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Batas Pambansa Bilang 68 (May 1, 1980) -passed during Martial Law -general law that governs corporations -amendment

is needed to strengthen SEC power Corporation (Attributes) 1. Artificial being 2. Created by operation of law 3. Right of Succession 4. Only the powers, attributes, properties expressly authorized by law or incident to its existence SECTION 2: A corporation is an artificial being created by operation of law, having the right to succession and the powers, attributes and properties expressly authorized by law or incident to its existence. Attribute 1: Separate Personality, Juridical Person *Legal consequence of being a judicial person -acquire all kinds of properties -can sue and can be sued - incur obligations to third parties General Rule: Obligation of Corporation Obligation of Stockholders *If corporation is exempted in tax, it does not mean that stockholders are also exempted *As a juridical person: should act in accordance with the law DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY - If corporation is used to cover for fraud, illegality then disregard the separation and consider as one/ identical CASE: Owner Pedestrian vs Driver convicted, pay fine and damages owner formed a corporation with family - Jeep was sold to the corporation

If the driver cannot pay then the owner of the jeep will pay *Pedestrian cannot go to the owner of jeepney, corporation said he cannot get the jeep because of separate personality SUPREME COURT: Corporation formed to get away from liabilities then the victim can go after the corporation because they are one. CASE: 500 SHARES ABCDE496 Shares (Contract: X Inc. by A) W 1 Share *W filed a case against the corporation. 1 Share * Corporation is a mere alter ego of A 1 Share *Corporation is controlled by A, disregard the corporation 1 Share

CASE: 2 CORPORATIONS ARE FORMED Corporation A: Sued for not paying vs. Employees (Win) Dissolve then created corporation B with the same stockholders SUPREME COURT: Corporation formed to evade liability; Corporation B is mere continuation of Corporation A, they are identical: employees can go after Corporation B CASE: CORPORATION WITH SUBSIDIARY CORPORATION San Miguel Corporation B- Meg, Magnolia *The Doctrine will apply if the flagship corporation or the parent corporation has complete control over the subsidiary corporation Suppose: Employee of Subsidiary Corporation got injured, the Parent Corporation sold the Subsidiary corporation to another corporation: Parent corporation is liable if it has complete control over the Subsidiary Corporation Attribute 2: There must be a law; either GENERAL LAW or SPECIAL LAW Special Law- created by congress Owned and Controlled by the government (GSIS,SSS, PNR, NAWASA) Attribute 3: Can continue even in cases of DAETH, INCAPACITY, TRANSFER OF SHARE, WITHDRAWAL OF STOCKHOLDER ~ will not result in dissolution

Driver Pedestrian

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Under BP 68- life not exceeding 50 years but can be extended Special Law- depends on the law creating it Attribute 4: Can only exercise EXPRESSED or IMPLIED powers granted by law of its creation *If corporation is formed to build railroad then railroad only DISTINCTION BETWEEN A PARTNERSHIP AND A CORPORATION PARTNERSHIP Agreement 2 Mere Agreement All rights as long as not contrary to law All are managers Go after Guilty Partner No Right of Succession Separate Property Cannot without Consent Going Concern Ltd, and Company Can be dissolved anytime Civil Code CORPORATION Law 5 (except Sole Corporation) Issuance of Certificate of Incorporation by SEC Expressed or Implied granted by law Board of Directors Always in the name of the corporation Has Right of Succession Limited to Investments and Shares Subscribed Can even without Consent 50 Years Any Name as long as it is not confusing Cannot without Consent of the State Corporation Code

Manner of Creation Number of Incorporators Commencement of Judicial Personality Powers Management Effects of Mismanagement Right of Succession Extent of Liability to 3rd Persons Transferability of Interest Term Name Dissolution Governing Laws

De Jure Corporation- existing both in fact and in law De Facto Corporation- exists only in fact not in law Parent Corporation (holding/ flagship) related to another corporation and can elect majority of the directors of the corporation Subsidiary Corporation- related to another corporation and majority of their directors can be elected by that corporation Close Corporation- limited only to selected few (family) Open Corporation- open to all who wants to be part of the corporation True Corporation- exists under statutory requirements Quasi- Corporation- exists not under statutory requirements Corporation by Prescription- Roman Catholic Church, the state allowed its existence even without article of incorporation Corporation by Estoppel- No corporation but a group of people said they are when in fact, they are not; allowed for purposes of litigation and claims for damages Public Corporation- organized for the government of a portion of the state: barangay (smallest), municipalities/ town, cities, provinces, regions Private Corporation- formed for private purpose, benefit: government owned corporation (General or Special law) Quasi-Public Corporation- private corporation granted franchise by congress; Examples: PAGCOR, Telecommunication, Water Companies, Transportation

SECTION 4: Corporations which are created by special law or charter shall be governed by the special law or charter creating it. not by general law BP 68 may supplement if it is applicable SECTION 5: Corporators -Shareholders/ Stockholders (Stock corporation) or Members (Non-stock Corporation) composing the corporation -Natural or juridical person -Corporation can buy shares from another corporation Incorporators - Stockholders or member originally forming the corporation - Names appear on the articles of incorporation -Signatory, cannot be increased or decreased as long as the corporation exists - 5 to 6 X

SECTION 3: Classes of Corporation Stock Corporation- has capital stock divided into shares and the holders are given dividends on basis of their invested capital Non-Stock Corporation- examples: DLSU Domestic Corporation- formed, organized and existing under the Philippine Laws Foreign Corporations- formed, organized and existing under laws other than Philippine Laws AGB-KMT/LLS

- Only natural persons, therefore a corporation cannot be an incorporator Promoters - bring about the organization of the corporation - invite people who want to join -sometimes become stockholders Subscribers - take and pay the original, unissued shares of a corporation formed or to be formed - become stockholders the moment their subscription is accepted by the corporation

-issued capital but in the hands of stockholder not in the corporation. PAID-UP CAPITAL STOCK -potion of subscribed capital stock that is paid X Inc. 10,000 shares P100 P25,000 (Subscribed) x .25 P 6, 250 Paid Up Capital Stock UNISSUED CAPITAL STOCK -not yet subscribed: P75,000.00 *common shares- usual classification Can classify in series of classes: common and preferred- each class has certain rights LAW: only PREFERRED SHARES or REDEEMABLE SHARES maybe denied of voting rights *one class must have complete voting rights PAR VALUE - amount attached to the share - mentioned in articles of incorporation and certificate of stock - maybe different from BOOK VALUE *Book Value- higher or lower - TOTAL ASSETS (including capital + surplus) no. of outstanding shares * P150,000 / 100 shares = P150 MARKET VALUE - Determined at Stock Market *BANK INSURANCE CO., PUBLIC UTILITIES and BUILDING & LOAN ASSOCIATIONS prohibited from issuing no par value share 2 KINDS OF PREFERRED SHARES Preferred as to Assets- distribution of assets upon dissolution Preferred as to Dividends- distribution of dividends

SECTION6: Classification of Shares *Share of Stock- One *Shares of Stock- Many Capital Stock- share of stock is only a unit of the capital stock *Participate in the management through voting rights *Share in the income in the moment it is declared as divideds Dissolve: share in surplus Being a stockholder doesnt make you the owner of the corporations assets Not considered as creditor Cant demand return of the value of shares as long as the corporation needs the investment

A 10 shares (P10,000) owes INC P10,000 Cannot compensate: A is a debtor not a creditor CAPITAL STOCK - Fixed in the article of incorporation that should be subscribed and paid, equity of stockholders in the corporate assets -Limits number of shares the corporation can issue -Remain the same -Synonymous to AUTHORIZED SHARE CAPITAL if there is a par value SUBSCRIBED CAPITAL STOCK - Subscribed fully paid or not -25% should be subscribed -synonymous to ISSUED/ OUTSTANDING CAPITAL STOCK AGB-KMT/LLS

* If merely preferred shares- preferred as to dividends 5 KINDS OF PREFERRED SHARES AS TO DIVIDENDS 1. Cumulative preferred share- the holder is entitled to current dividends and arrears (dividends issued in the past) 2. Non-cumulative preferred share 3. Participating Preferred Share a. Regular or Preferred Stockholders b. Common Stockholders EXCESS- participate with the common stockholders, pro rata 4. Non-participating Preferred Shares- only entitled to dividends allocated for the preferred stockholders, excess will be given to common 5. Cumulative Participating Preferred Share Preferred shareholder is not automatically deprived of voting right must be checked in articles of incorporation and stock certificate Must only be issued with state value Terms and conditions may be given by board of directors, authorized by articles of incorporation after the filling of certificate with SEC

LAST PARAGRAPH: Holders of shares without voting rights that attend stockholders meeting is entitled to vote on the following cases: 1. Amendment of the articles of incorporation 2. Adoption and amendment of by-laws 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate entity 4. Incurring, creating or increasing bonded indebtedness 5. Increase or decrease of capital stock 6. Merger or consolidation with another corporation 7. Investment of corporate fund in another corporation in accordance with this code 8. Dissolution of the corporation (not allowed to attend the election of BOD) SECTION 7: Founders Shares holder of this share is given certain rights and privileges not enjoyed by owners of other shares given the privilege of being voted as directors, for the maximum of 5 years from the date of approval of SEC preference as to dividends SECTION 8: Redeemable Shares usually preferred expressly provided in Articles of Incorporation may be purchased by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation *after redemptions, they have sufficient assets to pay their liabilities and debts *holder- given the right of a creditor only if right is subrogated to the corporate creditor (3rd person is given better right) can compensate with redeemable share after the redemption, it becomes treasury shares terms and conditions are mentioned in articles of incorporation and certificate of stock SECTION 9: TREASURY SHARES- issued and fully paid but reacquired by the corporation by: Purchase- delinquent subscription is purchased by the corporation during public auction Redemption, Donation or through some other lawful means

NO-PAR VALUE - No amount attached to the share - holder of share, fully paid and not liable - consideration must not be less than P5.00 - entire consideration shall be treated as capital and not to be distributed as dividends ISSUANCE OF 2 KINDS OF SHARES- reasons -w/o par- gives flexibility and easier to sell unlike PAR VALUE, can no longer change 2ND PARAGRAPH: comply with the requirements of the law -only way to monitor the requirements is to satisfy the share NEXT PARAGRAPH: unless provided in articles of incorporation and certificate of stock, all classes of shares shall enjoy equal rights (Doctrine of Equality of Shares) Applies to holder of preferred and redeemable shares Restrictions must appear on both documents (AOI and CS) AGB-KMT/LLS

- can sell even lower than par value as long as it is reasonably set by the board of directors - not part of earning, not part of surplus, not dividends or stock dividends but possible that it is PROPERTY DIVIDENDS the corporation cannot exercise the voting rights of treasury shares as long as it remains in the treasury cannot declare as dividends to itself (stock dividends treasury stock) treasury shares- 3rd persons: own at least one share of stock SECTION 10: Qualifications of Incorporators minimum: 5, maximum: 15 (natural persons) of legal age (at least 18 years old) majority should be residing in the Philippines (nationality is not a requirement) stock corporation: own at least one share of stock INCORPORATING A CORPORATION There should be a minimum of 5 persons Draft and execute articles of incorporation (Sec. 15) Elect a temporary treasurer: the one who will execute the treasurers affidavit (25% of authorized share capital is subscribed, then 25% of that was paid) open an account with the bank and deposit the 25% paid and ask for certificate from the branch managers, have to attach it to articles of incorporation to use as an evidence under a special law, favourable recommendation from appropriate government agency attach to articles of incorporation (treasurers affidavit, certificate by book, recommendation from government agency), pay filing fee and publication to SEC and wait for the issuance of certificate of incorporation SECTION 11: CORPORATE TERM not exceeding 50 years from the date of issuance of the certificate of incorporation 50 years maybe extended by amending the articles of incorporation *provided that not 5 years earlier than the expiration of term unless, theres a justifiable reason approved by SEC *extension cannot be done during the 3 year period of liquidation SECTION 12: no minimum authorized capital stock unless the special law requires it AGB-KMT/LLS

P5,000 paid up capital must be at least P5,000 SECTION 13: 25% of authorized capital stock should be subscribed for the purpose of initial corporation mandatory 25% of subscribed must be paid X Inc P25,000 (250 shares) P100,000 (1000 shares of 100) x .25 P 6,250 paid-up capital *25% no par value= no. of shares Suppose: A- 50 P2000 B - 50 P1000 C - 50 P2000 D- 50 P2000 E - 50- none

*** it complies with Sec. 13

When should they pay the balance? on the dates provided in the subscription contract without need of call without fixed dates:: upon call of board of directors

SECTION 14: Contents of Articles of Incorporation Articles of Incorporation charter of the corporation; can be in English or Tagalog 1. Name of Corporation- X corporation (corp.) Incorporation (inc.) 2. Purpose of Corporation: - must be legal - must not be indefinitely stated - be lawfully combined (bank insurance) - primary and secdondary/ subsidiary purpose, if more than one purpose 3. Principal Place of Business province + town Metro Manila = City Change: Baliwag, Bulacan to Malolos, Bulacan amend the articles of incorporation - But if within the same town or city: no amendment, just notify SEC Pasig to Makati: notify SEC 4. Term of the Corporation (50 years) 5. Incorporators- names, nationalities, residences: why? So that SEC will know that they live in the Philippines

6. Authorized Share Capital SECTION 15: Form of articles of Incorporation SECTION 16: amendment of Articles of Incorporation in General (outside section 37 and 38) 1. Approved by majority of Board of Directors/ Board of Trustees in case of non-stock corporation * Vote or written assents 2/3 of outstanding shares * 2/3 of members if non-stock corporation APPRAISAL RIGHTS - demand from corporation the face value of share - pay back hi share, return of investment *Both original and amendment should contain the provisions required by law but underscore the change When will it take effect? (amended AOI) upon approval of SEC date of filing it not acted upon by SEC in 6 months from filing for a cause not attributed to the corporation SECTION 17: Grounds for rejection of Articles of Incorporation and its amendment - does not comply witrh legal requirements: but SEC will give reasonable time for corporation to correct or modify objectionable portions 1. does not comply substantially with the form (Section 15) 2. purpose is unconstitutional, illegal, immoral, or contrary to the government rules and regulations 3. treasurers affidavit: amount to be subscribed or to be paid is false 4. required percentage for Filipinos to own was npt complied with *Amendments may not be accepted if without favourable recommendation from appropriate government agency: corporation under special laws PRESIDENTIAL DECREE 902-A : after due hearing, SEC may suspend the certificate of registration of corporation : 1. Fraud in procuring its certificate of incorporation: (paid-up capital: money was returned to the lender after incorporation) 2. Misinterpretation of what the corporation can do 3. Refusal to comply with lawful order of SEC AGB-KMT/LLS

4. Continuous inoperation for a period of 5 years 5. Failure to file by-laws, 30 days after issuance of certificate 6. Does not comply with some forms of SEC SECTION 18: Corporate Name May not be accepted if identical, deceptively or confusingly similar to existing corporation or already protected by law or patently deceptive Example: Shangrila: Hotel vs Restaurant Change of Name: approved by SEC - must issue amended certificate of incorporation under the amended name SECTION 19: Corporate Existence corporation commences from the date of issuance of certificate of incorporation by SEC under its official seal *Corporation cannot engage yet in business even though it was already given the certificate: must be formally organized, comply with by-laws, election of bpard of directors and officers SECTION 20: De Facto Corporation- only in fact but not in law does not comply substantially with the requirements of law cannot be questioned collaterally (Case *) the state must bring a direct proceeding vs. corporation Example of de facto corporation: SEC issue certificate of incorporation even if 3 of the 5 incorporators do not reside in the Philippines, use of similar name REQUISITES TO BECOME A DE FACTO CORPORATION 1. Valid law under which the corporation maybe incorporated (no corporation for the purpose of exercising ones profession) 2. Bona fide attempt to incorporate- theres an effort 3. Actual user/ actual exercise in good faith of corporate powers 4. Issuance of certificate of incorporation: because if none, then there will be no judicial personality Case * : X Inc. majority of incorporators do not reside in Philippines A P50,000 cant sue me because it is a de facto corporation must be in direct proceeding (quo warranto)

Only the office of the solicitor-general can question the corporate existence of the corporation Private individual cant question because it is the right t=of the state that was violated *Acts of De Facto corporation are valid SECTION 21: Corporation by Estoppel A -they said that they are a corporation but not in reality B x: entered into a contract C LIABLE AS GENERAL PARTNERS - Failed to pay X: ABC - ABC collect: x cannot use the ground of corporation by estoppel SECTION 22: If the corporation does not formally organize and commence the transaction of business within 2 years from the date of issuance of certificate of incorporation, then the corporation is: - considered as dissolved and corporate powers cease within - Within 1 month: must be able to file by-laws, if not then may cause suspension Suppose: able to comply with SEC but stop continuously for 5 years then SEC nay revoke certificate of incorporation *the sanction will not apply if the reason is beyond the control of the corporation ~ calamities, earthquake, war SECTION 23: Board of Directors- governing body of corporation all corporate power, business conducted, properties- controlled by BOD 1 year hold of office until successor is qualified majority of BOD must be residing in the Philippines Management belongs to BOD: ownership to shareholders *Shareholders cannot question or rejcy contract entered into by BOD BOD must act as a body in a meeting in order to bind the corporation: Exceptions: BOD is sole stockholders contract entered into by corporate officers, if they are authorized expressly or implied by BOD particular transaction was subsequently ratified in a board meeting AGB-KMT/LLS

by-laws of corporation may create an executive committee to act on specific matters action of directors without meeting or meeting improperly held, unless provided by laws to be valid or ratified corporation is expressly allowed to enter a management contract QUALIFICATION OF DIRECTORS 1. Must own at least one share of stock, must be in his name during his term as director *if not: cease to be a director merely mortgage or pledge: may still continue because did not transfer ownership Term of 1 year- can extend if successor is not yet qualified By-laws may provide that director must not be a competitor Majority must be residing in the Philippines

SECTION 24: Election of Board of Directors or Trustees majority of the outstanding shares must be present or written proxy *raising of hands, roll call, ballot by request even one X Inc 10 directors to be elected (5 Shares), how many votes: 5 shares x 10 directors = 50 votes no. of shares x no. of directors to be elected METHOD OF VOTING 1. Straight Voting- equally given to candidates 2. Cumulative Voting for One Candidate- 50 votes only to one candidate; represent minority of stockholders 3. Cumulative Voting by Distribution- 50 votes, not equally: 5, 10, 25 The first 10 to get the highest number of votes will win, if 20 candidates *Director elected by cumulative voting representing the minority cant be removed without cause NON-STOCK: General Rule: depending on no. of directors to be voted, unless cumulative voting is allowed DELINQUENT SHARES- cannot vote (Section 25)

SECTION 25: Election of Officers- BOD will elect them 1. President; should be a director 2. Treasurer; may not be a director 3. Secretary; resident of Philippines 4. Other corporate officers maybe elected can hold the 2 positions except: President and Treasurer President and Secretary By-law: VP should be a director Why BOD elect BOF? BODs powers are delegated to officers *majority of directors provided in AOI will constitute a quorum *majority of quorum will constitute a legal act except election of officer *majority of directors in the member of board CASE: 11 in AOI as BOD but only 9 are qualified; attended directors meeting; NO QUORUM Directors Meeting: cannot attend by proxy Stockholders Meeting: proxy allowed SECTION 26: 30 days from election of BOD, trustees and BOF, secretary or other officers must submit nationality, residence to SEC death and resign secretary notice SEC SECTION 27: Grounds for Disqualification 1. Candidate convicted by final judgment (after 15 days of appealing; began to serve the penalty) where penalty is more than 6 years 2. Violation of Corporation Code within 5 years prior to the election penalty is immaterial SECTION 28: Removal of Director or Trustee Can a director remove a fellow director? -NO, because their title were given by stockholders can be removed with or without cause except director who was voted with cumulative voting to represent the minority * notified to know the purpose AGB-KMT/LLS

* How many votes? of outstanding capital stock the director

* Special meeting to remove a director *How shall the vacancy be filled-up? Same meeting otherwise, regular or special meeting for that purpose SECTION 29: Vacancy not created by removal or expiration of term 1. Death 2. Abandonment 3. Disqualification 4. Retirement the remaining directors can fill up if it still constitute a quorum 5 directors, 2 died = 3 directors 5 directors, 3 dies = 2 directors (no quorum)

Increase in no. of directors: 5 new positions (example), same meeting they amended otherwise special or regular meeting

SECTION 30: Compensation of Directors General Rule: Directors are not allowed to compensate because the return of investment is enough for them *By-Laws or majority of stockholders may provide compensation: limit not exceeding 10% (for the total compensation) of net income *Income before income tax during the preceding year *Reasonable per diem= allowance SECTION 31: When directors, trustees or officers may be held for damages 1. knowingly or wilfully voted for patently unlawful acts of the corporation directors who voted will be solidarily liable for damages 2. Guilty of gross negligence, bad faith in carrying on the affairs of the corporation honest business judgment will not be a ground *fundsstock market = loss; not liable 3. acquires personal interest in conflict with his duty as director that prejudice the corporation

Ex. Magnolia (director) Selecta (consultant) *taken from personal funds 4. Disloyalty committed by director: should not accept commission Case: Property 10 million but sold for P8 million = P2 million should hold as trustee for profit that should have been to the corporation SECTION 32: Legal effects of directors who entered into contracts with the corporation (Director: textile corporation stall in Divisoria) Voidable at the option of the corporation but will be valid if: 1. Presence of that director is not necessary to constitute a quorum 2. The vote of that director is not necessary for the approval of the contract 3. Contract is fair and reasonable 4. Officer is authorized by BOD *If any of the first and second is missing: will be valid if ratified of outstanding share, director disclosed his interest * When is the contract valid? - if all the condition in section 32 is present - if corporation didnt question the contract - even if none of the conditions are met, but ratified by of stockholders SECTION 33: Contracts entered into by 2 or more corporations with interlocking directors cannot be invalidated on that ground alone, provided there is no fraud and the contract is fair and reasonable X Inc. 10 % 30% Y Inc. 10% (Nominal) 30% (Substantial)

SECTION 34: Disloyalty of Directors *Corporate Opportunity Theory 1. Section 31: Special disloyalty cannot be ratified 2. Section 34: Can be ratified by virtue of his office, acquires business opportunity that should have been for the corporation and all profits acquired should be refunded to the corporation Case: Corporation (buy and sell real property): 3rd person approached director 3rd person (piece of land) sells to the corporation Sells to director, resell created profit of 50% of the cast Case: 3rd person (neighbour) sells to director resells P50,000 profit: not disloyalty *did not use his powers as director *can be ratified by of stockholders - even if he risks his funds, will not excuse him from refunding the profit SECTION 35: Executive Committee By-laws: not less than 3 of BOD because it is difficult to create quorum Can act in certain matters delegated by by-laws and majority of stockholders Member of regular board of directors *Cannot be approved by Executive Committee 1. Cant approve contracts that needed the approval of stockholder 2. Cant fill up the vacancy in regular board 3. Cant amend by-laws 4. Cant amend resolutions of the board by its expressed terms cannot be refilled 5. Cant declare cash dividends

= =

*No need for Section 33


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SECTION 36: Some of Expressed Powers of the Corporation 1. Expressed Powers a. Power to sue and can be sued if the corporation is already known, it can now use the ground for reputation b. Give donation for charity, not to political parties or candidates c. Required to put up retirement and pension plan SECTION 37: Extension or Shortening of Corporate Term
needs the approval of outstanding stock, BOD

Exercise PER: A is entitled to additional 50% subscription of the 1000 + 500 irrespective of shares issued: class A = class B maintain shareholdings If A doesnt exercise right of pre-emption: waive his interest Suppose A: did not exercise his right And B, C, D exercised cant compel corporation to sell the shares to them General Rule: Right of pre-emption does not apply to the original unissued shares = 460 unissued cant exercise PER to 460 shares, corporation sell it to public Corporation only offered limited 540 shares, can they exercise their right to the 460 shares? Yes, because corporation only offered to 540 Right of pre-emption may be denied by AOI or by amendment of AOI Appraisal Right 3 Cases where one cannot exercise PER: 1. If new shares are being issued to comply with law 2. If new shares in good faith and approved by of capital stock in exchange

SECTION 38: Increase or Decrease of Capital Stock -Increase or decrease in capital stock must comply with SEC X Inc. P100,000 P200,000

1000shares 2000 shares

P100 P100

* SUBSCRIBED must also be increased (P200,000 x .25 x .25) 1. Increase the no. of shares without increasing par value 2. Without increase of no. of shares, with increase in par value 3. Increase of no. of shares, with increase in par value Reduce: P100,000 1000 shares (all subscribed but paid only 50%) P100 P50,000 to exempt the unpaid subscribed of their unpaid balance, prejudice to corporate creditors Whether increase or decrease in capital stock= must be approved by SEC Increase or decrease in Bond Certificate of indebtedness SECTION 39: Pre-empted Right Stockholders shall have PER for all X Inc 1000 shares A- 500 share (50%) can elect 3 out of 5 directors But X Inc. increase to 2000 shares AGB-KMT/LLS

of property needed by the corporation


3. New shares are issued as payment to previous liabilities

Why do we allow PER? Maintain their proportionate standing in the corporation *Treasury share: subject to right of pre-emption SECTION 40: Corporation may SLEMP or dispose all corporate assets/ property including goodwill SLEMP (sell, lease, exchange, mortgage, pledge) All /substantially all of corporate property: in order to exercise right of appraisal When is it substantially all? If it will render the corporation incapable of continuing the business or accomplishing the purpose of why it was constituted

Suppose: Real Estate business: corporation sells all cant exercise appraisal right because its in the usual course of business even if all/ substantially all Suppose: Manila branch was sold and the funds were used to improve Greenbelt branch: cant exercise appraisal right because its for the benefit of the corporation SECTION 41: Power of Corporation to Acquire its Own Share 1. Legitimate purpose 2. Unrestricted retained earnings in the book of corporation *Eliminate: corporation buys or issue fractional (250 x .25) = 32.5 *Collect or compromise an indebtedness: no higher bidder, corporation buys delinquent shares *Paying the shareholders who exercise their appraisal right becomes treasury shares TRUST FUND DOCTRINE the assets of corporation as represented by its capital stock cannot be disposed if no provision for payment of corporate creditors SECTION 42: Power to Invest Corporate Funds *In connection with business: cannot exercise appraisal right, no need for approval of stockholders *not in connection: can exercise appraisal right SECTION 43: Power to Declare Dividends Provided: Unrestricted returned earnings are in the books of corporation Total Asset Total Liabilities + Capital = Retained Earnings Dividend: Portion of profits, return of investment, based on outstanding shares, based on shares held 1. Stock 2. Property 3. Cash Delinquent Subscriber: entitled to dividends
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Stock dividend: withheld until fully paid Cash: applied to unpaid subscription + cost and expense 1000 shares subscribed, 50% paid basis of dividends, not in amount paid Power to declare Dividends: Discretionary, cant compel the corporation to declare dividends in the part of the BOD ~When is it MANDATORY? exceeds 100% of their paid-in capital Even if it exceed 100%, cant compel to declare dividends, if: 1. Justified corporate extension program 2. Prohibited by creditor, condition of the loan; needs the consent of the creditor 3. Retention is necessary Cash Dividends: only BOD, no need for approval of stockholders Stock Dividends: there must be available unissued shares; approval of BOD and stockholders Remedy: increase capital stock *No par value: consideration cannot be used as dividends, only capital Suppose: Corporation has receivables cant use as basis for dividends Increase value of asset: subject to market fluctuation *Stock Dividends do not increase income of stockholders SECTION 44: Power to Enter into Management Contract X Inc Y Inc The Managing The Managed A: owns more than 1/3 of shares A also a Stockholder *BOD: ABCDE *BOD: ABCFG Majority of BOD is the same = Y Inc. needs 2/3 of stockholders must approve the management contract all/ substantially all: if not, then the rules will not apply, contract not exceeding 5 years

SECTION 45: Ultra-Vires Acts of Corporation exceeds beyond the approval powers/ duties Ultra-vires can be legal and moral Intra-vires- opposite of ultra-vires SECTION 46: By-laws must be adapted 1 month after receipt of official notice of the issuance of its certificate of incorporation by SEC Simultaneous: By-laws and Articles of Incorporation all of directors must sign *Effective after SEC Issue a certificate that by-laws comply with the requirement *Corporation created by Special lawsreject by SEC of by-laws without recommendation from appropriate government agencies SECTION 47: Content of By-Laws Everything that hasnt been regulated by Corporation Code SECTION 48: Power to Amend By-Laws may be delegated by 2/3 of stockholders, may be revoked by mere majority only *More difficult to delegate than to revoke SECTION 49: Kinds of Meeting * May be REGULAR or SPECIAL SECTION 50 1. Regular Stockholders Meeting : annually, date fixed by by-laws: if none then April :notified 2 weeks before 2. Special Stockholders Meeting: one week before (notified) *Who will call? Authorized by by-laws/ petitioning stockholders SECTION 51: Place and Time of Meeting City or Municipality where the principal office of the corporation is located in Metro Manila = City
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Suppose: Improperly held~ may still be valid as long as ALL stockholders were present proceeding that was held within the powers of the corporation SECTION 52 Quorum: majority of Stockholders/ Members By-laws: may provide higher quorum, never less than SECTION 53: Regular or Special Meeting of Directors Monthly, can be outside the principal place, outside the Philippines Cannot be attended by proxy By-laws may restrict SECTION 54: President presides the Stockholder and Directors Meetings SECTION 55: Pledger or mortgager shall have the right to attend and vote in stockholders meeting unless the mortgagee or pledge is expressly authorized to vote, in writing: Authority is recorded in the Books of the Corporation SECTION 56: Joint Ownership Who will attend? Get the consent of all other co-owners or written proxy and/ or = either one can attend SECTION 57: Voting Right of Treasury Shares cannot be Exercised as long as they remain in treasury SECTION 58: Proxy Written Proxy: submitted to corporate secretary before election General Rule: only good for particular meeting, unless provided otherwise can only be a proxy for 5 years SECTION 59: Voting Trust One or more stockholders create voting trust for conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares

only good for 15 years but may exceed if part of condition for loan and will be terminated if loan is fully paid Mechanisms of Voting Trust Agreement 10 stockholders 1 person names will be erased in the books of corporation, their certificate of stock will also be cancelled new certificate will be issued in the name of trustee stating that it is issued pursuant to the said agreement Voting Trust Certificate= Certificate of Stock; Negotiable Instrument 10 stockholders may still inspect corporate books trustee will vote for 10 stockholders Case: Dividends were Declared Trustee: receives the dividends; will pass in his hands but will give it to the 10 stockholders Advantage of Voting Trust Agreement can in the mean time, sell their shareholdings to 3rd persons and still elect directors/ control the board *After the term of Voting Trust Agreement, Certificate of stock in the name of trustee and voting trust certificate will be cancelled and certificate of stockholders will be issued to the 10 stockholders SECTION 60: Subscription Contract any subscription of corporation still to be formed: contract of acquisition of unissued stock SECTION 61: Pre-incorporation Subscription Cannot be revoked: within 6 months from date of subscription unless all other subscribers agreed or incorporation of the corporation fails to materialize within said period or within a longer period stipulated in the subscription contract SECTION 62: Consideration for Stock not less than par value (original)
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1. 2. 3. 4. 5.

Actual cash paid to the corporation Property, tangible or intangible Labor Previously incurred indebtedness by the corporation Amounts transferred from unrestricted retained earnings to stated capital 6. Outstanding shares exchanged for stocks in the event of reclassification *Shares of stock shall not be issued in exchange for promissory notes of future services Intangible-initially evaluated by incorporators/ BOD, subject to approval by SEC *Dividends: subscribed but payment will be coming from dividendsVOID *AOI or BOD may fix the issued price of no-par value shares SECTION 63: Certificate of Stock and Transfer of Shares signed by the president or vice president, countersigned by secretary or assistant secretary Procedures in Selling to 3rd Persons: Indorse to the bank; write the name at the bank and deliver to the buyer, buyer pays amount Buyer: Wants to attend stockholder meeting *bring certificate of stock that was endorsed by owner, signed at the back by buyer as transferee *certificate of stock will be cancelled in the books of corporation then new certificate of stock will be issued in the name of buyer LAW: transfer must be recorded in the books of corporation to bind it and corporate creditors VALID AS BETWEEN PARTIES: if not recorded *Conveyance may be in a separate document (deed of assignment) unless provided by by-laws

Case: Govt official bought big amount of shares from stockholder Official- owner as evidence of deed of assignment of certificate of stock Stockholder- still the owner because not recorded in the books of corporation but dividends will be given to official Case: A (stockholder) purchased 80 shares not fully paid, sold 20 shares to 3rd person who fully paid cant demand corporation to issue of certificate of stock *Right to transfer share cannot be restricted by articles of incorporation or by-laws INVALID: Certificate of Stock. non-transferrable unless with consent of stockholders *but articles of incorporation and certificate of stock may say that it must be offered first to existing stockholders before to 3rd persons SECTION 64: Issuance of Stock Certificate No stock certificate shall be issued to a subscriber not fully paid with full amount of subscription Case: X Inc. A 5shares -paid P300 P100/ share

:in exchange for property: 1 share (P100) = table (P90) Reasons for Watered Stock: no favouritism/ nepotism SECTION 66: Interest on Unpaid Subscriptions A 5shares Paid P300 Balance P200 Aug. 15 to Dec. 31 *should be paid as indicated without need for call *then by call if no date was given legal interest of 12% Exceeds Dec. 31 not yet considered as delinquent stockholder given 30 days allowance SECTION 67: Payment of Balance of Subscription Case: Corporation is calling for 50% of unpaid subscription *What if A was not able to pay? then the balance becomes due and demandable *P100 demand P200 due and demandable SECTION 68: Delinquency Sale A: delinquent stockholder resolution by corporation selling the shares, public auction P200 shares 50 expenses P250 X-250: 2 shareshighest bidder Y- 250: 3 shares Z- 250: 4 shares

*Can A demand the corporation to issue certificate of stock for P300? NO, because he is not yet fully paid and the 300 pesos is distributed to 5 shares which means he still has a balance of P40 per share SECTION 65: Watered Stock stocks issued in exchange for something considered not equal to a value issued less than par applicable only to original issued stock *Directors or Officers will be solidarily liable for the difference to the stockholders Case: P100 worth of shares sld only for P90 and is considered as full payment
AGB-KMT/LLS

Suppose: X- 249 : 2 shares Y-249.99 : 3 shares Z-240 : 4 shares No highest bidder because no one is willing to pay the P250

SECTION 71: Effect of Delinquency Only Right: Right to Dividends cash, applied stock, kept until fully paid SECTION 72: Unpaid Shareholders are entitled to all rights SECTION 73: Lost or Destroyed Certificates Remedy: 1. Execute an affidavit stating why/ how was it lost/ destroyed 2. If secretary believes the affidavit then publish in the principal office of corporation, a notice for once a week for three consecutive weeks 3. One year after the last publication, no one contested then old certificate will be cancelled and a new certificate will be issued *Stockholder:one year is so long; make it a month- possible put up a bond good for one year as security for corporation If there is no fraud, bad faith or negligence on the part of corporation then no action maybe filed against them for issuing a new certificate

less than P50,000 paid-up capital= FS should be under oath of treasurer or other officer SECTION 76: Merger and Consolidation Merger- theres a surviving corporation Consolidation- no surviving corporation, an entirely new corporation is created: X Inc. + Y Inc. = Z Inc. SECTION 77: Individual corporation must submit plan of merger or consolidation approved by their respective Board of Directors and Stockholders SECTION 79: Securities and Exchange Commissions approval and effectivity of merger or consolidation *Corporations created by special laws should first secure a favourable recommendation from appropriate government agency SECTION 80: Effects of Merger or Consolidation X Inc. = Y Inc. stockholders, employees, properties and liabilities *Last provision to exercise appraisal right SECTION 81: Instances of Appraisal Right 1. In case of merger or consolidation 2. In case of lease, sale, exchange, transfer, mortgage, plege or other disposition of all or substantially all of corporate assets 3. In case of amendment of articles of incorporation that has an effect of changing or restricting the rights of any stockholders, extending/ shortening of corporate existence SECTION 82: How Right is Exercised within 30 days: try to implement change in name after 30 days: waived *Requirement: there should be unrestricted retained earnings in its book SECTION 83: Effect of demand and Termination of Right Voting and dividend rights are suspended

SECTION 74: Corporate Books required books of every private corporation: stock or non-stock a. A record of al business transactions b. Minutes of all meanings of stockholders or members c. Minutes of all meetings of directors and trustees d. Stock and transfer books: stock corporation all the names of stockholders (alphabetical) General Rule: Stockholders have the right to inspect if officer refuse, he can be charged for damages, violation of corporation code not absolute: not acting in bad faith, not for illegal purpose, corporate secrets SECTION 75: Right to Financial Statements -10 days upon request
AGB-KMT/LLS

only right for the fair value of his share *but if after 30 days and the stockholder has not been paid yet then the right will resume *cant return without consent of corporation SECTION 85: Costs and expenses of appraisal shall be borne by corporation SECTION 86: Notation on Certificate(s); Right of Transferee notation of certificate: deliver to secretary that you are dissenting stockholder SECTION 87: Non-Stock Corporation not authorized to declare profits unless profits is incidental then it can be used for improvement of corporation SECTION 92: No. of Trustees may be more than 15 *Election1/3 of the members of Board of Trustees should expire within a year 5- first 5 who got the lowest 1st year 5- 2nd year *one elected should have a term of 3 years 5- 3rd year *in case of replacement: only the unexpired portion th 5- 4 year SECTION 93: Place of Meeting can be outside the principal place but within the Philippines SECTION 96: Close Corporation manifested in Articles of Incorporation 1. Ownership of shares should not be more than 20 2. One or more restrictions on transfer of shares 3. Not allowed to make public offering; not listed in any stock exchange Provided: 2/3 of voting stock is owned by a corporation that is not a closed corporation then it is not a closed corporation
AGB-KMT/LLS

*Any corporation may be incorporated as a close corporation except: 1. Mining or Oil Companies 2. Stock Exchanges 3. Bank 4. Insurance Companies 5. Public Utilities 6. Educational Institutions 7. Corporations declared to be vested with Public Interest *Close Corporation- corporation of de jure or de facto corporation, do not follow technicalities SECTION 97: Articles of Incorporation 1. One or more restrictions on transfer of shares 2. Classify directors as class A and class B, to be elected by holders of stock 3. Instead of Board of Directors managing the corporation, stockholder will be the one who will manage 4. Electing the officers: stockholders will elect *Liability of directors will be applied to stockholders SECTION 98: Restriction on Transfer of Shares Provided in 3 Documents: 1. Articles of Incorporation 2. By-laws 3. Certificate of Stock If not, the buyer will not be bound They can provide: offer first to existing stockholders the to 3rd persons *option is only valid for 30 days SECTION 102: Pre-emptive Rights in Close Corporations Pre-emptive right of stockholders in close corporation shall extend to all stock to be issued, including reii=ssuance of treasury shares unless articles of incorporation provide otherwise

SECTION 104: Deadlocks 20 Members 10 votes agreed; 10 votes against *Corporation cannot proceed to the transaction SEC will intervene upon written petition of any stockholder 1. Cancelling or altering any provision contained in the articles of incorporation, by-laws or any stockholders agreement 2. Cancelling, altering or enjoining any resolution or other act of the corporation or its board of directors, stockholders or officers 3. Directing, or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action 4. Requiring the purchase at their fair value of shares of any stock holder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders 5. Appointing a provisional director: may not be a stockholder 6. Dissolving the corporation 7. Granting such other relief as the circumstances may warrant SECTION 106: Educational Corporation Stock: governed by rules on stock corporation non-stock SECTION 107:Get a favourable recommendation from Department of Education, Culture and Sports SECTION 108: Board of Trustees for non-stock Educational Corporation minimum of 5, maximum of 15 must be a multiple of 5 (5, 10, 15) *1/5 of Board of Trustees should expire every year SECTION 109: Classes of Religious Corporation Corporation Sole *File articles of incorporation verified by affidavit approved by SEC then archbishop, bishop, priest, minister, rabbi or presiding elder automatically becomes corporation sole Religious Societies
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SECTION 110: Corporation Sole For the purpose of administering and managing, as trustee, the affairs, property, and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder SECTION 115: Dissolution of Corporation Sole Voluntarily settle affairs by submitting to SEC a verified declaration of dissolution 1. Name of corporation 2. Reason for dissolution and winding up 3. Authorization for the dissolution of corporation by the particular religious denomination, sect or church 4. Names and addresses of the persons who are to supervise the winding up of the affairs of corporation upon approval of such declaration to dissolution by SEC, corporation will cease to carry on its affairs except for the purpose of winding up its affairs SECTION 116: Religious Societies maximum of 15, minimum of 5 file articles of incorporation to Security and Exchange Commission composed entirely of spiritual persons and which is erected for the furtherance of a religion or, for perpetuating the rights of the church or, for the administration of the church or religious work or property Roman Catholic Church- corporation by prescription, no articles of incorporation needed SECTION 117: Dissolution- extinguishment of corporate existence *3 years to wind-up the affairs of the corporation 2 Steps in Corporate Dissolution 1. Termination of the corporate existence at least as far as the right to go on doing ordinary business is concerned 2. Winding-up of the affairs of corporation, payment of debts and distribution of assets among stockholders after winding-up, the existence of the corporation is terminated for all purposes

Methods or Causes of Corporate Dissolution 1. Voluntary when no creditors are affected: vote of 2/3 of stockholders and majority of the Board of Directors/ Trustees *SEC will issue certificate of dissolution [Section 118] with creditors affected: by judgment of SEC after hearing of petition [Section 119] *SEC can appoint a receiver: collates the properties and assets then pay creditors (Liquidation by Receiver) shortening corporate term [Section 120] *amend Articles of Incorporation, approved by SEC In the case of a corporation sole, by submitting to the SEC a verified declaration of dissolution for approval 2. Involuntary failure to formally organize and commence transaction within 2 years from date of incorporation *can be questioned by proceeding order of SEC expiration of term provided for in the original articles of incorporation legislative enactment SECTION 122: Corporate Liquidation liquidation by the corporation itself *can you amend the articles of incorporation within the 3 years of liquidation? No, because there is nothing to amend liquidation by a trustee Within 3 years: corporation can transfer all its asset to a trustee becomes the legal owner of assets *may extend for more than 3 years: also true in liquidation by receiver liquidation by receiver: assigned by SEC *unless theres a limitation given to him

2nd to the last paragraph: distribute assets but creditor or stockholder/member is unknown or cannot be found then the city/ municipality where assets are located will be the one who will benefit SECTION 123: Foreign Corporations one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state *cant be called as a foreign corporation if its country do not allow Filipinos to engage business in their territory Requirement: 1. License from SEC 2. Certificate of authority from the appropriate government agency SECTION 133: What if they operate without a license? cannot sue but can be sued Exemptions: 1. Isolated business transaction in Philippines Case: F Corp. D Corp. One transaction: D did not pay F D corporation: F corporation cannot sue me because it has no license then foreign corporation can sue domestic corporation 2. Protection of its trade name or trademark in the Philippines Case: D corporation used puritan trade name Then foreign corporation may file a case against domestic corporation 3. Non-business Transaction in the Philippines Case: unloaded inventories in the Philippines that is supposed to be for Singapore then owner of foreign corporation may go to Philippines and file a case to recover 4. Non-exemption from suit in the Philippines SECTION 127: Resident Agent: natural or juridical persons SEC will require and will represent the foreign corporation

AGB-KMT/LLS

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