Corporation Reviewer 2 1

CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-AN
Types of Business Organization y Sole Proprietorship y Partnerships y Corporation y Joint Accounts y Joint Venture Sole Proprietorship - the business is carried in the name and style of the owner of the proprietor. There is no distinction between the person of the owner/proprietor and the business. The Business does not have a separate legal personality from the proprietor Example: Juan dela Cruz was given 5M to start a business, he decided to engage in trade and business, sale and manufacture of RTW. He secured permit from DTI and the business name is Juan dela Cruz doing business under the name and style of Johnny Trading Co. If Johnny Trading Co. acquires assets or properties in the course of the business, are these properties owned independently by the business or is it also owned by Juan dela Cruz? It is also owned by Juan dela Cruz because Juan dela Cruz has no separate legal personality from the business that he put up. In Sole Proprietorship, the assets as well as liabilities incurred by the business are not separate from the assets and liabilities of the proprietor. They are one and the same. So if Juan dela Cruz filed a complaint, in the complaint it should be Juan dela Cruz doing business under the trade name and style of Johnny Trading Co. the business must be specified or the trade name or business name. Juan dela Cruz doing business under the trade name and style of Johnny Trading Co. vs DEFENDANT Partnership - 2 or more persons bind themselves to contribute money, property to a common fund with intention to divide the profits between and among themselves. Example: Juan dela Cruz invited his best friend Pedro Reyes concerning his business of trading RTW. So if Pedro Reyes contributes capital also to make it 5M each, then there is partnership because in partnership 2 or more persons bind themselves to contribute money, property to a common fund with intention to divide the profits between and among themselves. The Partnership has a separate personality separate and distinct from the persons composing it. So Juan dela Cruz and Pedro Reyes have their own legal personalities. Lets say that the partnership name is Johnny and Peter Trading Co.
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In partnership, at the very moment the persons bind themselves to contribute money or property, the partnership is created, even if it not registered in the SEC. Corporation A Corporation needs at least 5 corporators or members except in case of a Corporation Sole. A Corporation Sole has only 1 member. What is a Corporation Sole? A corporation Sole is associated with a clergy, Bishop or a presiding head of a sect. Example: Roman Catholic Bishop of Malolos. The RCB of Malolos has its own character as of a natural person. If he want to put up a corporation, he can organized himself as a Corporation Sole although he is only one. So that Corporation may acquire properties independently of the character of the Bishop presiding the sect or organization. A Corporation has a Legal personality separate and distinct from the persons composing the Corporation. Who are the persons composing the Corporation? y Stockholders y Directors y Officers Lets say that a Corporation is 99.9% by 1 person, does that mean that it will be treated as one with the controlling stockholder? Not necessarily, the fact that one person owns and controls the Corporation does not justify treating the Corporation as one with the controlling stockholder. The personality of the controlling stockholder is still different from the legal personality of his Corporation Joint Account A concept found in the code of Commerce. It is not in the Corporation Code. It is just like a partnership in a sense that persons contribute a capital to a business but it has no legal personality separate and distinct from the persons composing the business and the business is carried out by the managing merchant. This concept is no longer be applied in modern days. Joint Venture a form of a particular partnership. A partnership is organized for a specific purpose or end just like a joint venture. Example: Juan dela Cruz has 5M and he was able to develop his business. Lets say that the RTW that manufacture and supplies to department stores are good quality in such that it
beats the competition, Juan dela Cruz can enter into a joint venture agreement with SM or Robinsons that Juan dela Cruz will increase in volume and he will be the only supplier of SM or Robinsons, they may enter into an agreement that all RTW of this quality will have to be source by SM or Robinsons from Juan dela Cruz. Is there a resulting Corporation by the Joint Venture Agreement? None, it only organize a specific purpose or end Is it possible for Juan dela Cruz and SM or Robinsons to create a Corporation that will carry out their venture? Yes, but it is not always the case. It is not really necessary to put out a corporation to reflect the terms of their agreement. They may just enter into a contract and set out the details on how to profit, and how the profit be distributed, limitations etc.. but need not to create a Corporation but if they want to they may also create a Corporation. Distinction between a Corporation from a Partnership? As regards to: y COMPOSITION o Partnership Should have at least 2 partners o Corporation Should have at least 5 except in a Corporation Sole y MANNER OF CREATION o Partnership Created by agreement of the parties o Corporation Created by Operation of law y COMMENCEMENT OF JURIDICAL PERSONALITY o Partnership From the very moment 2 or more persons bind themselves to contribute money or property to a common fund with intention to split the profits among themselves, the Partnership is deemed created because it is consensual in nature even though its articles of copartnership is not registered with SEC. even though the real property contributed in a Partnership is not yet registered in SEC does not detract from the acquisition of legal personality. Why do we register a Partnership in SEC? For administrative purposes and convenience, because a Partnership cannot obtain permit to operate from city government
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and a Tax verification number from the BIR unless it is registered with SEC. So it is not a condition to acquire a legal personality but it is for administrative convenience o Corporation There has to be a law authorizing the formation of the Corporation, which in that case the Corporation Code governing private corporations. Corporations may also be created by a special law like Red Cross, DBP, PCSO, they have a charter on its own. But whether by a special law (a charter on its own) or the general law (Corporation Code), the fact remains that a Corporation cannot be created except by law not just by mere agreement of parties
Section 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law.
Lets say Juan dela Cruz invites 4 persons to put up a Corporation and they agreed to put up a Corporation and to contribute 1M each, they signed a pre-corporation agreement. Is that agreement binding? Yes, but among themselves, they cannot back out from their agreement. General Rule: a pre-corporation agreement is irrevocable Is there already a Corporation formed? Not yet, because they have to prepare the Articles of Incorporation and file it with the SEC and the SEC would have to approve the Incorporation of the Corporation.
So it is the approval by the SEC that gives life to the Corporation not the agreement by 5 or more persons AUTHORITY (who is authorized to exercise the powers) o Partnership The Managing Partner designated in the Articles of Co-partnership. If there is no Managing Partner or in the absence of such, any of the partner may bind the Partnership. But if there is a Managing Partner designated, then he alone can manage the partnership for acts of administration. o Corporation The collective body called the Board of Directors (under section 23 of the Corporation Code). Corporate powers are exercise by the Board of Directors neither by the President nor the controlling stockholder.
Section 23. The board of directors or trustees. - Unless otherwise provided in this C ode, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this C ode must be residents of the Philippines.
Corporation For a Corporation, an act maybe lawful and yet it cannot be performed by the Corporation, the powers of Corporation are limited. Only the powers allowed or authorized by the Corporation Code, Articles of Incorporation and powers incidental to its express powers can be exercised by the Corporation.
Section 2. Corporation defined. - A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.
There is nothing unlawful in buying a resort. A partnership can buy resort. But what about a corporation engaged in Corporation engaged in agriculture or trading, can it but a resort? No, because it is not contemplated or it is inconsistent with the powers of the said corporation. The powers of the Corporation itself are the limitation. The articles of incorporation provide the powers and at the same time provides for the limitations of the powers in a sense that anything inconsistent with its powers cannot be performed or exercised by the corporation. y TERM o Partnership the term is Indefinite until there is a ground to dissolve a partnership. In case of death or withdrawal etc.. by a partner. Corporation Term is what is specified in the articles of Incorporation but to exceed 50 years.
So if the Corporation wants to buy or sell a property, or wants to obtain a loan, invest or to enter into a corporate transaction, it has to be approved by the Board of Directors (BOD). BOD is at least 5 but not more than 15 members except in merger of banks where it allows at least 21 directors y POWERS o Partnership A partnership can perform any activity or transaction except: those which are contrary to laws, good morals, custom, public order and policy.
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It is not correct to say that the life of a corporation is 50 years because there are many corporations whose term is less than 50 years. Can it be extended? Yes, but there is a limit for the number of extensions. The extension at any given time must exceed 50 years. CONTINUITY o Partnership If a partner dies, withdraws or becomes incapacitated or civil interdicted, the partnership is dissolved o Corporation Change of share ownership does not dissolve a corporation. There is
continuity in a corporation. The death, insanity, incapacity of one or all stockholders will not dissolve the Corporation. Equitable PCI bank was previously owned by the Go family and then the Go family sold the shares to the Sy family, but still Equitable Bank is still there despite the change of ownership LIABILITY o Partnership General Partners are liable beyond their contribution in the Partnership if the assets of the Partnership are not enough to satisfy the debts or liabilities of the Partnership. The personal properties of the partners may be levied to answer for Partnership debts if the assets are not enough. Such liability is not applicable to Limited Partner General Partners are liable beyond their contributions in proportion of their contribution to the Partnership. So if A contributes 60, B contributes 40, then the assets of the Partnership are not enough then the extended liability in proportion of A and B o Corporation The liability of the Stockholder is limited to the extent of his subscription to the Corporation. If A subscribe only to 100k pesos shares, that is the limit of his liability. His personal properties will not be made to answer for a debt and obligation of the Corporation. Certain stockholder subscribes 200k worth of shares, he paid only 50% (the corporation allows partial payment depending on the contract of subscription), Can a corporate creditor enforce payment of unpaid the unpaid subscription? No, as held in Ong vs Tsiu 401 scra, because the subscription agreement is between the corporation and subscriber (stockholder), if there is anyone who can enforce the terms of the
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contract, it is the aggrieved party of the contract except if the assets of the Corporation is not enough. If the Corporation becomes insolvent then a corporate creditor may enforce payment of the unpaid subscription. The corporate creditor can enforce payment to the extent of the subscribers subscription only if the assets of the corporation are not enough and if the Corporation becomes insolvent. If the corporation is solvent, then the corporate creditor not being a privy in the subscription contract cannot enforce payment of the subscription. ASSIGNABILITY o Partnership A partner cannot assign his interest to a 3rd person without the consent of his partners because partnership is based on trust and confidence. Any person in the partnership enjoys the same trust and confidence at that of the transferring partner vis--vis his partners. The 3rd party must enjoy trust and confidence of the partners Corporation General Rule: a stockholder has the right to dispose of his shares as he pleases, he need not to obtain the consent of his co-stockholders unless there is a right of first refusal specified in the articles of Incorporation GOVERNING LAW o Partnership New Civil Code o Corporation Corporation Code or the Charter creating it in case of a special corporation o
As regards to: COMPOSITION
Partnership Should have at least 2 partners Created by agreement of the parties From the very moment 2 or more
MANNER OF CREATION COMMENCEMENT OF JURIDICAL
Corporation Should have at least 5 except in a Corporation Sole Created by Operation of law There has to be a law authorizing the
PERSONALITY persons bind themselves to contribute money or property to a common fund with intention to split the profits among themselves, the Partnership is deemed created because it is consensual in nature even though its articles of co-partnership is not registered with SEC. So it is not a condition to acquire a legal personality but it is for administrative convenience formation of the Corporation, which in that case the Corporation Code governing private corporations. Corporations may also be created by a special law like Red Cross, DBP, PCSO, they have a charter on its own. But whether by a special law (a charter on its own) or the general law (Corporation Code), the fact remains that a Corporation cannot be created except by law not just by mere agreement of parties So it is the approval of the SEC that gives life to the Corporation not the agreement by 5 or more persons The collective body called the Board of Directors (sec. 23, Corporation Code). BOD is at least 5 but not more than 15 members except in merger of banks where it allows at least 21 directors transaction except: those which are contrary to laws, good morals, custom, public order and policy. Corporation Code, Articles of Incorporation and powers incidental to its express powers can be exercised by the Corporation. Term is what is specified in the articles of Incorporation but to exceed 50 years. Extendible - The extension at any given time must exceed 50 years. There is continuity in a corporation. The death, insanity, incapacity of one or all stockholders will not dissolve the Corporation. The liability of the Stockholder is limited to the extent of his subscription to the Corporation. The corporate creditor can enforce payment to the extent of the subscribers subscription only if the assets of the corporation are not enough and if the Corporation becomes insolvent. If the corporation is solvent, then the corporate creditor not being a privy in the subscription contract cannot enforce payment of the subscription. ASSIGNABILITY
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TERM
Indefinite until there is a ground to dissolve a partnership. In case of death, withdrawal by a partner.
CONTINUITY
LIABILITY
AUTHORITY (who is authorized to exercise the powers)
POWERS
The Managing Partner designated in the Articles of Co-partnership. If there is no Managing Partner or in the absence of such, any of the partner may bind the Partnership. But if there is a Managing Partner designated, then he alone can manage the partnership for acts of administration. A partnership can perform any activity or
If a partner dies, withdraws or becomes incapacitated or civil interdicted, the partnership is dissolved General Partners are liable beyond their contribution in the Partnership if the assets of the Partnership are not enough to satisfy the debts or liabilities of the Partnership. Such liability is not applicable to Limited Partner
Only the powers allowed or authorized by the
A partner cannot
General
Rule:
assign his interest to a 3rd person without the consent of his partners because partnership is based on trust and confidence. stockholder has the right to dispose of his shares as he pleases, he need not to obtain the consent of his costockholders unless there is a right of first refusal specified in the articles of Incorporation Corporation Code or the Charter creating it in case of a special corporation Disadvantages y [C]onflict of Interest The liability of shares may result in conflict of interest because a stockholder may transfer his shares to anyone and it is possible that the buyer may be a stockholder of a competing Corporation. Example: San Miguel Corporation Let say A is a significant stockholder of San Miguel, he owns certain number of shares for one board seat and he sold such shares to John Gokungwei. John Gokungwei will end up being a stockholder of a San Miguel corporation and because he has enough number of shares, he may be elected in the Board of San Miguel and if he wins, he may acquire trade secrets of San Miguel. He can take such information to the detriment of San Miguel and in the advantage of Gokungweis Corporation. That is were the disadvantage comes in, unless there is a conflict of interest clause in the by-laws. Gokungwei vs SBC Gokungwei was able to acquire enough certain number of shares of San Miguel for a board seat. He bought his shares from certain stockholders and in the stock exchange, so the acquisition resulted in ownership of certain number of shares enough for a board seat. Before the stockholders meeting, San Miguel Corporation amended its by-laws to disqualify any stockholder of a competing corporation to be elected in the board of San Miguel or any person representing adverse interest adverse to San Miguel. Obviuosly, it is directed to Gokungwei, hence he cannot be elected in the board of directors. Gokungwei oppose the amendments on the ground that it violates his proprietary rights as a stockholder. The SC said that a conflict of interest clause in the by-laws is valid because of confidential information may leaked to a competitor to the detriment of the Corporation. y Limited [C]redit because there is a limit on the liability of a stockholder, it is possible that its credits is likewise limited especially if the stockholders of the Corporation are limited
GOVERNING LAW
New Civil Code
ADVANTAGES AND DISADVANTAGES OF A CORPORATION AS AGAINST OTHER FORMS OF BUSINESS ORGANIZATION Advantages y [S]ue A corporation may sue and be sued, and acquire properties in its own name independently of the persons composing it y [M]anagement Management is centralized in the board of directors y [E]xistence Continued existence despite of the change of stockholders y [L]imited liability a stockholder may decide to limit his liability to the extent of his subscription y [T]ransfersability y [A]bility to raise capital a Corporation can have thousands of stockholders and can raise capital from the public who wants to subscribe the shares of the corporation. Initial Public Offering (IPO) the shares of the Corporation will be listed in the Stocks Exchange and offers to the public such stocks. Going public means to have the shares be listed and made available to the public. Ways of obtaining the money in a corporation y A corporation may borrow from a bank or from a stockholder because it is borrowing, the Corporation should pay interest on the loan. Usually the interest on the loan is 12%-15% y The Corporations can issue shares to the public and if the public is interested they may subscribe to shares of the Corporation and if they subscribe shares to the Corporation they bring capital to the Corporation which is cheaper because the Corporation need not to pay interest on the capital contributions.
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Example: ABC corporation, a closed corporation, owned by 20 stockholders. Since there is only 20 stock holders and the contribution of the subscribers has been fixed then this Corporation can only raise credit up to so much because the collective capital of the Corporation is only so much unless it invites another stockholders y [D]ifficult to organize and maintain it is difficult to organize and maintain a corporation. A corporation is required to file every year audited financial statement, if it fails the franchise will be revoked by the SEC. there are many requirements in maintaining a Corporation. The Corporation has to file every year financial statements, general information sheet (means there has to be election). The Corporation has to engage in business because if the corporation doesnt organize in 2 years, it will be revoked. It has to be in operation for 5years continuously or else its franchise will be revoked. [M]inority General Rule: Minority stockholders does not participate in the management of the Corporation, it is controlled by the Majority stockholders. The corporations affairs are determined by the Majority [L]imited Power the power of the Corporation is limited [D]ouble Taxation the income of the Corporation is already subjected to a tax and if it distributes dividends to its stock holders, the cash dividends if received by natural persons is also subject to tax (dividends tax). If the dividends are received by a corporation, it is not subject to tax but if received by a natural person, it is subject to 10% dividends tax. considers the corporation not just a group of persons but as a person. A legal person and therefore it has a personality that is separate and distinct from the person composing it (stockholders, directors or officers). So this is the DOCTRINE OF LEGAL ENTITY. DOCTRINE OF LEGAL ENTITY The Corporation has a legal/juridical personality separate, distinct, independent from the persons composing it. As an artificial being, it has certain rights enjoyed by a natural person. Can a corporation acquire properties independently from its stockholders? Yes Can it enter into contracts independently from its stockholders? Yes Can it have a cause of action independently from its stockholders? Yes Can it incur liabilities? Yes Are the liabilities of a corporation the same as the corporation? No Can the stockholders of the Corporation enjoy, possess, and occupy the properties of the corporation without the consent of the corporation? No What if a stockholder owns a 99.9% of the Corporation, can he use corporate properties without the consent of the corporation? No Similarly a corporation can be held liable for torts or quasidelict. The same principle of principal-agent relationship also applies to a corporation A corporation can also be entitled to certain Constitutional protections like unreasonable search and seizure STONEHILL VS DIOKNO were the SC held that a Corporation may invoked its own right against unreasonable searches and seizures for properties or documents that belong to the Corporation not from its stockholders
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y y
What is a Corporation?
Section 2. Corporation defined. - A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.
Attributes of a Corporation: y It is an artificial being y It is created by operation of law y It has power/right of succession y It has powers, attributes and properties expressly authorized by law or incident to its existence ARTIFICIAL BEING it exist in contemplation of law. It derives its existence to the law that created it either by a general law or a special law. It is not a natural person but the law
A corporation can also be held liable for a crime if the penalty is fine or forfeiture of license or franchise as held in the case of CHING VS SECRETARY OF JUSTICE AND ONG VS CA. If the penalty is imprisonment, there is no way that a corporation can put behind bars; in that context a corporation cannot be held liable for a crime. Can a corporation be entitled to moral damages? As held in the recent case of Filipinas Broadcasting Network vs Ago Medical and Educational Center. FILIPINAS BROADCASTING NETWORK VS AGO MEDICAL AND EDUCATIONAL CENTER. Facts: In this case, one of the broadcasters of Filipinas Broadcasting network uttered libelous remarks over a radio against Ago Medical and education Center. Ago Medical is a medical center in Cebu. On air, the said broadcaster said that Ago Medical is the dumping ground of intellectual misfits (bagsakan ng mga bobo). Ago Medical sued the broadcaster. Issue: can a corporation (ago medical) be entitled to moral damages? Held: Under the New Civil Code, in case of libel, oral defamation or slander, the aggrieved person be entitled to moral damages. SC through Justice Carpio said that the New Civil Code makes no distinction between natural and juridical person. The law authorizes recovery of damages to any person victim of libel, defamation or slander, whatever kind of person whether natural or juridical. MERALCO VS TEAM ELECTRONICS CORP General Rule: a corporation is not entitled to moral damages because, not being a natural person, it cannot experience physical suffering or sentiments. Exception: when the corporation has a reputation that is debased, resulting to humiliation in the business realm THE POINT IS: there is no more debate on whether or not the corporation is entitled to moral damages IF THERE IS LIBEL, DEFAMATION OR SLANDER. Lucio Tan owns Philippine Airlines. John Gokungwei owns Cebu Pacific. If PAL obtains a loan from consortiums of creditors and PAL failed to pay, can the creditors of PAL sue Lucio Tan? No, the liability of PAL is not a liability of Lucio Tan A creditor will not lend money from a corporation on the fate of the corporation alone, it extend credit to a corporation because such corporation is associated with Lucio Tan, or
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John Gokungwei or at least the family members that own the Corporation. The practice is to require a surety agreement, so the borrower is PAL and a surety agreement signed by the owners. Because of the surety agreement then the controlling stockholders agree to assume personal liability solidarily with the corporation. Without that surety agreement or an agreement where the stockholders assume liability, the only way that they can be made liable for the obligation of the Corporation if there is a ground to pierce the veil of corporate fiction. If there is no fraud, no wrongdoing and there is no basis to pierce the corporate veil, then the liability of the corporation cannot be imposed against the stockholders unless they assume personal liability thru a surety or guaranty CREATED BY OPERATION OF LAW THEORIES REGARDING THE CREATION OF CORPORATIONS y Concession Theory the corporation exist because the law allows it y Economic theory the corporation is a group of person exists for an economic purpose or end In our jurisdiction, we follow the Concession theory. The corporation owns it existence to the State thru a law enacted by Congress A PRIVATE CORPORATION can only be organized in accordance with the Corporation Code. BP 68 is the general law on incorporation. So any person or group of persons that wants to put up a corporation must do so based on the formalities, procedures prescribed by the Corporation code. In case of a GOVERNMENT OWNED AND CONTROLLED CORPORATION (GOCC) THAT MAY HAVE A CHARTER ON ITS OWN, they are not organized under the Corporation Code. Example: PCSO, DBP Are these Corporation exist on their own, do they have life on their own? Yes, they dont own their existence to the General Law (Corporation Code) but they still own their existence thru a law that created them. In case of a Corporation govern by a special law, Congress can enact a special law to create a corporation only if that corporation is owned and controlled the government and for sovereign purpose or end. Congress cannot enact a special law to create a private corporation, to compete with another private corporation. (sec. 4, Corporation code)
Section 4. Corporations created by special laws or charters. - C orporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission.
Example: San Miguel Corporation is very profitable. Then Congress enact a law to create Lucifer Corporation to compete with San Miguel, can the Congress do that? No, because Congress can only enact a special law creating a corporation only if such corporation is owned and controlled by the Government and organized for a governmental purpose or end. So, such law is unconstitutional and it cannot even create a de facto corporation (sec. 20, Corporation Code)
Section 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.
Just like power of succession, it is the ability for continued existence despite change in the share ownership Lets say the Corporation has so much money that it sent all stockholders of the closed corporation to abroad for a business meeting. On the way to Hong Kong, the plane crashed resulting to the death of all stockholders. Can the Corporation still exist, when there are no more stockholders? Yes, because ownership of the shares is transmitted to the heirs by operation of law. (WILLS TOH) Extension of Corporate term entails an amendment to the articles of incorporation. Any amendments in the articles of incorporation requires the approval by at least majority of the board and for the stockholders owning at least 2/3 of the outstanding capital stock and for non-stock corporation, at least 2/3 of its members (sec.16, Corporation Code)
Section 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. 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 said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.
What are the 2 kinds of franchise? y Primary franchise the authority to act as a corporation. All corporation registered in SEC has primary franchise. y Secondary franchise a special authority given to a corporation to engaged in a specialized business. Example: Banks, Insurance Companies RIGHT OF SUCCESSION A corporation is not immortal but a corporation is capable with continued existence because any change of ownership or in the composition of the stockholders will not result to the dissolution of the Corporation. It will continue to exist for as long as there is an extension of corporate term based on the requirements provided in the Corporation Code. The extension of corporate term can only be applied for before the expiration not after expiration. Can the application for extension of corporate term be done as early as 2 years after the Corporation acquires juridical personality? No, because no extension can be made earlier than five years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission (sec. 11, corporation code)
Section 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any 9
POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE the powers of the Corporation are only those authorized by law or incident to its existence. Where do we find these powers? In the Corporation Code, Articles of Incorporation, by-laws as well as all powers incidental to its express powers of Incorporation. It cannot therefore exercise powers outside the Corporation Code, Articles of Incorporation and by-laws, any
transaction or activity has to be consistent with and not contrary to with the express, implied and incidental powers of the Corporation. What are the various powers of the Corporation under the Corporation Code? y Power to amend the Articles of Incorporation (sec. 16 & 17) y Power to sue and be sued (sec.36) y Power to adopt a corporate seal y Power to adopt and amend its by-laws y Power to adopt and amend its Articles of Incorporation y Power to sell shares or acquire shares y Power to deal with properties whether its sale, lease or purchase so far as to promote its interest or for furtherance of the purpose for which the corporation was organized y Power to make reasonable donations y Power to enter into merger and consolidation y Power to dissolve y Power to extend or shorten corporate term (sec. 37) y Power to increase or decrease capital stock; incur, create or increase bonded indebtedness (sec. 38) y Power to deny pre-emptive right (sec. 39) y Power to Sell or other disposition of assets (sec. 40) y Power to acquire own shares (sec. 41) y Power to invest corporate funds in another corporation or business or for any other purpose (sec. 42) y Power to declare dividends (sec. 43) y Power to enter into management contract (sec. 44) DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION a doctrine that allows the State to disregard for certain justifiable reasons the notion that a corporation has a personality separate and distinct from the person composing it. Elements of the doctrine of piercing the veil of corporate fiction y It is a doctrine a principle of law y that allows the State only the State thru the courts that can pierce the corporate veil (judicial function) y To disregard for certain justifiable reasons the doctrine of piercing the veil of corporate fiction can only be applied if there is a wrongdoing or if someone is aggrieved or there is a right that has been violated. If there is no one been offended, we cannot talk about this doctrine Effects of piercing the veil of corporate fiction
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y y
If it is between the stockholder and the corporation, they will be treated as one If it is between 2 corporations likewise parents and subsidiary, they will be treated as one
Various test adopted by the SC y Control test y Instrumentality test or Alter-ego test y Public convenience test is the objective test What is the objective of the doctrine of piercing the veil of corporate fiction? To make the stockholders liable for the debts and obligations of the corporation not the other way around (Umali vs CA, Indophil textile vs Calica, Francisco motors)
Case Outline: Doctrine of Separate legal personality y PALAY, INC VS CLAVE (124 SCRA 638) y CRUZ VS DALISAY (152 SCRA 482) y REMO VS IAC (172 SCRA 405) y PALABAN VS NLRC (184 SCRA 495) y UMALI VS CA (189 SCRA 529) y INDOPHIL TEXTILE MILLS WORKERS UNION VS CALICA (205 SCRA 697) y BOYERS ROXAS VS CA (211 SCRA 470) y SESBRENO VS CA (222 SCRA 466) y ROBLEDO VS NLRC (238 SCRA 52) y LAGUIO VS NLRC (262 SCRA 709) y MATUGUINA WOOD PRODUCTS VS CA (263 SCRA 490) y REPUBLIC VS SANDIGANBAYAN (266 SCRA 515) y TRADERS ROYAL VS CA (269 SCRA 15)
y y y y y y y y y y y y y PCGG VS SANDIGANBAYAN (290 SCRA 639) (365 SCRA 538) UNION BANK OF THE PHILIPPINES VS CA (290 SCRA 198) ASIONICS PHILIPPINES, INC. VS NLRC (290 SCRA 164) FRANCISCO MOTORS CORPORATION VS CA (309 SCRA 72) COMPLEX ELECTRONICS EMPLOYEES ASSOC VS NLRC (310 SCRA 403) LIM VS CA (323 SCRA 102) MARUBENI CORPORATION VS LIRAG (362 SCRA 620) LAND BANK OF THE PHILIPPINES VS CA (364 SCRA 375) PNB VS RITRATTO GROUP INC. (362 SCRA 216) JARDINE VS JRB REALTY INC. (463 SCRA 555) PASRICHA VS DON LUIS DISON REALTY (548 SCRA 273) CHINA BANKING CORPORATION VS DYNE-SEM ELECTRONICS CORPORATION (494 SCRA 493) DELIMA VS GOIS (554 SCRA 731) at the time when the corporation was still inexistence. So, the right to sue and be sued of the corporation is not affected by any subsequent suspension of the corporate franchise or eventual revocation. Even if the corporation has been dissolve, it has 3 years to liquidate or wind up its corporate affairs. What do we mean by liquidation or winding up corporate affairs? All claims filed against the corporation will have to be completed or settled during the liquidation period. Jurisprudence said that for as long as the suit was filed during the lifetime of the Corporation, the suit may survive even beyond the 3-year period. The obligation of the corporation is not the liability of the stockholders, officers or directors y REMO VS IAC (172 SCRA 405) y EPG CONSTRUCTION VS CA (210 SCRA 230) y ASIONICS PHILIPPINES VS NLRC (290 SCRA 164) The obligation of the corporation is not the liability of the stockholders, officers or directors y REMO VS IAC (172 SCRA 405) In this case, the only participation of Remo as a mere director is he voted for the purchase of certain trucks y EPG CONSTRUCTION VS CA (210 SCRA 230) That the controlling stockholder and president are not liable for breach of contract committed by the Corporation for which he is a stockholder or president. This case involves a construction contract between EPG Construction and the UP Law Library. The air condition units installed were defective so UP Law Library has incurred expenses to control damage and to install new air condition units and such costs was passed on the corporation and the president refused to pay. Admittedly, there was poor workmanship on the part of the Corporation. The issue is whether or not the obligation of the corporation extends to the president because the president own and controls the 90% corporation. The SC held that obligation of the corporation do not extend to the president because there is no foul play on the part of the President and the act of resisting the claim of UP is not tantamount to bad faith
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The principle that a corporation has a legal personality separate and distinct from the persons composing it emanates from one of the attributes of a corporation (artificial being) that it exists in contemplation of law. The law regards it as a person and as a person it can exercise certain rights, remedies that are also available to natural persons. Because of this doctrine, the obligation or liabilities of the corporation are not the obligations or liabilities of the stockholders, officers or directors. The properties of the corporation are not properties of the stockholders, officers or directors.
PASRICHA VS DON LUIS DISON REALTY A corporation having a legal personality has the right to sue and be sued. The right to sue and be sued is not affected by any subsequent suspension of the corporate franchise or eventual revocation A case that involves an ejectment for nonpayment of rentals. The action for ejectment was filed at the time when the corporation was still legally capacitated. Subsequently the franchise of the corporation was suspended and eventually revoked. The issue in that case is whether or not the suit may prosper despite the fact that the license or franchise of the corporation is already suspended or revoked The SC held that the suit may prosper despite the fact that the license or franchise of the corporation is already suspended or revoked because it was filed
y ASIONICS PHILIPPINES VS NLRC (290 SCRA 164) The president who implemented the retrenchment program cannot be held liable by the affected employees y SILVERIO VS FILIPINO BUSINESS CONSULTANTS (466 SCRA 584) Kalatagan Property in Batangas, Esses and Tri-star Corporation own a property in Kalatagan. Esses and tri-star entered into an agreement with Filipino Business Consultant to mortgage the said property. The loan obligation was not paid, so Filipino Business Consultant foreclosed the mortgage. Esses and tristar failed to redeem the property. Filipino Business Consultant filed a petition for a consolidation of title and also prayed for the issuance of writ of possession. Such petition was granted by reason of default. The title was given to Filipino Business Consultant and they occupied the property. Upon learning the judgment by default, Silverio, a representative of Esses and tri-star filed a motion to set aside because there was defective service of summons. It was found out that the sheriff forged the service of summons. So the possession was restored in favor of Esses and tri-star. In the meantime, according to Filipino business consultant, there was a supervening event that they acquired the controlling shares and interest of Esses and tristar. Since they have the control and interest over the 2 corporations, the case becomes moot and academic, they now have the right to occupy and enjoy possession of the properties. The SC held that such properties are in the name of the corporation and still the corporation has to decide who gets to use, occupy or enjoy the properties. A stockholder is not a tenant, not an owner nor a co-possessor or usufructuary.
The properties of the Corporation are not the properties of the stockholders, officers or directors y LIM VS CA (323 SCRA 102) y BOYER ROXAS VS CA (211 SCRA 470) y SILVERIO VS FILIPINO BUSINESS CONSULTANTS (466 SCRA 584) The properties of the Corporation are not the properties of the stockholders, officers or directors y LIM VS CA (323 SCRA 102) The issue is whether or not the properties of the Corporation or registered in the name of the Corporation should be included in the settlement of the estate proceeding of its deceased controlling stockholder. Pastors Lim wife wanted include corporate properties as far as the settlement of the estate just because the deceased is the controlling stockholder The SC held that since the titles are in the name of the corporation, ownership is conclusively in favor of the Corporation. The fact that Pastor Lim control the Corporation during his lifetime is not enough reason to disregard the separate legal personality. y BOYER ROXAS VS CA (211 SCRA 470) This case involves a property in laguna owned by Vda de Roxas which is converted to a resort. One of the heirs of Vda de Roxas was appointed president by the Corporation and allowed to occupy the premiere cottage of the resort. When he was no longer the President, that privilege was taken away from him and he refused on the ground that as a former president/stockholder he has a right to use the property. The right of a stockholder to corporate properties is only inchoate in nature. The right is only expectancy. It will ripen into full ownership only in cases were the law or equity allows distribution of corporate properties back to the stockholders. Since the right is only an expectancy, the properties belong to the Corporation. It is the corporation who decides who will use such properties. A stockholder is not a tenant, not an owner nor a co-possessor or usufructuary.
What are the factors NOT ENOUGH to disregard the separate legal personality of the corporation? y Controlling ownership or ownership over the controlling shares O PALAY, INC VS CLAVE (124 SCRA 638) O EPG CONSTRUCTION VS CA (210 SCRA 230) O PNB VS RITRATTO GROUP INC. (362 SCRA 216) O JARDINE VS JRB REALTY INC. (463 SCRA 555) O SPOUSES NISCE VS EQUITABLE PCI BANK (516 SCRA 231) O LAND BANK OF THE PHILIPPINES VS CA (364 SCRA 375) y Common director O SESBRENO VS CA (222 SCRA 466) O TRADERS ROYAL VS CA (269 SCRA 15) y Substantial Identity of the incorporators and similarity of business
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O O O LAGUIO VS NLRC (262 SCRA 709) COMPLEX ELECTRONICS EMPLOYEES ASSOC VS NLRC (310 SCRA 403) CHINA BANKING CORPORATION VS DYNESEM ELECTRONICS CORPORATION (494 SCRA 493) Can a corporation corporation? Yes wholly owned another
Can one person owned and control a corporation? Yes In this case PNB, the parent company and PNB international based on Hong Kong, the subsidiary. The obligations of the parent company should be confined with its operations as a parent company. The obligations of the subsidiary will have to arise from its operations as subsidiary. The obligation of the parent is not the obligation of the subsidiary or vice versa unless there is showing that the subsidiary is only an instrumentality of the parent company with no mind of its own, complete control by the parent. PNB international granted credit accommodation to Ritratto Group in the form of Letter of credit cash receipt. The credit accommodations were secured by mortgaged on properties situated in the Philippines. The process of payment was executed by Ritratto in favor PNB as attorney-in-fact of PNB international. The obligation was not paid, prompting the bank to foreclose the mortgage. Ritratto group filed an action for injunction to restrain PNB (parent) from foreclosing the mortgaged properties. The SC held that PNB (parent) has separate and distinct personality from its subsidiary. There was no showing of that the subsidiary is only an instrumentality of the parent company with no mind of its own, complete control by the parent, hence the case will not prosper.
Controlling ownership or ownership over the controlling shares O PALAY, INC VS CLAVE (124 SCRA 638) Palay Corporation sold a property in installment basis to a buyer and the contract to sell provides for an extrajudicial rescission clause that in case of nonpayment of the amortization payment, the seller may extra-judicially rescind the agreement. The buyer failed to pay the amortization payment, so the seller-Corporation rescinded the contract, but the contract was rescinded without notice to the installment buyer, therefore the rescission was invalid. Since the rescission was invalid, under the terms of the contract, the seller has the obligation to return the property or refund the purchase price. Can this obligation be enforced against the controlling stockholder? The SC held that such obligation cannot be enforced against the controlling stockholder, the fact that a person owns and controls the corporation is not enough reason to disregard the separate legal personality of the corporation. The president in this case did not abuse the corporate fiction. O EPG CONSTRUCTION VS CA (210 SCRA 230)
PNB VS RITRATTO GROUP INC. (362 SCRA 216) In this case, it involves a parent company and a subsidiary. We said that the fact that a person owns and controls the corporation is not enough reason to disregard the separate legal personality of the corporation, and that person may be a natural person or a juridical person. If the controlling person is a juridical person, it is either called the parent company or holding company and the one that is controlled is called a subsidiary or affiliate. How we do distinguished between a subsidiary and affiliate? Under the General banking act which can be applied by analogy. If a corporation owns 50% or more, it is a subsidiary; if less that 50%, it is an affiliate
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JARDINE VS JRB REALTY INC. (463 SCRA 555) This case involves an estimation of air condition units, the temperature was not enough to meet the expectation of the JRB Realty. It was not in accordance with the agreement. The air conditioning unit was provided by AIRCON Corporation. JRB Realty sued not just the seller-provider AIRCON but also its distributor in the Philippines and the parent company Jardine. As between Jardine as parent and Aircon Corporation, there is no link other than ownership of the shares The SC held that it is not enough reason to disregard the separate legal personality.
SPOUSES NISCE VS EQUITABLE PCI BANK (516 SCRA 231)
Spouses Nisce had a placement in dollar with PCI capital. PCI capital was a wholly owned subsidiary of PCI bank. Spouses Nisce also have a loan obligation with Equitable Bank secured by a mortgaged on their properties. The loan on equitable bank was not paid and the bank foreclosed the mortgage. Spouses Nisce questions the foreclosure on the ground that its placements or investment with PCI capital would have been set off against the obligation with equitable bank because equitable bank was merge with PCI bank. Is there a legal set off in this case? None, because there can be a legal set off only if 2 persons has credit on each other. In a dollar placement, the creditor is Nisce, the debtor is the PCI bank. In the loan with equitable, the lender is equitable, the debtor is Nisce. The creditor and lender are different, therefore there can be no legal set off. The fact that equitable bank was the surviving entity with the merger with PCI bank which eventually resulted in Equitable PCI bank becoming the parent company of the subsidiary PCI capital is not enough reason to disregard the separate legal personality O LAND BANK OF THE PHILIPPINES VS CA (364 SCRA 375) Land bank granted credit accommodation to ECO Corp. The obligation was not paid; can the obligation be enforced against the president whose initials stand by the name of the Corporation? The SC held that the fact that the name of the corporation is based on the initials of the president or controlling stockholder is not enough reason to disregard the separate legal personality. There is no law that prohibits a corporation in adopting a corporate name based on initials of the controlling stockholder. Common director SESBRENO VS CA (222 SCRA 466) Raul Sesbreno made a money market placement with Phil finance. In consideration with the 300k money market placement Sesbreno made with Phil finance, phil finance issued a post dated check as well as a promissory note that delta motors issued to Phil Finance. Phil finance assign/transfer to Sesbreno the promissory note that delta motors issued with Phil Finance. The investment was not returned and not paid because Phil Finance became bankrupt. So Sesbreno left no other choice but to enforce
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payment of the promissory note against delta motors. It turns out that between Delta Motors and Phil finance there was a set off or compensation. Being an only an assignee of the promissory note, Sesbreno was covered by the set off. Sesbreno argued that Delta Motors and Phil Finance are one and the same because they have common director and common holder. The SC held that the fact they have common director, stockholder or controller is not enough reason to disregard the separate legal personality. O TRADERS ROYAL VS CA (269 SCRA 15)
Substantial Identity of the incorporators and similarity of business O LAGUIO VS NLRC (262 SCRA 709) This case involves 2 corporations (April Toy and Welworld) with common incorporator and similar of business. The laborers of April Toy wanted to be considered as laborers of Welworld after April Toy close business. Can they enforce their claims against Welworld just because Welworld has similar incorporators with April Toy and engage in the same line of business? The SC held that they cannot enforce their claims against Welworld. The mere identity of incorporators and engaged in the same line of business is not enough reason to disregard the separate legal personality. It cannot be said that Welworld was organize for defeating the rights of the laborer because it was organized before April Toy. It has bona fide existence. O COMPLEX ELECTRONICS EMPLOYEES ASSOC VS NLRC (310 SCRA 403) Complex Electronics has to close business because it could compete with its competitors in terms of pricing. The legitimate orders of the Corporation were transferred to Ionics. Ionics have the common director, incorporator with Complex. Whether or not the employees of Complex can enforce the same against Ionics The SC held that they cannot enforce their claims. The mere identity of incorporators and engaged in the same line of business is not enough reason to disregard the separate legal personality.
O CHINA BANKING CORPORATION VS DYNE-SEM ELECTRONICS CORPORATION (494 SCRA 493) Dyne-sem obtains a credit accommodation with China Bank. The obligations were not paid. China Bank sue Dyne-sem but the summons could not be served so China Bank amended the complaint to implead Dynetics because they have common incorporators and they engaged in the same line of business and Dynetics acquired the machineries of dyne-sem. The SC held that such reasons were not enough to disregard the separate legal personality. On the matter of acquiring the properties, as a general rule, the buyer of corporate assets not bound to honor or assume the obligation of the seller except in four cases: merger or consolidation; if the buyer is only an extension or continuation of the corporate personality of the seller; if the sale of assets is made in bad faith; if the buyer assumes the obligation of the seller. O O O O ABS-CBN BROADCASTING VS CA (301 SCRA 342) JARDINE DAVIES VS CA (333 SCRA 684) NATIONAL POWER CORPORATION VS PHILIPP BROTHERS OCEANIC (369 SCRA 629) FILIPINAS BROADCASTING NETWORK VS AGO MEDICAL AND EDUCATIONAL CENTER (448 SCRA 413) Facts: In this case, one of the broadcasters of Filipinas Broadcasting network uttered libelous remarks over a radio against Ago Medical and education Center. Ago Medical is a medical center in Cebu. On air, the said broadcaster said that Ago Medical is the dumping ground of intellectual misfits (bagsakan ng mga bobo). Ago Medical sued the broadcaster. Issue: can a corporation (ago medical) be entitled to moral damages? Held: Under the New Civil Code, in case of libel, oral defamation or slander, the aggrieved person be entitled to moral damages. SC through Justice Carpio said that the New Civil Code makes no distinction between natural and juridical person. The law authorizes recovery of damages to any person victim of libel, defamation or slander, whatever kind of person whether natural or juridical. MERALCO VS TEAM ELECTRONICS CORP (540 SCRA 62) In this case, the SC clarified that tortuous act, the act complained of, should have directly resulted to the destruction or impairment of the reputation or good will of the corporation. Not all acts can be charge against the corporation, it has to be an act that directly destroys, tarnishes the good will or reputation of the corporation.
There are only 6 cases were a director or officer may be held solidarily liable with the corporation y Gross negligence or bad faith in directing the affair of the corporation y Assenting or consenting to a patently unlawful act y Acquiring interest in conflict of his duty as a director or officer y If he agrees to make himself solidarily liable to the corporation as when he signed a surety agreement or a guaranty agreement or when he bind himself to pay personally with the corporation y If by express provision of law, he is made liable for the corporate act or omission like in sec. 13, PD 115 y Issuance of watered stocks (sec. 65, Corporation Code) Watered Stocks stocks issued for an amount below par
Section 65. 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.
Case outline: Doctrine of Piercing the Corporate Veil O VILLA REY TRANSIT VS FERRER (25 SCRA 845) O A.C. RANSOM LABOR UNION-CCLU VS NLRC (150 SCRA 498) O INDINO VS NLRC (178 SCRA 168) O SHOEMART INC VS NLRC (225 SCRA 311) O MANUEL R. DULAY ENTERPRISES VS CA (225 SCRA 678) O GUATSON INTERNATIONAL TRAVEL AND TOURS VS NLRC (230 SCRA 815) O FIRST PHILIPPINE INTERNATIONAL BANK VS CA (252 SCRA 259) O TOMAS LAO CONSTRUCTION VS NLRC (278 SCRA 716) O CONCEPT BUILDERS INC. VS NLRC (257 SCRA 149) O REYNOSO VS CA (345 SCRA 335)
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Case Outline: Claims for moral damages O SIMEX INTERNATIONAL, INC. VS CA (333 SCRA 684)
O O O O O O O O LIPAT VS PACIFIC BANKING CORP (402 SCRA 339) MAVEST USA VS SAMPAGUITA GARMENT CORPORATION (470 SCRA 440) PAMPLONA PLANTATION COMPANY VS TINGHIL (450 SCRA 421) TIMES TRANSPORTATION CO VS SOTELO (451 SCRA 587) APEX MINING CO VS SOUTHEAST MINDANAO GOLD MINING CORP (492 SCRA 355) RYUICHI YAMAMOTO VS NISHINO LEATHERS INDUSTRIES (551 SCRA 447) GCC VS ALSONS DEVELOPMENT AND INVESTMENT CORPORATION (513 SCRA 225) STA MONICA INDUSTRIAL AND DEVELOPMENT CORP VS THE DEPARTMENT OF AGRARIAN REFORM REGIONAL DIRECTOR (555 SCRA 97) REYNOSO VS CA (345 SCRA 335) LIPAT VS PACIFIC BANKING CORP (402 SCRA 339) O MAVEST USA VS SAMPAGUITA GARMENT CORPORATION (470 SCRA 440) Objective Test O UMALI VS CA (189 SCRA 529) O INDOPHIL TEXTILE MILLS WORKERS UNION VS CALICA (205 SCRA 697) O ROBLEDO VS NLRC (238 SCRA 52) O FRANCISCO MOTORS CORPORATION VS CA (309 SCRA 72) Public Convenience test O O
DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION a doctrine that allows the State to disregard for certain justifiable reasons the notion that a corporation has a personality separate and distinct from the person composing it. Forget about the doctrine of piercing the veil of corporate fiction if no right that has been violated. The application of the doctrine presupposes that there is a wrongdoing, that there is a right that has been violated. Only the State can pierce the veil of corporate fiction thru the courts. (CRUZ VS DALISAY) Various test adopted by the SC y Fraud test O MATUGUINA WOOD PRODUCTS VS CA (263 SCRA 490) O MARUBENI CORPORATION VS LIRAG (362 SCRA 620) O VILLA REY TRANSIT VS FERRER (25 SCRA 845) O A.C. RANSOM LABOR UNION-CCLU VS NLRC (150 SCRA 498) O FIRST PHILIPPINE INTERNATIONAL BANK VS CA (252 SCRA 259) O TIMES TRANSPORTATION CO VS SOTELO (451 SCRA 587) O STA MONICA INDUSTRIAL AND DEVELOPMENT CORP VS THE DEPARTMENT OF AGRARIAN REFORM REGIONAL DIRECTOR (555 SCRA 97) y Control test O CONCEPT BUILDERS INC. VS NLRC (257 SCRA 149) y Alter Ego or Instrumentality test
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Fraud test the SC warned that fraud is not presumed, it must be convincingly establish. The mere allegation of fraud is not enough to pierce the veil of corporate fiction y MATUGUINA WOOD PRODUCTS VS CA (263 SCRA 490) Matuguina, as a single proprietor, was the owner of a timber concession license that was found to be encroached to the concession area of Daven corp. Subsequently, Matuguina set up a corporation which he owns 70%, he transferred his license to that corporation. Is that corporation which he set up liable for the encroachment of the timber concession area perpetrated by Matuguina as a single proprietor? Can we say that the Corporation he set up, a continuation of the single proprietorship? The SC held that it is not a continuation of the single proprietorship because there is no showing in this case that the Corporation was just a vehicle of Matuguina to commit the infraction. y MARUBENI CORPORATION VS LIRAG (362 SCRA 620) Lirag was a peddler, he was to bag contracts for Marubeni, for every bag that he gets, and he gets a commission from Marubeni. Lirag was able to obtain a contract for Sanritsu not for Marubeni, but Lirag wanted to be paid not by Sanritsu but by Marubeni. Sanritsu and Marubeni are sister company. VILLA REY TRANSIT VS FERRER (25 SCRA 845) Villarama was the owner of a certificate of Public Convenience and the operator of ___ Buses. He sold ___ buses and assigned the certificate of Public convenience to Pantranco on the condition that within 10 years he will not engaged in a business that will compete with Pantranco. Years after, he set
up Villa Rey Corporation using his wife and brother in-law as dummies acquires assets and a certificate of public convenience. The seller of the buses was a defendant in a court case. The seller loses, there was a judgment against him and the buses that he sold was levied. Villa Rey Transit intervene, Pantranco, argued that Villa Rey transit has no right to intervene because Villa Rey Transit is just corporation use by Villarama to avoid a contractual restriction. Villarama was not a stockholder of the Corporation, except that he was the source of the subscriptions made by the wife and the brother of Villarama. The SC held that Villa Rey transit was organize for the purpose of evading a contractual restriction and therefore the separate legal personality has to be disregarded. So, the restriction against Villarama is also enforceable to Villa Rey transit. y A.C. RANSOM LABOR UNION-CCLU VS NLRC (150 SCRA 498) There is a pendency of a labor case filed by the labor union of AC ransom against the company. The officers of AC ransom set up a Corporation named Rosario. The officers transferred the assets of AC ransom to Rosario Corporation. The SC held that Rosario Corporation was organized only for the purpose of evading the claims that is due to the laborers of AC ransom y FIRST PHILIPPINE INTERNATIONAL BANK VS CA (252 SCRA 259) This case applies the doctrine of piercing the veil of corporate fiction in relation to the rule against forum shopping. Producers Bank acquired assets through a foreclosure of mortgage. This acquired assets was sold by it department manager. The department manager entered into a contract with Demetria and Janolo. There were offers and counter-offers and the parties could not agree whether there is a contract that is perfected. Demetria and Janolo filed an action with the RTC, the RTC declared the contract of sale perfected. The conservator of the Bank does not want to honor the contract prompting Demetria and Janolo to file a complaint in the RTC and they obtain a favorable judgment. The Bank appealed. During the pendency of the appeal, the controlling stockholder of producers bank filed a derivative suit in behalf supposedly of the Corporation to declare the same contract as invalid and unenforceable arguing that
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such suit was filed by the stockholders not by the corporation. The SC held that the legal personality of the corporation in the derivative suit will have to be set aside. It is basically a suit filed by the Corporation disguise as a derivative suit initiated by the Stockholders. So there is a complaint in the first case were the corporation was the defendant and piercing the veil of corporate fiction in the second case, it is as if the Corporation was the one who filed it. Identity of parties, identity of reliefs and cause of action, therefore there is forum shopping. The stockholders of the bank cannot say that it is a separate suit because they have a separate legal personality from the bank. y TIMES TRANSPORTATION CO VS SOTELO (451 SCRA 587) STA MONICA INDUSTRIAL AND DEVELOPMENT CORP VS THE DEPARTMENT OF AGRARIAN REFORM REGIONAL DIRECTOR (555 SCRA 97) Trinidads properties was covered by the CARP law, being covered with CARP, he is supposed to allocate certain hectares of his land in favor of the tenants to make such tenants the owner thereof. Trinidad set up a Corporation which his family owns and controls 98%. Since the owner of the properties is the Corporation, not being a natural person, he wants to place it outside the coverage of CARP. The SC held that the properties were merely transferred to the Corporation to evade the application of the CARP law. Control test Elements of Control test (all elements must concur) o Control, not mere majority or complete stock control, but complete domination, not of finances but of policy and business practice in respect to the transaction attacked such that the corporate entity as to this transaction had at that time no separate mind, will or existence of its own o Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest or unjust act in contravention of plaintiffs legal right o The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
y CONCEPT BUILDERS INC. VS NLRC (257 SCRA 149) proprietorship and the corporation, both business organizations is controlled by the spouses Lipat. y MAVEST USA VS SAMPAGUITA GARMENT CORPORATION (470 SCRA 440) This case talks about the liability of a head office. A head office has no legal personality of its own unless it is set up as a Corporation. It is possible that a Corporation is abroad and need not to set up a corporation in the Philippines to undertake its operation in the Philippines. It may put up a subsidiary or a representative/ head office. A head office is an extension of the parent company
Alter Ego or Instrumentality test y REYNOSO VS CA (345 SCRA 335) This involves a financing company, Commercial Credit Corp (CCC). It opened up various franchises over metro manila. One of the franchise involve is CCC-QC. Because of the rules on DOSRI, CCC-equity was created. Reynoso was the resident manager of CCC-QC and was charge of embezzlement, he filed a counterclaim arguing that he was dismissed illegally and he won a favorable judgment. Whether or not on the basis of the Counter-claim he can enforce such counter-claim not just to CCC-QC but against the parent company CCC. The SC concluded that CCC-QC is only an adjunct or instrumentality or CCC base on the circumstances that Reynoso was hired not by CCC-QC but by CCC; the funding of CCC-QC came solely from CCC; the policies may it be personnel, finance of CCC-QC was controlled and determined by CCC. y LIPAT VS PACIFIC BANKING CORP (402 SCRA 339) This case involves Spouses Lipat who is engaged in the Business of manufacture and sale of garments. They have also a business in the USA. The one managing the business (single proprietorship) in the Philippines is the daughter of the Spouses. The Mother executed SPA in favor of the daughter, for the daughter to obtain loans and credit accommodations from Pacific Bank secured by a mortgage. The daughter obtains loans and credit accommodations secured by a mortgage on the properties of the spouses Lipat. Eventually, the business in the Philippines (single proprietorship) was converted into a Corporation owned and controlled by the Spouses Lipat. There was a failure to pay the loans prompting the Bank to foreclose. Can the obligation of single proprietorship be transferred or assumed by the Corporation? The Spouses contend that the SPA or the authority given to the daughter to obtain a loan is for the single proprietorship and not to the Corporation, therefore, the bank cannot foreclose the mortgage to cover the obligation of the Corporation. The SC held that the Corporation was only an extension of the personality of the single proprietorship because there is no highly distinction between the assets of the Corporation and single proprietorship, the same funds of the Single
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Objective Test the end result in piercing the veil of corporate fiction is to make the stockholders liable for debts and obligations of the Corporation NOT to make the Corporation liable for the debts and obligations of the stockholders. y UMALI VS CA (189 SCRA 529) The Spouses obtain a loan secured by a mortgage. They could not pay the loan so they approach a developer who offered to convert certain parcel of land into a subdivision. The Spouses consented and the project was undertaken. They also set up a Corporation. They had to purchase a tractor to undertake the project, and the purchase price was secured by the Bond issued by an insurance Company. The bond issued by the insurance company is turn secured by a mortgage on the properties of the spouses. The obligation was not paid prompting the insurance company to foreclose the mortgage and sold to a buyer-corporation with a common debtor and owner. The owner of the property wanted to pierce the veil of corporate fiction and to treat the insurance company (seller) and the Corporation (buyer) as one and the same in order to justify the action to nullify the sale. The SC held that they can nullify the foreclosure proceeding without piercing the veil of corporate fiction if there is fraud y INDOPHIL TEXTILE MILLS WORKERS UNION VS CALICA (205 SCRA 697) Indophil textile mills workers union, a labor union in the Indophil textile wanted to include the employees of ____, a sister company of Indophil textile engaged in the same line of business; with common directors and owners, as part of the collective bargaining unit. The SC held that the end is not to make the stockholders liable for any debt or obligation of the
corporation in piercing the veil of corporate fiction, therefore such doctrine will not apply in this case y y ROBLEDO VS NLRC (238 SCRA 52) FRANCISCO MOTORS CORPORATION VS CA (309 SCRA 72) A certain lawyer lend his legal services to one of incorporators of Francisco Motors in connection with an estate proceeding. Such lawyer was not paid, he purchased a certain vehicle from Francisco motors corporation. He wants the purchase of the motor vehicle to be set off against the fees due in one of the incorporators. The SC held that the doctrine of piercing the veil of corporate fiction does not apply because the end result in such doctrine is to make the stockholders liable for debts and obligations of the Corporation not the other way around When it comes to labor cases, non-payment of separation pays. This involves 2 or more Corporations and the employees are transfer from one to another without receiving in full the separation benefits from the first corporation, then the separate legal personality of the Corporations will be pierced: O INDINO VS NLRC (178 SCRA 168) O GUATSON INTERNATIONAL TRAVEL AND TOURS VS NLRC (230 SCRA 815) Cases that may be included in the Objective test O APEX MINING CO VS SOUTHEAST MINDANAO GOLD MINING CORP (492 SCRA 355) APEX MINING CO VS SOUTHEAST MINDANAO GOLD MINING CORP (492 SCRA 355) Where the terms of a mining claim prohibit the assignment thereof except in favor of an agent and the corporation, as holder of the mining claim, transferred its right to a wholly-owned subsidiary, the separate legal personality of the subsidiary can not be pierced so that the latter shall be considered a mere conduit or agent of the parent company to legitimize the prohibited transfer. The doctrine of the piercing the corporate veil cannot be used as a vehicle to commit prohibited acts because these acts are the ones which the doctrine seeks to prevent. To allow the subsidiary to avail itself of this doctrine and to approve the validity of the assignment is tantamount to sanctioning illegal act which is what the doctrine precisely seeks to forestall. y
Section 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or non-stock corporations. C orporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations.
Classification of Corporations y According to [F]unction o Public Corporation o Private Corporation y According to [E]xistence of shares o Stock Corporation o Non-stock Corporation According to [L]egal Status o De Jure Corporation o De Facto Corporation o Corporation by Estoppel o Corporation by Prescription According to [R]elationship of Management and Control o Parent Corporation o Holding Corporation o Subsidiary Corporation o Affiliate Corporation According to Place of [I]ncorporation o Domestic Corporation o Foreign Corporation According to Place of [C]omposition o Corporation Sole o Corporation Aggregate [O]ther Classification o Open Corporation o Close Corporation o Religious Corporation o Educational Corporation
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ACCORDING TO [F]UNCTION Public y y y y
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. (n) Section 88. Purposes. - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations
If the corporation is organize for the government of a portion of a State. They have a charter of their own. They are organized to govern a portion of a State. Governed by the special law creating it
A non-stock corporation is not organized for profit.
Example: y City of Manila y City of Makati Private y If the corporation is organize for a private purpose or end. y Governed by the Corporation Code and its Articles of Incorporation and By-laws of such corporation ACCORDING TO [E]XISTENCE OF SHARES Stock Corporation - Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. 2 features of stock Corporation y It has capital stock divided into shares y Authorized to distribute dividends or surplus profit proportionately to the stockholders Non-stock Corporation Section 3 defines non-stock corporation by exclusion, so anything which does not have a capital stock divided into shares and/or not authorized to distribute dividends to its members is considered a non-stock corporation Supplementing section 3, Section 88 provides that non-stock corporation is not organized for profit. It is organize for charitable, civic, literary and related purposes. It cannot be organized of partisan activity because it is a partisan political activity registered as a political party not as a non-stock corporation
Section 87. Definition. - For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this C ode on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title.
Is there something wrong if the non-stock corporation earns profit? UST is a non-stock, non-profit corporation and yet UST belong to the top 500 corporation, is there anything wrong with that? None, for as long as the profits are not distributed to the members. For as long as the profits are used in furtherance of the purpose for which the corporation was organized What is a Capital Stock? An absolute amount specified in the Articles of Incorporation and available for subscription. It is fixed in the Articles of Incorporation, that amount that is available for subscription by the stockholders What is a Capital? A capital represents the assets of the Corporation. It fluctuates, maybe more or less depending on the results of operation How do we determine the authorized capital stock? Lets say, the authorized capital stock is Php 1B (absolute amount, fixed in the AOI, divided into shares) Determine the Capital Stock by multiplying the number of shares allowed in the AOI by the par value 100 million shares. So Php 1B 100 million shares = Php 10.00 (par value) The 100 million shares represent the maximum number of shares that a corporation may issue without amending the AOI. If the corporation wants to issue more than 100 million shares, it has to amend the AOI. What about if it has no par value share corporation? What number can we see in the AOI? Just the maximum number of shares Under section 6, that even though it has no par value, it has a minimum issued value (which is Php 5.00). A no par value
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share cannot be issued for an amount not lower than Php 5.00. How do we distinguished capital stock from stock? Shares of stock is an integral unit of the capital stock A stockholder who owns more shares have more say and control in the corporation in terms of voting, dividends and distribution of assets upon dissolution A stockholders standing in the Corporation depends on the shares subscribed in the Corporation What about Stock certificate? A stock certificate is a document issued by a Corporation acknowledging that the person named or specified therein owns certain number of shares in the Corporation. It is an instrument evidencing the ownership of a shares by the stockholder named in the document or instrument. Can a stockholder exercise the rights pertaining to the shares without a stock certificate? Yes, because shares of stock is different from a stock certificate. Even if there is no evidence (stock certificate) for as long as u are the holder, u can exercise the rights pertaining to the shares subscribed by the corporation. Under section 64, a stock certificate can only be issued if he had fully paid the subscription price
Section 64. Issuance of stock certificates. - 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
y y y
A valid law under which a corporation was organized or created Attempt in good faith to organize Actual exercise of corporate powers
If the law for which the corporation is organized is declared Unconstitutional, then that is not even a de facto corporation. Lets say Congress enacted a special law to create a private corporation and that private corporation was allowed to exercise corporate powers enters into a transaction and contract, is that corporation at least a de facto corporation? No, because Congress can enact a special law to create only a government owned and controlled corporation. The law passed by Congress to create a private corporation is unconstitutional. Therefore that corporation is not even a de facto corporation. When we say Attempt in good faith to organize we mean that the articles of incorporation has been filed with the SEC and the SEC issued a certificate of registration. Without the certificate of registration, it is not even a de facto corporation. Where lies the defect then? Defect as to form but it has been issued a certificate of incorporation Example: Under section 14, there is a prescribe form for the articles of incorporation. If the AOI is filed by the corporation or group of person concerned does not conform with the form prescribed by law but goes over with the SEC and SEC issues registration, that is a de facto corporation. The treasurers certificate is false, under the law, the treasurer must certify that this represent the controlled capital stock as may subscribed and paid up upon incorporation. If it is false but the SEC does not have a way of knowing right away and relied on the representation of the treasurer, it is a de facto corporation In case of residency, it is stated in the AOI that majority of the incorporators are Philippine residents, it turns out they are not, the SEC did not check and issued a certificate of registration. Therefore, it is a de facto corporation CASE: ALBERT VS UCP In this case Albert is a known author or authority in criminal law. He had commentaries in the revised penal code. University Publishing company entered into a contract with Albert to publish the commentaries on the revised penal code. UPC published the commentaries but it did not pay the
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The law allows partial payment of subscription ACCORDING TO [L]EGAL STATUS De Jure Corporation a corporation that fully conforms with the requirements for incorporation under the law. A corporation in law and in fact De Facto Corporation a corporation with a colorable imitation or compliance with the requirements prescribed by law. Colorable means substantial compliance with the requirements of the law. It is a corporation in fact but not in law. There is an infirmity in the incorporation such that the State reserves the right to question or assail its corporate existence thru a quo warranto proceeding. Elements/Requisites of a De Facto Corporation
amount due to Albert prompting him to file a collection suit. But during the pendency of the case, he died. The judgment obtains in favor of the estate against UPC. When they were about to implement the writ of execution, they had discovered that UPC is not registered with the SEC, is it a de facto corporation? No, it is not registered, there is no attempt in good faith to organize Who will be liable in that case? The president who had control over the proceedings. The real party in interest in case of an unincorporated association is the person who has control over the proceedings. Can the judgment be enforced against the president? Or is there a need to file a separate case against the president? There is no need to file a separate case; the judgment can be enforced against the president because this is an unincorporated association and he who had control over the proceedings is the real party in interest. Actual exercise of corporate powers (3rd element) over time a corporation is allowed to enter into contracts and transactions A de facto, for all end and purposes, is a corporation, it has the same powers, privileges, rights, attributes and subject to the same obligations as a de jure corporations. Its directors are authorized and liable as directors of de jure corporation. Its officers have the same rights and obligations as officers of a de jure corporation. Except that the state reserves the right to question its corporate existence until the defect is already rectified. The existence of a de facto corporation cannot be attacked collaterally What do we mean by it cannot be attacked collaterally? The principal purpose of the suit is to assail the corporate existence Example: ABC corporation, a de facto corporation, entered in a contract with X for sale of certain merchandise. ABC delivered the merchandise but X did not pay his obligation to ABC corp. ABC corp filed an action for collection, X filed a motion to dismiss on the ground that ABC corp has no legal capacity to sue on the ground that it is only a de facto corporation. Will the motion to dismiss be granted? No, because it is a collateral proceeding, the object of the suit is collection but not to question the existence of a corporation. If someone wants to question the existence of a corporation, it must be
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thru a quo warranto proceedings, not in a collection case.

Section 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be a corporation under this C ode, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.
Corporation by Estoppel under section 21, a corporation exists if a group of person assumes to be or represents themselves to be a corporation when they have no legal authority to do so and as such they are precluded from denying their corporate existence as regards to the 3rd party who relied on the representation.
Section 21. 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: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation.
Example: lets say 5 persons, A, B, C, D and E acting and represents themselves to be a corporation. They entered into a contract for purchase and delivery of supplies in favor of X. X delivered the supplies but A, B, C, D and E did not pay. X filed a case for collection, can A, B, C, D and E (ABC corp) deny their corporate existence? No, because they misrepresented X that they are a corporation. Therefore they are stopped from denying their corporate existence as regards with rd the 3 person who relied on such representation. What is the liability then of the persons who assumed to be a corporation when they are not authorized to do so? They will be liable as general partners not as stockholders. Which means they may be liable up to the extent of their personal assets or properties Corporation by Prescription a corporation which since the time immemorial have all the attributes and powers of a corporation. The only Example is the Roman Catholic Church ACCORDING TO [R]ELATIONSHIP OF MANAGEMENT AND CONTROL Parent Corporation a corporation that owns shares in another corporation. The parent corporation has a power to
elect the board of directors of a subsidiary or affiliate thru the ownership of the shares Holding Corporation a corporation that own shares in various companies for investment purposes y And whose laws allow Filipino citizens to do business in their own country
Example: SM incorporated has shares in various companies for investment purposes. BDO is owned by SM incorporated, at the same time SM incorporated owns SM Malls, SM residences. Subsidiary Corporation if the Parent Company owns shares in another corporation, if the investee corporation is 50% or more owned by the other corporation Affiliate Corporation if the Parent Company owns shares in another corporation, if the investee corporation is less than 50% owned by the other corporation Example of a Parent and Subsidiary: BDO it has a subsidiary BDO leasing and BDO capital. BDO leasing is a subsidiary because it is 99.9% owned by BDO, so BDO has the power to elect the board of directors of BDO leasing. Why will the parent company put up a subsidiary? Because the liability of BDO leasing will be limited to leasing. A subsidiary has a personality separate and distinct from the parent unless there is a ground for piercing the corporate veil. ACCORDING TO PLACE OF [I]NCORPORATION Domestic Corporation a corporation formed, organized and existing under Philippine laws. Can a corporation be considered as a domestic corporation if it is wholly owned by foreigners? Yes, for as long as it is a corporation formed, organized and existing under Philippine laws. So the test is, where is it incorporated? Foreign Corporation - If it is under foreign laws and whose government allows Filipino Citizens on the basis of their own country is a foreign corporation Under section 123 there are 2 features for a foreign corporation y Formed, organized and existing under other than Philippine Laws
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Section 123. Definition and rights of foreign corporations. - For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency.
Can we have a foreign corporation composed of Filipinos? Yes, for as long as it is Formed, organized and existing under other than Philippine Laws or foreign laws ACCORDING TO PLACE OF [C]OMPOSITION Corporation Sole a corporation with only one corporators associated with the clergy or the bishop or presiding elder with a natural character or capacity but once organized as a corporation sole acquires juridical capacity different from his natural character. Example: Roman Catholic Bishop of city of Manila, before the bishop of the city of manila was a natural person, he had a natural character. He organized himself as a corporation sole, so his juridical capacity is now distinguished from his natural character or capacity. As a corporation sole, he can acquire properties for the church, he can enter into contracts for a church Corporation Aggregate at least 5 incorporators [O]THER CLASSIFICATION Open Corporation Close Corporation a corporation that its AOI provides that the shares of the corporation should be held by specified number of persons not exceeding 20 and subject to certain restrictions on transfer of shares and whose shares are not available for listing in the stock exchange 3 features of a close corporation that such features must be embodied in the AOI y shares are held by specified number of persons not exceeding 20 y shares are subject to certain restrictions on transfer as specified in the AOI y shares are not available for listing in the stock exchange Lets say that a corporation has only 5 incorporators, is that a close corporation? Is a family corporation always a close corporation?
No, these features must be embodied in the AOI have access to the books, documents and transactions of PNB? It turned out that the charter of PNB specifies the persons who can have access in the books of PNB. The charter delimited the persons who can examine the books, documents and records of PNB. Which one prevails, the charter of PNB or the corporation code? The SC held that the Charter of PNB will prevail CASE: BALUYOT VS HOLGANZA One of the employees of Red Cross was caught misappropriating the funds of Red Cross. The case was filed against him. Which body has jurisdiction? The Civil Service Commission or the labor Arbiter? The SC held that it is the Civil Service commission because Red Cross is considered as a special corporation with a charter of its own
Section 5. Corporators and incorporators, stockholders and members. Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members.
Religious Corporation Educational Corporation What are those classifications found in the corporation code? y Public and Private y Stock and Non-stock y De Jure, de facto and by estoppel y Domestic and Foreign y Open and close y Religious y Education separate chapter What do we mean by Corporation going public and corporation going private? y Going Public the shares will be listed in the stock exchange y Going private it will limit the number of shares to a certain number of stockholders What is a quasi-public corporation? It is a private corporation organized to promote general welfare Example: MERALCO, it does not have a charter of its own, it is governed by the corporation code but it is quasi-public because it is organized to promote general welfare
Section 4. Corporations created by special laws or charters. - C orporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable.
Who compose the corporation? y Corporators y Incorporators Corporator is the generic term for anyone a part of the corporation. It is a stockholder for a stock corporation or a member for a non-stock corporation The term member applies to non-stock corporation. The term stockholder applies to stock corporation. Incorporator vs Corporator INCORPORATOR A signatory of the AOI. He is an original corporator of the corporation CORPORATOR Forms part or composes a corporation either a stockholder or member but he is not a signatory in the AOI A corporator is not always an Incorporator. Corporators, there is no limit of corporators except for a close corporation (20 only). If it is more than 20, it contravenes with the nature of a close corporation
How are these special corporations are governed? They are governed primarily by the charter creating them and the provisions of the corporation code in suppletory capacity In case of conflict between the provisions of the charter creating the corporation and the corporation code, which one prevails? The charter because the corporation code is merely suppletory meaning the corporation code supplies in case of deficiency. CASE: GONZALES VS PNB Gonzales wanted to investigate the biggest loans that may have been granted by PNB, and he demanded to have access to the records and transactions of PNB. Unfortunately, he was not a stockholder, being not a stockholder PNB refused. Gonzales acquired shares of PNB, after acquiring shares; he invoked his rights to inspection under section 74 of the corporation code. Can he invoke his rights to inspection or to
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An Incorporator is always a corporator Incorporators is not less than 5 but not more than 15 except in the case of corporation sole
An incorporator must be a natural person EXCEPT: in case of a registered cooperative that can be an incorporator of a rural bank Incorporators - majority of them must be Philippine resident A corporator maybe natural or juridical
What is a promoter? The person who brings about the formation of the corporation. A promoter may or may not be an incorporator. What is a Subscriber? Stockholders and subscriber are the same. One who owns shares in the corporation What is an Underwriter? The one who sells security or shares in the corporation. 2 kinds of Underwriting y Firm commitment the investment banker purchases the shares outrightly from the corporation y Best effort Basis the investment banker only acts as an agent of the corporation, whatever shares that cannot be sold, it belongs to the corporation. Example: ABC Corporation wants to list its shares to the stock exchange, it will make available certain number of shares to the public. Lets say Php 1 Billion authorized capital stock 100 million shares, for a value of 10 pesos, then only 25% has been subscribed (the minimum under the law), the 75% remaining may be unissued. Lets say the Corporation decides to issue the shares to the public. Why list the shares in the stock exchange? To generate capital from the public How do ABC Corporation make sure that the shares issued to the public will be doubled up by the public? By appointing an underwriter, he will be the one to do the selling for the Corporation. If it is in a FIRM COMMITMENT BASIS, whatever shares acquired by underwriter is considered sold Example: lets say XYZ is an investment bank underwrites 10million shares. The 10 million shares is considered sold, the capital goes to the Corporation If it is in a BEST EFFORT BASIS, the investment bank only acts as an agent of ABC corporation, whatever shares that cannot be sold will be return to the corporation How do we determine the NATIONALITY OF THE CORPORATION? What is the test to determine the nationality of the corporation? y Incorporation Test means the place of Incorporation
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Corporators requirement
no
such
CASE: Elvira Reyes-Chua, her name as an incorporator carried her married name Chua. She separated from her husband and to remove any trace of memory of the husband, she petition with the SEC to change her name as an incorporator from Elvira Reyes-Chua to Elvira Reyes. Should the petition be granted? The SEC denied the petition on the ground that the names of incorporators cannot be amended. That is the portion of the AOI which can never be amended Persons composing the corporations under the Section 5 of the Corporation Code y Corporators y Incorporators y Stockholders y Members Other persons composing the corporations y Board of Directors y Promoter y Underwriter Tri-level hierarchy y Stockholders the group of persons who elects the board y Board of Directors exercise corporate powers for the corporation y Corporate Officer - implements the policies lay down by the Board of Directors The stockholders elect the Board of Directors; the board of directors appoints the corporate officers. The corporate officers appoint the employees of the Corporation. Who are the Corporate officers under the law? y President must be a stockholder meaning he is a corporator y Secretary not required to be a stockholder y Treasurer not required to be a stockholder y Other officers specified in the by-laws of the corporation
y y Domiciliarity Test means the principal place of the corporation is located Control Test in our jurisdiction we apply this test. Control Test means, who are the stockholder who control the corporation. The nationality of the stockholders determines the nationality of the Corporation CORPO1 owns 60% of the shares of ABC corp CORPO2 owns 40% of the shares of ABC corp If CORPO1 is at least 60% owned by Filipinos, then it is considered as a Filipino Corporation Then the 60% requirement (nationalized activity) that ABC corporation has been complied with If CORPO1 is at least 59% (less than 60%) owned by Filipinos, then it is considered as a foreign owned What is the DOUBLE 60% RULE? In case of registered enterprise corporations under the foreign investments act of 1991, 60% of the stockholders must be Filipinos and 60% of the board members must be Filipinos
Section 6. Classification of shares. - The shares of stock of stock corporations 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 as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That 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: Provided, however, 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. Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. 2. 26 Amendment of the articles of incorporation; Adoption and amendment of by-laws;
Why is it important to determine the Nationality of the Corporation? For the purpose of complying with the requirements of the Constitution and special laws regarding nationalized Activities There are corporations that are wholly or partly reserved for Filipinos, they are nationalized corporations If the Corporation is not a nationalized forget about the control test. What are the nationalized corporations or activities? y Mass Media (broadcast and print) 100% reserved for Filipinos y Retail Trade 100% reserved for Filipinos unless the capital of the corporation exceeds $2.5 M. if it exceeds foreigners may be a stockholders y Rice and Corn 100% reserved for Filipinos y Security, watchman or detective Agency 100% reserved for Filipinos y Advertising 70% reserved for Filipinos y Recruitment 75% reserved for Filipinos y Exploration of Natural Resources 60% reserved for Filipinos y Public utility 60% reserved for Filipinos y Educational 60% reserved for Filipinos y Banks 60% reserved for Filipinos y Realty 60% reserved for Filipinos y Investment House 60% reserved for Filipinos Foreigners cannot occupy any executive position in any corporation engaged in a nationalized activity whether wholly or partly nationalized What is the GRANDFATHER RULE? A method to determine the nationality of the corporation by making reference to the nationality of the stockholders of the investor corporation Example: ABC Corporation (investee corporation) engaged exploration of natural resources ABC corporation stockholders are CORPO1 and CORPO2
in
3. 4. 5. 6. 7. 8. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; Incurring, creating or increasing bonded indebtedness; Increase or decrease of capital stock; Merger or consolidation of the corporation with another corporation or other corporations; Investment of corporate funds in another corporation or business in accordance with this Code; and Dissolution of the corporation.
right to vote or be voted. They share proportionately in the assets and dividends of the Corporations Preferred maybe preferred as to: y As to Assets y As to Dividends y As to Both Assets and Dividends Preferred shares AS TO ASSETS it means that the holder of the preferred shares, in case of dissolution and liquidation of the Corporation, get the assets of the Corporation ahead of the common shares. They are given priority or preference with respect to dissolution of assets Preferred shares AS TO DIVIDENDS - it means that if there are dividends, then they have to be paid ahead or first than the holders of common shares. It does not mean that holder of preferred shares are absolutely entitled to dividends. The right to received dividends depends on the availability of surplus profit. Holders of preferred shares are NOT CREDITORS of the Corporation. Just like an ordinary stockholder, a preferred shareholder is a risk taker, investors of the corporation. CASE: REPUBLIC PLANTERS VS AGANA Republic planters Bank issued preferred redeemable shares and the features of the preferred shares is that they are entitled to payment of dividends. Unfortunately, republic planters bank experienced liquidity problems, going to be insolvent. But despite of the condition, one of the stockholders holding on the preferred shares filed an action against the corporation to redeem his shares and paid the dividends due on the shares. SC held that holders of preferred shares are not creditors of the corporation. The right to received dividends ahead of the common shares depends on the availability or existence of surplus profit Preferred shares AS TO DIVIDENDS may be classified into: y Cumulative y Non-Cumulative y Participating y Non-Participating Cumulative - the right to received dividends are carried over to the succeeding years. Accrued
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Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.
CLASSIFICATION OF SHARES Unless otherwise specified in the AOI, each share has the same rights, privileges and restrictions as indicated in the AOI. Whatever rights, interests, privileges for a share also applies to the rest of the shares unless there are restrictions indicated in the AOI. If the Corporation wants restrictions or accord certain privileges to certain shares of stock, then it must be indicated in the AOI. Without such preferences and restrictions, the presumption is all the shares are COMMON, it has proportionate rights, interests, and privileges What are the Classification of shares? y Common and Preferred y Par Value and No Par Value y Voting and Non-voting y Founders Shares y Redeemable Shares y Treasury Shares y Watered Shares (sec. 65) y Other classifications as may be provided for in the AOI What is a STREET CERTIFICATE? It can mean 2 things: y Indorse in Blank by the stockholder (A stock certificate is a quasi-negotiable instrument) y Shares of stock held by a stock broker for the benefit of a client COMMON AND PREFERRED Common these are shares which cannot be denied or deprived the right to vote. They are not accorded with any special privileges, rights except that they always have the
Example: Lets say the preferred shares are cumulative in nature. It earned every year and the corporation paid 12% dividends every year. From 2001-2004, in 2001, the corporation did not declare dividends, in 2002, the corporation did not declare dividends, finally in 2003, the corporation declare dividends. What dividends will be received by the holder? Is it just the dividends that was declared or even the previous shares that accrued? If it is cumulative, the right to received dividends is not extinguished just because the corporation failed to declare dividends in a particular year, it is carried over all throughout the term of the shares. Non-cumulative if the corporation did not declare dividends for that year, the right to received dividend for that year is extinguished. The right to receive dividends in that kind of year exists if the dividends were declared. Only in the year, the dividends were declared. The right to received dividends is extinguished if there is no declaration, it only applies to dividends of the current year. Participating the holders of the preferred shares, in declaring of dividends, they can participate in the residual dividends with the holders of the common shares Non-Participating the holders of the preferred are not allowed to participate in the residual profits of the corporation, the rest of the residual profits will be given to the holders of common shares PAR VALUE AND NO PAR VALUE Par Value the assigned value for the share determined by the board of directors indicated in the stock certificate and in the AOI Is that the same with BOOK VALUE? No What is a BOOK VALUE? The actual value of share based on the finances and capital of the corporation How do we determine the BOOK VALUE? By dividing the Net worth capital by the number of outstanding shares number of outstanding BOOK VALUE = Capital shares
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What is a FAIR MARKET VALUE? The value in which the seller is willing to sell and a buyer is willing to buy NO Par Value Can a corporation issue a value below par? No What do u call shares that is issued below par? Watered Shares Can a STOCKHOLDER sell his share below par? Yes The Par Value is a limitation on the amount of the shares to be issued by a corporation not to shares sold or transferred by the Stockholder to another. The stockholder owns the shares and he has the right to sell for any amount he pleases. The Par Value is the minimum amount for which the corporation may issue shares May a PAR VALUE of the shares be lower than 5 pesos? Yes, the 5 pesos limitation applies to NO PAR VALUE shares A Corporation cannot issue a NO PAR VALUE SHARE below 5 pesos Is there any minimum amount for PAR VALUE share? Yes, 1 centavo What are the limitations on the issuance of NO PAR VALUE SHARES? y Banks, trust companies, insurance companies, public utilities and building and loan associations are not permitted to issue no par value shares y Preferred stocks may be issued only with stated par value y NO PAR VALUE shares deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto y The issued value cannot be lower than 5 pesos y NO PAR VALUE shares are not available for dividend distribution, they form part of the capital of the corporation May a NO PAR VALUE shares be issued in varying amounts? Lets say this month 5 pesos, after 2 months 7 pesos, after 8 months 9 pesos, is that allowed? Yes, for as long as the amount does not go below 5 pesos and those shares who were acquired by
stockholders in different/varying amounts have the same rights and privileges Example of a corporate act requiring share approval which does not fall within the 8 exceptions? Payment of compensation of director except if the stockholders authorized the payment of compensation FOUNDERS SHARES
Section 7. Founders' shares. - Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange C ommission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission.
VOTING AND NON-VOTING What shares that may be deprived the right to vote? y Redeemable y Preferred Treasury shares is by their nature it cannot vote or be voted If there is no denial of the right to vote, can holders of redeemable shares or preferred shares vote? Yes Can Common shares be denied of the right to vote? No, absolutely they cannot be denied of their right to vote There are cases were a non-voting share can vote, what are these 8 shares? 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation. Can the holders of a non-voting share be denied the right to vote the board of directors? They can. The corporation code refers to non-voting shares, in practice, it refers to voting of directors. Preferred and redeemable shares, if denied the right to vote, cannot choose or elect therefore the board of directors When the law requires the votes of the stockholders, other that the 8 cases enumerated, in including the minimum requirement under the law, do they include or exclude the non-voting shares? If the law says this corporate act or transaction must be approved by the stockholders representing at least 2/3 of the outstanding capital stock, in computing the 2/3 of the outstanding capital stock, do we include of exclude the non-voting shares? Excluded
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They are accorded with certain rights and privileges that are not given to ordinary shares IF AUTHORIZE BY AOI. Founders share must be classified as founders shares in the AOI If the privilege consists of the right to vote or to be voted, is there any limitation? Yes, it must be for a limited period not to exceed five years subject to the approval of the Securities and Exchange Commission. If the privilege given consists of a right to vote or be voted the law says that it is only good for 5 years reckoned from the date of approval by the SEC REDEEMABLE SHARES
Section 8. Redeemable shares. - Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares.
These are shares classified as such in the AOI which the Corporation may take up upon expiration of certain period regardless of existence of retained earnings. Lets say that the corporation issued preferred redeemable rd shares in 3 years. On the 3 year, the Corporation has to redeem or reacquire such shares. Is the redemption compulsory on the part of the corporation? It depends on the kind of redeemable shares
In practice, when the corporation issued preferred shares, it is redeemable. To make preferred shares more attractive, they are made redeemable Preferred shares are not bonds or borrowing instruments. The relationship between the holders of preferred shares to the corporation is different from the relationship by the corporation with the bond holder or creditor. If the security issued is a bond or a promissory note, it is a loan. Being a loan, the corporation has to pay interest and the interest has to be paid whether or not the corporation has money, restricted earnings, surplus profits because it is an obligation. Even though the Corporation is insolvent, the creditors participate in the assets of the corporation. In preferred shares, they are not debt instruments, they represent shares in the corporation. The holders thereof get dividends not interests every year or every so often as indicated in the AOI and stock certificates. Upon the expiration of period, they get back their money or return of the principal investment Once reverted to the corporation, they form part of the treasury. Shares so redeemed are no longer outstanding, they can no longer declare dividends, they become treasury shares. What are the 2 kinds of redeemable shares? y Compulsory if the corporation choice/option but to redeem the shares Optional at the option of the corporation. There is no mandatory obligation on the part of the corporation to redeem the shares Once redeemed, can it be reissued? Lets say that the corporation issues redeemable shares with a term of 3 years. It has issued 2005, therefore it will expire in 2008. This feature of redeemable shares is indicated in the AOI and the stock certificate. Come 2008, assuming that the Corporation has the funds, will now reacquire the shares. How can the shares be reissued if they expire in 2008 or are they retired? Retired unless reissuance is expressly authorized by the AOI y Once the shares so redeemed, they are considered retired. Retired means cease to exists, they are no longer outstanding. It can only be reissued if it is authorized by the AOI. Meaning the features of the redeemable shares in the AOI has to be amended. TREASURY SHARES
Section 9. Treasury shares. - Treasury shares 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. Such shares may again be disposed of for a reasonable price fixed by the board of directors.
has
no
Treasury shares are issued, wholly paid and outstanding. But they are reacquired by the corporation thru purchase, redemptions, donation and any other lawful means. As distinguished from redeemable shares, a corporation may acquire its own shares only if it has unrestricted retained earnings under sec. 41. Redeemable shares may be acquired even without surplus profit for as long as it will not result to the insolvency of the Corporation. Treasury shares may be acquire only if the corporation has surplus profit The shares so acquired by the corporation thru purchase, donation, redemption or any other lawful means are considered assets of the corporation. That is why there is a need for surplus profit. If there is no surplus profit, the money of the corporation is reserved for the creditors under the TRUST FUND DOCTRINE. TRUST FUND DOCTRINE The legal capital of the corporation cannot be touched or impaired because it is intended for the benefit of the creditors. The funds are held in trust for the benefit of the creditors
Compulsory redeemable shares is subject with limitations that if the redemption results in the insolvency of the corporation. So even though it is compulsory in nature, the corporation is not permitted to redeem the shares. Even though they are compulsory in nature, it does not mean that there is no exception. If the corporation is insolvent, then it cannot redeem the shares The law says that there is no need for a corporation to have surplus profit or retained earnings to effect the redemption for as long as the redemption will not result to insolvency of the corporation SEC issued a regulation that, any corporation issuing a redeemable share must set up a savings fund. Savings fund in the sense that every year until the term arise, the corporation must allocate or earmarked or segregate certain funds to be able to mix the costs of redemption.
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The corporation has to have money on top of the legal capital. That money on top of the legal capital is called surplus profits. Treasury shares may be reissued by the Corporation upon approval by the Board of Directors What is this other lawful means? what are the cases that a corporation may acquire its own shares other than purchase, redemption or donation? 1. To eliminate fractional shares arising out of stock dividends; 2. 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; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code.
Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this C ode.
shares at auction. And in that auction sale, the Corporation may acquire its own shares. So that the unpaid subscription will be considered paid. y To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (to pay dissenting stockholders exercising their appraisal right) What do we mean by APPRAISAL RIGHT? The right of the stockholder to defects from a proposed corporate act and demand the payment of the fair value of the shares Ordinarily the stockholder cannot get out from the corporation, once he invests his money, it stays forever unless the corporation dissolves or yet he is able to sell his interest to other party. In case of disagreement on certain corporate acts (sec.81), a stockholder may want out, and he could demand the fair value of the share be paid.
Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and 3. In case of merger or consolidation.
To eliminate fractional shares arising out of stock dividends. How can the corporation eliminate the fraction? Let say the corporation has 250 shares and declared 25% stock dividends. 25% of 250 is 62.5, the .5 is the fractional. A fractional share cannot vote. 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. The law allows partial payment of subscription. The law allows only 25% be paid upon incorporation and the balance be payable or undertake based on the contract of subscription or upon call of the board of directors. So there is a possibility that a stockholder may not pay the subscription balance. One of the remedies available to the corporation in case of nonpayment of the balance of the subscription on due date is to sell the shares at auction. To declare the delinquent and sale the
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As the stockholder demand the payment of the fair value of the shares, the corporation is obligated to pay him and in the process acquires his shares, and such shares so acquired will become treasury shares In these cases, money has made out or funds of the corporation have been spent to acquire such share. That is why they are considered properties of the corporation. As properties, they can be disposed of by the corporation by the act of the Board of directors. There is no need for a provision in the AOI to acquire its own shares. Mere board approval suffices. The board will determine how much, when, what are the terms for the reissuance of these shares. Once they are issued, they become again outstanding shares.
In case of close corporation were anytime a stockholder may demand out of the corporation, and therefore demand the value of share. Is treasury share entitled to vote? No What if they are no longer in the treasury? Can they be reissued? Yes Can they be reissued even there is a bar or provision in the AOI? Treasury shares can be reissued even if there is no approval or authority in the AOI Can they be reissued upon approval of the board? Yes, For a price terms and conditions that the board may determine Are treasury shares assets of the corporation? Yes Money of the corporation may be used to acquire its own shares. The corporation must have surplus profit/must have extra money to be able to acquire its own shares. So when a corporation acquires the shares which are wholly paid and outstanding, it uses its own funds. The shares in so far in exchange of the fund of the corporation are considered properties of the corporation. They are assets of the corporation and as such they can be reissued by the corporation to the board for a price, terms and conditions as the board may determine. POINT OF CLARIFICATION: If the shares are redeemed, apply section 8. If the shares are reacquired other than redemption, apply section 9.
Section 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation.
y y
Majority of them must be Philippine Resident Not less than 5 not more than 15 in number except in case of a corporation sole
Is Citizenship or Nationality a requirement? No, the only requirement of the Corporation Code is majority of them must be Philippine Resident. Citizenship is not a requirement except if the corporation is engaged in a nationalized activity. If it is wholly nationalized then all of the incorporators must be Filipinos. If it is only partly nationalized then the number of Filipino incorporators has to take into account the allowable equity for Filipinos and allowable equity for foreigners The CONTROL TEST is the liberal test but it has an exception, the GRANDFATHER RULE which is a conservative test. The SEC and DOJ both issued opinion that the GRANDFATHER RULE will only apply if the percentage of share ownership of Filipinos is less than 60% of the investor Corporation.
Section 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission.
Corporate Term is what is specified in the articles of Incorporation but to exceed 50 years. It can be extended or shorten upon amendment of the AOI, but the extension at any given time cannot exceed 50 years Extension of corporate term entails an amendment in the AOI of the Corporation, thats why it has to have the approval by the Board of Directors by at least majority vote and by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or incase of a non-stock corporation 2/3 of the members In case of a special corporation, the extension of corporate term must be endorsed favorably by the government agency having supervision over that special corporation. In case of Banks endorsement by BSP; in case of Insurance Company endorsement by Insurance Commission
Section 12. Minimum capital stock required of stock corporations. - Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law, and subject to the provisions of the following section.
Qualifications of Incorporator y Must be a Natural Person except in case of a cooperative which can be a cooperator of a rural bank y How can a juridical person be an incorporator of a rural bank? How can it sign? y Thru a representative, but the name appearing as incorporator is the registered cooperative
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Section 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. - At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent 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 board of directors: Provided, however, That in no case shall the paidup capital be less than five Thousand (P5,000.00) pesos.
If there is no due date of payment, then there is a need for a call on the part of the Board of Directors. A call is a demand. Call is a corporate jargon for demand Under the law, at least 25% of the authorized capital stock must be subscribed and at least 25% of the total subscription must be paid up upon incorporation Take not the law says 25% of the total subscription not on a per subscriber basis. So it is possible that one stockholder does not pay 25% of subscription, for as long as the total subscriptions are paid up at least 25% Authorize capital stock Shares Par Value 1 billion pesos 100 million shares 10pesos
Section 12 and 13 refers to minimum amount of authorized capital stock and subscribed capital stock Is there any minimum amount for authorized capital stock of the corporation? There is, theoretically Php5,000.00. although the law says that there is no minimum authorized capital stock but the paid up capital should not be lower than Php5,000.00. But no one can have a corporation which is fully paid, theoretically the minimum amount is Php5,000.00. Under certain special laws, there are certain corporation that are required by law to have a minimum capital y Universal Bank y Commercial Bank y Thrift Bank y Insurance Company If there is no special law, there is no minimum authorized capital stock Under the law, at least 25% of the authorized capital stock must be subscribed and at least 25% of the total subscription must be paid up upon incorporation Under the 25-25 rule, it is not always required to pay up the subscription General Rule: Partial payment is allowed for as long as the first tranche represent at least 25% of the total subscription. There are cases however, shares had to be fully paid. What are these shares? y No par value shares y Non-resident foreign subscriber unless it is secured by a surety undertaking made by a Filipino resident When should the balance be paid? It depends on whether or not the contract of subscription specifies the due date of payment. If there is a due date of payment, then the balance must be paid on that day with or without demand. Demand is not necessary to put the obligor in default.
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What is the minimum subscribed capital stock? 1 Billion x .25 (25%) = 250,000,000.00 What is the minimum paid up capital? At least 25% of 250,000,000.00 = 62,500,000.00 shares 1 billion 250,000,000.00 = 750,000,000.00 750,000,000.00 is the unissued portion of capital stock. The shares that will be made available for subscription Is it possible for the stockholders or subscribers to pay in full the subscription? Yes, the subscribers need not be burden by paying an obligation later on. Upon incorporation, they may determine to pay in full. What if the contract of subscription specified the period of payment but the stockholder wants to pay ahead of time? Can the corporation stop the payment? No, because there being no creditor-debtor relationship, the subscriber may pay at any time TRUST FUND DOCTRINE The legal capital of the corporation cannot be touched or impaired because it is intended for the benefit of the creditors. The funds are held in trust for the benefit of the creditors. The subscribed capital stock is the fund held in trust for the benefit of the creditors Can the corporation declare dividends out of the subscribed capital stock? No
Can the corporation acquire its own shares out of the capital stock? No Is there any form prescribed in the AOI? Yes, Can the AOI be in Filipino? Yes, What are the things needed when incorporate? What are the documents needed? y Articles of Incorporation y By laws (in practice) y Treasurers affidavit the proof of compliance with the 25% subscription and paid up requirement. Treasurers affidavit indicates that at least 25% of the authorized capital stock has been subscribed and at least 25% of the total subscription has been paid in cash or property receipt by the corporation y Bank certification Document showing that the money is in the treasurers hand. That the X amount of money corresponding to at least 25% of total subscription is deposited thru a bank y An undertaking to change the Corporate Name if it is identical or similar to an existing corporate name (sec.18)
Section 18. Corporate name. - No corporate name may be allowed by the Securities and Exchange C ommission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this C ode. The Securities and Exchange Commission shall not accept for filing the bylaws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law.
SEC will issue a certificate of registration which is the operative date by which a corporation acquires legal personality (sec. 19)
Section 19. Commencement of corporate existence. - A private corporation formed or organized under this C ode commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange C ommission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law.
y y
Company data maintenance sheet In case of a special corporation, an endorsement of appropriate government agency
Follow the language of the law when applying for incorporation otherwise the SEC will reject the application What about the by-laws, when should the by-laws be submitted? Sec. 46 allows the corporation 2 options: y To be with the AOI y Within 1 month from approval by the SEC of the incorporation Section 46. Adoption of by-laws. - Every corporation formed under this C ode must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange C ommission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the
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Lets say A is a subscriber of the Corporation that is to be formed. He contributed real property to the corporation. It turns out that he is not the owner. X is the real owner. The property is received by the treasurer in trust for the corporation. Unfortunately, the corporation failed to materialize. X filed an action for reconveyance against the Corporation, will the suit prosper? No, because the corporation have not acquired legal personality yet
Against whom can X file the action for reconveyance? Treasurer in trust. If the corporation does not materialize, the treasurer must return everything with the subscribers. If he does not, they may file an action against him, even a criminal action for estafa
The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); 7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; 9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and 10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. 6. The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five (25%) percent of the authorized capital stock of the corporation has been subscribed, and at least twenty-five (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five (25%) percent of the said subscription, such paid-up capital being not less than five thousand (P5,000.00) pesos.
What are the contents of the Articles of Incorporation? 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such; (There must be a distinction between the primary purpose and the secondary purposes) The place where the principal office of the corporation is to be located, which must be within the Philippines; The term for which the corporation is to exist; The names, nationalities and residences of the incorporators; The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code;
Section 14. Contents of the articles of incorporation. - All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. 2. The name of the corporation; The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such; The place where the principal office of the corporation is to be located, which must be within the Philippines; The term for which the corporation is to exist; The names, nationalities and residences of the incorporators; 35
3.
4. 5. 6. 7.
3. 4. 5.
(The names, nationalities and residences of the first directors in case their successors have been elected and qualified) 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; y y Amount of its capital stock If its a par value share corporation the amount of capital stock and the amount for which it was divided the names, nationalities and residences of the original subscribers the amount subscribed the amount paid by each on his subscription Can we have a corporation with various purposes? Yes, there is no limitation on the number of corporate purposes for as long as the purposes are capable of being lawfully combined meaning for as long as there is no prohibition on these corporate purposes then it can be combined. For example of corporate purposes cannot be combined Insurance and Banks. An insurance company cannot engaged in Banking. Vice versa The solution there is not to included insurance as a secondary purpose but to put up a subsidiary to engaged in insurance business If the corporation has many purposes, the law requires that there is a need to separate the primary from the secondary because under section 42 of the corporation code, investment of corporate funds in the secondary purpose requires stockholders approval by 2/3 of the outstanding capital stock. The stockholders put their money in the corporation with expectation that their money will be used for the primary purpose not for the secondary purposes The principal place of business: If the factory is in Bulacan but the meetings are held and the books are kept in Taguig, where is the principal office of the corporation? It is in taguig, where the meetings are held and where the books are kept and not in the place of operations Usually they are the same, but in some cases they are separate. So the test is the place where the books are kept and where the meeting is held must be consistent on what appears in the AOI.
y y y 9.
If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and 10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient.
Is it necessary to indicate in the articles of incorporation the provision that No transfer of shares shall be allowed if it reduces the minimum stock ownership by Filipinos even if the Corporation is not engaged in a nationalized activity? (sec.15)
Section 15. Forms of Articles of Incorporation. Unless otherwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the following form: .. ELEVENTH: (C orporations which will engage in any business or activity reserved for Filipino citizens shall provide the following): "No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in the proper books of the corporation and this restriction shall be indicated in all stock certificates issued by the corporation."
What about in case that the principal office is in Makati and the corporation close business in Makati and relocates to QC where the meetings are held and the books are kept, what is the principal office of the corporation? In the case of HYATT ELEVATORS AND EXCALATORS CORP VS GOLDSTAR ELEVATORS PHILS, the SC held that it is the place as specified in the AOI. Why is it the place of business important for a corporation? For purpose of venue in filing an action. The venue for civil action depends on the residence or domicile of the plaintiff or defendant at the option of the plaintiff. In case of a corporation suing in the place where the principal office is located, the test is: the principal place in the AOI.
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Yes, even it is not engaged in a nationalized activity because under section 17 of the corporation code, one of the grounds for rejection of the articles is if it does not conform with the form prescribed by the Corporation Code.
Despite the relocation in QC where the books are kept and where the meetings are held, the principal place is in Makati which is the place specified in the AOI. The reason being that if the rules are different then it would be easy on the part of the corporation to evade service of process, it will just keep on changing the principal office of the corporation The names, nationalities and residences of the first directors Usually the first incorporators are the first directors because the number of incorporators is the same in the number of directors until their successors are elected and qualified
Section 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. 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 said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.
proposed measure or resolution to the stockholders in a referendum like passion. So we may dispense an actual stockholders meeting unless the law requires such meeting to be called for a particular purpose. What else is required in amending the AOI? When we submit a proposal to the SEC to amend a specific portion of the AOI, do we submit both the original and the amended AOI? Yes, there is a need to submit both the original and the amended AOI Regarding the proposed amended AOI, is there a need to recopy the original articles or is it enough to highlight the portions of the Articles which have been amended? The proposed amended must consist of the original with the amendments desired duly underscore. Example: (in the proposed amended AOI) Sec.1 (if the same) recopy Sec.2 (if the same) recopy Sec.3 (amendments) from this section to this provision and the date it was approved by the Board of Directors not as approved by the SEC. such changes must be underscored or highlighted What else? Submission of the certificate of amendments to the SEC. Such certificate such be signed by at least majority of the board countersigned by the corporate secretary. The certificate of amendment will indicate the dates of the boards and stockholders approved proposed amendments and the amendments were made in compliance or conformity with the provisions of the Corporation Code. With the same certificate, there is a need to indicate the portion of the Articles of Incorporation that you want to amend. What about treasurers affidavit, is that important? Yes, but only when the corporation increases the its Capital Stock 2 situations when treasurers affidavit is needed y Upon incorporation y Amending the AOI that concerns the increase of capital stock What about in case of banks, trust companies, insurance companies, public utilities, and building and loan association, is there a need for an additional requirement? Yes, certificate of endorsement from the proper government agency having jurisdiction over the appropriate corporation
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What is the procedure to amend the Articles of Incorporation? Any amendment in the Articles of Incorporation must be approved by the Board of Directors at least majority vote and by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of a non-stock corporation. You cannot approve or effect any amendment with the Articles unless there is a board approval and stockholders/members approval With respect to the board approval, is there a need to conduct a meeting in which that approval should be obtain? Yes, a board meeting is not dispensable What about the stockholders approval, is there a need for a stockholders meeting? No, unless the law requires it, written assent will do. In other words, it can be done by way of referendum; it can be done by submitting the
Conclusion: y Board/Trustee Approval y Stockholders/members Approval y Both the original and the amended AOI must be submitted with the SEC with the amended AOI indicating the changes necessary to be effected by the Corporation. y Submission of the certificate of amendments to the SEC. y Treasurers affidavit if only when the corporation increases the Capital Stock Discussion: Every time there is an amendment in the AOI, the requirement is majority of the entire board, not just majority of the quorum. There are times that majority of the quorum suffices, but the amendment of the AOI requires majority if the entire board. The original and the amended articles must be submitted with the SEC. the second set of documents should contain the original, and the amendments to the original underscoring the changes indicated in the AOI. It is not enough to include a summary of the amendments of the Articles, there is a need to submit both the original and proposed amended AOI. The certificate of amendments signed by the majority of the directors and the corporate secretary, it contains: y the portions of the Articles that are proposed to be amended, y the fact that board approval has been obtained in a meeting called for that purpose, y the date and the fat that there was a quorum, and y the amendment is not contrary to laws, public morals, public policy or public order The amendments may be approved directly by the SEC or through inaction. (Inaction) If there is no action within 6 months from the date of filing for causes not attributable to the corporation
Section 17. G rounds when articles of incorporation or amendment may be rejected or disapproved. - The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this C ode: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval: 1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; 3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid is false; 4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution.
No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the C ommission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law.
What are the grounds for rejection of the AOI or any amendment thereto? y Non-compliance with the form prescribed by the Corporation Code y the purpose or purposes of the corporation are unconstitutional, illegal, immoral, or contrary to government rules and regulations y the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid is false y the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution Is the enumeration under section 17 exclusive? No, it is not exclusive What could be a possible ground to warrant rejection of the AOI and amendment thereto? y Any fraud or misrepresentation in filing the AOI or in procuring certificate of registration/incorporation y Non-filing of by-laws within one month from incorporation
Section 18. Corporate name. - No corporate name may be allowed by the Securities and Exchange C ommission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the C ommission shall issue an amended certificate of incorporation under the amended name.
What are the limitations in the use of corporate name? y If it is identical with existing corporate name y If it is confusingly or deceptively similar with existing corporate name or a name protected by law y If the name by itself is confusing, deceptive or contrary to law Can we use the term company as part of the corporate name? No, company is appropriate for partnership
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But how come we have Far East Bank and Trust Company which is a corporation? Far East and Trust Company is the Business Name but not the corporate name, the corporate name filed in the SEC is Far East and Trust Corporation The term company is for partnership as indicated by the SEC in its rules governing use of corporate name Can we have a corporation without the word corporation or incorporated or in its abbreviation (corp., inc.) as part of the corporate name? It must be included But how come far east and trust company does not have the word corporation, or BPI or Banco de Oro? The signage of the corporation may not include the word corporation or incorporated or its abbreviation (corp., inc.) but the official filed with the SEC should include the name corporation or incorporated or its abbreviation (corp., inc.) as part of the corporate name, otherwise, the SEC will not accept it. What about the term National or Baranggay, can it be part of a corporate name of a private corporation? No But how come we have National Bookstore? Because national bookstore is a business name not a corporate name No, because lyceum is a generic word. What about ang tibay? It can be appropriated Generic Word cannot be appropriated that is why lyceum cannot be appropriated. But the generic word yields to an exception under the DOCTRINE OF SECONDARY MEANING. Doctrine of Secondary Meaning If the generic word has become distinctive such that it is associated with the mind of the public as it has been source or manufactures by a person or a corporation then it is entitled to protection under the law. Even if it is generic, if it acquired a name of its own, if it becomes distinctive in the minds of the public, it can be titled to protection Ang tibay is a generic word but it has been associated with the manufacture of combat shoes Discussion: The name of the corporation is important to distinguish the same from other corporations. Section 18 provides for the limitations on the use of Corporate Name Requisites y The one who opposes the use of a corporate name must have acquired a prior right over such corporate name. Prior right acquired through registration from filing with the SEC y The proposed corporate name is identical with an existing corporate name or y Deceptively or confusingly similar with an existing corporate name or a name protected by law or y If the name by itself is confusing or contrary to law Similar or confusingly similar with an existing corporate name How do we get out from the similarity? Include a distinctive word as recommended by the SEC, so that it will not be similar with any corporate name A generic word cannot be appropriated. In the case of ASIA BREWERY VS CA, the SC held that beer is a generic word therefore San Miguel Corporation cannot prevent ASIA BREWERY from adopting the name beer for its brand The words National, Baranggay are reserve for the use of the government
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Is there any prohibition regarding adopting the initials of a person as corporate name? No, like in the case of EPG construction vs CA. EPG Ernesto P. Guzman. The SC held in the case of LAND BANK VS CA that there is no prohibition in using the initial of a person as part of the corporate name for as long as it has the consent of the person concerned Universal Textile Mills Universal Mills Incorporated are they confusingly similar? Yes, because if the term Universal How about Converse Rubber Device Universal Converse? Yes Lyceum can the name lyceum be appropriated by any educational institution? Can the lyceum corporation in taft bar other educational institution from using or adopting the word lyceum as part of its name?
In case of change of a corporate name, lets say ABC change to XYZ, is it a new corporation or is it the same only with different color? There is one case that a corporation has changed its name and argued that the obligations of the corporation under the old corporate name should not be absorbed by the Corporation because of the change of the corporate name. The SC held that the obligations of a corporation under the old name will be absorbed by the same corporation under the new corporate name
Section 19. Commencement of corporate existence. - A private corporation formed or organized under this C ode commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange C ommission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law.
A de facto corporation, for all intents and purposes, is a de jure corporation except that the State reserves the right to question its corporate existence through a quo warranto proceeding Discussion: There is NO de facto corporation unless there is a certificate of Incorporation issued by the SEC which presupposes the filing of AOI SAWADJAAN VS CA Non-filing of by-laws within one month from incorporation does not automatically result in the dissolution of the corporation at the very least it is a de facto corporation. Other examples of infirmities resulting to de facto existence: y The majority of the residences are not incorporators y Treasurers affidavit is false y Information indicated in the articles that happens to be inaccurate but overlooked by the SEC The stockholders of a de facto corporation are not liable as general partners, the concept of liability of general partners applies to corporation by estoppel not to a de facto corporation. The liability of a stockholder in a de facto corporation is limited to the amount of their subscription just like stockholders of de jure corporation.
Section 21. 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: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation.
When does a corporation acquire its juridical existence? Upon issuance of the Certificate of Incorporation What happens upon issuance of certificate of Incorporation? The group of persons becomes a body politic with all the rights and attributes and properties of a corporation under the law
Section 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be a corporation under this C ode, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.
What are the requisites of a de facto corporation? y A valid law under which a corporation was organized or created y Attempt in good faith to organize y Actual exercise of corporate powers Non submission of by-laws, is the corporation de jure or de facto within one month for incorporation? De facto, in the case of SAWADJAAN VS CA When should the by-laws be submitted? 30 days from incorporation Are stockholders or directors of a de facto corporation liable as general partners? No, they are not liable as general partners. The stock holders, officers, directors of a de facto corporation have the same rights and subject to the same obligations of stockholders, directors or officers of a de jure corporation.
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Corporation by estoppels exists if a group of person assumes or represents themselves as a corporation but in truth and in fact they are not legally authorize for that purpose or they have not been incorporated as a corporation. What is the obligation of the person composing corporation by estoppel? Those who made representations are liable as general partners. Only those who made representations. Example: 5 persons, A, B, C, D and E. E contributed cash to the corporation to be formed, same with A, B, C and D. they have prepared the AOI, but they did
not submit the AOI with the SEC. In the meantime A, B, C and D entered into a contract using the supposed corporate name for the purchase of certain merchandise and they did not pay the merchandise. The supplier filed a case against them. What is their obligation? They are liable as general partners. Are the 5 of them liable as general partners? No, the SC said that only those who actively represented themselves to be a corporation. In this case A, B, C and D. if the only participation of E is only to contribute money to the corporation to be formed but not a party in representation then he is not liable as a general partner Can the person who made a representation invoke that they are not a corporation? No, they are precluded in denying their corporate existence as regard to the person who relied on their representation How about if the person is aware that a corporation is not properly formed, is he barred from invoking or questioning the personality of a corporation? He cannot question the corporate existence of the corporation The SC clarified that only the victim or the party who did not reap anything from the transaction can invoke the doctrine of corporation by estoppels not the offender. So, anyone who reap benefit from the transaction is not allowed to invoke the doctrine of corporation by estoppel The doctrine of corporation by estoppel cannot be invoked if there is no 3rd party involve against whom the representation was made. In one case, there are 2 associations in mabalacat, Pampanga. Association of jeepney drivers and the other association, both associations agreed to have a common election and consolidated the 2 associations in one corporation to be filed in the SEC. The loser questions the results of the election, cried fraud and cheating. The issue is is the consolidating corporation or association at least a corporation by estoppel? The SC held that the consolidating corporation or association not a corporation by estoppel because there is no third part involve. There is no one to whom they made a representation. (LOZANO VS DE LOS SANTOS) Forget about the doctrine of corporation by estoppels is there is no third party who relied in their representation
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LOZANO VS DE LOS SANTOS In dispute between the president of two associations which agreed to consolidate but were not actually consolidated, the proposed consolidated corporation cannot be considered a corporation by estoppels, since there is no third person involved and the 2 presidents knew the consolidated corporations have not been registered. Corporation by estoppel is founded on principles of equity and is designed to prevent injustice and unfairness, and where there is no third party involved and the conflict arises only among those assuming the form of a corporation, who know that it has not been registered, there is no corporation by estoppel.
Section 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. - 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. (19a) This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission.
Failure to organize or commence business within 2 years from incorporation is a ground to revoke the corporate franchise Let say the corporation called for a board meeting and the board elected the corporate officers within 2 years but did nothing to pursue the business for which it was incorporated, is that tantamount to failure to organized? The SEC said that for as long as the corporation appoints the board and the board appoints the corporate officers within 2 years, it is deemed organized even though not a single business activity was conducted by the corporation What about no business activity within 5 years (a separate ground)? The corporation may have elected the board and the board appointed corporate officers but if there is no business activity within 5 years, continuous in inoperation for 5 years is a ground for suspension or revocation of the corporate franchise. The law says continuous in inoperation for period of 5 years, what if there is an interruption, 2 years in business, 2 years interruption, 2 years resumption, 2 years interruption and 2 years resumption. All in all the number of years is not in aggregate or continuous. The law says it is not a ground, it has to be continuous inoperation for a period of 5 years
Conclusion: 2 grounds y Failure to organize within 2 years y Continuous inoperation for the period of 5 years Are there other grounds to suspend or revoke corporate franchise? Yes, What are the other grounds: y failure to submit by-laws within one month from incorporation The non submission of by laws does not result to automatic dissolution of the corporation, it is only a ground for suspension of corporate franchise because the SEC must afford due process to the corporation, giving it time to rectify the mistake or address the deficiency. If despite due process then the SEC can revoke the corporate franchise (LOYOLA GRAND VILLAS HOMEOWNERS ASSOCIATION VS CA) AND (SAWADJAAN VS CA) y y Violation of Corporation Code No submission of reports (financial statements) required by the SEC Under the SEC regulation the corporation must submit Financial Statement every year Any transaction not authorized by the board is ultra vires or beyond the authority of the corporation. Whether a purchase or sale, lease or any property or transaction affecting the corporation without board approval is unenforceable. In dealing with a corporation, the submission of Board resolution is required. The Board resolution is of course adopted by the BOD. Transactions made by a person not authorize by the BOD does not bind the corporation. Lets say A wants to buy a property from a corporation, A made a down payment to the president, but such president is not authorized by the BOD, that transaction does not bind the corporation How would we know if the person signing is authorized by the board? 2 things must be required by the corporation: y Board resolution that the transaction has been approved by the board y The officer concerned is duly authorized by the board for that purpose DO NOT presume that the president or the chairman is always empowered to act in behalf of the corporation. He has to be equipped by a board resolution designating him as signatory for the corporation The BOD decides what is best for the Corporation under the BUSINESS JUDGMENT RULE. The stockholders or the courts cannot interfere with the BOD on how to run the affairs of the corporation. If an transaction or act does not fall within the exception and the Board approves a corporate act or transaction and the stockholders say that it is not the best for the interest of the corporation, can they pass a stockholders resolution to repudiate the action taken by the board? No, the remedy is to remove the director but not the judgment approved by the BOD The term of office of BOD is one year What will be the remedy of the stockholders in case the directors misbehave or the directors are guilty of lapses or they are exercising their discretion not in good faith? Remove the director. Under the section 28, the stockholders can remove a director with or without cause. Or another remedy is to file a derivative suit to question the action taken by the board in behalf of the corporation or to file a legal action against the board BUT NOT TO PASS a resolution to repudiate the action taken by the board because the presumption is the directors are guided for what is
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Section 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.
The board of directors is the body that exercises corporate powers for the corporation. The course of the corporate affairs are determined by the board of directors, unless it falls within the exception, qualification or otherwise provided in the Code, the stockholders cannot substitute their judgment or the judgments of the BOD. If a transaction or an act is not approved by the board or any officer appointed by the Board that transaction entered into does not bind the corporation.
best for the interest of the corporation. (BUSINESS JUDGMENT RULE) Questions of policy are left to the board of directors and it cannot be substituted or supplanted by courts discretion or the stockholders except if it is an actionable wrong. unless otherwise provided in this code that means there are certain powers that are reserve for the stockholders and there are certain powers also that can only be exercised stockholders jointly with the BOD. What are the powers that can only be exercised by the stockholders? y The power to remove a director y The board cannot remove a fellow member of the board or its own members An SEC opinion about a provision in the by laws of the corporation that in case of delinquency in the payment of __ dues by a director would result to an automatic forfeiture of his seat as determined and approved by the board. The issue is elevated in the SEC on whether or not the directors by majority vote can remove a director on the strength of that provision in the by-laws. SEC said that the power to remove does not belong to the board of directors; it belongs to the stockholders solely y The power to fill up vacancies in the board for a certain causes or grounds o If the cause of the vacancy is due to expiration of term, removal of a director or increase in the number of board seats, then ONLY the stockholders can fill up the vacancies (sec. 29) o If the cause or ground of the vacancy is NOT due to expiration of term, removal of a director or increase in the number of board seats BUT the remaining directors do not constitute a quorum, then only stockholders can fill up the vacancies y Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. Section 43. Power to declare dividends. Section 44. Power to enter into management contract. Section 48. Amendments to by-laws. Section 76. Plan or merger of consolidation. Section 117. Dissolution.
y y y y y
What are the qualifications of a BOD? y A BOD must have all the qualification of a BOD under the Corporation Code as well as the qualification under the By-laws and y none of the disqualifications under the Corporation code and by-laws What are the qualifications under the Corporation Code? y Must be a natural person except in case of a cooperative y Legal age y Ownership of at least 1 share of stock registered in his name in the books of the corporation. y Not less than 5 not more than 15 except in case of merger or consolidation of banks and corporation sole y Majority of them must be Philippine residence What are the disqualifications under the Corporation Code? Sec. 27 Commission of an offense with the penalty of imprisonment of more than 6 years or violation of the corporation code committed within 5 years prior to the date of his election or appointment
Section 27. Disqualification of directors, trustees or officers. - No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.
QUALIFICATION: Ownership of at least 1 share of stock registered in his name in the books of the corporation Such qualification is a continuing qualification. If at any time a director loses ownership of the shares or ceases to be a stockholder, automatically he loses or becomes disqualified to continue discharging the functions of a director. Lets say A is a director of ABC corporation, on the 6 month of his term he sold his shares in favor or X, can A continue in discharging his function as director?
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What are the powers exercise jointly by the BOD and stockholders? y Section 16. Amendment of Articles of Incorporation. y Section 37. Power to extend or shorten corporate term. y Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness y Section 40. Sale or other disposition of assets.
No, because the requirement of Ownership of at least 1 share of stock registered in his name in the books of the corporation is a continuing qualification. What about the buyer or the transferee, does he become a director on the strength of his acquisition of the shares of the selling-director? No, the acquisition of shares is not a mode for the election or appointment of a director What if a director conveys legal title of his shares in favor of his trustee? Voting trust agreement the stockholder as trustor conveys legal title of his corporate share in favor of his trustee and the trustee holds the shares for the benefit of the trustor or another beneficiary. What is the one conveying is a director? Does he forfeit his board seat? Yes, the SC held that when legal title is lost then the director automatically losses his seat (LEE VS CA) LEE VS CA Any director who ceases to be the owner of at least one share of the capital stock of the corporation of which he is a director shall thereby ceases to be a stockholder. Since a director who executes a voting trust agreement over all his shares ceases to be a stockholder of records in the books of the corporation and ceases to be a director, he cannot served with summons intended for the corporation Can the trustee qualify as a director even if he is not a full owner, he only has legal title over the shares, NOT A FULL TITLE? The SC held that a trustee can qualify as a director even if he is not a full owner because it is the legal title that counts not the beneficial title When a director be required as stockholder to qualify as a director? At the time indicated in the by-laws. If the by-laws are silent, then upon assumption of office QUALIFICATION: Majority of them must be Philippine residence Nationality is not a requirement, unless the corporation is engaged in a nationalized activity See discussion above Can the by-laws increase the share ownership to 100, 1000? Yes, as long as it is not intended to deprived minority representation The by-laws can expand the basic qualifications under the Corporation Code Section 27. Disqualification of directors, trustees or officers. It has to be on final judgment and it ahs to be an offense where the penalty of imprisonment is more than 6 years. So if it is probationable, he can be elected. If the director violates the Corporation Code within 5 years prior to his election or appointment With respect for the offense, the test is the gravity or the penalty of the offense With respect with the violation of the Corporation Code, the penalty is immaterial, it can be a mere fine of Php100.00 or a reprimand. If it is a violation of the corporation code, then what is important is when the violation is committed. When do we count the 5 year period? Is it counted from the date of finality of the violation as determined by the SEC or the date of the violation? If it is on the date of the violation as determined by SEC and the director appealed with the CA, and the CA reverses the decision of SEC, what happens now?, if we wait for the finality, then the 5 year period will not start to run. No jurisprudence yet What about conflict of interest, is that a ground for disqualification? No, unless otherwise provided in the by-laws GOKONGWEI VS SEC A corporation is authorized to prescribe the qualifications of its directors. A provision in the bylaws of the corporation that no person shall qualify or be eligible for nomination for elections to the board of directors if he is engaged in any business which competes with that of the Corporation is valid, provided, however, that before such nominee is disqualification. A director stands in a competition from being elected to the board of directors is a reasonable exercise of corporate authority. Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty to loyalty may well require that he discloses this information to a competitive rival. What is the term of a director? 1 year until their successors have been elected or qualified
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Why is the phase until their successors have been elected or qualified? Because it is possible in a stockholders meeting there will be no quorum. If there is no quorum, then they cannot elect replacement to the BOD. The Board will serve in a HOLD-OVER CAPACITY What are the powers of the BOD in a hold-over period? Same powers are regular board Are staggered terms allowed? Let say 15 directors, one set 1 year, 2nd set 2 years and 3rd ser 3 years. That is NOT allowed for STOCK corporations, but it is ALLOWED in a NON-stock corporations Directors by regions are not allowed in a stock corporations but allowed in non-stock corporations CASE: GRACE CHRISTIAN HIGHSCHOOL VS CA The by-laws of Grace village homeowners association provides that there are 15 directors and out of the 15 directors only 14 will be elected among th the members of the association, the 15 slot is reserved for the representative of the Grace Christian School which is situated inside the village. For the past years the representative of Grace Christian Highschool is allowed to have a seat in the Grace village homeowners association. Until one time, when the board of trustees of the Association decided to withdraw or revoked the privilege, but the Grace Christian School insisted that they be given the right of representation because it is mandated by the by-laws and in estoppel sets in against the homeowners association. Whether or not the provision in the by-laws earmarking or reserving a seat for a nominee or representative of Grace Christian School is valid? It is not valid because the term of directors is one year, it cannot be perpertual. The director or trustee must come from the stockholders or members of the corporation. A non-member or non-stockholder cannot be elected as director or trustee The board of directors of corporations (in this case, homeowners association) must be elected from among the stockholders or members. Thus, a provision in the amended by-laws of the corporation stating that of the 15 members of its BOD, only 14 members would be elected while the remaining member would be the representative of an educational institution located in the village the lot and building owners are member thereof, is invalid.
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Since the questioned cannot forestall a later challenge to its validity.

Section 24. Election of directors or trustees. - At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there are not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote.
Every a corporation conducts a regular or general stockholders meeting for the purpose of electing directors. Who should be present in that meeting? Stockholders representing at least majority of the outstanding capital stock unless the by-laws require a higher number either in person or by proxy In computing the majority of the outstanding capital stock, we exclude the non-voting shares and the delinquent stocks. Non-voting shares are not included in the majority of the outstanding capital stock neither the delinquent stocks The rules are by person or by proxy, meaning the stockholder maybe present personally or he may appoint a proxy. The proxy are stockholders who will yield their right to vote in favor of a nominee in the board or any stockholder for that matter. Proxy is basically an authority to vote given by a stockholder in favor of a nominee Is the viva voce the rule or the norm? Yes, unless voting by ballot is insisted upon by the stockholders or unless otherwise provided in the bylaws
How does stockholders exercise the right to vote? How many votes can he cast? It is based on the number or shares registered in his name in the books of the corporation Let us say a stockholder has 1000 shares, 15 directors to be elected. So 1000 shares x 15 = the answer is the number of votes allowed for such stockholder to cast (15,000 votes) What are the options available to such stockholder? y He can cumulate all of his votes in favor one nominee y He can spread out among the various nominees y He can apportion or allocate depending on his discretion A cumulative method of voting is given by the Corporation Code to a stockholder to determine the number of votes he can cast by multiplying the number of shares registered in his name by the number of directors to be elected. A right cannot be denied to a stockholder. A right given by law. The by-laws cannot deprived that right from the stockholder Who will be considered elected in a stockholders meeting? Those who obtained the highest number of votes What about this concept of INDEPENDENT DIRECTORS? For public companies, banks and for corporations with secondary franchise should have at least 2 independent directors. In other words, out of the 15 directors, 2 of them must be independent directors. Let say a corporation is required by law or the SEC to have 2 independent directors, how will be the voting go? Example: 13 regular directors, 2 independent directors. There are 18 nominees to the positions of regular directors. The top 13 will be considered regular directors. What if the shares or votes of the 2 independent directors are less than 14th nominee as general directors? The top 13 nominees for regular directors are considered elected and top 2 nominees for independent directors are elected as independent directors even though these 2 independent directors obtain less votes than the nominees for regular director
Section 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. 46 The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings.
The stockholders are not allowed to appoint corporate officers, this only true in a close corporation but not in an open stock corporation.
Master Transcribers Note: I think what he tries to point out is stockholders in a CLOSE CORPORATION can appoint corporate officers
In an open stock corporation, the stockholders have no power to appoint the officers, only the board of directors. In the hierarchy of authority, we have the stockholders electing thee board, the board appoints the officers. The Stockholders cannot by pass the board and elect directly the corporate officers. Who are the corporate officers under the Corporation Code? y President y Secretary y Treasurer y Other officers as mandated by the by-laws of the corporation What are the qualifications of the President? y Must be director which means he must be a stockholder, because a director is required to have at least own 1 share of stocks registered in his name in the books of the corporation y None of the disqualifications The president must be a director, what if there is no vacancy? Lets say the Corporation has 15 directors, when they elected the president, the president resigned as a president not as a director. So the board of directors are complete, how do we accommodate the next president if there is no vacancy? How do we comply with the provisions of the Corporation Code? The next president is a De facto president. In some corporations, they reserve one seat for the president or the stockholders will agree among themselves that they will contribute shares so that the nominee for president be elected as director. Is the President required to be a Filipino Citizen? Yes, except if the corporation is engaged in a nationalized activity. if it is nationalize, under the
Anti-dummy law which says no foreigner will be allowed to occupy an executive position Can a foreigner be appointed as a Chairman of the corporation? It depends, a chairman may be a non-executive position. It is executive or nom-executive depending on what functions he assumed in the Corporation. What about a secretary? May a foreigner be appointed as secretary? No, because the Corporation Code requires that the Corporate Secretary must be a Filipino What about a treasurer? May a foreigner be Treasurer? Yes, because citizenship is not a requirement although under the SEC rules he must be a resident of the Philippines Is it important to determine if a person is a corporate officer or just an officer? Yes, because in case of termination or suspension, which body has a jurisdiction, is the labor arbiter or the RTC acting as special commercial court The SC held that in case of termination of corporate officer, it is not the labor arbiter who has jurisdiction but the RTC acting as special commercial court What about an assistant manager, junior manager, are they considered as corporate officers? With respect to the concept of corporate officer whose termination is cognizable by the RTC acting as a special commercial court. So that term corporate officer has its own meaning, when we say corporate officer for this purpose we mean, only those position mandated by the by-laws. Not all officers are corporate officers, only those officers whose positions are mandated by the bylaws of the Corporation Can the board by majority of the quorum elect the officers? Lets say there are 15 directors, 8 are present, out the 8, 5 appointed President, Secretary and Treasurer. Are these valid appointments? No, because when it comes to appointment of corporate officers, the appointment must be approve by majority of the entire board, not just majority of the board. Under sec. 85, unless otherwise provided by law or by the bylaws majority of the quorum is enough to transact business meaning for as long as there is majority of directors present, then the majority of the majority, for as long as there is a quorum, majority of the quorum can transact business, unless the by-laws prescribes a higher number. CASE: PENA VS CA There are 5 directors, but the by-laws provide that there should be 4 to approve a corporate act. That has been the case 3 is not the quorum of 5. 3 out of 5 directors of the board of directors present in a special meeting do not constitute a quorum to validly transact business when its by-laws requires at least 4 members constitute a quorum. Under section 25 of the Corporation Code, the articles of Incorporation or by-laws may fix a greater number than the majority of the number of directors to constitute a quorum. Any number less than the number provided in the Articles or by-laws cannot constitute a quorum; any act therein would not bind
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May a President be a secretary at the same time? No
May a President be a treasurer at the same time? No
May a treasurer be a secretary at the same time? Yes What are the qualifications of a secretary? y Must be a Filipino Citizen y According to the regulations of the SEC: o Must have the legal skills of a general legal counsel or o Must have the legal skills of a chief legal officer o Must have interpersonal skills of the head of the Human Relations o Must have the vision and decisiveness of a CEO o Must have the financial skills Can a general counsel be a corporate secretary? Yes, it is not prohibited by the Corporation Code What about a Vice-president? Is the Vice-president required to be a stockholder or a director? No, unless by the by-laws it is indicated that it takes the place of the President in case he resigns What about other positions like controller? Yes, if provided for by the by-laws
the corporation; all that the attending directors could do is to adjourn What about in the Corporation Code, what are the cases in the Corporation Code where the majority of the entire board is required not just majority of the quorum? y Election/appointment of officers y Delegation of powers by the board to the executive committee y Amendment of AOI y Extension/shortening of corporate term y increase or decrease capital stock; incur, create or increase bonded indebtedness y invest corporate funds in another corporation or business or for any other purpose. y Sale or other disposition of assets. y Amendments to by-laws. y Plan or merger of consolidation. y Dissolution With respect of Declaring dividends and entering into management contract majority of the quorum is sufficient.
Section 26. Report of election of directors, trustees and officers. - Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees, and officers elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the Securities and Exchange Commission. Section 27. Disqualification of directors, trustees or officers. - No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation. Section 28. Removal of directors or trustees. - Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a nonstock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this C ode.
The power to remove belongs solely to the stockholders. It cannot be exercise by the board. Where the by-laws of the Corporation allows the forfeiture of a board seat in case of delinquency in __ dues of a director, despite that provision in the by-laws, the board cannot remove a delinquent director, the power belong only to stockholders What are the requisites for removal of a director? y There is a meeting called for that purpose whether regular or special y Notice must be given to the stockholders of the meeting and the intention to remove a director y The removal must be approve by the stockholders representing at least 2/3 of the outstanding capital stock y A director can be remove with or without cause provided that it is not use to deprive minority representation Can the agenda take other matters? And in the part of other matters, that is the time when a director should be remove? It cannot be justified by including the same as part of other matters. When a director is to be removed, notice must be given to the stockholders of the intention to remove a director
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CASE: PREMIUM MARBLE RESOURCES VS CA Which is controlling, the names of directors as filed with the SEC or the names of directors in the books of the corporate secretary? The SC made that precept in section 26 where it imposes upon the corporation the obligation to notify or to report matter with the SEC. the SC said it is the General Information Sheet as filed in the SEC. every year when there is election of directors, within 30 days, the report should be filed with the SEC or in case of vacancy, the same should be reported in the SEC. By express mandate of the Corporation Code, all corporations duly organized pursuant thereof are required to file with the SEC the names, nationalities and residence of the directors and officers elected. In determining whether the filling of an action was authorized by the board of directors, it is the list of directors in the latest General Information Sheet as filed with the SEC is controlling
What about the replacement, replacement to the Board? The replacement may be appointed by the stockholders in the same meeting where the removal was effected or in a meeting called for the purpose of electing the replacement
Section 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in office. Any directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting.
It can be accepted in a staggered basis, for as long as the remaining directors constitute a quorum Accept resignation number 1 then fill up the vacancy then accept resignation number 2 then fill up the vacancy so on and so forth until the 8 vacancies are filled up What if they do not constitute a quorum? Then only the stockholders can fill up the vacancies What about they constitute a quorum but they delegated the power to the stockholders? In that case, the stockholders alone can fill up the vacancy The stockholders in these cases has the power to fill up vacancies y Vacancies due to expiration of term, removal and increase in the number of board seats y Vacancies not due to expiration of term, removal and increase in the number of board seats but the remaining directors do not constitute a quorum y Vacancies not due to expiration of term, removal and increase in the number of board seats, the remaining directors constitute a quorum but the directors decided to delegate the matter or responsibility to the stockholders What about the board, when can they fill up the vacancies? Only when the ground is not due to expiration of term, removal and increase in the number of board seats (death, incapacity, abandonment, withdrawal and resignation) AND the remaining directors constitute a quorum If there is a vacancy, is the board obligated to fill up the vacancy? No, they are not obliged. They have the discretion to fill it up or not to fill it up until the next election of the board Meeting in teleconference is allowed, for as long as the director concern expresses his intention to participate with the teleconference, he is identified by the corporate secretary that he is the same director and he participate in the discussion What is the term of the replacing director? Under the law, only the unexpired portion of the replaced director
Section 30. Compensation of directors. - In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation other than per diems may be granted 49
We classify vacancies into 2 groups y Vacancies due to expiration of term, removal and increase in the number of board seats In any of these cases, only the stockholders can fill up the vacancies y If the grounds are other than expiration of term, removal and increase in the number of board seats The BOD can fill up the vacancies. But the law says, while the board can fill up the vacancies in cases other than expiration of term, removal and increase in the number of board seats, the remaining directors must constitute a quorum Lets say there are 15 directors, 8 died in a plane crash, can 7 fill up the vacancies? No 7 died, can 8 fill up the vacancies? Yes, because it is not due to expiration of term, removal and increase in the number of board seats 2 requisites to enable the board to fill up the vacancies y The causes should be other than expiration of term, removal and increase in the number of board seats y The remaining directors can constitute a quorum Can the resignation of directors be on a staggered basis? Lets say we have 15 directors, 8 resigned, can the remaining directors fill up the vacancies? For instance, ABC corporation owned by A family and A family sold the shares to X family and the number of shares sold is equivalent to 8 board seats. The nominees of the board of the seller tendered their resignation, how will the resignation be accepted so that in time there will be a quorum?
to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year.
Directors may approve payment of compensation to directors ONLY if they render services in other capacity. Example: The director is also a President or the vice president or a controller, there is no prohibition, board approval suffices Is per diem allowance considered as compensation? Is there an amount fixed in the Corporation Code? For as long as the amount is reasonable, it is allowed Does payment per diem requires stockholders approval or does it have to be in the by-laws? No, because per diem is not compensation therefore not covered by the prohibition. The only norm is reasonableness Per diem allowance is for the attendance during the meetings. Is there a limit on the amount of compensation of directors? Not exceeding 10% of the net income before income tax of the corporation during the preceding year The 10% cut applies to payment of compensation to director as such directors but the 10% does not apply to for other services In conclusion: General Rule: Compensation is not allowed Exception: unless authorized by the by-laws or stockholders If allowed by the by-laws, the yearly or annual compensation of directors AS SUCH directors must not exceed 10% of the net income before income tax of the corporation during the preceding year. The 10% cut does not apply to payment of compensation for other services meaning it was rendered in a capacity other than as a director
As a general rule, directors as such are not entitled to compensation because they are presumed to render services gratuitously. The presumption is the return of their investment is enough compensation.
Are there exceptions? Are there cases were a director as such director may be entitled to compensation? Yes, if the by-laws fix the compensation of the director What do we mean by compensation? Are bonuses part of the compensation? Insurance coverage, Housing plan, car plan are these part of the compensation? Any form of remuneration is considered compensation provided that it has been authorized by the by-laws OR approved by the stockholders representing at least majority of the outstanding capital stock The BOD cannot authorize payment of compensation to themselves, it must be authorize by the by-laws OR approved by the stockholders representing at least majority of the outstanding capital stock. Another exception to the general rule is in the case of WESTERN INSTITUTE OF TECHNOLOGY VS SALAS If payment of compensation is given to directors for services rendered other than as such directors. Which means if they perform services other than directors, they can be paid compensation. CASE: WESTERN INSTITUTE OF TECHNOLOGY VS SALAS Members of the board of directors may receive compensation, in addition to reasonable per diems, in the following cases: y When there is a provision in the by-laws fixing their compensation y When the stockholders representing at least majority of the outstanding capital stock at a regular or special stockholders meeting agree to give it to them y When they render services to the corporation other than as directors The board cannot approve compensation to directors AS SUCH directors, only the by-laws or the stockholders may do so.
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5. When a director, trustee or officer is made, by specific provisions of law, personally liable for his corporate actions When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation
6.
FINALS
Section 31. Liability of directors, trustees or officers. - Directors or trustees who wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.
Directors or trustees who wilfully and knowingly vote for or assent to patently unlawful acts of the corporations The emphasis is on patently unlawful. So of it is a debatable issue or if it can go either way or if it is not settled by jurisprudence, then it is not a basis to make a director or officers liable. It has to be a clearly and obviously patently unlawful act. No debate or whatsoever that the law makes it unlawful Under the Labor Code, in case of termination and employment due to authorized cause, the employer, in case of corporation, is required to notify the DOLE of the intended termination of employment due to authorized cause with 30day notice. Without the 30-day notice, the termination of employment is invalid and subjects the corporation to damages. What about the director or officer of a corporation task with the duty of notifying the DOLE, if he fails in his duty, can he be held personally liable under that instance consenting or assenting to patently unlawful act? No, that may be an act required by law but it is not a patently unlawful act to make the director or officer personally liable. It will be the corporation who will suffer the consequences for the omission of its officer in notifying or giving notice to the DOLE 30 days before the intended date of termination Directors or trustees who are guilty of gross negligence or bad faith in directing the affairs of the corporation In the discussion of doctrine of separate legal personality and the doctrine of piercing the veil of corporate fiction, there are cases where there was fraud on the part of directors or officers that made them personally liable. Like in the case of AC RANSOM LABOR UNION VS NLRC The rule before:
What are the cases or instances where a director, trustee or officers are be held to be personally liable? 1. Directors or trustees who wilfully and knowingly vote for or assent to patently unlawful acts of the corporations 2. Directors or trustees who are guilty of gross negligence or bad faith in directing the affairs of the corporation 3. Directors or trustees are guilty of conflicts of interest to the prejudice of the corporation 4. When a director has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto What about not expressing his objection in the issuance of the watered stocks upon knowing such issuance? Is that covered? Yes, under section 65
Section 65. 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. 51
What if the company closes operations, the corporation ceases business operation, the laborers filed a complaint against the corporation and the corporation is not making money, suffered losses and there are no leviable assets. Can the laborers enforce their claims against the president just because he is the president, no bad faith?
Yes, because the term employer includes any person acting in the interest of an employer, directly or indirectly. which imposes penalties for commission of such unlawful acts. There must be a law declaring the act unlawful and penalizing the act.
What about other officers, not the president but other corporate officers, having the same facts as above? Yes, in the case of RESTAURANTE LAS CONCHAS VS LLEGO. An exception to the rule that officers and members of a corporation are not personally liable for the acts done in the performance of their duties is when the employer corporation is no longer existing and is unable to satisfy the judgment in favor of the employee. The officers in this case should be liable for acting on behalf of the corporation. Present Rule: CARAG VS NLRC There has to be bad faith to make the director or corporate officers personally liable, if the company closed shop Art. 212 e does not state that corporate officers are personally liable for the unpaid salaries or separation pay of employees of the corporation. The liability of corporate officers for corporate debts remains governed by Section 31 of the Corporation Code. A director is not personally liable for the debts of the corporation, which has a separate legal personality of its own. A director is personally liable for corporate debts only if he willfully and knowingly votes for or assents to patently unlawful acts of the corporation or he is guilty of gross negligence or bad faith in directing the affairs of the corporation. However, to hold a director personally liable for the debts of the corporation, and thus pierce the veil of corporate fiction, the bad faith or wrongdoing of the director must be established clearly and convincingly. Bad faith is never presumed. Moreover bad faith does not automatically arise just because a corporation fails to comply with the notice requirement of labor laws on company or dismissal of employees. The failure to give notice is not an unlawful act because the law does not define such failure as unlawful. Such failure to give notice is a violation of procedural due process but does not amount to an unlawful or criminal act. Patently unlawful acts are those declared unlawful by law
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Directors or trustees are guilty of conflicts of interest to the prejudice of the corporation Is this related to the Doctrine of Corporate Opportunity under section 34? Is section 31 paragraph C related to the Doctrine of Corporate Opportunity under section 34? Yes
Section 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture.
A director has a fiduciary duty to the corporation. He must be loyal to the corporation. If he promotes interests at the expense of the corporation, then he is guilty of breach of fiduciary duty. What do we mean by DOCTRINE OF COPORATE OPPORTUNITY? If there is an interest that belongs to the corporation, it must not be seized or taken advantage of by the director or officer, otherwise any interest, income or profit earned by that venture or undertaking must be fully accounted for and remitted to the corporation. There is an obligation on the part of the director or officer to hold the profit in trust for the benefit of the corporation. Does this apply if the director or officer risks his own funds for that venture? Yes Is there any instance that such director or officer can be excused from the obligation to remit profits? Yes, if such is ratified by a vote of the stockholders owning or representing at least two-thirds of the outstanding capital stock. Lets say the Corporation authorizes its president to go abroad to negotiate with Levis Jeans manufacturer for the corporation to be exclusive distributor of Levis Jean in the Philippines. The president negotiated the terms and conditions of the contract and was able to obtain favorable terms and conditions, but instead of having the contract between the corporation and Levis manufacturer, he decided to get the contract for himself. Obviously, there is a violation
of the Doctrine of Corporate Opportunity. He is first obligated to account the profits he earned in the transaction and then to remit to the Corporation. In effect, he is a trustee of the corporation. He holds the property in trust for the benefit of the Corporation. The obligation to account and to remit is not excused just because he used his own funds for the particular venture. The only instance where he can be relieved from the accounting and remitting is if the transaction is ratified by the stockholders owning at least 2/3 of the outstanding capital stock. When a director has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto
Section 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; That the vote of such director or trustee was not necessary for the approval of the contract; That the contract is fair and reasonable under the circumstances; and That in case of an officer, the contract has been previously authorized by the board of directors.
2. 3. 4.
When a director, trustee or officer is made, by specific provisions of law, personally liable for his corporate actions Example Trust Receipts Law, under section 13 of PD 115.
Section 13. Penalty clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances.
Cebu Pacific is owned and controlled by Gokongwei Family and the director of Cebu Pacific is John Gokongwei, can Cebu Pacific enter into a contract with John Gokongwei? What is the status of that contract? The status of the contract is voidable at the option of the Corporation. Just because there is a contract between the Corporation and its directors, there is at once a presumption that it is voidable at the option of the corporation? Yes A contract between a Corporation and its directors are VOIDABLE at the option of the corporation Under what situation/s may that option not exercised? When does the option to invalidate ceases? The option to invalidate ceases when the following conditions are present 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in case of an officer, the contract has been previously authorized by the board of directors.
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When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation In the previous discussions, we said that if a bank or lender extends credit accommodations to a Corporation owned and controlled by dominant stockholder, the practice is to require the dominant stockholder to sign a surety or a guaranty agreement. Without that surety or guaranty agreement, the stockholder can invoke the doctrine of separate legal personality. Is the enumeration exclusive? Yes, there is no other way that we can make a director or officer outside of the 6 cases enumerated.
Lets say ABC corp grant a loan to X secure by a mortgage on real property, the loan was not paid, so ABC bank foreclosed the mortgaged, thereafter ABC corps officers and stockholders set up a management company (XYZ). XYZ manages all the acquired assets of the ABC including the acquired or foreclosed asset of X. B is an interlocking director of ABC and XYZ. Can X file an action to nullify the contract between ABC and XYZ on account of interlocking director? There is fraud and the contract between ABC and XYZ is not fair and reasonable. Can X, a third party file an action to nullify the contract just because of interlocking directors and not fair and reasonable under the circumstances? No, because the option to nullify the contract belongs to the Corporation only and not to a third party
Section 35. 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 it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders' approval is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new bylaws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders.
Can we dispense the first 3 elements? The first 2 elements can be dispensed with but the rd 3 element cannot be dispensed with Under what conditions can we dispensed the first 2 elements? If it is ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose provided that the contract is fair and reasonable under the circumstances. There is no way rd we can dispensed with that the 3 element to make the transaction valid and enforceable
Section 33. Contracts between corporations with interlocking directors. Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors.
The manufacturer of C2 is Universal Robina Corporation, Cebu Pacific is likewise owned by the Gokongwei family, and they (Universal Robina and Cebu Pacific) have interlocking directors, is that contract between Cebu Pacific and Universal Robina Corporation valid, void or voidable on account of interlocking directors? Valid, under sec. 33 because interlocking directorship per se does not make the contract void or unenforceable. There is nothing wrong per se in having contracts or transactions between corporations with interlocking directors. Under what cases or circumstances may that contract between 2 Corporations with interlocking directors be validated? y If there is no fraud y If the contract is fair and reasonable under the circumstances y if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal y compliance with the requirements in section 32 in so far as the nominal corporation is concerned What do we mean by substantial? Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors.
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The board of directors usually meets only once a month. The by-laws also provide that there will be a meeting on a monthly basis. But there are certain matters or transactions which cannot wait for one month. The Corporation will have to stand still if they have to wait for the board approval that only comes once a month, can the board create a committee that will function as a mini-board and can act on matters according to the boards competence? General Rule: The board alone or the board per se cannot create a mini board or a committee that will function as BOD Exceptions: y the by-laws may authorize the creation of the executive committee that can function as a mini or a small BOD or y the BOD pursuant to an authority under the by-laws may likewise create an executive committee that can act on matters according to the boards competence. The purpose of an Executive Committee is filling the details or gap in between the Board meeting
Can non-board directors be members of Executive Committee? Yes, provided that such non-board members function is merely recommendatory or advisory in nature What is the composition of the Executive Committee? It must have at least 3 board members Can the non-board members vote? No, non-board directors can be members of the executive committee on an advisory or recommendatory capacity and they have no right to vote. The right to vote reserves only for the Board members Can the Board create a retirement committee? Yes Is there a requirement to have a provision in the bylaws? It does not require What about a personnel committee, security committee or food committee? Yes Where do we draw the line in a committee that can only be created thru the by-laws and a committee that can be created by mere board action? The test is will that committee perform board functions? Will that committee act on matters according to the board competence? if the answer is in the affirmative then it requires authority in the by-laws. If it is a committee that does not perform the function of the board and for administrative purposes, then the BOD can create such committee. A mere board approval suffices. What are the limitations of the power of the Executive Committee? Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders' approval is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and
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(5) a distribution of cash dividends to the shareholders Can the executive committee approve the amendments of the Articles of Incorporation? No, because amendments of AOI requires approval by the stockholders Can the Executive Committee declare stock dividends? No, because declaration of stock dividends under section 43 requires stockholders approval
CASE OUTLINE Can the Board disqualify a nominee to the Board on account of conflict of interest with service of due process? Is there a need to afford the nominee to be disqualified, opportunity to prove that he is not covered by the prohibition in the by-laws? On the basis of that provision in the by-laws, the board can
disqualify anyone presumed to be representing an interest adverse to the Corporation? If there is a conflict of interest clause in the by-laws, the board can disqualify. Conflict of Interest is one thing, proving it is another, so the BOD must give any nominee the chance or an opportunity to show that he is not covered by the conflict of interest clause. If despite evidence or circumstances presented, the BOD, in its judgment, thinks that he represents an interest adverse to the corporation, then the BOD can now disqualify (GOKONGWEI VS SEC) Business Judgment Rule questions of policy and management are left to the BOD and it cannot be interfered by the court. The issuance of stocks certificate is a question on policy which cannot be questioned by the Court (SIPALAY VS) Qualifications of Directors y GOKONGWEI VS SEC y LEE VS CA y GRACE CHRISTIAN HIGHSCHOOL VS CA GOKONGWEI VS SEC The by-laws may prescribe for additional qualifications that are on top of the qualifications provided for by the Corporation Code and may likewise provide for grounds for disqualification. In this case the ground for disqualification which is not in the Corporation Code is conflict of interest. There is no law that prohibits a person from being the board of directors of 2 corporations even they have competing interest. But, the corporation, as a measure of self protection, may institute or include appropriate provision in the by-laws to disqualify a competitor or any person representing interest adverse to the corporation from being elected to the board. Gokongwei was the controlling stockholder/director of Universal Robina Corporation whose businesses compete with the businesses of San Miguel Corporation (SMC). John Gokongwei was able to accumulate enough shares in SMC to be assured of at least one board seat. SMC introduced amendment to the by-laws to disqualify meant directly at John Gokongwei under the catch all phrase, any person representing interest adverse to the company.
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The validity of this amendment was scrutinized, passed upon by the SEC, CA and then by the Supreme Court (SC). The SC said that it is a valid provision to the by-laws for the reason that sensitive information may be spilled over to the other corporation or the conflicting director may appropriate an information from one corporation and give the same to the other corporation to the detriment of the corporation. The director has the fiduciary duty of loyalty to the corporation and this fiduciary duty may be compromised if the sensitive information is acquired and spilled over/leaked to the other corporation. A ground for disqualification is one thing but proving it another. The SC made it clear that even though it is a valid ground for disqualification the person concerned/sought to be disqualified must be afforded due process. He must be given the chance/opportunity to explain/show that he is not covered by the prohibition. If he fails or if in the judgment of the board the evidence is not convincing then the board may disqualify such nominee. Dean Divinas Anecdote: When he was in Equitable PCI Bank (EPCIB) they disqualified the nominees of Banco de Oro/ Sy Family because they were representing interest adverse to the company. How did they comply with the due process requirement? Due process requirement does not necessarily mean hearing. For as long as a person is given the opportunity that he is not covered by the prohibition then that is sufficient compliance. They sent out questionnaires to the nominees of the Sy Family asking the background of the nominees, if they are stockholders of this corporation and other corporations whose businesses are related to EPCIB or its subsidiaries. They accomplished the questionnaires without them knowing that they are solidifying a basis for their disqualification. So on the basis of those information they disqualified said nominees. They were not given the chance to go to court, because the nomination committee (tasked to make the evaluation of the nominees of the board)
convened at 10 am, the same time within which raffle of cases is done. All cases filed after 10 am would be raffled the following day. At 10:30 they were disqualified. They had no more time to go to the court because it is only before 10 am that raffle of cases is done. So they were not able to get a TRO to stop the board from disqualifying them and so they were disqualified. What is important is that they were given the chance to be heard to explain their side. LEE VS CA Dichotomy of legal title and beneficial title to the expedient of voting trust agreement (Sec 59). In a voting trust agreement there is a trustee and a trustor. Who is the trustor in the voting trust agreement? The stockholder. The stockholder conveys legal title to the shares in favor of the trustee. Legal tile is acquired by the trustee for the benefit of the trustors beneficiary. The title is split between beneficial title and legal title. What counts is the legal title and not the beneficial title for the purpose of determining qualifications to the board of directors. The one with beneficial title gets the dividends, but for the purpose of determining qualification to the board it is not the beneficial title but the legal title the counts. Why will a stockholder enter into a voting trust agreement? Usually this is a condition for a loan agreement. Example: ABC Corp. obtains a loan from XYZ Bank. Usually the collaterals/security arrangements are mortgages, pledges, guaranty and surety agreements. However in a mortgage agreement there are documentary stamp tax, there is registration fee which are very expensive same with chattel mortgage. In pledge, there is no right to recover deficiency. In a guaranty agreement, the guarantor is
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entitled to the benefit of excussion (exhaustion). In a surety agreement youll have to file a case if the debtor contest being in default. So there ought to be other security arrangements and voting trust agreement is one of them. All you have to do is to get order from the bank to require the controlling stockholder to convey legal title over the shares as a condition for the loan. As long as the loan is not paid legal title remains with the trustee. The trustee then can vote the shares under VTA and elect his nominees the board of directors thereby acquiring control over the board of directors and indirectly over the policies and operations of the company. So there is no cost, no documentary stamp tax, no registration fee but you are able acquire control over the company. Back to LEE VS CA The issue is about propriety of service of summons, but it required the explanation of the concept of voting trust agreement. A loan was obtained from DBP secured by a voting trust agreement. The one who received the summons is the director who has conveyed legal title over his shares under the voting trust agreement. Said director is no longer qualified as such because he conveyed legal title over his share. Not having legal title he ceased to be a director of the company and therefore not authorized to receive summons on behalf of the corporation. GRACE CHRISTIAN HIGH SCHOOL VS CA 2 Basic principles regarding qualifications of directors In case of a board of director of a stock corporation the director must be a stockholder. In fact this is one of the qualifications, that is, he must hold at least 1 share of stocks registered in his name in the books of the corporations. This qualification is continuing in nature. So he must come within the ranks of stockholders for Stock Corporation. If it is a non-stock corporation, the trustee must be a member of the corporation. The by-laws of Grace Christian Village Homeowners Association provided that out of the 15 board of directors one of the seats is reserved permanently in favor of the Grace Christian School situated inside the village. But Grace Christian School is not a lot
owner or homeowner and therefore not a member of the homeowners association. So what happens now on that provision in the bylaws? For the past so many years the representative Grace Christian School was allowed representation in the board until a new management came in and decided to revoke privilege granted to it. So they questioned such act claiming or invoking the principle of estoppel that they have been allowed representation for so many years that has established a vested right over the board seat. SC said that estoppel does not lie because it is contrary to the provision of the Corporation Code. So no amount of practice, custom or usage can validate an act proscribed by the Corporation Code. Also the concept of permanent representation is anathema to the term limit of a director. The director only has 1 year until his successor is elected and qualified. For Grace Christian Highschool to have permanent representation would mean that it is destroying the 1 year term limit set by the Corporation Code. Business Judgment Rule y SALES VS SEC y FILIPINAS PORT SERVICES INC. VS GO What is the concept of BUSINESS JUDGMENT RULE? Corporate powers are exercised by the board of directors unless otherwise provided in the code. So business is determined, conducted, charted by this body called board of directors. For as long as they exercise their sound business judgment, the stockholder nor the court cannot interfere with the exercise of such judgment or discretion because courts are not businessmen. Courts are not supposed to be experts in the field of business. So it should be entrusted to the board of directors having been selected, appointed or elected by the stockholders. On the part of the stockholders having chosen for 1 year the person who will control the corporation, who will exercise the corporation powers and for the duration of 1 year period they cannot substitute their judgment for the judgment of the board. In case the board of directors misbehaves there are various remedies, like derivative suit or removal of the director but not to substitute their judgment for the judgment of the board of directors. The issue is when can you say that the act falls within the exercise of business judgment or when it is violative of the provision of the Corporation Code and therefore constitutes an abuse of business judgement and therefore not allowed by law? SALES VS SEC Questions relating to the issuance of stock certificates are questions of policy and management which cannot be interfered with by the courts based on this background: Shares of stocks were sold to an investment house on the condition that the investment house can further sell the shares but on block of 1M per sale. Why is it 1M per block? We talked about initial public offering or the concept of raising Capital from the public and the corporation would issue shares to the public in exchange for equity contribution to the contribution and there is a need to tap investment house to be able to reach a wider a base of investor. This is the concept of INVESTMENT HOUSE or INVESTMENT BANK. The issuer of the shares may set certain conditions on investment house, as in this case. You can sell but in block of 1M per share, so the investors are limited to institutional investors, meaning those who have the money (hindi tingi-tingi). If an investment house can sell even to retail. They can sell to you, to me, 5 shares to Juan de la Cruz, 10 shares to Petra Reyes and the Corporation will end up having 10K stockholders which can be ____. So this is the reason. The condition was breached. The investment house sold the shares in violation of the condition. Can the buyer of the shares exercise the right to vote if the issue of validity of the sale is still pending with court? If corporation directed the president to issue the stock certificate to the buyer, is that issuance of stock certificate invalid? Does that amount to abuse
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of discretion? Was that a question of policy under the business judgment rule? During the pendency of the case on the issue of validity of sale the buyer has the right to vote the shares, because the right to vote is inherent to ownership and can only be deprived from the stockholders if it is provided for in the articles of incorporation. The issuance of stock certificates to the buyer despite the pendency of the action is a question of policy of the management and therefore cannot be interfered with by the courts. FILIPINAS PORT SERVICES INC. VS GO The board of directors may create committees and create likewise offices. The former general manager, probably out of spite having been terminated, questioned the actions of the board in creating additional offices creating executive committee. The SC said it is the prerogative of the board to create offices, to create even executive committees but with the following caveat: Caveat: For an EXECUTIVE COMMITTEE (EXECOM). It has to be a committee that will not function as an executive committee under the Corporation Code. In other words, the board can create a committee and call it an executive committee. This is valid for as long as such executive committee as named by the board does not exercise the functions of an executive committee under Sec. 35 of the Corporation Code. Because if the executive committee exercises board functions under Sec. 35 then board approval is not enough. There must be a provision in the by-laws authorizing the creation of the executive committee. So it is not the name that counts but the functions of the committee. The board can create various committees. It can create a waste management committee, a personal committee, a security committee finance committee etc. for as long as it does not function as an executive committee it does not require a provision in the by-laws. It is the prerogative of the board under the business judgment rule.
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How about OFFICES? For offices this is the caveat for as long as it is not a corporate office. Because if it is a corporate office then it must be provided for in the by-laws; or The by-laws must authorize the board to create such corporate office. You can have an office of personnel, office of security. This does not require a provision or authority of the by-laws. The board can create it under the business judgment rule. Power of the Board of Directors y CITIBANK VS CHUA y VISAYAN VS NLRC y YAO KASIN TRADING VS CA y BITONG VS CA y TANG WING TALK VS MAKASIAR y AF REALTY & DEVELOPMENT, INC. VS DIESELMAN FREIGHT SERVICES COMPANY y PHILIPPINE RABBIT VS ALADDIN TRANSIT Under 23 that a corporate powers exercised by the board, properties held is contracted by the board of directors unless otherwise provided in the code. Different cases support this principle like the power to sue and be sued belongs to the board and not to a director; the president is not the board, the chairman is not the board; If the president transacts without board approval, the transaction is invalid or does not bind the corporation; Representation during pre-trial conference, the lawyer who appears must be authorized by the board otherwise he cannot enter into compromise, cannot stipulate the issues, admit the facts, or transact in behalf of the corporation. CITIBANK VS CHUA As a general rule if a party to a case is a corporation the lawyer representing the corporation must be equipped with a board resolution authorizing the lawyer to appear during the pre-trial and the trial of that case.
Without a board resolution the plaintiff can be declared a defendant in default. Is a board resolution same as SPA? No. With respect to a corporation the SPA is in the form a board resolution. If the president or corporate secretary signed an SPA in favor of the lawyer but not supported by a board resolution, that SPA is nothing. If party to a case is a natural person, he must provide his lawyer SPA and not a board resolution. There is an EXCEPTION. Board resolution is not necessary if the by-laws itself provides full authority of a corporate officer to appoint any lawyer to appear during the pre-trial or trial of the case. This is what happen in the case of Citibank vs Chua. The very by-laws of Citibank empowers its manager to appoint a lawyer who would represent the corporation during the proceedings and therefore board resolution is not necessary. General Rule: if a party to a case is a corporation the lawyer representing the corporation must be equipped with a board resolution authorizing the lawyer to appear during the pre-trial and the trial of that case. Exception: Board resolution is not necessary if the by-laws itself provides full authority of a corporate officer to appoint any lawyer to appear during the pre-trial or trial of the case. corporation, fired the incumbent employees and appointed their own set employees. Can the stockholders appoint? No. It is the board of directors not the stockholders who can appoint officers and employees.
What happens now to those employees and officers appointed by the stockholders who took control over the corporation by virtue of the writ injunction, can they file a case for illegal dismissal? No, because they were not appointed validly in the first place. YAO KASIN TRADING VS CA The chairman and the president entered into a contract for sale of cement with Yao Kasin Trading but the chairman and the president is not the board. Since the transaction has been repudiated by the board, did not have board approval then the transaction does not bind the corporation. BITONG VS CA Even a derivative suit filed by stockholder that is a corporation must be authorized by the board. So the power to sue and be sued must be lodged by the board. This includes all suits affecting or involving the corporation as a stockholder. Derivative suit is a suit filed by a minority stockholder in behalf of the corporation to question certain acts or policies of board of the corporation which is prejudicial to the interest of the corporation. It is filed by a minority stockholder for the interest, benefit and the name of the corporation. It is like the corporation performing illegal acts entered into unauthorized transactions or contracts but controlled by the board, but the board refuses to take action. So the minority stockholder can file a derivative suit in the name of the corporation. He may be a minority but he still own shares in the corporation and he is concerned with the corporation so he will file a suit in behalf of the corporation. If that minority stockholder is a corporation it has to be authorized just the same by its board of directors. TANG WING TALK VS MAKASIAR
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What about the fact that the by-laws upon which the authority of the lawyer is based not registered with the SEC? SC clarified that only corporations registered with the SEC are required to submit their by-laws to the SEC for such bylaws to be valid. In case of a foreign corporation, one the SEC issued the license of the foreign corporation it includes with it the approval of the by-laws. VISAYAN VS NLRC The stockholders after obtaining a writ of injunction took over forcibly the management of the
The director, a minority stockholder filed a case. The suit will not prosper because the power to sue and be sued is lodged with the board of directors. AF REALTY & DEVELOPMENT, INC. VS DIESELMAN FREIGHT SERVICES COMPANY What about with respect to sale of real property, if the agent or person who transacted in behalf of the corporation is not authorized by the board? Can his acts be ratified? With respect to the authority to sell, it must be in writing. SC correlated Sec 23 with the provision of the Civil Code on agency with respect to authority to convey rights over real/immovable property. If a person is not authorized by the board to sell, the acceptance of partial payment does not amount to ratification. That sale is void per se since it is not in writing. Being void per se it is not subject to ratification. PHILIPPINE RABBIT VS ALADDIN TRANSIT There is a problem against the person who certified against forum shopping. Who is the person who should certify against forum shopping? It should be a person/party authorized by the board. convened with a quorum and adopted specific resolution authorizing the loan and mortgage of the property. Can the bank or a 3rd party rely on the recitals of secretary certificate? Could it be given the same credit as a TCT where a 3rd party may rely on what appears on the face without being required to go beyond the 4 corners of the instrument? You may say that a secretary certificate is superior than a TCT. Because as to TCT, as general rule, banks are not required to go beyond the 4 corners of the instrument. Banks in various cases are expected to conduct diligence check if there are occupants of the property. While there is a general rule, there are exceptions. But when it comes to Secretary Certificate there is rd no exception. The bank or 3 party may rely on what appears on the face of the secretary certificate. In this case, the 3rd party need not investigate, corroborate, find out if the contents of the secretary certificate are indeed accurate. What is that so? What is the SIGNIFICANCE OF A SECRETARY CERTIFICATE? 1. Prepared by the corporate secretary who is the custodian of the corporate records. 2. It is under oath. Because of these measures of protection any party may rely on what appears on the face or recitals of the secretary certificate.
Is the counsel of the corporation presumed to be authorized to certify against non forum shopping? SC said no. Just because you are the lawyer does not mean you are authorized to certify against non forum shopping. You have to be designated by the board to certify against non forum shopping. Evidence of Exercise of Corporate Powers and Reliance of 3 party y ESGUERRA VS CA y METROBANK VS QUILT
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PREMIUM MARBLE RESOURCES INC. VS CA What happens if there a 2 cases filed by the same corporation? Same suit/case filed by 1 corporation but represented by different board of directors, which suit should be authorized or considered binding on the corporation? The one whose names are on file with the SEC. Every year within 30 days from the election of the board of directors the corporation is required to submit a general information sheet containing the names of the corporate officers as well as that of the board of directors . What if there are 2 sets on filed with the SEC? This was not answered by this case. Deans Anecdote:
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Lets say a Bank granted a loan secured by a mortgage on property but it turns out that the mortgage is not authorized by the BOD corporation because there was no quorum in that meeting where the transaction was supposedly to be approved. There was no quorum but the corporate secretary certified that there was quorum and certified that the board
This happened in Equitable PCI Bank. They faxed within 2 mins. after the election of the board of directors the names of the directors elected. So they were ahead. But, after 1 hour the other group also submitted their own set of directors and officers. How do you answer this? Such case is an intra-corporate controversy cognizable of the RTC acting as Special Commercial Court. Let the RTC decide. Meetings y PENA VS CA y LOPEZ REALTY VS FONTECHA For BOARD meetings, quorum is based on number of 1 bodies present. Unlike in the STOCKHOLDERS meeting the quorum dependent on the presence of stockholders representing the majority of the outstanding capital stocks. Usually the majority of the number of directors as fixed in the articles constitutes a quorum unless: y the law requires a greater number; or y the by-laws require a greater number PENA VS CA. 3 would have been a quorum of 5, but not if the bylaws provide that 4 out of 5 constitutes a quorum. This involves loan secured by mortgage. Loan was not paid mortgage was foreclosed. Then the right to redeem was assigned to another and the assignee wants to file an action for ejectment against the mortgagor. Was there a valid assignment of the right to redeem considering that 3 out of 5 were present and approved the assignment of the right to redemption? SC said it is invalid because the by-laws prescribed a greater number and likewise under Sec 40 if what is assigned is the right to redeem involving the only property of the corporation that amounts to a sale of substantially all the corporate assets and that requires not only board approval but likewise votes of the stockholder representing at least 2/3 of the outstanding capital stocks. LOPEZ REALTY VS FONTECHA In case of Board meetings, notice must be given to the board members. If there was no valid notice,
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even though there was a quorum, that meeting is invalid. Any resolution taken up in that meeting does not bind the corporation. Example: There are 5 directors, 4 are present, but 1 was not able to make it because he was not notified. Is there a valid meeting even if there was a quorum? None, because of lack of 1 essential requite. The EXCEPTION is if the absent director ratifies the action of the board of the directors. The case involves gratuity pay to the employees. So one director is absent therefore he objected to such payment but thereafter signed the cash vouchers representing the gratuity pay. The meeting was void at the outset but it was cured by the action of the absent director. General Rule: If there is no valid notice, even though there was a quorum, that meeting is invalid. Any resolution taken up in that meeting does not bind the corporation. Exception: if the absent director ratifies the action of the board of the directors.
Compensation of Directors WESTERN INSTITUTE OF TECHNOLOGY INC VS SALAS There 3 WAYS INSTANCES where directors may be paid compensation 1) If the by-laws fix the compensation of the directors 2) The stockholders representing at least majority of the outstanding capital stock authorized the payment of compensation of directors as such directors 3) Directors render services in a capacity other than as member of the board of directors. SC explained the meaning of as such directors. The prohibition is only against the payment of compensation as such directors. There is no prohibition, it does not require a provision in the by-laws, it does not require approval from stockholders if directors are to be paid for executive services or services rendered as other than board of directors. Board approval suffices if directors will be paid for executive services.
CASES WHERE A DIRECTOR OR CORPORATE OFFICER MAY BE HELD LIABLE 1. Consenting, assenting, voting in favor of a patently unlawful act; 2. Gross negligence or bad faith in directing the affairs of the corporation 3. Acquiring interest in conflict with his duty as director or officer resulting damage to the corporation; 4. If he agrees to be solidarily liable with the corporation; 5. If he consents to the issuance of watered stocks or does not express objection thereto upon learning of such issuance; 6. If express provision of law, he is made to answer for a corporate act or omission Assenting to a Patently Unlawful Act CARAG VS NLRC BENGUET ELECTRIC COOPERATIVE (BECO) VS NLRC TRAMART MERCANTILE INC VS CA CARAG VS NLRC SC said for an act to be patently unlawful the law must impose a sanction or penalty for the violation. The law must consider it an offense. Otherwise, a director cannot be held personally liable. The corporation closed or ceased operation but there was no appropriate notice given to the Department of Labor and Employment (DOLE). In cases of termination employment due to authorized cause the employer must notify DOLE at least 30 days from the intended date of termination of employment. If the director or officer failed to notify the DOLE does amount to a patently unlawful act for which the director or officer may be held personally liable? No. It may be a requirement under Labor Code, but it is not unlawful act because do law does not consider it as an offense. BENGUET ELECTRIC COOPERATIVE (BECO) VS NLRC Here there was bad faith on the part of the directors of the corporation. Reforms had to be executed in BECo because it was suffering loses. The general manager executed a reform by cutting the per diem allowance and other benefits given to the corporation. In retaliation the board of directors terminated his services. The termination is prompted by his desire to institute the reforms
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SC said it amounted to bad faith on the part of the board. TRAMART MERCANTILE INC VS CA Non payment of the purchase price of the tractor does not amount to bad for this reason the directors cannot be made liable. NAGUIAT VS NLRC This ruling applies only to CLOSE corporation, stockholders who are actively involved in the management of the corporation may be held personally liable in case of corporate tort (such as failure to pay separation benefits of employees terminated for authorized causes) unless the corporation has obtained adequate liability insurance coverage. *take note* this stockholders who are actively involved in the management of the Corporation applies only to CLOSE CORPORATION not to an OPEN CORPORATION. *In an open corporation it is the Board who exercise acts of management, not the stockholders. ATRIUM MANAGMENT CORP. VS CA The payee of a check is a corporation and the rd corporation wanted to negotiate in favor of a 3 rd party. The 3 party asked what was the background of that check. The treasurer certified that the check was issued in payment for fuel products therefore it had consideration. There being a consideration it could be negotiated in favor of somebody else but it turns out that the check issued by the corporation was not in payment of fuel products but only in form of financial assistance. So the drawer dishonoured the check because it was negotiated different from its avowed purpose or intention. Under the Law on Negotiable Instruments, If a check is crossed it serves as a warning to 3rd party that the check was issued for a specific purpose and he who acquires the check must do so consistent with such purpose and limitation otherwise he does not qualify as holder in due course. The check was crossed. It was supposed to be issued as a form of financial assistance but it was negotiated to another corporation but the assignee acquiesced to the assignment on the strength of the certification of the treasurer of the payee corporation.
If it was issued in payment of fuel products it could be validly negotiated and the assignee would have been qualified as a holder who could enforce the instrument against the drawer and indorser. But that is not so, that defense that there was no consideration for the could be invoked against a non-holder in due course. But the one who certified that the check was issued for a valid transaction was held personally liable. SIA VS PEOPLE OF THE PHILIPPINES Corporate director or officer cannot be held personally liable for a corporate act or omission unless the law says so. There must be a law making the director or officer liable for the act or omission of the corporation. Otherwise, there is no personal liability. This case was decided before the effectivity of PD 115. Is the transaction governed under the Revised Penal Code before the passage of PD 115. That debate is immaterial, now moot and academic because PD 115 clearly imposes upon director or officer responsible for the offense criminal liability PD 115 now AC RANSOM LABOR UNION VS NLRC RESTAURANTE LAS CONCHAS VS LLEGO REAHS VS NLRC CARAG VS NLRC AC RANSOM LABOR UNION VS NLRC The president and other corporate officers were made liable personally because during the pendency of a labor dispute, they assigned the properties of AC Ransom to a run away corporation, such that the unpaid laborers after getting a favorable judgment could not enforce such judgment because there are no leviable assets having been transferred to a run away corporation. The run away corporation is just an extension of the personality of AC Ransom and therefore the corporate veil must be pierced. As to the liability of corporate officers, the transfer amounts to bad faith for which reason they may be held liable. There is a statement in this case that if the corporate officers who are liable because of bad faith could not be identified the president should be held personally liable.
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The same principle was reiterated in ELCEE FARMS VS CA. In case of closure of the company, there are no assets to be levied, the president acting in the interest and in behalf the employer is considered as the employer and therefore can be made liable personally. But in this case it is not president that is being held liable but the mother of the president, because she was extending accommodations to the employees of the corporation. SC said that the mother of president cannot be held personally liable. Not just because she helped means that she is the president, or that she was acting in behalf of the corporation. REAHS VS NLRC The corporate officers were made personally liable because they violated the Labor Standards - under payment of wages and salaries. RESTAURANTE LAS CONCHAS VS LLEGO There was a closed shop. No bad faith but the corporate officers were made liable because the company closed shop and there are no more available assets to satisfy the unpaid claims of the laborers. These cases gives the impression that when a company closes shop, no more assets look for the president. Just cite the cases of AC RANSOM, ELCEE FARMS VS NLRC. If you can determine the other officers implead them likewise, invoke ruling in REAHS VS NLRC AND RESTAURANTE LAS CONCHAS VS LLEGO. Until the case of CARAG VS NLRC, MC CLAUDE VS NLRC AND RECENTLY LIBAN VS GORDON. The SC said the not just because you are the officer makes you liable. A corporate director or officer can be held liable only if there is bad faith or gross negligence in his part in directing the affairs of the corporation. This is consistent with Sec 31 of the Corporation. In fact SC quoted Sec 31. That the basis of liability of corporate directors and officers still Sec 31 of the Corporation Code. There must be bad faith or gross negligence on the part of the director or officer in directing or conducting the affairs of the corporation. Without bad faith he has no personal liability. The cases are the more fair and just interpretation because corporate officers are also employees. They
dont own the company, and they are also being paid by the company. It just so happens that their position/rank is higher. They are also employees in the generic sense that is why they should not be made liable if there is no bad faith. DE GUZMAN VS NLRC There was bad faith because the manager tasked to terminate the employment of the employees did so but sold the assets of the company and applied the proceeds in payment or satisfaction of his own claims. Instead of distributing the assets of the corporation proportionately to the employees of the corporation, he appropriated the proceeds for the satisfaction of his own claim. He was considered to have acted in bad faith therefore liable of damages because he violated the rules of concurrence and preference of credit. CONSOLIDATED FOOD CORPORATION VS NLRC There is nothing wrong in moving/transferring employees, conducting investigations. These are all in the exercise of management discretion, but to withhold the salary of such employee amounts to bad faith unless he is placed under preventive suspension. In other words, if you want to have a basis not to pay the salary of an employee you have to place him under preventive suspension if there is a ground to place him under preventive suspension. There is no provision in the Labor Code regarding preventive suspension but you can find one in the implementing rules and regulations i.e. imminent danger to the life, property of the employer; continuous employment poses threat to the life or property of the employer. But, it is only good for 30 days. Beyond that you have to pay the salary of the affected employee. The bad faith in this case consisted in withholding salary even though the employee was not placed under preventive suspension. UICHICO VS CA Under Labor Law it is the prerogative of the corporation to cease operations. If the closure is due to business losses there is no obligation to pay the employees separation benefits. If the closure is not due to serious business losses, salary for ever year of service. For you to close the company because of business losses you have to prove that losses are actual or imminent and real not imagined or feigned. You dont rely on forged financials, concocted financial statements, bloated records or understated assets to be able justify the closure of the company. The bad faith here consisted in feigning business losses justifying the closure of the company, that is why the officers are made personally liable. ARATEA VS SUICO In this case the lender granted credit accommodations (loan) to the borrower on the condition that the lender shall have the exclusive right to market the products of the borrower corporation. The lender was able to find buyers, but unfortunately the borrower corporation kept on rejecting the offers made by the buyer even though the prices were competitive. SC said that such act amounted to bad faith for which reason they were made personally liable.
Cases Where There Is No Bad Faith But Directors Or Corporate Officers Were Still Made Personally Liable LLAMADO VS CA LLAMADO VS CA Treasurer who signed the checks which eventually bounced was made personally liable. No bad faith. He just signed as treasurer. What was the basis of liability in this case? Because the law says so he is liable for a corporate act or omission. BP 22 (like PD 115) clearly imposes upon the responsible director or officer liability in case of a check drawn by a corporation that is drawn against insufficient funds. SECURITY BANK VS CUENCA Under the Civil Code any adverse change in the principal terms and conditions of a loan secured by a surety/guaranty agreement will have the effect of releasing the surety/guaranty. Changes have to be adverse and made without the consent of the surety or guarantor.
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In this case we learn the basic principle in dealing with the corporation. The lender always requires the Joint and Solidary Signature (JSS) of the controlling stockholder. The mistake of the bank in this case is that the term of loan was extended without consent of the surety. So the bank presumed the surety will agree, because any way it was for the benefit of the borrower giving him more time to pay. SC said it was a change in the terms of the contract and having been done without the consent of the surety the Civil Code comes in and provides that surety is release from liability. What about authority of corporate officer to bind the corporation? Here we have apparently conflicting decisions. y BOARD OF LIQUIDATORS VS KALAW against SAFIC ALCAN & CIE VS IMPERIAL VEGETABLE CO. INC. y PRIME WHITE CEMENT CASE as against PEOPLES AIRCARGO WAREHOUSING CO. CASE y RURAL BANK OF MILAOR CASE against NEW DURA WOOD CASE How do we reconcile this apparently conflicting decisions? BOARD OF LIQUIDATORS VS KALAW The general manager of NACOCO in this case is Kalaw. NACOCO is a government agency tasked to manage coconut industry. Kalaw entered into contracts for the sale and delivery of copra products and he would do so without seeking prior board approval. After the contracts were entered into he would go back to the board and the board ratified the contract which he entered into. Everything was smooth and handy until those contracts resulted in losses to the corporation. When strong typhoon hit the country, the contracts Kalaw entered into resulted in losses to the corporation and by which it was forced to recognize and pay. Can Kalaw be held liable personally for entering to those contracts without prior board approval? The SC said no. Does not this violate what we have been saying that there must be board approval for any transaction otherwise that transaction does not bind the corporation?
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No. Here the context is different. In this case the nature of the transaction requires on the spot decision. The price of copra fluctuates. It can change in 1 hour. It has been the custom and practice in the company to allow Kalaw to enter into contract and thereafter obtain ratification from the board. So there being a custom practice or usage, the board is now estopped from denying the authority of Kalaw to enter into those contracts. So the exception to the lack of board approval is estoppel there being custom, usage, practice in the company. General Rule: lack of board approval invalidates the transaction Exception: estoppel there being custom, usage, practice in the company.
SAFIC ALCAN & CIE VS IMPERIAL VEGETABLE CO. INC. This also involves sale of oil, products tentative in nature. How come in this case SC said that the corporation is not bound by the contract entered into by the president because there was no board approval? Because it was only a one time transaction. Unlike in Kalaw it was a continuing basis. There was a pattern. It was the norm or the practice of the company. Here there is no pattern, continued concession authority given to the general manager-president. PRIME WHITE CEMENT AS AGAINST PEOPLES AIRCARGO WAREHOUSING CO. PRIME WHITE CEMENT The president carries the day to day affairs of the corporation. In the order of things members/stockholders elect the board, the board elects the officers the tri-level hierarchy as explained in City Bank vs Chua. The board meets only once a month so you need corporate officers to execute/implement the policies of the BOD. So any transaction entered into in the
ordinary course of business by the president would have been binding upon the corporation, but not in this case. SC said he may be the president and chairman at the same time but still he is not the board of directors. So his transactions must be approved by the board. How come in PEOPLES AIRCARGO WAREHOUSING CO VS CA there is no board approval when the president engaged a consultant to prepare an operations manual for the company in connection with its application for a license with bureau of Customs. PEOPLES AIRCARGO WAREHOUSING CO VS CA Peoples Aircargo Warehousing Co is engaged in bonding warehouse business and has to obtain a license from the Bureau of Customs. One of the requirements is an operations manual. The president engaged a consultant for this purpose. No board approval and yet the corporation is bound. Unfortunately there was no board approval/resolution so the poor buyer could not transfer ownership of the property in his name because the Register of Deeds wont allow it. There is no required proof of the authority of the person who signed the deed of sale so the seller corporation found an opportunity not to honor the contract by refusing to submit and provide or give the buyer a board resolution. They got the purchase price but the poor buyer could not do anything because there was no board resolution/approval in writing. The buyer filed an action to compel the corporation to issue a board resolution to effect transfer of ownership. SC said while there may be no board resolution, under the doctrine of apparent authority the corporation clothe this officer with apparent authority and led the pubic to believe that he is authorized to transact for the corporation. Therefore the corporation is bound by that sale transaction entered into by its manager and consequently the corporation must submit, prepare, furnish to the buyer the board resolution to effect transfer of ownership. How do you distinguish RURAL BANK OF MILAOR VS CA as against NEW DURAWOOD CO VS CA? In NEW DURAWOOD CO VS CA it is not the function of the manager to dispose of the assets. Unlike in Rural Bank of Milaor, the manager is in charge of asset disposition. Here there was not board approval that is why petition for issuance of owners duplicate of title is not binding on the corporation. A mere manager is not authorized to do these things. GREAT ASIAN SALES CENTER CORPORATION VS CA If the authority given by the board consists of obtaining a loan and then included therein is an authority to sign, execute and deliver documents and perform any act necessary to implement the resolution. Does that general authority include assignment of receivables or securing the loan? Great Asian Sale obtained a loaned BA Bank secured by checks issued to Great Asian Sales (meaning secured by receivables). The checks bounced. The core of dispute is whether or not considering that the one who assigned the receivables have no
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Why? Because the corporation used the operations manual to subsequently obtain a license. What in the case is the exception? Ratification by estoppel on the part of the board These are the 4 cases where a director or officer may bind the corporation: 1. Authorized by the by-laws 2. Authorized by the board 3. No by-laws provision, no board approval but his act is ratified by the board 4. No by-laws provision, no board approval, no ratification made subsequent to the act or instance despite the lack of the 3, if the board clothe this officer with apparent authority and led the public to believe that he is authorized to transact business in behalf of the corporation. (DOCTRINE OF APPARENT AUTHORITY) This (#4) is what happened in RURAL BANK OF MILAOR VS PENA The manager who entered into the contract of sale was in charge of asset disposition. His function/duty is to dispose of assets. He entered into a contract of sale. The buyer paid the purchase price.
explicit authority from the board to assign such receivables. There was explicit authority to obtain a loan. But there was no explicit authority to secure that loan with assignment of receivables. SC said that the all in compassing authority to sign, execute and deliver documents includes the power to secure that loan with receivables. Before this case, that (the ruling) would not have stood. It is wrong because security is an encumbrance. Being an encumbrance it requires an affirmative act on the part of the board. That general authority, do everything necessary...sign...all documents, should be construed in relation to the primary a authority given to the officer. This means if the authority is to sign or obtain a loan, that means that he has no authority to sign a promissory note, the loan agreement, the invoices. Having a security is different from obtaining a loan because a security is an independent contract from the loan. That is why it should require a separate authority. This was the practice in the banks then - it is not enough that there is approval for the loan, there must be also approval for the mortgage, pledge, or the security arrangement. But, because of this case there is no need. That general authority sign, execute and deliver documents, include authority to secure a loan. If you go into practice, if you are the lender better be specific so that there will be no controversy. But if you forgot about it, or the case was assigned to you after the fact then you can invoke Great Asian Sales Center Corporation vs CA. Who are Corporate Officers? y TABANG VS NLRC y EASYCALL VS KING There 3 corporate officers under the Corporation Code 1. President 2. Secretary 3. Treasurer These are the statutory officers under Corporation Code. A corporation cannot do without these officers because the law requires these positions to be filled up. There are other officers that may be appointed by the corporation. You can have vice president of finance, chairman or general manager. What constitutes intra-corporate controversy? What constitutes disputes cognizable not by RTC but by the Labor Arbiter? In other words, when is it a labor dispute? When is it an intra-corporate dispute? If its a labor dispute - cognizable by the Labor Arbiter/NLRC If it is an intra-corporate dispute; all issues concerning removal, termination, appointment of corporate officers - cognizable by the RTC acting as a special commercial court. Conflicting decisions lie in what constitutes corporate officers Who are the corporate officers? What is the test determine if a corporate officer, is a corporate officer whose termination is cognizable by the RTC acting as a special commercial court?
TABANG VS NLRC The position of executive director of a theatre company considered a corporate office. Why? Because his position is in the by-laws EASYCALL VS KING Executive Vice-President Roberto Malonzo of Easycall appointed a sales manager. Then later the sales manager was terminated. Which agency has jurisdiction over him? NLRC Why? Because he does not occupy a by-laws position. He occupies an office but not a bylaws position and he was not appointed by the board but only appointed by the executive vice-president. Combining these 2 cases, a corporate officer is considered a corporate officer for the purpose of determining intracorporate controversy if: 1. He occupies a by-laws position; or 2. He is appointed by the board of directors
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If he does not occupy a by-laws position or not appointed by the board of directors then it is not an intra-corporate controversy and therefore cognizable by the NLRC. TORRES VS CA Why is that Torres held only 1 board seat even though he owns 90% of the company? Something may have gone on riot in this case. It can be surmised that: 1. His nominees turned traitors 2. Corporate secretary must have been his initial nominee but sided with the minority. In this case Torres wanted to have more representation in the board by causing the appointment of his nominees. But his nominees must own 1 share of stocks to be qualified as director. The corporate secretary refused to issue that qualifying share or refused to recognize the issuance in the books of the corporation. Torres made the entries in the books of the corporation and issued the qualifying shares to his nominees so that they would qualify in the ensuing stockholders meeting. In the ensuing stockholders meeting his nominees got elected. Are they qualified to be there in the first place? Where the issuance of the qualifying shares in their favor valid? Where the entries in the books of the corporation valid? SC said no, because he is not the corporate secretary. Therefore even if he is the controlling stockholder, it is not one of his function, he has no authority to cause the entries in the books of the corporation and he cannot take the law into his own hands. What are remedies available to him? Mandamus Under Sec 63 of the Corporation Code. You can file a action/petition for mandamus to compel the corporate secretary the make an entry in the books of corporation. Can the nominees file an action/petition for mandamus? No. Only the stockholder can file an action for mandamus. They have no personality yet because they are not stockholders. What if the corporate secretary does not want to call a meeting (corporate secretary is the one who issues
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the notice, which is one of the requirements of a valid meeting)? Go to the SEC and petition the SEC to call a meeting.
What are the powers of the corporation? Express, implied and incidental powers What are the Express Power of the Corporation under The Corporation Code?
Section 36. Corporate powers and capacity every corporation incorporated under this code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporation, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this code and to admit members to the corporation if it be a nonstock corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into merger or consolidation with other corporations as provided in this Code; 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establish pension, retirement plan and other plans for the benefit of its directors, trustees, officers and employees; 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation.
y y Section 37 Power to extend or shorten corporate term. Section 38 Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. Section 39 Power to deny pre-emptive right. Section 40 Sale or other disposition of assets. Sale in the ordinary course of business or sale of all or substantially all the properties. Section 41 Power to acquire own shares. Section 42 Power to invest corporate funds in another corporation or business or for any other purpose. Investment in secondary purpose of the business Section 43 Power to declare dividends Section 44 Power to enter into management contract. The power of succession (see discussion under Section 11) The power to adopt the corporation seal What is a corporate seal? Sign, Emblem, Device adopted by the corporation to distinguish it from other corporation. Is there any provision in the corporation code requiring the adoption of a corporate seal other than sec. 36 par. 3 of the corporation code? Under Section 63 of the Corporation Code a stock certificate must bear the official seal of the corporation. A seal is an emblem, device or sign to distinguish a corporation, these documents from the other. So if a document bears a seal of the corporation then we can be assured that it originated from the corporation. It is not spurious, it is genuine, and it is not fake, so it will be given faith and credit as document belonging to the corporation. Thats why stock certificate must have the seal of a corporation, we can be assured that it originated from the corporation and not from someone else. However, the absence of a seal in stock certificate does not invalidate the document. The SEC said thats only a formal requirement not a mandatory requirement. Although its supposed to have been couched in a must tenor it is not an absolute or mandatory requirement that will invalidate the stock certificate with the SEC. it is only formal requirement.
y y y y y
y y
There are other express powers in the Articles of incorporation but these are express powers under the corporation code. Any transaction activity, contract inconsistent with these powers is considered ultra vires under sec. 45 So under the corporation code makes a long enumeration of the corporate powers, it cuts the enumeration with a declaration that anything outside these powers is ultra vires. Powers of a Corporation under the Corporation Code: These are Express Powers of a Corporation in addition to the powers provided for in the Articles of Incorporation. So a Corporation may exercise Express powers found in the corporation code, in the articles, other special laws, and powers implied from these express powers under section 45. Section 36 starts the enumeration: And then cut by Section 45 anything not consistent with the express power is ultra vires acts of corporation. Elsewhere in the other provision of corporation code, there are other powers like the power to issue stock certificates under Section 63 and 64 but we may say that this is incidental to the express power under 36 of issuing shares and selling treasury shares. Later on when we reach the topic on stockholders well see the rights of stockholders vis-a-vis the powers of the corporation. The power to sue and be sued It is lodged with the board. So if a corporation is party then that suit must be authorized by the board and we have seen these in the discussion on the powers of the directors.
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Adoption of articles and by-laws Adoption of articles we discussed. Amendments we discussed already. (see discussion under Section 16)
Amending the by-laws (See discussion under Section 46 and 48) In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; (see discussion under Section 60-72)
No. Purchase, receive, grant, donate, encumber pledge or otherwise deal with real and personal property. What are the limitations of the corporation to deal with properties? What are the limitations under the special law? The Bulk Sales Law The power to deal with property therefore is subject to the following limitations: 1. Any dealing with property, whether real or personal, must be in the furtherance of the purpose for which the corporation was organized. So the law says other transactions or the lawful business of the corporation may acquire which is a highfaluting way of saying in furtherance in related to the purpose for which the corporation was organized or whether to purchase a property. The corporation can buy property only if it is related to the purpose. The corporation may sell property only if it is related to the purpose The corporation may mortgage, may pledge of a property only if it is related to the purpose of the corporation. SO there is delimitation with respect to the power of a corporation to purchase property. 2. subject to constitutional limitations Regarding constitutional limitations can you cite a few cases? Under the constitution limits the power of a corporation to deal with property. Foreign Corporation are not allowed to acquire lands in the Philippines What if the corporation is owned by Filipinos? Only foreign corporations with 60% of its capital stock is owned by Filipinos may acquire private lands in the Philippines. May a corporation acquire alienable land of the public domain? No. May a domestic corporation Owned by Filipinos lease a public land? Yes? 3. subject to the limitations under the special law. Bulk Sales Law Can PLDT for instance acquire globe, smart, digitel and fold them up under one telephone Corporation?
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Is there a law against monopoly, illegal combination or restraint of trade? Yes. So again this is another limitation under the special law. The acquisition or dealings with properties must be subject to the laws of monopoly, illegal combination or restraint of trade. To make it simple any dealing with property whether purchase, sale or donation must be in relation to the purpose for which the corporation is organized otherwise its ultra vires. Corporation code makes it more highfaluting as the transaction of the lawful business of the corporation may require. But it can be easily understood if you say if it is related to the purpose for which the corporation is organized. Remember as we said earlier, there is nothing wrong in buying of swimming pool but if the corporation is engaged in agriculture then the buying of swimming pool is not related with the purpose and therefore ultra vires. May a corporation mortgage its properties to secure his obligation? Yes, because in furtherance of the purpose for which the corporation is organized. May a corporation mortgage his properties to secure the obligation of another? Is the concept of third party mortgage applicable to a corporation? In credit transactions under article 2085 that a third person may mortgage or pledge his property to the debt of another, is that applicable to a corporation? Can it mortgage his property to secure the obligation? No, because not in furtherance of the purpose for which it was organized. Properties of the corporation must be used for its use or business not for the business of somebody else except if the debtor corporation is a subsidiary and no third party or creditor shall be prejudiced. What about a corporation securing the obligation of another without a mortgage. Is the concept of accommodation party applicable to a corporation? The concept of accommodation party under Section 29 of the Negotiable Instruments Law, does that apply to a corporation? In CRISOLOGO V. CA a case in Negotiable Instruments Law, a corporation can not secure the obligation of another, its ultra vires unless it is engaged in the business of suretyship, because it is a
bonding company then it is his business to secure the obligation of another. The power to deal with properties is subject to limitations under the Constitution. Only private corporations which is 60% owned by Filipinos may own a private land With respect to alienable land or public domain then private corporation may acquire but such properties must be ended to lease agreement or transaction to involving these properties. Also under special laws we made reference to the Bulk Sales Law, laws against illegal combination, monopoly or spurious trade in relation likewise to section 40 when it comes to sale of some or all corporate assets. In the case of Ayala Corporation and Ortigas Corporation are known for donating parcels of properties for educational and charitable purpose. Ortigas donated a huge a parcel of land to a foundation which now runs the U & AP (University of Asia and the Pacific) and Ayala has likewise donated properties. John Gokongwei also donate properties although some donations are not meant for charitable purpose some donations are for tax, shelter, taxing. Deans Anecdote One Taipan announcing the whole world that he has donated these properties to a foundation but the foundation is controlled by the same Taipan so what does it seem to accomplish? Donations made to an NGO meaning donation made to a foundation for as long as it receives the accreditation from the Philippine Council of NGO is tax exempt and fully deductible expense. I repeat there is nothing in the Corporation Code when we speak of donate to NGO or foundation if that foundation received accreditation from the Philippine Council for accreditation of NGO its not only tax exempt in so far as the donor is concerned it is fully deductible expense so the entire amount of donation may be treated as deductible expense. For the purpose of determining how much can be claimed as tax deduction then you dont apply the Corporation Code but you apply the Tax Code and other relevant regulations. Regarding Donation we said that it cannot be done in aid of any partisan political activity or to aid political candidate, how is it done? How do corporation donate properties or cash rather to candidates? Do you think that Taipan in this country dont give donations to all presidential candidates who can make in this election? No, so Taipans donate in cash or contribution to all presidential candidates who can make it so this amount to x candidate so they spread out to be assure that their business will not be touched by these presidential candidates. How is it done? It can be done through a corporation, if a corporation allows to donate to a political candidate or any political activity it can be
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to enter into merger consolidation (see discussion under section 76) To make reasonable donation for charitable civic civil purposes except that they cannot a partisan political activity or to aid a political candidate. Is there any limitation on the amount of donation? There is no limitation provided that it is Reasonable. Under the tax code what is the maximum amount of deduction that you can claim when you make a donation? Is the limitation under the tax code applicable to corporation? Is it? Well for the purpose of determining whether it is ultra vires or not, the only test is reasonableness. And reasonableness depends on the facts of the case like the income of the corporation, the assets, the objective but the amount of deductible expense by a donation is governed by the taxation law. SO in order to determine on how much the claim of deduction the tax code applies. To determine whether or not it is ultra vires it is the corporation code that will apply. Now regarding Donations under the Corporation Code the only test to determine if it is intra vires or ultra vires is reasonableness. So if there is no amount of donation that maybe reasonable it depends on what is reasonable and as we said reasonable depends on various factors like the income of the corporation, the assets of the corporation.
done in cash in a meeting place by a stockholder. Cash, they go to Hong Kong or pay a visit because there is no trade then there is no donors tax because there is no document. for every year of service. The corporation code recognizes the power of the corporation to adopt a retirement plan superior to the default retirement plan under the labor code and Respecting other retirement plan or benefit program everything can be justified under Sec. 36 such as those housing loan, car loan, motor vehicle loan, even salary loan. In our case outline the establishment of the post in a far plank area in mining camp in Zambales is justified for the benefit plan of its employees. That case was decided when there was no cell phone yet when the only means of communication was through mail but over saying is the corporation may like that any program and for as long as intended for the benefits of its employees then can be justified. In one case the corporation acting as collection agent for its employees. is it okay if ultra vires intra vires? It is within the powers of the corporation to facilitate the collection of payments for debts of his employees for as long as we pointed out the corporation has made no any profit or commission from that arrangement. The powers are not exclusive they can be other powers section 36 the as pointed out implies that there are powers which are incidental, related or akin to the primary or to the express powers of the corporation. For instance, a corporation engaged in a power plant or fishing generation in maintaining power plant or fishing generation can they hire stevedores to transport hulls to the power plant? Its not in the articles, its not in the corporation code but can the corporation do so? Yes, because it is related to the purpose of the corporation. As we are saying so there can be express, implied, or incidental powers and the same may likewise not considered ultra vires.
Section 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code
to establish a retirement plan pension and other benefit program.. can you think of other program plans other than these? That the corporation may adopt for the benefit of its employees? Health plan, salary loan, car loan, housing program, all of these may be justified under the corporation code. If the corporation did not adopt any retirement plan, is there a default retirement plan under the law that at the age of 60 and when you have rendered 5 years of service? Yes, Art. 27 of the Labor Code. SO when your 60 years of age and at least 5 years in service you get month salary for every year of service. That is the default retirement plan in the law. Now what the corporation code is saying is that it recognizes the power of the corporation to adopt or establish a retirement plan superior than what the law says. we said we could have a salary loan, housing loan all of there are part under the benefit program.. What about the corporation acting as a collection agent? Lets say, an Indian creditors of the employees, the ways of indian creditors is to harass you; embarrass you; so that you will pay.. so to save the employees from harassment and inconvenience, Can a corporation enter into an agreement with the lender to facilitate collection so that the corporation will be the one to collect from the debtors of the lender? can that be adopted as a benefit program for its employees under section 36? YES, as long as the corporation will not earn any commission or remuneration from that arrangement. So the corporation may act as a collection agent Remember we said that theres retirement plan under the labor code under article 27, the labor code provides that an employee which renders at least 5 years of service and reached at least 60 years of age is entitled to month salary
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What are the requisites for the extension of corporate term? y The extension must be done during the lifetime of the corporation. y It must be approved by at least the majority of the board.
y y The extension must not exceed 50 years at any given time. The extension cannot be done earlier than 5 years prior to original or subsequent expiry date unless there are justifiable causes that calls for earlier or extension as determined by SEC. In case of banks, insurance companies, public utilities, the extension must have favorable endorsement of the appropriate government agency. The extension is subject to SEC approval. may be. Individual and corporation and we figure out that the corporation is likely to pay 60M pesos. Just because the corporate secretary woke up in the wrong side of the bed and did not realize and forgot about completely that the corporate term is about to expire in one day. SO can it be extended? not anymore. Because there is nothing to extend if the term has expired as held in the case in ____ vs. LEgar. SO the remedy is reincorporation, right now there is no case yet whether or not the distribution of the properties to the Stock Holders that will be used as contributions to the new corporation is subject to tax, none yet. And we are arguing that it should not be subject to tax is because the gain was not realized by the Stock Holders because they will be used as contributions to the new corporation. But there is a risk, BIR will not just accept in sitting down, now if we dont succeed this client will pay 60M just because of the fault of the Corporate Secretary What is the remedy available to the Stock holder if he does not agree with the extension of corporate term? Exercise of appraisal right What is appraisal right? The right of the stock holders to demand for the Fair VALUE of the shares. What about shortening of corporate term? Can the stock holder exercise appraisal right for the shortening of corporate term? Yes, under section 81 Section 81 includes both appraisal right both extension and shortening of corporate term According to Dean Dimayuga, in case of shortening of corporate term there should be no appraisal right because by that time the corporation is dissolved. Shortening the term, we dissolve and when we dissolve, we distribute properties to the stockholders so what appraisal right are you talking about? What payment of fair value are we talking about? If the shares or properties anyway will be distributed to the stockholders by way of dissolution. Our only problem is sec. 81.. sec 81 is explicit even in case of shortening of corporate term, the stockholder may exercise appraisal right and not all shortening of corporate term will result to dissolution. Because you can shorten the term without having to dissolve. Lets say, originally 50 years and then the they decided to make it 35 years, so you can shorten without actually dissolving it. In that case, the stockholders can exercise appraisal right.
Can extension be done during the liquidation period or winding up period? No, if the corporation is already dissolve, there is nothing more to extend Lets say the corporate secretary in charge with the corporate papers forgot that the term of the corporation is about to expire and only remembers it a day after the expiration. SO he readily convened the board; issued notice of meeting to the board. And the board and the Stock holders readily approved to the amendment of the AOI for extension, extending the term of the corporation. They dismiss by one day. They filed the extension with the SEC and invoke inadvertence and excusable negligence. Can the term be extended? No, it cannot be extended even one day delay What then is the remedy available if the term already expired? The corporation is dissolved the term has expired. It exists only for one thing for liquidation and winding up corporate affairs. What is the remedy available in case it wants to continue? If the term expires, the corporation is dissolved. The remedy is REINCORPORATION. SC said in the case of PHILIPPINE BLOOMING MILLS. The SH can reincorporate and instead of receiving the properties by a dissolution, the same properties can be their contributions to the corporation to be formed. Deans Anecdote We are working on a case, one corporate sec of ten corporations except for one corporation. And this one corporation, the term expired in 1 day. Just one day Jan 19 so he readily notify the board to convey a meeting then the board extended the term. The problem is the SEC is already computerized, you can no longer antedate unlike before its manual all you have to do is change the roller date but now not anymore because its now computerized and the consequence is this, If the term expires, it amounts to dissolution and the Stock holder will be subject to income tax for the gain on the shares. Let us say that they acquire the share for 10 pesos per share and the buyer of the shares over time. SO the gain is subject to income tax, 30% of the change
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But if the shortening of corporate term will result to dissolution then we have a potential conflict of interpretation. We dissolve or do we allow the stockholders to exercise their appraisal right. But for bar purposes because sec. 81 says so, the law says so shortening of corporate term the stockholder may exercise appraisal right. ordinary income tax 30% as the case maybe. If those properties dont end up to the stockholders but instead used as contributions in the corporation to be formed engaged in the same kind of business, it is not clear yet whether that transaction shall be subject to tax and we argued that it is not subject to tax because there is no gain realized on the part of the stockholder So REINCORPORATION is the remedy allowed in the case of Philippine Blue Milling Mills It must be approved by at least the majority of the board. The extension of corporate term is or entails an amendment of articles of incorporation in otherwise any amendment must be approved by the majority of the board and approval by the stockholders owning at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non stock corporation. The extension must not exceed 50 years at any given time. The extension cannot be done earlier than 5 years prior to original or subsequent expiry date unless there is justifiable causes that calls for earlier or extension as determined by SEC. In case of banks, insurance companies, public ulitity corporations the extension must have favourable endorsement of the appropriate government agency. The extension is subject to SEC approval. What are the requirements for SHORTENING the Corporate Term? Same requirements for shortening corporate term. Remedy available to a stockholder in case he does not agree with the extension or shortening a corporate term is to exercise his appraisal right, demand payment of the fair value share although we pointed out Section 37 does not include shortening of corporate term but it is on Section 81, even shortening the corporate term triggers the exercise of appraisal right on the part of the stockholders.
Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or 75
Section 37 Power to extend or shorten corporate term. These are the limitations on the power to extend a corporate term: o The extension must be done during the lifetime of the corporation. o It must be approved by at least the majority of the board. o The extension must not exceed 50 years at any given time. o The extension cannot be done earlier than 5 years prior to original or subsequent expiry date unless there are justifiable causes that calls for earlier or extension as determined by SEC. o In case of banks, insurance companies, in case of corporations the extension must have favourable endorsement of the corporate agency. o The extension is subject to SEC approval. The extension must be done during the lifetime of the corporation. It cannot be done when the corporate term has already prescribed. It cannot be done during the liquidation period as said in the case of SEC V. ALHAMBRA CIGAR so even one day delay thats it, its pass because there is nothing more to extend. If a term has expired without any extension of corporate term being done by the corporation the remedy is to reincorporate. For the properties of the stockholders which would they have received during the liquidation and dissolution may be treated as contributions to the new corporation but bearing the same corporate name. That is something which is not clear yet if that is subject to tax what is subject to tax is the distribution of the properties to the stockholders by way of dissolution/liquidation if the stockholders gain from the appreciation in the value of shares. So we give this example that if the stockholders acquire shares at par value P10 and then the book value of the shares increase tremendously because the corporation earns profit in the form of separation then that gain is subject to income tax
diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) (2) (3) That the requirements of this section have been complied with; The amount of the increase or diminution of the capital stock; If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; Any bonded indebtedness to be incurred, created or increased; The actual indebtedness of the corporation on the day of the meeting; The amount of stock represented at the meeting; and The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness.
y By increasing the number of shares but maintaining the par value. y Increasing the par value but maintaining the number of shares. y Increasing the par value and increasing likewise the number of shares. What is the procedure or requisites for the increase of corporate stock? y Approval by Majority of the BOD y Stockholders approval owning at least 2/3 of the outstanding capital stock y Treasurers affidavit that at least 25% of the increased in capital stock has been subscribed or has been represented and paid in cash or property and received by the corporation y Certificate of amendment y In case of banks, insurance companies, public utility corporation favorable endorsement from the appropriate government agency y The increase is subject to SEC approval What does the certificate of amendment contain? Requirements of section 38 has been complied with Who should sign it? The certificate must be signed by at least majority of the board countersigned by the Chairman, the president, and also the corporate secretary What else will it contain? (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and
(4 ) (5 ) (6 ) (7 )
Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the C ommission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25 %) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the C ommission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange C ommission, which shall have the authority to determine the sufficiency of the terms thereof.
38 involves increase or decrease of capital stock What are the ways by which the corporation may increase or decrease its capital stock?
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(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. y Increasing the par value and increasing likewise the number of shares.
Are these the same requirements in case of reduction of capital stock? Yes, except the treasurers affidavit because that requirement is needed in the increase in capital stock. So in case of increase of capital stock So in case of increase of capital stock, at least 25% of the increase capital stock must be subscribed and at least 25% of the subscribed capital stock must be paid up upon filing of the increase with the SEC and this must be incorporated with a treasurers affidavit. IS the 25% of the capital stock as increased or is it only 25% of the increase in capital stock must be subscribed upon filing of the documents with the SEC? Of the increase not as increased Why? SO let us say the capital stock of a corporation is 1B divided into 1B shares with par value of 1 peso and subscribed and paid up capital stock 500 million and the corporation would like to increase the capital stock from 1B to 2B same par value 1peso, the shares increased from 1B to 2B. Is there a need to still subscribed to 25% of 2B considering that paid up capital is of the capital stock as increased. What is the rationale? To make sure that the corporation receives minimum capital because in our example, if it is 25% as increased then there is no need to subscribe further because 500M is of 2B. So it should be 25% of the increase not as increased. Can the corporation increase in capital stock even though the original authorized capital stock has not been fully subscribed? Yes, so there is no need to exhaust the authorized capital stock before you can increase the capital stock. The SEC said that there is no obligation on the part of the corporation to exhaust the authorized capital stock or to subscribed in full the authorized capital stock before a corporation increase the capital stock of the corporation for as long this 25% of the increase has been subscribed and 25% of the subscribe has been paid upon filing with the SEC. What are the ways to increase by which capital stock may be increase? A capital stock may be increase: y By increasing the number of shares but maintaining the par value. y Increasing the par value but maintaining the number of shares.
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Same with reduction of capital stock: y Reduce the par value but maintaining the shares. y Reduce the shares but maintaining the par value. y Combination of both. May a corporation increase capital stock even though the original authorized capital stocks are not being fully subscribed? Yes, as opined by SEC. a corporation may increase capital stock even though the original authorized capital stocks are not being fully subscribed Lets say, the authorized capital stock is 1Billion and then its subscribed capital stock is 250M shares and then lets say the paid up is 750M also, lets say they fully paid the subscription. The ad gist portion of the capital stock is 750M divide by 70 shares at par value of P1 assuming the par value is P1. What was we said is that it can increase its capital stock from 1B to 2B even though it is not fully subscribed. Does it make sense? Why do you have increase capital stock when all you have to do is to issue shares out of this additional portion of the capital stock. When you increase capital stock you pay filing fee 1/5th of 1% so it could give you cost so why increase when you can just subscribe the issued portion of the capital stock? When you issue new shares of the issued portion you also get capital but anyway the SEC said it can be done whether it takes businesses something that the accountant or auditors will not do to take into account but for law, for academic purposes the corporation may increase capital stock even though the original capital stock has not been fully subscribed. What are the requirements in increasing capital stock? The increase in capital stock again entails the amendment in the articles of incorporation and being an amendment of an article can we go back to what Section 16 provides majority of the board and approval of by the stockholders owning at least 2/3 of the outstanding capital stock or 2/3 members in case of non-stock corporation And again if it is a bank, insurance companies, public utility corporation favourable endorsement from the appropriate government agency so every time you refer to an amendment then we always bear in mind the approvals required:
y y y y board stockholders, appropriate government agency SEC. On Section 16 every time you amend the article you have to submit both the original and the articles as amended. So same principle when you increase the capital stock you have to submit the certificate of amendment and submit likewise the original articles and the articles containing the amendments duly underscored or highlighted and then the treasurer affidavit that at least 25% of the increased in capital stock has been subscribed or has been represented and paid in cash or property and received by the corporation and then complemented by a bank certification that shows that an X amount of money is deposited with the bank corresponding to the paid up portion of the capital stock. When the law says 25% of the increased capital stock has been subscribed, we said it is not 25% as increased but 25% of the increased. In our example here if the capital stock of the corporation is increased by from 1B to 2B and lets assume, for discussion purposes, thats the subscribed is 500M the paid up is also 500M and it increased from 1B to 2B now if we will say that 25% of the capital stock as increased then theres no need for this corporation to acquire funds from the stockholders because the 500M is 25% of 2B thats why the law says 25% of the increased so what is your increased 1B anything on top of the original authorized capital stock is your increase and thats why you measure or compute the 25% subscription requirement. So 25% of 1B must be subscribed and 25% of 250M must be paid up when you filed the articles and the amendments from SEC. In case of reduction of Capital Stock, all the requirements applies except for treasurers affidavit that requirement is obviously peculiar and applicable only in increased capital stock. What are the requirements for reduction of capital stock? y Same requirements except the treasurers affidavit and y the reduction of capital stock must not prejudice creditors. Now when you use the capital stock it will result in distribution of properties to the stockholders so lets say from 2B you reduce it from 1B what will you do with the 1B that was reduced will it be floating in the air? No, that will be distributed to the stockholders because you reduced capital stock but you cannot do if it will prejudice the creditors thats why you have to get the consent of the creditor. The SEC would require the consent of the creditors. In a reduction of capital stock is one of the ways or methods allowed by law where properties of the corporation maybe distributed back to the stockholders.
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In between of course before you get the approval of SEC you must submit the requirements. What are the requirements? Certificate of Amendment Certificate of Amendment must be prepared and filed with the SEC. what is a certificate of amendment all about? A certificate attesting to the fact that the board and the stockholders with quorum present adopted the appropriate resolutions to increase the capital stock of the corporation and that all the requirements under the law have been complied with. The certificate must be signed by at least majority of the board countersigned by the Chairman, the president, and in practice also the corporate secretary. So it must indicate: y the number of shares voting for and against it, y the amount of debt by the corporation and y take note even though there is no bonded indebtedness issued by the corporation the certificate of amendment must make reference to bonded indebtedness so it must say that no bonded indebtedness is incurred or if there is any it would be likewise stated. Why that so? Because the SEC is a robot, robotic, mechanical, so even though you can argue that why insist on putting it there when youre not increasing bonded indebtedness and youre just increasing capital stock they will look to it and if it is not there they will reject it and they will refuse their obligation and send it back to you so you can include it in your application. Certificate of amendment must contain the following information: y statement countersigned by at least majority of the board, chairman and corporate secretary and y then the original articles of incorporation and y the articles of incorporation with the amendments duly underscored. y the treasurer affidavit
Ways or methods allowed by law where properties of the corporation maybe distributed back to the stockholders. y Dissolution y Redemption of redeemable shares y Reduction of capital stock. Are all borrowings of the corporation subject to stockholders approval? No When do borrowings of the corporation requires stockholders approval? Only in case of bonded indebtedness not all indebtedness, borrowings, credit accommodations of the corporation requires stockholders approval only if the borrowings are classified or falls under the concept bonded indebtedness that only requires approval of the stockholders at least 2/3 of the outstanding capital stock. What constitute bonded indebtedness? If the obligation is burdened with or encumbered by corporate assets, then there is a need for stockholders approval. Bonded indebtedness is a form of a bond secured by a mortgage or charge of corporate assets. It does not depend on the amount? So if it is against the general credit? Will board approval suffice? So if it against the general credit not accompanied by encumbrance on corporate properties. Does that require stockholders approval? Board approval suffices if the value is against the general credit of the corporation. Meaning the credit accommodation is granted only on the strength or belief of the lender in the capacity of the borrower to pay. If the obligation is in the form of a bond and secured by corporate assets that is the time we need stockholders approval because it falls under the concept bonded indebtedness. Take note that the law says not only incurring bonded indebtedness but also increasing requires also stockholders approval. So if in the outset the corporation obtains stockholders approval for lets say 500M of bonded indebtedness and increased it 1B it has to obtain again stockholders approval. Are bonds the same as dividends? No, A bond is a borrowing of the corporation whereas dividends arising on shares are fruits of equity investment. Therefore the interest on the bond is a matter of right. The bond holder is entitled to the payment of interest on the bond regardless of whether or not there is surplus profit whereas Dividends arising from shares can only be made available if there are surplus profits or unrestricted retained earnings. Bonds are deductible, dividends are not. Bond Holders are creditors of the corporation while stockholders are risk takers of the corporation. Regarding bonded indebtedness we have to make a distinction between an obligation of the corporation based on its general credit and an obligation or indebtedness is classified as bonded indebtedness. So not all borrowings of the corporation require stockholders approval, only a debt classified as bonded indebtedness. Now what makes the bonded indebtedness? If it is in the form of a bond, or encumbered or secured by the corporate assets of the corporation. An ordinary borrowing is only good for a short term, 90 days or 60 days and only with one lender. Bonds are usually long term and involve large number of investors. If it is based only on the capacity of the creditor or the borrower of the corporation to pay based on the perception or judgment of the lender without charging the properties it does not require stockholders approval. How do we distinguish bond from shares of stock? The bonds are borrowings of the corporation. Shares are equity investment of the stockholders; equity contribution to the corporation by the stockholders. So from that main distinction you draw the other distinctions: if a bond is a borrowing therefore it has to be paid and if there is an interest, the interest on the loan must be paid regardless of the existence of the retained earnings. So its an obligation or the corporation to pay the interest as well as the amount of the loan on maturity thereof. So lets say you have a 10B bond given the different investors with the maturity of 3 years and with the
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coupon rate of 10% payable every quarter so what does coupon mean? If you have bond the holder is given a coupon. A coupon which means we detached and that what is we present to the issuer of the bond. When we present the coupon we get paid the interest. Now is the corporation bound to pay interest even if it does not have money, even if there are no retained earnings or surplus profit? Yes, unlike dividends because these are only due for payment if there are surplus profits or retained earnings but for loan arising from a bond regardless of retained earnings it has to be paid. And on the maturity of the bond lets say 3 years the corporation has to pay the principal amount. What about the shares? Lets say redeemable shares, if the corporation has no money can it be compelled to redeem the shares? In Section 8 that the corporation is bound to redeem despite the lack of surplus profit but it should have funds. It should not result to insolvency of the corporation. So bonds must be paid on maturity and every coupon rate period. The bond holders participate in the management of the corporation do they participate? They dont because they are not stockholders. They are creditors. They are not risk takers unlike stockholders; they participate in the management of the corporation and with the right to vote. Can the bond be converted into shares? It depends if the bonds are convertible in nature. There are bonds convertible to shares at the option of the corporation or at the option of the creditor based on the terms of the fund issuance. But unless there is such a feature then the bonds are simply loan obligations on the part of the corporation and the owner thereof are not entitled to vote nor to the assets of the corporation upon dissolution. a borrowing therefore it has to be paid and if there is an interest, the interest on the loan must be paid regardless of the existence of the retained earnings bonds must be paid on maturity and every coupon rate period. Earns dividends.
Dividends are only due for payment if there are surplus profits or retained earnings
Section 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing twothirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.
What do you mean by preemptive right? The right of the stockholder to subscribe in and in all issuance of shares or disposition of shares of any class by the corporation in proportion to his shareholdings in the corporation. In other words, before shares or new shares are to be issued they must first be offered to the existing stockholders in proportion to their shareholdings of the corporation before they can be offered to third parties. Only if the SH waive his preemptive right that the shares be offered to non-stockholders. What is the purpose or objective of preemptive right? to maintain the stockholders proportionate implement of interest of the corporation in terms of asset, dividends and management control. In other words, to prevent the stockholders from being diluted without his consent. SO let us say you have 5 stockholders owning 20% each and the corporation will issue shares. if his shares are offered to non-stockholders, that will result in reduction of the proportional percentage of the stockholder in the corporation. His right to receive dividends like assets, right to management is likewise impaired or diluted unless preemptive right is observed.
BONDS borrowings of corporation
the
SHARES OF STOCK equity investment of the stockholders

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Is preemptive right absolute? Preemptive right is not absolute. It can be waived or the stockholder may be deprived of such right in the AOI. Either Articles are the outset will not contain
preemptive right or will include a waiver of preemptive right. Preemptive right does not apply to shares issued in compliance with laws requiring minimum stock ownership of the public. Can you give an ex. of shares issued in compliance with laws requiring minimum stock ownership of the public? The public should owned 10% of public __ banks. So BSP requires at least 10% of the capital stock to be owned by the public so if shares are issued in compliance with these laws and regulations, then the stockholders cannot complain violation of preemptive right Shares issued in good faith in exchange for corporate property needed by the corporate purpose for as long as it is approved by the stockholders representing at least 2/3 of outstanding capital stock. Shares issued in payment of debt incurred in good for as long as the shares are so issued upon approval by the stockholders representing at 2/3 of the outstanding capital stock. Does preemptive right apply to sale of treasury shares? If the corporation will sell treasury shares, are these shares first to be offered to existing stock owners before they can be sold to third persons? Yes, the SEC opined that the Preemptive right also extends to treasury shares because the corporation code says any and all issuance or disposition of shares of any class. So whether common or preferred subject to preemptive right; whether original issuance or existing shares sold as treasury shares subject to preemptive right. Under the old code that preemptive right does not apply to issuance of shares arising from the original authorized capital stock but take note this is from old corporation code. So in 2000, the SEC made it clear that under the NEW corporation Code, preemptive right applies and extends to all issuance of shares whether taken in the original authorized capital stock or increase in capital stock. In other words under the old law preemptive right only applies when there is increase in capital stock not to issuance to original authorized capital stock. The New Code says any or all issuance of shares and the SEC intended that to mean are the issuance of shares out of original authorized capital stock or in case of increase in capital stock. The SEC further says that it also applies to treasury shares.
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if the corporation shares are listed in stock exchange, the first order is to amend the AOI to deny preemptive right. Can you imagine if you have 14K stockholders and the corporation will issue these shares, so you will be knocking at the doors of each of the 14k stockholders to get their approval or waiver of preemptive right. Deans Anecdote I remember in 1997 when equitable bank went into IPO (initial public offering) before we go to IPO we have to amend the AOI to include a denial of preemptive right. So the corporation will issue the shares without observing the preemptive right of the stockholders because the right is not absolute. So you see if you are a minority stockholder you can be diluted because all the corporation has to do is to keep on increasing the capital stock. First amend the articles to include preemptive right. Once it is done keep on increasing the capital stock of the corporation to the point that you get diluted. We have a problem with a stockholder owning only 10% of the company, 10% means nothing because to veto a corporate act you need more than 1/3 because if u have 2/3 all major corporate transactions can be approved if you have 2/3 of the outstanding capital stock but you know also a minority stockholder can file derivative suit meaning you can own 1 share but you can file a derivative suit to question the acts taken by the board. So how do you get rid of this 10% minority stockholder? You cannot kick him out because he is a stockholder and stockholder cannot be removed because those are his shares, so what do you do now? You keep on increasing capital stock then he will be diluted and diluted and diluted.such that even 10% becomes more insignificant as it keeps on increasing the capital stock of the corporation. One of the faculty members older than me obviously said that you can only do that in good faith meaning you can only keep in diluting in good faith. The corporation code provides that we can deny preemptive right. If the law says you can do it why not do it, as long as you get majority of the board and stockholders owning at least 2/3 of the outstanding capital stock. If you have 10 stockholders, it is easy to get waiver of preemptive right such stockholder can waived preemptive right. What do you do if one stockholder cannot be found and you cannot get the waiver, I said to SEC we cannot increase capital stock unless meron kang waiver of stockholders. What do you do if one stockholder cannot be found? The board resolution will indicate a time frame within which to exercise preemptive right otherwise it is deemed waived.
The board resolution indicates that the stockholders have 30 days to exercise or to indicate their communication to waive or to exercise their preemptive right and If he fails to do so then he waives his preemptive right and that is what we submit to the SEC Pre-emptive right is the right of the stockholder to subscribe to any and in all issuance or disposition of shares of any class in proportion to his shareholdings in the corporation. What is the rationale for the pre-emptive right of the stockholder? To prevent his dilution; to be able to maintain his proportionate implement of interest in the corporation without being diluted without his consent. What do you mean by this? Lets say you have a corporation with 5 stockholders at the outset or the first incorporators in each own 20% of the corporation. So lets say in our example we have 1B capital stock subscribed is 250M the 50M subscribed divide into 5 incorporators A, B, C, D and E, so you have 15 more to distribute to add to the stockholders and the 750M shares if issued must 1st be offered to A, B, C, D and E 20% each in proportion to their shareholdings. Why? because if the shares are to be issued to non-stockholders or if more shares will be given to A or to B then the proportion of influence of the rest will be diluted. So from 20% they will be reduced accordingly. So since we have quantified, they have measured their standing to the corporation 20% or x number as the case maybe they can be diluted without their consent. Thats the concept of pre-emptive right in theory. In practice, if you have no money you cannot subscribe to issuance of shares. That right becomes illusory. When you have no money and you have control, dont agree to increase capital stock because increase capital stock requires board approval and stockholders approval so if you are with the board, dont agree to increase capital stock in order that there will be no substitution. Deans Anecdote A client of ours issued redeemable shares to a foreign company, the biggest tea manufacturing in the whole world, it invited the largest group of stockholders of the whole world
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it owns 40% our client owns 60% and then the shares issued to this foreign company are common and redeemable and the redeemable shares can be converted into common after 3 yrs if the corporation fails to redeem. The corporation has no money so it cant redeem the shares so that means that 40% owner can convert redeemable to common and will end up controlling the company. The 40% will be the majority but as we learn, any amendment with the articles of incorporation requires board approval and SH approval. Simple, we did not amend we did not agree to the increase capital stock. They can convert the shares to common but there is no available shares everything has been fully subscribed the entire capital stock of the corporation has been fully subscribed so where do you get the common shares. So the right to convert is useless because there are no available common shares. In what cases pre-emptive right of SH does not apply? 1. In case of denial in the articles of incorporation either in the original or as an amendment of AOI. Meaning at the outset there can be pre-emptive right but can be denied later on as an amendment of AOI. Amendment requires majority of the board and SH approval 2/3 2. Waiver of pre-emptive right. The right is not absolute therefore it can be waived by the SH express or implied. If theres a period to exercise pre-emptive right and if that right is not exercise within that period then it deemed waived. When you prepare a board resolution you have to indicate the time frame within which the right to exercise otherwise deemed waived. It cannot go on indefinitely there must be a period fixed SH must exercise his right. 3. It doesnt apply to shares issued in compliance with laws requiring minimum stock ownership to the public as in Banks. 4. It does not apply to issuance of shares in exchange for the corporate property given for a corporate purpose if approved by the SH owning at least 2/3 of the outstanding capital stock. 5. Issuance of shares in payment of debt in regard of good faith if approve by the SH representing 2/3 of the outstanding capital stock. ABC Corp. wanted to expand his business; wanted to put up a branch in Cainta, Rizal and the bond property owned by Juan dela Cruz. Now Juan dela Cruz is not willing to sell property for cash instead he is willing to sell or convey the property to the corporation but in exchange for shares of stock. So ABC Corp. adopted a resolution to purchase the property in exchange for shares of stock and the SH owning at least 80% of the corp. approved the purchase and the swap of the property with shares of stock then the minority SH filed a derivative suit to
question the issuance of shares in exchange of the property. Will the suit prosper? Anniversary No, because first, the shares are issued in exchange of the property and the property is needed for corporate purpose meaning for expansion of the business and 80% is definitely more than the minimum required for SH approval which is 2/3 of the outstanding Capital Stock therefore the minority SH has no reason to complain.
Section 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section.
If sale of substantially all of assets? Board approval majority vote and stockholders approval representing at least 2/3 of outstanding capital stock. How do we consider a sale that involves all or substantially all? If after the sale, the corporation cannot continue with the business for which the corporation is organized What are the other limitations on the power of the corporation to sell all or substantially all of its corporate assets? Other than the approval by the board and stockholder, what are other limitations on the power of the corporation to sell all or substantially all of its corporate assets? y The sale is subject to laws against illegal combination, monopoly or restraint of trade. y Sale is subject to Bulk Sales law Remember bulk sales apply to all or substantially all of corporate assets. If it is a bulk sale what are the requirements? Other than board or stockholders approvals? 1. list of creditors under oath must be given by seller to the buyer 10 days before the sale, that list must contain the names, addresses, due dates and amount owing to the creditors. 2. Inventory of goods or properties to be sold, cost price and the amount for which it has been sold and 3. The list of inventory filed with the DTI, otherwise, the sale is in fraud creditors therefore null and void. Review There are 2 kinds of sale contemplated by Section 40 y Sale in the ordinary course of business only requires board approval. y Sale, disposition or encumbrance of all or substantially all of corporate assets requires board and SH approval 2/3 of outstanding Capital Stock and subject likewise to laws against illegal combination, monopoly or exchange of trade. Only sales of all or substantially all not sale in the ordinary course of business is subject to laws against illegal combination, monopoly or exchange of trade. In our example last time can PLDT acquire all telephone companies in the Philippines? No, because it will result to monopoly. Is there an Anti-Trust law in the Philippines just like in the US? Microsoft fro example has been defendants of various anti83
Sale, mortgage, pledge or disposition of properties in the ordinary course of business board or stockholders, approval or both? Board Approval 2 kinds of sale contemplated by section 40, y sale or disposition or conveyance in the ordinary course of business and y sale of all or substantially all of the corporate assets.
trust case. Anti-trust means keeping with the competition, ikaw lang ang natitira. In the case of Microsoft, they require all software should be or all PCs should have this software their operating systems. Thats a violation of the said law in the States there must be pre-market not monopoly. In the Philippines there is none but there is law against monopoly meaning there is no specific law of anti-trust but we have law on monopoly which is the same thing. And then all are subject to special laws like the bulk sales law if it is a bulk sales, if it is a sale of all or substantially all, it is a bulk sale. Remedy available to SH not in favour of sale of all or substantially all is appraisal right.
Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. 2. 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; and To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this C ode.
The Corporation may acquire its own shares in case of redeemable shares regardless of unrestricted retained earnings for as long as it does not result in the insolvency of the corporation. Is the enumeration in section 41 exclusive? Not exclusive as long as it is for legitimate corporate purpose, then the corporation may acquire its own shares Can you give me an instance of a legitimate corporate purpose where the corporation can acquire its own shares? Shares are conveyed to the corporation in payment of a debt (dacion en pago) Deans Anecdote One case we handled, shares are conveyed to the lender corporation in payment of a debt. ABC owns shares of XYZ. ABC owes XYZ a certain amount of money. So ABC has no money so ABC conveyed its shares to XYZ, in payment of the debt to XVZ, XYZ will end up acquiring its own shares in payment of debt. Does that require unrestricted retained earnings? No, in case of conveyance in payment of a debt, there should be no requirement for surplus profit because there is no cash-out in the part of corporation. If there is no cash-out, no money involve, why require unrestricted retained earnings According to foreign laws, surplus profit is only required when there is cash out on the part of corporation in acquiring its own shares. To eliminate fractional shares arising out of stock dividends; A fractional share is not entitled to vote but if you add all fractional shares there will be whole. When U become a corporate secretary and ur client declares stock dividends make sure you include a provision that a corporation is authorized to acquire any fractional share arising from stock dividends declaration. Let us say a stockholder own 250 shares and the corporation declares 25% stock dividends. 25% of 250 is 62.5. The .5 is the fractional share that the corporation may acquire 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;
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3.
What are the cases or instances may the corporation may acquire its own shares assuming all the conditions are present? 1. To eliminate fractional shares arising out of stock dividends; 2. 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; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. 4. In case of redeemable shares 5. In case of close corporation, in case close corporation the stockholders may at anytime demand the payment of the fair value of his shares Under what conditions may a corporate acquire its own shares except in case of redeemable shares? y Legitimate corporate purpose y No creditor will be prejudice y The corporation must have unrestricted retained earnings. Only if the corporation have excess then such corporation may acquire its own shares except in redeemable shares.
As we will see under sec 67, 68 of the corporation code what are the remedies available to the corporation in case of non payment of subscription price and becomes delinquent is to set or conduct a delinquency sale and if there are no bidders the corporation may acquire the delinquent shares To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code (See Discussion under Section 81-86, Appraisal right) The corporation may acquire its own shares only if it is for legitimate purpose and subject to availability of surplus profits or unrestricted retained earnings. Retained earnings are surplus profits is not required only when it comes to redemption of redeemable shares under sec.8. If the corporation redeems its redeemable shares it becomes treasury and the corporation may do so regardless of availability of surplus profits, that is by law. According to foreign authorities, if it is dacion en pago conveyance of shares to the corporation in payment of a debt it does not require availability or existence of surplus profits. The example we gave last time and in SPCL because of the rules in equity investment, Equitable bank was able to buy shares of PCI Bank only so much, the rest of the shares which can be acquired by the bank because of the limitation on equity investment falls in wholly owned subsidiary. Now, the subsidiary has no money so it borrowed money from the bank to finance the purchase of the shares so the subsidiary ended up being a SH of the bank and later on merge. So how the subsidiary pays the bank? So the subsidiary paid the bank by conveying shares through dacion en pago. At that time the bank has no retained earnings, can the shares be conveyed to the bank? Can the bank acquire the shares in payment of debt if it has no surplus profit? As I told you SEC and BSP kept on tossing it back and forth thats why in the Philippines. There is no settled jurisprudence but in the States because our corporation law is patterned after the California Code of Corporation in the States the rule is if it is in payment of debt surplus profit is not required. You only need surplus profit because it will violate the Trust Fund Doctrine you are not
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suppose to spend your money; youre not suppose buy your own shares unless you have excess money in the surplus profit. But because in dacion en pago youre not spending your own money youre not spending a single centavo instead you are getting in paid then there should be no such requirement of surplus profit. Specific cases when the corporation may acquire shares under sec.41: (1) to eliminate fractional shares arising out of stock dividends; (2) 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; and (3) to pay dissenting or withdrawing stockholders entitled to payment for their shares under the provision of this Code (under Sec. 81); (4) Redeemable shares; (5) Closed corporation then at any time the stockholder may demand the fair market value of the shares. The enumeration are not exclusive because there can be other cases for as long as they are for legitimate purposes like donation, purchase of shares. In IBM case when IBM engaged in the massive buy back shares of the buy back program what do you mean by that? IBM is a company bought its own shares in the market. The shares were traded below book value because the economy was in distress so people dont mind selling their shares below book so because they are cheap IBM decided to buy those shares. When the shares are outstanding the book value is less than P80 thats the amount they have to pay if they cash out but because youre buying the shares at an amount below book then your liability is decreased considerably? So the SEC said it is valid and for legitimate purpose to buy back the shares below book value.
Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the provisions of this C ode, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this C ode: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary.
Section 43 refers to the power of the corporation to declare dividends It is a power on the part of the corporation in the sense that it is the corporation through the board that declares dividends; it determines if the corporation is in the condition to declare dividends It is a right on the part of a stockholder in the sense that if the conditions are present then there is a right to receive dividends because one of the proprietary rights of the stockholders is the right to receive dividends Profits vs. Dividends Important to make distinction between profits and dividends because not all profits are dividends. Dividends may be the or portion of it that has been segregated and earmarked by the corporation for distribution to the stockholders. Dividends are the Profit of the whole or part of it that has been set aside for distribution for stockholders. If the profits have not been segregated that means that they cannot be made available for distribution to the stockholders. What is the significance of the distinction? The power to declare dividends rest with the BOD, whether stock or cash. It is first initiated by the board, and in case of stockholders approval, confirmed and approved likewise by the stockholders. But it starts with the corporation. The corporation, as a general rule, cannot be compelled to declare dividends. As a general rule, a petition for mandamus cannot be filed to compel a corporation to declare dividends because declaration of dividends is discretionary on the part of the corporation. So just because there are profits the corporation ought to declare dividends. What are the kinds of dividends under the law? y Cash - payable in cash y Property - payable in properties, whether real or personal y Stocks - payable in shares of stocks Cash requires board approval only Stocks require board and stockholders approval What about property? For the purpose of determining which approvals are required, property dividends are considered as cash
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ABC corporation is engaged in agriculture, it wants to devote its fund in deep sea fishing how can you go about it? There must be approval by the stockholders representing at least 2/3 of the outstanding capital stock and board approval. That is why we have the primary purpose and secondary purpose. A corporation may have a secondary purpose the funds if invested in secondary purpose will be subject to board and stockholders approval. What is the remedy available to a stockholder who does not agree with the investment with the secondary purpose? Exercise of appraisal right We said that the corporation code allows a corporation to have primary and secondary purposes but what the law allows combination of purposes there must be delineation between primary and secondary so that in case funds are invested in secondary purpose or purposes stockholders approval is required. A stockholder puts money in the corporation with expectation that the money put in the corporation will be used for the primary purpose. So if the funds will be used not for the primary but for other business then the Board must get back to the stockholders and get their approval. Now if the stockholders dont agree then they may exercise their appraisal right.
Section 43. 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 stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.
dividends approval. and therefore only require board the corporation. So when he was trying to invoke the management contract, the corporation refused. When the case went up to the SC, it held that only stockholders are entitled to receive dividends. He may be paid shares of stocks for services rendered Stock dividends payable to stockholders on the strength of the shares held by them. Now shares may be issued to non-stockholders but only in payment of services rendered. They are not stock dividends. They are considerations for the issuance of shares by the corporation. 3. What about stock dividends? When we say stock dividends, the shares of stock are taken from the unissued portion of the capital stock not from existing shares that should have been acquired by the corporation but in the unissued portion of the capital stock, whether original or increased capital stock. How do you distinguish stocks from cash dividends? 1. Cash May be approved only by the BOD by majority of the quorum. When it comes in declaration of dividends, majority of the quorum is sufficient not necessarily majority of the entire board Stocks Has to be approved by the Board by majority vote of the quorum and by stockholders representing at least 2/3 outstanding capital stock 4. 2. Cash Payable in cash Stocks Payable in shares taken from the unissued portion of the capital stock of the corporation Can the corporation issues stock dividends to a nonstock holder? In the case of NIELSON VS. LEPANTO CONSOLIDATED MINING the SC said that only stockholders are entitled to receive stock dividends because if stock dividends are given to non-stockholders then it will result in the dilution of the existing stockholders. Does it mean that shares cannot be issued to persons as payment for services? In the case of nielson, Nielson signed a management contract with Lepanto and one of the features of the management contract is his entitlement of 10% stock dividends but he was not a stockholder of
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Can shares be distributed to the stockholders as property dividends? Yes, in the case of treasury shares. Treasury shares are shares issued by the corporation, fully paid and outstanding and reacquired by purchase, donation, reversion and any other lawful means. So these shares, once acquired by the corporation become, properties of the corporation. They are assets of the corporation. They can be distributed by way of property dividends in which case board approval suffices.
Cash Shall be applied against unpaid subscription price Stockholders may be allowed partial payment of the subscription provided that it paid at least 25% of what you have subscribed which means that you can pay the balance on a later day depending upon the due date indicated in the contract of subscription or exercising upon the call of the board. If the corporation declares cash dividends, the shares shall be applied against the unpaid subscription. Stocks if there is unpaid subscription price, Stock dividends shall be withheld until full payment of the subscription Cash There is cash out on the part of the corporation. There is cash outlay Stocks No cash outlay because because what happens is that the surplus profit of the corporation is transferred to capital. So from surplus profits it is to reclassified to into capital, and once it becomes capital it will no longer be available for dividend distribution. There is no money being given to the stockholders. The money is being classified from surplus profit to capital. Determining Dividends If the corporation declares cash dividends, for example 30 centavos per share, equal; all we have to do is to determine the number of outstanding shares and paid therein 30 centavos each. But stock dividends are a two step process. First, you declare cash dividends but instead of distributing cash to the stockholders, the corporation will use the cash dividends to subscribe to shares at par
value. So in forced use of cash dividends to subscribe to shares at par value. Lets say the corporation declares 25% stock dividends so how do you determine the stock dividends? First determine the number of outstanding shares. How do you determine the outstanding shares? Lets say that there are 10M outstanding shares; the par value at 10 pesos per share. That means the subscribe capital is 100M and then the corporation declares 25% stock dividends. So 25% of the outstanding shares is about 2.5M multiplied by par value, 2.5M times 10 = 25M. This (25M) is what the corporation needs as surplus profit to be able to declare stock dividends of 25%. But instead of distributing 25M to its stockholders, the corporation will use this 25M to subscribe to shares at par value taken from the inforced capital stock and distribute it to the stockholders. So there is no cash out. If the unissued portion of the capital stock is not enough to accommodate the shares brought about the stocks dividend declaration, the corporation will increase the capital stock to be able to accommodate the issuance of shares. 5. Cash Once declared by the corporation cannot be revoked Stocks Once declared, it may be revoked even after actual declaration but before actual issuance to the stockholders. If the shares are already issued there is nothing to revoke. That is why for cash dividends, once declared by the corporation there is created upon declaration a creditor-debtor relationship. So before the declaration of dividends, the relationship between the stockholder and the corporation is one of equity and risk taker (as a stockholder) against the corporation. And as a stockholder he is not the creditor of the corporation. So even though the shares issued are guaranteed in payment of dividends, republic planters bank vs. Gomez. The bank issued preferred shares, with 1% guaranteed dividends every quarter. But despite use
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of the word guaranteed dividends because the corporation has no surplus profits, the stockholders have no right receive dividends. And in that case, the SC said the stockholders are not creditors of the corporation and the right to receive dividends depends on the condition for the declaration of dividends. Once the dividends has been declared, the stockholders now become a creditors of the corporation with the right to demand payment with what is being declared by the corporation. 6. Cash If received by a natural is subject to tax; if received by corporation it is not subject to tax. Stocks Not subject to tax whether received by a natural person or a corporation
Cash May be approved only by the BOD by majority of the quorum
Payable in cash
Shall be applied against unpaid subscription price
There is cash out on the part of the corporation. There is cash outlay The declaration cannot be revoked
Stocks Has to be approved by the Board by majority vote of the quorum and by stockholders representing at least 2/3 outstanding capital stock Payable in shares taken from the unissued portion of the capital stock of the corporation If there is unpaid subscription price, stock dividends shall be withheld until full payment of the subscription No cash outlay
If received by a natural is subject to tax; if received by corporation it is not subject to tax.
May be revoked even after the declaration but before the actual issuance to the stockholders Not subject to tax whether received by a natural person or a corporation
What are the basic conditions to enable the corporation to declare dividends? y There must be surplus profits or there must be unrestricted retained earnings y Board Approval y Stockholders Approval (as the case may be) Dividends cannot be declared out of the capital of the corporation; dividends cannot be declared outside the total
subscription be of the corporation because it will violate the trust fund doctrine. Dividends can only be taken from the excess of liabilities and total subscription. That is why in determining whether or not the corporation has a surplus profit the formula is not assets minus liabilities. This is the formula (assets liabilities) to determine whether the corporation is insolvent or not. But to determine if the corporation has surplus profits, the formula is assets minus liabilities minus legal capital (Assets liabilities Legal Capital). Legal capital is your total subscriptions. So why do you deduct legal capital or total subscription from assets? Because portion is not supposed to be touched. This portion of the capital is supposed to be funds held in trust for the benefit of creditors under the trust fund doctrine. The law also says it is not enough that the corporation has retained earnings it must be Unrestricted which means there must be no encumbrance, limitation, restriction in declaration of dividends. So if the corporation, despite the unavailability of surplus profit, is a party to a loan agreement which prohibits declaration of dividends until the loan is paid, then the corporation cannot declare dividends because the surplus profits are not unrestricted, they are burdened with conditions. What are the different kinds of surpluses under the law? y Operation surplus or profit surplus y Reappraisal surplus or revaluation surplus y Paid-in surplus y Reduction Surplus Operation surplus or profit surplus y Profits earned in the course of operation y This is Income or profit earned in the course of the operation of the company. y It can be the basis of dividend declaration Reappraisal surplus or revaluation surplus Surplus brought about by appreciation in the value of property. Supposed the corporation purchased a property five years ago and after five years the corporation had the property reappraised and having mark value of the property is two times or double the amount. They realized a paper gain of
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100% Can the corporation declare dividends out of the reappraisal surplus? No, because there is no actual gain. It is only a paper gain and the value fluctuates. The corporation may declare dividends only if that property is sold for an amount higher than the acquisition cost. Because in that case, it is not a paper gain and actual gain is realized by the corporation. Paid-in surplus It is the difference between the par value and the issued value of the shares. Lets say the par value is ten pesos and the corporation issued the shares for 100. How do you treat the 90 pesos difference? It is a surplus Can it be the basis of the dividend distribution? Paid in surplus cannot be the basis of cash in dividend but it can be the basis for stock dividends according to the SEC. the incremental difference between the par and the issued value can be the basis of stock dividends but not cash dividends. Reduction Surplus Surplus brought about by reduction of capital stock
If the corporation decreases the capital stock from 2B to 1B what will you do with the 1B that has been save because of the reduction? This will be distributed to the stockholders with the consent of the creditors 3 Modes by which the properties of the corporation may be distributed by the corporation y Dissolution y Redemption of redeemable shares y Reduction of the capital stock with the consent of the Creditors So reduction surplus can be distributed to the stockholders Who is entitled to dividends? y The stockholder as of the date fixed by the by-laws or y if the by-laws is silent, fixed by the BOD y If by laws and BOD silent on that matter, whoever is the stockholder at the time of declaration Lets say the corporation declares dividends payable to the stockholders as of December 1; distribution December 15. On December 5, the stockholders sold the shares. Who is entitled to receive dividends? The seller, who is the stockholder in
December 1 or the buyer who is not a stockholder on December 1 but a stockholder as of the distribution date. That is why it is important in the by-laws to fix or to determine who are the stockholders entitled to receive dividends. The by-laws usually has a record date or if silent, the BOD fixes the record date Record date - means that the stockholders of record as of declaration of dividends. Example: The corporation declares dividends payable to stockholders (Stockholder A) as of December 1 to be distributed on December 15. If on December 5, the stockholder of record on December 1 sold his shares, the Corporation can pay to Stockholder A because he is a stockholder as of December 1 (the record date fixed by the corporation). And the corporation will be made liable even though the real owner of the shares as of distribution date is somebody else. But in so far as Stockholder A is concerned, he has the right to remit the dividends to the buyer, unless otherwise stipulated by the both of them. Can a corporation be compelled by way of mandamus to declare dividends? No because it is discretionary on the part of the corporation. *Microsoft Co. only declared dividends only once. General Rule: A corporation cannot be compelled by way of mandamus to declare dividends Exceptions: Corporations are prohibited from retaining surplus profits in excess of 100% of the paid-in capital. Any surplus profit in excess of the 100% of the paid-in capital, not subscribe, will be distributed to the stockholders. In that case the stockholders may file a petition to compel the corporation to declare dividends. Exception to the exception: (cases were despite the fact that the surplus profit is in excess of 100% of the paid-in capital, the corporation can still opt not to declare dividends) y Justified by definite corporate expansion program as approved by the board of directors. as approved by the BOD - The board ought to approve the expansion program Just present the expansion program to the board and once there is board approval, then the corporation may not be compelled anymore to declare dividends
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If Corporation is a part of a loan agreement that prohibits the declaration of dividends without the consent of the creditor Contingency, to meet contingencies, in case there is a need for special reserve The exception is so liberal and so broad that the corporation may decide not to declare dividends.
Why do you declare dividends? It is okay if the corporation is owned by one person then there is no problem. But lets say the corporation has 10% minority. So if you declare dividends that mean that there is a leak of 10%. so you will not get a 100M but only 90M because the 10M must be given to the minority and you do not want the minority to be happy.
Section 44. Power to enter into management contract. - No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or ( 2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations.
Section 44 is about the power of the corporation to enter into a management contract. This provision applies to a management contract by the Corporation with another corporation not between a corporation and a natural person A corporation may enter into a management contract with another corporation if the management contract has been approved by at least majority of the board of the managing and managed corporation.
Every stockholder representing at least majority of the outstanding capital stock of the managing and managed corporation and for a period not exceeding five years except if it is in connection or if under in a special law regulations, for example mining then the special law applies Can a corporation have a management contract with a natural person? Who will be the president of the corporation and has the power to put up his own management team and existence within 10 years or five years In the Case of WESTMOND BANK AND SECRETARY ESPIRITU Westmond bank signed a management contract with Espiritu for ten years. It is not valid yet, because it is not a management contract contemplated by section 44. There is no term limit between a corporation and a natural person. It depends on the agreement of the parties. The five year term limit does not apply to a management contract between a corporation and a natural person. A management contract can called in whatever name you want to call it for as long as the corporation delegates the management or the affairs of the managed corporation then it is governed by section 44 of the corporation code Are there cases where a greater number of votes of required from the stockholders? Yes, in case of interlocking directors and interlocking stockholders. The approval by the stockholders representing at least 2/3 of the outstanding capital stock of the managed corporation shall be required. What do we mean by Interlocking Directors or stockholders? Interlocking directors - if majority of the member of the board of directors of the managing corporation are also majority of the board of directors of the managed corporation Interlocking Stockholders - a stockholder or both stockholders who represents and own common interest of the corporation owes more than 1/3 of the capital stock of the managed corporation
Section 45. Ultra vires acts of corporations. - No corporation under this C ode shall possess or exercise any corporate powers except those conferred by this C ode or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred.
y y
implied powers incidental powers
Express powers are those that are found in the corporation code and in the articles of incorporation as well as by laws of the corporation Implied and incidental powers are powers that are implied or derived from the express powers under the articles of incorporation and the corporation code NAPOCOR VS. [VIERRA] Napocor is engaged in the generation of electricity it has a power plant. And it hires stevedores to transport coal or fuel to the power plant. Can the corporation hire the stevedores, is it part of its purpose? It is not with the express powers of NAPOCOR but is implied and incidental from the express power of generating electricity. That is why it is not ultra vires. If a transaction, contract or activities is done outside the express, implied or incidental powers and then the law says it is ultra vires meaning not binding or enforceable against the corporation. The corporation engaged in urban development, can it engaged in mining, or vice-versa? The SC said no IN THE CASE OF HEIRS OF ANTONIO RAFAEL. What about a lending investor? Can it act as a pawn broker or engage in pawn shop? No, as held IN THE CASE OF FILIPINAS SHELL. Because lending is different from Pawn brokering. So these are not compatible concepts. If the corporation is engage in lending then it cannot engage in Pawn Shop business. You need a separate license for that purpose. Can a lending company engage in security finance agency? No, because lending investor is different from finance. These powers must be provided for in the articles of incorporation otherwise it cannot be ventured by the corporation. Is Ultra vires act the same as illegal act? An ultra vires act is not necessarily an illegal act. It is simply an act not consistent with the express, implied or incidental to the express powers of the corporation.
No corporation shall exercise powers not confirmed by the law or the AOI or powers implied or from the express powers. 3 kinds of powers under the law y express powers
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An illegal act is an act that is contrary to law, public morals and public policy. An illegal act is necessarily an ultra vires act but the ultra vires act is not necessarily and illegal act. An ultra vires act is simply an act that the corporation cannot perform because outside its powers. Second, an illegal act cannot be ratified, not susceptible to ratification. what about ultra vires act? May an ultra vires act be ratified? if power is not in the articles, not in the corporation code or not implied from those powers, can that act be ratified? The SC held in the case of REPUBLIC VS. ____ MINING COMPANY. An ultra vires act which is not an illegal act may be ratified. But if you read the two cases the SC held that the ultra vires act which is not an illegal act may be ratified because of estoppel. Because if there is no estoppel how can you ratify and act which is outside powers of the corporation? If the powers are outside the corporation there is no for you to make the act valid or enforceable unless you are estopped from denying the validity or enforceability of such act or transaction. So that is why it may be ratified because of estoppel as held in these two cases. Ulta vires act Simply an act that is not express, implied or incidental to the express powers of the corporation Can be ratified by estoppel Illegal act An act that is contrary to law, public morals and public policy Cannot be ratified y y His acts were not ratified by the corporation Doctrine of apparent authority does not apply
There are four cases by which a corporate officer may bind the corporation: y if he is authorized by the bylaws y despite lack of authority from the by-laws, he is authorized by the board y despite lack of authority from the by-laws and by the board, his acts were ratified by the corporation y Under the doctrine of apparent authority, if the corporation shows to the public that he is authorized to transact for the corporation. If there is no authority under the by laws and no board approval then the ultra vires act of the officer will become an ultravires act of the corporation. It is not binding on the corporation. But what about 3rd and 4th? It may be an ultra vires act on the part of the officer but binding on the corporation because the corporation is estopped or has ratified the action taken by the officer. So what was erstwhile an ultra vires act on the part of the officer has become binding on the corporation because of estoppel and ratification.
Section 46. Adoption of by-laws. - Every corporation formed under this C ode must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange C ommission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this C ode. The Securities and Exchange Commission shall not accept for filing the bylaws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law.
Can the doctrine of ultra vires be invoked if the acts had been executed partly or wholly? Is the doctrine of ultra vires applicable only for executory acts or transactions? If an act has been performed by one party or both parties then the doctrine of ultra vires will not apply because the other party is now estopped from invoking. So in other words, that doctrine applies only to purely executory contracts. A contract still to be performed by either party to the transaction. Is ultra vires act on the part of the corporation the same as ultra vires act on the part of the corporate officer? Can an act be intra-vires as far as the Corporation is concerned but ultra vires because the officer acted beyond his authority? Are they the same? They are not. An act is ultra vires in so far as the officer is concerned if he has: y no authority under the by laws y No authority under the board
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Section 46, 47 and 48 refers to the by laws of the corporation. What are by-laws?
They are a set of rules for the internal government of the corporation. They define the relationship between the corporation and the board, the corporation and stockholders, corporation and officers, stockholders among themselves, stockholders with the board, board among themselves, board and corporate officers. Applying by analogy, the articles of incorporation is the constitution of the corporation. The by laws are the rules and implementing regulations. Not everything can be captured by the corporation. The articles contains the broad powers of the corporation but not everything could be there so you need to implement the broad strokes in details and this is where the by laws come in and the board resolutions come in. What are the modes or ways of adopting the by laws of the corporation? There are two ways by which you can submit by laws to the SEC: y Submit the by laws together with the articles of incorporation, in which case all of the incorporators must sign y The by laws may be submitted to the SEC within 1 month from approval or issuance by the SEC of a certificate of incorporation. The by laws must then be signed by stockholders representing at least majority of the outstanding capital stock, certified by majority of the board and the corporate secretary. You get two approvals when u have Articles and By-laws y certificate of filing of articles y certificate of filing of by laws What happens if the corporation fails to submit the by laws within one month from incorporation? Is the corporation automatically dissolved? Is the corporation a de facto corporation? In the case of SAWJAHAN VS CA, if the corporation fails to submit within one month it does not result in the automatic dissolution of the corporation at the very least it is a de facto corporation because even though the law is couched in mandatory language, it is still permissive in the sense that the sec must afford the corporation the chance to rectify the mistake and cure the error. This is the case of LOYOLA GRAND VILLAS, HOMEOWNERS ASSOCIATION VS CA SAWJAHAN VS. CA. Due process must be given to the corporation and only if the corporation failed to submit the by-laws despite order from the SEC then the SEC may revoke the franchise of the corporation.
Section 47. Contents of by-laws. - Subject to the provisions of the Constitution, this C ode, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.
What are the contents of the by laws as enumerated in the corporation code? Time, place, manner of calling stockholders meeting whether regular or special 1. Time or manner of calling the board of directors meeting How come there is no place? Because for board meetings it can be done anywhere, even outside the Philippines unless the by laws provides otherwise 2. Quorum for stockholders meeting. For stockholders meeting, the quorum is at least the majority of the outstanding capital stock unless the law or the by laws provide for a greater number. And we have seen the cases where quorum of the stockholders meeting means least 2/3 of the outstanding capital stock. In determining the majority of the outstanding capital stock for corporate purpose, we exclude the non-voting shares. And also for determining the quorum for stockholders; meeting it is not the number of persons present but the number of shares represented during the meeting. So if there is one stockholder who has majority of stocks, there is a quorum. 3. Proxy or form of Proxy
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4. Qualifications, compensations, and duties of the BOD The basic qualifications are spelled out in section 23. There is a caveat that the by laws may prescribe additional qualification. Section 47 confirms the authority of the by-laws to prescribe additional qualifications on the part of the board of directors. 5. Compensation. As found in section 30, the directors as such are not entitled to a compensation unless fixed in the by laws. Date of the annual stockholders meeting and the manner or mode of giving notice. manner or mode of giving notice How do you notify stockholders of the stockholders meeting? Is fax acceptable? Or do you have to send out individual notice to the stockholders? In practice, the most pragmatic approach is to embody in the by laws that publication is sufficient. Because of it is going to by individual notice, before the stockholders meeting the corporate secretary must present proof of that he notified all the stockholders. So if there are about 40,000 stockholders, letters sent out to the stockholders, postage and proof of receipts has to be presented. That can be simplified by requiring in the by laws publication in a news paper of general circulation. If the by-laws says that stockholders will be notified of stockholders meeting (date, time and place) in a news paper of general circulation then there is no need to prove that the stockholders read the newspaper. There is no need to come out and issue affidavits. All you have to present as corporate secretary is the affidavit of the publisher that the newspaper has published this notice in the newspaper. The step is once a week for 3 consecutive weeks. Why make it expensive or repetitive? It can be done one time basis 7. Qualifications, duties, term of officers other than the directors entrusted the corporation. Why important to include? To determine which committee has jurisdiction in case of issues surrounding the appointment, removal or termination.
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If the office is in the by laws, then the holder is considered as a corporate officer and any issue surrounding termination, removal is within the RTC acting as special commercial court. Now if the officer is holding a very high position but not listed as such in the by-laws of the corporation or his appointed is not approved by the board, then no matter how high the position is issues about his removal or termination is recognizable by the NLRC. 8. Violation in case of non-compliance with the by laws. the manner of issuing stock certificates in case of stock corporations
6.
9.
10. Other matters necessary to carry out the objectives of the corporation. In the long list, the name is not included. Does it mean that you do not need to see the name in the by laws? Not necessarily, for the first thing that you will see in the by laws is the name of the corporation. Is it common sense that it should be there? The Law sometimes say it because congress has nothing in common. If you want to amend the name the corporate name, do you just amend the articles or both the articles and the by laws? Both because both the articles and the by laws have to mirror the name of the corporation. What about the corporate seal? It is not there but the by-laws must contain the corporate seal of the corporation. Business address, place of business is it there? It is not there but you see in the by laws also the principal place of the corporation. So section 47 is the general contents or outline of the by-laws but they are not all. Are by laws binding on third persons or non-stockholders of the corporation? IN THE CASE OF PMI COLLEGE VS. NLRC AND VALLEY AND COUNTRY CLUB VS. CALAPATIAN, the SC said that third persons who are not stockholders are not bound by the provisions of the by laws. In PMI college vs. NLLRC, an instructor was hired by PMI college, taught for 3 semesters in the 4th semester he was not paid by the corporation, by the school, on the ground that the person who signed his employment contract was not a chairman of the board, and the one in the by laws is the only
signatory for enforcement of the contract. But he had received his salary for 3 semesters. Is he bound by that provision of the by laws, or can he invoke the employment contract? The SC said yes, he can enforce and invoke the employment contract because he is not aware of the only officer who is authorized to sign the contract on behalf of the corporation. registered in the chattel mortgage register, then the chattel mortgage on the shares of the corporation is binding on the corporation. PCI VS. CA
Section 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a nonstock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of twothirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange C ommission the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code.
In VALLE GOLF AND COUNTRY CLUB, a Valle golf and country club obtained a loan from China bank secured by a pledge of shares of stock. The loan was not pledged and the China bank foreclosed the pledged. After foreclosing the pledge, China bank became the only bidder. China bank sought to transfer ownership of the stock certificate from the defaulted pledgor to the bank. The corporate secretary refused because under the by laws, in case there are unpaid dues on the shares, the corporation may reject any request for transfer of ownership. Is this provision binding? The SC said No, because China bank is a third party not aware of such limitation. Can China bank enforce the pledge, even though it is not recorded in the books of the corporation? Can China bank insist that the corporation is bound by the pledge? The SC said in PCI BANK VS. CA that only conveyances are required to be entered in the books of the corporation. So in the case of pledge, what makes the pledge binding against the whole world? It is the fact that it is in a public instrument. For as long as the pledge is in a public instrument, it binds the whole world, including the corporation that issued the shares even though not recorded in the books of corporation. What about chattel mortgage? Is the chattel mortgage binding on the corporation if it is not recorded in the books of the corporation? For a chattel mortgage to bind the whole world it must be registered in the chattel mortgage register. So even though the chattel mortgage is not recorded in the books of the corporation, for as long as it is
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How do you amend the by laws of the corporation? By laws may be amended by the approval of the board of directors by at least majority vote and for the stockholders, the majority of the outstanding capital stock or members for non-stock corporation. Can the stockholders delegate the authority to the board to amend the board, solely on its instance? Yes, by 2/3 of the outstanding capital stock. Can it be revoked? Yes, by majority of the outstanding capital stock. To repeat, the power to delegate requires 2/3, the stockholders by 2/3 of the outstanding capital stock delegate the authority to the BOD. That delegated authority may be revoked by simple of stockholders representing at least majority of the outstanding capital stock. Open issue: must the delegation be embodied in a separate stockholders resolution or can it be enshrined in the by laws itself? There is a 1994 opinion of the SEC that it must be embodied in a resolution. Dean Divinas opinion: for as long as the by laws has been approved by the stockholders representing at least 2/3 of the outstanding capital stock then the delegation is valid consistent with section 48
Section 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or members may be regular or special. Section 50. Regular and special meetings of stockholders or members. Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have chosen one of their number as presiding officer. (24, 26) Section 51. Place and time of meetings of stockholders of members. Stockholder's or member's meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein. All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (24 and 25) Section 52. Quorum in meetings. - 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 non-stock corporations. (n) Section 53. Regular and special meetings of directors or trustees. - Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise. Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the by-laws. Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly.
Stockholders meeting: y Regular y Special For Regular Stockholders Meeting, how often? Once a year or annually For what purpose? To determine or to vote the directors of the corporation because of the one year term limit under section 23.
Where should the meetings be conducted? In the city or municipality where the principal office is located preferably in the principal office itself. Is Metro Manila still a valid address for determining the place of stockholders meeting? In 2004, the SEC issued a regulation that the by laws have to be specific on the city or municipality of the principal office of the corporation. Metro Manila is no longer acceptable. When do the regular stockholders meeting convene? The date fixed in the by-laws. If the by-laws is silent, the law says any day in april. Why April? Because by that time, the corporation shall have known already the results of its corporation or the audited financial statements. It says any day in April, is that acceptable? The SEC issued a regulation that it has to be specific. What about notices? Regular stockholders meeting Two weeks prior written notice, unless otherwise provided in the by laws. What about Special stockholders meeting? Anytime, provided that you give at least one week prior written notice, unless the by laws provide otherwise. Where? Principal Office When? Any date Board meeting: y Regular
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Stockholders and board meeting
y Special
Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy.
Regular Board Meeting, how often? Once a month Where? Anywhere even outside the Philippines unless the by laws provides otherwise Notice? One day notice. It is not required to be in writing, unless the by laws provides otherwise.
What about the pledgor, the mortgagor, the executor, administrator, or shares held in an and/or capacity? If the shares is under pledge or mortgage, who has the right to vote? As a general rule, it is the pledgor or mortgagor because in pledge or mortgage, the pledgor mortgagor does not part with the ownership of the shares. They are just encumbered. Unless the pledge agreement provides otherwise.
How Often Purpose Where
Stockholders meeting Regular Special Once a year Anytime Voting In the city or municipality where the principal office is located On the date stated in the by laws; if silent any day of April Two weeks
Board of directors Regular Special Once a Anytime month Anywhere Anywhere
Is the corporation bound by the pledge agreement? If it is registered, all that the pledgee has to do is give the copy of the pledge agreement and chattel mortgage agreement to the corporate secretary. In that way he can invoke his right to vote Can the executor and administrator vote the shares? Yes, if approved by the board. They must obtain authority from the board. Once that they had obtain the approval of the board then there is no need to make a consent of the estate that they represent.
Section 56. Voting in case of joint ownership of stock. - In case of shares of stock owned jointly by two or more persons, in order to vote the same, the consent of all the co-owners shall be necessary, unless there is a written proxy, signed by all the co-owners, authorizing one or some of them or any other person to vote such share or shares: Provided, That when the shares are owned in an "and/or" capacity by the holders thereof, any one of the joint owners can vote said shares or appoint a proxy therefor.
Principal office
When convene
Any date
Notice
One week
One day
One day
Section 54. Who shall preside at meetings. - The president shall preside at all meetings of the directors or trustee as well as of the stockholders or members, unless the by-laws provide otherwise.
Who presides during meetings? President, unless the by-laws provides otherwise. (Sir: But in practice, it is the chairman of the Board.) Why the chairman and not the president? Because the president reports to the chairman. The president cannot preside over his bosses.
Section 55. Right to vote of pledgors, mortgagors, and administrators . - In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. (n)
What about shares held in an AND capacity or in an OR capacity or in an AND/OR capacity? Same with bank deposits. If they are held in an AND capacity that means both of them must consent or all of them must consent, unless one is authorized by the other. If they are held in an AND/OR capacity that means that one of them can vote. If it is in an OR then with more reason one of them can vote What are the requisites for a valid meeting: y Proper notice must be given to the stockholders or to the board as the case may be When is notice proper? If it is given in accordance with the requirements of the by laws.
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Who should issue the notice? The one specified in the by laws What should be contained in the notice? The date, time and place of the meeting In LOPEZ REALTY VS FONTECHA, if there was no valid notice, the meeting is invalid and if there was a proper notice, the meeting is valid, even though you have more than a quorum. For example, everybody is present except for one stockholder who was not notified of the meeting, then the meeting is void unless he ratifies the same. Same with board meeting. We have 14 out of 15 present, but if one of them is not notified, then the meeting is likewise invalid. y There must be a quorum A quorum must be for a stockholders meeting is majority of the outstanding capital stock unless the law or the by-laws provides otherwise. For board meetings quorum is majority of the number of directors as fixed in the articles of incorporation unless the law or the by-laws provide otherwise. Is proxy voting allowed for board meetings? Is the alternate board of director allowed? Is representative allowed in board meetings? Proxy voting is allowed in stockholders meeting but never for board meeting. In a board meeting, the director should appear or should participate because he was elected on the strength of his qualification and cannot delegate to another. Can a representative of the director attend, but without the right to vote, can he send his lawyer to attend the board meeting, without the right to vote? No, because board of directors can only attend the directors meeting. So if you do not like the lawyer appearing for the director you can question his legal standing or personality. Now on the other hand, if the board of directors meets because they are hostile directors, then you need to get approval from the board. So the board has authorized you to assist the board during deliberation. What if the corporate secretary certifies that there was a quorum and then during the meeting the stockholders left,
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such that midway of the meeting there was no quorum, may the meeting continue? For corporate meetings, once the corporate secretary has certified that there is a quorum, it continues all throughout the proceedings. So if some stockholders walked out and some stockholders are still present, then the meetings can continue.
What if there was a motion to adjourn because the stockholders already left? A motion to adjourn is the way to end the meeting. A motion takes precedence over all other motions, except motion to declare you out of order. So declaring you out of order is the first motion and the first motion has to be resolved. When a corporate secretary declares a motion to adjourn, there will be difficulty to call a stockholders meeting because they will not participate. If someone declares the motion to adjourn out of order, which takes the precedence now? The motion to adjourn or the motion to declare the movant who move to adjourn be out of order? In the rules of parliamentary procedure, the motion to declare you out of order, takes precedence over all motions. So you do not have to go through the motion to adjourn because you are out of order.
Section 57. Voting right for treasury shares. - Treasury shares shall have no voting right as long as such shares remain in the Treasury.
Treasury shares are said to be not intangible, for as long as they stay in the treasury. But once they are resold by the corporation and they become outstanding all over again then they can vote.
Section 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time.
Proxy refers either to the instruments evidencing the authority to vote or it may refer to the proxy holder. It is not grammatically wrong to say who is your proxy. When you say who is your proxy, it means who is the holder of the proxy form. Who is your agent, in other words. What are the formalities of a proxy under the law? y The proxy must be in writing, y Signed by the stockholder y Filed with the corporate secretary before the meeting
y Valid only for the meeting intended In the case of GSIS VS. CA, on authority of the SEC vis a vis the RTC on the validation of proxies. Which government agency has jurisdiction to pass upon the validity of the proxy forms? Is it the SEC or the RTC? To be discussed in the SRC The proxy forms are good only for that particular meeting unless it is general and continuing in nature. But if it is general and continuing in nature it must not exceed a period of five years. Can a proxy appoint a proxy (sub-proxy)? Yes, unless otherwise prohibited by the proxy form. A general proxy must be: y Must be in writing y Signed by the stockholder y Filed before the meeting with the corporate secretary y Valid only for the meeting intended unless it is general and continuing in nature in which case it may be extended but not to exceed five (5) years. a proxy is governed by the law on agency wherein the stockholder is the principal and the proxy holder is the agent who has power to vote the shares in behalf of the stockholders. Why is proxy important? Proxy is a way by which a stockholder may participate and exercise the right of management even though he may not be physically present during the stockholders meeting. For instance, if a stockholder is in the province and because of distance or physical barrier he cannot be there during the stockholders meeting, he can still exercise the right of management by appointing anyone to vote his shares on his behalf. Proxy is widely use. It is also a tool by which minority can have representation in the board. Illustration: In the case PCI bank, stockholders who only owned insufficient number of shares but he would solicit proxies from other minority stockholders. Although the shares of these stockholders are insignificant in numbers, if they are combined or put up together, and vote one particular candidate, then they can have a nominal voice in the board of directors. It also important or useful in gaining control of the corporation especially its management
A proxy need not be notarized it is enough to be in writing. Can the by-laws require that the proxy be notarized? Yes, if the by laws says so. In which case, it would not be accepted if it is not notarized. Should documentary stamp be affixed in the proxy form? Would it be a valid and enforceable if there is no Documentary Stamp Tax? Yes, it is still valid and enforceable but is not admissible in evidence. But you dont have to submit it as evidence in court anyway, so there is no need to affix documentary stamps unless the by laws require that documentary stamps be affixed. Documentary stamp tax is what you affix in a document to make it admissible in evidence. So without DST you cannot submit it in evidence. Can the corporation adopt a period to submit proxies? Of course. The law says file with the corporate secretary, but when? Can it be filed a minute after the stockholders meeting? How will the corporate secretary determine and pass upon its validity of the proxy form? You will still have to compare the shares with the books and therefore the corporation has a right to fix a period to validate proxies. For public companies, the SEC requires that the proxy forms be submitted at least five days before the stockholders meeting. The by-laws may provide for a longer period but not shorter. What is the reason for that period to submit that proxy? So that the aggrieved party can take the appropriate remedy in case the proxy forms are rejected For example If the stockholder died already is the proxy forms still valid? Not anymore, because the death of the principle revokes the power of the agent. Proxy forms are valid for 5 years But who will know that the principal stockholder is dead? That is what Meralco did. Can you imagine if there was no period stated, you will be at the mercy of the corporate secretary. That is why SEC says there must be a period to validate the proxy.
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Management would solicit proxies to be able to vote the shares and election of directors. If the management is doing very well, it is not difficult for them to solicit from the minority stockholders. Illustration: Case of San Miguel Corporation. The capital of SMC is around 80 or 90 billion pesos which means that for 20% of the company youll going to have something like 40 to 45 billion. In the case SMC, the largest single stockholder is Danding Cojuangco who owns 20%. And the other are 12%, and the other is The 20% by itself cannot achieve control. The 20% by itself, if you have 15 directors will only get 3 board seats. But the management can solicit proxies of minority stockholders. In the case of SMC what they do is: the retirement fund of SMC comprises of the current funds remitted by the employees with the counterpart contribution from the employer. In the meantime that they are not retiring the funds are manage by a trustee and a trustee of the fund is allowed to invest in equity. So in the case of retirement funds of SMC, it buys shares of the corporation but the persons managing the retirement fund are appointed by the management of SMC. So effectively SMC has 20% Danding conjuangco and the proxy has 12% of the retirement fund Lopezs for instance, only has 10% control of Meralco before they sold it to Manny Pangilinan. But 12% of Meralco is held by the retirement fund, the retirement fund have their money from the contribution of the employees who will retire. So, they buy shares of Meralco and then they give the proxy to the management of Meralco-the Lopezs. So 20% lopezes, those who equate Meralco with the Lopezs would give their proxies to the Lopezs. This is the reason while they were able to maintain the control of the corporation for year until 2009 because in 2009, SSS, GSIS and Landbank tried to wrestle control of SMC. How will the government have control of the Corporation? You exclude the proxies. Because if you exclude the proxies the government will have more seats How do you exclude the proxies? Under SRC, there are certain formalities regarding proxies registration. For one, you have to submit a proxy statement with the SEC. So you have to express your intention to solicit proxies from the minority stockholders. This, the Lopezs did not do. So we filed a petition with the SEC and we were able to obtain a cease and desist order (CDO) to stop the Lopezs from voting from those illegally acquired proxies. The Lopezs defied the CDO, thats why they
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went to the CA, the CA invalidated the CDO issued by SEC. When does SEC and when does the RTC acquires jurisdiction when it comes to violation of proxies? SC held that violation of proxies for as long as they do not relate to stockholders meeting or intracorporate controversy is cognizable by is by the SEC. So in other words, administrative supervision over proxy violation is dictated by the SEC for as long as it does not graduates into an election contest or intracorporate controversy. If it graduates into an election contest or intracorporate dispute under SRC, then the RTC has jurisdiction.
Section 59. Voting trusts. - One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any time: Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of this Code. Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. The voting trustee or trustees may vote by proxy unless the agreement provides otherwise.
no less pertaining to the shares including the right to: y inspect corporate books y obtain copies of the financial statements Governed by law on trust and corporation code Presence of SH does not revoke authority of trustee
How is proxy distinguished from a voting trust agreement? Proxy As to form The proxy it is enough that it is in writing. It need not be notarized A proxy need not be filed with the SEC. As to period Proxy is valid only for the meeting intended Unless it is general and continuing in nature but not to exceed the period of 5 years Voting trust agreement Must be in writing, notarized
As to law governing it
Governed by law on agency
It must be filed with the SEC to be valid and enforceable. VTA is valid for all meetings but not to exceed 5 years likewise, unless it is made pursuant to a loan agreement in which case the VTA is co-terminous with the loan. So it may be longer than 5 years or shorter than 5 years depending on the extinguishment of the loan obligation. So if the loan is for seven years, the VTA will automatically extend to 7 years.
Effect of presence of SH
Proxy authority principal present
if
loses his is
In the case of LEE VS. COURT OF APPEALS A director received summon in behalf of the corporation when he had already conveyed legal title to his shares under the VTA in favor of DBP. ISSUE: whether or not the director can still receive summon in behalf of the corporation when he had already lost the title to his shares. HELD: The SC held that having conveyed the legal title over the shares then he cease to be a director, hence, he is not authorized to receive summons in behalf of the corporation. Section 59 confirms the voting trust agreement. Under the voting trust agreement, legal title is conveyed over the trustee who will hold the shares for the benefit of the SH. The stockholder has beneficial title; the trustee has legal title. Who has the right to receive dividends? it is the beneficial owner or the stockholder. so the trustee holds the shares for the benefit of the beneficial owner. The trustee has no right to receive dividends because it belongs to the beneficial owner unless it is stipulated in the voting trust agreement. In a voting trust agreement, the right to vote as well as other rights is transferred to the trustee.
As regards title conveyed
No legal title is transferred or conveyed to the proxy holder thats why he has no right to be voted or elected as director. Proxy only acquires the right to vote, no more
In VTA, legal title is transferred to the trustee thats why he is qualified to be elected as director
As to rights acquired
Trustee acquires the right to vote as well as all other rights

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What are the other rights transferred to a trustee? (1) the right to inspect the books of the corporation;
(2) the right to obtain copies of financial statements; (3) all other rights pertaining to shares except the right to receive dividends which belongs to the beneficial owner unless otherwise stipulated under the terms of the voting trust agreement. So if the shares are held under the VTA, the stock certificate of the stockholder is cancelled and a new one is issued in favor of the trustee with a notation that these shares are held and issued pursuant to a VTA. So what does the stockholder get in return for having shares cancelled? He gets in turn, a voting trust certificate, not from the corporation but from the trustee. So the trustor or stockholder gets voting trust certificate from the trustee; the trustee in turn gets stock certificate. These are two separate instruments both of them can be assigned. Once the VTA expired then the shares issued by the trustee will be cancelled and a new one is issued again in favor of the stockholder.
Section 60. Subscription contract. - Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract.
if the corporation is not yet in existence, you subscribe the shares; you dont buy shares from a corporation that is not yet a person but you can subscribe to the corporation to be formed thru the treasurer in trust Or if the corporation will increase the capital stock the stockholder will subscribe in the shares of the increase capital stock. So you dont subscribe treasury shares, you purchase treasury shares because treasury shares are existing shares of the corporation not taken from the unissued portion of the capital stock. A subscription, it covers or applies to corporation to be formed or already in existence while purchase is limited to acquisition of shares of a corporation already formed. In subscription, the subscriber acquires and can exercise all the rights pertaining to his shares even though you have not paid in full the subscription price. Illustration: A subscribe to 1000 shares of the corporation and he pays only 25%, that means 250 shares and the partial payment is allowed because the law allows the balance to be paid at a later day for as long as the upfront payments corresponds to at least 25% of the subscribed. Lets say you subscribe for 1000, 25% paid in the outset, how mush shares does he own? 250 or 1000? It is 1000 even though you have not paid in full the subscription price. In purchase, the buyer cannot exercise all the rights pertaining to the shares unless he has complied with the terms and conditions of the purchase. In subscription, the liability of a SH or subscriber is limited on the subscription. It cannot be beyond that unless you are the director in which case he is personally liable. But as stockholder per se, not a director nor officer, is limited to his subscription Can a corporate creditor enforce payment of the subscription? In the case of PNB VS. _______, it was held that yes, if the assets of the corporation are not enough to satisfy the claims of the creditor. So even though corporate creditors have no privity of contract with the subscriber because the contract is between the corporation and the subscriber, the corporate creditors are allowed to enforce payment of the subscription price.
Is subscription the same as purchase? No, subscription is not the same as purchase. The distinction is important because subscription is not governed by the Statue of Frauds whereas purchase is governed by the Statute of Frauds. Meaning, if the purchase if the purchase contract involves an amount in excess of 500 pesos, it must be in writing otherwise it is unenforceable. Whereas subscription may be verbal and it is still valid and enforceable because it is not covered by the Statue of Frauds. What is subscription? Any contract for the acquisition of the unissued shares of the corporation inexistence or still to be formed, notwithstanding the parties call it a purchase or other contract or transaction. So even if the parties call it as purchase for as long as the shares acquired correspond to the unissued portion of the capital stock of the corporation to be formed or the corporation inexistence, it is subscription even if the parties call it a purchase. What do we mean by corporations to be formed, meaning not yet in existence?
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y What about in purchase? Lets say the buyer has not paid the corporation in full of the purchase price, can the corporate creditor of the corporation enforce payment on the purchase price? No, because theres no privity of contract between him and the buyer of shares. In subscription, can a subscriber be released from his obligation to pay the balance of the subscription? No, because it will violate the trust fund doctrine. In one case, SC held that the corporation cannot condone payment of the balance of subscription because it is for the benefit of the creditors. Subscription is not covered by the Statute of Frauds.; purchase is covered by the Statute of Fraud. What are involved is treasury shares? Do you buy or subscribe treasury shares? You buy, because they are existing shares. If the purchase of the treasury shares is not in writing, is it enforceable? No, it is unenforceable because if the purchase of the existing shares involves an amount in excess of 500, it has to be in writing to be enforceable under Statute of Frauds. What are the rights of a stockholder? The rights of a stockholder can be classified to 3: y Proprietary right y Management right y Remedial Right Proprietary Right Anything about money or pecuniary interest. y Right to receive dividends (Section 43) y Right to assets in case of dissolution and liquidation y Right to approve stock dividends y Right of appraisal Management right Right to vote on certain corporate acts Remedial rights y Pre-emptive right y Right of inspection y Right to obtain copies of the financial statements y Right to issuance of stock certificates
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Right to file a derivative suit
Do you find the right to file derivative suit in the corporation code? All the rights enumerated, except the right to file a derivative suit, can be found in the Corporation Code. The right to file a derivative suit is a right recognized by jurisprudence. What are the requisites of a derivative suit? What is the basic concept of a derivative suit? (1) it can only be filed by a stockholder, (2) he must be a stockholder at the time the cause of action accrued and he must be suing in behalf of the Corporation (3) He must exhaust all administrative or intracorporate remedies except if the ones who are guilty are the BOD themselves in which case, this requirements of exhaustion of remedies may be waived. It can only be filed by a stockholder it is usually filed by a minority stockholder in behalf of the corporation. In other words, he is suing in behalf of the corporation because the majority refuses to take action. So the majority committed a wrongdoing but because they are the majority, they refuse to take legal action. They refuse to allow the contract or transaction, so the minority stockholder now will file a derivative suit in behalf of the corporation, so the cause of action belongs to the corporation not to the stockholder. The aggrieved party is the corporation not the stockholder. It is a right given to the minority but in the case of KAHN VS. SAN MIGUEL, the SC said that if the stockholder has significant number of shares that does not mean that he cannot file a derivative suit. In other words, generally, it is filed by a minority stockholder but it does not stop someone with significant number of shares from doing the same thing for as long as he takes the action in behalf of the corporation. If the right is personal to the stockholder, lets say preemptive right, is that proper for derivative suit? No, it is not proper because it is a right pertaining to him. If the right is personal to him derivative suit is not allowed
He must be a stockholder at the time the cause of action accrued; if you are not a stockholder, you have no right to file a derivative suit ( case of Bitong vs. CA) He must be suing in behalf of the Corporation. it must be alleged that he is suing a derivative cause of action in behalf of the corporation. He must exhaust all administrative or intra-corporate remedies except if the ones who are guilty are the BOD themselves in which case, this requirements of exhaustion of remedies may be waived. WESTERN INSTITUTE VS. SALAS The officers of Western Institute made a resolution authorizing payment of compensation to them. In addition to the issues regarding propriety of payment of compensation, there was a criminal case filed against these directors by the minority stockholders. The case was dismissed and they appealed the dismissal claiming that it is a derivative suit. The SC held that it cannot be a derivative suit because of that they have no right to appeal. TAN WING TAK VS. MAKASIAR SC held that it is not proper because only the board can authorized it neither it is proper for derivative suit because it was not alleged that they were suing in behalf of the corporation. HIGH YIELD REALTY VS. COURT OF APPEALS A minority of the stockholder asked the members of the board to nullify or disallow a loan obtained by the corporation to benefit the majority stockholder but his please fell on ___ so he filed an action for annulment of mortgage and he filed it not in the place where the property is situated but on the principal office of the corporation. He claims that the action for annulment of mortgage is only incidental to his principal cause of action filed in behalf of the corporation to repudiate the action taken by the board. In other words, it is a derivative suit and the action for the annulment of mortgage is only incidental to a derivative cause of action The SC held that yes, it is a derivative cause of action because action for the annulment of mortgage is only incidental, that means that the venue was properly laid, because intra-corporate controversies must be initiated in the city where the principal office is located.
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In this case, it was supposed to be an action for the annulment of mortgage which should be filed in the city where the property is situated. But the SC construed this action as a derivative cause of action with the action to nullify as only incidental, then it is proper for the RTC of the city where the principal office to assume jurisdiction over the case.
Section 61. 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 six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no preincorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission.
Is pre-incorporation subscription irrevocable or can it be revoked by the consensus of subscribers? if 5 incorporators agreed to put up a corporation, they contribute to treasurer in trust. So there is a contract among them that they must proceed to incorporate the corporation. They cannot back out because under section 61 of the corporation code, pre-incorporation subscription is irrevocable for a period of 6 months, unless all the subscribers consent or the corporation fails to materialize within the period of 6 months or a longer period as may be stipulated by the parties. Once the papers are filed with the SEC, it becomes irrevocable unless the SEC rejects the application. If theres no corporation yet, the one who will receive the money or the property for the subscription is the treasurer in trust. What happens if the corporation did not materialized? The treasurer must remit or return everything to the subscribers otherwise, he is liable for estafa.
Section 62. Consideration for stocks . - Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. 2. Actual cash paid to the corporation; Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; Labor performed for or services actually rendered to the corporation; Previously incurred indebtedness of the corporation; Amounts transferred from unrestricted retained earnings to stated capital; and Outstanding shares exchanged for stocks in the event of reclassification or conversion.
3. 4. 5. 6.
Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose
So shares cannot be issued for services to be performed or work to be done in the future. NIELSON VS. LEPANTO CONSOLIDATED One of the features of management contract of Nielson was that he was entitled to 10% stock dividends and the Supreme Court says not being a stockholder, he has no right to receive dividends. The SC made a suggestion, though he is not allowed to receive dividends because he is a nonstockholder, he can be paid shares for management and services actually rendered to the corporation. The Corporation Code then and now allows shares to be issued in payment for services actually rendered. y Previously incurred indebtedness Amounts transferred from retained earnings to capital which means stock dividends; Outstanding shares issued in reclassification or conversion. the event of
Shares may be issued for any or combination of the following considerations: 1. Cash received by the corporation Remember the wording of the treasurers affidavit that the treasurer must certify that at least 25% of the subscription has been paid up in cash or property received by the corporation 2. Property y Limitations: y the property must be necessary and convenient for the lawful use of the corporation the treasurer in thrust therefore cannot accept a property if it is not related to the purpose for which the corporation was organized. Or if the corporation is already in existence, it cannot accept a property in exchange for shares unless the property is necessary and convenient for the use of the corporation. y The property must be fairly valued The shares cannot be issued for an amount lower than par or issued value of the shares y Subject to the approval of the SEC. The initial valuation determined by the incorporators or by the board, in case the corporation is already in existence, is always subject to the approval by the Securities and Exchange Commission. This is the only instance where a consideration requires the approval by the SEC. y Labor performed or services actually rendered.
In the case of San Miguel, the government owned 20%.. What the SMC did is that it offered preferred shares to the government. So the government will surrender their common shares in exchange for preferred shares. And because preferred shares are non-voting shares that means that government will lose the right to vote. The 20% shares by the government will no longer exercise the right to vote. They are out of the equation. So whoever is in control of Malacanang is immaterial. The SMC will not need to deal with the government because it has no right to vote. What will the government get in return is that they get a preferred shares with a commitment that they will get be paid 89% interest every year. The SC said that this is a valid arrangement because the term is favorable to the government. So now that the government is out of the equation, Danding Cojuangco is now in complete control of the SMC. This is allowed because the Corporation Code says that shares issued in exchange for shares outstanding in the event of reclassification or conversion. So the common shares which are outstanding will be swapped with preferred shares of the same corporation. Note: But even though preferred shares are guaranteed, the right to receive dividends depends still on the availability of
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surplus profit as we saw in the case of REPUBLIC PLANTERS BANK VS. LOPEZ.
Section 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, 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. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.
Is fax signature or embossed or printed signature allowed? Yes, especially for public companies with 40,000 stockholders wherein it would be difficult to sign all by hand or manually. The law simply says that it must be signed by the president and countersigned by corporate secretary. Requisites for valid transfer of shares of stock: y The stock certificate must be endorsed by the stockholder or his agent or someone legally authorized for the purpose; and y The stock certificate must likewise be delivered. y to be binding in the corporation, the transfer must be recorded in the books of the corporation showing the : (1) names of the parties to the transaction; (2) the stock certificates covered and (3) The number of shares represented by the instrument. if the transfer is not recorded in the books of the corporation, the transfer is not binding against the corporation. Illustration: ABC issued stock certificate in favor of A. A sold the shares to B but without endorsing or delivering anything to B. If the corporation declared dividends, who is entitled to receive it? A, because he is still the stockholder of record If the corporation pays A dividends, can B sue ABC? No, because the transfer is not binding unless it is recorded in the books of the corporation. Is the transfer valid between A and B? Yes, between them it valid but in so far as the corporation is concerned, unless it is recorded, it will not bind the corporation. What will compel the corporation to recognize the transfer? If the stock certificate of A is endorsed by him or his agent and delivered to B. So B presents stock certificate to ABC endorsed by A, delivered to ABC and ABC now will cancel the stock certificate of A and issue a new one to B after taxes have been paid. Without payment of taxes and other operative document, ABC will not recognize the transfer. In this case, A continues to have the right to vote and to exercise all the rights pertaining to the shares. NOTE: if you become a corporate secretary, it is a crime to recognize or record a transfer of shares without proof of payment of taxes. You have to obtain a tax clearance otherwise, you can go to jail if youre the corporate secretary
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Shares of stock are personal properties. As personal properties; they can be sold, they can be mortgage, they can donate, they can be the object of trust. We dont see the shares but what we see is the stock certificate. Shares are intangible property, you dont see them. But they are properties and therefore they can be sold. Are shares the same as stock certificate? No, Stock certificate is evidence of ownership of the shares which is issued by the corporation. Therefore the stockholder need not need the stock certificate before he can exercise all the rights pertaining to the shares. Just like a land, wherein the landowner has all the rights and attributes of ownership even though the ownership is not yet with respect to a TCT or OCT. Same with a stockholder wherein one who subscribes to the shares of the corporation has all the rights even though the he has not yet been issued a stock certificate by the corporation. the stock certificate must: 1. bear the seal of the corporation, 2. must be signed by the president or the vicepresident 3. countersigned by the corporate secretary, 4. must be entered in the stock transfer book and delivered to the stock holder and 5. subscription price must have been paid in full NOTE: stock certificate can be bought in the National Book Store. You just have to type-in the words-the name of the corporation, the number of shares. You can buy shares also in the National Bookstore. ___a seal by the corporation. So you dont need a printing press in order to issue a stock certificate.
by virtue of Revenue Regulation 2-82. It is however probationable. Illustration: A, signed a deed of assignment or deed of sale. A sold the shares to B and then B presented the deed of assignment to ABC. The deed was notarized (in the law if it is notarized, it amounts to delivery). Is it enough to make the corporation bound? This is not enough to make the corporation bound. In the number of cases decided by the SC, the SC said that these formalities are not to be taken for granted, they oath to be strictly complied with. So even though theres a valid deed of sale or deed of assignment, if the stock certificate covered by the assignment is not endorsed and delivered to B, then ABC cannot be compelled to transfer the shares in favor of B. There is only one instance where the SC held that despite the lack of endorsement by the stockbroker or the seller, the corporation is bound to recognize the right of the buyer. This was the case of TAN VS. COURT OF APPEALS. TAN VS. COURT OF APPEALS A, the buyer and B, the purchaser, entered into a contract. B paid the purchase price then A gave the stock certificate to B. Then deed of assignment was presented to ABC corporation. The stock certificate was not endorsed by A, what ABC did is that it ordered B to return it to A so that A can endorsed it. A however, did not endorsed. The SC held that under those circumstances, it is inequitable on the part of A not to endorse. So it is considered endorsed by reason of equitable considerations. But in all cases, those formalities required in Section 63 must be complied with. TAN VS. COURT OF APPEALS is the only one but the rest of the cases decided by the court held that those requirement under Section 63 of the Corporation Code must be complied with, that is-endorsement coupled with delivery and presentment to the corporation. What is the remedy of the available to a stockholder in case the corporation refuses to recognize the transfer? Can B, the transferee, file a petition for mandamus to compel the corporation to transfer the shares assuming it is complete? No. He is not yet recognized as a stockholder, so he has no right or standing in so far as the corporation is concerned.
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Who can file a petition for mandamus? it is A (the transferor) because A is the stockholder. He has the right to file a petition for mandamus to compel a ABC to honor the transfer. That is why when you entered a contract of sale, you have to stipulate that you are the buyer authorized by the seller to cause transfer. If you are not authorized by the seller to cause transfer, then you cannot file a petition for mandamus because you are not recognized; you have no right to do so. Petition for mandamus can be filed by the stockholder or anyone authorized for the purpose. So if you enter a contract of sale, make sure that if you represent the buyer, you have to obtain an authority for the seller to cause transfer of shares in your name in the books of the corporation. XYZ is the creditor of A. A sold his shares to B but did not comply with the formalities required by law (it was not endorsed, delivered or/and recorded in the books of the corporation.) Can XYZ present a deed of execution to levy the shares in favor of A? Yes, because the transfer has not been recorded yet in the books of the corporation. It does not bind the corporation and the whole world. The transfer is only valid between them (A and B) but it will never be binding against the corporation and the whole world unless recorded in the books of the corporation. So the corporate creditor, XYZ, can still levy the shares sold in favor of B. (GARCIA VS __) RAZON VS. COURT OF APPEALS A stock certificate was issued in favor of Suijian but it was kept by Razon. According to Razon, he is the real owner of shares because he was the one who paid the subscription. Unfortunately, in the books of the corporation, it was Suijian and not Razon who is the owner of the shares. The heirs of Suijian wants to include the shares in the settlement of the estate, but opposed to by Razon on the ground that he is the one who paid for it. Who is the owner of the shares? Is it Razon or Suijian? The SC held that it is Suijian because he is the registered owner, he did not endorse and deliver the stock certificate. Therefore the shares can be included in the settlement of Suijians estate. NOTE: Probably there is basis to say that Razon may have paid for the subscription, but he did not cover his ground. So if you will pay subscription of another, make sure that you require a declaration of trust
MAXICARE CASE One case which resulted to 16 cases including a disbarment complaint against the corporate secretary of Maxicare and disbarment complaint against Dean Angeles- the former Secretary, criminal cases against delos Angeles for violation of the Corporation Code and qualified theft because he did not surrender the books, cases for perjury filed by delos Angeles against the incumbent directors of the corporation. In here, Banco de Oro owned 60% of Maxicare- which is the second largest health care company in the Phillippines. Sun Insurance Company is a Wellness Company- it supposed to prevent you from getting sick. BDO entered into a contract in favor of PIN-AN Holdings which majority owned _____former chairman of Equitable Bank. BDO, Maxicare PIN-AN, ALG are all clients of sir. Is there conflict of interest? None, because all of them consented. . Maxicare has a stockholders agreement wherein under said stockholders agreement, all the stockholders of Maxicare have the right of first refusal. So before it can sell the shares, it has to be offered first to the stockholders. Some of the stockholders are Dean delos angeles of Ateneo, Payumo, and Santos, former Insurance Commissioner. They owned 2% each of Maxicare, They exercise their right of first refusal. They said that would like to match the offer of PIN-AN, PINAN agreed to buy Maxicare share for 176 million. On the last day of exercise period, they deposited the amount of 100 million to match the over of PIN-AN. Unfortunately for them, they did not comply to the terms of the notice of sale wherein under the notice of sale, it cannot pull the purchase price that is, if anyone who will match the offer, it must be an individual; they cannot come together and form a consortium to match the offer. Because of that Maxicare board passed a resolution to reject the exercise of the right of Payumo, Delos Angeles and De los Santos and likewise, another resolution for the sale to proceed in favor of PIN-AN. But the former Corporate Secretary of Maxicare, Delos Angeles, who has in possession of the stock and transfer book. Under the Corporation Code, the transfer is not binding against the Corporation and the whole world unless the transfer is recorded in the books of the corporation. So the transfer cannot be register or record the transfer (to PIN-AN) because delos Angeles refused to surrender the stock and transfer book. The corporate secretary of Maxicare went to the SEC and filed an affidavit stating that despite demand from delos Angeles, he did not surrender the book and therefore the book is presumed loss. The SEC issued replacement of the
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stock and transfer book in favor of Maxicare. In that new stock transfer book book the transfer was recorded in favor of PIN-AN. The Board of Maxicare drafted a resolution confirming the validity and enforceability of the transfer in favor of PIN-AN. De los Angels, Santos and Payumo filed a petition for injunction with the RTC enjoining the sale in favor of PIN-AN. The petition was dismissed because there is nothing else to enjoin as the transfer has already been recorder in the books of the corporation; taxes are paid; nominated the nominees of PIN-AN etc. Under the terms of the stockholders agreement, there is also the right of arbitration. The 3 went to Singapore to arbitrate and this time, PIN-AN is not included because it is not a stockholder. They asked, during the arbitration, for 400 million pesos damage against BDO. We filed a petition for injunction on the ground that there is nothing more to arbitrate. What are the issues here relevant to us? First, is the transfer valid? Yes. The Corporation Code simply provides that it must be recorded in the books of the corporation. The Corporation affirms that these are the books of the corporation. It did not say old book or new book of whatever book. THE CASE OF RURAL BANK VS. SALINAS Husband appointed wife as an agent to sell the shares. Pursuant to said authority, SPA, the wife has sold the shares and signed the corresponding instrument pursuant to the sale and endorsed. When everything is said and done, the husband died. The corporate secretary refused now to record the transfer in favor of the buyer on the ground that because of the death of the death of the husband, who a stockholder, there must be settlement of the estate proceeding. ISSUE: Assuming that the stock certificate is endorsed, delivered, does the corporate secretary of the corporation have any discretion to refuse the transfer? HELD: The corporate secretary need not pass upon legality of the transfers. It is not for the corporate secretary to say that there must be liquidation proceeding because all the documents are complete, stocks was endorsed, at the time at the time that he was still alive and it was delivered to the buyer, tax
have been paid, so the corporate secretary has no discretion to refuse to record the transfer. SC said that the duty of the corporate secretary ministerial for as long as all the documents are in order. There is one instance though were by express provision of law, the corporation cannot be compelled to transfer it shares despite compliance of all the requirements. So if there is non-compliance of the requirements, corporate secretary cannot be compelled to record the transfer. But even though all the requirements are complied with, if there is unpaid claim, then the corporation cannot be compelled to transfer the shares. The last paragraph of Section 63 provides that shares against which the corporation has unpaid claim cannot be transferrable in the books of the corporation. What does the term unpaid claim mean? The term unpaid claim means, unpaid subscription as held in the case of CHINA BANK VS. COURT OF APPEALS. Does it include dues and assessment? No. Does it include other obligation of the stockholder to the corporation? No So can the corporation prevent the transfer just because there are unpaid dues and assessments on the subject shares? No, as held in CHINA BANK VS. CA
Section 65. 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. (n) Section 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. (37) Section 67. 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. Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within 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.
What are the requisites for the issuance of the stock certificate? y it must be signed by the president and vice president; y countersigned by corporate secretary y sealed by the corporation y it must be detached from the stock certificate and delivered to the stockholder and y the subscription price must have been paid in full under Section 64 of the Corporation Code, no stock certificate shall be issued unless there is full payment of the subscription price. Lets say that the stockholder subscribe to 1000 shares and he paid only 250 shares, can he ask for a stock certificate corresponding to the shares he actually paid? No, the Corporation Code provides that unless the entire subscription has been paid, you cannot be entitled for a stock certificate. What if, if it is in the AOI? What if the Corporation allows the issuance of stock certificate corresponding to the shares actually paid?
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What if the stockholder has unpaid debts to the corporation, can the corporation prevent the transfer? No, there is only one instance and that is in case of unpaid subscription. If the Corporation has a lien over the shares for an unpaid dues is not binding against 3rd persons, who are not aware of the contents of the by-laws. The Corporation may prevent a transfer only the case of unpaid claim and unpaid claim means unpaid subscription and not unpaid dues or assessment.
Section 64. Issuance of stock certificates. - 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. (37)
No jurisprudence yet. If in the AOI and the SEC allows, then it is OK, because the provision in Section 64 is for the benefit of the Corporation not for the benefit of the Stockholder and that benefit can only be waived by the corporation. Section
68. Delinquency sale. - The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder 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. 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 favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. Should there be no bidder at the public auction who offers 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, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code.
What will make the shares delinquent? Only when it is not paid within 30 days from due date What if the shares become delinquent? The BOD will pass a resolution to order the sale of the delinquent shares not earlier that 30 days but not less than 60 days from delinquency date. Notice will be given to the stockholder and publication for once a week for three consecutive weeks in a newspaper of general circulation Lets say a stockholder subscribed for 1000 shares, he paid 250, the shares become delinquent, what shares are delinquent, the 1000 shares or the 750 shares? The 1000 shares because the contract of subscription is indivisible; it cannot be split apart. The entire 1000 shares become delinquent. What will be sold in auction is the entire 1000 shares despite the payment of the 250 shares. In public auction, the winning bidder offers the highest amount. When it comes to sale of delinquent shares, the bid price is the same (the person who offers the highest amount) What is the bid price? It is the unpaid subscription + interest + cost and expenses Who is the winning bidder, the one who offers to pay the full amount of the subscription for the lowest number of shares Illustration: Delinquent shares is The unpaid subscription price is Interest Cost and expenses Total
Lets say the subscription is not paid in the due date, does the shares become delinquent? Not yet, on the due date, the shares are not delinquent and therefore the shares can still vote, can be voted. What does due date mean? Due date may either be: y the date indicated in the contract of subscription or y call on the part of the Directors Call is only needed is there is no due date specified in the contract of subscription. Non-payment of the subscription price on due date does not make the shares delinquent.
1000 Php 7,500 Php 1,500 Php 1,500 Php 10,500
A offers Php 10,500 for 700 shares, B offers Php 10,500 for 950 shares, C offers Php 10,500 for 1000 shares Who is the winning bidder? A because the one who offers to pay the full amount of the subscription for the lowest number of shares is the winning bidder. That means only 700 shares will be issued to A What about the remaining 300 shares? It will be credited in favor of the erstwhile delinquent stockholder
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Procedure by which shares may be sold at auction. If no payment is made on due date, within 30 days from due date the entire stocks covered by the subscription (meaning all of the shares covered by the subscription) become delinquent and the corporation may order the sale not earlier than 30 days but not more than 60 days from delinquency date. Notice to be given to the stockholder and the published in a newspaper of general circulation once a week for three consecutive weeks. The winning bidder is the one who offers to pay the full amount for the smallest number of shares. The shares so bidded shall be issued in favor of the winning bidder and the remaining shares, if any, share be credited in favor of the erstwhile delinquent stock holder. Example: If the number of shares subscribed is 1000 and the number of shares paid up were 250. The balance was not paid on due date so the stocks became delinquent 30 days thereafter. The corporation caused the auction sale and the winning bidder bids only for the full amount for 700 shares. 700 shares shall be given to winning bidder and the 300 remaining bidder shall be credited to the erstwhile delinquent stock holder. If he only paid for 250 why would he be given 300? Because the law says that remaining shares should be credited in favor of the erstwhile stockholder. That is why it is not in violation of due process amounting to taking of the property at the expense of another or unjust enrichment. Ordinarily, although the law says for the smallest number of shares, the winning bidder will pay full amount for all the shares covered by the subscription. But for bar purpose, the winning bidder is the one who pays the full amount for the smallest number of shares. What if there is no participant in the bidding, can the corporation bid and acquire the shares? Yes. The shares so acquired will be considered treasury (Treasury Shares) and they will be disposed of again upon the approval of board of directors. From the day of subscription up to the day before delinquency, all the rights may be exercised (right to receive dividends, right to vote). The holder of unpaid shares which
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are not delinquent shall be entitled all the rights pertaining to the shares. Here the rights are not suspended. From delinquency date until the auction sale, the law allows the stockholder to pay the full amount of the subscription plus interest, cost and expense. What is the status of the stockholder from delinquency date before the auction sale? Can he exercise the rights of a stockholder? Are all the rights suspended or forfeited from this period? All rights are suspended except the right to receive dividends. Take note that the law says, except the right to receive dividends in accordance with law. What does it mean? Under Sec 43. what are the rules regarding dividends? Cash dividends should be applied against unpaid subscription. Stock dividends should be withheld until full payment of the subscription. So if from delinquency date before the auction sale, the corporation declares dividends, if in cash it shall be applied against unpaid subscription or if in stocks, then the stocks shall be withheld until full payment of the subscription. Once the sale takes place, then the shares belong to the winning bidder.
What are the remedies of the corporation to enforce payment of the subscription? y Extrajudicial - To cause the sale of the delinquent shares based on these procedures and formalities. y Judicial - File an action for collection to recover the subscription. How much is the subscription? Does it include interest? The law says 2 kinds of interest are contemplated. y Interest on the subscription (moratory interest) y Interest by reason of default (compensatory interest) Section 66 covers interest on the subscription. This is due only if specified in contract of subscription at the rate provided in the by-laws. If the rate is silent, it is legal rate. In other words, the unpaid subscription shall earn interest from the date of the subscription until full payment.
This is the moratory interest (interest on subscription). It can be collected only if stipulated and for the rate specified in the contract. If the rate is silent the legal rate shall be followed. What is the legal rate, 6% or 12%? 6%, because 12% applies only for loans, forbearance of money, credit. What about the other interest contemplated by Sec 67 or 68? It says, the unpaid balance shall also earn interest from delinquency date until full payment for the rate specified in the by-laws, or if the rate is silent it shall be the legal rate (6%). Are these 2 different set of interest or are they the same? They are not the same because they are covered by two different sections. One refers moratory, meaning interest on the subscription by reason of stipulation. If there is no stipulation in the contract of subscription then you do not collect the interest on subscription. You can collect another kind of interest that is compensatory interest. Interest imposed by reason default. But, compensatory interest is computed only from the delinquency date (the date it becomes payable), not from the date of subscription. The amount that can collected whether judicially or extrajudicially: y Unpaid subscription y Interest y Cost and Expenses
Section 69. When sale may be questioned. - No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a complaint within six (6) months from the date of sale.
y y
It must be commenced within 6 months from the sale; and Tender of the amount paid during the auction plus interest at legal rate
CLEMENTE VS CA The 6 month period only applies to sale of delinquent shares in case of stock corporations. The 6 month period does not apply to sale of shares of a non-stock corporation. Can there be a share in a non-stock corporation? Yes, golf shares. They are called shares even though it is a non-stock corporation. For Golf membership they are entitled to playing rights. There are 2 recent decision on this matter CARAG VS VALLEY GOLF & COUNTRY CLUB INC. CLEMENTE VS CA The first time we encountered Valley Golf & Country Club Inc. was the case of Chinabank vs CA involving Calaptia and Valley Golf. CHINABANK VS CA Calapatia, a stockholder of Valley Golf & Country Club, obtained a loan from Chinabank secured by a pledge on his share. The loan was not paid so Chinabank foreclosed the pledge. When sought the transfer of the share in its favor, the corporate secretary refused on the ground that under the bylaws of Valley Golf & Country Club it is provided that the Valley Golf has a lien on the shares in case of non-payment of the dues and assessments. Valley Golf cause the sale of the share of Calapatia for non payment of dues and assessment. Can Chinabank compel the corporation to transfer the sale or does the corporation, Valley Golf & Country Club, have right to prevent the transfer because stockholder owes the corporation unpaid dues and assessment? That provision in the by-laws are not binding against 3rd persons because by-laws are binding only against stockholders except when the 3rd person has actually knowledge of the contents thereof. Under Sec 63 of the Corporation Code, no shares against which the corporation has unpaid claim shall be transferable in the books of the corporation.
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What about the remedies available to the stockholder? Can the stockholder question or assail the sale? Under Sec 69, the stockholder may file the appropriate action to nullify the sale in case of infirmity thereof or defect in the notice given but only within 6 months from the sale and he must be willing to tender the amount paid during the auction plus interest at legal rate. So 2 conditions.
The term unpaid claim refers to unpaid subscription and not to any other obligation by the stockholder to the corporation. In these 2 recent cases (CARAG VS VALLEY GOLF & COUNTRY CLUB INC. AND CLEMENTE VS CA) if there is provision in the by-laws regarding the lien by corporation over the shares of a member because of unpaid dues and assessment is that enough to create a security over the shares or to authorize the corporation to sell the shares in payment of the dues and assessment? No, because that provision in the by-laws does not take the place of a chattel mortgage or pledge. For the shares to be considered as security for the payment of an obligation, there must be an actual chattel mortgage or pledge agreement, not just a provision in the by-laws authorizing the corporation to sell the shares for non-payment of dues and assessment. In Clemente, the SC said that the period to contest the sale of the shares is not 6 month. The 6 month period applies only to delinquent stocks of a stock corporation. What is the applicable period? 4 years under the Civil Code.
Section 70. Court action to recover unpaid subscription. - Nothing in this Code shall prevent the corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and expenses. (49a) Section 71. Effect of delinquency. - No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any. (50a) Section 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. Section 73. Lost or destroyed certificates. - The following procedure shall be followed for the issuance by a corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed: 1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares represented by such certificate, the serial number of the certificate and the name of the corporation which issued the same. He shall also submit such other information and evidence which he may deem necessary; After verifying the affidavit and other information and evidence with the books of the corporation, said corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for 113 three (3) consecutive weeks at the expense of the registered owner of the certificate of stock which has been lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner and the serial number of said certificate, and the number of shares represented by such certificate, and that after the expiration of one (1) year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock, unless the registered owner files a bond or other security in lieu thereof as may be required, effective for a period of one (1) year, for such amount and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one (1) year period provided herein: Provided, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed. Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described.
Section 73 refers to lost stock certificate What is the remedy if the stockholder lost his stock certificate? Sec 73 provides for the procedure to obtain a replacement for the lost stock certificate. y The stockholder must execute and file with the corporation an affidavit of loss stating the grounds and circumstances surrounding the loss. The loss can be destruction, impairment or physical loss. The affidavit must explain the circumstances surrounding the loss. This includes misplaced stock certificates, cannot be found despite diligent efforts. The affidavit must include the name of the corporation which issued the shares, stock certificate number and the number of stocks covered by the stock certificate. It shall be filed with corporation, to the corporate secretary, and the corporate secretary will verify the affidavit, match the information in affidavit with the records on file. To check whether the stock certificate really
2.
belong to the stockholder, whether shares covered thereby correspond to the shares in the name of stockholder and other relevant information. y If the corporate secretary is convinced that the affidavit is in order he will cause the publication of the notice of loss once a week for 3 consecutive weeks in a newspaper of general circulation at the expense of the stock holder. Within one year from the last publication, if there is no contest/claim filed by anyone then the corporation may issue a replacement of the stock certificate. He will be liable for estafa for the false representation. Illustration: A, a stockholder of ABC Corporation, lost his stock certificate. He waited one year for the corporation to issue a new stock certificate. No, lets say that A did not really lose his stock certificate but pledge the same in favor of B, but B came forward only after 1 year. So the corporation issued a replacement which A sold to C. A represented the he lost his stock certificate. He filed an affidavit so the corporation published a notice once a week for 3 consecutive weeks. He waited for 1 year but no body came forward, so the corporation issued a replacement. That replacement stock certificate with the same faith and credit was sold by A in favor of C. It turns out that the original stock certificate was not lost but pledged in favor of B. Who has a better right B or C? Here we have no actual SC decision. These are some of the possible answers: If the pledge is in a public instrument, the pledge binds the whole world including the corporation and 3rd person. So if the pledge is in a public instrument, the pledge of B binds everybody including the transferee of the replacement stock certificate. What if the pledge is not in a public instrument, who has the better right is it the pledgee or the transferee, buyer, assignee of the replacement stock certificate? The transferee of the replacement stock certificate has the better right because the replacement stock certificate should be given same faith and credit as the original stock certificate as if it was not, lost, no irregularity, as if no claim. This why you should have a better right against an unregistered pledge. What if the shares are mortgaged in favor of B? Same principle. If he mortgage is recorded with the Chattel Mortgage Register then it binds the whole world including the buyer of the replacement stock certificate. If not registered/recorded then the buyer or assignee of the replacement stock certificate will have a better right. Is there a way by which the stockholder can accelerate the issuance of the replacement without waiting for the 1 year period?
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Possibilities: There is claim within the 1 year period. Somebody may come forward saying that the shares are not lost but in fact sold or pledged to him. What should the corporation do if there is a claim or contest during the 1year waiting period? y The corporation should not take sides. The issuance of the replacement should be deemed suspended and y the corporation may file an action for interpleader to compel two conflicting claimants to litigate and prove who has the better right over the shares. Interpleader is not so indicated in Sec 73 but it is a general remedy available to a person (natural or juridical) who finds himself in a position where there are 2 or more conflicting claims on a particular property in his possession. So this remedy is available to a corporation if there are conflicting claims over the same shares. If there is no contest within 1 year then the corporation issues a replacement. What if the 3 party emerged only after the expiration of the 1 year period? Lets say the shares have been pledged or sold to the 3rd party but he came forward only after expiration of the 1 year waiting period under Sec 73. Is there any liability on the part of the corporation? In so far as the corporation is concerned, unless there is bad faith or gross negligence, the corporation is not liable for issuance of replacement if made after the expiration of the 1 year period. Who then shall be held liable? The stockholder who misrepresented to the corporation that the shares are lost when in truth and in fact they were pledged or sold to somebody else.
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The law says that the corporation may cut short, waive the one year waiting period upon a bond or security issued by the stockholder for such form and terms acceptable to the corporation. So the stock holder, who lost the stock certificate, may put up a bond or security to answer for any damage that the corporation may suffer in the event that the stock certificate is not lost after all. If the stockholder willing to put up a bond, is it mandatory on the part of the corporation not to observe the 1 year waiting period, or does the corporation have the discretion not to accept the bond issued by the stockholder and insist on the lapse of the 1 year period? The law is clear that it is discretionary on the part of the corporation to accept or not to accept the bond. So the willingness of the stockholder to put up a bond should not be taken as an obligation on the part of the corporation not observe the 1 year waiting period. It depends upon the discretion of the corporation. It may refuse the bond and wait for a period of 1 year.
Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable.
What are the books required to be kept by the corporation? y Record of all business transactions y Book containing the minutes of meetings, whether stockholders or board meetings y Stock and transfer book y Other books required by special law like journals, ORs, ledgers for the BIR (stock or transfer book)
The book containing the minutes of the meeting should include: y the number directors present and absent, y those who voted for or against the resolution, yeas and the nays, y including dissents if so requested by the director. What about for the stockholders meeting? y Number of shares represented y Number of shares voting for or against the particular resolution Are Minutes of meeting entitled to full faith and credit if certified by the corporate secretary, or is it only a prima facie evidence of what transpired during the meeting? The minutes have persuasive effect once certified by the corporate secretary. In other words it is prima facie proof of what transpired during the meeting, but it is not conclusive. So evidence may be shown to prove otherwise. Recent Case: PEOPLE VS DUMLAO (2009) The issue is whether or not the majority of the board of directors should sign the minutes to make the minutes binding.
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Dumlao was charged with violation of the Anti-Graft and Corrupt Practices Act for entering into a contract of lease disadvantageous to the government while he was still with the GSIS. The prosecution failed to show approval of the lease agreement because the majority members of the board did not sign the minutes of the meeting. The contention of Dumlao is, If lease agreement was not approved after all there is no basis for which to charge me for entering into a contract disadvantageous to the government. The issue is whether or not lack of the of signature by the majority of the members of the board is enough evidence to prove that no lease agreement was approved by GSIS. SC said that the fact the majority of the board did not sign does mean that the resolution was not approved by the board of directors because other evidence may be shown to prove that the board indeed approved the transaction. The certification by the chairman and the corporate secretary is enough to prove what transpired in the meeting unless overcome by evidence to the contrary. So this confirms that the minutes of the meeting if certified by the corporate secretary will be given probative value and weight unless overcome by evidence to the contrary. What about the stock and transfer book? Under Sec 63 the transfers must be recorded in the books of the corporation to make the transfer binding to the corporation. So what is the book being referred to under Sec 63? It is the stock and transfer book. So every corporation book must have a stock and transfer book containing the names of the stockholder, in alphabetical order and the transactions involving the stockholder. You have column for A, B, C Every stockholders will have individual sheets. i.e. Antonio Abejo. All transactions involving Antonio Abejo will be there. The date the stock certificate was issued to him. If he sold, it must be indicated. The buyer must be indicated. If he paid on installment it must be indicated. Any transfer, or donation, or conveyance must be recorded in that particular stock and transfer book. REMEMBER: PLEDGE and CHATTEL MORTGAGE are NOT transfers, not conveyances therefore not required to be recorded in the books of the corporation. What are required to be recorded are: Conveyances which cover sale, donation, and succession. SO change of ownership because of these modes. But not simply encumbrance. IF the corporation is too big or too huge, and there are so many stockholders can the corporation appoint a stock and transfer agent? A stock and transfer agent is an extension of the personality of the corporate secretary. All listed corporations are required by the SEC to have stock transfer agent. Under the law a stock transfer agent must be a stock corporation. Sec 74 also tells us of the right of inspection by stockholder. So the right of inspection is statutory right. It is a right guaranteed by law. Any stockholder has the right of inspection. Is this the same right given to the SEC? Therefore, SEC subject to the same limitations as a stockholder? The SEC has visitorial right. Visitorial right is the right to inspect books and documents of a corporation. For a stockholder, the right is one of inspection. What are the limitations on the right of inspection by the stockholder? 1. The right of inspection must be exercised at the time place manner specified in the by-laws. 2. The right of inspection does not extend to trade secrets. This is not in the Corporation Code, but by jurisprudence. 3. The right of inspection can only be exercised for a purpose germane to his interest as stockholder. 4. The right of inspection may be denied if the stockholder improperly used the information secured in previous examination or examination was made in bad faith.
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The right of inspection must be exercised at the time place manner specified in the by-laws. Can a stockholder insist on the right of inspection at 8 pm? No. It should be made during reasonable hours on a business day. Can the stockholder demand that he take out the documents and the records from the office of the corporation? NO, unless allowed by the by-laws. Can he demand that photocopies be given to him at the expense of the corporation? NO, unless specified by-laws. The right of inspection does not extend to trade secrets. This is not in the Corporation Code, but by jurisprudence. Illustration: Can a stockholder of San Miguel Corporation demand that he be given the formula manufacturing beer, or the formula of manufacturing coca-cola or pepsi? No, by jurisprudence. Gokongwei, once a stockholder of San Miguel wanted to inspect the books, records of a subsidiary, Neptunia Corporation. Does the right of inspection extend to the subsidiary corporation of San Miguel? SC said he has the right to determine where the funds of San Miguel Corporation were invested, because it is his money as a stockholder. But because a subsidiary has different personality separate from San Miguel, the right to inspection does not extend to the subsidiary. He cant inspect but he can ask questions related to the investment of San Miguel in the corporation.
The right of inspection can only be exercised for a purpose germane to his interest as stockholder. GONZALES VS PNB Gonzales was not a stockholder of PNB but he wanted to have access to the books of PNB to determine the behest loans that the bank may have granted. Because he is not a stockholder PNB refused access. So he bought 1 share of stock from Justiniano Montano. After acquiring 1 share he demanded that he be allowed to exercise his right to inspection under the Corporation Code. Under Sec 4, if the corporation is governed by a special then the special law prevails. The law creating the special corporation prevails over the Corporation Code. And, because the charter of the PNB delimits person who can have access to the books of PNB which has nothing to do with the stockholder, then that provision is paramount, supreme than Sec 74 of the Corporation. Another reason given by SC was that the right of inspection was not germane to his interest as a stockholder. GOKONGWEI VS SEC
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The right of inspection may be denied if the stockholder improperly used the information secured in previous examination or the examination was made in bad faith. What are the defenses available to a corporation if a stockholder demands the right of inspection? Just reverse the limitations. The defenses are: 1. The right of inspection is not being exercised in accordance to the by-laws; 2. It extends to matters which are not covered by the right of inspection; 3. Information obtained in previous; examination was used improperly; or 4. The request made in bad faith. Remember also the secrecy of information concerning deposits vis-a- vis the right of inspection. Does the right of inspection extend to bank deposit? The right to secrecy of bank deposits is a special law therefore it prevails over the general law or the Corporation Code. So a stockholder cannot exercise his right of inspection to have access to the deposits of a stockholder who is also a depositor of a corporation. The refusal by the corporation to allow the stockholder to exercise the right to inspection is a criminal offense. By express provision of law, Sec 74 in relation to Sec 144,
penalizes the refusal to allow inspection of corporate books documents and records. What are the defenses? y Stockholder is prompted by bad faith or ill-motive; y He has improperly used the information secured in a prior examination; y Inspection was not made in the corners of the procedures laid down by the by-laws; y Records involve Trade secrets; y Information governed special law y Right to inspection not germane to his interest as stockholder What do you do if as stockholder demands the right of inspection, and you know that if you refuse you can be the subject of a criminal complaint? You dont want to accommodate the stockholder because you know that he will just use the information against you or the corporation. There is no prior showing that he improperly used an information secured in the previous examination. Pre-empt the filing of the criminal complaint for violation of Sec 74 in relation to Sec 144, by filing a declaratory relief to the court and let the court determine if the request was made in good faith or bad faith. So if there is a criminal complaint against the corporation or corporate officers for the refusal, then you can invoke the petition for declaratory relief as a prejudicial to question to the criminal complaint. The criminal complaint will be suspended and the court will determine if the request is made in good faith or bad faith. If the request is made in good faith, then you allow it. If in bad faith, then dont allow it.
Section 75. Right to financial statements. - Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant. However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. 118
This refers to the right of stockholders to obtain copies of the financial statements. There are 2 cases by which you can obtain copies of the financial statements 1. Within 10 days from demand. By express provision of law, any stockholder can demand copies of the financial statements and within 10 days the corporation must comply. 2. During annual stockholders meeting. In our discussion under stockholders meeting it was said that the reason why stockholders meeting was set in April, unless the by-laws provide otherwise, is to give the ample time to the corporation to finalize and organize its financial statements because such statement must be submitted to the corporation during the annual stockholders meeting and certified by an independent public accountant. If the paid up capital of the corporation is less than P50,000, the treasurer can be the one to certify the financial statements of the corporation. Case Outline APODACA VS NLRC Unpaid subscription cannot be set-off against unpaid monetary claim by a stockholder to the corporation because the unpaid subscription is not yet due. The contract of subscription does not specify the due date of payment and there is no call on the part of the board. What if the contract of subscription specifies the due date of payment or there is a call on the part of the board, can the unpaid subscription be set-off against unpaid monetary claim? As a general rule, salary or wages are not subject to deduction. If it is already due for payment or there is a call on the part of the board can we apply the principle of compensation? Compensation is one of the exceptions that salary and wages are not subject to deduction
(Alcantara)
PONCE VS ALSONS CEMENT CORPORATION Who can file a petition for mandamus? Transferor When can the transferee file a petition for mandamus? .
In this case the transferee has no standing yet in the books of the corporation. He is not recognized yet by the corporation. That is why he cant file a petition for mandamus. The SC said it could have been different if it was the stockholder-transferor who filed the petition for mandamus. This case is proper because he is recognized in the books of the corporation as someone with standing in the corporation. But because it was the transferee, who have not acquired standing yet, the petition is not proper. How do you distinguish this from RURAL BANK OF SALINAS VS CA? In SALINAS all the documents were complete and SC said it is a ministerial duty on the part of the corporation, through the corporate secretary to record the transfer. In the PONCE VS ALSONS CEMENT SC said that the transferee cannot compel the corporation because he has not acquired any standing yet in the books of the corporation. In both cases were the stock certificates indorsed? They are indorsed (Read the Share-Purchase Agreement in PONCE VS ALSONS CEMENT). Did the transferee had any authority from the transferor to cause the transfer to the books of the corporation? In PONCE there is none. This is the big difference. In PONCE there is no authority granted to the transferee to cause the transfer. Had there been such authority then the transferee would have been justified in filing a petition for mandamus. REPUBLIC VS SANDIGANBAYAN (On voting of sequestered shares) As a general rule who has the right to vote sequestered shares? The stockholder, as a general rule can vote sequestered shares As a general rule the government has no right to vote sequestered shares because
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the PCGG has no power of dominion. It is only a conservator and therefore can only perform acts of administration. There are cases wherein the government can vote sequestered shares following the 2 TIERED TEST. What is this two tiered test all about? y There is prima facie evidence that the shares are ill-gotten y There is imminent danger of dissipation of assets while the case is pending with the Sandiganbayan.
Is there an EXCEPTION to the 2 tiered test such that if this exception is present the government can vote sequestered shares? The PUBLIC CHARACTER TEST If the shares are originally government shares; or The funds are public in nature Under the public character test the government may vote the shares while the case is pending with the Sandiganbayan. In case the stockholder of record who owns the sequestered shares is not allowed to vote, the stockholders meeting therefore is invalid. Do you cancel/annul the entire stockholders meeting results if the stockholder of record was deprived of the right to vote the sequestered shares and assuming the exceptions does not apply of it is not a case where the government can vote the shares? It depends on the number of shares. This is the case of TRANSMIDDLE EAST VS SANDIGANBAYAN. Not the entire results were nullified but only the shares affected and how many seats affected by those shares. Is a stock certificate a negotiable instrument? No Doe the principle of holder in due course apply to stock certificates? No The Stock certificates of the Marcoses were indorsed in blank. When they fled the country in 1986 the stock certificates with
their indorsement were seen lying all over the place in Malacaang. The PCGG agents seized the stock certificates. Can they claim ownership just because the stock certificates are indorsed in blank following Sec 34 of the Negotiable Instruments Law? No. REPUBLIC VS SANDIGAN BAYAN & REPUBLIC VS MENZI A is a stockholder of record of 10000 shares and his ownership of 1000 shares is evidenced by stock certificate # 001. He indorsed in blank the stock certificate and placed it on top of his table. His accountant saw the stock certificate, obtained possession and negotiated by delivery in favour of X who acquired the instrument in good faith and for value. Who has a better right over the shares covered by stock certificate # 001, A or X? A, because the principle of holder in due course does not apply. The transferee or holder acquiring the instrument is subject to defenses that may be raised by the stockholder or creditor, except estoppel. DERIVATIVE SUIT What is a derivate suit? A right of a minority stockholder to file a suit in behalf of the corporation. It is a right not enumerated in the Corporation Code but recognized by jurisprudence. It is a remedy by the minority against the abuses of the majority. What are the REQUISITES of derivative suit? y The aggrieved party is the corporation. The cause of action belongs to the corporation. It is a derivative cause of action. The cause of action does not belong to the stockholder in his personal capacity but to the corporation. y The one filing is a stockholder at the time when the cause of action accrued, unless the cause of action is continuing in nature y Exhaustion of intra-corporate remedies Is there an exception to the requisite exhaustion of intracorporate remedies? If the one guilty of wrong doing are the board of directors themselves, meaning those who have majority control of the corporation. What are the examples of cases proper of derivative suit?
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REYES VS TAN - Unauthorized importation of textile by the company. REPUBLIC VS CUADERNO - Payment of a salary to a chairman despite commission of acts contrary to the General Banking Law, particularly the rules against DOSRI transactions. The Stockholder wanted to prevent the payment of the salary and other benefits to a chairman who he is guilty of what he thinks is a wrongdoing, violating the rules on DOSRI.
Was he after the position the chairman? No. His is only after the payment of salary, wages and benefits to the chairman despite doing unauthorized and unlawful acts. SAN MIGUEL VS KAHN - The Assumption by San Miguel Corporation of a loan of a subsidiary was properly questioned by a stockholder through a derivative suit. What about cases which are NOT PROPER for derivative suit? REYES VS RTC OF MAKATI - Issues concerning successional rights are not proper for derivative suit. A and B are brothers. Their mother was a controlling stockholder of a corporation before her death. A claims that B manipulated the transfer of the shareholding so that he got more than what he is entitled to from the assets of his mother. Is this proper for derivative suit? No, because the cause of action does not belong to the corporation but belongs to the stockholder. WESTERN INSTITUTE OF TECHNOLOGY VS SALAS An appeal from the dismissal by RTC of the dismissal of the complaint for falsification of commercial documents involving payment of compensation for directors for executive services. The appeal is not proper for derivative suit because the minority stockholder is not suing on a derivative cause of action. TANG WING TAK VS MAKASIAR - Compliant for violation of BP 22 filed by a minority stock holder where the payee is the corporation.
On the 2ND ELEMENT: Stockholder at the time the cause of action accrued. Is it necessary for the stockholder to own significant number of shares? Is it necessary for a director representing the minority to file derivative suit? Is the number of shareholdings necessary to file derivative suit? No, for as long as he is a stockholder at the time the cause of action accrued. So he may own a miniscule portion of the authorized capital stock .0000001%, or he may own significant amount of shares for as long as he is a stockholder at the time he filed a derivative suit. 3 REQUISITE: Exhaustion of intra-corporate remedies. This is hardly a hard and fast rule requisite because there are many cases where the SC said that exhaustion is not necessary where ones guilty of wrong doing are the majority themselves. But this is precisely the essence of the essence of derivative suit the majority refusing to take action that is why a minority taking the cudgels in behalf of the corporation. So it is always a suit filed against the majority, therefore if this is rule the 3rd requisite is not really applicable because most of the cases the one guilty of the wrong doing are the majority in control of the corporation. TRANSFER OF SHARES. Basic Principles Shares can be transferred by indorsement of the stock certificate plus delivery (INDORSEMENT + DELIVERY). If there is indorsement but no delivery the corporation is not bound to recognize the transfer. If there is no indorsement but there was delivery, the corporation cannot be compelled to record the transfer. SO there has to be INDORSEMENT + DELIVERY of the transfer. The only EXCEPTION is if there is NO STOCK CERTIFICATE. If there is no stock certificate there is nothing to indorse. In this case a deed of assignment suffices.
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To be binding on the corporation there is a 3RD REQUISITE in addition to indorsement and delivery transfer must be RECORDED IN THE BOOKS of the corporation. Here you have DISTINCT RULES. The documents are complete. There is indorsement plus delivery and the transferee sought to transfer the shares in his name. The corporation refused to record the transfer in the books of the corporation. If the corporation allows it no problem. If everything is in order. If the stocks have been paid and are in order, then the corporation will just cancel the stock certificate of the transferor and issue new one to the transferee. The problem arises when the corporation refuses to record the transfer in the books of the corporation. What is the remedy available to the aggrieved party? In PONCE VS ALSONS CEMENT, a petition for mandamus can only be filed by a stockholder, meaning by the transferor himself. The transferee cannot file a petition for mandamus because he has no standing in the corporation. Illustration: ABC Corp. A is a stockholder of record. B is the transferee. All the documents are complete. A indorsed the stock certificate, delivered to B. B presented the stock certificate to the corporation as endorsed and paid the taxes. What will the corporation do? The corporation will cancel the certificate of A and issue an new one in favor of B. In which case B now can exercise the right to vote or receive the dividends. If there is no transfer yet in the books of the corporation A has the right to vote and the right to receive the dividends as in the BLTB VS BITANGGA case wherein there was partial payment of the shares involving millions of pesos but it was not yet recorded in the books of the corporation. Can B vote the shares so that he will be considered director of the corporation? No, because the transfer is not recorded yet in the books of the corporation. The problem arises if the corporation, despite document completeness, refuses to transfer. If it is a petition for mandamus only A can file a petition for mandamus, not B because B has not acquired standing yet in the books of the corporation.
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How can B file a petition for mandamus? This is how the SC distinguished PONCE VS ALSONS CEMENT from SALINAS. In PONCE what was lacking was the authority by the transferor in favor of the transferee to cause the transfer in the books of the corporation. The Share-Purchase Agreement in PONCE case you would notice that the document was poorly crafted, there was no authority given by the transferor to cause the transfer shares. If you are the buyer of shares make sure that you are authorized by the transferor to cause transfer. So if the corporation refuses you can file a petition for mandamus. What is the rule regarding SEQUESTERED SHARES? As a general rule, the government does not own the sequestered shares. The government only acts as administrator. In a word it is only a conservator. It has no power of dominion, therefore cannot sell or cannot vote the shares. Because it is not the owner of the sequestered shares the stockholder of the sequestered share can sell the shares, but subject to the outcome of the Sandiganbayan Case, meaning buyer acquires ownership but subject to the results of the litigation. This is the case of PACIFIC BASIN VS ORIENTAL PETROLEUM CORP. SC said that the owner of the sequestered shares can sell and there is no need to conduct a public hearing. It can be done even through a private sale. The transferee has the rights pertaining to the shares and can compel the corporation to effect the transfer because the government cannot exercise acts of dominion. However, in some cases the SC said that the government may exercise the right to vote under the TWO TIERED TEST TWO-TIERED TEST y There is a prima facie evidence that the shares are ill-gotten y There is imminent danger of dissipation of corporate assets while the case is pending. If any of these elements is lacking the government cannot vote the shares EXCEPT if we apply the PUBLIC CHARACTER TEST. Under the PUBLIC CHARACTER TEST y if the shares are originally government shares or
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the funds acquired or used to acquire the shares are government money then the government may vote the shares without having to applying the 2 tiered test in which case the public character test applies. y But also in PINET TRANSMIDDLE EAST VS SANDIGANBAYAN If the stockholder of record is not allowed to vote despite the fact that the 2 tiered test or public character test does not apply, it is too drastic remedy to nullify the results of the entire collection. First keep in mind how many shares were affected, how many shares were not allowed to vote. If these shares can only elect one seat then only one seat will be affected. In the case of PINET the SC directed the corporation and the corporate secretary to admit nominees/representatives of Transmiddle East who shares were sequestered not allowed to vote to take the place of the 15 top vote getter. BDO did not allow Martin Romualdez, the nominee of Transmiddle East to vote the shares on the strength of the writ of sequestration issued by the Sandiganbayan. BDO claims that Martin, Transmiddle East cannot vote. So he was not elected. In his place was Jun Villacorta (close friend of Dean Divina), former president of the bank. Then the decision came out saying that the corporation must recognize the nominee of Transmiddle East to take the place of the director who basically obtained the lowest number of votes. Jun Villacorta asked Dean what he will do, should he file a motion for reconsideration? He is not a party to the case so he cannot file a motion for reconsideration. Can he file a motion for intervention? No. It is too late because the case already reached the SC and a decision has been rendered. Dean advised him to accept it peacefully and take his seat as a member of the board. Stock certificate is NOT a NEGOTIABLE instrument because it does not represent unconditional promise or to pay sum certain in money. It is an undertaking on the part of the corporations to recognize the person named therein as the owner of the shares.
It does not involve money. It involves rights pertaining to the shares. However the SC said in some cases that even if it is not a negotiable instrument it is a QUASI-NEGOTIABLE INSTRUMENT. MERGER AND CONSOLIDATION What do we mean that it is a quasi-negotiable instrument? It is quasi-negotiable because it can be negotiated in the same way as a negotiable instrument indorsement plus delivery. Under Negotiable Instruments Law an instrument payable to order can be negotiated by indorsement plus delivery. What is the repercussion if we are to say that a stock certificate is not a negotiable instrument? Not being a negotiable instrument, the principle of holder in due course does not apply. The principle of acquiring ownership or better title or strength of blank indorsement does not apply as what the SC said in REPUBLIC VS SANDIGANBAYAN. In 1986 when the Marcoses fled the Country, stock certificates of various certificates indorsed in blank were scattered all over Malacanang and the government seized possession and claimed possession on the strength of the blank indorsement invoking Sec 34. SC said it does not apply. It has to be proven in court whether or not the shares are indeed ill-gotten. Illustration: A is a stockholder of record of stock certificate 001. He indorsed in blank and he placed it on top of his table but somebody got it and negotiated it in favor of X who acquired the instrument in good faith and for value. In good faith, meaning without notice that it was stolen by the transferor from the stockholder of record. Who has the better right in this case, is it A the stockholder record or X who acquired the stock certificate in good faith and for value? A. Because the instrument is not negotiable he who takes it is subject to all defenses that may be raised by the stockholder or creditor except the principle of estoppel. Merger and consolidation are forms of business combination. On top of merger and consolidation, the other forms of business combination are sale of assets, or sale of shares. PLDT, used to be owned by the Cojuangcos and Tony Boy Cojuangco used to be the CEO. Then came the Metropacific Group, subsidiary of First Metro Pacific based in Hongkong and owned by ____Group. In a merger PLDT and First Pacific will become one/get married (corporate marriage relation), OR the stockholder of Metropacific can just buy the shares of the controlling stockholder of PLDT. This (latter) is what happened the Metropacific bought the shares of the Cojuangos in PLDT and became the controlling stockholder. So PLDT standing alone together with Metropacific which has its own distinct operation, but part of one conglomerate. The danger in this kind of transaction is that you do not know the extent of the liabilities of the PLDT. So the new owner, Pangilinan or Metro Pacific acquires control of PLDT but he has to know the exactly how much the obligations and liabilities of PLDT. One of the complaints of Pangilinan when he bought the shares of the Cojuangcos is that there are so many undisclosed obligations, which made the price very expensive. This is the danger that you have to face when you buy a company because you do not know what you are buying. That is why in most cases the buyer performs due diligence. Due diligence means examining the books, records, transactions of the corporation; employing accountants, lawyers to examine the books and records of the corporation to find out if anything there is not disclosed to the buyer. The other one is by buying/purchase of assets of the company. If you buy the assets you are not concerned about the liabilities of the company because your buying the assets.
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Illustration: ABC Bank buying the receivables (collectibles) of XYZ Finance Company. It lends money to facilitate housing loan, car loan. So the customers of XYZ issues promissory notes to XYZ. One client to augment his loan portfolio bought the receivables of XYZ. Because what were acquired are assets then ABC does not assume the obligations of XYZ. In the same transaction the buyer does not assume the obligations of the seller unless in 4 cases: y If the buyer is a continuation of the to personality of the seller y If the legal personality is supposed to be pierced y In the case of merger or y Consolidation What is in the Corporation Code are Merger and Consolidation. What is MERGER? A and B = A or B Merger is the absorption of one or more corporation by another corporation which retains its corporate existence and acquires the rights and obligations of the absorbed corporation. In merger, there is a surviving corporation which retains its corporation existence and acquires the rights and obligations of the absorbed corporation. Illustration. A and B = A A is the surviving corporation. A retains its corporate existence and acquires the rights, obligations, properties, receivables of the absorbed corporation. What is CONSOLIDATION? A and B = C Both constituent corporation cease to exist. It is a combination of 2 or more corporation resulting to a new corporation called the consolidated corporation and in the process acquiring the rights and liabilities of the constituent corporations. C acquires all the rights, obligations, properties, franchise of both A and B, both of which ceased to exist. In the Philippines merger is more common than consolidation y Equitable Bank and PCI Bank. Equitable is the surviving Bank;
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Equitable PCI Bank merged with Banco de Oro with BDO as the surviving bank; y BPI merged with City Trust and y before with Inter Bank then Far East Bank, in all cases BPI was the surviving bank; y Metrobank merged with Solid Bank, with Metrobank as the surviving bank. There is hardly consolidation in the Philippines. In the States you have Time Warner and America On-Line _____ as the surviving corporation; Bank of Tokyo and Bank of Mistubishi, with Bank of Tokyo as the surviving Bank. y Some mergers dont work. In the States the trend is to divorce, meaning to unwind the merger because they realize that not all corporate mergers workout. Before the trend was to make it big, be big. They merge. Then they realized that in a merger just like marriage the best couple may not work because they have different culture, personalities. You merge conservative vs liberal, traditional vs pro active it will not work.
Section 76. Plan or merger of consolidation. - Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation. The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: 1. 2. 3. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; The terms of the merger or consolidation and the mode of carrying the same into effect; A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this C ode; and Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable.
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What is the PROCEDURE for merger or consolidation? The plan of merger must be approved by at least majority of the board of directors of both constituent corporations in a meeting that was called separately for that purpose. What is not stated in the Code is before the approval of plan of merger by the board, it is preceded by preparation of the plan of merger. When you get the approval of the board you have to present something. So management first prepares the plan of merger.
What is the PLAN OF MERGER? The plan of merger contains: o terms of the merger, o the names of the corporations (i.e. Equitable, PCI Bank) o terms and conditions of the merger and modes of getting it into effect swap ratio or exchange ration name of the institution principal office deposits insured by PDIC What do you mean by the terms of the merger, meaning the specific provisions in the plan of merger? What is the most important item in a plan of merger other than determining which corporation will be the surviving bank? The swap ratio or exchange ratio Illustration: Equitable and PCI Bank Both Equitable and PCIB have their respective authorized capital stock and subscribed capital stock. Both have their respective stockholders. In the merger Equitable will be the surviving bank. This mean that it will acquire the shares of PCIB and the stockholder of PCIB will be stockholders of Equitable. For one share of PCI how many shares of equitable? This is what you call exchange ratio or swap ratio. In the case Equitable and PCI, because PCI was larger/bigger than Equitable the ratio was for every 1 PCIB share equivalent to 3 Equitable shares. That is why the stockholders of PCI will have the bigger number of shares than equitable stockholders. How is this ratio determined? By studying the valuation of the PCI and Equitable. You need lawyers and accountants. How much are the shares of Equitable? How much are the shares of PCI? How much are the assets of the PCI? How much are the assets of Equitable? What is the most equitable, fair and just exchange ratio? Another, what is the name of the surviving institution? The name used was Equitable-PCI Bank. This was because Equitable was not well known in the province. PCI has its own franchise especially in the province. To convey to the public that Equitable is the surviving bank, more prominence in the font size was given to Equitable than to PCI (EQUITABLE-PCI). Head Office or Principal Office From Binondo to Makati The principal office of Equitable was in Binondo, small time, Chinese based. If you are going big it has to be in Makati. What about the deposits of PCIB are they insured with PDIC? They should be. Are they included in the __ of PCIB? Yes. This is also included in the plan of merger. These are usually the things that you must be able to see in the plan of merger. Once you prepared the plan of merger, we submit to the board directors of both corporations (Equitable and PCI) in separate meetings called for that purpose. This is not under the Corporation Code You dont submit the plan of merger to the board unless you have control of the board because there is no point in submitting the plan of merger to board if it will be reject.
Section 77. Stockholder's or member's approval. - Upon approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation, the same shall be submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose. Notice of such meetings shall be given to all stockholders or members of the respective corporations, at least two (2) weeks prior to the date of the meeting, either personally or by registered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for the approval of such plan. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code: Provided, That if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished. 125
Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least two-thirds (2/ 3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation.
corporation and countersigned by the corporate secretary likewise of each the constituent corporation. What should the articles merger contain? y The plan of merger basically. y The number of shares of both corporations, y The number of shares voting for or against the merger of both corporations. The articles of merger is then submitted to the SEC for approval. If it is a bank, public utility corporation, insurance company, investment corporation, they must have the endorsement of the appropriate government agency. If everything is in order the SEC will issue a certificate of merger or consolidation.
Section 79. Effectivity of merger or consolidation. - The articles of merger or of consolidation, signed and certified as herein above required, shall be submitted to the Securities and Exchange C ommission in quadruplicate for its approval: Provided, That in the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained. If the Commission is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, at which time the merger or consolidation shall be effective. If, upon investigation, the Securities and Exchange Commission has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this C ode or existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard. Written notice of the date, time and place of hearing shall be given to each constituent corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed as provided in this Code.
After you have the approval of the plan of merger, what is the next step? Submit the plan of merger to the stockholders of both corporations in separate meetings called for that purpose. Notice must be given to the stockholder at least 2 weeks before the meeting unless the by-laws prescribe otherwise either by publication or by mail. The notice to the stockholders must include the plan of merger the summary of the plan of merger. What is the REMEDY of the stockholder if he does not agree to the plan of merger? Appraisal right. Under Sec 81 of the Corporation Code the stockholder must be present in the stockholders meeting in which the merger was taken up. So you cannot exercise your appraisal right unless you dissented from the proposed corporate act like the merger. If you were absent you cannot demand your way out. The plan of merger must be approved by the stockholders representing by at least 2/3 of the outstanding capital stock of both constituent corporations in separate meetings called for that purpose.
Section 78. Articles of merger or consolidation. - After the approval by the stockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation setting forth: 1. 2. 3. The plan of the merger or the plan of consolidation; As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members; and As to each corporation, the number of shares or members voting for and against such plan, respectively.
The merger becomes effective from the time of the approval by the SEC as evidence by the certificate of merger or consolidation. If the merger is inconsistent with law, or it is deficient the SEC will give the corporation concerned the chance to rectify the mistake, if any. If it is outright contrary to law, then the SEC will reject the application. What are the effects of merger? In case of merger is there dissolution on the part of the absorbed corporation. Is the absorbed corporation deemed dissolved? Yes, because merger is a form of dissolution. The absorbed corporation ceases to exist.
One you have the board approval and stockholders approval what is the next step? You execute the articles or merger. The articles of merger will be signed by the president or vice-president of each of the constituent
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But unlike in dissolution of corporations, it is followed by liquidation. In a merger, the absorbed corporation is dissolved but there is no liquidation or distribution of assets to the stockholders. Why? Because assets, liabilities of the absorbed corporation are transferred to, assumed by the surviving corporation. What are the EFFECTS of merger or consolidation? o A single corporation is created. In the case of merger, the surviving corporation; in case of consolidation, a new or consolidated corporation. o The corporate existence of the constituent corporation cease to exist, except the surviving corporation in case of merger and the new/consolidated corporation in case of consolidation. The surviving corporation or the consolidated corporation acquires all the rights, franchises, privileges, immunities and subject to same liabilities as a corporation under the corporation code. In other words, the powers of the corporation, liabilities, obligations, franchises all of them are possessed by the surviving corporation or consolidated corporation. o All properties, whether real or personal, of the absorbed corporation are transferred to the surviving corporation. Including the receivables or any chose in action or any interest in property, real or personal. Take Note: transferred to and vested in the surviving corporation without any further act or deed. All properties basically, whether real or personal by the absorbed corporation are acquired by the surviving corporation without any act or deed. Is there a need for the absorbed corporation to sign a deed of sale to transfer each and every property to the surviving corporation? No need.
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Is there any need for a deed of conveyance or deed of assignment from the absorbed corporation to the surviving corporation? No need, because the transfer is without any act or deed. All interests are transferred to and vested in the surviving corporation without any further act or deed. o All obligation or liabilities of the absorbed corporation are acquired by the surviving corporation as if it was the one that incurred the obligations. All claims, whether pending or otherwise against the absorbed corporation can be enforced against the surviving corporation. The rights of the creditor shall not be impaired by merger or consolidation. In other words the creditors of the absorbed corporation may enforce the liabilities against the surviving corporation. All obligations are acquired by the surviving corporation. Does that include employment agreement? Illustration: Equitable Bank is the surviving bank. Is it duty bound to honor the Collective Bargaining Agreement of PCIB? Yes because that is a liability that should be honored assumed by the surviving bank. Does it mean that there will be 2 CBAs (CBA for Equitable and CBA for PCIB)? Yes, because these are both obligations. This is only until such time that they arrive at a common CBA for both employees.
Is Equitable duty bound to absorb all the employees and officers of PCIB? Yes, because employment agreements are liabilities and they to be assumed by the surviving corporation. What is the available remedy to Equitable in such case knowing that Merger and consolidation are not grounds for termination of employment?
It has to absorb all the employees of PCIB but without prejudice to its right to declare certain positions redundant. While merger is not a ground, redundancy is a ground. i.e. You cannot have two corporate secretaries. You cannot have two heads to legal, of securities, of finance, comptroller. You cannot have 2 branch managers of one branch. You let go of people who are redundant or find other suitable positions for them. Under the Labor Code in case of redundancy the employee gets separation pay equivalent to 1 month salary for every year of service tax free (cause not within the control of the employee). y All obligations and liabilities of the absorbed corporation acquired and assumed by the surviving corporation as if it were the one incurred the obligations. All pending claims and actions against the absorbed corporation may be prosecuted or enforced by or against the surviving corporation and no creditors will be impaired by reason of merger or consolidation.
REVIEW
Procedures on plan of merger y Approval of plan of merger by at least majority of the board of each constituent corporations y Approval of the plan by the stockholders representing at least 2/3 of the outstanding capital stock of each of the constituent corporations in a meeting called for that purpose y The execution of the Articles of Merger y If the corporation is a special corporation governed by special laws like banks, insurance companies, public utility corporations, then the filing of the Articles of Merger with the SEC must be accompanied by favorable endorsement from the appropriate government agency y The issuance by the SEC of the certificate of Merger is the effective date of the Merger Consequences of Merger y The combined or constituent corporations shall become a single corporation which in the case of merger, the surviving corporation in consolidation in the new corporation y The corporate existence of the constituent corporation subsist except the surviving corporation in merger y The surviving corporation or consolidated corporation shall have all the powers, franchise and immunities and subject to the same liabilities and obligations as a corporation under the corporation code y All properties, real or personal, including receivables, interest in every property of the constituent corporation shall be transferred to or vested in favor of the surviving corporation in case of merger or the consolidated corporation in case of consolidation.
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BABST VS CA Can the debtor of the absorbed corporation refuse to pay the surviving corporation on the argument that there was novation because there is a change of creditor from the absorbed corporation to the surviving corporation and novation requires consent of the debtor to become effective? The debtor of the absorbed bank refuses to pay the surviving bank because of novation (change of creditor). A bank with which another bank was merged can sue a debtor of the absorbed bank because it acquired the rights of the absorbed bank. Novation (because of the change of creditor) is not a valid defense because It is settled that in the merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation. Is the consent of the creditor necessary or requirement in a merger or consolidation? No, because the creditors are protected by express provision of law. The last paragraph of section 80 provides that the interest of the creditors shall not be impaired by merger or consolidation. They need not to give their consent or it is not necessary because their claims may be enforced against the surviving corporation. They are acquired by the surviving corporation by operation of law. Novation is not therefore a defense ASSOCIATED BANK VS CA What about a promissory note executed after the merger? Lets say there was a promissory note issued to the absorbed corporation and this promissory note was renewed or extended and such promissory note as extended reissued in favor of the absorbed corporation after the merger becomes effective or after it was approved by the SEC, is the debtor still liable to pay the surviving corporation or when we said that the properties of the absorbed corporation are deemed transferred to the surviving corporation, are we limiting ourselves to the properties, receivables as of the date of the effectivity of the merger? Receivables whether during or after execution of the merger or effectivity thereof are deemed acquired
by the surviving corporation. Therefore the debtor must pay the surviving corporation What is not provided in the corporation code is on top of these documents in a merger, we usually obtain a BIR ruling. A BIR ruling that the transfers of property from the absorbed corporation to the surviving corporation and the swap of shares from the absorbed corporation to the surviving corporation are not subject to tax (capital gains tax, documentary stamp tax, VAT, donors tax). The only tax that is subjected to is the original issuance of shares by a corporation. In the merger of Equitable and PCIB, Equitable at that time is the 7th largest bank in the Philippines and PCIB was the 3rd largest Bank in the Philippines. How can a small bank acquired a big bank and be the surviving corporation in the merger? Because Equitable was supported by SSS and GSIS. When Equitable acquired the shares of PCIB, they were supported by SSS and GSIS. The 2 institutions agreed to the merger with equitable bank as the surviving entity What will happen to this merger? There will be swap of shares. From the shares of PCIB to the shares of Equitable. The stockholders of PCIB will swap their PCIB shares in exchange for Equitable Bank shares. If the authorized capital stock of Equitable Bank is not enough to accommodate the shares of to be issued or swap to the stockholders of PCIB, then the authorized capital stock of Equitable will have to be increased. The shares issued as the result of the increase is subject to documentary stamp tax. So the original issuance is subject to documentary stamp tax. What about the transfer of properties from PCIB to Equitable? What about the swap of shares of PCIB with Equitable shares? They are not subject to tax, its a tax-free transaction, but there is a need to obtain a BIR ruling otherwise the BIR will keep holding you. There is a need to get a BIR ruling to confirm that it is a tax exempt transaction pursuant to the provisions of the Tax code Transfer of property of PCIB to Equitable not subject to tax because these properties are acquired by operation of law under section 80 of the corporation code. Same with the swap of shares, there is no gain realized by the stockholder PCIB by swapping there shares such that the shares of PCIB bearing stock certificates obviously do not have to be converted to shares bearing the name of equitable bank, so that is not likewise subject to tax. But all of these has to be
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confirmed in a BIR ruling. The SEC requires for a BIR ruling. But the merger becomes effective not upon the issuance of the BIR ruling but upon approval of the SEC.
Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and In case of merger or consolidation.
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Section 82. How right is exercised. - The appraisal right may be exercised by any stockholder who shall have voted against the proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares: Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (3 0) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment: and Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation.
What are the requisites of a valid exercise of appraisal right? y It can only be exercise in the cases provided by law y The stockholder must have been present during the stockholders meeting in which the vote was taken or the proposed corporate act was discussed and must his dissent to the proposed corporate act. y The must make a written demand for payment for the fair value of his share within 30 days from the date the vote was taken y He must surrender his stock certificate for notation that stock certificate is subject to appraisal right, he must do so within 10 days from the date of demand for payment of the fair value of the share. y The fair value of the share shall be the value as of the day before the vote was taken without taking into account the appreciation or depreciation of the value of the share. In case of disagreement, then 3 appraisers shall be appointed to determine the fair
value, one appraiser is appointed by the corporation, the 2nd appraiser is appointed by the stockholder and the 3rd is appointed by the nominees of the corporation and stockholder. The corporation must have unrestricted retained earnings After the stockholder has been paid of his share, the stock certificate shall be surrendered and cancelled, and such shares shall become treasury shares y decides to issue preferred shares. In that case the stockholder may exercise appraisal right. Amendment of the AOI regarding the extension of shortening of corporate term. Appraisal right may be exercised in case of extension or shortening of corporate term. (See discussion under Section 37) Sale, lease, exchange, mortgage, pledge or disposition of all or substantially all of corporate assets. (see discussion under section 40) Merger or consolidation (see discussion under section 76-80) What is not included in section 81? o Section 81 missed section 42, section 42 refers to investment of corporate funds in another business or secondary purpose. (see discussion under section 42) o In close corporation, a stockholder at any time for any reason may demand the payment of the fair value of his shares. It does not even require surplus profit. For as long it will not result to the insolvency of the corporation.
y y
Appraisal right is the right of the stockholder to demand payment of the fair value of his share after dissenting from a proposed corporate act involving fundamental changes in the corporation in the cases specified by law. It is a statutory right because it is in Section 81 of the corporation code. And such right is part of proprietary right of the stockholder, the right to demand payment of the fair value of the share but after dissenting from the proposed corporate act, such act involves fundamental changes in the corporation and only in the cases specified by law. A stockholder cannot exit or get out his investment in the corporation just because he disagrees with the corporation, management of the corporation, BOD on how the affairs are being conducted because appraisal right is limited by law. Only in those cases specified by law. It can only be exercise in the cases provided by law What are these cases? y Any amendment to the AOI which have the effect of changing or restricting the rights of stockholders or authorizing preferences superior to outstanding or existing shares. Any amendment with the shares that will change or affect the rights of the stockholders will entail the exercise of appraisal right. Amendment of the AOI regarding the extension of shortening of corporate term. Appraisal right may be exercised in case of extension or shortening of corporate term. Restricting the rights of the stockholders Like from common to preferred or preferred to common; preferred cumulative to cumulative participating. Any amendment with the shares that will change or affect the rights of the stockholders will entail the exercise of appraisal right Authorizing preferences superior to outstanding or existing shares Lets say there are no preferred shares, all common shares and the corporation
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y y
The stockholder must have been present during the stockholders meeting in which the vote was taken or the proposed corporate act was discussed. The stockholder will not dissent unless he is present in that particular meeting which the proposed corporate act was taken
Section 83. Effect of demand and termination of right. - From the time of demand for payment of the fair value of a stockholder's shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this Code, except the right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored.
What is the effect of the demand for payment of the fair value of the share? The law says, in case of demand for the payment of the fair value of the share, all rights are suspended including the right to receive dividends. The only right that is NOT suspended is the surpluses (the right to demand payment of the fair value of the share). It is surpluses because that is the very essence of appraisal right.
Section 84. When right to payment ceases. - No demand for payment under this Title may be withdrawn unless the corporation consents thereto. If, however, such demand for payment is withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the Securities and Exchange Commission where such approval is necessary, or if the Securities and Exchange Commission determines that such stockholder is not entitled to the appraisal right, then the right of said stockholder to be paid the fair value of his shares shall cease, his status as a stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to him.
In what cases are the rights restored? y If no payment is made within 30-days from the award was made. In case of disagreement on the fair value of the shares, 3 appraisers shall determine the fair value of the shares and the award of appraisers is supposed to be final and it must be paid within 30 days from the award was made. If the value is not paid within that period, then the rights of the stockholder are restored. y Under the law, in case the proposed corporate act is abandoned or not implemented by the corporation. y In case the SEC rejects or disapproves the corporate act that triggers the exercise of appraisal right. Only those corporate acts that requires SEC approval that is contemplated under this case. Take note that not all corporate acts need SEC approval. y If the SEC determines that the stockholder is not entitled to appraisal right. (if all the requisites are not present) Can the transferee demand the payment of the fair value of the shares? No, because once the shares are sold then it ceases to be subject to appraisal right. So the buyer acquires all the rights of a regular stockholder. The law even says that the right to receive dividends which would have accrued from the shares had there been no appraisal right would likewise inure to the benefit of the buyer.
Section 85. Who bears costs of appraisal. - The costs and expenses of appraisal shall be borne by the corporation, unless the fair value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the stockholder, in which case they shall be borne by the latter. In the case of an action to recover such fair value, all costs and expenses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was unjustified. Section 86. Notation on certificates; rights of transferee. - Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee. 131
Who bears the cost of appraisal? y The Corporation bears the cost of appraisal in the following cases: 1. If the price that the corporation is willing to pay is lower than the value as determine by the appraisers 2. In an action to recover the cost of appraisal in case the refusal by the stockholder is justified y The stockholder bears the cost of appraisal in the following cases: 1. If the price that the corporation is willing to pay is approximately the same as determine by the appraisers 2. In an action to recover the cost of appraisal in case the refusal by the stockholder is unjustified
Section 87. Definition. - For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this C ode on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. Section 88. Purposes. - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations.
Existence of Capital Stock y Stock Corporation has a capital stock divided into shares y Non-stock Corporation no authorized capital stock But is it possible for a membership in a non-stock corporation to be evidenced by share? (CARAG VS GOLF AND COUNTRY CLUB and CLEMENTE VS CA) Valley Golf and Country Club is a non-stock corporation, it has no authorized capital stock but the membership is the Valley Golf and Country club is evidenced by a golf share. Does that make it a stock corporation? No, because it has no authorized capital stock divided into shares, it is such that membership is evidenced by golf shares If it is a non-stock corporation, then the treasurer need not to submit a treasurers affidavit that at least 25% of has been subscribed and paid-up.
Profit y In Non-stock Corporation, if it is provided in the AOI, the right to vote may be broaden, denied or delimited. And the SC said that voting by district is a form of limitation on the right to vote for Non-stock Corporation. What is voting by district? Lets say 5 members from Luzon, 5 from Visayas and 5 from Mindanao, all members from Luzon vote 5, all members in visayas vote 5 so on Voting by district does not apply in Stock Corporation but it that can apply to Non-stock Corporation if such form of voting is specified in the AOI or by-laws of such non-stock corporation.
Section 90. Non-transferability of membership. - Membership in a non-stock corporation and all rights arising therefrom are personal and nontransferable, unless the articles of incorporation or the by-laws otherwise provide.
Stock Corporation is organized for profit; Non-stock Corporation is not organized for profit.
Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof.
But that is not to say that the non-stock corporation should not earn profit. There is nothing wrong with that for as long as the profit is not distributed to the members and used in furtherance of the purpose for which the corporation is organized Distribution of Profits y Stock Corporation - the profits can be distributed thru dividends to the stockholders y Non-stock corporation - there no dividends so profits are not distributable
Section 89. Right to vote . - The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote. Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code. (n) Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission.
Membership y Stock Corporation - membership is not personal, the shares can be disposed of without the consent of the corporation. They can sell freely and voluntarily unless there is a right of restriction in the AOI. The rights are transferrable y Non-stock Corporation membership is nontransferable because it took it into account he personal qualification of the members
Section 91. Termination of membership. - Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws. Termination of membership shall have the effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by-laws.
Right to vote y Stock Corporation cumulative method of voting is a statutory right, it cannot be denied in the AOI. In section 24, during the regular, annual stockholders meeting for the purpose of electing directors, all the stockholders must be present in person or by proxy and no stockholder may be denied the right to resort to cumulative type of voting. The right to vote cannot be denied
Does that apply to non-stock corporation? In AO-AS VS CA, the SC said that voting by district is allowed for non-stock corporation. Is voting by district allowed in Stock Corporation? No, because in a stock corporation, all stockholders should be present in one quorum and meeting.
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Grounds for termination of membership or expulsion y Stock corporation a stockholder cannot forfeit his share; the corporation cannot forfeit his share because such shares are owned by the stockholder even in case of violation of the AOI or by-laws of the Corporation y Non-stock Corporation the grounds for expulsion or termination of membership may be provided for in the AOI or by-laws. Can we terminate the stockholdings of a stockholder in the event that he violates the provision of the by-laws or AOI? Is a ground for forfeiture of shares because the stockholder violates or does not comply with the by-laws or AOI of the corporation. (CLEMENTE VS CA and CHINA BANK VS CA).
The by-laws of Valley Golf and country club provides that the corporation have a lien on the shares in case of non-payment of dues and assessments and that the some shares were sold at auction. The issue is whether the sale is valid on account of the by-laws provision that there is a lien on the share for nonpayment of dues and assessment. The SC said that it cannot be equated to a chattel mortgage or pledge, the by-laws provision creating a lien cannot be a formed or cannot be equated to a chattel mortgage or pledge because it is not a bilateral contract between a stock holder and the corporation. There must be a separate instrument of pledge or chattel mortgage to make them a security for non-payment of dues or assessments. The SC likewise said that while membership in Valley Golf and Country club is evidenced by a golf share, it is a non-stock corporation. Being a non-stock corporation, the grounds for termination of membership apply under the AOI or by-laws. But if it is coupled with property (membership is evidenced by proprietary interest) or if it is coupled with proprietary interest, there must be compliance with substantive justice. Stock - Stockholder cannot forfeit his shares, he has to sell his shares, and it is inherent to ownership. He has to dispose his share; hence there can be no forfeiture. Non stock - a member can be expelled on the grounds specified in the AOI or by-laws, but if membership is coupled with proprietary interest, then there must be compliance with substantial justice. The SC compared the case of CLEMENTE with LONG VS BASA. In LONG VS BASA, a member of religious sect disowned the teachings of the sect. without due process, the religious sect which is a non-stock corporation expelled him in his membership without any hearing or notice. The SC affirmed the validity of expulsion because it is provided in the by-laws. This case is compared with CLEMENTE case, in this case, if it involves a proprietary right, the corporation cannot just suspend or terminate membership, there must be compliance with due process.
133 Section 92. Election and term of trustees. - Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising onethird (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period. No person shall be elected as trustee unless he is a member of the corporation. Unless otherwise provided in the articles of incorporation or the by-laws, officers of a non-stock corporation may be directly elected by the members.
Term of directors y Stock Corporation 1 year until the successor is elected or qualified y Non-stock Corporation - staggered term What is staggered term? The first set of directors should organized themselves such that 1/3 of the total number of class will have the term only for 1 year; the second 1/3 is for 2 years; the remaining 1/3 is for 3 years. Thereafter, there will be election and the successors will have a term of 3 years. So every year, therefore, 1/3 of the class will be replaced. How many directors are allowed in: y Stock Corporation not less than 5 not more than 15 except in case of merger or consolidation were the law allows 21 directors y Non-stock Corporation by express provisions of law, a non-stock corporation can have more than 15 trustees There is no formal SEC opinion yet whether or not it must be divisible by 3. But according to the SEC director, it may not be divisible by 3 for as long as 1/3 is replaced every year. And such 1/3 is not absolutely 1/3. (Only an informal encounter of Dean with the SEC director)
Section 93. Place of meetings. - The by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines.
Meetings y Stock Corporation stockholders meeting should be conducted in the city or municipality where the principal office is located but preferably in the principal office itself
y Non-stock Corporation anywhere for as long as it is within the Philippines. Need not be in the principal office. Right to vote stockholders cumulative method of voting is a statutory right, it cannot be denied in the AOI. the right to vote may be broaden, denied or delimited as provided in the AOI. voting by district is a form of limitation on the right to vote for Non-stock Corporation. membership is non-transferable
In case of dissolution y Stock corporation - governed by the chapter on dissolution under the corporation code y Non-stock corporation governed by the procedure under the chapter on non-stock corporation
Membership
Grounds for expulsion
Term Limit STOCK CORPORATION VS NON-STOCK CORPORATION STOCK Stock Corporation has a capital stock divided into shares Organized for profit the profits can be distributed thru dividends to the NON-STOCK Non-stock Corporation has no authorized capital stock Not organized for profit there no dividends so profits are not distributable
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Existence of Capital Stock
Number of directors
Profit Distribution of profits
Membership is not personal, hence transferable. The shares can be disposed of without the consent of the corporation. They can sell freely and voluntarily unless there is a right of restriction in the AOI. a stockholder cannot forfeit his share; the corporation cannot forfeit his share because such shares are owned by the stockholder even in case of violation of the AOI or bylaws of the Corporation 1 year until the successor is elected or qualified not less than 5 not more than 15 except in case of merger or consolidation were the law allows 21 directors stockholders meeting should be conducted in the
the grounds for expulsion or termination of membership may be provided for in the AOI or bylaws.
staggered term
by express provisions of law, a non-stock corporation can have more than 15 trustees.
Meetings
anywhere for as long as it is within the Philippines.
city or municipality where the principal office is located but preferably in the principal office itself governed by the chapter on dissolution under the corporation code Need not be in the principal office. 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefore; Assets held by the corporation requiring surrender or return upon certain condition, which condition occurs by reason of dissolution should be return to that transferor or donor There assets held by the corporation which can only be used for charitable or similar purposes but which are held not upon the condition requiring the return in case of dissolution, in which case, if the assets are to be used only for charitable purposes or similar purposes, then they must be donated to this institution organized for the same purposes. It cannot be appropriated by the corporation nor distributed to the members of the corporation Any other assets will be distributed in accordance with the articles or by-laws of the corporation to the extent that distributive rights of the members is so specified In case of default, meaning, if the articles do not apply, a plan of distribution or liquidation may be adopted by the board of trustees by majority vote and by the members by at least 2/3 of the members of total membership
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3. governed by the procedure under the chapter on non-stock corporation
dissolution
Section 94. Rules of distribution. - In case dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefore; Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements; Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter; Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the by-laws, determine the distributive rights of members, or any class or classes of members, or provide for distribution; and In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter.
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Can we convert a non-stock corporation into a stock corporation or from stock to non-stock? A non-stock corporation may be converted to Stock Corporation but a stock corporation cannot be converted to Non-stock Corporation. How to convert a non-stock to stock? The assets of the non-stock corporation will be the contribution of the members to the stock corporation.
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Section 95. Plan of distribution of assets. - A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner: The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in this Code for the giving of notice of meetings to members. Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the members having voting rights present or represented by proxy at such meeting.
Can we merge a stock corporation with a non-stock corporation? Yes, because all the properties of the absorbed corporation shall be acquired by the surviving corporation A stock corporation cannot be converted to Non-stock Corporation because the purpose is incompatible with each other Can we apply the provision of stock corporation to non-stock corporation to the extent that the provisions in the non-stock corporation is incomplete, inadequate with the provisions in stock corporation in a suppletory basis?
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Dissolution of Non-stock Corporation
Yes, in case of conflict the provision of non-stock corporation shall prevail Is there a provision under the non-stock corporation in filling up the vacancies? None, the provisions in the Stock Corporation shall apply in suppletory character, hence the BOT can fill up the vacancies provided that the BOT still constitute a quorum and the ground is only resignation.
Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least twothirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.
y y y y y y y y
Mining Oil companies Stock exchange Banks Insurance companies Public Utility Corporations Educational Corporations or Any corporation impressed with public interest
Can there be a right of first refusal in an Open corporation? Can the AOI provide that a stockholder cannot sell his shares unless he first offers the sale to his co-stockholder? Yes, for as long as the restriction is in the AOI and by-laws and printed in the stock certificate Section 98 can be made to apply to open corporation provided that such restriction is in the AOI and by-laws and printed in the stock certificate What are the conditions for valid restrictions on transfers? (applicable to open and close corporation) y As to form the restriction on transfer must be in the AOI, by-laws and printed in the stock certificate y It cannot be more onerous than the right of first refusal. The restriction can be more burdensome or onerous that the option given to the corporation or the stockholder to buy the shares of the selling stockholder. If the restriction is more onerous than the right of first refusal, it is invalid.
is the corporation considered close just because there are 5 stockholders or 15 stockholders? In SAN JUAN STRUCTURAL AND STEEL FABRICATORS INC. VS CA, the SC said husband and wife owned 99.8% of the corporation but that does not make it a close corporation. Narrow ownership of shares is not the only consideration or feature of a close corporation. A corporation is considered a closed corporation is the AOI provide for the following features: (essential features of close corporation) y Stockholdings, exclusive of treasury shares shall be held by stockholder of record not exceeding 20. We cannot have more than 20 stockholders in a close corporation y The shares are not available for listing in the stock exchange y Shares are subject to certain restriction on transfers as may be specified in the AOI and by-laws and printed in the stock certificate. (applicable also to open stock corporations) What are those corporations which are not allowed to be a close corporations?
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Can the AOI provide that the consent of the corporation shall be obtained in case the stockholder sells his shares? No, such restriction is more onerous than the right of first refusal
Section 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this C ode.
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The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect:
Section 100. Agreements by stockholders. 1. 2. No meeting of stockholders need be called to elect directors; Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and The stockholders of the corporation shall be subject to all liabilities of directors. 1. Agreements by and among stockholders executed before the formation and organization of a close corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, except those required by this Title to be embodied in said articles of incorporation. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this C ode on directors. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance.
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The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. 2. Section 98. Validity of restrictions on transfer of shares. - Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person. Section 99. Effects of issuance or transfer of stock in breach of qualifying conditions. 1. If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder. If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such number, and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either (a) that he is a person not eligible to be a holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the transferee. The provisions of subsection (4) shall not be applicable if the transfer of stock, though contrary to subsections (1), (2) or (3), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title. The term "transfer", as used in this section, is not limited to a transfer for value. The provisions of this section shall not impair any right which the transferee may have to rescind the transfer or to recover under any applicable warranty, express or implied. 137
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Section 101. When board meeting is unnecessary or improperly held. - Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: 1. 2. 3. 4. Before or after such action is taken, written consent thereto is signed by all the directors; or All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing.
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If a director's meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof. Section 102. Pre-emptive right in close corporations. - The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise. Section 103. Amendment of articles of incorporation. - Any amendment to the articles of incorporation which seeks to delete or remove any provision required by this Title to be contained in the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for
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amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose. Section 104. Deadlocks. - Notwithstanding any contrary provision in the articles of incorporation or by-laws or agreement of stockholders of a close corporation, if the directors or stockholders are so divided respecting the management of the corporation's business and affairs that the votes required for any corporate action cannot be obtained, with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally, the Securities and Exchange Commission, upon written petition by any stockholder, shall have the power to arbitrate the dispute. In the exercise of such power, the Commission shall have authority to make such order as it deems appropriate, including an order: (1) cancelling or altering any provision contained in the articles of incorporation, by-laws, or any stockholder's agreement; (2) cancelling, altering or enjoining any resolution or 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 stockholder, 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; (6) dissolving the corporation; or ( 7) granting such other relief as the circumstances may warrant. A provisional director shall be 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. A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the Commission or by all the stockholders. His compensation shall be determined by agreement between him and the corporation subject to approval of the Commission, which may fix his compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation. Section 105. Withdrawal of stockholder or dissolution of corporation. - In addition and without prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution of such corporation whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted.
Open Corporation vs Close Corporation OPEN no limit on the number of stockholder the shares may be listed in the stock exchange BOD exercises corporate powers; acts of management are performed by the BOD. There are certain powers that are reserve to Stockholders but such powers do not pertain to the management of the corporation. These are residual powers of the
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Number of stockholders Stocks listed in the stock exchange Management by Stockholders
CLOSE not exceeding 20
the shares cannot be listed in the stock exchange Stockholders may actively participate in the management of the Corporation. The consequence is that if the stockholders are actively involve in the management of the corporation, then they should be subjected to the same liabilities as members of the
corporation. BOD. They can be made liable for corporate tort unless the corporation obtain adequate liability insurance coverage Formalities are dispensed with; an action may be implemented by the corporation sans prior or after board meeting for as long as the stockholders are accustomed in doing in this manner or no objection from them or the directors consent before or after the meeting. Preemptive right extends to any or in all issuance of shares whether for the payment of a debt or exchange of property. Preemptive right extends to treasury shares by explicit provision of law fair value of shares regardless of existence of retained earnings for as long as it will not result to the insolvency of the corporation In case of deadlock in the management of the corporation, the SEC may intervene and can do certain acts which would have not been allowed to do in open corporations. Any stockholder who thinks there is mismanagement or fraud in the corporation may petition with the SEC to dissolve the corporation.
SEC interference
Business Judgment Rule
Meetings
meetings of the BOD, teleconference, video conference is allowed, still there is a meeting in which the resolution is taken up and adopted by the BOD
Dissolution
Preemptive right
Preemptive right does not extend to issuance of shares in payment of a debt or in exchange of property unless ratified by the stockholders owning at least 2/3 of the outstanding capital stock. Preemptive right extends to treasury shares by way of SEC opinion. it can only be exercise in a case provided for by law; it can be exercised if there is unrestricted retained earnings
in case of voluntary dissolution, the approval of the majority vote of the BOD and stockholders representing at least 2/3 of the outstanding capital
Can the SEC interfere with an open corporation? Let say there is a disagreement among the BOD or stockholders, can the SEC interfere? Can the courts intervene? No, because of the Business Judgment Rule What about in case of close corporation? In case of deadlock in the management of the corporation, the SEC may intervene and can do certain acts which would have not been allowed to do in open corporations. Some of the provisions under close corporation are applicable to open corporations: y Restriction on transfers y Classification of shares y Qualifications of directors y Pulling of shares /and manner of voting SPECIAL CORPORATIONS y Educational Corporations y Religious Corporations
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Appraisal right
it can be exercise for any reason or for no reason at all; a stockholder may want out and demand the payment of the
Section 106. Incorporation. - Educational corporations shall be governed by special laws and by the general provisions of this Code. (n) Section 107. Pre-requisites to incorporation. - Except upon favorable recommendation of the Ministry of Education and Culture, the Securities and Exchange Commission shall not accept or approve the articles of incorporation and by-laws of any educational institution. (168a) Section 108. Board of trustees. - Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5). Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority of trustees shall be defined in the by-laws. For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations.
In non-stock corporations in general the term STAGGERED means that 1/3 will be replaced every year. With respect to non-stock educational corporations, exception to the 3 year term, the term of office is 5 years but the first trustees so qualified and elected shall classify themselves such that 1/5 of the trustees shall have a term only of 1 year and every shall be elected to fill up the remaining period of 5 years. Thereafter they will have a full term of 5 years. Whether it is educational, stock, or non-stock corporation, it cannot be organized without the favorable endorsement of the appropriate government agency. In this case CHED or DECS as the case may be. y CHED for higher learning y DECS for primary and tertiary level
Section 109. Classes of religious corporations. - Religious corporations may be incorporated by one or more persons. Such corporations may be classified into corporations sole and religious societies. Religious corporations shall be governed by this Chapter and by the general provisions on non-stock corporations insofar as they may be applicable.
EDUCATIONAL CORPORATIONS These are corporations organized for the purpose of providing facilities for instruction and learning. Educational Corporations are governed by the Educational Act of 1982 (excluded in the bar exam) and the provisions of the Corporation Code in a suppletory basis. What are the relevant provisions under the Corporation with respect to Educational Corporations? An educational corporation may be organized as a stock or non stock corporation. If the educational corporation is organized as a STOCK corporation: y the number of directors are similar to that of a regular corporation not less than 5 not more than 15. y the term of office is 1 year until the successors are elected and qualified. If it is a NON-STOCK corporation: The number of corporation is still the same not less than 5 not more than 15 but divisible by 5 (multiples of 5). Why is it a multiple of 5? Because the terms of trustees of non-stock educational corporation is staggered basis like in non-stock corporations.
RELIGOUS CORPORATIONS These may be classified into: y Corporation sole y Religious society
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 of such religious denomination, sect or church.
What is a CORPORATION SOLE? It is a corporation organized by the bishop, the presiding elder, rabbi or any head of religious sect or denomination for the purpose of administering, managing the temporalities, affairs, estate and properties of such religious sect or denomination. Illustration: The Bishop, Cardinal X head of the Catholic Bishop of Malolos, has a natural character. He may organize himself as a corporation sole in which case he may have a juridical character separate from his natural character. In his juridical character he serves as trustee for the purpose of administering and managing the affairs of the Roman Catholic Bishop in Malolos or any religious sect or denomination for that matter.
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It is very important to make a fine distinction between the natural character and juridical character in terms of capacity to acquire private lands in the Philippines. Illustration: The head, presiding, elder, bishop, or rabbi of the corporation sole is a foreigner can he acquire private land in the Philippines? Taking away his juridical character as a corporation sole, foreigner cannot acquire private lands in the Philippines except by way succession. When, however, he organized himself as a corporation sole which is separate character from his natural character can he now acquire private land in the Philippines as trustee for his religious sect or denomination? Is the nationality of the presiding elder or bishop of the corporation sole necessarily determine the qualification of the corporation to acquire private land in the Philippines? The rule is that if at least 60% of members of the religious sect or denomination are Filipinos the corporation sole regardless of the nationality of the presiding elder or bishop may acquire private land in the Philippines. He is only acting as trustee for his religious sect or denomination. He is not acting in his personal capacity. If he is acting in his personal capacity he cannot acquire private land in the Philippines.
Section 111. Articles of incorporation. - In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file with the Securities and Exchange Commission articles of incorporation setting forth the following: 1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious denomination, sect or church and that he desires to become a corporation sole; That the rules, regulations and discipline of his religious denomination, sect or church are not inconsistent with his becoming a corporation sole and do not forbid it; That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with the administration of the temporalities and the management of the affairs, estate and properties of his religious denomination, sect or church within his territorial jurisdiction, describing such territorial jurisdiction; The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi of presiding elder is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect or church to which he belongs; and 141
The place where the principal office of the corporation sole is to be established and located, which place must be within the Philippines.
The articles of incorporation may include any other provision not contrary to law for the regulation of the affairs of the corporation. (n) Section 112. Submission of the articles of incorporation. - The articles of incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public. From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof.
How is a corporation sole ORGANIZED? Being a corporation sole there is no problem about authorized capital stock, subscribed capital stock, paid-up capital stock. It is accomplished by simply filing verified articles of incorporation with the SEC. o The articles of incorporation have to provide that the presiding bishop, elder or head desires to organize himself as a corporation sole and that the rules, regulations and discipline of the religious sect or denomination are not inconsistent with the formation of the corporation sole or do not forbid such formation; o As trustee of the corporation sole he will manage the affairs, properties, estate of the religious sect or denomination; o The manner of filling up the vacancy; and o The place where the corporation sole is located or shall be established. Once filed, ergo, the bishop is transformed into a corporation sole. From the very moment the articles of incorporation are filed with the SEC he is transformed into a corporation sole. It does not require the issuance by the SEC of the certificate incorporation unlike in an ordinary
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corporation. From that moment on, he acquires a juridical character distinct from his natural character and capacitated as trustee to acquire manage the temporalities, affairs and estate of his religious sect or denomination.
Section 113. Acquisition and alienation of property. - Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the Court of First Instance of the province where the property is situated upon proof made to the satisfaction of the court that notice of the application for leave to sell or mortgage has been given by publication or otherwise in such manner and for such time as said court may have directed, and that it is to the interest of the corporation that leave to sell or mortgage should be granted. The application for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination, sect or church represented by the corporation sole: Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary.
You need to go to court only if the rules and regulations of the religious sect are silent on the manner of the disposing the properties of the corporation.
Section 114. Filling of vacancies. - The successors in office of any chief archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation sole shall become the corporation sole on their accession to office and shall be permitted to transact business as such on the filing with the Securities and Exchange Commission of a copy of their commission, certificate of election, or letters of appointment, duly certified by any notary public. During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church incorporated as a corporation sole, the person or persons authorized and empowered by the rules, regulations or discipline of the religious denomination, sect or church represented by the corporation sole to administer the temporalities and manage the affairs, estate and properties of the corporation sole during the vacancy shall exercise all the powers and authority of the corporation sole during such vacancy. (158a) Section 115. Dissolution. - A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Securities and Exchange Commission a verified declaration of dissolution. The declaration of dissolution shall set forth: 1. 2. 3. 4. The name of the corporation; The reason for dissolution and winding up; The authorization for the dissolution of the corporation by the particular religious denomination, sect or church; The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation.
May a corporation sole acquire properties? Yes. Take note: A corporation sole may acquire properties without court intervention. The property may be acquired through purchase, donation and other lawful means. It is said that the Catholic Church can receive donation even from gamblers, jueteng lords for as long as the properties are used in furtherance of the purpose of the corporation. It is way of mitigating the liabilities of the donor. Can the Catholic Church sell, convey, encumber, pledge, or mortgage properties of the corporation? It cannot dispose of or encumber properties without court intervention. A petition will have to be filed before the court, for leave of court to sell, dispose of or encumber the properties of the corporation. So the bishop or presiding elder of the sect will have the secure the approval of the court, UNLESS the rules and regulations of the religious sect provide for and regulate the manner of disposing of, encumbering, alienating of properties in which case, court intervention is not necessary.
Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs.
How do you DISSOLVE a corporation sole? By filing a verified affidavit of dissolution of the corporation sole, the reason why the corporation is being dissolved, and how the dissolution shall be carried out. Does the corporation sole have a TERM? None. Does it mean that it can exist forever or indefinitely? Yes, because one of the requirements of the SEC to form a corporation sole is the manner of filling up the vacancy. Because the successor of the presiding elder will have to simply submit to the SEC his proof of appointment, his commission and whoever becomes the elder the corporation sole, there is principle of succession. So whoever takes the place of the presiding elder becomes the corporation sole by submitting his commission to the SEC.
Section 116. Religious societies. - Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, unless forbidden by the constitution, rules, regulations, or 142
discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties and estate by filing with the Securities and Exchange Commission, articles of incorporation verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious society or religious order, or diocese, synod, or district organization of the religious denomination, sect or church, setting forth the following: 1. That the religious society or religious order, or diocese, synod, or district organization is a religious organization of a religious denomination, sect or church; That at least two-thirds (2/3) of its membership have given their written consent or have voted to incorporate, at a duly convened meeting of the body; That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious denomination, sect, or church of which it forms a part; That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate; The place where the principal office of the corporation is to be established and located, which place must be within the Philippines; and The names, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese, synod, or district organization to serve for the first year or such other period as may be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district organization, the board of trustees to be not less than five (5) nor more than fifteen (15).
Here, the member was espousing beliefs and tenets contrary to the teachings of the religious sect or denomination. He was expelled from the corporation without due process (without prior notice). SC said it is valid because the very essence of the religious corporation is adherence to its tenets beliefs and tenets. So, if anyone advocates a belief or a principle contrary to the teachings of the religious faith or denomination may be expelled even without due process. If it is coupled with proprietary interest like in the cases CLEMENTE VS CA, CARAG vs CALCO, CALCO VS CARAG then it has to be with due process. Members cannot be expelled without due process. DISSOLUTION OF THE CORPORATION Dissolution is the extinguishment of corporate franchise; termination of corporate existence. If a corporation is dissolved then it ceases to exist and cannot continue with its business; it cannot enter into new business; it cannot undertake any activity meant to promote the purpose for which it was organized. If a corporation is dissolved, whether voluntarily or involuntarily (expiration of term, annulment or forfeiture of its franchise, or any other modes), the corporation exist only for one thing to liquidate and wind up its corporate affairs.
Section 117. Methods of dissolution. - A corporation formed or organized under the provisions of this C ode may be dissolved voluntarily or involuntarily.
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Another kind of religious Corporation is a RELIGIOUS SOCIETY RELIGIOUS SOCIETY Also composed of many members like the Dominicans, Franciscans, Pink Sisters, Carmelite Nuns/Sisters and other religious societies They can be organized as a corporation independently of the religious society. The religious society can be converted/transformed into a corporation and therefore can acquire properties and therefore have all the powers of a corporation as long as there is approval of at least 2/3 of the total number members and the rules and regulations of the religious society do not forbid creation/formation of a religious corporation. LONG VS BASA The grounds for expulsion of membership in a nonstock corporation is justified with respect to religious corporations, for as long as the rules provide for the grounds for expulsion even without prior notice or hearing it is valid unlike membership which is coupled with proprietary interest.
What are the MODES of dissolution under the Corporation Code? y Voluntary Mode o By Petition of the Corporation were Creditors are Not Affected. o By Petition of the Corporation where Creditors are Affected o Shortening the Corporate term o In case of Corporation sole by filing an affidavit of Dissolution o Merger and Consolidation y Involuntary Mode y By court order through a quo warranto proceeding
Section 118. Voluntary dissolution where no creditors are affected. - If dissolution of a corporation does not prejudice the rights of any creditor having a claim against it, the dissolution may be effected by majority vote of the board of directors or trustees, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members of a 143
meeting to be held upon call of the directors or trustees after publication of the notice of time, place and object of the meeting for three (3) consecutive weeks in a newspaper published in the place where the principal office of said corporation is located; and if no newspaper is published in such place, then in a newspaper of general circulation in the Philippines, after sending such notice to each stockholder or member either by registered mail or by personal delivery at least thirty (30) days prior to said meeting. A copy of the resolution authorizing the dissolution shall be certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation. The Securities and Exchange Commission shall thereupon issue the certificate of dissolution. (62a) week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or city. Upon five (5) day's notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation.
1st Mode: VOLUNTARY MODE y By Petition of the Corporation were Creditors are Not Affected. y By Petition of the Corporation where Creditors are Affected By Petition of the Corporation were Creditors are Not Affected. The petition is 1st filed with the SEC, coupled by resolution signed by at least majority of the board of directors or trustees as the case may be, and by stockholders representing at least 2/3 of the outstanding capital stocks or at least 2/3 of the members if it is a non-stock corporation. Before the approval of the SEC of the dissolution, there will be publication for once a week for 3 consecutive weeks in the place where the principal office is located; and in default if there is no newspaper there, in a newspaper of general circulation in the Philippines; Thereafter the SEC will issue a certificate of dissolution. If the corporation in its own volition files a petition for dissolution where creditors are not affected still it requires the approval by the SEC to make sure that creditors are not affected.
Section 119. Voluntary dissolution where creditors are affected. - Where the dissolution of a corporation may prejudice the rights of any creditor, the petition for dissolution shall be filed with the Securities and Exchange Commission. The petition shall be signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least twothirds (2/3) of the members at a meeting of its stockholders or members called for that purpose. If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition, fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at least once a 144
By Petition of the Corporation were Creditors are Affected How do you distinguish the 1st from the 2nd? In terms of notice to stockholders; publication requirement, both are the same If the creditors are affected the SEC must conduct a HEARING to determine the claims of the various creditors. The petition will have to be signed by at least majority of the board or trustees and approved likewise by the stockholders representing at least 2/3 of the outstanding capital stocks and countersigned by the president and the corporate secretary. Upon filing the SEC will set the date, time and place of the hearing which shall not be less than 30 days but not later than 60 days after the entry of the order. Before the hearing the law requires publication of the notice of hearing once a week for 3 consecutive weeks. In formalities, in approval both voluntary modes are the same board (majority), stockholders/members (2/3), publication. The distinction lies in the SEC conducting a hearing If creditors are affected the corporation is required to set forth in its the petition the various creditors of the corporation. It is possible that some times this is omitted, hence the need for publication for the public to know that the corporation intends to dissolve of itself. So that they can come forward and file their claims with SEC conducting a hearing. Is consent of the creditor necessary to dissolve the corporation? If there are creditors who oppose the dissolution can the creditors be approved?
Consent of the creditors is not necessary to approve the dissolution because there is a proceeding where their interest will be protected. This is through in liquidation of corporate properties. The end objective of liquidation is to pay-off the claims of the creditors the distribution of the remaining assets to the stockholders. So there is no cause for complaint insofar as the creditors are concerned. Even if they object or did not give their consent the dissolution will still be approved by the SEC. Once approved the SEC will render a judgment dissolving the corporation and proceed to liquidation of corporate assets and properties.
Section 120. Dissolution by shortening corporate term. - A voluntary dissolution may be effected by amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this Code. A copy of the amended articles of incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon approval of the amended articles of incorporation of the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings, subject to the provisions of this C ode on liquidation.
The board hereby approves the dissolution of the corporation...; the stockholders hereby confirms the dissolution of the corporation... Resolved that Article X of the Articles of Incorporation be amended to read as follows: The term of the corporation shall be 50 years from March 11, 2001 to the term of the corporation shall be (number of years) as the case may be. Otherwise the SEC will not approve or process your application. What happens if you shorten the corporate term and the creditors come forward to oppose the petition? Can the SEC still approve the proposed amendment? There will be a conversion into a situation akin to filing of petition were creditors are affected. In other words the SEC will conduct a hearing to determine the claims against the corporation to determine whose claims are valid and once specified then the SEC will dissolve the corporation and order its liquidation. In case of corporation sole by filing an affidavit of dissolution In case of merger or consolidation In merger the absorbed corporation ceases to exist. In consolidation the constituent corporations cease to exist to give rise to a new corporation called consolidated corporation. Except that in merger and consolidation, there is no liquidation procedure, because the properties or assets of the absorbed corporation are transferred to or assumed by operation law by the surviving corporation or the new corporation. 2 Mode: INVOLUNTARY MODES What are INVOLUNTARY modes? Against the will; not the volition of the corporation SEC order or decree in the following cases: y Failure to commence business within 2 years from incorporation under Sec 22. y Continuous inoperation for a period of 5 years under Sec 22. y Fraud or misrepresentation in procuring the articles of incorporation
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Shortening of Corporate Term (Sec. 37) This entails an amendment of the articles of incorporation. You have to get the consent/approval of the majority of the board and stockholders representing 2/3 of the outstanding capital stocks or 2/3 of the members in case of Non-stock Corporation. If it is a bank, insurance company, public utility corporation, education corporations, corporation governed by special law, the shortening of the corporate term must be accompanies by favorable endorsement from the public agency concerned otherwise the SEC will not act on the application. The resolution of the board and the stockholders, as well as the corresponding amendments to the articles must show the provisions sought to be amended (from this provision to this provision). The resolution of board and stockholders must indicate not just to dissolve the corporation, not just the approval of the board and the stockholders to dissolve the corporation. It should likewise indicate the provision of the articles of incorporation sought to be amended by reason of the dissolution. Illustration:
y y y Refusal to comply or violation of laws, rules, and regulations implemented by the SEC Failure to submit reports as required by law and the SEC. Failure to submit by-laws within one month from incorporation BIR that you have paid taxes. The SEC will not approve unless you have presented clearance. If it is involuntary mode like when the SEC orders the dissolution because of non-compliance with the submission of reports or other requirements their own website does not indicate that BIR clearance must be obtained. If it is voluntary, there is a need for BIR clearance If it is involuntary, there is no need for a BIR clearance In some cases, you can work for the interest of your client. If you cannot get BIR clearance because you have to pay taxes but you want to dissolve the corporation, the involuntary mode becomes a useful tool to achieve your objective. 3rd Mode: BY COURT ORDER THROUGH A QUO WARRANTO PROCEEDING. Can a stockholder file a quo warranto proceeding to dissolve the corporation? Can a corporation file a quo warranto proceeding to dissolve the corporation? No. It is the government through the OSG that can a initiate quo warranto proceeding. A stockholder cannot file a petition with SEC to dissolve a corporation, with the exception only of a close corporation. In close Corporation, a stockholder alone may petition the SEC to dissolve the corporation in case of mismanagement or fraud in its operation. But for ordinary corporation, the corporation cannot file a quo warranto because the procedure for dissolution is spelled out in the Corporation Code approval by the board, stockholders and SEC.
Section 122. Corporate liquidation. - Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the 146
Failure to commence business within 2 years from incorporation under Sec 22. This is not automatic this requires the approval/decree/order of the SEC. There has to be a determination by the SEC that the corporation was not organized within the period of 2 years from incorporation. What do you mean by not organized? Under Sec. 22, a corporation is deemed organized as long as it was able to elect or appoint directors and officers of the corporation within 2 years even though it has not undertaken a single business activity. If no officers are elected, not a single business activity then the corporation is not deemed organized and the SEC may suspend or revoke its corporate franchise. Failure to submit reports as required by law and the SEC. This is something innocuous but it warrants the suspension or revocation of corporate franchise. What are the REPORTS usually submitted with the SEC by a corporation which is not a public company (if it is a public company there are many other requirements or documents)? For an ordinary corporation the most basic are: y General Information Sheet y The audited financial statements (FS). Every year the corporation is required to submit FS. If not the SEC may suspend or revoke the franchise of the corporation with notice to the corporation. You can capitalize on this regulation because in this particular case you dont need to obtain BIR clearance when the corporation is dissolved involuntarily. What are the requirements when you dissolve the corporation voluntarily? One of the requirements when you dissolve voluntarily, not in the Corporation Code but in list of the requirement of the SEC, is clearance from the
benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this C ode, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.
been appointed then the powers of the board and the corporate officers cease. So the receiver takes the place of the board of directors. The president cannot condone payment debts, payment of interest. (YAM VS CA) YAM VS CA Because having appointed a receiver the power to condone interest ceases or is no longer lodges with the president or the board of the directors A Trustee is appointed by the corporation. Ideally, the corporation must appoint trustee during the 3-year liquidation period. The properties of the corporation should be conveyed to the trustee during the 3-year liquidation period. If a trustee is appointed during that period, the law says that the suit can continue even beyond 3 years for as long as a trustee is appointed during the 3 year regulation period. The trustee will be the one who shall have the legal title over the properties and assets of the corporation. GILLANO VS CA The lawyer who handled the case for the corporation is considered a trustee. Therefore, that case handled by the lawyer of the corporation can be continued even beyond 3 years. TAKE NOTE: in this case that there is no appointment by the corporation for the lawyer to be the trustee of the corporation, but the court said that the lawyer is deemed a trustee of the corporation with respect to the particular case that he is handling. Therefore, even though there is no particular appointment for him as trustee he can continue with the case even beyond 3 years. REBURIANO VS CA and CLEMENTE VS CA The board of directors may likewise conduct the liquidation Subsequent to these decisions are: KNECHT VS UNITED CIGARETTE CORP. If a suit is filed during the lifetime of the corporation (before dissolution) there is no reason why it cannot proceed and continue even beyond the 3-year liquidation period, because under Sec 145 of the Corporation Code, no rights of the corporation shall be impaired on account of the subsequent dissolution of the corporation. So dissolution cannot
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What is the NEXT STEP after dissolution? LIQUIDATION of properties During the liquidation period under the Sec 122 of the Corporation Code, any corporation whose corporate franchise expire because of expiration of term or annulment or forfeiture of license, or any other mode of dissolution has a 3-year period to liquidate and wind up it corporate affairs. Ideally, the corporation must finish the liquidation within 3 years. But in practice liquidation is not completed in 3 years. From the date of dissolution, whether voluntary or involuntary mode, once the corporate franchise expires then corporation has 3 year window to liquidate and wind up its corporate affairs. During the liquidation period all the receivables will have to be collated; creditors will have to be paid or at least credits established; suits will have to be filed and concluded everything within 3 years. What happens now to the suits initiated during the lifetime of the corporation but carried out beyond the liquidation period? What happens to suits filed by corporation after the liquidation period? That does that mean that they cannot be prosecuted or continued by the corporation? In MAMBULAO LUMBER, an old case the SC said if a suit is filed during its lifetime but not completed within 3 years it is deemed abated. This has been modified by subsequent decisions to the contrary. So, before there was a school of thought that everything must be done within 3 years finished or unfinished. What are the MODES of liquidation? Liquidation may be done by y Receiver y Trustee y Board of directors Receiver is appointed by the court. The court upon petition of the corporation, may appoint a receiver. Once a receiver has
extinguish, impair corporation. rights belonging to the No more, because the corporation has been dissolved and there is no corresponding extension of corporate term. What if the stockholder of the dissolved corporation want to reincorporate? Is this available as a remedy? In CHUNG KA BIO VS CA, SC said that the stockholders of a corporation may reincorporate a new corporation using the properties of the defunct corporation as their contribution in the new corporation.
If the corporation has the right to sue, if it is done within its life time then it can go on even beyond 3 years ORDONEZ VS PARAMOUNT INSURANCE The appeal from an adverse decision was made after 3 years.
Can the appeal be taken even if it was done after 3 years? Yes, because of Sec 145 states that no right of the corporation shall be impaired by reason of dissolution. So whatever rights that the corporation has before, during its life time or liquidation period, it can be enforced even after 3 years because of Sec 145 of the corporation. In other words the old concept that everything must be done within 3 years is obsolete based on the decisions. For as long as the corporation has the right, that right can be enforced and continued all the way until its legal conclusion. TAKE NOTE, however, that NO NEW BUSINESS during the 3 year liquidation period. It is only for the purpose of liquidating and winding up the corporate affairs. The corporation which has been dissolved cannot enter into new lease agreement; cannot renew existing lease contracts because it amounts to continuing its business activity for which it was organized. Assuming the term of the corporation expired through inadvertence or oversight of the lawyer or corporate secretary, can it be rectified? No more, because once the term expires, thats it. It exists only for one thing liquidation. Can the term be extended? Not anymore because there is nothing more to extend. Can the stockholder exercise his appraisal right in that particular case?
What if not all the stockholders agreed in the reincorporation? Lets say 90% owned by ABC and then 10% owned by various stockholders who do not agree to the reincorporation. Can they exercise their appraisal right? They cannot, because reincorporation is not an extension of the corporate term. It is not one of the cases specified by law were a stockholder may exercise his appraisal right. Because the term expired there is no more term to extend. What is the remedy? Liquidation of the assets of the corporation. You can argue that reincorporation is not subject to tax because there is no corresponding distribution of the assets of the corporation; instead these will just be used by the stockholders as their contributions to the new corporation. What are the rights available to them? They have to be paid the 10% equivalent of their shares in the corporation. The shares have to be paid by the receivable assets or they have to be bought out. By buying their shares the new stockholders may give their consent to the reincorporation. Section 122 confirms that the properties of the corporation can be distributed to the stockholders only in cases specified by law such as dissolution and liquidation. What are the 3 Cases where properties of the corporation may be distributed back to the stockholders without violating the trust fund doctrine? y Dissolution and liquidation y Reduction of the capital stock y Redemption of redeemable shares Save for these 3 cases, the properties of the corporation belong to the corporation and the stockholders have no right to possess, use, or occupy these corporate properties.
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Section 123. Definition and rights of foreign corporations. - For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to issue, itemized by classes, par value of shares, shares without par value, and series, if any; 8. A statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued, itemized by classes, par value of shares, shares without par value, and series, if any; 9. A statement of the amount actually paid in; and 10. Such additional information as may be necessary or appropriate in order to enable the Securities and Exchange Commission to determine whether such corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable. 7. Attached to the application for license shall be a duly executed certificate under oath by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing. If such certificate is in a foreign language, a translation thereof in English under oath of the translator shall be attached thereto. The application for a license to transact business in the Philippines shall likewise be accompanied by a statement under oath of the president or any other person authorized by the corporation, showing to the satisfaction of the Securities and Exchange C ommission and other governmental agency in the proper cases that the applicant is solvent and in sound financial condition, and setting forth the assets and liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the application. Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply with the provisions of existing laws applicable to them. In the case of all other foreign corporations, no application for license to transact business in the Philippines shall be accepted by the Securities and Exchange C ommission without previous authority from the appropriate government agency, whenever required by law. (68a) Section 126. Issuance of a license. - If the Securities and Exchange Commission is satisfied that the applicant has complied with all the requirements of this Code and other special laws, rules and regulations, the Commission shall issue a license to the applicant to transact business in the Philippines for the purpose or purposes specified in such license. Upon issuance of the license, such foreign corporation may commence to transact business in the Philippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revoked, suspended or annulled in accordance with this C ode or other special laws. Within sixty (60) days after the issuance of the license to transact business in the Philippines, the license, except foreign banking or insurance corporation, shall deposit with the Securities and Exchange Commission for the benefit of present and future creditors of the licensee in the Philippines, securities satisfactory to the Securities and Exchange Commission, consisting of bonds or other evidence of indebtedness of the Government of the Philippines, its political subdivisions and instrumentalities, or of government-owned or controlled corporations and entities, shares of stock in "registered enterprises" as this term is defined in Republic Act No. 5186, shares of stock in domestic corporations registered in the stock exchange, or shares of stock in domestic insurance companies and banks, or any combination of these kinds of securities, with an actual market value of at least one hundred thousand (P100,000.) pesos; Provided, however, That within six (6) months after each fiscal year of the licensee, the Securities and Exchange Commission shall require the licensee to deposit additional securities equivalent in actual market value to two (2%) percent of the amount by which the licensee's gross income for that fiscal year exceeds five million 149
FOREIGN CORPORATIONS A foreign corporation is a corporation formed, organized and existing under laws other than Philippine laws and whose laws allow Filipino Citizens to do business in its own state or country. 2 FEATURES make a foreign corporation within the coverage of the law y The place of incorporation it is formed organized and existing under foreign law y The principle of reciprocity its laws allows Filipino Citizens to do business in its own state or country Is it possible that a foreign corporation be composed of the Filipinos? Yes, for as long as it is formed, organized, and existing under foreign laws. It does not matter that they are owned by Filipinos for as long as they are formed, organized and exiting under foreign laws then they are deemed to be foreign corporation.
Section 124. Application to existing foreign corporations. - Every foreign corporation which on the date of the effectivity of this Code is authorized to do business in the Philippines under a license therefore issued to it, shall continue to have such authority under the terms and condition of its license, subject to the provisions of this C ode and other special laws. (n) Section 125. Application for a license. - A foreign corporation applying for a license to transact business in the Philippines shall submit to the Securities and Exchange Commission a copy of its articles of incorporation and by-laws, certified in accordance with law, and their translation to an official language of the Philippines, if necessary. The application shall be under oath and, unless already stated in its articles of incorporation, shall specifically set forth the following: 1. 2. 3. The date and term of incorporation; The address, including the street number, of the principal office of the corporation in the country or state of incorporation; The name and address of its resident agent authorized to accept summons and process in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation; The place in the Philippines where the corporation intends to operate; The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of authority issued by the appropriate government agency; The names and addresses of the present directors and officers of the corporation;
4. 5.
6.
(P5,000,000.00) pesos. The Securities and Exchange Commission shall also require deposit of additional securities if the actual market value of the securities on deposit has decreased by at least ten (10%) percent of their actual market value at the time they were deposited. The Securities and Exchange C ommission may at its discretion release part of the additional securities deposited with it if the gross income of the licensee has decreased, or if the actual market value of the total securities on deposit has increased, by more than ten (10%) percent of the actual market value of the securities at the time they were deposited. The Securities and Exchange Commission may, from time to time, allow the licensee to substitute other securities for those already on deposit as long as the licensee is solvent. Such licensee shall be entitled to collect the interest or dividends on the securities deposited. In the event the licensee ceases to do business in the Philippines, the securities deposited as aforesaid shall be returned, upon the licensee's application therefor and upon proof to the satisfaction of the Securities and Exchange Commission that the licensee has no liability to Philippine residents, including the Government of the Republic of the Philippines. consenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office. Any such foreign corporation shall likewise execute and file with the Securities and Exchange Commission an agreement or stipulation, executed by the proper authorities of said corporation, in form and substance as follows: "The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being granted by the Securities and Exchange Commission a license to transact business in the Philippines, that if at any time said corporation shall cease to transact business in the Philippines, or shall be without any resident agent in the Philippines on whom any summons or other legal processes may be served, then in any action or proceeding arising out of any business or transaction which occurred in the Philippines, service of any summons or other legal process may be made upon the Securities and Exchange Commission and that such service shall have the same force and effect as if made upon the duly-authorized officers of the corporation at its home office." Whenever such service of summons or other process shall be made upon the Securities and Exchange Commission, the Commission shall, within ten (10) days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home or principal office. The sending of such copy by the Commission shall be necessary part of and shall complete such service. All expenses incurred by the Commission for such service shall be paid in advance by the party at whose instance the service is made. In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing the Securities and Exchange Commission of the new address.
What is the BASIC RULES regarding foreign corporation? A foreign corporation cannot do business in the country where it is foreign. It can only do business in the territory where it was incorporated. i.e. If the corporation is organized in Delaware or California, then it can only do business in Delaware or California. It cannot do business in the Philippines, unless it obtains license to do business in Philippines. Where to obtain license? With the SEC, The foreign corporation must apply for such license. What are the requirements to be submitted to the SEC to obtain the license? It has to submit the y Articles of incorporation y By-laws as approved by the country where it was incorporated y Deposit securities with the SEC *The amounts indicated under the Corporation Code are no longer relevant. They have been updated by the SEC. Deposit securities with the SEC are intended to answer for any possible violation of laws, rules and regulations and conditions to be imposed by the SEC.
Section 127. Who may be a resident agent. - A resident agent may be either an individual residing in the Philippines or a domestic corporation lawfully transacting business in the Philippines: Provided, That in the case of an individual, he must be of good moral character and of sound financial standing. (n) Section 128. Resident agent; service of process. - The Securities and Exchange Commission shall require as a condition precedent to the issuance of the license to transact business in the Philippines by any foreign corporation that such corporation file with the Securities and Exchange C ommission a written power of attorney designating some person who must be a resident of the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and 150
The foreign corporation must appoint a resident agent for the purpose of receiving summons and processes in behalf of the corporation. If there is no one authorized to receive summons for the corporation then it can easily evade, can be outside of the coverage or reach of the Philippine Courts. 2005 Case Is a resident agent on account of his appointment as resident agent authorized to certify against non-forum shopping? NO. Just because he is authorized as resident agent does not mean that he is also authorized to certify against non-forum shopping. As resident agent, he is aware of the cases filed against corporation, but not necessarily the cases filed by the corporation. To be authorized to certify against non-forum shopping you must be equipped with separate authority from the foreign corporation. Assuming that everything is in order; that the foreign corporation was able to submit the requirements imposed by SEC; able to show that it is a bona fide corporation and it has the financial capacity to do business in the Philippines then it can now be issued with a license.
CITIBANK VS CHUA Are the by-laws of the foreign corporation valid even though they have not been approved by the SEC; even though it was not evidenced by a certificate of approval by the SEC? When the SEC issues the license, the approval of the foreign corporation to do business in the country, it goes with it the approval of the articles and by-laws of the foreign corporation. There is no need for a separate approval of the by-laws by the SEC. What are the consequences if a foreign corporation transact within the Philippines without license? Law says it cannot intervene or maintain any action or suit in any court or administrative agencies. In simple words, it cannot sue. It cannot have access to Philippine court or administrative agencies. Can it be sued despite lack of license? Yes So the consequence is that it cannot sue if it has no license but it can be sued for any cause of action recognized under Philippine laws. Lack of license is not bar to the filing of a case against a foreign corporation but it is a bar for it, because it has no legal capacity, to file a case in the Philippines unless it obtains a license to do business here. The test is capacity to sue here in the Philippines. What are cases where a foreign corporation may sue in the Philippines despite the lack of license to business in the Philippines? y Isolated or casual transaction y If the foreign corporation had no license at the time the transaction was consummated but subsequently obtains a license to engage in business before filing the case in the Philippines. y An action to enforce intellectual property rights y If the foreign corporation is a co-plaintiff with a domestic corporation and latter filed a suit here in the Philippines. y If by stipulation the venue shall be laid in Philippine courts y In case of estoppel Isolated or casual transaction
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If a foreign corporation would sue in the Philippines it has to allege in its Complaint that it has the license to do business in the country; or it is suing on an isolated transaction. If these allegations are not present then it has no legal capacity to sue and a motion to dismiss should be filed by the defendant. If the foreign corporation which has no license has been operating in the country for so many years it can no longer claim the it is suing on an isolated transaction. When you say isolated it really casual or is usually one time. What do we mean by doing business? Continuity of dealings or transactions with the end view of achieving the purpose for which the corporation was organized. If there is no continuity of activity or undertaking, then it is a casual or isolated transaction. This is the general norm. If its only one time activity or one time transaction the corporation can sue despite lack of license to do business in the country. There are, however, some cases where the transaction was singular and yet the SC said that the corporation was deemed to be doing business. HUTCHISON VS SBMA Hutchison is owned by the richest man in Asia Lee Kashin. He is based in Hong Kong and owns the Hutchison Shipping Co. He competed with the Razon Group where the right to operate the port of Subic. The SBMA conducted a bidding for this purpose. The award was first granted to Hutchison but the President reversed the award and granted it to the Razon Group. Hutchison Group feeling aggrieved filed an action for injunction to enjoin the SBMA as well as the president to award the project to Razon Group. Razon filed a motion to dismiss on the ground that Hutchison has not obtained a license to do business in the Philippines and therefore has no legal capacity to sue. Take note that the only transaction/activity of Hutchison was to participate in a public bidding to operate the free port zone in Subic yet the SC said it was doing business, because it showed the intention of the foreign corporation to maintain their presence.
Mere participation in a public bidding is tantamount to doing business and because Hutchison had no license to do business in the Philippines the motion to dismiss was granted. LITTON MILL, INC. VS CA This involves the purchase of soccer uniforms. Only one transaction but 3000 sets, SC said doing business. In other words, there are cases where even though there is only one transaction, but for as long as it shows the intention of the foreign corporation to establish its presence in the Philippines is tantamount doing business in the Philippines. General Rule: Doing Business means Continuity of dealings Exceptions: there are cases that one transaction is enough for the corporation to be considered doing business in the Philippines Other Cases wherein the SC said that a foreign corporation is doing business in the Philippines When foreign corporation y appoints a local representative in the Philippines y appoints a distributor y has headquarters in the Philippines y extends credit ERIKS PTE. LTD VS CA When it extends credit on a 90 day basis. The foreign corporation will not extend credit on a 90 day basis for customers unless it is doing business. Why will you extend credit/loan if you have intention of engaging into business? What about casual transactions and therefore do not require license to do business in the Philippines? y Unloading of cargo in the Philippines y Reinsurance. Reinsurance company gets reinsurance from a foreign corporation over properties situated in the Philippines, is this tantamount to doing business in so far as the foreign corporation is concerned? No, because it is only an act of reinsurance, a casual transaction. Even though the subject matter of reinsurance is situated in the Philippines (LORENZO SHIPPING CO. VS CHUBB and SONS). If it is a casual transaction not need to obtain license. The foreign corporation may sue or have access to Philippine courts. If the foreign corporation had no license at the time the transaction was consummated but subsequently obtains a license to engage in business before filing the case in the Philippines. Meaning, at the outset it had no license but when it went to court it obtains a license. The act of obtaining a license subsequent to the action retroacts to the date of the transaction and confers upon the corporation the legal capacity to sue in the Philippines (HOME INSURANCE CO. VS EASTERN SHIPPING LINES). HOME INSURANCE CO. VS EASTERN SHIPPING LINES In the said case the SC said that the lack of license does not invalidate the transaction, it is only voidable. If the license is obtained subsequently then it cures the defect without prejudice to the imposition of penal sanction against the persons representing the foreign corporation in committing an act in violation to the Corporation Code citing SEC 144 of the Corporation Code. TAKE NOTE: The act of not obtaining a license or failure to obtain a license to do business in the Philippines is a criminal offense under SEC 144 of the Corporation Code. An action to enforce intellectual property rights Like Infringement of trademark, copyright, or patent can be prosecuted by a foreign corporation in the Philippines despite the lack of license to do business in the Philippines. (PHLIP MORRIS VS CA and COLUMBIA PICTURES VS CA) If the foreign corporation is a co-plaintiff with a domestic corporation and latter filed a suit here in the Philippines. Otherwise, it will result to multiplicity of suits. If one cause of action will be enforced separately by two corporations, one here in the Philippines and another one the place of incorporation of the foreign corporation. If by stipulation the venue shall be laid in Philippine courts. The parties, involving a foreign corporation, stipulated that the venue for the filing of the legal actions shall be here in the Philippines. In case of estoppel The foreign corporation has no license to do business in the Philippines but its counter-party new that the foreign corporation had no license to do business and yet despite such knowledge continued to deal with the foreign corporation. If this is the
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case the domestic corporation cannot question the legal capacity of the foreign corporation to sue in the Philippines. (MERRYL LYNCH FEATURES VS CA COMART VS CA) Illustration: A foreign corporation appointed a domestic corporation as its marketing agent to market its products here in the Philippines and then Domestic Corporation violated the terms of the agreement and caught pirating, imitating the software of the foreign corporation and selling it to its own customers/clients. The foreign corporation filed an action to enjoin the domestic corporation from pirating, manufacturing and selling the software to its clients. The domestic corporation filed a motion to dismiss on the ground that the foreign corporation has no legal capacity to sue because it did not obtain a license to do business in the Philippines. Will the motion to dismiss prosper? No, because both of them are estopped. The domestic corporation is estopped from denying the lack of legal capacity of the foreign corporation because it knew all along that it had no license to do business and yet continued to deal with it. Since both parties are in pari delicto, the law we leave them as they are. So the suit against the domestic corporation will prosper. Can the license of the foreign corporation be revoked? Yes. There is a long list, but basically a violation of the conditions imposed by the SEC for the issuance of the license.
SRC notes will be distributed thru email. WAG KYONG DEMANDING! Hahaha
Master Transcriber Marx
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y y y y y enhance the democratization of wealth, promote the development of the capital market, protect investors, ensure full and fair disclosure about securities, minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market.
THE SECURITIES REGULATION CODE (SRC)

What is the objective or rationale behind the SRC? The ultimate objective is to protect the investors particularly the public against sale or disposition of worthless securities. The SRC does not guarantee that investor will make money, so if the investor buys securities or subscribe shares, there is no guarantee and the law does make a guarantee that he will make money. But what the law wants to accomplish is to make sure that the investor is informed before making a decision to invest or not to invest the securities because the public may end up buying securities which are worthless after all. Example: Time Share entitles the holder to enjoy possession or occupy a condo or a unit in a hotel for a certain number of days without. When we buy a time share it means that we are allowed to use or occupy a condominium unit or a unit in a hotel or resort without ownership specific property in the condo or in the resort. But the laws the person to occupy the same for a certain time ABC Corporation would to issue Time Share. A time share is evidence by a certificate. The time certificate issued by the Corporation is not in compliance with the requirements imposed by law for sale of securities in the public. Juan dela Cruz buys time share. It turns out that this Corporation is insolvent or its principal directors or officers are convicted of a crime against moral turpitude or there is no property being developed after all. Without the requirements imposed by the SRC to prevent the sale or disposition of shares or securities, Juan dela Cruz may end up buying a worthless piece of paper. That is what the objective of the SRC: to prevent sale or disposition of worthless securities despite that its blue sky. Blue sky: the skies are all blue but nothing. The securities look beautiful but worthless. The law does not guarantee the investor to make money but the law at least intend to accomplish that the public will be informed of the security before it make a decision to buy or invest in such security. What is the policy of the state towards the SRC? y The state shall develop a self-conscious free market that regulates itself. y encourage the widest participation of ownership in enterprises,
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In other words, a market with a conscience. Market is not always profit driven all the time. Before the SRC, brokers commit various violations, manipulative vices, schemes, jump up prices just to reduce the buying or selling securities and ended up prejudicing the public or destroying the public. The event that facilitated the enactment of the SRC was BW scandal. BW was the Best Work Resource Gain Corporation owned by then Danny Tan, a businessman with an ally former president Estrada. Danny Tan and Stanley Ho entered into a contract to develop, operate and man a Casino in the Philippines under BW Resources. BW Resources then listed its shares in the stock exchange at Php 3.00. in the span of 4 months the prices when up, up to a certain period. From Php 3.00 up to Php 157. After reaching P 157.00, it could not support itself anymore. So, the Php 157 went down, now at 70 centavos per share. What happens now to those who bought shares from BW resources? Those investors lost huge amount of money. There was an investigation. It turns out that Danny Tan and his associates created an illusion of active trading. They created an illusion of active trading by buying and selling securities between and among themselves. Danny Tan and his associates will be the one buying and selling securities, it is what we call Wash Sale, there is no actual transfer of ownership. It creates an illusion that there is something good in these shares of stock. There is a ____ for the public to buy and buy more shares until it cannot support anymore by realities and it went down to a single centavo. That was the SRC intends to accomplish to develop and establish a self-conscious market. To minimize if not totally eliminate insider trading What is insider trading? It is the buying and selling securities while in the possession of a material non-public information. If u are an insider and u are in the possession of a material non-public information, u are not suppose to disclose this information to another because that other may buy and selling such securities to the detriment of the corporate of transaction.
Requisites of insider trading y Exists if there is buying and selling of securities y The buying and selling must be done with an insider y The buying and selling must be done while in the possession of a material non-public information Who is an insider under the law? 2 kinds of insider under Philippine laws y Actual insider the issuer in the corporation, director, officer or any person controlling the issuer (stockholder) or any person who on account of his relationship, past or present, gives or gain access to a material non-public information (lawyers, accountants, investment bankers, advisers, employee, director or officer of stock exchange) and any person who acquired information from any of the foregoing insiders SRC provision
3.8. "Insider" means (a) the issuer; (b) a director or officer (or any person performing similar functions) of, or a person controlling the issuer; gives or gave him access to material information about the issuer or the security that is not generally available to the public; (d) A government employee, director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (e) a person who learns such information by a communication from any forgoing insiders.
After the merger of PCI bank and Equitable was pronounced the price of equitable shares went down for as low as Php 15.00 per share. If Dean Divina bought share of equitable before the merger was announced, is he liable for insider trading violation? Yes, because he bought shares as an insider and counsel of the bank therefore he has access to material non-public information and he did buy the securities while in possession of this material nonpublic information What if he asked his wife to buy the shares and lets say his wife buys, who are liable is Dean Divina liable? Is Dean Divinas wife liable? The law says if the insider discloses material non-public information to another knowing that the one who secured the information (tipee) will buy securities is also liable for insider trading violation. So if Dean Divina know that his wife is going to buy then Dean Divina is liable. His wife is also liable because she is a constructive insider, having learn the information from an insider
Section 8. Requirement of Registration of Securities. 8 .1. Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser.
Constructive insider - a person who learns such information by a communication from any forgoing insiders.
What do we mean by material non-public information? Material if it will affect the price of the securities or influence a decision of a reasonable person to buy or sell securities. Any information that will affect the price of securities like (merger, cash dividends, appointment of new president, resignation of the incumbent president).
"material nonpublic" if: (a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security.
The underlying principle of the SRC Securities, unless exempt or sold in an exempt transactions, shall not be sold or offered to be sold to the public within the Philippines unless the issuer complies with the SEC registration requirement What do we mean by registration requirements? Filing a registration statement with the SEC. A registration statement is a document filed with the SEC that contains all relevant information about the issuer and the securities that will be issued (name of the company, assets and liabilities, capital stock, subscribed capital stock, creditors, actual or contingent liabilities, income for the past 5 years, income projection, nature of business, possible losses, litigation) so that the public can make an informed decision on whether or not to buy the security.
What are securities? Example:

155 3.1. "Securities" are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a
certificate, contract, instruments, whether written or electronic in character. It includes: (a) Shares of stocks, bonds, debentures, notes, evidences of indebtedness, asset-backed securities; (b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certifies of deposit for a future subscription; (c) Fractional undivided interests in oil, gas or other mineral rights; (d) Derivatives like option and warrants; (e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments (f) Proprietary or nonproprietary membership certificates in corporations; and (g) Other instruments as may in the future be determined by the Commission.
to 1,2,3,4 and down the rest is investment contract, therefore it cannot be sold or offered to be sold in the Philippines unless it complies with the registration requirement under the SRC. What is an option? 3 kinds y Put option entitles the holder to sell securities at a specified price in a specified time y Call option entitles the holder to buy securities at a specified price in a specified time y Straddle option the combination of put and call option Example of Put option Lets say Dean is a holder of a put option of PLDT shares which entitles him to sell his shares of PLDT to PLDT management. Lets say the put option price is Php 110.00. As of today the price is Php 90.00 so Dean has to wait until the price becomes Php 110.00. Once it reaches Php 110.00 then Dean can exercise his put option. He can compel PLDT to buy his shares. Call option Call means the option to buy from the issuer of the security. Warrant the option to subscribe the shares of stock of the corporation at a specified price Proprietary or nonproprietary membership certificates in corporations Like membership in a golf course, membership in clubhouse vis--vis resort Bottom line is that these securities cannot be sold unless there is compliance with registration requirement
Bonds, debentures, notes, these are borrowings (promissory notes, bonds issued by the corporation) Evidences of indebtedness these are long term or short term commercial papers Asset-backed securities securities that entitles the holder to the (stream?) of income earned by the pull of assets underlying the security. Securities backed-up with pull of assets underlying the security. Example: Various clients of the bank issued various promissory notes. Ordinarily the Bank has just to wait for the maturity of the Promissory notes. But instead of the Bank waiting for the securities for the payment of the principal, the investment bankers these promissory notes (pulled the promissory notes) and sold certificates of assignment or participation in the pull of promissory notes. In other words, the holders of the certificates of assignment or participation will be entitled to collection from the income collected or generated coming from the borrowers of the bank. It is the bank that will be the one collecting from the borrowers, the holders of the certificate or participation are the ones to receive the income. Investment Contracts any instrument that entitle the holder to participate in a profit of any enterprise POWER HOMES LIMITED VS SEC This case is a scheme of investment contract ABC Corporation engaged in recruitment activity, A was recruited, then A will pay B to be a member of ABC. For every recruit that A will get lets say 1,2,3,4, he will get a certain percentage to B and for every recruit of 1, he will get certain percentage from the next members of the entire scheme. The SC said that the entire scheme issued by ABC to A, and A issued
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BAR QUESTION: A and B putting up a partnership, the partnership became profitable. They needed more capital but unfortunately they have already exhausted their money, so they decided to issue
certificates of participation. The holders of certificate of participation are considered partners, they have the right to participate in the profit of the partnership. Can A and B issue the certificate of participation to 10 select friends? Yes, but only if they comply with the registration requirement imposed by the SEC Is a certificate of participation a security? Yes, because it entitles the holder to profit of the partnership So the security is not only for the corporation. It extends to any enterprise that makes profit. Any instrument that entitles the holder to participate in a profit of any enterprise is considered a security, therefore cannot be sold or offered to be sold in the Philippines unless it complies with the registration requirements required by the SEC. TIME SHARE REALTY VS CA The SC said that simply because the Corporation has deemed incorporated does not mean that it is authorized to deal with unregistered TIME SHARE certificates because time share certificates are considered proprietary certificates. They are securities and therefore it cant be sold in the Philippines unless there is compliance with the registration requirements
Section 9. Exempt Securities. 9.1. The requirement of registration under Subsection 8.1 shall not as a general rule apply to any of the following classes of securities: (a) Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government. Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, That the C ommission may require compliance with the form and content for disclosures the Commission may prescribe. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board, or the Bureau of Internal Revenue. Any security issued by a bank except its own shares of stock.
y y
y y
Securities issued by Foreign government with whom the Philippines have diplomatic relation Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body Certificates of sale or transfer of which subject to the supervision by Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board, or the Bureau of Internal Revenue. security issued by a bank except its own shares of stock other securities as determined by the SEC
What is the common denominator in all of these securities? It is already under the supervision of another government agency that is why it is not subject anymore to registration requirement
Section 10. Exempt Transactions. 10.1. The requirement of registration under Subsection 8 .1 shall not apply to the sale of any security in any of the following transactions: (a) (b) At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy. By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling of offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provision of this Code, to liquidate a bonafide debt, a security pledged in good faith as security for such debt. An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner therefore, or by his representative for the owners account, such sale or offer for sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transaction of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security. The distribution by a corporation actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus. The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock. The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, when the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale. The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under this C ode or was, when sold, exempt from the provision of this Code, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under this C ode. Upon such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold.
(c)
(d)
(b)
(e)
(c) (d)
(f)
(g)
(e)
9.2. The Commission may, by rule or regulation after public hearing, add to the foregoing any class of securities if it finds that the enforcement of this Code with respect to such securities is not necessary in the public interest and for the protection of investors.
What are the securities that are exempt therefore can be issued or sold or offered to be sold in the Philippines even without registration requirement? y Securities issued by the government or any of its instrumentalities, agency
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(h) (i) Brokers transaction, executed upon customers orders, on any registered Exchange or other trading market. Subscriptions for shares of the capitals stocks of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stocks under the C orporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscription is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized, capital increase. The exchange of securities by the issuer with the existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period. The sale of securities to any number of the following qualified buyers: i. Bank; ii. Registered investment house; iii. Insurance company; iv. Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or manage by a bank or other persons authorized by the Bangko Sentral to engage in trust functions; v. Investment company or; vi. Such other person as the Commission may rule by determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management.
Who are the qualified buyers? y Bank; y Registered investment house; y Insurance company; y Pension fund y Investment company y Other qualified buyers as determined by SEC Procedures: ABC Corporation will issue shares of stock to the public. It taps an Invest banker, investment house to manage the sale of the shares on a firm commitment basis, are the shares of stock securities? Yes. If they are securities they cannot be sold or offered to be sold unless there is compliance with the registration requirement What should the ABC corporation will do? ABC corporation will file a registration statement with the SEC. registration statement is a document that contains all information about the issuer and the securities it will issue. The registration statement contains: y name of the corporation, y the directos y the officers y nature of business y income for the past 5 years y income projection for the next 5 years y assets y actual or contingent liabilities what about information about securities? y Common or y Preferred y If preferred o Cumulative or Non-cumulative o Participating or Non-participating Within 45 days, the SEC may approve the registration statement, reject or suspend the registration statement. The has 45 days to act on the registration statement If approved, then the issuer (ABC Corporation) is now ready to prepare a prospectus. Prospectus is what is given to investors. It convinces the buyers to invest to the shares of stock. After that the actual issuance of shares. Lets say A, B, C , D and E are various investors and decided to buy shares of ABC Corporation. They
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(j)
(k) (l)
10.2. The Commission may exempt other transactions, if it finds that the requirements of registration under this C ode is not necessary in the public interest or for the protection of the investors such as by the reason of the small amount involved or the limited character of the public offering. 10.3. Any person applying for an exemption under this Section, shall file with the Commission a notice identifying the exemption relied upon on such form and at such time as the Commission by the rule may prescribe and with such notice shall pay to the C ommission fee equivalent to one-tenth (1/10) of one percent (1%) of the maximum value aggregate price or issued value of the securities.
Other kinds of securities which are not subject to registration are securities sold in an exempt transaction (keywords only) y Judicial Sale y Foreclosure y Isolated transaction y Stock dividends y Sale of capital stock y Sale for a single purchaser y Broker transaction y Subscription of shares y Security issued with exchange for an exempt security y Less than 20 y Qualified buyers y others
made a decision on the strength of what is contain in the registration statement and prospectus. Now A is a stockholder, what can he do? He is entitled to vote etc or he may sell his shares. If the shares are listed in the Stock exchange, he may sell. To whom he may sell? To a buyer. He sells it to the buyer through the stock exchange
(b) Has violated any of the provision of this Code, the rules promulgate pursuant thereto, or any order of the Commission of which the issuer has notice in connection with the offering for which a registration statement has been filed iii. Has been or is engaged or is about to engage in fraudulent transactions; iv. Has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities; v. Has failed to comply with any requirements that the Commission may impose as a condition for registration of the security for which the registration statement has been filed; or The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statements of a material fact required to be stated therein or necessary to make the statement therein not misleading; or The issuer, any officer, director or controlling person performing similar functions, or any under writer has been convicted, by a competent judicial or administrative body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and /or fraud or is enjoined or restrained by the Commission or other competent or administrative body for violations of securities, commodities, and other related laws. ii.
Philippine Stock Exchange is the market place for buying or selling of listed shares. Under the SRC, it is unlawful to buy and sell securities over the counter. Over the counter means buying and selling outside the facilities Stock Exchange or creating your own market place. A person can only buy shares through a registered stock exchange. It only covers listed shares not unlisted shares, if a person is going to purchase unlisted shares, he does not have to go to the Philippine Stock Exchange. Lets say A will buy shares of ABC Company which are not listed, there is no need for a broker. But if the shares are listed then A should enter the transaction with the Stock Exchange, otherwise it is a violation of the law. Keep in mind that a person does not buy shares in the Philippine Stock Exchange, PSE is just a market place for buying and selling shares thru accredited brokers. Can the SEC disapproves or rejects the Registration Statement? The Sec may reject or disapprove the registration statement in which case the issuer cannot proceed with the sale of securities
(c)
For the purposes of this subsection, the term "competent judicial or administrative body" shall include a foreign court of competent jurisdiction as provided for under Rules of Court. 13.2. The C ommission may compel the production of all the books and papers of such issuer, and may administer oaths to, and examine the officers of such the issuer or any other person connected therewith as to its business and affairs. 13.3. If any issuer shall refuse to permit an examination to be made by the Commission, its refusal shall be ground for the refusal or revocation of the registration of its securities. 13.4. If the Commission deems its necessary, it may issue an order suspending the offer and sale of the securities pending any investigation. The order shall state the grounds for taking such action, but such order of suspension although binding upon the persons notified thereof, shall be deemed confidential, and shall not be published. Upon the issuance of the suspension order, no further offer or sale of such security shall be made until the same is lifted or set aside by the Commission. Otherwise, such sale shall be void. 13.5. Notice of issuance of such order shall be given to the issuer and every dealer and broker who shall have notified the Commission of an intention to sell such security. 13.6. A registration statement may be withdrawn by the issuer only with the consent of the Commission.
Section 13. Rejection and Revocation of Registration of Securities. 13.1. The Commission may reject a registration statement and refuse registration of the security there-under, or revoke the affectivity of a registration statement and the registration of the security there-under after the due notice and hearing by issuing an order to such effect, setting forth its finding in respect thereto, if it finds that: (a) The issuer: i. Has been judicially declared insolvent; 159
What are the grounds for rejection under the SRC? (simplified) y If the issuer: o becomes judicially declared insolvent o violates any law or rules or the SRC or any law administered by the SEC o engaged in fraudulent transaction o made any false or misleading statements the in prospectus
failed to comply with any requirements imposed by the SEC o convicted of a crime involving moral turpitude o refusal to examination of the books and records if the registration statement contains false statement o
Section 24. Manipulation of Security Prices; Devices and Practices. 24.1 It shall be unlawful for any person acting for himself or through a dealer or broker, directly or indirectly: (a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange of any other trading market (hereafter referred to purposes of this Chapter as "Exchange"): i. By effecting any transaction in such security which involves no change in the beneficial ownership thereof; By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or orders of substantially the same size, time and price, for the sale or purchase of any such security, has or will be entered by or for the same or different parties; or By performing similar act where there is no change in beneficial ownership.
Section 23. Transactions of Directors officers and Principal Stockholders. 23.1. Every person who is directly or indirectly the beneficial owner of more than ten per centum (10%) of any class of any equity security which satisfies the requirements of subsection 17.2, or who is a director or an officer of the issuer of such security, shall file, at the time either such requirement is first satisfied or after ten days after he becomes such a beneficial owner, director, or officer, a statement form the C ommission and, if such security is listed for trading on an exchange, also with the exchange of the amount of all the equity security of such issuer of which he is the beneficial owner, and within ten days after the close of each calendar month thereafter, if there has been a change in such ownership at the close of the calendar month and such changes in his ownership as have occurred during such calendar month. 23.2. For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director or officer by reason of his relationship to the issuer, any profit realized by him from any purchase or sale, or any sale or purchase, of any equity security of such issuer within any period of less than (6) months unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of holding the security purchased or of not repurchasing the security sold for a period exceeding six (6) months. Suit to recover such profit may be instituted before the Regional Trial Court by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty (60) days after request or shall fail diligently to prosecute the same thereafter, but not such shall be brought more than two years after the date such profit was realized. This Subsection shall not be construed to cover any transaction were such beneficial owner was not such both time of the owner or the sale, or the sale of purchase, of the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection. 23.3. It shall be unlawful for any such beneficial owner, director or officer, directly or indirectly, to sell any equity security of such issuer if the person selling the principal: (a) Does not own the security sold: or (b) If owning the security, does not deliver not deliver it against such sale within 20 days thereafter, or does not within five days after such sale deposit in the mails or the unusual channels of transportation; but no person shall be deemed to have violated this subsection if he proves not withstanding the exercise of good faith he was unable to make such delivery in such time, or that to do so would cause undue inconvenience or expense. 23.4. The provisions of subsection 23.2 shall not apply to any purchase and sale, or sale and purchase, and the provisions of Subsection 23 .3 shall not apply to any sale, of an equity security not then or thereafter held by him and an investment account, by a dealer in the ordinary course of his business and incident to the establishment or maintenance by him of a primary or secondary market, otherwise than on an Exchange, for such security. The Commission may, by such rules and regulations as it deems necessary or appropriate in the public interest, define and prescribe terms and conditions with respect to securities held in an investment account and transactions made in the ordinary course of business and incident to the establishment or maintenance of a primary or secondary market.
ii.
iii.
(b)
(c)
To affect, alone or with others, a securities or transactions in securities that: (I) Raises their price to induce the purchase of a security, whether of the same or a different class of the same issuer or of controlling, controlled, or commonly controlled company by others; or (iii) Creates active trading to induce such a purchase or sale through manipulative devices such as marking the close, painting the tape, squeezing the float, hype and dump, boiler room operations and such other similar devices. To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purpose of sale of such security. To make false or misleading statement with respect to any material fact, which he knew or had reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange. To effect, either alone or others, any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security; unless otherwise allowed by this C ode or by rules of the Commission.
(d)
(e)
24.2. No person shall use or employ, in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance. Neither shall any short sale be effected nor any stop-loss order be executed in connection with the purchase or sale of any security except in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest for the protection of investors. 24.3. The foregoing provisions notwithstanding, the Commission, having due regard to the public interest and the protection of investors, may, by rules and regulations, allow certain acts or transactions that may otherwise be prohibited under this Section.
What are unlawful and prohibited acts? (simplified) o Insider trading There is violation of insider trading rule: If there is buying or selling of securities by the insider while in the possession of material non-public information
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If an insider discloses to third person material nonpublic information knowing that the other person will buy securities Short swing transaction Over the counter transaction Short selling transaction Manipulative device of scheme Wash Sale Match order Active trading through a manipulative devices and scheme Disseminating information that the price of shares will go down or up Making false or misleading statement in connection with the sales and securities Active trading through a manipulative devices and scheme These are transactions or series of transactions to induce buying or selling of securities either by one person or in conspiracy with others in increasing or decreasing the price of securities just to induce the buying or selling of securities. Painting the tape painting a rosy picture of the issuer Marking the close buying or selling at the end of trading Hype and Dump hype the shares so that price will increase and then dump it Squeezing the float limits the supply of shares Margin Trading the purchase of the securities is against credit provided by the broker. The broker advances the cost of the purchase price or the price for buying the shares. The customer relies on the credit of the broker and there is a constitute a pledge in favor of the broker Margin Trading is allowed for as long as the margin credit is reasonable When is the margin credit unreasonable? Can the broker lend the entire purchase price to the customer? No, there is a limit on how much credit that a broker may extend to the buyer that is: (whichever is higher) 65% of the current market price of the security or 100% of the market price for the last 36 months but not to exceed 75% of the current market price In other words, maximum is 75%, the 25% must come from the buyer. So if the management extends 75% of the current market price, then it is a violation of the SRC. What are the liabilities under the SRC? These prohibited transactions will give rise to criminal, civil, and administrative liabilities What are the remedies available that the SEC may afford to enforce the obligations of the liabilities? Administrative Criminal Civil Administrative remedies
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o o o o o o o o o
What is the presumption regarding insider trading? If the buying or selling is done by the spouse and relatives of the insider within a certain degree of consanguinity or affinity, there is a presumption that they bought the shares while in possession of material nonpublic information. It includes common-law spouse What is a short swing transaction? The buying and selling or selling and buying of securities within the period of 6 months A person buys the securities and sells within 6 months or a person sells and buys securities within 6 months. Any profit earned from short swing transaction must be remitted to the issuer. The issuer has 2 years to file such action to recover from short swing transaction. The only exception is if the buying or selling is done to liquidate a bona fide debt Over the counter means buying and selling outside the facilities Stock Exchange or creating your own market place. A person can only buy shares through a registered stock exchange. Short selling - selling securities that u do not know or have. Selling securities that you have but cannot be delivered within 20 days from the transaction. It is prohibited because it is prone to abuse Wash sale selling of securities without change of beneficial ownership Match order placing an order to buy knowing that there is a simultaneous order to sell securities for the same price, terms and conditions.
The SEC can issue a cease and desist order (CDO) and to impose sanctions against the erring director and officers and disqualify them from holding any position from any corporation. The SEC has the power to disqualify any person from sitting in the Board or any position. There are 3 cases or instances where CDO may be issued by the SEC
Section 5.1 (i) Issue cease and desist orders to prevent fraud or injury to the investing public Section 53.3 Whenever it shall appear to the Commission that any person has engaged or is about to engage in any act or practice constituting a violation of any provision of this C ode, any rule, regulation or order thereunder, or any rule of an Exchange, registered securities association, clearing agency or other selfregulatory organization, it may issue an order to such person to desist from committing such act or practice: Provided, however, That the C ommission shall not charge any person with violation of the rules of an Exchange or other self-regulatory organization unless it appears to the Commission that such Exchange or other self-regulatory organization is unable or unwilling to take action against such person. After finding that such person has engaged in any such act or practice and that there is a reasonable likelihood of continuing, further or future violations by such person, the Commission may issue ex-parte a cease and desist order for a maximum period of ten (10) days, enjoining the violation and compelling compliance with such provision. The Commission may transmit such evidence as may be available concerning any violation of any provision of this Code, or any rule, regulation or order thereunder, to the Department of Justice, which may institute the appropriate criminal proceedings under this C ode. Section 64. Cease and Desist Order. 64.1. The Commission, after proper investigation or verification, motu proprio or upon verified complaint by any aggrieved party, may issue a cease and desist order without the necessity of a prior hearing if in its judgment the act or practice, unless restrained, will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public.
Can it be issued motu proprio? If it is under section 64.1, the SC held that it can be issued motu proprio for as long as there is proper investigation on the part of the SEC. there can be no complaint, the SEC can conduct it own verification and investigation and if it determines that the acts operates fraud or causes great irreparable injury on the public then it may issue CDO. PERFORMANCE (FORMS) EXCHANGE VS SEC The SEC alleges that Performance forms Exchange was engage in foreign currency trading without authority from the BSP. SEC referred the matter to the BSP for proper investigation. But before BSP could finish or conclude its investigation, the SEC issued a CDO. Issue: whether or not the CDO issued by the SEC is valid Held: the SC held that it is INVALID, having refer the matter to the BSP, it should have waited for the BSP to determine if there indeed fraud or the corporation is deemed engaged in unlawful activity or transaction. Can it suspend or revoke franchise if found violating the SRC or the corporation code? Yes Criminal remedies Does the SEC have the power to prosecute? No, it does not have the power to prosecute it can only refer the matter to the DOJ. In the case of BAVIERA VS STANDARD CHARTER BANK Baviera, the former HR officer of standard charter bank, filed a criminal complaint against the Standard Charter Bank for selling unregistered securities. The complaint was filed directly with the DOJ. Issue: is it proper to go directly with the DOJ for violation of the SRC or Corporation Code? Held: the SC laid down the doctrine of primary jurisdiction. Under the doctrine of primary jurisdiction, if it requires the expertise of a particular government agency, then the complaint must first be filed with that government agency. In this case the SEC. the SEC will conduct an investigation to determine if there is a prima facie violation of the law and it will refer the matter to DOJ. It is outrightly dismissible if the complaint is filed directly with the DOJ if the complaint involves violation of SRC or
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If under Section 53.3, the CDO is only good for 10 days. Under that section the person or corporation is about to commit an act in violation of the SRC, the SEC may issue a CDO, good for 10 days. In Section 5.1 and 64 both refer to fraud, the SEC may issue a CDO to prevent fraud if it will cause a great irreparable injury to the public. In the case of GSIS VS CA, SC held that the SEC has to indicate which of the CDO it will issue. It has to specify what section is the CDO is based. It is an error on the part of the SEC to just issue a CDO without specifying the basis thereof because each section has own basis and validity and term for the issuance of CDO. In that case, Commissioner Martinez issued a CDO without specifying the basis. The SC also held that the CDO has to be issued by the SEC en banc, it cannot be issued by the chairman or one of the commissioners.
corporation code or other laws administered by the SEC. Civil remedies Action for damages by the Sec and the aggrieved party Example: in insider trading violation, who is the aggrieved party? The one who bought the shares from an insider. The counter party to the violation of insider trading, or any aggrieve party (aggrieved in the sense that he was aggrieve by any act found to be violative under the SRC) has likewise have the same remedies (criminal and civil). Civil remedies, he can ask for damages up to 3 times of the total loss, he can also ask for exemplary damages in case of bad faith and attorneys fees he can go as high as 30% of the total award. Is there a prescriptive period under the law to file action for damages in case of false statements or insider trading violation? Within 2 years from discovery of falsity but later than 5 years from the issuance of the shares or securities What is the penalty for insider trading violation? 7 years to 21 years of imprisonment not probationable and/or Php 50,000 to 1M fine at the discretion of the court In the Case of PHILIPPINE STOCK EXCHANGE (PSE) VS CA The Philippine Stock Exchange is under the supervision of SEC. The SC held that the SEC cannot interfere with the business affairs of the Philippine Stock Exchange. PSE is a stock corporation, and under the Business judgment rule, we said that the SEC or the courts cannot interfere with the business affair of the corporation. Issue: the listing of shares of the Puerto Asul The ___ family wanted to list the shares of Puerto Asul and PSE refused to list the shares because there was an issue on the ownership of shares of Puerto Asul. But the SEC ordered the PSE to list the shares. Held: the SC held that the SEC cannot interfere with the policy and management of the PSE. Which government agency exercises supervision over brokers, holders of primary franchise? SEC How do we classify the power of the SEC? Regulatory and adjudicative. But the adjucative powers are only up to year 2000. It has supervision over corporation, partnerships and holders of primary franchise. PILIPINAS LOANS VS SEC If the issue involves an ultra vires act, is it the regular court or SEC? lets say the corporation is engage in brokering when it is not authorize by its charter. SEC. Any issue or controversy relating to the exercise of primary franchise is cognizable by the SEC. Does the SEC has to wait for the BSP to withdraw the license of this corporation that engage in brokering before it can suspend or revoke it franchise? No need, any ultra vires act is determined solely by the SEC What about rights arising from account opening from a broker? Lets say a person opens an account or a contract with a broker and the issues arising from the contract opening, can the SEC interfere or should it be the regular court? If an act will give rise to both violation of the SRC and intra-corporate controversy, can the SEC exercise jurisdiction or supervision? The SC held that if one act give rise to criminal liability and violation of the SRC, the administrative part can be enforced by the SEC, the criminal with is lodged with the DOJ and the regular courts
What if the Stock and transfer book has been fraudulently issued, does the SEC has the power to revoke a stock and transfer book that was fraudulently obtained? In the case of provident international resources vs CA, the validity of the entries in the stock and transfer book is an intra-corporate controversy therefore cognizable by the regular courts but the SEC has the power to revoke a stock and transfer book that was fraudulently obtained by the corporation Facts: a group of persons went to the SEC and reported that the stock and transfer book was lost, the SEC issued a replacement. But in truth and in
163
fact, it was not lost. It is in the possession of the controlling stockholder. Does the SEC has the power to revoke the second STB? Held: Yes, it is an administrative remedy and it does not require court intervention Ultra vires act regulatory supervision If an act give rise to both criminal liability and violation of the SRC, the SEC may exercise administrative supervision without prejudice for the court to determine that there was a crime or not The power to revoke stock and transfer book, an administrative remedy available to the SEC. Intra-corporate controversy is cognizable by the RTC designated by the SC as special commercial court, what is the test to determine if it is a intra-corporate controversy? Relationship test for as long as the issue relates or involves the corporation, partnership, and the public; corporation, partnership and its stockholders or partner; corporation, partnership against the State; partners or stockholders among themselves, it is intra-corporate Nature of the controversy test the controversies must pertain to the enforcement of rights and obligations under the corporation code. In the case REYES VS RTC OF MAKATI, the SC said that it should be combined, the relationship test and the nature of the controversy test should be combined. These tests must both concur for the RTC as special commercial court to exercise jurisdiction. corporate controversy? Is that cognizable in the RTC as special commercial court or RTC as a regular court? It passed the relationship test but under the nature of the controversy test, it fails because it involves issues on succession rights. Termination, removal of corporate officers are always a intracorporate dispute. And the only will have to resolve is whether or not the officers are corporate officers as defined by law. If such officer is not a corporate officer then the issue of termination is not cognizable by the RTC but by the labor arbiter. In the recent case, GARCIA VS EASTERN TELECOMMUNICATIONS, the vice president for personnel and support services, his position is in the by-laws, is that a corporate position? Yes, because it is in the by-laws Lets say it is an issue of termination of employment by a corporate officer but with the prayer for damages, does that take the jurisdiction of special commercial court? No, the claim of damages does not mean taking away the jurisdiction of the RTC as special commercial court, for as long as the principal issue is the validity of the termination of employment of the corporate officer. The claim for damages is only incidental but does not deprived the special commercial court jurisdiction What about the issue is the remuneration of stockholder as an officer, intra-corporation or not? Intra-corporate
Example under the Relationship test The issue of controversy concerns 2 stockholders who slap each other, is that intra-corporate? No Intra-corporate controversy should be intra-corporate relations and the dispute pertains to the rights and obligations under the Corporation code In that case of REYES VS RTC OF MAKATI, the mother was the controlling stockholder is ABC Corporation. A and B are brothers. A got angry because B have more shares. A filed an action to demand from the corporation accounting of the actual shares of the mother to determine how many shares will go to him and go to his brother B. is that an intra164
What about money placed by non-stockholder in the corporation, an action to recover that money from the corporation, intra-corporate or not? Lets say, A and B placed money in the corporation but they are not stockholders It is not, because there is no intra-corporate relation and it is cognizable by the RTC as regular courts Petition for suspension of payment Corporate Rehabilitation Under PD 902-A, the SEC has jurisdiction for suspension of payment. Which body now exercises supervision over corporate rehabilitation or suspension of payment? RTC designated as special commercial court. The SEC does not have jurisdiction over the suspension of
payment. Except those filed before the enactment of SRC What is a case which is under the RTC as special commercial court but filed under the RTC as a regular court? Can the regular court or the judge reraffle the case to the special commercial court? Or vice versa? In the case of CALLEJA VS PANDAY, the only thing that the court can do is to dismiss it and not to order the reraffle to the other court Corporate Rehabilitation Once the rehabilitation court issues the stay order and the appointment of the rehabilitation receiver, all claims are suspended. The Court has 5 days to determine if the petition is sufficient in form and in substance. If it is sufficient in form and substance, within 5 days, the court will appoint a receiver and issues a stay order. Sureties are NOT covered by the stay order What does the term claim means? Jurisprudence says that the term claim under the new rule means money claim or otherwise. Example: An action to claim missing luggage. Lets say Philippine Airlines files a petition for rehabilitation and some of its passengers filed an action to recover missing luggage because the came back from abroad, they discovered that their luggage is missing. Is that action be suspended? In the case of SPOUSES CULILLIG VS PHILIPPINE AIRLINES, such action are suspended Rehabilitation means technical insolvency Technical insolvency means the assets are more than the liabilities but foresees the unenforceability of payment of debts If the corporation is insolvent, it cannot be rehabilitated. It will move to liquidation What is tender offer in the SRC? TENDER OFFER occurs if a person or group of persons intends to buy at least 35% of the security of a public company. Public Company those shares are listed in the stock exchange or with at least 15M assets and one stockholder owns at least 100 shares each Example ABC corporation is owned by various stockholders (1, 2, 3) Lets say A buys the shares of 1 and 1 owns at least 35% of the ABC, then A will have to make a tender offer to the other stockholders of ABC Corporations to sell their shares to him for the same price terms and conditions What is the rationale of tender offer? To protect the minority stockholder If the stockholders agreed to the tender offer, then A has no choice but to buy the shares of the agreeing stockholders corresponding from the same number of shares he acquired from 1. If all of the stockholders agreed to sell, then it will be proportionately distributed. If A buys, 51% of ABC Corporation, then he has to buy everybody for the same price, terms and conditions. So, if it is 35%, he is obligated to buy the shares for those who will tender to him for the same proportion If he acquires 51% of the company over a 12 month period, then he is obligated to buy everybody for the same price, terms and conditions. So A must file a tender offer statement with the SEC, it will be published in newspaper of general circulation inviting the stockholders to tender their shares to the buying stockholder. What is the possible way to avoid tender offer? Lend money instead of buying shares of the stockholders with an option to buy the shares after 1 year
In labor case, there is an order for reinstatement but superseded by a rehabilitation petition, can the reinstatement order by the labor arbiter be implemented? No, event he reinstatement of the employee is suspended once the corporation is placed under rehabilitation. What about actions to nullify documents? Suspended also The objective of suspension is to give the rehabilitation court an ample time, undistracted to work on the rehabilitation of the distressed corporation Insolvency means assets is less than liabilities
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TAKE NOTE: the law says 51% percent over a 12 month period but the SEC increase the threshold limit to 35%, so it is now 35% The SC said that the TENDER OFFER RULE applies to direct and indirect acquisition. Illustration: ABC Corporation is owned by Corporation 1 and Corporation 2 Corporation 1 composed of 3 stockholders (A, B, C) Corporation 2 owns 34% of ABC Corporation Lets say that Corporation 2 acquires the shares of A in 34%. Is that covered by the tender offer rule? Take note, Corporation 2 does not own directly ABC Corporation because it has only 34%, If the total direct or indirect ownership of a corporation exceeds 35%, it is covered by the tender offer rule. Tender offer rule is applicable to both direct and indirect acquisition for as long as 1 stockholder owns controlling at least 35% of the shares of the public company
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Corporation Reviewer 2 1

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CORPORATION LAW REVIEWER BY MARX, MON, DONNA, JEN, THEENA AND ME-AN

As regards to: COMPOSITION

MANNER OF CREATION COMMENCEMENT OF JURIDICAL

AUTHORITY (who is authorized to exercise the powers)

Only the powers allowed or authorized by the

New Civil Code

SPOUSES NISCE VS EQUITABLE PCI BANK (516 SCRA 231)

A non-stock corporation is not organized for profit.

thru a quo warranto proceedings, not in a collection case.

Since the questioned cannot forestall a later challenge to its validity.

May a President be a secretary at the same time? No

May a President be a treasurer at the same time? No

BONDS borrowings of corporation

SHARES OF STOCK equity investment of the stockholders

Cash May be approved only by the BOD by majority of the quorum

Shall be applied against unpaid subscription price

If received by a natural is subject to tax; if received by corporation it is not subject to tax.

implied powers incidental powers

Stockholders and board meeting

How Often Purpose Where

Board of directors Regular Special Once a Anytime month Anywhere Anywhere

Governed by law on agency

Proxy authority principal present

As regards title conveyed

Trustee acquires the right to vote as well as all other rights

Right to file a derivative suit

1000 Php 7,500 Php 1,500 Php 1,500 Php 10,500

Grounds for expulsion

Existence of Capital Stock

Profit Distribution of profits

anywhere for as long as it is within the Philippines.

3. governed by the procedure under the chapter on non-stock corporation

Dissolution of Non-stock Corporation

Number of stockholders Stocks listed in the stock exchange Management by Stockholders

CLOSE not exceeding 20

Business Judgment Rule

Master Transcriber Marx

THE SECURITIES REGULATION CODE (SRC)

What are securities? Example:

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