The Corporation Code Reviewer

THE CORPORATION CODE A.

CORPORATION Definition 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. (Sec. 2) Attributes of a Corporation i. An Artificial Being (“Capacity to Contract and Transact Business”) A corporation exists by fiction of law. Hence, it can act only through its directors, officers, and employees.

B.

ii.

Treated as private corporations not as public corporations

Test to Determine Whether a Corporation is Government Owned or Controlled or Private in Nature: Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation law? d. Quasi-Public Corporations  A cross between private corporations and public corporations.  Usually cover school districts, water districts and the like (Villanueva, p. 75). AS TO PLACE OF INCORPORATION: a. Domestic One formed, organized, or existing under the laws of the Philippines. b. Foreign One formed, organized or existing under any law other than those of the Philippines Whose laws allow Filipino citizens and corporations to do business in its own country or State (principle of reciprocity). Licensed by SEC to do business in the Philippines after securing a certificate of authority from the Board of Investments and after complying with the conditions for issuance of license on application forms, structural organizations and capitalization.

ii.

Created by Operation of Law (“Creature of the Law”) Mere consent of the parties is not sufficient. The State must give its consent either through a special law (in case of government corporations) or a general law (i.e., Corporation Code in case of private corporations).

iii.

Has the Right of Succession (“Strong Juridical Personality”) A corporation has the capacity for continuous existence despite changes in stockholders/members or by any transfer of shares by a stockholder to a 3rd person.

iv.

Has the Powers, Attributes, and Properties Expressly Authorized by Law or Incident to Its Existence (“A Creature of Limited Powers”) As a mere creature of law, it can exercise only such powers as the law may choose to grant it, either expressly or impliedly.

AS TO GOVERNING LAW: a. Public – Special Laws and Local Government Code b. Private – Corporation Code c. Quasi-Public Corporations – seems to be a cross between private corporations and public corporations.

Corporate Fiction: A corporation has a personality separate and distinct from the persons composing it. (Art. 44-47 of the Civil Code; PNB vs. Andrada Electric Engineering Co., 381 SCRA 244 (2002). CLASSES OF CORPORATION IN RELATION TO STATE: a. Public Corporations  Formed or organized for the government of the portion of the state (e.g., barangay, municipality, city, and province).  Created for political purposes connected with the public good in the administration of the civil government. Note: Ownership of the government of the majority of the shares of a corporation does not qualify such entity as a public corporation (National Coal Co., vs. CIR, 46 Phil 583, 1924). b. Private – by private persons alone or with the State.  A corporation is created by operation of law under the Corporation Code.  Mainly governed by the Corporation Code.  A government-owned or –controlled corporation when organized under the Corporation Code is still a private corporation. But being a governmentowned or –controlled corporation makes it liable for laws and provisions applicable to the Government of its entities and subject to the control of the Government (Cervantes vs. Auditor General, 91 Phil 359, 1952).

AS TO LEGAL STATUS: a. De Jure Corporation A corporation organized in accordance with the requirements of law.  Every corporation is deemed de jure until proven otherwise. b. De Facto Corporation (Sec. 20) A corporation claiming in good faith to be a corporation under the Corporation Code. Corporation where there exists a flaw in its incorporation, it falls short of the requirements of law. It is the result of an attempt to incorporate under an existing law coupled with the exercise of corporate powers. Under the Sec. 66 of the Rules of Court, inquiry must be done by the Solicitor General in a quo warranto proceeding - the main issue is the right to exist as a corporation. A de facto corporation will incur the same obligation, have the same powers and rights as a de jure corporation. Elements: 1. A valid law under which incorporated; 2. Attempt in good faith to incorporate of “colorable compliance;” 3. Assumption of corporate powers; and 4. Issuance of certificate of incorporation. (Arnold Hall vs. Piccio, 86 Phil 634, 1950) A corporation which has failed to file its by-laws within the prescribed period does not ipso facto lose its powers as such (Sawadjaan vs. CA, 459 SCRA 516, 2004).

c. On GOCCs i. Created under a special law or charter

-

DE JURE Created in strict or substantial conformity with the statutory requirements for incorporation Right to exist cannot be successfully attacked even in a direct proceeding by the State

DE FACTO Actually exists for all practical purposes as a corporation but which has no legal right to corporate existence as against the State Right to exercise powers cannot be inquired into collaterally in any private suit. But such inquiry may be made by the State in a proper court proceeding.

c. 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 a result thereof. Where a group of persons misrepresent themselves as a corporation (ostensible corporation), they are subsequently estopped from claiming lack of corporate life in order to avoid liability. A third party who assumes an obligation to an ostensible corporation cannot resist performance by alleging the ostensible corporation’s lack of personality. DE FACTO BY ESTOPPEL Existence in Law Yes None Dealings among Not required Required parties on a corporate basis Effect of lack of Could be a Not a corporation requisites corporation by in any shape or estoppel form d. Corporation by Prescription The Roman Catholic Church is a corporation by prescription, with acknowledged juridical personality inasmuch as it is an institution which antedated by almost a thousand years any other personality in Europe (Barlin vs. Ramirez, 7 Phil. 41, 1906). AS TO EXISTENCE OF STOCKS: a. Stock Corporation One which has a capital stock divided into shares and is authorized to distribute to the holders such shares, dividends or allotments of the surplus profits (i.e., retained earnings on the basis of the shares held (Sec. 3) It is organized for profit. The governing body is usually the Board of Directors (except in certain instances, e.g. close corporations) Even if there is a statement of capital stock, the corporation is still NOT a stock corporation if dividends are not supposed to be declared, that is, there is no distribution of retained earnings (CIR vs. Club Filipino de Cebu, 1962). b.

Non-Stock Corporation (See Sec. 87-88) A corporation where no part of its income is distributable as dividends to members, trustees or officers. Corporation that does not issue stocks and does not distribute dividends to their members. -

-

Not organized for profit. Profit obtained as incident to operation had to be used for the furtherance of the purpose/s for which the corporation was organized. The governing body is usually the Board of Trustees.

AS TO RELATIONSHIP OF MANAGEMENT AND CONTROL: a. Holding Company – one that controls another as a subsidiary or affiliate by the power to elect its management; one which holds in other companies for the purpose of control rather than for mere investment. b. Affiliate Company – one that is subject to common control to a mother or holding company and operated as part of a system. c. Parent and Subsidiary Companies – when a corporation has a controlling financial interest in one or more corporations, the one having in control is known as the “parent company” and the others are known as “subsidiary companies”. A “subsidiary” of a specified person is an affiliate controlled by such person, directly or indirectly, though one or more intermediaries. AS TO FUNCTIONS: a. Public – government of a portion of the State; and b. Private - usually for profit-making functions. AS TO PURPOSE OF INCORPORATION: a. Municipal Corporation b. Religious Corporation c. Educational Corporation d. Charitable, Scientific or Vocational Corporation e. Business Corporation AS TO NUMBER OF MEMBERS: a. Aggregate – a corporation which consists of many persons united to form a body politic and corporate (Quimson, p. 156) b. Corporation Sole – may be formed by the chief archbishop, bishop, minister, rabbi, or other presiding elder of any religious denomination, sect or church. Purpose: formed for the purpose of administering and managing, as trustee, the affairs, properties, and temporalities of any religious denomination to which the holder of the office belongs and also to transmit the same to his successor in office (Sec. 110). Director of Land vs. IAC, 146 SCRA 509 (1986) held that a corporation sole has no nationality, overturned the previous doctrine (Republic vs. Villanueva, 114 SCRA 875 [1982] and Republic vs. Iglesia ni Cristo, 127 SCRA 687 [1984] that a corporation sole is disqualified to acquire or hold alienable lands of the public domain, because of the constitutional prohibition qualifying only individuals to acquire land of the public domain and the provision under the Public Land Act which applied only to Filipino citizens or natural persons. {Republic vs. Iglesia ni Cristo, 127 SCRA 687 (1984); Republic vs. IAC, 168 SCRA 165 (1988)}. OTHER CLASSIFICATION: a. Close Corporation – the issued stock of all classes shall be held of record by not more than twenty persons; shall not list in any stock exchange or make any public offering any of its stocks. 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 (Sec. 96).

b. C.

Eleemosynary Corporation – one organized for charitable purposes.

determined to be the ultimate Filipino ownership of the subsidiary corporation (SEC Opinion re: Silahis)

NATIONALITY OF CORPORATIONS Serves as a legal basis for subjecting the enterprise or its activities to the laws, the economic and fiscal powers, and various social and financial policies of the state to which it is supposed to belong.

Ex. MV Corporation and AC Corporation have equal interest in XYZ Corporation. MV Corporation is 60% owned by Filipinos while AC Corporation is 50% owned by Filipinos. By the grandfather rule, MV Corporation would have a 30% Filipino interest in XYZ Company (60% 0f 50%), while AC Corporation would have a 25% Filipino interest in XYZ Company (50% of 50%). Hence, the total Filipino interest is only 55%.

Tests: 1. Place of Incorporation Principal doctrine on the test of the nationality of a corporate identity in the Philippines A corporation is a national of the country under whose laws has been organized and registered 2. Control Test A corporation shall be considered a Filipino corporation if the Filipino ownership of its capital stock is at least 60%, and where the 60-40 Filipino-Alien equity ownership is NOT in doubt (SEC opinion dated 6 November 1989; DOJ Opinion No. 18, s. 1989). Therefore, its shareholdings in another corporation shall be considered to be Filipino nationality when computing the percentage of Filipino equity of the second corporation (SEC Opinion dated 23 November 1993). Control test is applied in the following:  Exploitation of natural resources – “Only Filipino citizens or corporations whose capital stock are at least 60% owned by Filipinos can qualify to exploit natural resources.” (Sec. 2, Art. XII, Conti.)  Public Utilities – “xxx no franchise, certificate or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or corporations organized under the laws of the Philippines at least 60% of whose capital is owned by such citizens.” (Sec. 11, Art. XII, Consti.)  Mass Media – “Ownership of mass media shall be limited to the citizens of the Philippines, or to corporations, cooperatives, or associations, whollyowned and managed by such citizens” (100% Filipino management of the entity)[Sec 11, Art. XVI, Consti.]



3.

Cable Industry – CATV as “a form of mass media which must, therefore, be owned and managed by Filipino citizens, or corporations, cooperatives, or associations, wholly-owned and managed by such citizens pursuant to the mandate of the Constitution.” (DOJ Opinion No. 95, s. 1999) Advertising Industry – “xxx only Filipino citizens or corporations or associations at least 70% of whose capital is owned by such citizens is allowed to engage in the advertising agency.” (Sec 11, Art. XVI, Constitution)

Grandfather Rule It is a method of determining the nationality of a corporation which in turn is owned in part by another corporation by breaking down the equity structure of the shareholder corporation. It involves the computation of Filipino ownership of a corporation in which another corporation of partly Filipino and partly foreign equity owns capital stock. The percentage of shares held by the second corporation in the first is multiplied by the latter’s own Filipino equity, and the product of these percentages is

Note: the application of the test is limited to the issues of investment. Only when the corporation is less than 60% owned shall the grandfather rule be applied. D.

CORPORATE JURIDICAL PERSONALITY 1. Doctrine of Separate Juridical Personality A corporation has personality separate and distinct from that of its stockholders and members and is not affected by the personal rights, obligations, and transactions of the latter. The property of the corporation is not the property of its stockholders or members and may not be sold by them without express authorization from the Board of Directors (Woodchild Holdings, Inc. vs. Roxas Electric and Construction Co. 436 SCRA 235, 2004) Stockholders have no claim on corporate property as owners, but mere expectancy or inchoate right to the same upon dissolution of the corporation after all corporate creditors have been paid. Such right is limited only to their equity interest (doctrine of limited liability). Although a stockholder’s interest in the corporation may be attached by his personal creditor, corporate property cannot be used to satisfy his claim (Wise & Co. vs. Man Sun Lung, 1940) a. Liability for Torts As a separate juridical personality, a corporation can be held liable for torts committed by its officers for corporate purpose (PNB vs. CA, 1978).

b.

“Corporate tort” consists in the violation of a right given or the omission of a duty imposed by law; a breach of legal duty. The failure of the corporate employer to comply with the law-imposed duty under the Labor Code to grant separation pay to employees in case of cessation of operations constitutes tort and its stockholder who was actively engaged in the management or operation of the business should be personally liable. (Sergio F. Naguiat vs. NLRC, 269 SCRA 564, 1997) Liability for Crimes Since a corporation is a mere legal fiction, it cannot be proceeded against criminally because it cannot commit a crime in which personal violence or malicious intent is required. Criminal action is limited to the corporate agents guilty of an act amounting to a crime and never against the corporation itself (West Coast Life Insurance Co. vs. Hurd [1914], Time Inc. vs. Reyes [1971]). General Rule: Corporations cannot commit felonies punishable under the RPC for it is incapable of the requisite intent to commit these crimes. Also, crimes are personal in nature requiring personal performance of overt acts. Finally, a corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment.

Exceptions: If the crime is committed by a corporation, the directors, officers, employees or other officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because of the nature of the crime and the penalty therefore. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment. However a corporation may be charged and prosecuted for a crime if the imposable penalty is fine (Ching vs. Secretary of Justice, GR NO. 164317, February 6, 2006)

2.

When express provisions of law are enacted specifically providing that a corporation may be proceeded against criminally, it is the responsible officer who will be held personally liable for the crimes committed by the corporation. (Sia vs. CA , GR No 111809, May 5, 1997) Under the Anti-Money Laundering Act, juridical persons are also defined as offenders of criminal acts. c. Recovery of Moral Damages General Rule: Moral damages cannot be awarded in favor of corporations because they do not have feelings and mental state. They may not even claim moral damages for besmirched reputation (NAPOCOR vs. Philipp Brothers Oceanic, G.R. No. 126204. November 20, 2001). Exceptions: A corporation can recover moral damages under Art. 2219 (7) if it was the victim of defamation (Filipinas Broadcasting Network vs. Ago Medical and Educational Center 448 SCRA 413, 2005) A corporation with a good reputation, if besmirched, is allowed to recover moral damages upon proof of existence of factual basis of damage (actual injury) and its causal relation (Crystal vs. BPI, 2008). Doctrine of Piercing the Corporate Veil This doctrine means that the court may disregard the separate and distinct personality of the corporation from its members or stockholders and treat the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group especially when the corporate legal entity is used as a cloak for fraud or illegality. (Kukan Internatl. Vs. Reyes, September 29, 2010). It is merely an equitable remedy, and may be granted only in cases when the corporate fiction is used to defeat public convenience, justify a wrong, protect fraud defend crime or where the corporation is a mere alter ego of business conduit of a person. a. Grounds for Application of Doctrine i. If done to defraud the government of taxes due it. ii. If done to evade payment of civil liability. iii. If done by a corporation which is merely a conduit or alter ego of another corporation. iv. If done to evade compliance with contractual obligations. v. If done to evade compliance with financial obligation to its employees. b. Test in Determining Applicability General Rule: The mere fact that a corporation owns all or substantially all of the stocks of another

corporation is NOT sufficient to justify their being treated as one entity. Exception: The subsidiary is a mere instrumentality of the parent corporation. Circumstances rendering subsidiary an instrumentality (PNB vs. Ritratto Group, 2001): i. The parent corporation owns all or most of the capital of the subsidiary. ii. The parent and subsidiary corporations have common directors and officers. iii. The parent company finances the subsidiary. iv. The parent company subscribed to all the capital stock of the subsidiary or otherwise causes its incorporation. v. The subsidiary has grossly inadequate capital. vi. The parent corporation pays the salaries and other expenses or losses of the subsidiary. vii. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation. viii. The papers of the parent corporation or in the statements of its officers, is subsidiary described as a department or subdivision of the parent corporation, or its business or financial responsibility is referred to as the parent corporation’s own. ix. The parent corporation uses the property of the subsidiary as its own. x. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation. xi. The formal and legal requirements of the subsidiary are not observed. E.

INCORPORATION AND ORGANIZATION 1. Promoter Promoters are persons who, acting alone or with others, take the initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefore (RA 8799, Securities Regulation Code). a. Liability of Promoter General Rule: The promoter binds himself personally and assumes the responsibility of looking to the proposed corporation for reimbursement. Exception:  Any express or implied agreement to the contrary, or novation of the contract.  The court ruled in Caram Jr. vs. CA that the investors who were not the “moving spirit” behind the organization of the corporation, but who were merely convinced to invest in the proposed corporate venture on the basis of the feasibility study undertaken, are NOT liable personally with the corporation for the cost of such feasibility study (Caram Jr. vs. CA 151 SCRA 372, 1987).  Exception to Exception: Where there was a showing that the corporation was fictitious and did not have a separate juridical personality, to justify the making the principal stockholders thereof, responsible for its stockholders. b. Liability of Corporation for Promoter’s Contracts

2.

3.

General Rule: A corporation is not bound by the contract. Since the corporation did not yet exist at the time of the contract, it could not have an agent who could legally bind it. Exceptions: A corporation may be bound by the contract if it makes the contract its own by:  Adoption of ratification of the entire contract after incorporation.  Acceptance of benefits under the contract with knowledge of the terms thereof.  Performance of its obligation under the contract. Number and Qualifications of Incorporators Incorporators are stockholders or members mentioned in the articles originally forming and composing the corporation and who are signatories thereof.  Natural persons  Of legal age  Must own or subscribe at least one share of stock of the corporation (Genuine interest)  5 to 15 incorporators who must sign the articles of incorporation (AOI)  Majority of the incorporators must be residents of the Philippines Corporate Name – Limitations on Use of Corporate Name  Must not be identical or deceptively or confusingly similar to that of any existing corporation including internationally known foreign corporation though not used in the Philippines;  Any other name already protected by law;  Name that is patently defective, confusing or contrary to existing laws, morals or public policy (Sec. 18).  Must include the word “Corporation/Corp.”or “Incorporated/Inc”. Change of Corporate Name Requires amendment of the AOI: majority vote of the board and the vote or written assent of stockholders holding 2/3 of the outstanding capital stock (Sec 16). Doctrines Pertaining to Corporate Name A corporation may change its name by the amendment of AOI, but the same is not effective until approved by the SEC (Philippine First Insurance Co. vs. Hartigan 34 SCRA 252, 1970). A change in the corporate name does not make a new corporation, and whether affected by a special act or under a general law, has no effect on the identity of the corporation, or on its property, rights, or liabilities. Consequently, the “new” corporation is still liable for the debts and obligations of the “old” corporation (Republic Planters Bank vs. CA 216 SCRA 738, 1992). Similarity on corporate names between two corporations would cause confusion to the public especially when the purposes stated in their charter are also the same type of business (Universal Mills Corp. vs. Universal Textile Mills Inc. 78 SCRA 62, 1977). A corporation has no right to intervene in a suit using a name other than its registered name; if a corporation legally and truly wants to intervene, it should have used its corporate name as the law requires and not another name which it had not registered (Laureano Investment and Development Corp. vs. CA 272 SCRA 253, 1997).

There would be no denial of due process when a corporation is sued and judgment is rendered against it in its unregistered trade name, holding that a corporation may be sued under the name by which it makes itself known to its workers (Pison-Arceo Agricultural Development Corp. vs. NLRC 279 SCRA 312, 1997). 4.

5.

  6.

Corporate Term Not more than 50 years from date of incorporation subject to extension for periods not exceeding 50 years per extension unless:  Sooner dissolved, or  Extended Extensions:  Not earlier than 5 years prior to expiry  Unless earlier extension is for justifiable reasons as determined by SEC.  How to extend – amend the AOI during the life of the corporation before the expiry of its term. Any dissenting stockholder may exercise his appraisal right (Sec. 37). Minimum Capital Stock and Subscription Requirements At the time of incorporation:  At least 25% of authorized capital stock as stated in the AOI must be subscribed  At least 25% of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the BOD.  Call – term used when the Board formally asks for payment of the balance of the subscription or a part thereof. No minimum authorized capital stock is required except if required by special laws (Sec. 12 and 13) Minimum paid-up capital is not less than P5,000. Articles of Incorporation a. Nature and Function of Articles The AOI is a basic contract document in Corporation Law that defines the charter of the corporation. Section 14 of the Corporation Code provides that the AOI do not become binding as the charter of the corporation unless they have ben filed with the SEC. b. Contents i. Name of corporation; ii. Purpose/s, indicating the primary and secondary purposes; iii. Place of principal office; iv. Term which shall not be more than 50 years; v. Names, citizenship and residences of incorporators; vi. Number, names, citizenships and residences of directors; vii. If stock corporation, amount of authorized capital stock, number of shares; viii. In par value stock corporations, the par value of each share; ix. Number of shares and amounts of subscription of subscribers which shall not be less than 25% of authorized capital stock; x. Amount paid by each subscriber on their subscription, which shall not be less than 25% of subscribed capital and shall not be less than P5,000.00; xi. Name of treasurer elected by subscribers; and xii. If the corporation engages in a nationalized

industry, a statement that no transfer of stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal minimum. c. Amendment Requirements: i. A legitimate purpose for the amendment; ii. by a majority vote of the board of directors or trustees; iii. by a vote or written assent of the stockholders representing at least two thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of the Corporation Code; iv. by a vote or written assent of at least two thirds (2/3) of the members if it be a non-stock corporation. v. The original and amended articles, together, shall contain all provisions required by law to be set out in the articles of incorporation. Such articles, as amended, shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that the said amendment or amendments have been duly approved by the required vote of stockholders or members, shall be submitted to the Securities and Exchange Commission (SEC).
When the SEC is satisfied that the amendment should be allowed, the SEC will issue a certificate indicating its approval. The amendments shall take effect upon approval by the SEC, or from the date of filing with the SEC if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.

vi.

Issuance of Certificate of Incorporation by SEC The SEC shall give the incorporators reasonable time to correct or modify the objectionable portions of the articles or amendments (Sec. 17). Grounds for Disapproving AOI: i. AOI does not substantially comply with the form prescribed ii. Purpose is patently unconstitutional, illegal, immoral, contrary to government rules and regulations iii. Treasurer’s Affidavit concerning the amount of capital subscribed and or paid is false iv. Required percentage of ownership of Filipino citizens has not been complied with. Remedy in case of rejection of AOI – petition for review in accordance with the Rules of Court (Sec. 6, last par., PD 902-A). Commencement of corporate existence and juridical personality – upon issuance of certificate of incorporation (Sec. 19) Revocation of certificate of incorporation – if the incorporators are guilty of fraud in procuring the same after due notice and hearing (Sec. 6(i), PD 902-A). 8.

Adoption of By-Laws (Sec. 46) After Incorporation – within one month after receipt of official notice of the issuance of its certificate on incorporation by the SEC. Before Incorporation – approved and signed by all the incorporators and submitted to SEC together with AOI. a)

d. Non-amendable Items i. Names of incorporators ii. Names of incorporating directors/trustees iii. Names of original subscribers to capital stock and subscribed and paid- up capital iv. Treasurer-in-trust elected by original subscribers v. Members who contributed to the initial capital of non-stock corporation vi. Place and date of execution vii. Witnesses and acknowledgments (De Leon, 2010) 7.

Registration and Incorporation

Issuance

of

Certificate

of

Documents to be filed with the SEC: i. Articles of Incorporation ii. Treasurer’s affidavit certifying that 25% of the total authorized capital stock has been subscribed and at least 25% of such has been fully paid in cash or property iii. Bank certificate showing the paid-up capital iv. Letter authority authorizing the SEC to examine the bank deposit and other corporate books and records to determine the existence of paid-up capital. v. Undertaking to change the corporate name in case there is another person or entity with same or similar name that was previously registered.

Certificate of authority from proper government agency whenever appropriate like BSP for banks and Insurance Commission for insurance corporation (Sundiang and Aquino).

Nature and Functions By-laws are mere internal rules among stockholders and cannot affect or prejudice third persons who deal with the corporation unless they have knowledge of the same (China Banking Corporation vs. CA, 1997). Regulations, ordinances, rules or laws adopted by an association or corporation or the like for its internal governance, including rules for routine matters such as calling meetings and the like (SMC Vs. Mandaue Packing Products Plants UnionFFW, 467 SCRA 107, 2005).

b)

Requisites of Valid By-Laws (Sec. 46) i. Must be approved by the affirmative vote of the stockholders representing the majority of the outstanding capital stock or majority of members (if filed prior to incorporation, approved and signed by all incorporators). ii. Must be kept in the principal office of the corporation; subject to inspection of stockholders or members during office hours (Sec. 64). iii. It must be consistent with the Corporation Code, other pertinent laws and regulations. iv. It must be consistent with the AOI. v. It must be reasonable and not arbitrary or oppressive. vi. It must not disturb vested rights, impair contracts or property rights of

stockholders or members obligations unknown to law. c)

or

create

personal property, including securities and bonds of other corporations;

Binding Effects Only from the issuance of SEC certification that bylaws are not inconsistent with the Code. Cannot bind stockholders or corporation pending approval. As to the Corporation and its Components - Binding not only upon the corporation but also on its stockholders, members and those having direction, management and control of its affairs. They have the force of contract between stockholders/members. As to Third Persons - Not binding unless there is actual knowledge. Third persons are not even bound to investigate the content because they are not bound to know the bylaws which are merely provisions for the government of a corporation and notice to them will not be presumed (China Banking Corporation vs. CA, 1997).

While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the Board of Directors whose approval will finalize the transaction. (Firme v. Bukal Enterprises, 414 SCRA 190) viii.

To enter into merger or consolidation with other corporations; To make reasonable donations, provided, that no corporation shall give donations in aid of any political party or candidate or for purposes of partisan political activity; To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; To exercise other powers as may be essential or necessary to carry out its purpose or purposes stated in the articles of incorporation.

ix. x. xi.

2.

SPECIFIC POWERS i.

d) Amendment or Revision (Sec. 48) Majority vote of the members of the Board and majority vote of the owners of OCS or members, in a meeting duly called for the purpose; or Delegation to the BOD of power to amend or repeal by-laws by vote of stockholders representing 2/3 of OCS or 2/3 of the members. Such delegated power is considered revoked by majority vote only of stockholders representing 2/3 of OCS or 2/3 of the members. F. CORPORATE POWERS 1.

GENERAL POWERS Every corporation has the power and capacity: i.

To sue and be sued in its corporate name; In the absence of a special authority from the Board of Directors to institute a derivative suit, the President or Managing Director is disqualified by law to sue in her own name or on behalf of the corporation. The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the Board of Directors that exercises corporate powers and not in the President. (Bitong v. CA, 292 SCRA 304)

ii.

Of succession by its corporate ; A corporation has a capacity of continuous existence irrespective of the death, withdrawal, insolvency, or incapacity of the individual stockholders or members and regardless of the transfer of their interest or shares of stock.

iii.

To adopt and use a corporate seal; However, a corporation may exist without a seal.

iv. v. vi. vii.

To amend its articles of incorporation; To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same; In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks, or admit members to the corporation if it be non-stock corporation; Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and

Power to Extend or Shorten Corporate Terms

Requirements: - Majority vote of the Board of Directors or Trustees Ratification at a meeting by 2/3 of the outstanding capital stock or members An extension of corporate term allows a dissenting stockholder to exercise his appraisal right. ii.

Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded Indebtedness

Requirements: Majority vote of the board of directors Favored by 2/3 of the outstanding capital stock Ways to increase or decrease capital stock: i. By increasing/decreasing the number of shares authorized to be issued without increasing/decreasing the par value thereof; ii. By increasing/decreasing the par value of each share without increasing/decreasing the number thereof; iii. By increasing/decreasing both the number of shares authorized to be issued and the par value thereof. A corporate bond is an obligation to pay a definite sum of money at a future time at fixed rate of interest. A business corporation may borrow money whenever the necessity of its business so requires and issue security or customary evidence of debt such as notes, bonds or mortgages. This includes non-stock corporations as well. iii.

Power to deny pre-emptive right

Whenever the capital stock of a corporation is increased and new shares of stock are issued, the new issue must be offered first to the stockholders who are such at the time the increase was made in proportion to their existing shareholdings and on equal terms with other holders of the original stocks before subscriptions are received from the general public. This is called a Pre-emptive right . The pre-emptive right of stockholders of a stock corporation to subscribe to all issues or disposition of shares of any class in proportion to their respective shareholdings may be denied by the articles of incorporation.

EXCEPTIONS: i. Stocks issued in compliance with laws requiring stock offerings or minimum stock ownership by the public ii. Stocks issued in good faith with approval of stockholders representing 2/3 of the OSC: -In exchange for property needed for corporate purposes -in payment of a previously contracted debt.

Requirements: Majority vote of board of directors or trustees Ratification by the 2/3 stockholders representing the OSC or members. However, if the investment is reasonably necessary to accomplish the corporation’s primary purpose, the approval of the stockholders or members shall not be necessary. Any dissenting stockholder may exercise his appraisal right.

iv.

Power to Sell or Dispose All or Substantially All of the Corporate Assets

Requirements: Majority vote of its board of directors Authorization by 2/3 of stockholders of the OSC or members. Provided, that in non-stock corporations, where there are no members with voting rights, the vote of at least a majority of the trustees will be sufficient for authorization. Authorization must be done at a stockholders’ or members’ meeting duly called for that purpose after written notice. Any dissenting stockholder may exercise his appraisal rights. A sale or 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. If the corporation can sell, it can also abandon the transaction through the board without further action or approval by the stockholders or members but subject to rights of third parties under any contract relating thereto. v.

Power to Acquire Its Own Shares A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose, provided that the corporation has unrestricted retained earnings. It includes the following cases: i. ii.

iii.

To eliminate fractional shares arising out of stock dividends; To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; To pay dissenting or withdrawing stockholders entitled to payment for their shares. (Sec. 41, Corporation Code)

Conditions for the exercise of the power: i. The capital is not impaired; ii. For a legitimate and proper corporate purpose; iii. There is unrestricted retained earnings to purchase the same; iv. The corporation acts in good faith without prejudicing the rights of creditors and stockholders; v. The conditions of corporate affairs warrant it; (De Leon, Corporation Code of the Philippines, 2010) vi.

The other purposes for which the funds may be invested without amending the articles of incorporation must be those enumerated in the articles of incorporation. In order to engage in any of its secondary purposes, the corporation must comply with the above requirement. A corporation is not allowed to engage in a business distinct from those enumerated in the articles of incorporation without amending the purpose clause of said articles to include the desired business activity among its secondary purpose. (De Leon, Corporation Code of the Philippines, 2010) vii.

Power to Declare Dividends

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 stock holder until his unpaid subscription is fully paid; (Sec. 43) Requirement: Approval of stockholders representing not less than 2/3 of the OSC In a regular or special meeting duly called for its purpose Existence of unrestricted retained earnings A stock corporation is prohibited from retaining surplus profit in excess of 100% of their paid-in capital stock, except: When justified by definite corporate expansion projects or programs approved by the board of directors; When prohibited under any loan agreement with any financial institution or creditor without their his/her consent; That such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies. (Sec. 43, par 2) Dividend, is that part or portion of the profits of a corporation set aside, declared and ordered by the directors to be paid ratably to the stockholders on demand or at a fixed time.

Power to Invest Corporate Funds in Another Corporation or Business

Stock Dividends, these dividends are payable in unissued additional shares of the corporation instead of cash or property out of the unrestricted retained earnings. These are issued by a resolution of the board and approval of stockholders. It must also require to have unissued shares for distribution to stockholders, otherwise, it must increase its capital stock to the extent of corporate earnings to be declared.

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.

Cash Dividends, these are dividend payable in cash. These can be declared by mere board resolution from unrestricted retained earnings.

Property Dividends, these are dividends distributed to the stockholders in the form of property, real or personal, such as warehouse receipts, or shares of stock of another corporation. This is actually cash dividend since the stockholder may sell the property received and realize cash. These must be properties no longer intended to be used by the corporation for its business. However, no actual distribution of property dividend shall be made without approval by the Commission.

performance, ratification, or estoppels, while the latter is void and cannot be validated. When a contract or act is illegal per se, it is wholly void or inexistent. But when a contract is not illegal per se but merely beyond thepower of a corporation, the same is merely voidable and may be enforced by performance, ratification, or estoppels or on equitable ground.  -

The participation of each stockholder in the earnings of the corporation is based on his total subscription and not on the amount paid by him in account thereof. Ex. A subscribes to 1,000 shares of the par value P10.00 per share and has paid P5,000 on his subscription, he will participate in dividends on the basis of 1,000 shares, not 500 shares. (De Leon, Corporation Code of the Philippines, 2010) Dividends are usually declared generally quarterly. But the directors may declare dividends in advance for succeeding quarters when the business is in good shape and abundant with revenues. viii.

-

3.

HOW THESE POWERS ARE EXERCISED

Power to enter into Management Contract

a.

A management contract is one whereby the corporation undertakes to manage or operate all or substantially all of the business of another corporation. A management contracts must not be longer than 5 years for any one term. However, service contracts which relate to the exploitation, development, exploration or utilization of natural resources may be entered into for such periods provided by law or regulation. (De Leon, 2010)

Stockholders have residual power of fundamental corporate changes in the exercise of their right to vote.

Requirements: Resolution of a quorum of the Board of Directors/Trustees; and Ratified by a majority vote by the stockholders representing the outstanding capital stock or members, as the case may be, in a meeting called for the purpose; In both cases, such votes must be made by both the managing and managed corporation.

c.

EXCEPT: That 2/3 votes shall be necessary if: Stockholder who represents the interest of both corporations owns 1/3 of the outstanding capital stock of the managing corporation. Majority of the members of the Board of the managing corporation compose also majority of the members of the board of the managed corporation. (Villanueva, Commercial Law Reviewer, 2009) ix.

-

Consequences of Ultra Vires Acts If executor on both sides, it cannot be enforced by either party thereto. If fully performed on both sides, neither party can maintain an action to set aside the transaction or to recover what he has parted with. If performed on one side and the other has received benefits by reason of such performance, recovery is permitted on the ground that it would be unjust to sanction retention of benefits coupled with refusal to perform (De Leon, 2010)

Ultra Vires Acts

These are acts not within the express, implied, and incidental powers of the corporation conferred by the Corporation Code or its articles of incorporation. There are three types of ultra vires acts: 1. Those outside the express, implied or incidental powers of the corporation; 2. Those which are effected by corporate representatives who act without authority; 3. Those which are contrary to laws or public policy. 

Applicability of Ultra Vires Acts

The term ultra vires is distinguished from an illegal act since the former is merely voidable which may be enforced by

b.

Stockholders

Board of Directors

Generally, the Board of Directors alone exercises the powers of the corporation. The board exercises their power through board meetings. Officers

Corporate officers may exercise corporate powers via authority from: 1. Law 2. Corporate By-laws 3. Authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business. 4.

TRUST FUND DOCTRINE The assets of a corporation of the corporation as represented by its capital stock are “trust funds” to be maintained unimpaired and to be used to pay corporate creditors in the sense that there can be no distribution of such assets among the stockholders without provision being first made for the payment of the corporate debts and that any such disposition of it is a fraud on the creditors of a corporation who extend credit on good faith of its outstanding capital stock and, therefore, void. (Philippine Trust Co. v. Rivera, 144 Phil 469) Under the trust fund doctrine, the capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of the corporate creditors. (CIR v. CA, 301 SCRA 152)

G. BOARD OF DIRECTORS AND TRUSTEES 1.

DOCTRINE OF CENTRALIZED MANAGEMENT

Unless otherwise provided in the Corporation Code, the corporate powers of all corporations 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 corporations, who shall hold office for one (1) year and until their successors are elected and qualified. (Sec. 23, Corporation Code) A corporation’s Board of Directors is understood to be that body which: a. Exercises all powers provided for under the Corporation Code; b. Conducts all business of the corporation; and c. Controls and holds all property of the corporation. (Hornilla v. Salunat, 405 SCRA 220) 2.

BUSINESS JUDGMENT RULE

The courts cannot undertake to control the discretion of the board of directors about administrative matters as to which they have legitimate power of action, and contracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority. Exceptions: a. When otherwise provided by the Corporation Code b. When the Directors or officers acted with fraud, gross negligence or in bad faith; and c. When directors or officers act against the corporation in conflict of interest situation. 3.

Tenure, Qualifications and Disqualifications of Directors or Trustees

Tenure: Under section 23, the board of directors and trustees shall hold office for one (1) year and until their successors are elected and qualified. As a general rule, the directors or trustees of a corporation shall serve for a term as fixed in the by-laws. Hold-over: Upon failure of a quorum at any meeting of the stockholders or members called for an election, the directorate naturally holds over and continues to function until another directorate is chosen and qualified. Qualifications: Stock Corporations: a. Own at least one (1) share; b. Share of stock must be registered in his name; c. Must continually own such share during his term; otherwise he automatically ceases to be a director; d. Majority must be residents of the Philippines; Non-stock Corporation: a. He must be a member in good standing thereof; b. a majority of them must be residents of the Philippines; Only a natural person may be elected as directors or trustees. However, a corporation which owns shares of stocks or is a member in another corporation can designate by board resolution its officer or representative to sit in the latter’s board and thus qualifying him to be elected as director or trustee. (De Leon, 2010) A trustee in a voting trust may be elected as director/trustee. (Villanueva, 2009) Disqualifications: No stockholder or member can be elected as director or trustee if he has been convicted by final judgment of an offense carrying an imprisonment exceeding 6 years, or an

offense constituting a violation of the Code, 5 years prior to his election or appointment. Every Director requires at least one share of stock to be elected. If he transfers all his shares during his tenure, he automatically ceases to be a director. This applies to a Director who transfers all his shares to a trustee under a Voting Trust Agreement. (Lee v. CA, 205 SCRA 752) 4.

ELECTIONS

In order for the election of the Directors or Trustees to take place, the presence of a majority of the capital stock or members, either personally or by written proxy is required. Elections must be held by secret ballot if requested by any voting stockholder or member, otherwise, it may be held in any form. a.

CUMULATIVE VOTING AND STRAIGHT VOTING

Example: A owns 100 shares of stock in a corporation and 5 directors are to be elected. A is entitled to 500 votes (100 shares x 5 directors) Straight Voting - every stockholder “may vote such number of shares for as many persons as there are directors” to be elected. In this case, A may distribute equally 100 shares to each of the 5 directors without preference. The same rule applies to elections of the board of trustees, whereby A has 1 vote for each trustee to be elected. 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.” In this case, A may vote all his 500 shares to a single director to be elected. Cumulative Voting by Distribution – By this method, 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. Here, A may distribute his votes as he may desire among the directors to be elected, i.e., 200 shares to Director 1, 100 shares to director 2, and 200 shares to director 3, giving no favorable vote to Directors 4 and 5. However, the Corporation Code states that the total number of votes cast by a stockholder shall not exceed the number of shares owned by him. Lastly, no delinquent stock shall vote or be voted. b.

QUORUM

A majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business. Except, when it is otherwise provided in the articles of incorporation or the bylaws that a greater majority is required. (Sec. 25, Corporation Code) Note: There is a difference between requiring “A majority vote of the directors or trustees” and “A vote of majority of the directors or trustees constituting a quorum.” In the former, you require a vote of majority plus one of all the directors. In contrast, the latter requires a majority plus one vote of directors enough to constitute a quorum (majority).

5.

REMOVAL

Any director or trustee of a corporation may be removed from office: a. By a vote of the stockholders representing 2/3 of the outstanding capital stock, or 2/3 vote of the members. b. At a regular meeting of the corporation or at a special meeting called for such purpose, c. Previous notice to stockholders or members d. May be without just cause, except when it operates to deprive minority stockholders or members the right of representation (requires just cause). The board of directors has no power to remove one of its members as director or trustee. 6.

FILLING OF VACANCIES

Generally, if still constituting a quorum, at least a majority of the members are empowered to fill any vacancy occurring in the board other than by removal by the stockholders or members or by expiration of term. Stockholders or members may fill the vacancy in the following cases: a. Vacancy results from removal by the stockholders or members, or the expiration of term; b. Vacancy occurs other than by removal or expiration of term, such as death, resignation, abandonment, or disqualification; provided that the remaining directors do not constitute a quorum; c. When the board refers the matter to the stockholders; d. Increase in the number of the board; A director or trustee so elected to fill a vacancy shall only be for the unexpired term of his predecessor in office. 7.

COMPENSATION

Generally, the by-laws of a corporation fixes the compensation of the directors. However, if no compensation is provided for therein, then directors shall receive only reasonable per diems. Per diems are paid per attendance in board meetings. The amount of compensation may also be fixed in a resolution of the stockholders by a majority vote representing the outstanding capital stock. Notwithstanding, the stockholders cannot delegate to the board of directors the authority to fix the amount of their own compensation. Where the compensation is granted either in the by-laws or by the vote of stockholders, the total yearly compensation of directors or trustees shall in no case exceed 10% of the net income before income tax of the compensation during the preceding year. 8.

FIDUCIARIES DUTIES AND LIABILITY RULES

“A director is a fiduciary. Their powers are powers in trust. He who is in such fiduciary position cannot serve himself first and his cestuis second. He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters.” (De Leon, The Corporation Code of the Philippines, 2010) Duty of Obedience – The directors or trustees and officers to be elected shall perform the duties enjoined on them by law

and by the by-laws of the corporation. Any director, trustee or officer violating this duty is liable for ultra vires acts. Duty of Diligence – Directors or trustees who (1) willfully and knowingly vote for, or assent to patently unlawful acts of the corporation, (2) or who are guilty of gross negligence or bad faith in directing the affairs of the corporation, shall be liable jointly and severally for all the damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. (Sec. 31, Corporation Code) Personal Liability of corporate director, trustee or officer shall attach only when: a. He affirms an unlawful act, or acts with bad faith or gross negligence in directing its affairs, or for conflict of interest resulting in damage to the corporation, stockholders or other persons; b. He consents to the issuance of watered stocks or does not file with the secretary his written objection thereto; c. He agrees to hold himself personally and solidarily liable with the corporation; d. Law makes him personally liable for his corporate action. (Tramat Mercantile v. Court of Appeals 238 SCRA 14) Duty of Loyalty – When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation with respect to 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. (Sec. 31, Corporation Code) This liability shall attach despite the fact that the director risked his own funds in the venture. However, violation of this duty may be ratified by a vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock. (Sec. 34, Corporation Code) These two provisions are contained in the doctrine of corporate opportunity, which states that a corporate director cannot take advantage for his personal benefit a business opportunity which has an inherent aptitude of being integrated into the existing business of the corporation. 9.

RESPONSIBILITY FOR CRIMES

Since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers, since it does not have the essential element of malice; in such case, the responsible officers would be criminally liable. The performance of the act is an obligation directly imposed by the law on the corporation. Since it is a responsible officer or officers of the corporation who actually perform the act for the corporation, they must of necessity be the ones to assume the criminal liability (People v. Tan Boon Kong, 54 Phil 607) 10. INSIDE INFORMATION The fiduciary position of insiders, directors, and officers prohibits them from using confidential information relating to the business of the corporation to benefit themselves or any competitor corporation in which they may have a mere substantial interest.

Since loss and prejudice to the corporation is not a requirement for liability, the corporation has a cause of action as long as there is unfair use of inside information. It is inside information if it is not generally available to others and is acquired because of the close relationship of the director or officer of the corporation. (Sec. 3.8, 27 Securities Regulation Code) 11. CONTRACTS a.

By Self-Dealing Directors with the Corporation

A contract of the corporation with one ore more of its directors or trustees or officers is voidable, at the option of such corporation, unless the following conditions are present: i. The presence of such director or trustee in the board meeting in which the contract was approved is not necessary to constitute a quorum for such meeting; ii. The vote of such director or trustee was not necessary for the approval of the contract; iii. That the contract is fair and reasonable under the circumstances; iv. (In the case of an officer) The contract with the officer has been previously authorized by the board of directors.

Where majority of the members of the members of the board of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, the management contract must be approved by the stockholders of the MANAGED Corporation owning 2/3 of the total outstanding stock or members. Illustration: If A, B, C, D, and E constitute the majority of the members of the board of directors of X corporation and also of Y corporation, the bigger 2/3 vote by the stockholders of Y corporation is necessary. This is a case of a contract between two corporations with interlocking directorates. (De Leon, 2010) 16.

EXECUTIVE COMMITTEE

The by-laws of a corporation may create an executive committee composed of not less than three members of the board to be appointed by the Board. 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 in the by-laws, or on a majority vote of the board. The purpose of the Executive Committee is to take off part of the work from the Board during the periods when the Board does not meet.

In the absence of the first two conditions, a ratification may be made by a vote of the stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 vote of the members in a meeting called for the purpose. Full disclosure of the adverse interest of the directors or trustees must be made at such meeting. (Sec. 32, Corporation Code)

Matters they cannot act on: a. Approval of any action for which shareholder’s approval is also required; b. Filling of vacancies in the board; c. Amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repeatable; d. Distribution of cash dividends.

b.

17.

Between Corporations with Inter-locking Directors

General Rule: A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone. Exceptions: (1) There is Fraud and (2) The contract is not fair and reasonable under the circumstances. Rule when the director’s interest is nominal in one corporation and substantial in the other: The requirements under Section 32, as stated above, must be complied with to make the contract between the corporation and interlocking directors valid. Stockholdings exceeding 20% of the outstanding capital stock shall be considered substantial for the purposes of interlocking directors.

a.

MEETINGS Regular or Special Meetings

Regular meetings of directors or trustees are those held by the board monthly, unless the by-laws provide otherwise. Special meetings of directors or trustees are those held by the board at any time upon the call of the president or as provided in the by-laws. These meetings maybe held anywhere in or outside the Philippines, unless provided otherwise in the by-laws. Notice must be sent to every director or trustee at least 1 day prior to the scheduled meeting. b.

Who Presides

The By-Laws may prohibit a director of a corporation from serving at the same time a director of a competing corporation. (Gokongwei, Jr. v. SEC, 89 SCRA 336)

Section 54 provides, 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.

The by-laws may provide that the chairman, instead of the president, shall preside at board meetings. Where there is a vice-chairman provided in the by-laws, he presides in the absence of the chairman.

Management Contracts

Previously tackled under Corporate Powers. A management contract cannot delegate entire supervision and control over the officers and business of a corporation to another as this will contravene the fundamental rule that the corporate powers of all corporations shall be exercised by the board. The board cannot surrender its power and duty of supervision and control for otherwise, it becomes a mere instrumentality of the managing company.

Where the officer entitled to preside is not present at the time of the meeting, a stockholder or member who takes the floor may temporarily preside at the meeting pending the selection of the presiding officer. c.

Quorum

Under Sec. 52, Unless otherwise provided for in this Code or in the by-laws, 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 nonstick corporations. d.

Rule on Abstention

When time comes for directors to vote on an issue, a director may vote "yes" or "no." If a director abstains from voting, that means the director has not voted. An abstention is a non-vote, a decision not to make a decision. When the chair calls for a vote, abstentions are not called for, only the yeas and nays. Whenever a director believes he/she has a conflict of interest, the director should abstain from voting on the issue and make sure his/her abstention is noted in the minutes. The other reason a director might abstain is that he/she believes there was insufficient information for making a decision. Otherwise, directors should cast votes on all issues put before them. Failure to do so could be deemed a breach of their fiduciary duties. H. STOCKHOLDERS AND MEMBERS 1. RIGHTS OF A STOCKHOLDER OR MEMBERS  Direct or indirect participation in management  Voting Rights  Right to remove directors  Proprietary Rights  Right to Inspect books and records  Right to be furnished with the most recent financial statements/reports  Right to recover stocks unlawfully sold for delinquent payment of subscription  Right to file individual suit, representative suit and derivative suits. a.

If the voting trust was a requirement for a loan agreement, period may exceed 5 years but shall automatically expire upon full payment of the loan. (Sec. 59, Corporation Code). c. CASES WHEN STOCKHOLDER’S ACTION IS REQUIRED i. By a Majority Vote (of the outstanding capital stock and entitled to vote)  Fixing of the issue value of no par value shares but the articles may fix the issue price or may authorize the Board of Directors to fix said issue value (Sec. 62);  Adoption or amendments to the By-Laws (Sec. 48);  Execution of Management Contracts, unless in case of interlocking shareholders of more than one-third (1/3) in the managing corporation or interlocking majority of directors in both managed and managing corporations (Sec. 44);  Revocation of delegation to the Board of Directors on the amendment of By-Laws (Sec. 48);  Calling a meeting to remove directors (Sec. 26); and  Payment of compensation for directors unless already fixed in the By-Laws. ii.

By a Two-Thirds Vote  Declaration of bond or stock dividends (Sec. 43);  Investment in other corporations or for purposes other than those provided in the Articles of Incorporation (Sec. 42);  Certain amendments to the Articles of Incorporation (Sec. 16; Sec. 37);  Delegation to the Board of Directors to amend the ByLaws (Sec. 48);  Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially of the corporate assets, but stockholders’ action is not required if corporation’s business is not substantially limited or if the proceeds are used to continue the remaining business (Sec. 40);  Removal of a director (Sec. 28);  Ratification of voidable contracts in certain cases between a corporation and its director or trustee (Sec. 32);  Voluntary dissolution of the corporation (Sec.118);  Execution of management contracts in cases of interlocking stockholders or directors (Sec.44);  Increase or decrease of capital stock and creation or increase of bonded indebtedness (Sec. 38);  Extending or shortening corporate term (Sec. 37);  Issuance of shares not subject to pre-emptive right (Sec. 39);

iii.

By Cumulative Voting – Cumulative voting is allowed in the election of directors or trustees (Sec. 24). - A 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 (Sec. 24).

Doctrine of Equality of Shares Each share shall be EQUAL in ALL respects to every other share, except as otherwise provided in the Articles of Incorporation and stated in the certificate of stock.

2. PARTICIPATION IN MANAGEMENT a. PROXY - Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. A written authorization given by one person to another so that the second person can act for the first. A proxy is a special form of agency. The proxy holder is in the eye of the law an agent and as such a fiduciary. (Ballantine, p. 412) Requirements for Validity: (Sec. 58) i. Unless otherwise provided in the proxy, it shall be valid only for the meeting which it was intended. ii. It shall be signed by the stockholder or member concerned; iii. Proxies shall be in writing; iv. It shall be filed before the scheduled meeting with the corporate secretary; v. No proxy shall be valid and effective for a period longer than 5 years at any one time. b. VOTING TRUST - An arrangement created by one or more stockholders 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 five (5) years at any time. The trustee can also be voted as director.

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.

3. PROPRIETARY RIGHTS The proprietary rights of shareholders consist principally in their right to dividends and to liquidation of assets. While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it however, does not vest the owner thereof with any legal right or title to any of the assets, his interest in the corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct legal person. a. RIGHT TO DIVIDENDS Right to dividends vests upon lawful declaration by the Board of Directors. From that time, dividends become a debt owing to the stockholder. No revocation can be made except if NOT yet announced or communicated to the stockholders. Stock corporations are prohibited from retaining surplus profits in the excess of 100% of their paid-in capital stock, EXCEPT: i. When justified by definite corporate expansion projects or programs approved by the board of directors; ii. 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 iii. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies. Forms of Dividends: Cash, Property or Stock. NOTE: Right to dividends vests upon declaration so whoever owns the stock at such time also owns the dividends. Subsequent transfer of stock would not carry with it right to dividends UNLESS agreed upon by the parties. b. RIGHT OF APPRAISAL Right to demand payment of the fair value of his shares, after dissenting from a proposed corporate action involving a fundamental change in the corporation in the cases provided by law. When Right of Appraisal May be Exercised: i. Extend or shorten corporate term; ii. Restriction of rights or privileges of shares through the amendment of the articles of incorporation; iii. Sale of all or substantially all corporate assets; iv. Equity investment in non-primary purpose business enterprise; v. Merger or consolidation NOTE:

(a) All the above instances require the 2/3 votes of the outstanding capital stock; (b) The appraisal right pertains only to stockholders who have actually dissented from the above-enumerated transactions.

c. RIGHT TO INSPECT Under Section 74 of the Corporation Code, the stockholder has a right to examine the books of the corporation. That it be done during business hours on a business day in the place where the corporation keeps all its records; the stockholders has not improperly used any information he secured through any previous examination; demand is made in good faith or for a legitimate purpose. If the director or officer unjustly refuses to allow stockholder to inspect the corporate books, he can be held liable for damages and for criminal offense punished under Sec. 144 of the Corporation Code. A stockholder’s right of inspection is based on his ownership of the assets and property of the corporation. Therefore, it is an

incident of ownership of the corporate property, whether this ownership or interest is termed an equitable ownership, a beneficial ownership, or quasi-ownership. Such right is predicated upon the necessity of self-protection. (Gokongwei Jr. Vs. SEC, 1979). d. PRE-EMPTIVE RIGHT Right to subscribe to all issues or disposition of shares of any class in proportion to his present stockholdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the retained earnings, and also in the net assets in the event of dissolution. Sec. 39 has widened the coverage of pre-emptive right which now includes re-issuance of treasury shares because of the use of the words “disposition of shares,” which would cover the following instances: i. Increase in the Authorized Capital Stock; ii. Opening for subscription the unissued portion of existing capital stock; and iii. Disposition of treasury shares. Pre-emptive right not available in the following instances: i. Shares to be issued to comply with laws requiring stock offering or minimum stock ownership by the public; ii. Shares issued in good faith in exchange for property needed for corporate purposes; iii. Shares issued in payment of previously contracted debts; iv. In case the right is denied in the articles of incorporation. (Sec. 39) e. RIGHT TO VOTE A stockholder is given the right to participate in the corporate affairs by giving him the right to attend meetings after due notice and the right to vote thereat in person or through a proxy or trustee. Non-voting shares are not entitled to vote except as provided for in the last paragraph of Sec. 6 of the Corporation Code. Preferred or redeemable shares may be deprived of the right to vote. Fractional shares of stock cannot be voted. Treasury shares have no voting rights as long as they remain in the treasury. No delinquent stock shall be voted. (Sec. 71) A transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of the corporation. f. RIGHT OF FIRST REFUSAL Except in the case of close corporations where the right of first refusal is required to be a feature to be found in the articles of incorporation, the right of first refusal can only arise in Corporate Law by means of a contractual stipulation, or when it is provided in the articles of incorporation. The nature and purpose of by-laws would not allow rights of first refusal to be found in its provisions. 4. REMEDIAL RIGHTS a. Individual Suit – A suit instituted by a shareholder for his own behalf against the corporation. b. Representative Suit – A suit filed by a shareholder in his behalf and in behalf likewise of other stockholders similarly situated and with a common cause against the corporation (Pascual vs. Del Saz Orozco, 19 Phil. 82).

c. Derivative Suit – A suit filed in behalf of the corporation by its shareholders (not creditors whose remedies are merely subsidiary such as in accion subrogatoria or in accion pauliana) upon a cause of action belonging to the corporation, but not duly pursued by it, against any person or against the directors, officers and/or controlling shareholders of the corporation. If the suit is filed against a third person, the case is not infra-corporated in nature. A derivative suit is a remedy designed by equity and has been the principal defense of the minority stockholders against abuses by the majority. The real party-in-interest in a derivative action is the corporation itself, not the shareholders who have actually instituted it. (Gilda Lim vs. Patricia Lim-Yu, 352 Scra 216) Requisites of a derivative suit i. Cause of action is in favor of the corporation, such as those arising from fraudulent conveyances, breach of trust (but not error of judgment) on the part of the board of directors, ultra vires acts and similar others; ii. There is refusal on the part of the corporation to sue after the corporation is advised to take appropriate remedies but the exhaustion of intra-corporate remedies may be dispensed with if that recourse would be a futile exercise, such as when it is under the complete control of the defendants (Everest vs. Asia Banking Corporation, 49 Phil. 512). iii. There would be injury to the corporation if the action is not taken; and iv. The action is brought by a shareholder or group of shareholders in the name of the corporation.

Failure to give notice would render a meeting VOIDABLE at the instance of an absent stockholder, who was not notified of the meeting. (Board vs. Tan, 1959). b. WHO CALLS THE MEETINGS i. The President, unless the by-laws provide otherwise. (Sec. 54). ii. The person or persons designated in the by-laws have the authority to call stockholder’s or member’s meeting. iii. In the absence of such provision in the by-laws, the meeting may be called by a director or trustee or by an officer entrusted with the management of the corporation unless otherwise provided by law. iv. Whenever for any cause there is no person authorized to call a meeting, SEC upon petition of a stockholder/member, and on the showing of good cause therefore, may issue an order to petitioner to call a meeting by giving proper notice, with the petitioner presiding thereat until at least a majority of stockholders/members present have chosen a presiding officer. (Sec. 50) Pursuant to the powers granted to the SEC under Section 50 of the Corporation Code, and Section 6(f) of Pres. Decree 902-A, the SEC has opined that when there is no person authorized in the by-laws to call a meeting or in the event the person authorized in the by-laws to call a meeting fails or refuses to call for a meeting, any interested stockholder may petition the SEC to authorize him to call a meeting, or compel the officers of the corporation to call a meeting.

5. OBLIGATION OF A STOCKHOLDER i. Liability to the corporation for unpaid subscription (Sec. 6770, CCP); ii. Liability to the corporation for interest on unpaid subscription if so required by the by-laws (Sec. 66); iii. Liability to the creditors of the corporation for unpaid subscription (Sec. 60); iv. Liability for watered stock (Sec. 65); v. Liability for dividends unlawfully paid (Sec. 43); vi. Liability for failure to create corporation (Sec. 10). 6. MEETINGS a. REGULAR OR SPECIAL i. WHEN AND WHERE WHEN: 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. (Sec. 50). WHERE: Stock Corporations: City or municipality where the principal office of the corporation is located, or, if practicable, in the principal office of the corporation; Provided, Metro Manila shall be considered a city or municipality. (Sec. 51). Exception: Such meeting shall be valid even if not held in the proper place when “all the stockholders or members of the corporation are present or duly represented at the meeting.” Failure to comply with the mandatory provisions of Section 51 would render the meeting illegal. ii. NOTICE Regular Meeting – written notice sent to tall stockholders or members at least (2) weeks prior to the meeting, unless a different period is required by the by-laws. Special Meeting – written notice sent at least 1 week prior to the meeting, unless otherwise provided in the by-laws. Subject to waiver, expressly or impliedly.

c. QUORUM Under Section 52 of the Corporation Code, unless otherwise provided for in the Code itself or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in case of non-stock corporations. In those cases in which the law determines the number of shareholders or members whose concurring votes are necessary to make their action binding on the corporation, no less than such number is necessary to constitute a quorum at a meeting called to transact such business. In such cases, the by-laws may provide for a greater quorum. In other cases, the by-laws may provide for the holding of meetings with the presence of any number of stockholders or members, even less than a majority, provided there are at least two. It is customary however, to provide in the by-laws that the presence of the registered holders of a majority of the outstanding shares is necessary to constitute a quorum, but that a smaller number may meet and adjourn to a later date, and that at such adjourned meeting, the shareholders attending shall constitute a quorum. The SEC has opined that where a corporation encounters several unsuccessful attempts or if it would be impossible for the corporation to get the required quorum of the stockholders/members necessary to transact business, it may, pursuant to the provisions of Pres. Decree 902-A, petition the SEC for the appointment of a management committee to undertake the management thereof. Where quorum is present at the start of a lawful meeting, stockholders present cannot without justifiable cause break the quorum by walking out from said meeting so as to defeat the validity of any act proposed and approved by the majority.(Johnston vs. Johnston, 1965 CA decision)

d. MINUTES OF THE MEETINGS Under Section 74 of the Corporation Code, the corporation shall, at its principal office, keep and carefully preserve a record of all minutes of all meetings of stockholders and members, in which it shall be set forth in detail the time and place of holding the meeting; the notice given; whether 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, shareholder or member, the time when any director, trustee, shareholder 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, shareholder or member or any action or proposed action must be recorded in full on his demand. Without the signature of the secretary of the meeting, alleged minutes taken at that meeting has no probative value nor credibility. VI. The Corporation Code I. Capital Structure  Subscription Agreements: The Root to Stockholder Standing  Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. It is considered as such not withstanding the fact that the parties refer to it as purchase or some other contract (Sec. 60, CCP)  Underpins the relationship between the stockholder and the corporation and therefore is a special contract in Corporate Law.  It is subscription to shares of stock that creates the legal relationship between the stockholder and the corporation.  It is subscription and not the payment of such subscription that grants the stockholder the statutory common rights granted to stockholders.  It is the issuance of shares by the corporation to a subscriber pursuant to a subscription agreement that creates ownership over such shares in the person of the subscriber.  It essentially constitutes a contract between the corporation and the subscriber covering unissued shares. Characteristics of Subscription Agreements There can be a “subscription (and also “issuance”) only with reference to shares of stock which have never been issued by the “corporation (i.e. over “unissued shares” of the Authorized capital Stock) in the following cases:  The original issuance from Authorized Capital Stock at the time of the incorporation;  The opening, during the life of the corporation, of the portion of the original Authorized Capital Stock previously unissued; or  The increase of Authorized Capital Stock achieved through a formal amendment of the articles of incorporation and registration thereof with the SEC. How does one become a shareholder in a corporation? A person becomes a shareholder the moment he: 1. Enters into a subscription contract with an existing corporation (he is a stockholder upon acceptance of the corporation of his offer to subscribe whether the consideration is fully paid or not) 2. Purchase treasury shares from the corporation or

3.

Acquires shares from existing shareholders by sale or any other contract.

What are the kinds of subscription contracts? 1. Pre-incorporation subscription 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: a. All of the other subscribers consent to the revocation; or b. 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: No pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the SEC. 2. Post-Incorporation Subscription Entered into after incorporation. Subscription Agreement under Statute of Frauds Subscription agreements are not covered by the Statute of Frauds, and the corporation has a right to enforce and collect, and to adduce oral evidence upon oral subscription agreement, on the following grounds: 1. The special treatment accorded to subscription agreements under Corporate Law requires that subscription agreements, even when they have been entered into orally, should be allowed to be proved and enforced by parol evidence, in order to fully protect corporate creditors under the trust fund doctrine; and 2. Even if subscription agreements are covered by the Statute of Frauds, but by their nature which upon consent would make the subscriber a stockholder and owner of the covered shares, which would constitute partial execution, they are deemed to be exempted from the prohibition against the presenting of oral evidence to prove and enforce them.  Consideration for Stocks Since the capital stock of a corporation constitutes the area or basis upon which the trust fund doctrine operates, the law ensures that the consideration received (which becomes part of the assets of the corporation) would have proper value to support the capital stock. What are valid considerations for subscription agreements? 1. Cash; 2. Property; 3. Labor or services actually rendered to the corporation; 4. Prior corporate obligations; 5. Amounts transferred from unrestricted retained earning to stated capital (in case of declaration of stock dividends); 6. Outstanding shares in exchange for stocks in the event of reclassification or conversion. Note: Promissory notes or future services are not valid considerations. Rationale: It would convert the legal relationship into an ordinary mutuum or account receivable, and covered by the ordinary rules pertaining to contracts in general, which may then be invoked to undermine the trust fund doctrine. Consideration as Cash or Property: It is not necessary for the subscription agreement to be valid that the same must be delivered at perfection, for a

subscription agreement is a consensual (not real) contract, being a species of genus sale. Definition of “actually...paid” and “actually received” under Sec. 62, CCP: It indicates that eventually the consideration must be paid and cannot be given as a discount or amount to watered stock. Consideration Other Than Cash or Consists of Intangible Properties such as Patents or Copyrights: The valuation thereof shall initially be determined by the incorporators or the Board of Directors, subject to final SEC approval.



 Issued Price or Par Value: Stocks shall not be issued for a consideration less than the par or issued price thereof. The issued price of no-par value shares may be fixed:  In the articles of incorporation  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 at a meeting duly called for the purpose representing at least a majority of the outstanding capital stock. 

Shares of Stock  Nature of Stock  Shares of stock in a corporation constitute intangible personal property of the stockholder, which he can contract with as in any other form of property, like assignment by way of disposition, or pledge by way of encumbrance.  Shares of stock, therefore, are properties and have intrinsic pecuniary value to the stockholders.  They do not, however, represent proprietary rights of stockholders to the assets or properties of the corporation. Characteristics of stockholder’s interest in corporate contracts: 1. It is indirect. 2. It is contingent. 3. It is remote. 4. It is conjectural. 5. It is consequential. 6. It is collateral. 7. It is purely inchoate or in sheer expectancy of a right in the following after payment of the corporate debts and obligations:  Management of the corporation  Share in the profits and assets thereof on the dissolution.  Shares of stock, whether issued or unissued, do not constitute part of the “Assets” of the corporation as reported in its financial statements (i.e. the balance sheets).  They do not constitute “debts” or “liabilities” of the corporation; and they are not reported as components of “liabilities” in the corporation’s financial statements (i.e. the balance sheet).  Shares of stock fall within that special category of intangible personal properties under the generic name “equity”.  Rationale: All dealings pertaining to shares of stock (e.g. authorized capital stock, outstanding capital stock, subscription receivables, paid up capital stock and treasury shares) and all claims that arise therefrom (e.g. retained earnings or deficit) are reported in the “Stockholder’s Equity”

section of the corporation’s financial statements (i.e. balance sheet).  Stockholder’s Equity represents the primary claim of the stockholders to the results of the operations of the corporation’s business enterprise, which if run profitably (i.e. there are accumulated retained earnings) tend to increase the Assets of the corporation; and when run unprofitable or at a loss (i.e. there is a deficit) tends to decrease the Assets of the corporation. A share of stock represents a proportionate proprietary claim by the holder thereof (stockholder) to the business enterprise pursued through the medium of a corporation. Watered Stock  Definition  Shares issued as fully paid-up when in fact the consideration agreed to and accepted by the directors of the corporation was something known to be much less than the par value or issued value of the shares.  Stocks issued by a corporation for which it has in fact intentionally or knowingly received or agreed to receive nothing at all from them or less than their par value either in money or in property or in service.  The “water” in the stock refers to the difference between the fair market value at the same time of the issuance of the stock (not at the time of discovery of the inadequate consideration or at the time of demand for payment) and the par or issued value of said stock. Subsequent increase in the value of the property used in paying the stock does not do away with the “water” in the stock. The existence of such “water” is determined at the time of the issuance of the stock.

Liability of Directors for Watered Stocks Any director or officer of a corporation:  consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or  who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same (Sec. 65, Corporation Code). Trust Fund Doctrine for Liability for Watered Stocks  The doctrine serves as basis for holding such stockholders and officers liable for watered stocks.  Under which all corporate creditors would have legal basis to recover against stockholders and guilty officers.  The trust fund doctrine on watered stock prevails.  It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts...A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock and

take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary (Philippine Trust Cop. V. Rivera, 1923).

Reasons: The above-types of corporations deal with the public and most of them manage the savings of the people; thus, the law seeks to protect the investing public by making sure that such corporations have sufficient funds in the form of capital so that the public could determine the financial viability of such corporations.  Three ways of Determining Value of No-Par Value Shares:  By majority vote of the outstanding shares (issued shares) in a meeting called for that purpose;  By Board of Directors pursuant to authority conferred upon it by the articles of incorporation; or  By amendment of articles of incorporation (Sec. 62, Corporation Code).  Redeemable Shares Redeemable shares can only be issued when expressly authorized by the articles of incorporation. The terms and conditions affecting redeemable shares are required to be provided for in the articles of incorporation and to be stated on the certificates of stock.  Founders’ Shares These must be provided for in the articles of incorporation, which would be entitled to vote and be voted directors to the Board of Directors. But such privilege is good only for 5 years, which period shall begin from the date of the approval thereof by SEC.  Treasury Stocks These are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means.  Escrow Shares Shares that have been issued subject to a condition.

 Situs of the Shares of Stock The actual situas of shares of stock is the domicile of the corporati on (Tayag vs. Benguet Consolidated Inc., 26 SCRA 242, 1968) 

Classes of Shares of Stock  Common Shares a. A stockholder, owner of at least one common share has the following rights:  Right to vote at meetings;  Right to dividends;  Right to examine corporate books. b. A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. 





Preferred Shares a. May enjoy a right of preference in: i. Dividends; ii. Voting (Particularly in election of directors); iii. Corporate property upon dissolution. b. Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution. c. Limitations: i. Preferred shares can only be issued with par value; ii. Preference must be:  Stated in the articles of incorporation; or  May be fixed by the Board of Directors when authorized by articles of incorporation, provided, such terms and conditions shall be effective upon filing of a SEC certificate. Par Value Shares Their value is fixed in the articles of incorporation, which nominal value remains the same regardless of the profitability of the corporation. This gives rise to financial stability and is the reason why banks, trust corporations, insurance companies and building and loan associations must always be organized with par value shares. No Par Value Shares They have no assigned value, their value being dependent on the changes in the profits of the corporation and the market value of the shares themselves at the time the shares are issued. Minimum consideration: 55.00. The following cannot issue no par value shares: i. Banks; ii. Insurance companies; iii. Trust companies; iv. Building & Loan Associations; and v. Public Utilities

General Rule on Classification of Shares: The shares of stock in a corporation may be divided into classes or series of shares, or both, any of which classes or series of shares, may have such rights, privileges or restrictions thus must be stated in the articles of incorporation in order to be valid (Sec. 6, Corporation Code). Exceptions:  No share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares.  There shall always be a class or series of shares which have complete voting rights.  Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation, except that banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no par value shares of stock. Note: There can be no privilege or restriction on any share other than what is provided for in the articles of incorporation (Sec. 6, Corporation Code). 

Payment of Balance of Subscription Subject to the provisions of the contract of 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.



Sections 67 to 70 give the two ways by which a corporation can collect from the stockholders the balance of their subscriptions: extrajudicially or judicially.

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 bylaws, computed from such date until full payment. If within thirty (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 (Sec. 67, Corporation Code).

Procedure of Delinquency Sale (EXTRAJUDICIAL REMEDY): a. The Board of Directors must make a call by resolution demanding the payment of the balance of the subscription. This is called the NOTICE OF CALL. b. The NOTICE OF CALL shall be served on each stockholder either personally or by registered mail (There is no need for publication). c. If the stockholders do not pay the amount due on the date designated in the notice, the Board shall issue, by resolution, a NOTICE OF DELINQUENCY. d. NOTICE OF DELINQUENCY shall be served on the non-paying subscriber either personally or by registered mail PLUS i. Publication in a newspaper of general circulation in the province or city where the principal office of the corporation is located. ii. PERIOD FOR PUBLICATION: Once a week for two consecutive weeks. iii. CONTENTS OF THE NOTICE OF DELINQUENCY/NOTICE OF SALE:  The amount due on each subscription plus accrued interest.  The date, time and place of the sale. iv. Such notices are jurisdictional.

May be through any of the following means:  As specified in the subscription contract.  The Board, through a resolution, may call for all or part of the unpaid subscriptions.  Failure to pay on a specified date, the entire balance which is due and payable.  Failure to pay within 30 days from the date the subscription becomes delinquent and is subject to sale. 



Call by Board of Directors  3 meanings of the nature of the call: a. It may mean the resolution of the Board of Directors for the payment of unpaid subscriptions; b. Notification of such resolution made on the stockholders; or c. The time when subscriptions become payable.  It is usually expressed in the form of a resolution adopted by the Board of Directors, specifying the: i. Proportion of the unpaid subscription which it is desired to call in and the ii. Time or times when it is to be payables. b. The entire amount of the unpaid subscription maybe called at once or it may be made payable by instalments, at stated intervals, or by successive calls.  When call not necessary: a. A specific date of payment is specified in the subscription contract; b. Failure to pay the unpaid subscription within the prescribed 30-day period from the date specified in the subscription contract. c. If the corporation becomes insolvent, which makes the liability on the unpaid subscription due and demandable regardless of any stipulation to the contrary in the subscription agreement. Notice Requirement The Notice of Call shall be served on each stockholder either personally or by registered mail. The Notice of Call for unpaid subscribed stock must be published, except when the corporation is insolvent, in which case, payment is immediately demandable (Lingayen Gulf Electric Power Co. v. Baltazar, 93 Phil. 404 (1953)

Sale of Delinquent Shares

e.

f.

g.



In the public auction, the highest bidder is the one who is willing to pay the amount of the balance of the subscription for the least number of shares. After the bidding, the corporation will give the highest bidder the certificate of stock in the number of his bid while the remaining number, if any, will be issued a certificate of stock in favour of the original subscriber as fully paid. On the other hand, if there are no bidders, then the corporation must bid for the whole number of shares (regardless of how much the stockholder has paid), which shall then pertain to the corporation as fully-paid treasury stocks.

Effect of Delinquency On the holder: a. It disqualifies the stockholder to be voted for or be entitled to vote or to representation at any stockholder’s meeting. b. It disqualifies the stockholder to exercise any rights of a stockholder except the right to dividends, until and unless he pays the amount due on his subscription with accrued interest and the costs and expenses of advertisement, if any. i. The CASH DIVIDEND DUE shall first be applied to the unpaid balance. ii. The STOCK DIVIDEND shall be withheld until the unpaid balance is fully paid. c. The stockholder shall not be entitled to notice of the regular or special meetings of the stockholder.

d.





The stockholder’s delinquent shares be included in the determination of a quorum for shareholdings’ meetings. Auction Sale and the Highest Bidder PERIOD OF THE SALE: It shall not be less than 30 days nor more than 60 days from the date the stocks become delinquent. WHO IS THE HIGHEST BIDDER? a. Who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. b. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favour.

Certificate of Stock  Nature of the Certificate It is an instrument that is issued formally by the corporation, with the intention that the same constitute the best evidence of the issuance of shares of stock that are fully paid and no longer assessable.

iv.

By appropriate book-entries in the securities accounts maintained by securities intermediaries; v. In the stock and transfer book held by the corporation or the stock transfer agent and such bookkeeping entries shall be binding on the parties to the transfer. b. A transfer made pursuant to the foregoing has the effect of the delivery of a security in bearer form or duly indorsed in blank representing the quality or amount of security or right transferred , including the unrestricted negotiability of that security by reason of such delivery. c. However, transfer of uncertificated shares shall only be valid, so far as the corporation is concerned, when a transfer is recorded in the books of the corporation so as to show the names of the parties to the transfer and the number of shares transferred. 

Negotiability Since certificates of stock are quasi-negotiable in nature, the normal mode of dealing with such certificates is by the process of endorsement and delivery.

It is the evidence of a holder’s interest and status in a corporation.

It must be noted that “endorsement and delivery” of certificates of stock may be for any of the three purposes: a. For sale or assignment of the shares; b. Pursuant to a trust or nominee arrangement; or c. By way of pledge or encumbrance of the shares.

It is a written instrument signed by the proper officer of a corporation stating or acknowledging that the person named in the document is the owner of a designated number of shares of its stock. It is prima facie evidence that the holder is a shareholder of a corporation. 

Uncertificated Shares Rule on Uncertificated Shares Notwithstanding Section 63 of the Corporation Code, under Section 43.1 of the Securities Regulation Code, a corporation whose shares of stock are registered pursuant to the Code or listed on a stock exchange may: i. If so resolved by its Board of Directors and agreed by a shareholder, issue shares to, or record the transfer of some or all of its shares into the name of said shareholders, investors or, securities intermediary in the form of uncertificated securities; ii. The use of uncertificated securities shall be without prejudice to the rights of the securities intermediary subsequently to require the corporation to issue a certificate in respect of any shares recorded in its name; and iii. If so provided in its articles of incorporation and by-laws, issue all of the shares of a particular class in the form of uncertificated securities and subject to a condition that investors may not require the corporation to issue a certificate in respect of any shares recorded in their name. Binding Effect on Shares Transactions Under Section 43.3 of the Securities Regulation Code, transfers of securities, including uncertificated securities may be validly made and consummated in any of the following manner:

Endorsement is an essential ingredient in dealing with certificates of stock, and generally cannot be dispensed with. The delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new transferee. Registration of the transfer of the share in the stock and transfer books is necessary to complete the process of negotiation of the certificate of stocks. 



Requirements for Valid Transfer of Stocks a. The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; b. There must be delivery of the stock certificate; and c. To be valid against third parties, the transfer must be recorded in the books of the corporation.

Issuance 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 (Sec. 64, Corporation Code).  



Full payment A subscriber must first totally pay his subscription before a certificate of stock covering shares subscribed and paid for could be issued to him. Every stockholder has a right to have a proper certificate issued to him by the corporation upon demand, as soon as he has complied with the













conditions under Sec. 64 of the Corporation Code, which requires full payment of the subscription. The provisions under Section 64 of the Corporation Code actually operates as a legal basis on the part of the corporation, through its Board of Directors and officers, to refuse any claim by a subscriber to issue certificate of stock covering the extent of shares that have been paid-up while leaving the remaining balance unpaid. The SEC has opined that a stockholder shall only be entitled to the issuance of his certificate of stock upon payment of the full amount of his subscription, together with interest and expenses (in case of delinquent shares), if any is due: “Section 64 of the Corporation Code clearly provides that a subscription is one, entire and indivisible whole contract.

thereof shall be suspended until the final decision by the court. NOTE: Except in cases 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 certificates of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described. 

 Payment Pro-Rata The corporation is not prohibited from “dividing” the subscription of a subscriber by considering portion thereof as fully paid and issuing a corresponding certificate over the paid-up shares. This option is ONLY granted to the corporation. In the absence of provisions in the by-laws to the contrary, a corporation may apply payments made by subscribers on account of their subscriptions either as: a. Full payment for the corresponding number of shares the par value of which is covered by such payment; or b. Payment pro rata to each and all the entire number of shares subscribed for. The two alternatives cannot be availed of by the corporation at the same time.  Once an alternative is chosen, it must be applied uniformly to all stockholders similarly situated, and therefore, it cannot be changed without the consent of all stockholders who might be affected.

Lost or Destroyed Certificates a. The following procedure shall be followed for the issuance by a corporation of new certificates of stock in lieu of hose which have been lost, stolen or destroyed: a. The registered owner of certificates of stock or his legal representative shall file with the corporation an affidavit setting forth, if possible: i. The circumstances as to how the certificates were lost, stolen or destroyed; ii. The number of shares represented by each certificate, the serial numbers of the certificates; iii. The name of the corporation which issued the same; iv. He shall submit such other information and evidence which he may deem necessary. b. The 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. c. However, instead of waiting for one (1) year, the registered owner may file a bond or other security, running for a period of one (1) year for a sum 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 one (1) year period provided; d. Provided, That if there is a pending contest regarding the ownership of said certificates of stock the issuance of the new certificates of stock in lieu

Stock and Transfer Book Under Section 74 of the Corporation Code, a stock corporation must keep a book to be known as the “stock and transfer book”.  Contents a. All stocks in the names of the stockholders alphabetically arranged; b. The instalment paid and unpaid on all stock for which subscription has been made, and the date of payment of any instalment; c. A statement of every alienation, sale or transfer of stock made; and d. Such other entries as the by-laws may prescribe.  Who May Make Valid Entries Entries made on the stock and transfer book by any person other than the CORPORATE SECRETARY, such as those made by the President and Chairman, cannot be given any valid effect. It is the CORPORATE SECRETARY’s duty and obligation to register valid transfers of stock and if said corporate officer refuses to comply, the transferor-stockholder may rightfully bring suit to compel performance. A stockholder who transfer shares of stock has no authority to effect their entries in the stock and transfer book of the corporation, even when the Corporate Secretary happens to be at odds with such stockholder, and even when such stockholder happens to be in possession of the book. The entries would be considered VOID.



Disposition and Encumbrance of Shares  Allowable Restrictions on the Sale of Shares The authority granted to a corporation to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoptions of regulations as to the formalities and procedure to be followed in effecting transfer. SEC has allowed reasonable restrictions on the transfer of shares in the articles of incorporation if the restrictions comply with the provisions of Section 63 of the Corporation Code, namely, that: i. The restriction must appear in the articles of incorporation, by-laws and the certificate of stock, and ii. That 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. 

Sale of Partially Paid Shares No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. A corporation may refuse to acknowledge and register a sale or assignment of shares which are not fully

paid, and may continue to hold the original subscriber liable on the payment of the subscription.

a.

The term “unpaid claims” refers to “any unpaid claims arising from unpaid subscription and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transactions. The lien created under Section 63 of the Corporation Code can only cover unpaid subscriptions to the corporation, and is without application to other obligations that a stockholder may have against the corporation. 

Sale of a Portion of Shares Not Fully Paid A stockholder cannot transfer part of his subscription in view of the indivisible nature of a subscription contract. Rationale: It would be difficult to determine whether or not the partial payments made should be applied as full payment for the corresponding number of shares which can only be covered by such payment as proportional payment to each and all of the entire number of subscribed shares. ii. The difficulty in determining the unpaid balance to be assumed by each transferee. i.



Sale of All Shares Not Fully Paid The entire subscription although not yet fully paid, may be transferred to a single transferee, who although not yet fully paid, may be transferred to a single transferee, who as a result of the transfer must assume the unpaid balance. It is necessary, however, to secure the consent of the corporation since the transfer of subscription rights and obligations contemplates a novation of contract which under Article 1293 of the Civil Code cannot be made without the consent of the creditor. The contract of sale or assignment between the original subscriber and his transferee, although binding between them, cannot be forced upon the corporation, when it covers not fully paid shares. This principle is in consonance with the principle in Contract Law that the substitution of the party obligor can be made only with the express consent of the oblige, the corporation being considered the oblige in a subscription contract.



Sale of Fully Paid Shares The proper mode to deal with fully paid shares covered by certificates of stock would be endorsement of the certificates and their due delivery to the assignee. No transfer shall be valid except as between the parties until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. The failure to register a sale or transfer in the stock and transfer book of the corporation would render the sale invalid and not binding to all persons, including attaching creditors of the seller. The rationale for holding registration of a sale or disposition of shares of stock valid only when registered in the stock and transfer book of the corporation, thus:

b.

c. 

To enable the corporation to know at all times who the actual stockholders are, because mutual rights and obligations exist between the corporation and its stockholders; To afford to the corporation an opportunity to object or refuse its consent to the transfer in case it has any claim against the stock sought to be transferred, or for any other valid reason; and To avoid fictitious or fraudulent transfer.

Involuntary Dealings with Shares a. A mortgage or pledge of shares of stock that would involve the outright assignment or delivery and indorsement of the certificates of stock to the pledge or mortgagee would constitute a valid mortgage even without registration with the register of deeds, but it would always be subject to prior attachment or levy of the shares duly effected pursuant to the Rules of Court by the judgment creditors of the registered stockholder; b. Outside of physical transfer or delivery of the certificates of stock, a chattel mortgage over the shares of stock, whether or not covered certificates of stock, would be valid and binding on third parties only if the mortgage was registered with the register of deeds or registers of deeds as the case may be, of the province or city where the mortgagor has his domicile and where the corporation has its principal place of business; c. A writ of attachment/execution against the shares of stock of the judgment debtor would be valid and binding on the shares and against third parties, the moment there is proper service of the writ to the proper officer of the corporation pursuant to Section 7(d), Rule 57 of the Rules of Court. d. In any of the three cases above, the pledge, mortgage, attachment or levy of the shares of stock would thereupon be valid and binding on the entire world upon their constitution or completion of process; no registration of the pledge, mortgage, attachment or levy in the stock and transfer book of the corporation is required to make any of them either valid or binding; and their registration in the stock and transfer book would have no legal effect at all and such registration does not produce the effect of notice to third parties; e. As between two contending creditor, it would seem that the first to have the writ served upon the proper officer of the corporation would be preferred; f. As between contending pledge/mortgagee and an attaching creditor, if the registration requirement for the pledge or mortgage happened first in point of time prior to service of the writ to the proper corporate officer, the pledge or mortgage shall be preferred; whereas, if the service of the writ to the proper court officer happened ahead of the registration of the pledge or mortgage, then the attaching creditor would be preferred; g. As between a pledge/mortgage duly constituted (even when not registered in the stock and transfer book) and the buyer or assignee of the shares, if the pledge or mortgage was constituted and registered ahead of the registration of the sale or assignment in the stock and transfer book (even when the sale or assignment was perfected and consummated ahead of the pledge or mortgage) the pledge or mortgage would still be preferred because the registration of the sale or assignment in the stock and transfer book is a

h.

necessary ingredient to make the sale or assignment binding on third parties, including the pledge/mortgagee; As between an attaching/levying creditor where there has been proper service of the writ to the proper corporate officer (even when not registered in the stock and transfer book) and the buyer or assignee of the shares, if writ was properly served upon the corporate officer ahead of the registration of the sale or assignment in the stock and transfer book (even when the sale or assignment was perfected and consummated ahead of the service of the writ) the attachment/levy would still be preferred because the registration of the sale/assignment in the stock and transfer book is a necessary ingredient to make the sale or assignment binding on third parties, including on attaching/levying creditor.

c. Order shall be published once a week for three consecutive weeks in a newspaper published in the municipality or city where the principal office of the corporation is situated; if none, in a newspaper of general circulation in the Philippines, and a copy is to be posted for 3 consecutive weeks in 3 public places in such municipality or city; d. After 5 days’ notice from expiry date, SEC shall hear the petition and the objections thereto; e. If lawful, it shall order the corporation dissolved, provide for the disposition of properties, and may appoint receiver.

i. ii.

iii.

Dissolution and Liquidation  Modes of Dissolution “Dissolution” signifies the extinguishment of a corporation’s franchise and the termination of its corporate existence for business purpose. A de jure dissolution is one adjudged and determined by administrative or judicial sentence, or brought about by an act of the sovereign power, or which results from the expiration of the charter period of corporate life.

a.

A de facto dissolution is one which takes place in substance and in fact when the corporation by reason of insolvency, cessation of business, or suspension of all its operations, as the case may be, goes into liquidation, still retaining its primary franchise to be a corporation. This is actually a dissolution only of the “business enterprise”, while leaving intact the juridical entity. Voluntary i. Where No Creditors Are Affected By an administrative application for dissolution filed with the SEC a. Majority vote of the Board by resolution; b. Affirmative vote of 2/3 of the outstanding capital stock or 2/3 of the members, as the case may be: i. Provided: Notice of such meeting was published in the principal office; if none, then in a newspaper of general circulation in the Philippines, with notice sent to each stockholder or member at least 30 days prior to the meeting; c. Copy of the resolution certified by majority of directors or trustees and countersigned by secretary and filed with SEC; d. SEC must issue certificate of dissolution. ii.

Where Creditors Are Affected By a formal petition for dissolution filed with the SEC, with due notice, and hearing to be duly conducted a. Formal petition with SEC  Signed by majority of the directors/trustees or officers having management of its affairs, verified by president or secretary or one director/trustee;  Set forth all claims and demands against it;  Set forth that dissolution was resolved upon affirmative vote of 2/3 of the outstanding capital stock or 2/3 of the members, as the case may be; b. SEC shall issue an order reciting purpose of petition and shall fix date before which objections may be filed, which shall not be less than 30 days nor more than 60 days after the entry of order;

iv.

iii. By Shortening of Corporate Term By the amendment of the articles of incorporation. By vote of 2/3 of the outstanding shares or 2/3 of the members, the articles may be amended to shorten the corporate life. SEC internal rules require the following:  Notice of the dissolution to be published in a newspaper of general circulation for 3 consecutive weeks;  List of corporate creditors, with their consent to the shortening of corporate term;  Submission by a majority stockholders/principal officers an Undertaking to personally answer for any outstanding corporate obligations of the corporation; and  Latest audited financial statements which must not be earlier than the date of the stockholders’ meeting approving amendment to the articles of incorporation, and a BIR clearance on the tax liabilities of the corporation. Under Section 120 of the Corporation Code, it is only upon approval of the amended articles of incorporation by the SEC that the corporation shall be deemed dissolved. This means that if the shortened term, as proposed in the amendment of the articles of incorporation, expires before the approval by the SEC, the corporation will not be automatically dissolved upon such expiration but only upon SEC approval of the amendment. On the other hand, if the SEC give its approval before such shortened term expires, the dissolution can take effect only upon the expiration of such shortened term (SEC Opinion No. 06-20, 13 March 2006). b. Involuntary A corporation may be dissolved by SEC upon filing of a verified complaint, after proper notice and hearing on grounds provided by existing laws, rules and regulations. i. By expiration of Corporate Term When the corporate life of the corporation as stated in its articles of incorporationis allowed to expire, without extension, the corporation is deemed dissolved by such expiration without need of further action on the part of the corporation or the State. ii. Failure to Organize and Commence Business Within 2 Years from Incorporation If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation (Section 22, Corporation Code).

The term “to organize” when used in reference to a corporation, involves the: i. Election of officers, ii. Providing for the subscription and payment of the capital stock, iii. The adoption of by-laws. And iv. Such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which it was created.

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 (Sec. 122, Corporation Code) 

Conveyance to a Trustee within a 3-Year Period 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 (Sec. 122, Corporation Code)



By Management Committee or Rehabilitation Receiver 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 (Sec. 119, Corporation Code)

It referred to the term “organization” as relating to the systematization and orderly arrangement of the internal and managerial affairs and organs of the corporation. The same SEC rules consider a corporation to have “commenced the transaction of its business” when it has performed preparatory acts geared towards the fulfilment of the purposes for which it was established such as but not limited to the following: a. Entering into contracts or negotiations for lease or sale of properties to be used as business or factory site; b. Making plans for and construction of the factory; c. Taking steps to expedite the construction of the company’s working equipment. iii. iv. a. b. c. d. e. f. g.

Legislative Dissolution (see FRIA’s discussion on Corporation’s Dissolution) Dissolution by the SEC on Grounds Under Existing Laws Failure to organize and commence business within 2 years from incorporation; Continuously inoperative for 5 years; Failure to file by-laws within 30 days from issue of certificate of incorporation; Continuance of business not feasible as found by Management Committee or Rehabilitation Receiver; Fraud in procuring Certificate of Registration; Serious Misrepresentation; and Failure to file required reports.

 Methods of Liquidation The process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance, if any, is to be distributed to the stockholders or members. NOTE: A dissolved corporation continues to be a body corporate for 3 years from the time it is dissolved for the purpose of liquidation or winding up its corporate affairs. The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity nor those of its owners and creditors alike (see Sec. 145 of the Corporation Code). 

By the Corporation Itself Through its board of directors/trustees 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

Grounds for Appointment of Management Receiver a. Imminent danger of loss, wastage, dissipation or destruction of assets; or b. Paralysation of business operations of the corporation that may be prejudicial to the interest of minority stockholders, party-litigants or general public. K. OTHER CORPORATIONS 1. CLOSE CORPORATIONS A close corporation, within the meaning of this Code is one whose Articles of Incorporation provide: (REQUIREMENTS) a. Number of stockholders not to exceed 20 b. Restriction on the transfer of issued stocks (Restriction: right of first refusal in favor of the stockholder or the corporation); and c. The stocks cannot be listed in the stock exchange nor should they be publicly offered Special Rule on Stock Ownership: not deemed a close corporation whenever 2/3 of the voting stocks or voting rights is owned or controlled by another corporation which is not a close corporation a. CHARACTERISTICS: 1.The stockholders themselves can directly manage the corporation and perform the functions of directors without need of election: a. When they manage, stockholders are liable as directors; b. There is no need to call a meeting to elect directors; c. The stockholders are liable for tort. 2. Despite the presence of the requisites, the corporation shall not be deemed a close corporation if at least 2/3 of the voting stocks or voting rights belong to a corporation which is not a close corporation. BUSINESS PROHIBITED FROM BEING A CLOSE CORPORATION (a) Mining companies (b) Oil companies (c) Stock exchange (d) Banks (e) Insurance companies (f) Public utilities

(g) Educational institutions (h) Other corporations declared to be vested with public interest b. VALIDITY OF RESTRICTIONS ON TRANSFER OF SHARES 1. The restrictions in the transfer of the stocks must appear: (a) In the AOI (b) In the By-Laws and (c) On the stock certificates. OTHERWISE: they shall not be binding on any purchaser thereof in good faith. 2.

Restriction 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 terms, conditions or period stated therein.

c. ISSUANCE OR TRANSFER OF STOCK IN BREACH OF QUALIFYING CONDITIONS 1. If stock is issued or transferred to any person not entitled and the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders – conclusive presumption of notice of fact of ineligibility 2. If AOI states the number of persons, not in excess of 20 entitled to be holders of stock and if the certificate conspicuously states such number, and if issuance or transfer would cause stock to be held by more – person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact 3. If stock certificate conspicuously shows a restriction on transfer of stock- conclusive presumption of notice of the fact by transferee The corporation may, at its option, refuse to register the transfer of stock in the name of the transferee. EXCEPT: (a) consented to by all stockholders, or (b) if close corporation has amended AOI in accordance with this Title. This does not in any way impair any right of a transferee regarding any right to rescind the transaction or to recover under any applicable warranty, express or implied. d. WHEN BOARD MEETING IS UNNECESSARY OR IMPROPERLY HELD Unless By-Laws provide otherwise, VALID if: 1. before or after such action is taken, written consent thereto is signed by all the directors; or 2. all stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. the directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or 4. all the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing 5. ratified by a director who failed to attend, unless promptly files his written objection, if director’s meeting is held without proper cal or notice

specified provided in the AOI for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for such purpose. g. DEADLOCKS  if the stockholders split into camps, and there is a deadlock with the result that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders in general – any stockholder can petition the SEC, which is empowered to take the necessary steps to break the deadlock, even by amending the AOI or By-laws and to the extent of rd appointing a 3 party as a provisional director.  PROVISIONAL DIRECTOR i. An impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation and whose further qualifications, if any may be determined by the Commission. ii.

Not a receiver of the corporation and does not have the title and powers of a custodian or receiver

iii.

Have all the rights and powers of a duly elected director of the corporation (right to notice, to vote) until such time as he shall be removed by order of the Commission or by all stockholders.

iv.

Compensation determined by agreement between him and corporation subject to approval of SEC (SEC may fix in absence of agreement or in the event of disagreement) So long as the close corporation has unrestricted profits, it can be compelled to buy out the stockholder A stockholder may also petition the SEC to compel dissolution whenever affairs are carried out for illegal, fraudulent or dishonest, or unfairly prejudicial, or corporate assets are misapplied

 

2. NON-STOCK CORPORATIONS a. Definition -one organized for an eleemosynary purpose and where no part of its income is distributable to its members, trustees, officers, subject to the provisions 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/s for which it was organized. POWER TO MAKE PROFITS AND ENGAGE IN BUSINESS 1.Incidental Profits obtained from operations 2.Profits obtained from investment of accumulated funds – it may subscribe to the capital stock of a corporation or invest in commercial papers such as money instruments, but such power must be included in its AOI in order that the investment may not be considered ultra vires (must be necessary and incidental) 3.Powers necessary in furtherance of purposes The mere realization of profits out of the operations of a non-stock corporation does not automatically result in the loss of its exemption from income taxation as long as no part of its profit inures to the benefit of any stockholder or individual. It is not earning of incidental profits that make the entity non-stock, but the actual or legal authority to distribute such profits to the officers or members. (Collector vs. University of the Visayas, 1 SCRA 669)

e. PRE-EMPTIVE RIGHT IN CLOSE CORPORATIONS – extends to all stock to be issued, including reissuance of treasury shares, whether for money or for property or personal services, or in payment of corporate debts, unless AOI provides otherwise. f. AMENDMENT OF AOI – Any amendment to the AOI which seeks: (a) to delete or remove any provisions required by the Corporation Code to be contained in the AOI; (b) to reduce a quorum or voting requirement stated in said AOI; shall not be valid or effective unless approved by at least 2/3 of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be

b. PURPOSES 1.

Charitable

2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Religious Educational Professional Cultural Recreational Fraternal Literary Scientific Social Civic Service Or similar purposes, like trade, industry, agriculture and like chambers 13. Any combination thereof RULES FOR DISTRIBUTION OF ASSETS UPON DISSOLUTION

subject a foreign corporation doing business in the country to the jurisdiction of our courts, it must acquire a license from SEC and appoint an agent for service of process. Without such license, it cannot institute a suit in the Philippines. (European Resources vs. Ingenieuburo Birkhanh, 435 SCRA 246) 

A foreign corporation has the right to transact business in the Philippines after it has obtained a license to do business.

d.SUABILITY OF FOREIGN CORPORATIONS SUMMARY OUTLINE Doing Business in the Philippines, With a License

May sue and can be sued in the Philippines

Its assets shall be applied and distributed as follows: 1.All liabilities and obligations of the corporation 2.Assets held by corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution 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 1 or more corporations, societies or organizations engaged in activities in the Philippines substantially similar 4.Assets other than those mentioned in the preceding paragraphs, if any shall be distributed in accordance with the AOI or the Bylaws 5.Assets may be distributed to such persons, societies, organizations, or corporations, whether organized for profit as may be specified in the plan of distribution 3. RELIGIOUS CORPORATIONS – EXCLUDED 4. FOREIGN CORPORATIONS -a corporation that is organized other than under the laws of the Philippines, provided said foreign country allows Filipinos and Philippine corporations to do business there General Rule: FC can have no legal corporation or status beyond the bounds of the State or sovereignty by which it is created or incorporated a. Except: (BASES OF AUTHORITY) 1) CONSENT DOCTRINE – the FC may act in another State or country with the latter’s express or implied consent, however, subject to conditions and restrictions it may impose 2) DOING BUSINESS WITH REGARD TO FC - continuity of commercial dealings incident to prosecution of purpose and object of the organization. Isolated, occasional or casual transactions do not amount to engaging in business. But where the isolated act is not incidental/casual but indicates the FC’s intention to do other business, said single act constitutes engaging in business in the Philippines. A corporation has legal status only within the state or territory in which it was organized. For this reason, a corporation organized in another country has no personality to file suits in the Philippines. In order to

Doing Business in the Philippines, Without a License

Cannot sue, but may be sued in the Philippines

Not doing Business in the Philippines, on Isolated Transactions

May sue and May be sued

Doctrine of “Doing Business” (Sec.3(d) of Foreign Investments Act of 1991) (a) (b) (c) (d)

Soliciting orders Service Contracts Opening offices, whether called “liaison” offices or branches Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period/s totaling 180 days or more (e) Participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines (f) Any other act/s that imply continuity of commercial dealings or arrangements, and contemplate to that extent, performance normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization PROVIDED: the phrase “doing business” shall not be deemed to include: (a) Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business and/or exercise of rights as such investor (b) Having a nominee director or officer to represent its interests in such corporation and (c) Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account. TRUE TEST: whether the FC is continuing a body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another The term implies a 1) (existence of continuing intent) continuity of commercial dealings and arrangements, and 2) (nature of the act or transaction) contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organization. (Mentholatum Co., Inc. vs. Mangaliman, 72 Phil. 524)

CONTRACT TEST: So long as the perfection and consummation of a series of transactions are done outside Philippine territory, the same would not constitute doing business in the Philippines, even if the products themselves should be manufactured or processed in the Philippines by locals. The implication of this doctrine is that if the salient points of a contract are not performed within Philippine territory, Philippine authorities would have no business subjecting the parties to local registration and licensing requirements. (Pacific Vegetable Oil Corp. vs. Singzon, 267 SCRA 567) b. NECESSITY OF LICENSE TO DO BUSINESS i. ii. iii.

To place them under the jurisdiction of the courts To place them in the same footing as a domestic corporation Protection for the public in dealing with said corporations 1.Issuance of License - FC shall have a right to transact business in the Philippines; and to subject the FC doing business in the Philippines to the jurisdiction of the courts OTHERWISE: a FC illegally doing business may refuse or neglect to obtain the required license and may successfully, though unfairly, plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts SEC will issue a license to the FC to do business in the Philippines provided the ff. conditions are met: a)

b) c) d) e) f) g) h)

Appointment of a Resident Agent i. Either a Filipino or domestic corporation and ii. Power of attorney for SEC to receive process Must prove that FC’s country grants reciprocal rights to Filipinos and Philippine corporation Establish an office in the Philippines Bring in its assets In the event of insolvency – undertaking that Filipino creditors will be preferred Notice of 6 months should there be a desire to terminate operations Franchise and patents must remain belonging to the Philippines, if this is possible Must file a bond of P100,000 which may be in the ff. form: i. Surety bond ii. Government Securities iii. Securities of political subdivisions iv. Shares of stock of registered with SEC v. Shares of stock of any corporation being sold at the stock exchange That within 6 months after each fiscal year, SEC shall require the deposit of additional securities equivalent to 2% of the amount in excess of P5,000,000 of the gross income

2.RESIDENT AGENT- may be a) an individual residing in the Philippines, of good moral character and of sound financial standing, or b) a domestic corporation lawfully transacting business in the Philippines. ISOLATED TRANSACTIONS  single or isolated acts, contracts, or transactions of FC are not regarded as a doing or carrying on of business  a series of transactions which are occasional, incidental and casual – not of a character to indicate a purpose to engage in business  the fact that a FC is not doing business in the Philippines must be disclosed if it desires to sue in Philippine courts under the

“isolated transactions rule”, otherwise the court may choose to deny its right to sue e. INSTANCES WHEN FC ALLOWED TO SUE (a) (b) (c) (d)

To protect Its corporate reputation, name and goodwill To enforce its right not arising out of a business transaction To seek redress for an isolated business transaction The subject contracts provide that Phil. Courts will be venue to controversies (e) A license subsequently granted enables the FC to sue on contracts executed before the grant of the license (f) Recovery of misdelivered property (g) Where unlicensed FC has a domestic corporation  

Estoppel – after contracting or accepting benefits with a FC, a domestic firm or individual can no longer deny the former’s capacity to sue Wrongful assumption of Jurisdiction by a court

Single or isolated acts, contracts, or transactions of foreign corporations are not regarded as a doing or carrying on of business. Typical examples of these are the making of a single contract, sale, sale with the taking of a note and mortgage in the state to secure payment thereof, purchase, or note, or the mere commission of a tort. In these instances, there is no purpose to do any other business within the country. (MR. Holdings, Ltd. vs. Bajar, GR No. 138104, April 11, 2002) f. GROUNDS FOR REVOCATION OF LICENSE (a) Failure to file annual reports required by Code (b) Failure to appoint or maintain a resident agent (c) Failure to inform SEC of the change of resident agent or the latter’s change of address (d) Failure to submit a copy of amended AOI or by-laws; or articles of merger or consolidation (e) A misrepresentation in material matters in reports (f) Failure to pay taxes, impost, assessments (g) Engaged in business not authorized by SEC (h) Acting as a dummy of a FC not licensed to do business in the Philippines (i) Any other ground as would render it unfit to transact business in the Philippines L. MERGERS AND CONSOLIDATIONS MERGER is when a corporation absorbs the other and remains in le the others are dissolved. CONSOLIDATION is the union of two or more existing corporations. A ration is created, and consolidating corporations are extinguished. MERE ACQUISITION/TRANSFER (3 LEVELS) 1.ASSET ONLY LEVEL. Purchase of raw assets of the enterprise. Transferee is NOT liable for the debts and liabilities of the transferor corporation as there is no privity of contract between transferee and creditors except when there is fraud, assumption of liability, or take over of the assets of a dissolved corporation. 2.BUSINESS ENTERPRISE LEVEL. Purchase of substantially all the assets of the corporation extending to its “going concern”: ability to do business and make money, goodwill, clientele, stock-in-trade, etc. the transferee is liable for the debts and

liabilities of the transferor. A “free and harmless clause” holding the transferee free from the liabilities of the transferor is binding only between them and cannot prejudice creditors who are not parties thereto. 3.EQUITY LEVEL. Purchaser takes control of the business by purchasing the shareholdings. Purchasing corporation is still protected by the limited liability feature but the same can be pierced. PROCEDURE OF MERGER OR CONSOLIDATION 1.

The Boards of each corporation shall draw-up a plan of merger or consolidation setting forth: i. Names of corporations involved ii. Terms and mode of carrying it out iii. Statement of changes, if any in the present articles of surviving corporation; or the articles of the new corporation to be formed in case of consolidation iv. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable

2.

Approval of plan – Majority Vote of stockholders of each corporation

3. 4.

Right of Appraisal of Dissenting Stockholders Amendment of Plan of Merger or Consolidation – majority vote of Board and ratified by 2/3 of stockholders Articles of Merger or Consolidation (by each constituent) – signed by the president or vice-president and certified by the secretary or assistant secretary setting forth:

5.

i. ii.

Plan of merger or consolidation As to stock corporations, the number of shares outstanding, or in case of non-stock, the number of members; and As to each corporation, the number of shares or members voting for or against such plan, respectively.

iii.

6.

7.

Requirements on Submission of Financial Statements – serve as basis of fixing the shares to be issued in favor of the merged corporation vis-à-vis the net assets to be absorbed by the surviving corporation as of a specific date Approval by SEC – signed and certified, submitted in quadruplicate

EFFECTS OR MERGER OR CONSOLIDATION 1. The constituent corporations shall become a single corporation. 2. The separate existence of the constituents shall cease except that of the surviving corporation (in merger) or the consolidated corporation (in consolidation) 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities, franchise of each of the constituent corporations 4. All property, real or personal, and all receivables due on whatever choses in action, and all the every other interest thereof, or belonging to, or due to each constituent corporation, shall be taken and deemed transferred to and vested in such surviving or consolidated corporation without further act or deed 5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if surviving or consolidated corporation had itself incurred such liabilities or obligations

6. Any claim, action or proceeding pending by or against any may be prosecuted by or against the surviving or consolidated corporation 7. Neither the rights of creditors nor any lien upon the property of any of each constituent corporation shall be impaired by such merger or consolidation. SPIN-OFF- has the opposite effect of merger or consolidation, whereby a department, division or portions of the corporate business enterprise is sold-off or assigned into a new corporation that will arise by the process which may constitute it into a subsidiary of the original corporation LIMITATIONS 1. Must be consistent with provisions of Corporation Code or existing laws 2. Issuance of Certificate, not upon mere agreement of the constituent corporations 3. Claims of employees of the constituent corporation shall be respected 4. Power to merge or consolidate must be expressly granted by law 5. Procedure must be followed As specifically provided under Sec. 79 of Corporation Code, the merger (or consolidation) shall only be effective upon the issuance of a certificate of merger (or consolidation) by the SEC, subject to its prior determination that the merger (or consolidation) is not inconsistent with the Code or existing laws. (Poliand Industrial Ltd. vs. NDC, 467 SCRA 500)