Trust Fund Doctrine – The capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits. Corporation may not dissipate this and the creditors may sue stockholders directly for the unpaid subscription. •

Investment of Corporate Funds Sec. 42 of the Corporation Code states that: “Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least 2/3 of the outstanding capital stock, or by at least 2/3 of the members in the case of non-stock 29

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro corporations, at a stockholders’ or members’ meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary.” Requisites: 1. Majority vote of the Board 2. Vote of the stockholders representing 2/3 OCS. •

Declaration of Dividends Sec. 43 of the Corporation Code states that: “The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than 2/3 of

the outstanding capital stock at a regular or special meeting duly called for the purpose. Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock, except: 1. When justified by definite corporate expansion projects or programs approved by the board of directors; or 2. When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or 3. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.” *This section is exclusive to stock corporations. Dividends – represents part of the earnings of the corporation which the board has decided to distribute among the stockholders. *The fact that the corporation has surplus earning does not mean that it is mandated to declare dividends; it is still upon the sound discretion of the board of directors. Reason: Trust Fund Doctrine *There must be a unrestricted retained earnings before dividends may be declared. *The board may opt to restrict its earnings, as the earnings may be allocated to legitimate business purpose.

CASH DIVIDENDS does not require

STOCK DIVIDENDS Requires 30

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro stockholders’ approval The stockholders receive cash Creditor-debtor relationship

stockholders’ approval The stockholders receive stocks No creditordebtor relationship

Requisites for declaration of cash/property dividends: 1. Board approval 2. Unrestricted Retained Earnings Requisites for declaration of stock dividends: 1. Unrestricted Retained Earnings; 2. Board approval; 3. Ratification by the stockholders. Q: Why stockholders’ ratification is necessary in the declaration of stock dividends? A: Because the earnings are capitalized. It is considered to be a corporate assets. Q: May the board be compelled to declare dividends? A: General Rule: NO. Exception: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock. Exceptions to the Exception: 1. Corporate expansion 2. Pursuant to loan agreement 3. Special circumstances/contingent liabilities Q: Are the stock dividends considered as watered stocks because the stockholder concerned does not pay anything therefor? A: NO. The unrestricted retained earnings are considered to be a consideration thus dividends received through stocks are not watered stocks. *The source of payment is the unrestricted retained earnings.

•

Q: Are delinquent stockholders entitled to receive dividends? A: YES. But only in terms of cash dividends. Q: Who are entitled to receive dividends? A: Stockholders *In Nielson case, the SC held that dividends cannot be given to nonstockholders. *If there is date of record – Dividends may be received by those persons who are holders of stocks as of date of record. *If there is no date of record – dividends may be received by those persons who are holders of stocks as of the declaration. Q: When the corporation declares stock dividends, would it likewise create a creditor-debtor relationship between the corporation and the stockholder? A: NO. Stock dividends will not bring about a creditor-debtor relationship. When it comes to shareholdings, the one holding the shares are considered investors; risk-takers. Q: Will legal compensation possible to occur? A: NO. The parties are not mutually creditor-debtor of each other. The requisites under the Civil Code on legal compensation are not present. Management Contract Sec. 44 of the Corporation Code states that: “No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the 31

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro purpose: Provided, That 1. Where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation; or 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, then the management contract must be approved by the stockholders of the managed corporation owning at least 2/3 of the total outstanding capital stock entitled to vote, or by at least 2/3 of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than 5 years for any one term. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations.”

*When the corporation enters into a management contract, appraisal right is NOT AVAILABLE to any dissenting stockholder. Reason: Sound business policy dictates that it would be better for the corporation, at the inception of its operation, to be managed by a company who has been experienced in a particular kind of business if the managed corporation needs the technical expertise, skills, experiences, background of another entity. CORPORATE BY-LAWS: A. Concept, Use and Nature of By-Laws By-Laws – relatively permanent and continuing rules of action adopted by the corporation for its own government and that of the individuals composing it and those having the direction, management and control of its affairs, in whole or in part, in the management and control of its affairs and activities. Nature: Regulates internal affairs of the corporation.

B. By-Laws in relation Incorporation

to

Articles

of

Distinction between By-Laws and Articles of Incorporation: By-Laws –is a condition subsequent. Articles of Incorporation – is a condition precedent. Essential for corporate existence.

Requisite: General Rule: the OCS

Majority vote of

Exception: 2/3 of the OCS *SEC’s approval is not necessary

ARTICLES OF INCORPORATIO N External affairs Affects the status of existence of the corporation

BY-LAWS Internal Affairs Does not affect the status of the existence but has impact on the 32

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro existence; failure to submit is a ground for disenfranchisemen t Joint decision of General Rule: the board and joint decision stockholders Exception: Delegates the power to amend the By-Laws to the Board C. Adoption of By-Laws; Effect of NonFiling within the prescribed period Sec. 46 of the Corporation Code states that: “Every corporation formed under this Code must, within 1 month after receipt of official notice of the issuance of its certificate of incorporation by the SEC, adopt a code of By-Laws for its government not inconsistent with this Code. For the adoption of By-Laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The By-Laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the SEC which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, By-Laws may be adopted and filed prior to incorporation; in such case, such ByLaws shall be approved and signed by all the incorporators and submitted to the SEC, together with the articles of incorporation. In all cases, By-Laws shall be effective only upon the

issuance by the SEC of a certification that the By-Laws are not inconsistent with this Code. The SEC shall not accept for filing the By-Laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance companies, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such By-Laws or amendments are in accordance with law.” *Submission of By-Law is not a requirement for acquisition of corporate existence, however, for the corporation to be able to continue its corporate existence, the corporation is required to submit the corporate ByLaw. *Non-submission of the By-Laws within the prescribed period allowed by law is a ground for the dissolution of the corporation. *In Loyola Grandvillas Homeowners Association v CA, the SC held that failure to adopt a set of By-Laws within the prescribed period, notwithstanding the word used in the Code, the same would not result to automatic dissolution of the corporation. The failure to file by-laws would not, by itself, amount to dissolution or extinguishment of the corporate existence. *Section 46 of the Corporation Code must be read in conjunction with PD 902-A which outlines the procedure to be followed before the franchise/license of a private corporation may be suspended or revoked. *Observance necessary.

of

Due

Process

is

33

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *In Sawadjaan v CA, the SC held that meanwhile when the By-Laws is not yet submitted, the corporation, at that time, and the very least, may be considered as a De Facto Corporation and therefore, its right to exist as such cannot be inquired into or cannot be collaterally attacked in a private suit. It is for the State to initiate a proceeding questioning the existence, on the ground of its non-submission of By-Laws, within the prescribed period.

D. Contents of By-Laws; Requisites of a Valid By-Law Provision Sec. 47 of the Corporation Code states that: “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; 6. The time for holding the annual election of directors or 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.”

Requisites: 1. It must be consistent with Corporation Code, other pertinent laws and regulations. 2. It must be consistent with the Articles of Incorporation. 3. It must be reasonable and not arbitrary or oppressive. 4. It must not disturb vested rights, impair contract or property rights of stockholders or members or create obligations unknown to law.

E. Amendment to By-Laws Sec. 48 of the Corporation Code provides that: “The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any ByLaws or adopt new By-Laws. The owners of 2/3 of the outstanding capital stock or 2/3 of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any ByLaws or adopt new By-Laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any By-Laws or adopt new By-Laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new By-Laws are adopted, such amendment or new ByLaws shall be attached to the original By-Laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate 34

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro secretary and a majority of the directors or trustees, shall be filed with the SEC the same to be attached to the original articles of incorporation and original By-Laws. The amended or new By-Laws shall only be effective upon the issuance by the SEC of a certification that the same are not inconsistent with this Code.”

F. By-Laws in relation to Third Parties *In China Banking Corporation v CA, the SC held that in the absence of evidence that China Bank is aware of the provisions of the By-Laws, China Bank is not bound to observe the provisions of the By-Laws. Hence, China Bank must be allowed to register the shares in its name. General Rule: Third parties are not affected by the By-Laws. Exception: If the third party has actual knowledge of the provisions of the By-Laws. CORPORATE MEETINGS: A. Kinds of Corporate Meetings Sec. 49 of the Corporation Code provides that: “Meetings of directors, trustees, stockholders, or members may be regular or special.” Kinds: a. Stockholders/Members: 1. Regular meeting 2. Special meeting b. Directors/Trustees: 1. Regular meeting 2. Special meeting Sec. 50 of the Corporation Code provides that: “Regular meetings of stockholders or members shall be 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 board of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least 2 weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, That at least 1 week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. Whenever, for any cause, there is no person authorized to call a meeting, the SEC, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have been chosen one of their number as presiding officer.” *Regular meeting of stockholders/members shall be held annually on a date fixed in the by-laws or if not so fixed, on any date in April of every year. Written notice of regular meetings shall be sent 2 weeks prior to the meeting unless a different period is required by the by-laws. ** Special meeting of stockholders/members shall be held at any time deemed necessary or as provided in the by-laws. Written notice shall be sent to all stockholders or members at least one week or unless otherwise provided in the by-laws. Sec. 53 of the Corporation Code provides that: “Regular meetings of the board of directors or trustees of 35

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro every corporation shall be held monthly, unless the by-laws provide otherwise. Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the bylaws. Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least 1 day prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly.” *Regular meetings of directors/trustees shall be held monthly unless the by-laws provide otherwise. *Special meetings of directors/trustees may be held at any time upon the call of the president or as provided in the by-laws. *Meetings of directors or trustees may be held anywhere in or outside of the Philippines unless the by-laws provide otherwise. *Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least 1 day prior to the scheduled meeting unless otherwise provided by the by-laws. B. Requirements of a Meeting 1. It must be held at the proper place. 2. It must be held at the stated date and at the appointed time or at a reasonable time thereafter. 3. It must be called by the proper person. 4. There must be a previous notice. 5. There must be a quorum.

Sec. 51 of the Corporation Code provides that: “Stockholders’ or members’ meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein. All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting.” *Applies to both stock and non-stock corporations. General Rule: The meeting must be held in the city or municipality where the principal office is located. Exception: Sec. 93 on non-stock corporations, the By-Laws may provide different venue for their meeting. *A casual reading of section 51 would say that a corporation cannot provide any other place for the meeting of stockholders. But in case of a nonstock corporation, Section 93 of the Corporation provides that the by-laws could provide any place for the meeting of its members provided that it is within the Philippines and proper notice has been given. Q: Is there a conflict between Section 51 and Section 93? A: YES. There is conflict but this conflict may be reconciled. As a rule, the by-laws may provide a different place of meeting provided that it is within the Philippines and notice has been given. As an exception, if the bylaws is silent of the place of the meeting, section 51 applies. 36

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Sec. 52 of the Corporation Code provides that: “Unless otherwise provided for in this Code or in the bylaws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations.” General Rule: Majority of the OCS or Majority of the members Exception: Unless otherwise provided by the Code or by the By-Laws. *In Tan v Sycip, deceased member is not entitled to vote Sec. 54 of the Corporation Code provides that: “The president shall preside at all meetings of the directors or trustees as well as of the stockholders or members, unless the by-laws provide otherwise.” C. Right to Vote of Stockholders •

Instances when voting right not available Sec. 6 of the Corporation Code provides that: “Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.” Instances when voting right is not available: 1. Delinquent shares 2. Treasury shares 3. Fractional shares 4. Escrow shares

•

Rules on: 1. Delinquent Shares Sec. 71 of the Corporation Code provides that: “No delinquent stock shall be voted for or be entitled to vote or to representation at any

stockholders’ meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any.” *Delinquency default in subscription.

arises upon payment of

Q: Are they included for quorum and voting purposes? A: NO. Q: Even if there are proxies? A: YES. Q: Shares not yet fully paid but not yet delinquent, are they entitled to vote? A: YES. *Delinquent stock is not entitled to vote and his presence would not be taken for purposes of quorum. *The only right remain is the right to receive dividends subject to the provision of Section 43. 2. Escrow Shares *Escrow shares are not entitled to vote before the fulfillment of the condition imposed thereon. 3. Unpaid Shares Sec. 72 of the Corporation Code provides that: “Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder.” 37

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro General Rule: The holder of unpaid shares can exercise the right to vote. Exception: If it is provided in the subscription contract that such right cannot be exercised until the subscription is fully paid. 4. Sequestered Shares Q: What is the reason sequestration process?

for

A: For investigative purposes; To avoid wastage dissipation of assets. Q: Is PCGG authorized to vote for the sequestered shares? A: General Rule: No. PCGG cannot vote for the sequestered shares because being a conservator/administrator, it should only perform acts of administration and not acts of ownership. Exception: If there is a strong evidence that indeed the shares have been purchased through public funds. Requisites: 1. Strong evidence or prima facie evidence that the shares are ill-gotten. 2. There is an imminent danger that the shares will be dissipated. Case: Transmiddle East v CA Q: During the pendency of sequestration process, are the sequestered shares included for quorum purposes? A: General Rule: YES. Q: Who can vote them?

A: General Rule: Stockholder of record. *In Republic of the Philippines v COCOFED, the SC held that there is a prima facie evidence that the shares are purchased with the use of public funds. 5. Pledgor, Mortgagor Administrator of Shares

or

Sec. 55 of the Corporation Code provides that: “In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy.” Q: Can the pledgee/mortgagee exercise the right to vote? A: General Rule: No. right to vote remains to owner thus, it is pledgor/mortgagor that exercise it.

The the the can

Exception: If there is an agreement that the pledgee/mortgagee can exercise the right to vote. Case: Calapatia *Administrator/executor/heirs have the right to vote even without prior proxy. But the SEC requires them to submit letters 38

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro of appointment or documents showing that he has been duly instituted as executor/administrator of the deceased. 6. Shares Jointly Owned Sec. 56 of the Corporation Code provides that: “In case of shares of stock owned jointly by two or more persons, in order to vote the same, the consent of all the co-owners shall be necessary, unless there is a written proxy, signed by all the co-owners, authorizing one or some of them or any other person to vote such share or shares: Provided, That when the shares are owned in an “and/or” capacity by the holders thereof, any one of the joint owners can vote said shares or appoint a proxy therefor.”

member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than 5 years at any one time.” Requisites: 1. Must be in writing 2. Filed before the scheduled meeting; under the SEC rule, 10 days before the scheduled meeting *Proxy ensures presence of a quorum and also approval of corporate acts. General Rule: Proxy is revocable. Exception: If proxy is coupled with interest. Ways to revoke proxy: 1. By execution of subsequent proxy.

D. Concept of Proxy and Voting Trust Agreement Proxy is a written authorization given by one person to another so that the second person can act for the first. *Proxy is a representative. *Relationship: Principal-Agent. *Proxy is authorized to vote and also authorized to be present in a meeting. Functions: For quorum purposes; for voting purposes. *In Board meeting, proxy is not allowed (Sec. 25 of the Corporation Code). Sec. 58 of the Corporation Code provides that: “Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall be in writing, signed by the stockholder or

2. If the stockholder concerned would appear in the scheduled meeting. Voting Trust Agreement is an agreement whereby one or more stockholders transfer their shares of stocks to a trustee, who thereby acquires for a period of time the voting rights (and/or any other rights) over such shares; and in return, trust certificates are given to the stockholders, which are transferable like stock certificates, subject however, to the trust agreement. PROXY

VOTING TRUST AGREEMENT The stockholder The stockholder remains the ceases to be a stockholder of stockholder of record record Revocable Irrevocable General Rule: 5 years Exception: If coupled with interest 39

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

*The transfer includes the transfer of legal title. Sec. 59 of the Corporation Code provides that: “One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding 5 years at any time: Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding 5 years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the SEC; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of this Code. Any other

stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. The voting trustee or trustees may vote by proxy unless the agreement provides otherwise.” Consequence: The stockholder entering into a voting trust agreement ceases to be a stockholder of record. *In case of Lee v CA, the SC held that the stockholder concerned loses his legal title to the shares so that if the stockholder is, at the same time, a director of the corporation, automatically he is disqualified to continue performing the duties of a director because the law requires each and every director to have legal, not beneficial title to at least one share. E. Derivative Requisites

Suit;

Concept

and

Derivative Suit is a suit brought by any stockholder, usually a minority shareholder, to redress a wrong committed against the corporation whenever the responsible officers refuse to take any action thereon or are the very person to be sued. *This prerogative is developed through jurisprudence. 40

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *This is expressly mandated by Sec. 31 of the Corporation Code. Q: Why derivative? A: From the word derive. The one bringing the suit derives the cause of action from the corporation. Q: Who brings the suit? A: Any stockholder/member usually minority stockholder. Q: Whose cause of action? A: It is the corporation’s cause of action. Q: Are we in violation of the Code? A: No. Because the power to sue lies on the board thus when the board refuses to take action in order to protect the corporation derivative suit may be allowed. Compelling Reason: Inaction of the officers. Failure to discharge their responsibilities. Requisites: 1. The stockholder bringing the suit must be one of record as of the time the cause of action accrues as well as of the time the action is brought unless the cause of action is a continuing offer. *The stockholder must implead the real party in interest, i.e. the corporation. *In Chua v CA, the SC held that the corporation must be impleaded since it is the real party in interest. 2. The action must be named under the corporation’s name 3. General Rule: The stockholder bringing the suit must have exhausted intra-corporate remedies within the corporation.

Exception: If the very person to be sued is the responsible officers themselves. **This is a condition precedent. 4. The suit is not intended to harass the defendant, not a nuisance or harassment suit. 5. Appraisal right must not be an available remedy. Individual suit is a suit filed by the stockholder because his personal right has been violated. The cause of action is personal to the stockholder. The party injured is the stockholder himself. Representative suit is a suit filed by a group of stockholders that suffered common injury. SUBSCRIPTION CONTRACT: A. Ways to become a Stockholder of a Corporation 1. Subscription corporation.

contract

with

the

2. Purchase or acquisition of shares from existing stockholders. 3. Purchase of treasury shares from the corporation. *All of them involve shareholdings. *Subscription is unique because it involves unissued shares. B. Concept of Subscription Contract Subscription Contract is, under Sec. 60 of the Corporation Code, “any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract.”

41

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *This is strictly regulated Corporation Code.

by

the

C. Kinds of Subscription 1. Pre-incorporation – one entered incorporation.

subscription into before

Sec. 61 of the Corporation Code provides that: “A subscription for shares of stock of a corporation still to be formed shall be 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: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the SEC.” *Contracts subscribers.

between

the

2 Fold Characteristics: a. It is a contract subscribers.

between

b. May be regarded as continuing offer on the part of the subscriber concerned which the corporation may accept upon acquisition of juridical personality. Reason: The corporation is not yet in existence. 2. Post incorporation subscription – one entered into after the incorporation for the acquisition of unissued stock. *Contracts between the subscribers and the corporation.

*Creates a relationship.

D. Consideration Shares

for

creditor-debtor

the

Issuance

of

Sec. 62 of the Corporation Code provides that: “Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 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 purposes 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 of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification of conversion. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to the approval by the SEC. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the 42

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro outstanding capital stock at a meeting duly called for the purpose.” Valid considerations for subscription agreements:

the

1. Cash 2. Property 3. Labor or services actually rendered to the corporation 4. Prior corporate obligations 5. Amounts transferred from unrestricted retained earnings to stated capital 6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.

E. Payment of Subscription Q： When payment of the subscription is made? A: Look into the subscription agreement. If subscription agreement is silent as to when the amount of subscription to be paid, the board of directors may call on all the unpaid subscribers to pay the remaining balance of their subscription. •

Remedies to enforce payment of subscription 1. By Extra-judicial sale at public auction. 2. By judicial action. 3. Collection from cash dividends and withholding of stock dividends.

•

When shares delinquent

are

subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within 30 days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise.” *If there was no date as to payment of subscription stated in the subscription agreement, the board may call on all the unpaid subscribers to pay the remaining balance of their subscription. Failure to pay within 30 days from the said date, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale unless the board of directors orders otherwise.

considered

Sec. 67 of the Corporation Code provides that: “Subject to the provisions of the contract of

F. Certificate of Stock Certificate of Stock is a written evidence of the shares of stock but it is not the share itself. 43

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *Does not represent credit. Q: How important certificate?

is

a

A: The payment partially made shall be applied proportionately to all the shares covered by the subscription.

stock

A: It is an evidence of ownership of stocks.

Example: P10 per share; payment made is P6000 covering 1000 shares. The P6000 shall be allocated equally to all shares. P6 per share has been paid. P4 per share is the liability.

Q: Who issue stock certificate? A: Stock certificates must be signed by the president or vice-president, countersigned by the secretary or assistant secretary. Q: When certificate of stock may be issued? A: Sec. 64 of the Corporation Code states that: “No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid.” •

Doctrine of Indivisibility Subscription Contract

of

Doctrine of Indivisibility of Subscription Contract: Failure to pay any of the installments due would necessarily affect all the other installments because the subscription is to be treated as one, whole, entire, indivisible contract. Upon default of payment on any of the installment results to entire subscription due and demandable. *The Certificate of Stock cannot be divided into portions. *No certificate of stock shall be issued until the full payment of the subscription. *The corporation has an automatic lien over the shares. Q: What will happen payment already made subscriber?

to by

the the

•

Certificate negotiable

of

Stock,

quasi-

Q: can the stock certificate be treated as negotiable instrument under NIL? A: No. The requisites are not complied with. There is no engagement to pay in sum certain in money. *Negotiable instrument represents credit. Creditor-debtor relationship arises. Q: Are certificates negotiable?

of

stock

A: They are negotiable in certain extent. That is why they are quasinegotiable. *The title over the share can be assigned, transferred by indorsement and delivery. *Due course applicable.

holding

is

not

G. Transfer of Shares If represented by a certificate, the following must be strictly complied with: 1. Delivery of the certificate; 2. Indorsement by the owner or his agent; 44

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 3. To be valid to third parties, the transfer must be recorded in the books of the corporation. *If not represented by the certificate, the shares may be transferred by means of a deed of assignment and such is duly recorded in the books of the corporation. *To make the transfer binding to the corporation and third person, the transfer must be recorded in the stock and transfer book of the corporation. Q: Who is the owner of the share? A: The stockholder of record.

H. Lost and Stock

Destroyed

Certificate

of

Sec. 73 of the Corporation Code provides that: “The following procedure shall be followed for the issuance by a corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed: 1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares represented by such certificate, the serial number of the certificate and the name of the corporation which issued the same. He shall also submit such other information and evidence which he may deem necessary; 2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for 3 consecutive weeks at the expense of the registered owner

of the certificate of stock which has been lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner and the serial number of said certificate, and the number of shares represented by such certificate, and that after the expiration of 1 year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock, unless the registered owner files a bond or other security in lieu thereof as may be required, effective for a period of 1 year, for such amount and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the 1 year period provided herein: Provided, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed. Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described.” CORPORATE BOOKS AND RECORDS: A. Books required Corporation

to

be

kept

by

a

45

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Sec. 74 of the Corporation Code provides that: “Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall

be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation’s records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book to be known as the “stock and transfer book,” in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the SEC and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable.” *Keeping of books and records are mandatory. 46

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Books required to be kept: 1. Book of minutes – reflects the decisions and actions of the Board of Directors/Stockholders. 2. Record of all business transactions 3. Stock and Book/Membership Book

Transfer

4. Books of Proceedings

Basis and Extent of the Right of Inspection Q: Is the keeping of these books mandatory? A: YES. Section 144 of the Corporation Code provides penalty for any violation of the provision of the Code. Rationale: Right of inspection would be futile. Right of inspection would not be exercised.

•

Limitations Inspection

on

the

Right

of

1. The books and records shall be open to inspection at reasonable hours on business days. 2. The books and records shall not be improperly used any information secured through any prior examination of the books or records.

•

*Can also claim damages. MERGER AND CONSOLIDATION: A. Concept of Merger and Consolidation Merger is one where a corporation absorbs the other and remains in existence while the others are dissolved. *There is a continuous flow of juridical personality.

B. Right to Inspect Corporate Books •

concerned may file an action for mandamus before the RTC.

3. The stockholder’s demand must be in good faith or for a legitimate purpose. *Inspection can be done personally or through agent. Remedies to Enforce Right of Inspection *In case of refusal to exercise the right of inspection, the stockholder

Examples: A+B=B A+B+C=C A+B+C=A A+B+C=B Consolidation is one where a new corporation is created, and consolidating corporations are extinguished. Examples: A+B=C A+B+C=D A + B + C = ABC A + B + C = XYZ

B. Requisites of and Procedure for Merger and Consolidation 1. Approval by majority vote of the Board of Directors of each corporation. 2. Approval of the stockholders of each corporation representing 2/3 of the outstanding capital stock. 3. Approval of SEC Cases: Associated Polyan v CA

Bank

v

CA; 47

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Procedure: 1. The Board of each corporation shall draw up a plan of merger/consolidation. 2. The plan of merger or consolidation shall be approved by majority vote of each board of the concerned corporations at separate meetings. 3. The plan of merger/consolidation shall be approved by the majority vote of the 2/3 of the shareholders of the outstanding capital stock or members in case of a non-stock corporation. 4. Articles of Merger/Consolidation shall be executed by each of the constituent corporators, signed by the President or Vice-President and certified by the secretary or assistant secretary. 5. Four copies of the Articles of Merger or Consolidation together with favorable recommendation of a pertinent government agency in certain cases shall be submitted to the SEC for approval. 6. The SEC shall issue a certificate or merger if it is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing laws.

C. Effects of Merger or Consolidation 1. All property, real or personal, and all receivables due to, and all other interest of each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed. 2. The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of

each of corporations.

the

constituent

3. Any claim, action or proceeding pending by or against any of the constituent corporations may be prosecuted by or against the surviving or consolidated corporations. 4. The rights of the creditors or lien upon the property of any of each constituent corporation shall not be impaired by such merger or consolidation. 5. Dissolution of other corporation leaving the surviving or consolidated corporation exists. Remedy of the dissenting stockholder: The dissenting stockholder may exercise his appraisal right. RIGHT OF APPRAISAL: A. Concept of Appraisal Right Appraisal Right is the right to withdraw from the corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in corporate structure. *Demanding for the reasonable return of investment. *Stockholders cannot right at his pleasure.

exercise

this

Requisites: 1. The Stockholder has dissented 2. Corporate change must have been approved by the SEC. *Any changes that stockholders’ right.

affect

the

*Any changes that concern the corporation’s existence. 48

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *Corporate changes that appraisal right can be availed of. 3. There must have an unrestricted retained earnings, *It is not a matter of right. Reason: If it is a matter of right it shall lead to the diminution or depletion of corporate assets which is violative of the Trust Fund Doctrine.

B. Instances of Appraisal Right Sec. 81 of the Corporation Code provides that: “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.”

of the appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. If within a period of 60 days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by 3 disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within 30 days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment: and Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation.” Requisites:

C. Requirements for a Valid Exercise of Appraisal Right

1. Any of the instances set forth by law must be present.

Sec. 82 of the Corporation Code provides that: “The appraisal right may be exercised by any stockholder who shall have voted against the proposed corporate action, by making a written demand on the corporation within 30 days after the date on which the vote was taken for payment of the fair value of his shares: Provided, That failure to make the demand within such period shall be deemed a waiver

2. Dissenting stockholder must have voted against the proposed action. *Abstaining stockholder cannot claim or exercise his appraisal right. 3. Demand for payment must be made within 30 days from the date vote is taken thereon. Failure to make demand shall be deemed a waiver. 49

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 4. Price must be based on fair value as of day prior to date on which vote was taken 5. Submission by withdrawing stockholder of his shares to the corporation for notation of being a dissenting stockholder within 10 days from written demand. 6. Payment must be made only when the corporation has unrestricted retained earnings in its books. 7. Stockholder must transfer his shares to the corporation upon payment by the corporation.

D. Effects of Exercising Appraisal Right Sec. 83 of the Corporation Code provides that: “From the time of demand for payment of the fair value of a stockholder’s shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this Code, except the right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored.” Effects: 1. All rights accruing to such shares shall be suspended from the time of demand for payment of the fair value of the shares until either the abandonment of the corporate action. 2. The dissenting stockholder shall be entitled to receive payment of the fair value of his shares as agreed upon between him and the

corporation or as determined by the appraisers chosen by them. *Sec. 86. The dissenting stock can be sold during the pendency of its payment. Remedy in case appraisal right cannot be exercised: Dispose the shareholdings. NON-STOCK CORPORATIONS: A. Definition and Purposes of a Non-Stock Corporation Sec. 87 of the Corporation Code states that: “For the purposes of this Code, a non-stock is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporations, when pertinent, shall be applicable to nonstock corporations, except as may be covered by specific provisions of this Title.” *Sec. 87 should be read in harmony with Sec. 94. *A Non-stock corporation is not precluded from engaging in profitbusiness related. Sec. 88 of the Corporation Code provides that: “Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this 50

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Title governing particular classes of non-stock corporations.” *The purpose corporation is welfare.

of a non-stock related to public

B. Distinguished from Stock Corporation Non- stock Corporation Public welfare Board of Trustees Generally, the term of office of trustees is 3 years By-laws can provide for a different venue as long as it is within the Philippines Member may be deprived of their right to designate proxies by provisions in the articles of incorporation or by-laws Reason: To promote camaraderie, togetherness, unity and familiarity. Generally, members could directly elect officers. Except unless AOI provides otherwise. C. Membership Corporation

in

Stock Corporation For profit Board of directors 1 year subject to hold-over principle City or municipality where the principal office is located Proxy is allowed

Election is vested upon Board of Directors

a

Non-Stock

Sec. 89 of the Corporation Code provides that: “The right of the membership of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the bylaws. Unless so limited, broadened or denied, each member, regardless of

class, shall be entitled to one vote. Unless otherwise provided in the articles of incorporation of the by-laws, a member may vote by proxy in accordance with the provisions of this Code. Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be prescribed by, the SEC.” General Rule: Sec. 58 Exception: Sec. 89. This provision allows denial of proxy. Reason: To promote camaraderie, togetherness, unity and familiarity. *A member is entitled to 1 vote. However, such right may be limited, broadened or denied in the Articles of Incorporation or By-Laws. Thus, the By-laws of a non-stock corporation may provide for the desired voting rights of members including the number of votes. Sec. 90 of the Corporation Code provides that: “Membership in a nonstock corporation and all rights arising therefrom are personal and nontransferable, unless the articles of incorporation or the by-laws otherwise provide.” General Rule: Membership is nontransferable. Exception: If the Articles of Incorporation or the By-laws provide otherwise. Sec. 91 of the Corporation Code provides that: “Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws. Termination of membership shall have the effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the bylaws.” Rules on Place of Meeting: General Rule: Sec. 51 Exception: Sec. 93 51

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro D. Rule on Distribution of Assets Sec. 94 of the Corporation Code provides that: “In case dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefor; 2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements; 3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter; 4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the bylaws, to the extent that the articles of incorporation or the by-laws, determine the distributive rights of members, or any class or classes of members, or provide for distribution; and 5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter.” Order of distribution:

1. All its creditors shall be paid; 2. Assets held subject to return on dissolution, shall be delivered back to their givers; 3. Assets held for charitable, religious purposes, etc., without a condition for their return on dissolution, shall be conveyed to one or more organizations engaged in similar activities as dissolved corporation; and 4. All other assets shall be distributed to members, as provided for in the Articles or By-Laws. Sec. 95 of the Corporation Code provides that: “A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner: The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in this Code for the giving of notice of meetings to members. Such plan of distribution shall be adopted upon approval of at least 2/3 of the members having voting rights present or represented by proxy at such meeting.” Q: Would it be possible for a non-stock corporation to be converted into a stock corporation by mere amendment of the Articles of Incorporation? A: NO. Because it would violate Section 87 of the Corporation Code which prohibits distribution of income as dividends to members. 52

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Reason: Fraudulent to donors Q: Can a stock corporation be converted to a non-stock corporation by mere amendment of the Articles of Incorporation?

primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.”

A: YES.

*Whether open or close corporation depends on its charter.

Requirements:

Case: San Juan Structural

1. Approval of 2/3 of the members

The following must be stated in the Articles of Incorporation:

2. Approval of the SEC Q: What was relinquished? A: Proprietary rights. *Appraisal right is available.

1. Membership is limited to 20 2. Transfer or disposition of shares is subject to specified restrictions

CLOSE CORPORATIONS: A. Concept; Distinguished Corporations

from

Open

Sec. 96 of the Corporation Code states that: “A corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding 20; (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall

3. Prohibition against offering to the public of the shares or listing in the stock exchange. General Rule: Any corporation may be incorporated as close corporation. Exceptions: 1. Mining or oil companies 2. Stock exchanges 3. Banks 4. Insurance companies 5. Public utilities 6. Educational institutions 7. Corporations declared to be vested with public interest Distinctions Corporations:

from

Open

Open Corporation Its articles of incorporation need only contain the general matters enumerated in Section 14 of the Corporation Code

Close Corporation Its articles must contain the special matters prescribed by Section 97 aside from the general matters in Section 14. Failure to do so precludes a de jure close 53

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

Its status as an ordinary stock corporation is not affected by the ownership of its voting stock or voting rights Its articles cannot classify its directors Business of the corporation is managed by the board of directors

The corporate officers and employees are elected by a majority vote of all the members of the board of directors The pre-emptive right is subject to the exceptions found in Section 39 of the Corporation Code The appraisal right may be exercised by a stockholder only in the cases provided in Sections 81 and 42 of the Corporation Code Except as regards redeemable shares, the purchase by the corporation of its own stock must always be made from the unrestricted retained earnings

corporation status 2/3 of its voting stock or voting rights must not be owned or controlled by another corporation which is not a close corporation Its articles may classify its directors Business of the corporation may be managed by the stockholders if the articles so provide, but they are liable as directors Its articles may provide that any or all of the corporate officers or employees may be elected or appointed by the stockholders The pre-emptive right is subject to no exceptions unless denied in the articles The appraisal right may be exercised and compelled against the corporation by a stockholder for any reason In case of an arbitration of an intracorporate deadlock by the SEC, the corporation may be ordered to purchase its own shares from the stockholders regardless of the availability of unrestricted retained earnings

Arbitration of intracorporate deadlock by the SEC is not a remedy in case the directors or stockholders are so divided respecting the management of the corporation.

Arbitration of intracorporate deadlock by the SEC is an available remedy in case the directors or stockholders are so divided respecting the management of the corporation.

*In San Juan Structural Steel Fabricators v CA, the SC held that the circumstance that around 99.86% of the total share holding of petitioner belongs to respondent would not justify classification of the corporation as close. B. Permissive Provisions in the Articles of Incorporation Sec. 97 of the Corporation Code provides that: “The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be 54

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro directors for the purpose of applying the provisions of this Code; and 3. The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors.”

C. Restrictions on Transfer of Shares Sec. 98 of the Corporation Code provides that: “Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not 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.” Option Restriction – this restriction provides that no disposition of shares will be made unless the shares are offered first to the corporation or the stockholders. *Pre-emptive right is exercisable or available. *This restriction is valid and allowed. Reason: it is the one contemplated by law. *Restriction derogates private rights. Consent Restriction – this restriction provides that no disposition of shares

will be made without the consent of directors. *This restriction is not valid. Reason: It is burdensome.

more

onerous

and

CORPORATE DISSOLUTION/LIQUIDATION: A. Methods of Voluntary Corporate Dissolution and the Requirements therefor Dissolution refers to the extinguishment of franchise or termination of corporate existence. Modes of Dissolution: 1. Voluntary dissolution 2. Involuntary dissolution Methods of Voluntary Dissolution: 1. Voluntary dissolution where no creditors are affected 2. Voluntary dissolution creditors are affected

where

3. Shortening of the corporate term by amending the articles of incorporation *Dissolution takes effect upon the coming of the shortened term. 4. Expiration of corporate term

•

Voluntary dissolution creditors are affected

where

no

Sec. 118 of the Corporation Code provides that: “If dissolution of a corporation does not prejudice the rights of any creditor having a claim against it, the dissolution may be effected by majority vote of the board of directors or trustees, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least 2/3 of the outstanding capital stock 55

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro or of at least 2/3 of the members of a meeting to be held upon call of the directors or trustees after publication of the notice of time, place and object of the meeting for 3 consecutive weeks in a newspaper published in the place where the principal office of said corporation is located; and if no newspaper is published in such place, then in a newspaper of general circulation in the Philippines, after sending such notice to each stockholder or member either by registered mail or by personal delivery at least 30 days prior to said meeting. A copy of the resolution authorizing the dissolution shall be certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation. The SEC shall thereupon issue the certificate of dissolution.” Requisites: 1. A meeting must be held on the call of the directors or trustees; 2. Notice of the meeting should be given to the stockholders by personal delivery or registered mail at least 30 days prior to the meeting; 3. The notice of meeting also be published consecutive weeks newspaper published place;

should for 3 in a in the

4. The resolution to dissolve must be approved by the majority of the directors/trustees and approved by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of members; 5. A copy of the resolution shall be certified by the majority of the

directors or trustees and countersigned by the secretary; 6. The signed and countersigned copy will be filed with the SEC and the latter will issue the certificate of dissolution

•

Voluntary dissolution creditors are affected

where

Sec. 119 of the Corporation Code provides that: “Where the dissolution of a corporation may prejudice the rights of any creditor, the petition for dissolution shall be filed with the Securities and Exchange Commission. The petition shall be signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least twothirds (2/3) of the members at a meeting of its stockholders or members called for that purpose. If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition, fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality 56

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro or city. Upon five (5) day's notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation.” Requisites: 1. Approval of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of members in a meeting called for that purpose; 2. Filing of a Petition with the SEC signed by majority of directors or trustees or other officers having the management of its affairs verified by President or Secretary or Director. Claims and demands must be stated in the petition; 3. If petition is sufficient in form and substance, the SEC shall issue an Order fixing a hearing date for objections; 4. A copy of the Order shall be published at least once a week for 3 consecutive weeks in a newspaper of general circulation or if there is no newspaper in the municipality or city of the principal office, posting for 3 consecutive weeks in 3 public places is sufficient; 5. Objections must be filed no less than 30 days nor more than 60 days after the entry of the order; 6. After the expiration of the time to file objections, a hearing shall be conducted upon prior 5 day notice to hear the objections; 7. Judgment shall be rendered dissolving the corporation and directing the disposition of assets; the judgment may include appointment of a receiver. •

Sec. 120 of the Corporation Code provides that: “A voluntary dissolution may be effected by amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this Code. A copy of the amended articles of incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon approval of the amended articles of incorporation of the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings, subject to the provisions of this Code on liquidation.”

B. Concept of Involuntary Dissolution and the Grounds therefor Sec. 121 of the Corporation Code provides that: “A corporation may be dissolved by the Securities and Exchange Commission upon filing of a verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulations.” *This must be done with substantive and procedural due process. Grounds: 1. Failure to submit by-laws within the prescribed period 2. Fraud in the procurement Certificate of Registration

of

3. Misrepresentation as to the activities that the corporation will undertake 4. Treasurer’s affidavit is false 5. Continued inoperation for 5 years

Shortening of term of existence 57

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 6. Failure to commence business transactions within 2 years from issuance of certificate of registration 7. To some cases, performance of ultra vires act since it is a violation to the franchise but depending on the seriousness or gravity of the offense 8. Issuance of watered stocks 9. De facto status 10.Failure to keep corporate books and records depending on the gravity or seriousness of the offense 11.Violation of its charter

C. Corporate Liquidation Liquidation is a process by which all the assets of the corporation are converted into liquid assets in order to facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the stockholders. *Liquidation dissolution.

takes

place

after

Sec. 122 of the Corporation Code provides that: “Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it

was established. At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.”

D. Methods of Liquidation or Winding Up 1. By Board of Directors 2. Through a trustee to whom the properties are conveyed 3. By management committee or rehabilitation receiver Q: Can the 3 year period be extended? A: NO. Reason: Beyond the 3 year period, there is no corporate existence for all purposes subject to doctrine of relation. Remedy: Before the expiration of the 3 year period, appoint a trustee/receiver.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Q: During the 3 year period, does the corporation enjoy corporate existence? A: YES. But for limited purpose only, i.e., for liquidation purposes only. (Limited existence) Q: May such corporation sue during the 3 year period? A: YES. But only when the subject matter is related to liquidation and winding up of its remaining affairs. *In case trustee/receiver is appointed, he is not bound by the 3 year period. *In Gelano v CA, the SC held that the lawyer of the corporation can be considered as trustee. The term trustee must be considered in its generic sense. Anyone who has been designated by the corporation to act on its behalf could be considered as trustee for purposes of pursuing a claim for and on behalf of the corporation. A lawyer falls within the ambit of the word “trustee.” *Appointment of trustee can be inferred from the conduct of the corporation. This is by Implication. *If the corporation is the creditor appoint a trustee. If the corporation is the debtor appoint a receiver. Q: What if the corporate properties have already been distributed among the shareholders without trustee/receiver? A: Remedy: Run after the erring directors and officers. E. Concept of Rehabilitation; Effects of Appointment of Management Committee or Receiver Rehabilitation connotes a reopening or reorganization. Contemplates a continuance of corporate existence in an effort to restore the corporation to its former successful operation. *This is a remedy expressly allowed under Section 6 of PD 902-A. Purpose: To make the corporation financially viable again.

Substantive Grounds: 1. When there is imminent danger of dissipation or wastage of corporate assets 2. Serious paralyzation of business which would work to the prejudice of the stockholders and creditors of the corporation *Mere misconduct of an officer is not a ground for corporate rehabilitation. *A corporation cannot ask for corporate rehabilitation and at the same time dissolution. *With the passage of RA8799, the remedy could now be instituted with the proper RTC. Effect: Stay Order - stops or suspends the enforcement of all claims for money or otherwise whether enforcement is by court or not, until rehabilitation proceedings are terminated. Cases: PAL v Garcia; Sobrejuanite; Lingkod Manggagawa ng Rubberworld v Rubberworld Philippines; RCBC v IAC *In PAL v Garcia, the SC held that stay order suspends all enforcement in all stages of the proceedings. *In Lingkod Manggagawa sa Rubberworld v Rubberworld Philippines, the SC held that labor claims are likewise affected by the Stop order. *In RCBC v IAC, the SC held that whether creditors are secured or not, stay order will still affect them. The preference still remains it is just the enforcement that is suspended. FOREIGN CORPORATIONS: A. Concept of Foreign Corporation Foreign Corporation is a corporation formed, organized or existing under any law other than those of the Philippines, and whose laws allow Filipino citizens and corporations to do business in its own country or state. 59

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Sec. 123 of the Corporation Code provides that: “For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency.” Reciprocity Clause provides that the foreign laws allow Filipino citizens and corporations to do business in its own country or state.

B. Tests to Determine Nationality of a Corporation 1. Incorporation Test – when the corporation is incorporated, organized under the law of other country. 2. Control Test – for purposes of investment; the citizenship of a particular corporation is to be determined by the citizenship of the controlling stockholders.

functions normally incident to and in progressive prosecution of, the purpose and object of its organization. *Foreign Corporation is required to obtain license from the SEC to enable them to do business in the Philippines. *The foreign corporation must appoint a resident agent so that court may acquire jurisdiction over the foreign corporation *License is essential if there is an intention to maintain main or substance of the business in the Philippines or to continue the same. *Lack of license does not affect the validity of the transaction. *License is for regulatory purposes. *License requirement does not prevent performance of acts that are isolated from the main business of the corporation and there is no intent to continue the same in the Philippines. *If the foreign corporation is not licensed to do business in the Philippines, General Rule: they have no access in Philippine Courts Exceptions: 1. Isolated transactions 2. Infringement of trademark

C. Concept of “Doing Business” and the License Requirement therefor Substance Test provides that: a foreign corporation is doing business in the country if it is continuing the body or substance of the enterprise of business for which it was organized. Continuity Test provides that: doing business implies a continuity of commercial dealings and arrangements, and contemplates to some extent the performance of acts or works or the exercise of some

*International offense can be sued anywhere. Cases: Expert Travel Tours v CA; Home Insurance v Eastern Shipping Lines *In Expert Travel Tours v CA, the SC held that resident agent is not with authority to execute a certification of Forum shopping following Sec. 23 of the Corporation Code. *In Home Insurance v Eastern Shipping Lines, the SC held that if at the time the suit was brought, the suing foreign entity already have license to do business in the 60

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Philippines, the suit will be allowed although at the time the transaction was made it does not have the requisite of a license to do so, the remedial defect is cured. Cases: Japan Airlines v CA *In Japan Airlines v CA, the SC held that the selling of tickets though there is no aircraft landing in the Philippines constitute doing business in the Philippines. *In Ericks v CA, the SC held that license is necessary in order the foreign corporation may sue. In this case, the court considered the continuity test, they found out that the foreign corporation has the intent to continue business in the Philippines. *Credit is obtained to maintain longer transactions. D. Effects of Being Issued a License 1. They are placed under the jurisdiction of the Philippine courts 2. They are placed under the same footing as domestic corporations 3. The public is protected in dealing with foreign corporations.

E. Revocation and Withdrawal of License

incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by the Corporation Code 5. A misrepresentation of any material matter in any application, report affidavit or other document submitted by such corporation pursuant to the provisions of the Corporation Code 6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivision 7. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license 8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines 9. Any other ground as would render it unfit to transact business in the Philippines.

Grounds for Revocation: 1. Failure to file its annual report or pay any fees as required by the Corporation Code 2. Failure to appoint and maintain a resident agent in the Philippines as required by the Corporation Code 3. Failure, after change of its resident agent or his address, to submit to the SEC a statement of such change as required by the Corporation Code 4. Failure to submit to the SEC an authenticated copy of any amendment to its articles of 61