Beruflich Dokumente
Kultur Dokumente
CORPORATION LAW
Corporation is one of the types of business
organizations. It is also the most important in economic
development.
INTRODUCTION
Sole proprietorship
- One man form of business entity, personally answers all
liabilities, but enjoys all the profts with the exclusion of
others
- Limited shareholders responsibility
- Paid subscription in full, you are no longer liable
Partnership
- Based on mutual trust and confdence
Joint venture
- one time grouping of persons whether they be natural or
juridical
- does not entail continuity because after the undertaking
is completed it is already the end
- particular partnership and joint venture would be
similar, but there is already a decision of the Supreme
Court declaring them as diferent
- when they do not register, it does not exist
- Foreign corporations enters into an agreement with a
domestic corporation, it must be registered. Generally
they do not need to be registered.
Corporations
- They may enter into joint venture, but generally they
cannot enter into a partnership, but there are
exceptions allowed by the SEC: the 3 exceptions must go
hand in hand
1. The articles of incorporation expressly authorized
the corporation to enter into contracts of
partnership;
2. The agreement or articles of partnership must
provide that all the partners will manage the
partnership; and
3. The articles of partnership must stipulate that all
the partners are and shall be jointly and severally
liable for all obligations of the partnership.
DEFINITION AND ATTRIBUTES
4 attributes of a corporation
1. Artifcial being
2. Created by operation of law
3. Right of succession
4. Powers, attributes and properties expressly authorized
by law or incident to its existence.
Doctrine of limited capacity
- Only such powers as are expressly granted to it by law
and by its articles of incorporation including others
which are incidental to such conferred powers, those
reasonably necessary to accomplish its purpose and
those which may be incidental to its existence
- Can do things as the law asks or allows it to do
- If it does anything beyond, it shall be considered as
ULTRA VIRES
General rule: Moral damages cannot be granted to
corporations
Exception: Filipinas Broadcasting Network Inc. vs. Ago
Med
- In cases of slander, libel and other forms of defamation
(should not qualify because the code does not qualify
whether natural or juridical) Art. 2219 of the civil code:
Art. 2219. Moral damages may be recovered
in the following and analogous cases:
(1) A criminal ofense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27,
28, 29, 30, 32, 34, and 35.
The parents of the female seduced, abducted, raped, or
abused, referred to in No. 3 of this article, may also
recover moral damages.
The spouse, descendants, ascendants, and brothers and
sisters may bring the action mentioned in No. 9 of this
article, in the order named.
Advantages (SEE LADIA BOOK)
- No. 2 may also be a disadvantage
- No. 5 may also be a disadvantage
A corporation is a person, therefore protected by the due
process clause and equal protection clause of the
Constitution
CLASSIFICATION OF CORPORATIONS
Section 3 Stock and non-stock
- Importance of knowing, determining what provisions of
the code or the law may be applicable
Section 3. Classes of corporations. -
Corporations formed or organized under this Code may
be stock or non-stock corporations. Corporations which
have capital stock divided into shares and are
authorized to distribute to the holders of such shares
dividends or allotments of the surplus profts on the
basis of the shares held are stock corporations. All other
corporations are non-stock corporations. (3a)
Non-stock- title 10
Stock- section 51
Stockholders must generally cast their votes in the
meeting; section 4 governed primarily by the law
creating them
Section 4. Corporations created by special
laws or charters. - Corporations 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. (n)
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
2
Section 3
- The two requisites must always concur
1. That they have a capital stock divided into shares; and,
2. That they are authorized to distribute dividends or
allotments as surplus profts to its stockholders on the
basis of the shares held by each of them.
Section 4
- Created by a special law, they have their own character
- They are not immune from suit unless provided by the
law of their creation
- Primarily governed by the law creating them
- Their subsidiaries are entirely diferent or independent
from that of the other
Close corporation
- There is no exemption it is absolute
Public corporation
- Political or governmental purposes
- Those formed or organized for the government or a
portion of the State or any of its political subdivision
and which have for their purpose the general good and
welfare
Private Corporation
- Immediate beneft, aim or advantage of private
individuals
- Those formed for some private purpose, beneft, aim or
end
- Distinction: public for governmental purpose
Corporation Sole
- Exemption to the rule because it is composed only of
one person
- An incorporator may also be a juridical person
Close corporation
- There is exclusivity of shares of stock
- Section 96-105
- Restrictions to transfer shares
- Only those indicated can own shares
- Article must provide that there will be no public ofering
Open corporation
- openly admit investors
- example: stock exchange
Domestic/ Foreign
Test
- Incorporation test
- If incorporated under the laws of the Philippines it is a
domestic corporation
ME Gray vs. CA
- Parent or Holding/ subsidiaries and afliates
- Afliates- no majority vote
SMC 12%
HERSHEY CBPl 12%
12%
Afliate is subject to common control by the 12 % owners
De jure
- cannot be attached by the state even in a quo warranto
proceeding
De facto
- exists by virtue of colorable compliance
- Attached directly only by the state in a quo warranto
proceeding
Corporation by estoppel
- So defectively formed, but still considered corporation,
but only in relation to those who cannot deny their
existence section 20 and 21
FORMATION AND ORGANIZATION
3 stages
1. Creation
2. Re-organization or quasi-reorganization
3. Dissolution/winding-up
Purpose clause
- Defning the scope of authority of the corporate
enterprise pr undertaking. Both confrmed and limited
4 limitations of purpose clause
1. Lawful
2. Specifc or stated concisely
3. More than one, the primary and secondary must
be specifed
4. Lawfully combined
- Provision that states, cannot be issued less than par,
exception is treasury shares because it can be issued
less than par
A corporation commences only upon issuance of the
certifcate, prior thereto it has no being and cannot
transact business. Promoters cannot act for a projected
corporation
Metro Manila- paid up capital requirement is 10 M
Non- stock- mere mention of the operating capital
Mention the authorized capital
Restrictions
- Mandatory in close
- Not mandatory in ordinary
Non-stock
- If value is not more than 100,000
A corporation cannot use any other name unless it has
been amended
Section 19
- If confusingly similar it will not be allowed to be
registered
- Verifcation slip from the records ofcer
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 certifcate of incorporation under its ofcial
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. (n)
- Words corporation or inc. either in full or abbreviated
form must be included
Section 18. Corporate name. - No corporate
name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
CBP
3
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
certifcate of incorporation under the amended name. (n)
Doctrine of secondary meaning
- A word or phrase originally incapable of exclusive
appropriation [usually generic] with reference to an
article in the market, because of geographically or
otherwise descriptive, might nevertheless have been
used so long and so exclusively by one producer with
reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase has
become to mean that the article was his product.
Section 18
- Lyceum of the Philippines case, the additional
geographical name does not make it confusingly similar
- actual confusion is not necessary- Philips case it is
enough that there is probable confusion
2 requisites must be proven
- that the complainant corporation acquired a prior right
over the use of such corporate name
- identical, deceptively or confusingly, patently deceptive
principal ofce
- statement of principal ofce is required
- city and municipality not only province must be
specifed
- principal ofce NOT operations ofce
- necessary because it will establish the residence of
corporations
- venue of actions for or against the corporations
- venue of meetings
- section 51 meetings may only be within the boundaries
of the city where the principal ofce
- non-stock may be held anywhere in the Philippines, if
provided in its by-laws
- where summons may be served
- registration of chattel mortgage must be registered in
the register of deeds where the principal ofce is located
Clavecilla Radio System vs. Antillon
- action not upon a written contract
- city where the defendant resides
term of existence
- corporate term required
- determining what point in time the juridical personality
will cease to exist
- enter into contract only when it has juridical personality
- once it ceases to exist, it no longer has personality
- exist for another 3 years only for purposes of liquidation
- Dissolution- it is automatic
When should extension be made?
- General rule: Not earlier than 5 years
- Exception: unless there are justifable reasons
May it be extended after expiration?
- Alhambra cigar vs. SEC once it ceases to exist it has no
vested politic, exist only for a period of 3 years only for
liquidation and for that purpose only
Article 5 How many incorporators should there be?
- 5-15
May a corporation be an incorporator?
- General rule: only natural persons
- Exception: cooperatives and corporation primarily
organized to hold equities in rural banks
How about minors?
- NO, because they must be of legal age
May a corporation organized by incorporators consisting
solely of foreigners
- Yes, there is no nationality requirement only residence,
as long as majority are residents of the Phil
Defne incorporators <sec.5>
- Those person mentioned in the articles as originally
forming the corporation and who are signatories of the
articles of incorporation.
- Must be signatories to be incorporators
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. (4a)
Defne corporators <sec.5>
- All persons who compose the corporation at any given
time and need not be among those who execute the
articles of incorporation at the start of its formation and
organization.
- Originally or subsequently
- Section 5 provides:
Corporators in a stock corporation are called
stockholders or shareholders. Corporators in a non-
stock corporation are called members. (4a)
May a corporation be a corporator?
- YES. There is nothing to prevent a corporation from
being a stockholder
Incorporator must subscribe to 1 share
There are those that are exclusively reserved to Filipinos
An incorporator maybe a corporator as long as he is a
stockholder
section 6
Section 6. Classifcation 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 classifed 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
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
4
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 fx the terms and conditions of
preferred shares of stock or any series thereof: Provided,
That such terms and conditions shall be efective upon
the fling of a certifcate 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 fve
(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 certifcate 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. 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.
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. (5a)
How many directors should there be?
- General rule: Not less than 5 not more than 15
- Exceptions:
1. Educational corporations registered as non stock
corporation whose number of trustees, though not less
than fve and not more than [15] should be divisible by
fve [5], meaning they must have either fve, ten, or
ffteen trustees and no other;
2. In close corporations where all the stockholders are
considered as members of the board of directors thereby
efectively allowing twenty members in the board.
3. The by-laws of a corporation may provide for additional
qualifcations and disqualifcations of its members of the
board of directors or trustees. However it may not do
away with the minimum disqualifcations lay down by
the Code.
Qualifcations of the governing board
- Requires mere residency <sec. 23>
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
ofce for one (1) year until their successors are elected
and qualifed. (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.
May a domestic corporation have a governing board
consisting solely of foreigners?
- YES, section 23 majority of them must be residents of
the Philippines, no nationality requirement
Anti-dummy act <sec.2-A>
- If the business undertaking or activity is only partially
nationalized, aliens can be elected as such directors,
[unless the law provides otherwise] but their number
shall only be in proportion to their equity or
participation in the capital stock of the corporation.
Disqualifcations <sec.27>
- The disqualifcations provided for is absolute and may
not be done away with. Corporate by-laws may, however,
provide for additional qualifcations and
disqualifcations.
Section 27. Disqualifcation of directors,
trustees or ofcers. - No person convicted by fnal
judgment of an ofense punishable by imprisonment for
a period exceeding six (6) years, or a violation of this
Code committed within fve (5) years prior to the date of
his election or appointment, shall qualify as a director,
trustee or ofcer of any corporation. (n)
Section 27 and 23 minimum disqualifcations and
qualifcations
Lee vs. CA
- By laws may provide for additional
Govt vs. El hogar Filipino, Gokongwei vs. SMC
Capital structure
Foundation- minimum paid-up capital 3M
Authorized capital 1 M No. of shares 1M shares
par value 1.00
Amount of shares subscribed
50 K A
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
5
50 K B
C 250K
D
E
PAID UP =62,500
Corporation cannot exceed more than 1 M it is the maximum
amount it cannot issue more unless amended
Maximum shares it can issue is 1M shares unless amended
How much shares should be subscribed?
- Must be at least 25% of the authorized capital stock
Paid- up must be at least 25%-minimum
Section 30
- Total subscription compliance with minimum 25% total
- Any combination would comply with the minimum
required by section 30
Section 30. Compensation of directors. - In
the absence of any provision in the by-laws fxing their
compensation, the directors shall not receive any
compensation, as such directors, except for reasonable
per diems: Provided, however, That any such
compensation other than per diems may be granted to
directors by the vote of the stockholders representing at
least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall
the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the
preceding year. (n)
Minimum for a domestic corporation?
- In no case shall the paid- up capital be less than 5k
Is there a minimum authorized capital imposed by the
code?
- If there is minimum paid-up logically there should also
be a minimum capital =5000
Minimum paid-up capital for a fnancing company metro
manila 10 M if located in MM
Shares of stock
Purpose of classifcation
- To specify and defne the rights and privileges of the
stockholders;
- For regulation and control of the issuance of sale of
corporate securities for the protection of purchasers and
stockholders.
- As a management control device.
- To comply with statutory requirements particularly
those which provide for certain limitations on foreign
ownership and shares like overseas employment
agencies requiring to own at least 75% of the shares of
stock thereof.
- To better insure return on investment which can be
afected through the issuance of redeemable shares or
preferred shares, i.e., granting the holders thereof,
preference as to dividends and/or distribution of assets
in case of liquidation; and,
- For fexibility in price, particularly, no par shares may
be issued or sold from time to time at diferent price
depending on the net worth of the company since they
do not purport to represent an actual of fxed value.
Section 6
- Each shall be equal in all respects to every other share
Preferred shares
- Specifc preference
- Dividends or during liquidation
No par
- Can sell it with the network of the corporation
Distinction between the subscribed and outstanding
stocks?
- Section 137
Section 137. Outstanding capital stock
defned. - The term "outstanding capital stock", as used
in this Code, means the total shares of stock issued
under binding subscription agreements to subscribers
or stockholders, whether or not fully or partially paid,
except treasury shares. (n)
- Voting and dividend rights, it refers to the outstanding
capital stocks
- Only outstanding stocks are allowed to vote and receive
dividends
- Actually the same
Treasury shares
- are also subscribed shares
- while they remain in the treasury, no voting and
dividend rights
- may be reissued by the corporation
- once reissued they become outstanding stocks again
common shares
- carry the right to vote
preferred shares
- grants the holder preference
- preference as to dividends
- preference as to distribution of the remaining assets
upon dissolution or
- both
- YOU MUST STATE THE PREFERENCE BECAUSE IF
NOT THEY ARE PRESUMED TO BE EQUAL
- It may include such other preferences not inconsistent
with the Code. This is so because Section 6 of the said
law allows a stock corporation to issue preferred shares
subject only to the limitations imposed therein which
are:
a. They can be issued only with sated par value; and,
b. The preferences must be stated in the articles of
incorporation and in the certifcate of stock, otherwise,
each share shall be, in all respect, equal to every other
share.
Participating
- Must be stated because the presumption is that it is
participating
Cumulative
- Irrespective of whether or not they where earned
Preferred
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
6
- May be denied
- Unless denied they are still entitled
What if hindi i-declare kahit na may dividends rights for
the previous years? May they be denied dividend rights
because they are non holders of non-cumulative? NOTE:
YOU CANNOT COMPEL THE CORPORATION TO
DECLARE DIVIDENDS UNLESS IT EXCEEDS 100 %
PAID UP CAPITAL SEC. 43
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 frst 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. (16a)
Stock corporations are prohibited from
retaining surplus profts in excess of one hundred
(100%) percent of their paid-in capital stock, except: (1)
when justifed by defnite corporate expansion projects
or programs approved by the board of directors; or (2)
when the corporation is prohibited under any loan
agreement with any fnancial 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. (n)
- It depends because there are three types of non-
cumulative preferred shares
- Discretionary dividend type
- Mandatory if earned
- Earned cumulative or dividend credit type
Compare cumulative share from non-cumulative, earned
cumulative or dividend credit type
- Cumulative share whether or not earned
- Non-cumulative earned cumulative or dividend credit
type- only if earned
Par
- stated par value; shall not be issued less than par
No par
- without stated par value
- once fully paid no longer liable
Corporations cannot use its capitals in declaring
dividends; not all can issue no par value section 6
Voting
- entitled to vote at any motion brought up in writing
Non-voting
- not entitled to vote
What types of shares may be denied of the right to vote?
- Preferred and redeemable shares
Is it correct to state that common shares can never be
denied the right to vote?
- Only preferred and redeemable shares are denied unless
provided in this code
- PWEDENG MA-DENY YUNG COMMON SHARES, KASI
YUNG FOUNDERS SHARES MERON SILANG
EXCLUSIVE RIGHTS NA SILA LANG ANG MERON, SO
PWEDE SILANG BUMOTO WITH REGARDS TO
SOMETHING NA HINDI NA SAKOP NG COMMON
SHARE RIGHTS
- Example: founders shares- may be given certain rights
and privileges
- Even common shares may be denied the right to vote of
founders shares issued <sec.7>
Section 7. Founders' shares. - Founders'
shares classifed 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 fve (5) years subject to the approval of the
Securities and Exchange Commission. The fve-year
period shall commence from the date of the aforesaid
approval by the Securities and Exchange Commission.
(n)
Do you include non-voting shares in passing a valid
corporate act?
- Even non-voting shares are entitled to vote under
section 6
Redeemable shares
- Discretionary/optional
- Obligatory or mandatory
Generally a corporation can reacquire its own shares if
it has unrestricted retained earnings
Exception: redeemable shares may be reacquired
irrespective of retained earnings
Treasury shares
- They are treasury while in the treasury account of the
corporation
May they be reissued by the corporation?
- YES
If they are reissued will they be denied the right to vote?
- Once reissued they shall become outstanding stocks
again and purchasers shall be entitled to all the rights
and privileges as the other holders have
Section 57 treasury shares have no voting and dividend
rights. Why not?
Section 57. Voting right for treasury shares. -
Treasury shares shall have no voting right as long as
such shares remain in the Treasury. (n)
- Answer: commissioner vs. manning page 62 frst par.
Although authorities may difer on the exact
legal and accounting status of so-called treasury shares,
they are more or less in agreement that treasury shares
are stocks issued and fully paid for and reacquired by
the corporation either by purchase, donation, forfeiture
or other means. Treasury shares are therefore issued
shares but being in the treasury they do not have the
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
7
status of outstanding shares. Consequently, although a
treasury share, not having been retired by the
corporation re-acquiring it, may be re-issued or sold
again, such shares, as long as it is held by the
corporation as a treasury share, participates neither in
dividends, because dividends cannot be declared by the
corporation to itself, nor in meetings of the corporation
as voting stock, for otherwise equal distribution of voting
powers among stockholders will be efectively lost and
the directors will be able to perpetrate their control of
the corporation, though it still represents a paid for
interest in the property of the corporation. The foregoing
essential features of a treasury stocks are lacking in the
questioned shares.
In this case, and under the terms of the trust
agreement, the shares of stock of Reese participated
in dividends which the trustee received and the said
shares were voted upon by the trustee in all corporation
meetings. They were not, therefore, treasury shares.
When the law speaks of outstanding rights it does not
include treasury shares
Treasury shares may be reissued
- They are actually assets of the corporation
- Once re-issued they become outstanding stocks again
- The corporation may cancel them; in efect there will be
a reduction in the outstanding capital stocks
- The code does not require ordinary corporations to
provide for restrictions, but it does not likewise prohibit
restrictions
- Example: right of frst refusal
- The restriction must be contained in the articles of
incorporation
- If provided in by-laws but not in the articles of
incorporation then it will not be binding
- Restrictions and preferences are mandatorily required in
close corporations
- If it does not provide restrictions it is not a close
corporation
- Specifed persons- close corporations
- If not one of those specifed you are not included
because there is exclusivity in close corporations
- Should also be in the by-laws not only in the articles of
incorporation
No transfer clause
Execution clause
Acknowledgment
Treasurer afdavit part of the articles of incorporation
Section 23-27 minimum qualifcations, but there may be
additional
Grounds for disapproval
- Only substantial and not strict is required
May the SEC refuse or reject registration?
- <Section 17>
Section 17. Grounds 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 Code:
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 Afdavit 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 fnancial intermediaries,
insurance companies, public utilities, educational
institutions, and other corporations governed by special
laws shall be accepted or approved by the Commission
unless accompanied by a favorable recommendation of
the appropriate government agency to the efect that
such articles or amendment is in accordance with law.
(n)
- But the grounds in section 17 are not exclusive
When will the corporation commence to exist?
- Section 19
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 certifcate of incorporation under its ofcial
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. (n)
A corporation de jure can come into existence only upon
the issuance of the certifcate of registration by the
SEC? TRUE OR FALSE?
- TRUE
- EXCEPTION: CORPORATION SOLE <sec. 112>
Section 112. Submission of the articles of
incorporation. - The articles of incorporation must be
verifed, before fling, by afdavit or afrmation of the
chief archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be, and accompanied by
a copy of the commission, certifcate of election or letter
of appointment of such chief archbishop, bishop, priest,
minister, rabbi or presiding elder, duly certifed to be
correct by any notary public.
From and after the fling with the Securities
and Exchange Commission of the said articles of
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
8
incorporation, verifed by afdavit or afrmation, 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
beneft of his religious denomination, sect or church,
including hospitals, schools, colleges, orphan asylums,
parsonages and cemeteries thereof. (n)
- CORPORATION SOLE- upon fling of the verifed articles
of incorporation, once fled it is vested with a judicial
capacity
General rule section 19
- Vested with judicial capacity upon issuance of the
certifcate by the SEC
o However it is not accurate according to atty.
Ladia because there are those that can issue
for example cooperatives- BUREAU OF
COOPERATIVES which register, home
insurance guaranty corporation- HOME
OWNERS
Cagayan Fishing vs. Sandika
- Corporations are created by law
- Commence to exist upon issuance by the CONCERNED
government corporation or agency
- Prior there to it has no being
- The transfer of the property was not valid, it likewise did
not have the right to transfer
De jure
- Strict or substantial compliance
De facto
- 4 requisites must go hand in hand take out anyone of
them there can be no de facto corporation
1. There is a valid statute under which the corporation
could have been created as a de jure corporation.
2. An attempt, in good faith, to form a corporation
according to the requirements of law, which goes far
enough to amount to a colorable compliance with the
law;
3. A user of corporate powers, the transaction of business
in some way as if it were a corporation; and,
4. Good faith in claiming to be and doing business as a
corporation.
Are the rights and obligations between ofcers and
directors of a de jure and de facto the same?
- YES. Governed by the same law, rules and regulations
Only important in determining, is for the purpose of
applying the rules with regards to the direct and
collateral attack
The existence of a de jure cannot be questioned even by
the State, either directly or indirectly
Existence of a de facto can be questioned only by the
State directly in a quo warranto proceeding only
Municipality of Malabang vs. Benito
- What is the missing link so as to consider it a de facto?
A law, because the executive order is unconditional
- An unconditional act afords no rights, creates no ofce
- Legal contemplation it was never passed at all
- It can therefore be questioned by any person
If the certifcate of registration has not been issued, may
a corporation de facto exist?
- NO!
- Number 4 requirement, good faith in claiming to be and
doing business as a corporation
Hall vs. Piccio
- Missing link is good faith
- The certifcate was not yet issued by the SEC, the
members knew and therefore they were not acting in
good faith, therefore anybody can question its existence
Corporation by estoppel
- So defectively formed so that they are not to be
considered a de jure or de facto
- General partners- liable even beyond his promise even
his personal properties are prone to attachment
Lozano vs. Delos Santos
- Founded on principle of equity
- Exercise corporate powers
- Enters with business with 3
rd
parties
- When there is no 3
rd
persons involved and the problem
arises between there members, therefore they
themselves know that there is no corporation by
estoppel
Albert vs. University
- 1965 case, no section 21 yet
- Applied where the rules governing agency
- A person purporting in behalf of a non existing
corporation
- Section 21, you arrive at the same decision
Chiang Kai Siek vs. CA
- SC based its decision from the provision of the
education act
- It cannot immune itself by virtue of its non compliance
with the law
Assuming there was no law?
- YES, it may still be sued as a school for the past 32
years the school represented itself as possessed of
juridical personality
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
9
General rule: a 3
rd
party transacting with a non existent
corporation shall be estopped to deny
Asia banking vs. standard products
- General rule: absence of fraud a person who has dealt
with a non incorporated corporation shall be stopped to
deny from actions in which it had benefted
- Exemptions: when there is fraud the general rule shall
not apply
Salvatierra vs. Garlitos
- As a general rule a person who has contracted it a
corporation lacking personality
- Doctrine is not applicable where fraud takes part in the
transaction
Another exemption
International express travel and tours vs. CA
- No fraud in this case
- How come Kahn was made liable?
- Doctrine of incorporation
- Applies only if that person is trying to escape from a
contract where he is benefted
- In this case petitioner is not trying to escape liability,
but rather the one claiming from the contract
Would this apply to foreign corporation?
- YES, it may apply
- Georg Grotjahn vs. Isnami
A foreign corporation cannot gain access to our courts
unless they attain a license to engage in business in the
Philippines but applying corporation by estoppels, the
court allowed
Municipality of Malabang case
- No law, hence may be questioned by any person
- An unconstitutional act is not a law, t confers no rights,
it imposes no duties, it afords no protections, it crates o
ofce, it is in legal contemplation, as inoperative as
though it had never been passes
Hall vs. Piccio
- No good faith
Corporation by estoppel
- Admission, conduct or agreement
- Will not apply among members themselves there must
be a 3
rd
party
- Cannot escape when benefted
- General rule: you deal with a corporation, as to estop it
- Exceptions: 1. fraudulently misrepresents the third
person may fle an action directly to those members, 2.
3
rd
party will not be estopped if he is not trying to escape
liability
2 possible remedies
- Chiang kai siek case
- Albert case
What would be the efect if the corporation failed to
commence transaction?
- Automatic
Operated but becomes subsequently inoperative for 5
years only a ground for suspension, proper notice and
hearing
Commencement
- Example realty company
CORPORATE CHARTER AND ITS AMENDMENTS
What do you understand by the word charter? Is it the
same as articles of incorporation?
- Corporate charter is broader
Franchise
- Primary power granted by the state to be and act as a
corporation
- Secondary franchise is the right or privilege that the
corporation may exercise
You cannot issue investment contracts without a
secondary franchise, kailangan primary muna hindi
pwede mauna secondary kasi sa section 19 it does not
exist until issued with a certifcate of registration or
incorporation
Corporate entity
- Corporation exist separately and independently from the
stockholders
- Stockholders cannot bring an action, to bring back the
properties of a corporation
- Corporation has no interest in the individual properties
of its members
Sulo ng Bayan vs. Araneta
- Corporation cannot bring an action for the recovery of
the properties of its members
Caram vs. CA
- Stockholders cannot be held liable for the legitimate
obligations of the corporation, they exist separately and
independently from one another
Cruz vs. Dalisay
- Final judgment against a corporation cannot be enforced
against stockholders
Rustan Pulp vs. CA
- Corporation exist separately and independently
- Corporation are juridical entities, they exist only in legal
contemplation, can act only through its authorized
representatives
Soriano vs. CA
- They are not personally liable
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
10
- They where signed for and in behalf of the corporation
Palay inc. vs. Clave
- Liabilities incurred by the corporation cannot be
enforced against stockholders, etc., even if stockholders,
etc. happens to own a substantial interest in the
corporation, mere ownership does not disregard the
corporate entity theory
Corporate entity for legal or legitimate purposes only
Two or more corporations, one of them will be treated as
a mere alter-ego
You cannot pierce the veil of corporate fction when
there are no facts attendant in the case
Corporate Entity Theory
- The corporation is possessed with a personality separate
and distinct from the individual stockholders or
members and is not afected by the personal rights,
obligations or transactions of the latter
Instrumentality rule
- Where one corporation is so organized and controlled
and its afairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fction of the
corporate entity of the instrumentality may be
disregarded
- Courts are concerned with reality and not form
- Mere ownership of all or substantially all of the shares
of stock of a corporation is not, in itself, insufcient
ground for disregarding the separate corporate
personality. And for the separate personality of the
corporation to be disregarded, the wrong doing must be
clearly and convincingly established
- Fraud must be proven by clear and convincingly
evidence amounting to more than preponderance. It
cannot be justifed by speculation and can never be
presumed. And only if it sought to hold the stockholders
liable directly for corporate debt
Palacio vs. Fely
- Piercing the veil of corporate fction
- Fely trans and the other corporation is one and the
same
Marvel bldg. vs. David
- There must be facts before the court will be justifed in
piercing the veil of corporate fction
- Corporation was a mere extension of the personality of
the person
Yutivo and sons vs. Court of Tax Appeals
- What where the facts or circumstances arrived by the
court here?
- Subscribed capital where all advanced by Yutivo, the
board where the same as Yutivo
Commissioner of Internal Revenue vs. Norton and
Harrison
- Court applied the general rule
- Mere substantial ownership does not mean that it
has a same corporate entity
La Campana Cofee Factory, Inc. vs. KKM
- Two corporations managed by the same family, workers
were made interchangeably
Emilio Cano vs. CIR
- Sued in there ofcial capacity
- Reverse of Soriano vs. CA (signed in their ofcial
capacity)
Tesco vs. WCC
- The two corporations where located in the same ofce
Claparols vs. CIR
- Same as NAFLU and A.C. Ransom
Concept builders vs. NLRC
- Instrumentality rule. What is the instrumentality rule?
where one corporation is so organized and controlled
and its afairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fction of the
corporate entity of the instrumentality may be
disregarded.
- Has no separate mind of its own. What is the degree of
control?
1. Control, not mere majority or complete stock control,
but complete domination, not only of fnances but of
policy and business practice in respect to the
transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will
or existence of its own.
2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty or dishonest and
unjust act in contravention of plaintifs legal rights;
and,
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained
of.
- The absence of one of the elements prevents piercing
the corporate veil. In applying the instrumentality or
alter ego doctrine, the courts are concerned with
reality and not form, with how the corporation operated
and the individual defendants relationship to that
operation.
There must facts and circumstances before warrant
piercing the veil of corporate fction
The control necessary does not mean stock ownership
MCConnel vs. CA
- were located in the same foor
- while the mere ownership of all or nearly all of the
capital stock of a corporation does not necessary mean
that it is a mere business conduit of the stockholder,
that conclusion is amply justifed where it is shown, as
in the case before us, that the operations of the
corporation were so merged with the stockholders as to
be practically indistinguishable from them. To hold the
latter liable for the corporations obligations is not to
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
11
ignore the corporations separate entity, but merely to
apple the established principle that such entity cannot
be invoked or used for purposes that could not have
been intended by the law that created that separate
personality.
Tan boon bee vs. Jarencio
- Why would a drug company need a printing machine
- The property must be in pursuance of a company
business
Cease vs. CA
- Alter-ego or the extension of the person of forest ware
does the court pierced the veil of corporate fction
- As to not deprive the holders of their successional rights
- Mere ownership of all or substantially all is not a
justifcation of piercing the veil of corporate fction
Fraud must be proven by clear and convincing evidence
cannot presume or speculate, there must be facts and
circumstances
Fraud must be clear and convincing evidence more than
preponderance
Remo Jr. vs. IAC
- The resolution was not entered to defraud anyone
Del Rosario vs. National Labor Commission
- The wrongdoing must be clearly established
- There must be facts to support
- Payment of claims cannot thus be presumed
Indophil Textile Mill vs. CALICA
- How do you distinguish this ruling to La Campana,
having the same issues:
- La campana, one payroll, employees were made
interchangeable. Acrylic had its own standards
PNB vs. Ritratto Group
- Control test
- Not mere majority but rather complete
- Twin ace was only a subsequent interested party
- Assets and machineries
Amendment of the articles of incorporation
- Express power granted to a corporation
Section 16
- Appraisal right
- Section 81 to object on certain acts and transactions
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 efect 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. (n)
- Right granted only in specifed instances
Are non-voting shares included in amending the articles of
incorporation
1 100/s
XYZ-----ABC
2 100/s
To
10 100/s
=1M/S what would be
the 2/3?
Section 6 last paragraph
Voting shares are excluded except the foregoing instances
1 1
2 2
3 3
4 4
5 5
6 6
1 & 2=absent
1&2=absent but gave their written assent
3 & 4= objected
3&4=objected
5 & 6= approved the amendment 5&6=approved
Would there be a valid amendment
Special amendments 37 & 38 shortening that would
result to dissolution require prior approval by the SEC
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 ratifed 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 ofce 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. (n)
Section 38. Power to increase or decrease
capital stock; incur, create or increase bonded
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
12
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 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 ofce with postage prepaid, or served
personally.
A certifcate 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) 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
efective 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
(7) The vote authorizing the increase or diminution of
the capital stock, or the incurring, creating or
increasing of any bonded indebtedness.
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 certifcates shall be kept
on fle in the ofce of the corporation and the other
shall be fled 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
Commission of its certifcate of fling, the capital stock
shall stand increased or decreased and the incurring,
creating or increasing of any bonded indebtedness
authorized, as the certifcate of fling may declare:
Provided, That the Securities and Exchange Commission
shall not accept for fling any certifcate of increase of
capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully
holding ofce at the time of the fling of the certifcate,
showing that at least twenty-fve (25%) percent of such
increased capital stock has been subscribed and that at
least twenty-fve (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-fve (25%) percent of the subscription: Provided,
further, That no decrease of the capital stock shall be
approved by the Commission if its efect 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
Commission, which shall have the authority to
determine the sufciency of the terms thereof. (17a)
The vote must be cast at the meeting called for that
purpose
Written assent would not sufce
When do amendments become valid and efective?
- Only upon the approval of the SEC TRUE OR FALSE?
- FALSE because it can be valid upon the date of fling if
not acted upon within 6 months without fault
attributable to the corporation
Why is it retroactive?
What provision may be amended, altered or repealed
Can you change name, address for example she married
or changed address?
- NO. you cannot change that
Fait accompli, are beyond the powers or authority of the
corporation to change, alter or modify. These would
include the following:
- Names of the incorporators and
- The incorporating directors or trustees,
- The name of the treasurer originally or frst elected by
the subscribers or members to act as such until his
successor has been duly elected and qualifed,
- The number of shares and amount originally subscribed
and paid out of the original authorized capital stock of
the corporation,
- The date and place of execution of the articles of
incorporation,
- The signatories and acknowledgment thereof.
- All other provisions or matters stated or contained in
the articles are subject to amendment.
Founders or signatories hindi pwede palitan
Names, nationalities- you cannot
Capital- right granted by law to all corporation
Paid up capital- NO
Restriction and transfer of shares in ordinary stock
corporations
- You can, but close corporation cannot
- Section 96, otherwise it will not be a close corporation
Section 96. Defnition and applicability of
Title. - A close corporation, within the meaning of this
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
13
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 specifed number of persons, not
exceeding twenty (20); (2) all the issued stock of all
classes shall be subject to one or more specifed
restrictions on transfer permitted by this Title; and (3)
The corporation shall not list in any stock exchange or
make any public ofering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall not
be deemed a close corporation when at least two-thirds
(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.
Transfer clause, executor clause, acknowledgment,
treasury afdavit-NO
Philippine First Insurance case
- Mere change in the name of a corporation or by merely
complying with the law is general amendment
- It does not change its personality. It is the same person
in a diferent name. the charter is the same
Amendment of a corporate term
- Extending the same can never be made 7 years prior?
TRUE or FALSE
- FALSE. It can be if there are justifable reasons for
earlier extension as may be determined by the SEC
Can you extend the corporate term if it has already
expired?
- Once the term expires without an amendment having
happen it ceases to exist as a body politic. It is dissolved
automatically on the day it expires.
Alhambra cigar and PNB case
Instances when the SEC allowed extension whose term
has already expired
- All of them involved are institutions of learning, it was
the case in order to avoid confusion that would arise
later on.
BOARD OF DIRECTORS/TRUSTEES
Section 23
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
ofce for one (1) year until their successors are elected
and qualifed. (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.
- Controlled by the board of directors
- Authority are however restricted to the day to day
- Stockholders may have all the proft but will turn over
the management to the governing board
- But unless the law provides the power may be delegated
General rule
- Corporations must sit and act as a body
- Will be bound by corporate ofcers if they acted within
the 5 classifcation page 150
Ramirez vs. Orientalist co.
- What was the position of Fernandez in this case?
TREASURER
- Why did the court rule that actions of Fernandez bound
the corporation when he is not even a board of director?
if a man is found acting for a corporation
with the external indicia of authority, any person not
having notice of want of authority, may usually rely
upon those appearances; and if it be found that the
directors had permitted the agent to exercise that
authority and thereby held him out as a person
competent to bind the corporation, or had acquiesced in
a contract and retained the beneft supposed to have
been conferred by it, the corporation will be bound,
notwithstanding the actual authority may never have
been granted.
- Contracts must be made by the director and not the
stockholders
- Actions of the stockholders in such matters is only
advisory and not in any way binding in the corporation
Barreto vs. La previsora Filipina
- Everything emanates from the board of directors
- Stockholders action is merely advisory except their
approval or vote is necessary to prove a valid corporate
act
Qualifcations:
- No citizenship requirement, at least majority must be
residents
- Can have a governing board consisting solely of
foreigners
- But we have to take into consideration partly
nationalized industries and other laws which prohibits
or limits foreign ownership
- Anti-dummy act
- Utilization development of natural resources 60% must
be owned by Filipino citizens, therefore they only own
40%---10 members they can only have 4 seats, but not
entirely correct because the law may provide otherwise;
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
14
educational institutions restricted to Filipinos, but there
are exceptions when created by religious and charitable
institutions.
- By-laws may provide additional qualifcations and
disqualifcations
- To qualify as a director he must own at least 1 share
Should the stockholder be the equitable or benefcial
owner in order to qualify as a director?
- NO, it is not necessary, as long as you are listed in the
books as owner of one share
Lee vs. CA
- As long as you are listed in the books as owner of one
share
- Under the old law he must be the benefcial owner and
legal owner thereof but in the new law it is not required
as long as it stands in his name he is qualifes
1 A-100t/S B (own in the trust of X) is B qualifed to be a
director?
2
3-10
2 transferring there voting rights in favor of VT
Other rights will accrue in favor of them, but not the voting rights
voting rights must be recorder in the books of the corporation that
it is transferred
PNB-IFL- wholly owned subsidiary of PNB
PNB will assign to PNB-IFL nominal shares and PNB-IFL now will
be able to be nominated
Gen. Rule:
- Term of one year who will serve as such until there
successors are elected and qualifed
Exception:
- Non-stock corporation can serve for a term of 3 years
- Educational non-stock- term of the governing board can
be 5 years
May this term exceed one year?
- Yes, they may serve in a hold over capacity until their
successors have been duly elected and qualifed
Detective and protective bureau vs. Cloribel
- In the by-laws, managing director must be elected from
among themselves
- Must be duly elected and qualifed
How are the directors elected?
1-100T/S
2-100T/S
3-100T/S
to 10=1M/S
Do you include the vote of 1 & 2 to have a quorum to
have a valid meeting?
- NO, quorum requirements is 401,000
Quorum requirement is 501k
Holders of non-voting shares are only entitled to vote in last par. Of
section 6
1-200k
2-200k
3-200k
4-100k
5-100k
6-100k
7-50k
8-40k
9-5k
10-5k
=1MS
1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10,
tumakbo and ninominate nila yung sarili nila and cast all their
shares on themselves
Who wins? Or who gets elected?
- No vote requirement, the one who gets the most number
of votes gets elected, section24.
What is cumulative voting?
- Process of multiplying the number of shares to the
number of director to be elected
- Matter of right granted to stockholders in a stock
corporation
1 to 5 has 200k/s and members of the same family- majority 800k
they have 4M votes they are guaranteed 4 seats
6 to 10 are not related- 1 seat 1M votes
Cumulative to allow the minority to have a rightful
representation in the board
Is it allowed in a non-stock corporation?
- Not generally available
- Section 89 unless the articles or by-laws allow
cumulative voting
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 specifed 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
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
15
approval of, and under such conditions which may be
prescribed by, the Securities and Exchange
Commission.
Other corporate ofcers other than the governing board
section 25
Section 25. Corporate ofcers, 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
ofcers 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.
The directors or trustees and ofcers 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 fxed 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 ofcers 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. (33a)
Is the president required to be a stockholder. YES
The chairman may be another person
The president may also be another person
Prohibited is president to be secretary or treasurer at
the same time
Board of director must sit and act as a body to arrive at
a corporate act
What would constitute a quorum if 5 then 3 must be
present
May the vote of 2 members past a 5 man governing
board pass a valid corporate act?
- YES. Voting requirement is majority of directors present
at which there where a quorum
1 1 and 2 present=valid voting
requirement
2 1 and 2 voted yes
3 3 voted no
4
5
Is it absolute?
- NO, except in the election because it requires the
majority of all the members of the board
- If by-laws or articles provide a higher voting requirement
Artifcial beings must act through its members and act
as a body to have a valid corporate act
Exception:
- Delegation
- Expressly conferred
- Where the ofcer or agent is clothed with actual or
apparent authority
- Otherwise it will not bind the corporation
Yao ka sin trading case already asked in the bar
- Only bind the corporation to the extent of authority
confned to him or virtue of customs, usage and policy
- Must pass frst the controller and counsel
What if the notice requirement is not complied with?
Lopez realty vs. Fotencha
- Notice requirement must be complied with hence it
should have been with force and efect, but according to
the SC, it may be ratifed expressly if there is a
subsequent meeting called for that purpose
- Impliedly through acts
- Asuncion was aware of the corporations obligation
- There was implied ratifcation or she was estopped
Pua casim vs. Neumark and Co.
- Considered 3 circumstanced
- Check which was the proceed of the loan which was
endorsed and deposit in the corporate account
- Neumark as president and also stockholder
Yu chuck vs. Kong Li Po
- General manager usually has the power to hire but the
SC said the contract must be reasonable
- The contract here is so onerous that it would throw the
corporation into insolvency
Francisco vs. GSIS
- GSIS cannot evade the binding efect of the telegram
- Only 15 months later that the corporation said there
was a mistake
- The silence coupled with the unconditional acceptance
of the other subsequent remittances is binding to the
corporation
Board of liquidators vs. Kalaw
Settled jurisprudence has it that where
similar acts have been approved by the directors as a
matter of general practice, custom and policy, the
general manager may bind the company without formal
authorization of the board of directors. In varying
language, existence of such authority is established, by
proof of the course of business, the usages and
practices of the company and by the knowledge which
the board of directors has, or must be presumed to
have, of acts and doings of its subordinates in and
about the afairs of the corporation. So also, xx
authority to act for and bind a corporation may be
presumed from acts of recognition in other instances
where the power was in fact exercised. xx Thus, when,
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
16
in the usual course of business of a corporation, an
ofcer has been allowed in his ofcial capacity to
manage its afairs, his authority to represent the
corporation may be implied from the manner in which
he has been permitted by the directors to manage its
business.
In the case at bar, the practice of the
corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading
activities for and in NACOCOs behalf without prior
board approval. If the by-laws were to be literally
followed, the board should give its stamp of prior
approval on all corporate contracts. But that Board
itself, by its acts and through acquiescence, practically
laid aside the by-law requirement of prior approval.
- Kalaw signed alone and said contracts were submitted
to the board of directors after its consummation and not
before
Buenaseda vs. Bowen
- Express ratifcation is made through a formal board
action
- Implied ratifcation is through: silence or acquiescence,
acceptance benefts and lastly recognition or adoption
An unauthorized act may nevertheless be binding either
by express or implied by estoppels
By virtue of silence the board had impliedly accepted the
act
By recognition or adoption
By virtue of payment of obligations arising therefore-
Lopez realty
May directors or trustees be disqualifed to act as such?
- YES, crime, etc. disqualifcations in book
- Possess or dispossess any of the qualifcations or
disqualifcations , cease to hold at least one share
May directors be ousted from ofce?
- At least 2/3 of members representing outstanding
capital stock. Again notice requirement must be
complied with
1-200 1-5 same
family
2-200
3-200
4-100
5-100 electing
6-100 6 to 10 not
related
7-50
8-40
9-5
10-5 outstanding
director
Meetings called by the president or the secretary
ordered by the president
It depends if the removal is without cause they cannot
do so because removal without cause shall not deprive
the minority stockholders or members of the right of
representative
If with cause they can even if it will prejudice the rights
of the minority, provided of course additional
requirements by-laws and articles of incorporation
Who will fll up the vacancy created due to the ouster of
a member of the board of directors <section 29>
Section 29. Vacancies in the ofce 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 flled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be flled by the
stockholders in a regular or special meeting called for
that purpose. A director or trustee so elected to fll a
vacancy shall be elected only or the unexpired term of
his predecessor in ofce.
Any directorship or trusteeship to be flled by
reason of an increase in the number of directors or
trustees shall be flled 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. (n)
Other than by removal or expiration of term they do not
have the power
When will the vacancies be flled up?
Is notice required, to fll up vacancies due to removal?
What if the vacancy is due to an increase, can it be flled
up in the same meeting where in the number is
increased?
Election due to removal-in the same meeting notice is
not required
Election due to increase in number- it must be so stated
in the meeting
Section 30
Section 30. Compensation of directors. - In
the absence of any provision in the by-laws fxing their
compensation, the directors shall not receive any
compensation, as such directors, except for reasonable
per diems: Provided, however, That any such
compensation other than per diems may be granted to
directors by the vote of the stockholders representing at
least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall
the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the
preceding year. (n)
- Generally not entitled to receive compensation because
they render it gratuitously
- Unless the by-laws allows
- Stockholders may also grant pursuant to a majority vote
- Must not exceed net income of 10% tax of the preceding
year
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
17
- Acting in special capacity
- In, sum directors may receive compensation when
1. there is a provision in the by-laws to that efect
2. When the stockholders, by a majority vote of the
outstanding capital stock grant the same; and,
3. If the director renders extra-ordinary or unsual service
Central cooperative exchange vs. Tibe
- By-laws may allow, stockholders may also allow such
What do you understand by the phrase as such
directors
Western institute vs. Salas
- Compensation was granted without by-laws authority
- Prohibition is not a sweeping rule
- Members of the board may receive when they receive in
a special capacity
- Mere act of the board will sufce
Is the 10% ceiling applicable to other ofcers?
- NO. the phrase as such director was used twice
<Section 30>
- The SC ruled that the 10% ceiling will not likewise apply
if they acted in a capacity other than as such directors
Government vs. El Hogar
- Judicial intervention is not proper
- The appropriates remedy is to those who can make or
unmake the by-laws
Liability of corporate ofcers
- Obligations incurred by those acting for and in behalf of
the corporations are not theres BUT there are
exceptions even if they are acting for and in behalf of the
corporation
Tramat vs. CA
- General rule was applied in the case
- Ong acted as ofcers and acted within the scope of his
authority
- Court laid down 4 instances when even if acting within
the scope of his authority he is held solidarily liable
1. He assents (a) to a patently unlawful act of the
corporation, or (b) for bad faith, or gross negligence in
directing its afairs, or (c) for confict of interest,
resulting in damages to the corporation, its stockholders
or other persons;
2. He consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith fle with
the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable
with the corporation;
4. He is made, by a specifc provision of law, to personally
answer for his corporate action.
- Watered stocks- issued, fully paid up when in fact they
have not been fully paid or promised as such
Llamado vs. CA
- The corporate entity theory cannot be used as a defense
to escape liability in violation of B.P. 22
- Where the check is drawn by a corporation the persons
who signed the check shall be liable.
Uichico vs. NLRC
- Labor case corporate directors and ofcers are solidarily
liable with the corporation for the termination of
employment of corporate employee done with malice and
bad faith
3 fold duty of directors
- obedient
- diligent
- loyal
Business judgment rule
- Questions of policy and management are left solely to
the honest decision of the board of directors and the
courts are without authority to substitute its judgment
as against the former. The directors are the business
managers of the corporation and as long as they act in
good faith, its actuations are not subject to judicial
review. Montelibano vs. Bacolod Murcia Milling
- questions of policy and management are left solely to the
board of directors
- BOD, business manager of the corporation and as long
as they act in good faith, its actuations are not subject
to judicial review
- They are not insurer of the property of the company,
they were guarantors that the enterprise undertaken by
the corporation shall be successful
Montelibano vs. Bacolod Murcia Milling Co.
- Directors are not liable due to imprudence or honest
error of judgment
- Duty of loyalty of corporate directors
- 31,32,33,34
- 31,32,33- specifc instances when corporate ofcers
may violate loyalty
- 32,33 self-dealing and interlocking director
Corporate opportunity doctrine
- It places a director of a corporation in the position of a
fduciary and prohibits him form seizing a business
opportunity and/or developing it at the expense and
with the facilities of the corporation. He cannot
appropriate to himself a business opportunity which in
fairness should belong to the corporation.
Last paragraph of section 31 and the provision of
section 34 make reference to recovery of forbidden
profts
Distinction between section 31 and 34 relative to the
ratifcation by the stockholders
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
18
- The second paragraph of section 31 which makes a
director liable to account for profts if he attempts to
acquire or acquires any interest adverse to the
corporation in respect to any matter reposed in him in
confdence as to which equity imposes a disability upon
him to deal in his own behalf is not subject to
ratifcation by the stockholders. Whereas, in section 34
if a director acquires for himself a business opportunity
which should belong to the corporation, he is bound to
account for such profts unless his act is ratifed by the
stockholders owning ore representing at least 2/3 of the
outstanding capital stock.
- If reposed in him in confdence, not subject to
ratifcation
- If the acquisition is merely that of a business
opportunity which has not been reposed in him in
confdence, the same may be subject to ratifcation by
the stockholders.
Director x co.
A-REALTY
B
C Z owns property and is going
abroad never to Return, he wants
to sell for 25M the fair market value
is 30M
D
E
E goes to Z and ofers to pay the property for 26 M and later he
sells it for 30M making 4M proft, one of the stockholders learned
and complains that he should submit the profts. E said that he
will move for ratifcation of his actuation. Can it be ratifed?
- It can be ratifed he merely acquired a business owning
to the corporation
- It would be diferent if it was entrusted in his confdence
Another scenario:
Had A not attended the meeting he would not have known of the
sale it is then a matter reposed in him in confdence
A corporation cannot reaquire its share if it has no
restricted unretained earnings
Strong vs. Rapide
- What duty did he violate?
- He violated his duty of loyalty
- The law would be impotent if the sale were not
invalidated
Self-dealing director and interlocking director
What is a self-dealing director?
- Director of a corporation dealing or transacting business
with his corporation
Are the contracts and dealing of a self0dealing director
valid?
General rule: voidable
May the contracts of a self-dealing director be valid per
se.
- YES. If all the 4 conditions are present they will be valid
per se
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 ofcer, the contract has been
previously authorized by the board of directors.
When do they become voidable?
- When any of the two requisites are absent it is voidable,
but subject to ratifcation by 2/3 of the outstanding
capital stock or 2/3 of the member
Requisites for ratifcation (subject to ratifcation by the
stockholders holding or representing at least 2/3 of the
outstanding capital stock or 2/3 of the members.)
- it must be at a meeting called for the purpose
- full disclosure of the adverse interest of the director
concerned must be made
- the contract is fair and reasonable under the
circumstances
Problem if self-dealing director involved owns all or
substantially all of the shares of stock of the corporation
thereby making it easily possible to have the contract
ratifed
- last sentence of section 32 should be made to apply by
determining the reasonableness and fairness of the
contract
Section 32. Dealings of directors, trustees or
ofcers with the corporation. - A contract of the
corporation with one or more of its directors or trustees
or ofcers 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;
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 ofcer, the contract has been
previously authorized by the board of directors.
Where any of the frst 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
ratifed 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. (n)
Prime white cement vs. IAC
- a director of a corporation owes a position in trust
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
19
- in case of confict between himself and that of the
corporation, he cannot sacrifce the interest of the
corporation to his own advantage
- as a director he should have acted in a manner as not to
unduly prejudice the corporation
- he cannot be allowed to enrich himself
May corporate directors purchase the corporate
property?
Mead vs. Mccullogh
- interlocking director- a director of one corporation who
deals and transacts business with another corporation
who is himself a director
A- director of X company also a director of Y corporation
B-
C-
D-
E-
Both companies enter into a contract and A sits, is the
contract valid?
- Yes on the ground of fraud or if it is unfair
- May be subject to the provision of section 32
- Section 32 contract may become voidable, hence it may
also be ratifed
X Co.
Y Co.
A owe 20%
A owe 20%
Is it generally valid or voidable? VALID
25%
25% VALID
15%
25% VOIDABLE SUBJECT TO section 32
More than 20 substantial
BOD mismanages corporate ofcers. Who may fle a
suit?
- General rule: BOD which can institute a case because it
has all the powers. To allow stockholders to fle would
violate the doctrine of corporate entity and may result to
multiplicity of suits
- Stockholders cannot therefore generally fle a case
EXCEPT of course in a DERIVATIVE SUIT
Derivative suit
- An action based on injury to the corporation-to enforce
a corporate right- wherein the corporation itself is joined
as a necessary party, and recovery is in favor of and for
the corporation.
- Remedy granted by law to stockholders to institute a
case to remedy a wrong done directly to the corporation
and indirectly to the stockholders, if the board refuses
to do so. Otherwise if not they would be left without any
recourse
Available suits
individual or personal
- Wrong done against his person as a stockholder
Class suit
- Filed by a stockholder in representation of other
stockholders
- A wrong or redress done, a derivative suit in nature
Intra-corporate remedies
- Demand to the BOD to institute such action
- Negated by the BOD
- The one who instituted must be a stockholder at the
date when the act was done, must have been a
stockholder by that time
Demand will not be required if the majority of the BOD
are the ones guilty of the wrong charged
The corporation must be made a party in the case
whatever side will not matter because under Philippine
law misjoinder is not a ground for dismissal
Non-joinder is a ground for dismissal
Any beneft should inure to the corporation
Stockholder bringing the action is entitled to
reimbursement such as attorneys fee ONLY IF the case
is SUCCESSFUL to avoid harassment suit to their
management
Pascual vs. Orozco
- By virtue of the fact that he is a stockholder, may
maintain a derivative suit
- Depend on how, when and what reason
- Seeking for the years 1898 all the way 1907
- Only became a stockholder in 1903
- He can sue only in 1903 forward because he must be a
stockholder
- The right of action is personal in nature. He became a
stockholder only in 1902
Derivative suit
- By a stockholder to address a wrong done against the
corporation and the stockholder indirectly
- Essential requisite must have been a stockholder from
the time the act complained of took place
- Cannot institute an action from the years he was still
not a stockholder
Everett vs. Asia Banking
- Stockholders cannot ordinarily commence suit in equity
and such is in the hands of its BOD however there are
exceptions when the BOD will not sue since they are
themselves principals to the fraud.
Republic vs. Cuaderno
- The facts constitute sufcient cause of action
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
20
- It is not the corporate interest to shield one from
criminal prosecution which is personal interest
- Perez is not suing in his behalf, but in behalf of the
corporation
Western institute vs. Salas
- Assuming it was fled in the proper forum would there
argument that it is a derivative suit prosper? NO. it is
people of the Philippines vs. individual director, it must
be stated in the complaint that it is being instituted as a
derivative suit and for and in behalf of the corporation
- Granting arguendo, that this is a derivative suit, the
same is still outrightly dismissible for having been
wrongfully fled in the regular court devoid of any
jurisdiction to entertain the complaint. The case should
have been fled with the SEC which exercises original
and exclusive jurisdiction over derivative suits, they
being intra-corporate disputes, per Section 5 (b) of P.D.
902-A
San Miguel vs. Khan
- Was a demand made? NO
- It is not necessary because he objected in the board
meeting, but still it was adopted therefore it was useless
Chase vs. Buencamino
- Argument that he should be in estoppels since he fled
in the U.S.
- Assuming the case prospered in the U.S. would not
estoppels apply as against him? NO for estoppels to step
in it must be a case by the corporation
Reyes vs. tan
- Corporate director are guilty of breach of trust
- A stockholder may institute an action to remedy a wrong
done
- Fraud in the conduct of corporate afairs
Gamboa vs. Victoriano
- Is derivative suit appropriate in this case
- They are not vindicatory damage done to the
corporation, but rather they where vindicating damage
against him
- Violation of their rights as individuals, hence derivative
suit is not the remedy
Evangelista vs. Santos
- Derivative suit is not proper
- Claim is not for the beneft of the corporation, but
rather his individual beneft
From the cases above cited, these are the requirements
and the procedures that must be followed in order that a
derivative suit may prosper
1. That the party bringing the suit should be a stockholder
as of the time the act or transaction complained of took
place, or whose shares have evolved upon him since by
operation of law. This rule, however, does not apply if
such act or transaction continues and is injurious to the
stockholder or afect him specifcally in some other way.
The number of his hares is immaterial since he is not
suing in his own behalf or for the protection or
vindication of his own right, or the redress of a wrong
done against him, individually, but in behalf and for the
beneft of the corporation.
2. He has tried to exhaust intra-corporate remedies, he has
made a demand on the board of directors for the
appropriate relief but the latter had failed or refused to
heed his plea. Demand, however, is not required if the
company is under the complete control of the directors
who are the very ones to be sued (or where it becomes
obvious that a demand upon them would have been
futile and useless) since the law does not require a
litigant to perform useless acts;
3. The stockholder bringing the suit must allege in his
complaint that he is suing on a derivative cause of
action on behalf of the corporation and all other
stockholders similarly situated, otherwise, the case is
dismissible. This is because the cause of action actually
devolves on the corporation and not to a particular
stockholder.
4. The corporation should be made a party, either as party-
plaintif or defendant, in order to make the courts
judgment binding upon it, and thus, bar future
litigation of the same issues. On what side the
corporation appears loses importance when it is
considered that it lay within the power of the court to
direct the making of amendment of the pleading, by
adding or dropping parties, as may be required in the
interest of justice. Misjoinder of parties is not a ground
to dismiss action; and,
5. Any beneft or damages recovered shall pertain to the
corporation. This is so because in all instances,
derivative suit is instituted for and in behalf of the
corporation and not for the protection or vindication of a
right or rights of a particular stockholder, otherwise, the
aggrieved stockholder should institute, instead, an
individual or personal suit to vindicate his personal or
individual right. Or, for that matter, representative or
class suit for all other stockholders whose rights are
similarly situated, injured or violated, personally or
individually.
Executive committee
- Not allowed under the OLD law
How may executive committee created and constituted?
- Section 35
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
specifc 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 fling of vacancies in the board; (3) the
amendment or repeal of by-laws or the adoption of new
by-laws; (4) the amendment or repeal of any resolution
of the board which by its express terms is not so
amendable or repealable; and (5) a distribution of cash
dividends to the shareholders.
- Said committee may act and bind the corporation by the
majority vote of all its members except with respect to
those matters provided for in sec. 35 these are:
1. Approval of any action for which shareholders approval
is also required
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
21
2. The fling of vacancies in the board;
3. Amendment or repeal of by-laws or the adoption of new
by-laws;
4. Amendment or repeal of any resolution of the board
which by its express terms is not so amenable or
repealable; and,
5. Distribution of cash dividends to the shareholders.
May the board alone create an executive committee
without any authority provided for the by-laws?
- NO board of directors must sit and act as a body to have
a valid transaction
May a non-member of the board of directors be a
member of the executive committee?
- NO, all of them must be members of the board of
directors
- BOD cannot act by proxy it would be abdication of
powers
Purpose clauses necessary because it confers and also
limits the actual authority of the corporation
CORPORATE POWERS AND AUTHORITY
Corporate authority may be classifed into three classes
namely:
1. Those expressly granted or authorized by law inclusive
of the corporate charter or articles of incorporation;
2. Those impliedly granted as are essential or reasonably
necessary to the carrying out of the express powers;
3. Those that are incidental to its existence.
Section 36 to 45- POWER GRANTED BY LAW
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
certifcate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance
with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or
public policy, and to amend or repeal the same in
accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to
subscribers and to sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this
Code; and to admit members to the corporation if it be a
non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with such
real and personal property, including securities and
bonds of other corporations, as the transaction of the
lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed
by law and the Constitution;
8. To enter into merger or consolidation with other
corporations as provided in this Code;
9. To make reasonable donations, including those for
the public welfare or for hospital, charitable, cultural,
scientifc, civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of
partisan political activity;
10. To establish pension, retirement, and other plans for
the beneft of its directors, trustees, ofcers and
employees; and
11. To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated
in the articles of incorporation. (13a)
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 ratifed 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 ofce 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. (n)
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 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 ofce with
postage prepaid, or served personally.
A certifcate 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) 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
efective 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
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
22
(7) The vote authorizing the increase or diminution of
the capital stock, or the incurring, creating or
increasing of any bonded indebtedness.
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 certifcates shall be kept on fle in the ofce of
the corporation and the other shall be fled 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 Commission of its
certifcate of fling, the capital stock shall stand increased or
decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certifcate of fling may declare:
Provided, That the Securities and Exchange Commission shall not
accept for fling any certifcate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the
corporation lawfully holding ofce at the time of the fling of the
certifcate, showing that at least twenty-fve (25%) percent of such
increased capital stock has been subscribed and that at least
twenty-fve (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-fve (25%) percent of the subscription: Provided,
further, That no decrease of the capital stock shall be approved by
the Commission if its efect 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 Commission, which shall have the
authority to determine the sufciency of the terms thereof. (17a)
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 oferings or
minimum stock ownership by the public; or to shares to be issued
in good faith with the approval of the stockholders representing
two-thirds (2/3) of the outstanding capital stock, in exchange for
property needed for corporate purposes or in payment of a
previously contracted debt.
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 ofce 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 ofce will be
sufcient authorization for the corporation to enter into any
transaction authorized by this section.
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 Code. (a)
Section 42. Power to invest corporate funds in another
corporation or business or for any other purpose. - Subject to the
provisions of this Code, a private corporation may invest its funds
in any other corporation or business or for any purpose other than
the primary purpose for which it was organized when approved by
a majority of the board of directors or trustees and ratifed 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 ofce with postage prepaid, or served
personally: Provided, That any dissenting stockholder shall have
appraisal right as provided in this Code: Provided, however, That
where the investment by the corporation is reasonably necessary
to accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or members shall
not be necessary. (17 1/2a)
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 frst 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. (16a)
Stock corporations are prohibited from retaining surplus profts in
excess of one hundred (100%) percent of their paid-in capital
stock, except: (1) when justifed by defnite corporate expansion
projects or programs approved by the board of directors; or (2)
when the corporation is prohibited under any loan agreement with
any fnancial 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. (n)
Section 44. Power to enter into management contract. -
No corporation shall conclude a management contract with
another corporation unless such contract shall have been
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
23
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 fve 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. (n)
Section 45. Ultra vires acts of corporations. - No
corporation under this Code shall possess or exercise any
corporate powers except those conferred by this Code or by its
articles of incorporation and except such as are necessary or
incidental to the exercise of the powers so conferred. (n)
Section 36
Where should the corporation be sued?
- principal ofce is important because it establishes the
residence of the corporation and determining service of
summons, venue of action
- it can be sued in the city or municipality where its
principal ofce is found
Principal ofce is also important for venue of meetings
Non-stock corporation may provide in its by-laws that
the venue of meeting be anywhere in the Philippines
Upon whom service of summons be made?
- Section 11. Service upon domestic private juridical
entity- when the defendant is a corporation, partnership
or association organized under the laws of the
Philippines with a juridical personality, service may be
made upon the president, managing partner, general
manager, corporate secretary, treasurer, or in house
counsel.
Delta motor vs. Mangosing
- strict compliance is necessary
- should be served to those named in the statute
- secretary of a dept are not those included in the statute
E.B. Villarosa vs. Benito
- decision En Banc repeals all other pronouncement
- section 13 Rule 14 was repealed
- the old rules was ambiguous and broad and at all time
illogical
the particular revision under Section 11 of Rule 14 was
explained by retired Supreme Court Justice Florenz
Regalado, thus:
xxx the then section 13 of this Rule allowed
service upon a defendant corporation to be
made on the president, manager, secretary,
cashier, agent or any of its directors. The
aforesaid terms were obviously ambiguous
and susceptible of broad and sometimes
illogical interpretations, especially the word
agent of the corporation. The Filoil case,
involving the litigation lawyer of the
corporation who precisely appeared to
challenge the validity of service of summons
but whose very appearance for that purpose
was seized upon to validate the defective
service, is an illustration of the need for this
revised section with limited scope and specifc
terminology. Thus the absurd result in the
Filoil case necessitated the amendment
permitting service only on the in-house
counsel of the corporation who is in efect an
employee of the corporation, as distinguished
from an independent practitioner.
o notes: additional knowledge
- special appearance enter for that particular appearance
you are not the counsel in the case
- would apply only if it does not involve an intra-
corporate controversy (controversy between and among
the stockholders)
- upon any of the statutory ofcers or ofcers fxed in the
by-laws any secretary, any of the directors; any
managers in the by-laws
Seal
- merely ministerial or permissive
Power to amend
- section 16
- special 37,38,120
Power to adopt by-laws
- section 46-48
Power to issue or sell stocks and to admit members
- stock of stockholders and provision governing non-stock
Power to acquire or alienate real or personal property
- is there any limitation? YES
- Two specifc limitation
1. Section 36, as lawful transactions of business of the
corporation may reasonably and necessarily require
2. Constitution and law
Luneta vs. A.D. Santos
- Importance of the purpose clause
- Cannot have the power to acquire
- Cannot engage in land transportation
- Doctrine of limited capacity
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
24
Govt vs. El Hogar
- As the lawful transaction of its business may
reasonably represent
Director of Lands vs. CA
- Exception to the rule in the constitution
- Alienable public land
- Converts the property to a private land automatically
once converted it can now be registered
Power to make donation
- Limitation section 36 par.9
- These are circumstances, however, under which a
donation by a corporation may be to its beneft as a
means of increasing its business or promoting
patronage. Thus, paragraph 9 of section 36 expressly
authorizes a corporation to make donations. The only
limitations imposed are the following:
1. The donation must be reasonable;
2. It must be for public welfare, or for hospital, charitable,
scientifc, cultural or similar purpose; and,
3. It shall not be in aid of political party or candidate, or
for purposes of partisan political activity.
Power to establish pension
- Include any act to promote and improve the
convenience, welfare and beneft of the employees or
ofces
Republic vs. Acoje
- While as a rule an ultra-vires act is one committed
outside the object for which a corporation is created as
defned by law, there are however certain corporate acts
that may be performed outside of the scope of the
powers expressly conferred if they are necessary to
promote the interest or welfare of the corporation. Thus,
it has been held that although not expressly
authorized to do so a corporation may become a surety
where the particular transaction is reasonably
necessary or proper to the conduct of its business, and
here it is undisputed that the establishment local post
ofce is a reasonable and proper adjunct to the conduct
of the business of appellant company. Indeed, such post
ofce is a vital improvement in the living condition of its
employees and laborers who came to settle in its mining
camp which is far removed from the postal facilities or
means of communication accorded to people living in a
city or municipality.
Power to exercise such other powers essential or
necessary to carry out its purpose (implied power)
1. Acts in the usual course of business;
2. Acts to protect debts owing to the corporation;
3. Embarking in a diferent business;
4. Acts in part or wholly to protect or aid employees; and,
5. Acts to increase business
Teresa Electric and Power Co. vs. P.S.C.
- Examined the articles of incorporation to arrive at its
decision
National Power vs. Vera
- For purpose of prohibiting the NAPOCOR
- The court must decide whether or not a logical and
necessary relation exists between the act questioned
and the corporate purpose expressed in the NPC
charter
Importance of PLACE of registration
- Residence
- Venue
- Place of meetings
- Place or registration of chattel mortgage
Power to extend its terms
- Once its term expires, already dissolved automatically,
thus can no longer ask for extension
- After dissolution, it has 3 years to windup
What are the modes of increasing capital stock?
1. Increasing the par value of the existing number of
shares without increasing the number of shares;
2. Increasing the number of existing shares without
increasing the par value thereof; and,
3. Increasing the number of existing shares and at the
same time increasing the par value of the shares.
Why a corporation increases it capital stock?
- Generate funds, business expansion, or payment of
liabilities, purposes of acquiring other business.
(example: to buy cars for the ofcers, purpose of
acquiring other business, expansion, other valid
reasons)
How do you decrease capital stock and why a
corporation decreases?
- Reduce or wipeout existing defcit where no creditors
would thereby be efected
- When capital is more than necessary to procreate the
business or reduction of capital surplus
- To write down the value of its fxed assets to refect
those present and actual
o NOTE: any increase or decrease of capital stock requires
approval of government agency like SEC it can never
take place unless SEC approves the same
Relevance of decrease of capital?
1. To reduce or wipe out existing defcit where no creditors
would thereby be afected;
2. When the capital is more than what is necessary to
procreate the business or reduction of capital surplus;
or,
3. To write down the value of its fxed assets to refect there
present actual value in case where there is a decline in
the value of the fxed assets of the corporation.
- Examples: Php 10M capital for grocery business, mayor
didnt want to issue license/permit because mayor has 3
other grocery stores, only allowed sari-sari store permit,
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
25
reduce capital for sari-sari so that the money will not
sleep in bank
- Example: car rental agencies-Php 10M capital for 20
taxis, after some time each taxi is only 250K, nagmura
ang taxi, to reduce capital is to show actual assets
Limitation imposed by law
- Decrease shall not in any way afect the rights of the
creditors
Philippine Trust Company vs. Rivera
- Without the appraisal of SEC, a decrease in capital
stocks has no efect
TRUST FUND DOCTRINE:
- Subscription to capital stock of a corporation constitute
a fund to which the creditors have a right to look upon
for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid
stock subscription in order to realize assets for the
payment of its debts.
Madrigal vs. Zamora
- Decrease in capital has a subterfuge to evade payment
- Thus not valid and efective
- Must not prejudice creditors which includes the
employees
Bond
- Commonly understood as an obligation of a state, its
subdivision or a private corporation, represented by a
certifcate or an instrument for the principal and by
detachable coupons for the payment of interests. In its
simplest term, it is one where an obligor obliges himself
to pay a certain sum of money to another at a day
named.
- There are diferent kinds of bond but before they may be
issued or foated by the corporation, the same must be
registered and approved by the SEC subject to the rules
and regulations that may be adopted by that agency.
The procedure and requirements set forth in section 38
is the same as in increasing or decreasing the capital
stock except that the certifcate does not have to state
the matters required in sub-section 2 & 3 thereof.
Pre-emptive rights
- A right granted by law to all existing stockholders of a
stock corporation to subscribe to all issues or
disposition of shares of any class, in proportion to their
respective stockholdings, subject only to the limitations
imposed under section 39 of the Code.
- Internationally granted
Pre-emptive rights, why it is granted?
- In order that the existing stockholders may maintain
their proportionate right as not to dilute their right
Power to deny pre-emptive rights
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 oferings or minimum stock ownership by the
public; or to shares to be issued in good faith with the
approval of the stockholders representing two-thirds
(2/3) of the outstanding capital stock, in exchange for
property needed for corporate purposes or in payment of
a previously contracted debt.
May it be denied? How?
- Yes, if provided by articles of incorporation or by an
amendment
- However, pre-emptive rights is unavailable to shares in
trading in stock exchange otherwise stockholders must
waive frst their right before they may sell such.
Exceptions
1. When the shares to be issued is in compliance with
laws requiring stock oferings or minimum stock
ownership by the public
2. Shares to be issued in good faith with the approval
of the stockholders representing 2/3 of the
outstanding capital stock either
a. In exchange for property needed for corporate
purpose or,
b. In payment of a previously contracted debt
- The exceptions, however will not apply to stockholders of
a close corporation by virtue of a subsequent and
specifc provision of the Code which provides that the
pre-emptive right of a stockholder in a close corporation
shall extend to all stock to be issued, including
reissuance of treasury shares, whether for money,
property or personal services or in payment of a
corporate debt, unless the articles of incorporation
provide otherwise, if not entirely absolute, in that it
extends to all issuance and disposition of shares
- Such right of pre-emption may be lost by waiver of the
stockholder, expressly or impliedly by his inability or
failure to exercise it after having been notifed of the
proposed issuance or disposition of shares
When is it unavailable?
- In shares traded openly in stock exchange/market
Is it applicable to close corporations?
- See section 96, close corporations must provide it frst
on its articles of incorporation, that its articles does not
really deny such pre-emptive rights.
Section 102, will not apply to close corporations
The right of pre-emptive rights is absolute in close
corporations
All issues or depositing shares of any class form part of ACS
Certain instances when a stockholder may nevertheless
be unable to exercise this right:
- Issued for public ownership
- Issued in good faith, with approval of 2/3 of outstanding
capital stock either a) in exchange for property needed
or b) for payment of a previously contracted debt
Pre- emptive rights of stockholders in ordinary stock
corporations may be denied
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
26
- if the shares are to be issued in compliance with laws
requiring stock ofering or minimum stock ownership by
the pubic
- In exchange for property needed for corporate purposes
- In payment of previously contracted debts
This rule, however, does not apply in a close corporation
as the pre-emptive rights of the stockholders thereof is
broadened to include all issues without exceptions
unless, of course, denied or limited by the articles of
incorporations. Section 102 provides:
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.
Denial will not apply to a close corporation, ABSOLUTE
- section 96
May a stock holder in a close corporation insist in the
exercise of his pre-emptive rights?
- Yes, section 102
What type or shares are covered by pre-emptive rights?
Does it include those originally unsubscribed?
- NO. Benito vs. SEC
Will the stockholders be able to exercise their pre-
emptive right with respect to the old unissued shares?
- Pre-emptive rights is applicable only to new issued
shares and not to the old unissued shares because it is
presumed that the original subscribers is deemed to
have taken his shares knowing that they form a defnite
proportionate part of the whole number of authorized
shares
- When the shares, left unsubscribed are re-ofered, he
cannot therefore claim. DILUTION OF INTEREST
Will the acquiring purchaser be liable for debts of the
former corporation?
- Generally no, corporate entity theory because there may
be instances when purchasing corporation may be held
liable
May a corporation acquire its own shares?
- Yes
Is there any restriction provided for by law in
reacquiring its own shares?
- Yes, it must have been unrestricted retained earnings
appearing in the books of corporation
A corporation can never acquire its own shares if it has
no unrestricted retained earnings
- False, exception close corporation and redeemable
shares
EXAMPLE:
ACS 2M
SUBSCRIBED 1M
PAID UP 1M
1 100K
2 100K
TO
10 100K
If 1-5 became 200K each, may 6-10 demand the exercise
their pre-emptive right?
- YES
May 1-5 subscribe to the unsubscribed capital stock to
the exclusion of 6-10?
- If a corporation makes 2M unrestricted retained
earnings, it is the shares and not the number of persons
that matters
May 6-10 complain for a dilution of their interest?
- YES, its an internationally recognized right because it
includes all issues and disposition of shares of any
class and all kinds of shares new or old
- If the remaining unsubscribed shares are issued, its an
issuance of any class
May a corporation sell/dispose all or substantially all of
its corporate assets and liabilities?
- YES
- 1) RESOLUTION 2) AUTHORIZATION 3) RATIFICATION
4) PRIOR WRITTEN NOTICE 5) SALE SUBJECT TO
PROVISIONS OF EXITING LAWS 6) DISSENTING
STOCKHOLDERS HAVE THE RIGHT TO EXERCISE
THEIR APPRAISAL RIGHT
If a corporation sells substantially all of it assets and
properties, will the buyer assume liability?
- NO, EXCEPT
1) Express or implied agreement to the purchase
2) Where the transaction amounts to consolidation or
merger of the corporations
3) When purchasing corporation is merely a continuation
of the selling corporation
4) Where the transaction is entered into fraudulently in
order to escape liability for such debt
Legitimate purpose: for a corporation to reacquire its
own shares
- Limitation: it must have surplus/unrestricted retained
earnings
- Exception: may redeem irrespective of unrestricted
retained earnings
1) Exercise of stockholders right to compel close
corporation to purchase his shares
2) Where corporation has sufcient assets in its books to
cover its debts and liabilities exclusive of capital stock
ACS 1M
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
27
SUBSRIBED 1M
PAID-UP 1M
ASSETS 500K
1M PROFITS
- 500K LIABILITIES
____________________
500K RESERVES IN A CLOSE
CORPORATION IT CAN USE THIS TO REACQUIRE ISSUED
STOCKS
X REALTY CORPORATION
THE ONLY PROPERTY
OF THE CORPORATION
BOARD OF DIRECTORS
DECIDED TO SELL IT
Will it need the approval of the stockholders?
- NO, 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
If X is a manufacturing company, then it can sell its
only property upon approval of the stockholders because
it will render itself capable of continuing its business,
BUT if the proceeds will be used to purchase a better
one for the continuance of its business, then it does not
need the approval of the stockholders
Conditions for the valid exercise of this power are the
following
1. Resolution by the majority vote of the board of
directors/trustees
2. Authorization from the stockholders representing at
least 2/3 of the outstanding capital stock or 2/3 of the
members;
3. The ratifcation of the stockholders or members must be
made at a meeting duly called for that purpose
4. Prior written notice of the proposed action and of the
time and place of meeting must be made addressed to
all stockholders of record, either by mail or personal
service;
5. The sale of the assets shall be subject to the provisions
of existing laws on illegal combinations and monopolies
6. Any dissenting stockholder shall have the option to
exercise his appraisal right
IDP vs. CA
- Consent of the members was not secured
Edward Nell Co. vs. Pacifc Farms
- Generally where one corporation sells or otherwise
transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the
transferor, except:
1. Where the purchaser expressly or impliedly agrees
to assume such debts;
2. Where the transaction amounts to a consolidation
or merger of the corporations;
3. Where the purchasing corporation is merely a
continuation of the selling corporation;
4. Where the transaction is entered into fraudulently
in order to escape liability for such debts.
Power to acquire own shares
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 Code. (a)
The corporation must at all times have unrestricted
retained earnings to exercise this corporate power
Steinberg vs. Velasco
- For as long as there are debts and liabilities, a
corporation may not reacquire its shares (subject to
exceptions)
- Creditors of a corporation have the right to assume that
so long as there are outstanding debts and liabilities,
the board of directors will not use the assets of the
corporation to purchase its own stock, and that it will
not declare dividends to stockholders when the
corporation is insolvent.
Power to invest funds <sec.42>
Section 42. Power to invest corporate funds in
another corporation or business or for any other purpose.
- Subject to the provisions of this Code, a private
corporation may invest its funds in any other
corporation or business or for any purpose other than
the primary purpose for which it was organized when
approved by a majority of the board of directors or
trustees and ratifed 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 ofce with postage prepaid, or
served personally: Provided, That any dissenting
stockholder shall have appraisal right as provided in
this Code: Provided, however, That where the investment
by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles
of incorporation, the approval of the stockholders or
members shall not be necessary. (17 1/2a)
- For any other purpose other than the primary purpose,
stockholders consent or approval is necessary
- Thus, if its for the secondary purpose, it is necessary
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
28
- If its in connection with the primary purpose, only
board resolution is necessary
Requirements and steps to be followed for a valid
investment of corporate funds are:
1. Resolution by the majority of the board of directors or
trustees;
2. Ratifcation by the stockholders representing at least
2/3 of the outstanding capital stock or 2/3 of the
members in case of non-stock corporations;
3. The ratifcation must be made at a meeting duly called
for that purpose;
4. Prior written notice of the proposed investment and the
time and place of the meeting shall be made, addressed
to each stockholder or member by mail or by personal
service, and;
5. Any dissenting stockholder shall have the option to
exercise his appraisal right
Dela rama vs. Ma-ao Sugar
- There is a substantial and not remote connection
between the sugar bags and the sugar manufacture,
thus stockholders approval is not necessary for validity
- A private corporation, in order to accomplish its purpose
as stated in its articles of incorporation, and imposed by
the Corporation Law, has the power to acquire, hold,
mortgage, pledge, or dispose of shares bonds, securities
and other evidences of indebtedness of any domestic or
foreign corporation. Such an act, if done in pursuance of
the corporate purpose, does not need the approval of the
stockholders; but when the purchase of shares of
another corporation is done solely for investment and
not to accomplish the purpose of its incorporation, the
vote of approval of the stockholders is necessary.
Gokongwei vs. SEC
- Investments made by SMC is necessarily connected with
its primary purpose and this was ratifed in a meeting
- Submission of previous action is a sound corporate
practice
Redeemable shares
Closed corporation (see section 105)
- For any reason, compel the value of shares withdrawal
shares provided corporation has sufcient funds to
cover its debts and liabilities
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 sufcient 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,
ofcers 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.
If shares are reacquired, what happens?
- It becomes treasury shares
Stockholders consent/ approval is not necessary and
mere board action is sufcient if in accordance with
primary purpose
The logical relation of act done and primary purpose of
corporation and between the board of directors to
undertake submission of acts is a sound corporate
practice
Dividends
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 frst 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. (16a)
Stock corporations are prohibited from
retaining surplus profts in excess of one hundred
(100%) percent of their paid-in capital stock, except: (1)
when justifed by defnite corporate expansion projects
or programs approved by the board of directors; or (2)
when the corporation is prohibited under any loan
agreement with any fnancial 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. (n)
What are dividends?
- Corporate profts set aside, declared and ordered by the
Board of Directors to be paid to the stockholders.
What are property dividends?
- Those paid in property surplus
Like tables and chairs? Can tables and chairs make
surplus profts?
- No, they do not make surplus, bonds, etc.
Where should dividends come from?
- Stock dividends are declared as stocks coming from
corporation
Who declares dividends to be declared? Do stockholders
have any say?
- Board of Directors, if stock approval of 2/3 outstanding
capital stock
ACS-1M SUB-1M P.U.-1M 1M-U.R.E. (surplus
profts of the corporation)
1-100k
2-100k
To
10-100k
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
29
1M
Board decides to declare 1M, how much will each
receive? May the board declare stock dividend
- NO. that would be over issuance of shares, violation of
securities regulation code
- It must have a free portion
- The corporation may increase its capital
Z co. 1M to X Co. is 2/3 of Xco. Stockholders
reacquired?
- No, because in property 2/3 is not required
What is the efect of declaration of dividends with
regards to the assets of a company?
- As compared to stock dividends, the declaration of cash
or property dividends have the efect of reducing
corporate assets to the extent of dividends declared.
- Neither would stock dividends increase the
proportionate interest of the stockholders of the
corporation although it will have the efect of increasing
the subscribed and paid-up capital of the corporation. It
gives the stockholders nothing in the way of distribution
of assets but merely divides his existing shares into
smaller units.
Earnings belong to the corporation until declared or
given
Revocation
- No revocation of dividend may be has unless it has not
been ofcially communicated to the stockholders or is in
the form of stock dividends which is revocable at any
time prior to distribution.
Stock dividends- no reduction, you capitalize your
restricted retained earnings, what is issued is a piece of
paper. The restricted earnings remain in the corporation
Cash and property- reduces corporate assets
Stock dividends increase corporate assets? No, it will
only have the efect of increasing the subscribed and
paid-up capital of the corporation
Will there be a corresponding increase in their
proportionate interest?
- REMAINS THE SAME
- Exception: when stock dividends will result in a
fractional share
ACS-2M 1-100K 200 (10%) *VOTING AND
DIVIDEND RIGHTS STILL THE SAME
SUB-1M TO
10%
PU-1M 10-100K
ACS 2M
SUB 1M
PU 1M
1M RE
1 100K
2 100K
TO
10 100K
1M
May they be compelled?
- NO. You cannot declare if it does not come from
unrestricted retained earnings.
1. 1M-U.R.E. (is it true there is no way to compel?)
2. 2M-U.R.E.
May they be compelled to declare dividends
- Mandatory if earned, the board may be compelled to
declare dividends
- if exceeds 100% of the paid-up capital the boards may
be compelled
ACS 2M 1M U.R.E.
SUB 1M
PU 800K
1-100K 50K PU
2-100K 50K
TO
10-100K
1M
Will 1 and 2 receive full amount of dividends?
- YES. They are entitled however if they are declared
delinquent, the amount due them shall frst be applied
to his delinquency plus expenses.
Delinquency occurs, you are called to pay, but you failed
to pay. In case of stock dividend, the delinquent stock
holder will not be entitled thereto until he has paid his
subscription in full.
Are non-stockholders entitled to receive dividends?
- No, tock dividends are civil fruits of the original
investment, and to the owners of the shares belong the
civil fruits.
How did the court decide dividends in the case of
Neilsen
- Stock dividends cannot be issued to a person who is not
a stockholder in payment of services rendered.
- Whether cash, property or stock, only stockholders may
receive dividends. Dividends are fruits of investments.
They come from the U.R.E. or surplus profts of the
corporation.
ACS 2M 1M U.R.E.
SUB 1M JULY 24 DECLARATION
JULY 31
PU 1M
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
30
1 100K 100T JULY 26-Y(NEW
ONE WAS DECLARED TO Y) JULY 30- 100K
2
TO TO HAVE THE TRANSFER
RECORDED
10 100K
1M
Insofar as 1 and Y who has a better right? Already
declared, but not yet paid?
- Right to receive vest upon declaration. Who ever owns at
the time of declaration owns the dividends
- Unless there is a stipulation to the contrary
TRUST FUND DOCTRINE
- The power to declare it if paid-up capital is not
maintained or is impaired
- Trust fund must be kept intact for the protection of
creditors who have the right to rely on such subscription
and the paid-up capital for the satisfaction of their
claims
Cannot accumulate surplus unreasonably
Basis is the paid-up capital
Entitled to dividends
Irrespective of whether the subscription is full
Illegally declared
- Declare dividend with the belief that it formed part of
the U.R.E., but yun pala sa capital
Directors are not liable, unless sec31 acted in bad faith
or gross negligence in the conduct of corporate afairs
Directors even if acting in behalf of the corporation, may
still be held solidarily liable
Power to enter into management contract
- New provision
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 fve 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. (n)
The requirement for a valid management contract are as
follows:
1. Resolution of the board of directors
2. Approval by the stockholders holding or representing a
majority of the outstanding capital stock or majority of
the members in case of non-stock corporation of both
the managing and the managed corporation
3. The approval of the stockholders or members must be
made at the meeting called for that purpose
4. The contract shall not be for a period longer than 5
years for any one term, except those which relate to
exploration, development or utilization of natural
resources which may be entered into for such periods as
may be provided by pertinent laws and regulations
Every corporate act emanates from the BOARD
Is the voting requirements of a majority stockholder
ABSOLUTE?
- Not only a majority but 2/3 of the outstanding capital
stock or 2/3 of the members in a non-stock corporation
would be required for the approval of a management
contract in the following instances:
1. Where the stockholders representing the same interest
of both the managing and managed corporation own or
control more than 1/3 of the total outstanding capital
stock of the managing corporation; and
2. Where a majority of the members of the board of
directors of the managing corporation also constitute a
majority of the directors of the managed corporation
3. Where the contract would constitute the management or
operation of all or substantially all of the business of
another corporation, whether such contracts are called
service contracts. If it will not constitute the
management of all or substantially all of the business of
another corporation the frst paragraph of section 44
will apply and not that of the second, that is, only the
vote of the stockholders holding or representing at least
a majority of the outstanding capital stock or majority of
the members in the case of non-stock corporation will
be required.
How long?
- Not longer than 5 years for any one term
- Exception: exploration, development or utilization of
natural resources
What is an ultra-vires act or contract?
- Doctrine of limited capacity. Corporation can do such
acts and things as it is allowed to do
- Acts beyond it will be ultra vires, allowing a collateral
attack
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
31
- If not illegal per se merely voidable. Can be ratifed
expressly or impliedly or even stopped as equitable
grounds
- Ultra-vires acts which are not illegal per se may become
binding and enforceable either by satisfaction, estoppels
or equitable grounds
Consequences of ultra-vires acts?
1. On the corporation itself
- The proper forum, in accordance with the provisions of
PD 902-A, as amended and R.A. No. 8799 may suspend
or revoke, after proper notice and hearing, the franchise
or certifcate of registration of the corporation for
serious misrepresentation as to what the corporation
can do or is doing to the great damage or prejudice of
the general public
2. On the rights of the stockholders
- A stockholder may bring either an individual or
derivative suit to enjoin a threatened ultra-vires act or
contract. If the act or contract has already been
performed, a derivative suit for damages against the
directors may be fled, but their liability will depend on
whether they acted in good faith and with reasonable
diligence in entering into the contract.
3. On the immediate parties
- The courts have not agreed as to the legal efect of a
corporate contract outside of its authorized business
but Ballatine gives the following summary of the
doctrines evolved:
a. If the contract is fully executed on both sides, the
contract is efective and the courts will no interfere
to deprive either party of what has been acquired
under it
b. If the contract is executory on both sides, as a
rule, neither party can maintain an action for its
non-performance
c. Where the contract is executor on one side only,
and has been fully performed on the other, the
courts difer as to whether an action will lie on the
contract against the party who has received
benefts of performance under it. Majority of the
courts, however, hold that the party who has
received benefts from the performance is estopped
to set up that the contract is ultra-vires to defeat
an action on the contract. This is more in
conformity with the doctrine that no person shall
be allowed to enrich himself at the expense of
another
Privano vs. Dela Rama
- Court looked into the purpose clause
- The purpose clause empowers and limits
- Articles likewise provide that it may deal with any of its
money
- deal broad enough to cover the donation it is not then
ultra-vires
- Not illegal per se hence (law of agency) excess powers are
subject to ratifcation
- Ratifed by passing the resolution in question
Carlos vs. Mindoro sugar Co.
- PTC- trust company as such, it also has implied powers
as to make them more attractable
- Not ultra-vires in pursuance of its legitimate business
Japanese war notes vs. SEC
- Non-stock corporations cannot make profts and
distribute profts to its shareholders
- Ultra-vires because Japanese war notes is a non-stock
corporation
Crisologo-Jose vs. CA (ALWAYS ASKED BY DEAN
SUNDIANG)
- The negotiable instruments law which holds an
accommodation party liable on the instrument to a
holder for value, although such holder at the time of
taking the instrument knew him to be only an
accommodation party, does not include nor apply to
corporations which are accommodation parties. This is
because the issue or indorsement of negotiable paper by
a corporation without consideration and for the
accommodation of another is ultra-vires
- Corporate ofcers may guarantee or endorse an
accommodation only if specifcally authorized
Section 36 paragraph 11
Section 10
Section 14 and 15
Corporate powers depend on the agreement of the
stockholders rather than any director
- It may sell and it may guarantee, contract not
necessarily illegal, it will in the absence of proof to the
contrary presumed within its power. Corporations are
presumed to contract with in its powers- CARLOS CASE
- Purpose clause may be stretched to cover PLDT internet.
It may be within its business.
- May it sell computers? NO! other line of business. Its
trading!
BY-LAWS
By-Laws
- Rule adopted by the corporation for its internal
governance
Is the adoption of by-laws mandatory?
When should the by-laws be adopted or fled? Can it not
be adopted earlier?
- After incorporation- within 1 month (emanates from the
BOARD)
- Prior-more convenient (signed by the incorporators)
Who will sign the adoption clause?
- Majority of the stockholders or members attested to by
the corporate secretary
What happens if the corporation fails to adopt the by-
laws from the tie provided by the law? Would there be an
automatic revocation or suspension?
- Proper notice and hearing, must frst be complied with
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
32
Loyola grand villas vs. CA
- Not the SEC, but the HIGC
- Must not always imperative
- Filing of by-laws mandatory
- Empowered by SEC
- Merely a ground, there must be proper notice and
hearing
- Not afect the status of the corporation as a juridical
person
- Subject the corporation to a fne, as may be issued by
the SEC
When do by-laws become efective?
- Until and unless the SEC gives it stamped of approval
- Suspension of any government agency. The permission
must frst be secured- section 46
Elements of a valid by-law
1. It must not be contrary to law, public policy or morals;
2. It must not be inconsistent with the articles of
incorporation;
3. It must be general and uniform in its efect or applicable
to all alike or those similarly situated;
4. It must not impair obligations and contracts or vested
rights; and
5. It must be reasonable.
- Must not be inconsistent with existing laws. Not be
inconsistent with articles of incorporation
By-laws
- None fling would not afect the status of the
corporation, Loyola grand villas case
- The word must is not always imperative
- Stockholders are conlusively presumed to know the
provisions of the by-laws
How about 3
rd
persons?
- NO. unless there is actual knowledge of the same they
are not presumed to know of the provisions of the by-
laws
Fleischer vs. Botika Nolasco
- Shares of stock are personal properties
- Shares of stock may transfer to whom ever he wishes
- The by-laws is contrary to law
Articles of incorporation
- May provide reasonable restriction
- By-laws merely internal laws
- Articles is the contract between and among the parties
and corporation
Govt vs. El Hogar
- Did the court categorically ruled here that the provision
in the 5
th
cause of action is valid?
- Rules governing equity, considering the fact that there
was always lack of quorum
- Section 29 BOD if still constituting a quorum may fll up
a vacancy other than by removal, etc.
Gokongwei vs. SEC
- Section 48 allows a corporation to amend it by-laws
- Section 47 of the code, the by-laws may provide for the
qualifcation and disqualifcation
- It cannot be said Gokongwei has a vested rights
- Prevent directors from taking advantage of position to
promote his individual interest to the damage of others
- The validity or reasonableness of a by-laws is a question
of law
- Subject to the limitations that reasonableness of a by-
law is a mere matter of judgment
- Rule of the majority and not the tyranny of the minority
May the by-laws be amended altered or appealed?
- YES. HOW? Two modes
1. By a majority vote of the directors or trustees and the
majority vote of the outstanding capital stock or
members in a non-stock corporation, at a regular or
special meeting called for that purpose;
2. By the board of directors alone when delegated by 2/3 of
the outstanding capital stock or 2/3 of the members in
a non-stock corporation.
- This delegated power, however, is considered revoked
whenever a majority of the outstanding capital stock or
members shall so vote at a regular or special meeting.
If it is to be amended what is the proceeding?
- Section 48 2
nd
paragraph provides:
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
non-stock 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 two-thirds
(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 ofce of the
corporation, and a copy thereof, duly certifed under
oath by the corporate secretary and a majority of the
directors or trustees, shall be fled with the Securities
and Exchange Commission the same to be attached to
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
33
the original articles of incorporation and original by-
laws.
The amended or new by-laws shall only be
efective upon the issuance by the Securities and
Exchange Commission of a certifcation that the same
are not inconsistent with this Code. (22a and 23a)
Baretto vs. La Previsora
- Any corporate act emanates from the board
- Directors themselves cannot amend the by-laws if they
were not granted the same
Section 48
The power granted is not subject to revocation T or F?
- FALSE
If the by-laws are amended when will they become valid?
- Upon issuance of the SEC that they are not inconsistent
What if the SEC failed to act within 10 months without
fault attributable to the corporation?
T or F any amendment of the by-laws will never become
valid until it gives its stamp of approval even after 1 year
- TRUE. Articles of incorporation and by-laws are diferent
MEETINGS
Meetings
- Meetings of stockholders 1. Date fxed
in the by-laws or by-law
- Meetings of director or trustees
Meetings are regular and special
Meetings of stockholders
What is regular and what is special?
When are regular meetings of the stockholders held?
- Fixed date provided by the by-laws
What if there is no date?
- April
Why april?
- Point in time the audited fnancial statement have been
prepared
What if in the date specifed in the by-laws or by the law
itself the meeting was not convened, for instance lack of
quorum or force majeure?
- It may be postponed on a reasonable date
Notice requirement?
- Regular- 2 weeks prior notice
- Special- 1 week
May the notice requirement be lessened?
- By-laws may provide a longer or a shorter duration
What if the notice requirement is not complied with?
What happened to any act passed in a meeting when
notice requirement was not required with?
- Voidable, subject to ratifcation
Board of directors vs. Tan
- Notice requirement is the by-laws is a mandatory
requirement
- Improperly served, any action will be invalidated at the
objection of any stockholder or member
Must be held in the proper place
Where should it be held?
- Apparent from the foregoing provision is that meetings
of stockholders must, at all times, be held in the city or
municipality where the principal ofce of the
corporation is located and, as far as practicable, in the
principal ofce of the corporation.
May the by-laws of a corporation provide that meetings
be held anywhere in the Philippines?
- While there is no provision authorizing a stock
corporation to hold stockholders meetings outside of the
City of Municipality where the principal ofce is located,
the law allows a non-stock corporation to provide in its
by-laws any place of members meeting provided that
proper notice is sent to all members indicating the date,
time and place of the meeting which shall be within the
Philippines.
T or F the by-laws of a stock corporation may validly
provide that meetings shall be held anywhere in the
Philippines?
- FALSE. Non-stock corporations lang pwede provided
nakalagay sa by-laws and provided proper notice is given
Corporation can do only such things as the law allows it
to do, DOCTRINE OF LIMITED CAPACITY
San Miguel ofce located in Ortigas Center. May
stockholders meeting be held in PICC center?
- YES. Metro Manila, one single city
Must be called by the proper party
Who calls?
- President until and unless there is a provision ,
secretary on order of the president
What if there is nobody who can call?
- The petitioner, stockholder may petition the court
What if there is a person who can call, but he fails or
neglects to call the meeting? May a stockholder petition
to authorize a meeting?
- Ponce case only applies when there is NO person
authorized to call the meeting. If there is a person, but
neglects his duty. Ponce will not apply.
Writ of injunction may never be issued ex parte
Is there any exception?
- Section 28 only instance
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
34
Section 28. Removal of directors or trustees. -
Any director or trustee of a corporation may be removed
from ofce by a vote of the stockholders holding or
representing at least two-thirds (2/3) of the outstanding
capital stock, or if the corporation be a non-stock
corporation, by a vote of at least two-thirds (2/3) of the
members entitled to vote: Provided, That such removal
shall take place either at a regular meeting of the
corporation or at a special meeting called for the
purpose, and in either case, after previous notice to
stockholders or members of the corporation of the
intention to propose such removal at the meeting. A
special meeting of the stockholders or members of a
corporation for the purpose of removal of directors or
trustees, or any of them, must be called by the secretary
on order of the president or on the written demand of
the stockholders representing or holding at least a
majority of the outstanding capital stock, or, if it be a
non-stock corporation, on the written demand of a
majority of the members entitled to vote. Should the
secretary fail or refuse to call the special meeting upon
such demand or fail or refuse to give the notice, or if
there is no secretary, the call for the meeting may be
addressed directly to the stockholders or members by
any stockholder or member of the corporation signing
the demand. Notice of the time and place of such
meeting, as well as of the intention to propose such
removal, must be given by publication or by written
notice prescribed in this Code. Removal may be with or
without cause: Provided, That removal without cause
may not be used to deprive minority stockholders or
members of the right of representation to which they
may be entitled under Section 24 of this Code. (n)
Cases of removal or ouster of a director
Mandamus would be appropriate remedy if there is a
person authorized but refuses
Quorum and voting requirement
- Majority stockholders or members constitute a quorum
Is the presence of the majority owners of the
outstanding capital stock ABSOLUTE to have a quorum?
- NO. when the code requires a higher quorum it must
also be equivalent to the vote required
Do you include non-voting shares in arriving at the
voting requirement to have a valid corporate act?
- It depends.
- Section 6 last par. If it falls within the penultimate par.
Of section 6
Five requisites of a valid meeting
1. It must be held on the date fxed in the by-laws or in
accordance with law
2. Prior notice must be given
3. It must be held at he proper place
4. It must be called by the proper party
5. Quorum and voting requirements must be met
Date not complied with, notice, place, not complied with
and the person who called not authorized, what
happens to any resolution called?
- Section 51, any meeting shall be valid provided all the
stockholders are present or duly represented and
provided it is within the power of the corporation. 3
RD
paragraph of 324
- If the voting requirement is met, any resolution passed
in the meeting, even if improperly held or called will be
valid if all the stockholders or members are present or
duly represented thereat. The last paragraph of section
51 is clear on the matter when it provides:
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.
Directors/trustees meeting
Regular (monthly) and special (anytime)
May that be restricted (within or outside the Phil)
- YES. unless the by-laws provide otherwise.
Is there any notice requirement?
- YES. 1 day unless otherwise provided by the by-laws
What happens if notice is not complied with?
- If the notice requirement is not complied with the
meeting is illegal and will not bind the corporation
except when subsequently ratifed or in the case of a
close corporation where the act of any one director may
bind the corporation even without a meeting under the
special provision of Section 101 of the Code.
Can notice be waived? <sec.53>
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. (n)
- YES. Expressly and impliedly
- SEC ruling
A special meeting is valid without notice
where the directors are all present or where
they consent to the meeting. Presence at the
meeting waives the want of notice. Moreover,
it has been ruled that the meeting of the
directors without a formal call frst being had,
and notice thereof given to the members, did
not operate to invalidate it or to render the
proceedings which were taken at it void, for
every member of the board were present, and
their joint action had completely bound the
corporation as if the meeting has been called
with due formality, and everyone of the
directors had received proper notice.
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
35
What is the quorum and voting requirement in the
directors meeting?
- Majority of the members of the board of directors (entire
membership)
Vote required to pass a valid corporate act?
- Majority of those present at which there is a quorum (3
present, vote of 2 sufcient)
- Exception, majority of all the members of the board in
case of election of corporate ofcers, unless the articles
provide for a greater quorum or voting requirement
Should the director or trustees be physically present?
- General rule, must sit and act as a body to have a valid
corporate act
Five man member board, a meeting was called today,
should the physical presence or warm bodies requires to
constitute a quorum?
- NO. it is not required. Teleconference or video conference
is allowed, E- commerce law
Membership subject to laws
Stockholder not yet
May director vote by proxy?
- NO
If A is a director and a meeting is called for the purpose
of electing a new set of BOD can A vote by proxy?
- YES. Because it is a stockholders meeting
If directors meeting, cannot vote by proxy
Stockholders right to vote
- Inherent in stock ownership
- However this right is not always inherent, because it
may be denied:
1. Redeemable and preferred shares, however if
founders shares are issued others may be denied
the right to vote.
2. May be denied by the articles of incorporation or
contracts
- When not denied they may do so in person or by proxy
May the right to vote by proxy be denied?
May the articles of incorporation deny?
May the by-laws validly provide that proxy voting is not
allowed?
- NO
Only non-stock may be denied proxy voting (may be
broaden, limited or denied)
Proxy voting is a matter of right granted by law
Requirements of a valid proxy?
- Section 58
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 fled 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 efective for a period longer than fve
(5) years at any one time. (n)
How long may a proxy exist?
- Maximum of 5 years
- Valid for the meeting in which it is intended
Is proxy revocable?
- Generally revocable, unless coupled with interest
Revocation
- A proxy, like agency in general is revocable unless
coupled with an interest and revocation need not be
made by formal notice in writing. Revocation may be
expressed to the proxy holder, to the election committee,
by a subsequent proxy to another or by sale of the
shares. Thus it may be revoke orally by conduct such
that appearing and asserting the right to vote at a
meeting by the registered owner of the shares revokes a
proxy previously given.
Must be submitted to a validation committee
By-laws of non-stock corporations may deny proxy
voting
What is voting trust agreement?
- One created by an agreement between a group of
stockholders of a corporation and a trustee, or a group
of identical agreements between individual stockholders
and a common trustee, whereby it is provided that for a
term o years or for a period contingent upon a certain
event, or until the agreement is terminated, control over
the stock owned by such stockholders, shall be lodged in
the trustee, either with or without reservation to the
owners or persons designated by them the power to
direct how such control shall be issued.
- It is a devise of binding stockholders to vote as a unit
and thus assuring a desirable stability and continuity in
management in situations where it is needed.
What is the efect of a voting trust agreement relative to
the rights?
- Lee vs. CA must pass these criteria
1. That the voting rights of the stock are separated from
the other attributes of ownership;
2. That the voting rights granted are intended to be
irrevocable for a defnite period of time; and,
3. That the principal purpose of the grant of voting rights
is to acquire voting control of the corporation.
During the duration of the trust they are irrevocable
unless there is a violation either by fraud
Requisites
- Section 59
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
36
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 fve (5) years at any
time: Provided, That in the case of a voting trust
specifcally required as a condition in a loan agreement,
said voting trust may be for a period exceeding fve (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 certifed copy of such agreement
shall be fled with the corporation and with the
Securities and Exchange Commission; otherwise, said
agreement is inefective and unenforceable. The
certifcate or certifcates 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 certifcates, which
shall be transferable in the same manner and with the
same efect as certifcates of stock.
The voting trust agreement fled 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
certifcates as well as the certifcates of stock in the
name of the trustee or trustees shall thereby be deemed
cancelled and new certifcates 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. (36a)
Does it need to be notarized?
- Yes, otherwise it is inefective and unenforceable
Only legal ownership is transferred
Being still the benefcial owner they may transfer these
rights
Is the right granted to a voting trust agreement
absolute? (to inspect)
- NO.
- The voting trust agreement fled 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
transfer 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.
Legal title is transferred to the voting trustee
May the voting trustee vote by proxy?
- Yes, legal owner may vote by proxy
May the proxy holder vote by proxy?
- NO, (AGENT) an agent can have no other agent unless
specifcally allowed by the principal
Stockholder executing as a proxy, is he qualifed to be
voted as a director?
Why is he qualifed to act as a director if the stockholder
executes as a director?
- The benefcial owner of the shares in a voting trust is
disqualifed to be a director in a voting trust whereas in
a proxy, the owner of the shares may be elected as such
since legal title thereof remains with him
- YES he remains to be the owner
Is the stockholder executing in a voting trust agreement,
is he qualifed to act as a director?
- NO. ceases to be stockholder of record, no longer the
legal owner of shares
May the corporation enforce the voting trust agreements
executed by its stockholders?
- NO. NIDC vs. AQUINO
- Not a privy to the contract
- Rights liabilities of a stockholder are there in their
individual capacity- corporate entity theory
Voting trust agreements
- Normally executed in favor of banking and fnancial
institutions
- So that they can vote a certain set of directors
- They will be more secured
Voting pull agreement
- Enters into an agreement
- Pull all their shares to cast one vote
- Covered by rules governing contracts
- By pulling their votes they can decline the resolution
passed by the board
E N D O F M I D T E R M S
STOCKS AND STOCKHOLDERS
3 modes
1. By a contract of subscription with the corporation;
2. By purchase of treasury shares from the corporation;
and,
3. By purchase or acquisition of shares from existing
stockholders.
Section 60 subscription
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
37
- Any contract
- Whether existing or still to be formed
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.
(n)
Under the old law the 4
th
mode is PURCHASE
Purchase
- Reciprocal in nature
- Purchaser can neither require the issuance
Xco. Inc.
Authorized capital 1M
500 SUBSCRIBED
500 UNISSUED STOCKS (AS LONG AS GALING DITO)
Z wants to acquire 100K
Entered in June 50% shall be down payment remainder December
08
o he will not be considered a stockholder unless he has
paid in full
August 08 property is ravaged by fre all are turned into shares
Is Z liable to pay the balance of his acquisitions?
- YES, no matter how the party refer to it, it is considered
subscription
- Once you subscribe, you become a stockholder which is
entitled to all the liabilities of a stockholder
Z- subscribed to 100T/S of XCo.
Amount he paid 50k
Z did not pay on the date called and was declared a delinquent
share
Corporation paid 100T/S therefore the corporation
reacquired the shares again, what are they called?
- Treasury shares
Y- 80T/S DECEMBER 08
40 % (AUGUST) WAS DESTROYED BY FIRE, IS HE STILL LIABLE
TO PAY THE UNPAID PORTION?
IT WAS AGREED THAT IT WAS A PURCHASE AND WILL
BE A STOCKHOLDER ONLY IF PAID IN FULL IS HE
LIABLE?
- NO, because that was a purchase
- First example galing sa unissued stock
- 2
nd
example galling sa treasury shares hindi sa unissued
share
NO such thing as purchase of unissued stocks
A subscription contract can be conditional provided
there is nothing in the charter or statute prohibiting it
and not against public order, law, etc.
Must it be in writing?
- NO, it may be oral
5M should it be in writing to be valid and binding as a
subscription?
- NO, statutes of frauds only applies to SALES
Trillana vs. Quezon College
- Counter proposal, therefore there was a need for an
acceptance
- Facultative because it is in his own free will, it is void
What may be used as a consideration and how much
should be the consideration?
- Section 62 provides:
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. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by
the corporation and necessary or convenient for its use
and lawful purposes at a fair valuation equal to the par
or issued value of the stock issued;
3. Labor performed for or services actually rendered to
the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained
earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event
of reclassifcation or conversion.
Where the consideration is other than actual
cash, or consists of intangible property such as patents
of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of
directors, subject to 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 fxed 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. (5 and 16)
Amounts transferred from unrestricted retained
earnings to stated capital what does it mean?
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
P
38
- Stock dividends will in efect capitalize the unrestricted
retained earnings
After 5 years the founders shares may be converted into
common shares or other kinds of shares
May shares of stocks be issued without consideration?
Why?
- NO, two reasons by the SC, discriminatory against other
stockholders and second unlawful, it prejudices the
right of the creditors Trust Fund Doctrine
If issued without a consideration
- Section 65, they will be considered as watered stocks
Section 65. Liability of directors for watered
stocks. - Any director or ofcer 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 fle the
same with the corporate secretary, shall be solidarily,
liable with the stockholder concerned to the corporation
and its creditors for the diference between the fair value
received at the time of issuance of the stock and the par
or issued value of the same. (n)
- Subscribers may be compelled to pay the value
Issuance of a certifcate of stock is another thing
What are the requisites for the issuance of a valid
certifcate of stock?
1. It must be signed by the president or vice-president and
countersigned by the secretary or assistant secretary;
2. It must be sealed with the corporate seal; and the entire
value thereof (together with interest or expenses, if any)
should have been paid.
While it appears, that a subscriber to shares of stock
cannot be entitled to the issuance of a certifcate of
stock until the full amount of his subscription together
with interest and expenses (in case of delinquent shares)
if any is due, has been paid, a subscriber to shares of
stock, even if not yet fully paid, is entitled to exercise all
the rights of a stockholder and the corresponding
liability that attach thereunder. Thus, the Code
provides:
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.
(n)
Is the issuance of a certifcate of stock necessary to
consider the subscriber a stockholder?
- NO, shall be considered a stockholder even without a
certifcate of stock
Instances when he may not be able to exercise his rights
as such stockholder
- Declared delinquent
- When he exercises his appraisal right
Are certifcate of stocks transferrable?
- YES
Are certifcate of stocks considered negotiable?
- Quasi-negotiable
Why are they considered quasi-negotiable when it may
be transferred through endorsement and delivery?
B stole and forged the signature
C is purchaser in good faith and for value will C acquire title
Endorsement from
When issued by owner
Endorsed by owner- strict compliance
ANSWER: a certifcate of stock is not regarded as negotiable in the
same sense that a bill or note is negotiable, even if it is endorsed in
blank. Thus, while it may be transferred by endorsement coupled
with delivery thereof, and therefore merely quasi-negotiable, it is
nonetheless non-negotiable in that the transferees takes it without
prejudice to all the rights and defenses which the true and lawful
owner may have except in so far as the principles governing
estoppels may apply.
He acquired it by virtue of a forged instrument; no matter how
innocent the purchaser is because it is subject to all the rights and
defenses
What if A endorsed it?
- He is estopped, unless there are other available defenses
Transfer is required to be recorded in the books of the
corporation, however even if not recorded, it will be valid
between the parties. Non-registration will not however,
afect the validity thereof at least in so far as the
contracting parties are concerned.
Section 63. Certifcate of stock and transfer of
shares. - The capital stock of stock corporations shall be
divided into shares for which certifcates 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
certifcate or certifcates 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 certifcate or certifcates 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. (35)
Until registration is accomplished, the transfer, though
valid between the parties, cannot be efective as against
the corporation. Thus the, unrecorded transfer cannot
enjoy the status of a stockholder; he cannot vote nor be
voted for, and he will not be entitled to dividends. The
corporation will be protected when it pays dividend to
the registered owner despite a previous transfer of which
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
100t/s 001
10/s
Abc co.
39
it had no knowledge. The purpose of registration
therefore is twofold: to enable the transferee to exercise
all the rights of a stockholder and to inform the
corporation of any change in shares ownership so that it
can ascertain the persons entitled to the rights and
subject to the liabilities of a stockholder.
Thus, it was also ruled by the High Court in
Nautica Canning Corp. vs. Yumul that A
transfer of shares not recorded in the stock
and transfer book of the corporation is non-
existent in so far as the corporation is
concerned. This is so because the
corporation looks only through its books for
the purpose of determining who its
stockholders are.
Registration is necessary for the following:
1. To enable the corporation to know who its stockholders
are;
2. To enable the transferee to exercise his rights a s
stockholders;
3. To aford the corporation an opportunity to object or
refuse registration of the transfer in case allowed by law;
4. To avoid fctitious and fraudulent transfers; and,
5. To protect creditors who have the right to look upon
stockholders, in case of no-payment or watered shares,
for the satisfaction of their claims.
Duty of the secretary is ministerial, hence mandamus
will lie if the secretary refuses to record the transfer, but
he cannot be compelled when the transferees title to the
said shares has no prima facie validity or uncertain
Transfer- absolute and unconditional transfer to warrant
registration in the books of the corporation in order to
bind the latter and other third persons.
Other restrictions on the right to transfer shares would
include:
1. It is not valid, except as between the parties, until
recorded in the books of the corporation;
2. Shares of stock against which the corporation holds any
unpaid claim shall not be transferable in the books of
the corporation; unpaid claims, refer to claims arising
from unpaid subscription and not to any indebtedness
which a stockholder may owe the corporation such as
monthly dues;
3. Restrictions required to be indicated in the articles of
incorporation, by-laws and stock certifcates of a close
corporation;
4. Restrictions imposed by special law, such as the Public
Service Act requiring the approval of the government
agency concerned if it will vest unto the transferee 40%
of the capital of the public service company;
5. Sale to aliens in violation of maximum ownership of
shares under the Nationalization Laws;
6. Those covered by reasonable agreement of the parties.
Monserat vs. Ceron
- Does it include mortgage?
- NO, it is not an absolute transfer
- Will not afect the transfer through mortgage
- Absolute and unconditional transfer
- Only the transfer or absolute conveyance of the
ownership of the title to a share need be entered and
noted upon the books of the corporation in order that
such transfer may be valid, therefore, inasmuch as a
chattel mortgage of the aforesaid title is not a complete
and absolute alienation of the dominion and ownership
thereof, its entry and notation upon the books of the
corporation is not necessary requisite to its validity
Chua guan vs. Magsasaka
- Was the mortgage valid and efective as against
subsequent third parties
- Register of deeds where the corporation resides and if
diferent in the register of deeds of owners domicile
Unson vs. Dinamito
- All transferred not register will not have a valid force and
efect
Right to transfer may be regulated
May not be unreasonably restricted
Violation of nationalization law- Central Bank
Lambert vs. Fox
- Valid , may be reasonably regulated, restricted by
agreement of parties
- Reasonable agreement by the parties
- Reasonable as to length of time
Padgett vs. Babcock
- Any attempt to restrain transfer
- SC, in the absence of a valid lien upon its shares
- Valid restrictions shares are applicable
- Any restriction on a stockholders right to dispose of his
shares must be construed strictly; and any attempt to
restrain a transfer of shares is regarded as being in
restraint of trade, in the absence of a valid lien upon its
shares, and except to the extent that valid restrictive
regulations and agreements exist and are applicable.
Subject only to such restrictions, a stockholder cannot
be controlled in or restrained from exercising his right to
transfer by the corporation or its ofcers or by other
stockholders, even though the sale is to a competitor of
the company, or to an insolvent person, or even though
a controlling interest is sold to one purchaser.
Certifcate of stocks are transferrable
- By endorsement and delivery of the stock certifcate to
the transferee
In order to be valid, must be registered in the books. If
not, will only be binding among parties
How may shares of stock be transferred?
- Endorsement of stock certifcate by owner or attorney-
in-fact with delivery
Embassy farms vs. CA
- Must be endorsed by owner or attorney-in-fact coupled
with delivery
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
40
- Endorsed not delivered
- Proper mode and manner must be complied with
Razon vs. IAC
- Delivered not endorsed
- Reverse of Embassy Farms
- Endorsement alone is not sufcient nor delivery without
endorsement is not allowed
- Endorsement plus delivery is mandatory
Is there any other mode of transferring stock?
- Notarized deed
- Deed of assignment
Rural bank of Salinas vs. CA
- If denied or refused without good cause, mandamus will
lie
Tay vs. CA
- Mandamus may issue if petition has a clear legal right
- Never issued in doubtful cases
- Petitioner failed to establish a clear legal right and
alleged ownership is without merit
- Did not acquire ownership by virtue of the contract of
pledge
- In a contract of pledge there must be foreclosure
- In the case there was no attempt to foreclose
- Petitioner must have a prima facie right
Nava vs. Peers Marketing
- A stock subscription is a subsisting liability from the
time the subscription is made
- The subscriber is as much bound to pay his
subscription as he would be to pay any other debt
- No stock certifcate was issued. Without stock
certifcate, which is the evidence of ownership of
corporate stock, the assignment of corporate shares is
efective only between the parties to the transaction
Exception to the general rule
Rural Bank of Lipa vs. CA
- By notarized deed
- Certifcate of stocks already issued must be coupled
with delivery, exception (TAN vs. SEC)
Stock certifcate has already been issued it must be
coupled with the delivery
After certifcate of stock is issued, may it be efectively
transferred even without endorsement or delivery of the
stock certifcate?
- Person sought to be a stockholder is an ofcer and has
custody
Endorsement and delivery is not necessary (TAN vs.
SEC)
Tan vs. SEC (FULL KNOWLEDGE, HE IS ESTOPPED)
- Persons sought to be stockholder is ofcer and has
custody of the book (estopped)
General Rule for valid transfer
- Certifcate of stock must be endorsed by owner or
attorney-in-fact coupled with delivery
Exceptions
- Section 63 uses the word may
- Showing that there may be other modes of transferring
shares
Is there a time frame or fxed period as when transfer
can be made?
- NO, (WON vs. WACK WACK)
Won vs. Wack Wack
- Valid between contracting parties even if not recorded in
corporation books
- Right accrues only if refused
- Statute of limitations does not apply in registration of
shares of stock
- Must determined from the time of refusal
Why are they non-negotiable when they may be
transferred?
- Transferees pays it without prejudice to all the rights
and defenses as the true and lawful owner may have
under the law except insofar as such rights and
defenses are subject to the limitations imposed by the
principles governing estoppels
De los Santos vs. Republic
- Why is he, not considered as the owner of shares? When
it has been said that when endorsed by the owner it is
considered as strict certifcate? Because certifcate of
stocks are non-negotiable
- Although a stock-certifcate is sometimes regarded as
quasi-negotiable, in the sense that it may be transferred
by endorsement, coupled with delivery, it is well settled
that the instrument is non-negotiable, because the
holder thereof takes it without prejudice to such rights
or defenses as the registered owner or creditor may have
under the law, except insofar as such rights or defenses
are subject to the limitations imposes by the principles
governing estoppels.
Unauthorized issuance of stock certifcates
100 pesos per share
Stolen by B and forged the signature of A
B sells to C will C acquire title? NO
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
100/s
100
XYZCo
41
ENDORSEMENT FORM
C armed with the endorsement form certifcate, sold to D
(innocent purchaser for value), will D acquire title?
- NO, subject to such rights and defenses as the true and
lawful owner may have
What if C now goes to the corporation and presents the
form?
- Then the corporation shall cancel the old certifcate and
issues a new one, now in the name of C, now registered
in the name of C, will C acquire title?
A found out what happened and goes to the corporation
who has a better title C or A?
- A, A cannot be deprived of his right by virtue of an
unauthorized transfer
Corporation can compel C to deliver the new stock
certifcate because he made a representation that the
certifcate where good.
Armed with the new certifcate issued to C, C delivers to
D a purchaser in good faith and for value will D acquire
title?
- D will acquire title took the shares not by virtue of a forged
or unauthorized transfer, but on the reliance that the
stock certifcate is valid and owned by C
Stock certifcate now in possession of D. A knew of what
happened and went to the corporation and complains.
Who will have a better title?
- the corporation may be compelled to recognize both, A as
stockholder (non-negotiable) D, reliance that the stock
certifcate is valid and existing and owned by C
Forged transfers
- If the corporation should issue a new certifcate in
pursuance of a forged transfer, the corporation incurs
no liability to the person in whose favor it is issued and
it may demand its return for cancellation. The
corporation in such case has been guilty of no
misrepresentation. On the other hand, it is the duty of
the purchaser to determine that the indorsement of the
owner is genuine. However, if the new certifcate issued
to the purchaser comes into the hands of a bona fde
purchaser for value, the corporation will be stopped
from denying validity thereof, since by issuing such new
certifcate it represents that the person named therein is
a stockholder of the corporation. The corporation is thus
forced to recognize both the original certifcate and new
certifcate-the original, because the true owner could
not be deprived of his title by a forged transfer, and the
new, because of its representation that the person
named therein is the owner of shares in the corporation.
But if the recognition of both stockholders would result
in an over issue of shares, then only the original and
true owner can be recognized as a stockholder. The bona
fde purchaser of the new certifcate will however have a
right of damages against the corporation. The
corporation, in turn, would have a right of action
against the person who made false representations and
in whose favor it issued a new certifcate. The true
owner of the shares which were wrongfully transferred
would of course have a right to compel the corporation
to issue him a certifcate in lieu of the original one
which was wrongfully cancelled.
Authorized capital stock 1M shares
All are subscribed who will the corporation recognize as
rightful owner A or D? if both will be recognized there
will be over issuance
- only A citing citizens national bank vs. state (but if
recognition of both stockholders would result in an over
issue of shares, then only the original and true owner can
be recognized as a stockholder)
- by virtue of the doctrine of non-negotiability of certifcate
of stocks
The true and lawful owner will never be deprived of his
rights
What happens to D?
- D will have a cause of action against the corporation for
the value of his acquisition cost inclusive of damages,
attorneys fees and cost of suit
D sues the corporation for the value of his acquisition
cost, inclusive of damages, attorneys fees and cost of
suit. What may the corporation do?
- NO defense, no valid defense, because it was represented
to other parties that the certifcate of stocks is valid,
subsisting, etc.
2
nd
situation, what cause of action may the corporation
have? Remedy?
- Third party complaint against C, but what if he is a
purchaser for value? 4
th
party claim against B
When may certifcate of stocks be issued?
- Section 64 provides:
Section 64. Issuance of stock certifcates. - No
certifcate 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)
A certifcate of stock cannot be issued unless he fully
paid the amount subscribed
Subscription to the capital stocks of the corporation are
indivisible
Clear mandate of section 148 of the code is that the
ruling of the court in Baltazar vs. Lingayen Gulf, no
longer holds true
Section 148. Applicability to existing
corporations. - All corporations lawfully existing and
doing business in the Philippines on the date of the
efectivity of this Code and heretofore authorized,
licensed or registered by the Securities and Exchange
Commission, shall be deemed to have been authorized,
licensed or registered under the provisions of this Code,
subject to the terms and conditions of its license, and
shall be governed by the provisions hereof: Provided,
That if any such corporation is afected by the new
requirements of this Code, said corporation shall,
unless otherwise herein provided, be given a period of
not more than two (2) years from the efectivity of this
Code within which to comply with the same. (n)
Subscription to shares of stocks are indivisible
Also apparent is that once a subscriber has paid his
subscription in full, he becomes entitled to be issued a
stock certifcate and in the event that the corporation
refuses to do so, the stockholder my institute a case for
mandamus with damages. Thus, it has been said that
the duty of the corporate ofcers to issue stock
certifcates to those entitled thereto is a ministerial duty
enforceable by mandamus.
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
42
Fua Cun vs. Summers and China Banking Corp.
- The court erred in holding the plaintif as the owner of
250 shares of stock; the plaintifs rights consist in
equity in 500 shares and upon payment of the unpaid
portion of the subscription price he becomes entitled to
the issuance of certifcate for said 500 shares in his
favor.
- No certifcate of stock until the full amount has been
paid.
Watered stock
- One which is issued by the corporation as fully paid-up
shares, when in fact the whole amount of the value
thereof has not been paid.
- Basis is par value and not the fair market value
Section 62 states that stocks shall not be issued for a
consideration less than par or issued price thereof,
while section 13 states that in no case shall be paid-up
capital be less than fve thousand [P5000] pesos.
If issued below par, issued value considered as water
How may watered stocks be issued?
1. For a monetary consideration less than its par or issued
value;
2. For a consideration in property, tangible or intangible,
valued in excess of its fair market value;
3. Gratuitously or under an agreement that nothing shall
be paid at all; or
4. In the guise of stock dividends when there are no
surplus profts of the corporation.
Why is stock watering illegal?
1. The corporation is deprived of its capital thereby hurting
its business prospects, fnancial capability and
responsibility;
2. Stockholders who paid their subscriptions in full, or
promised to pay the same, are injured and prejudiced by
the reduction of their proportionate interest in the
corporation; and,
3. Present and future creditors are deprived of the
corporate assets for the protection of their interest.
- Corporation is prejudiced
- Stockholders, dilution of interest
- Creditors are prejudiced, virtue of right to look upon
corporations properties for the satisfaction of their
claims
What is the efect of issuance of watered stocks
1. As to the corporation - when a corporation is guilty of
ultra-vires or illegal acts which constitute an injury to or
fraud upon the public, or which will tend to injure or
defraud the public, the State may institute a quo-
warranto proceeding to forfeit its charter for the misuse
or abuse of its franchise.
2. As between the corporation and the subscriber- The
subscription is void. Such being the case, the
subscriber is liable to pay the full par or issued value
thereof, to render it valid and efective.
3. As to the consenting stockholders - They are stopped
from raising any objection thereto;
4. As to dissenting stockholders - In view of the dilution of
their proportionate interest in the corporation, they may
compel the payment of the water in the stock solidarily
against the responsible and consenting directors and
ofcers inclusive of the holder of the watered stocks;
5. As to creditors - They may enforce payment of the
diference in the price, or the water in the stock,
solidarily against the responsible directors/ofcers and
the stockholders concerned; and
6. As against transferees of the watered stock His right is
the same as that of his transferor. If, however, a
certifcate of stock has been issued and duly indorsed to
a bona fde purchaser, without knowledge, actual or
constructive, the latter cannot be held liable, at least as
against the corporation, since he took the shares on
reliance of the misrepresentation made by the
corporation that the stock certifcate is valid and
subsisting. This is because a corporation is prohibited
from issuing certifcates of stock until the full value of
the subscriptions have been paid and could not,
therefore, deny the validity of the stock certifcate it
issued as against a purchaser in good faith. Thus,
Ballentine states that whether there is any liability on
the part of the transferee of watered stock is made to
depend upon whether he acquired the same without
notice, either as purchaser or donee. If he had
knowledge thereof, he is subject to the same liability as
his transferor.
What is the nature of the liability of the corporate
directors consenting to the issuance of watered stocks
and the extent of their liabilities?
- Solidarily liable with the holder of the watered stocks to
the extent of the water from said shares of stocks
Will all the directors be liable? What if you objected will
you also be liable?
- If you do not issue a written objection, you are still liable
- Even passive directors may be liable
- Those having knowledge thereof, but did not interpose
their objection shall be liable
- Section 65 provides:
Section 65. Liability of directors for watered
stocks. - Any director or ofcer 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 fle the
same with the corporate secretary, shall be solidarily,
liable with the stockholder concerned to the corporation
and its creditors for the diference between the fair value
received at the time of issuance of the stock and the par
or issued value of the same. (n)
ACS-100M 100M/S PAR VALUE-
1.00
SUBSCRIBED-50M FAIR MARKET VALUE-
12.00/S
UNSUBSCRIBED-50M
A
B
C
D
E
There is a denial of pre-emptive rights and directors
A,B,C,D,E decided to issue the remaining 50M and
subscribed for 10M each at 2 per share.
Is there stock watering if the fair market value is 12.00?
- No stock watering
- The basis is the par value
- The shares where in fact paid more than the par value
indicated in the articles of incorporation
3 days later they sold their 10M share for P11.00 each,
therefore making a proft.
Can you question there actuations? What would be the
cause of action?
- It may be questioned.
- Duty of loyalty or fduciary duty as such directors
- They cannot advance their own motives to the damage
prejudice of the corporation which they represents and
stockholders as a whole instead of it being sold outside
- 500M would have gone to the cofers of the corporation,
500M should be there for the protection of creditors
- They are placed in a fduciary relationship
- Sila lang ba ang kikita, pano naman yung corporation,
opportunity na yun para kumita
When are unpaid subscriptions due and payable?
- 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
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
43
be made on the date specifed 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 diferent 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. (38)
Remedies of the corporation to enforce payment of
unpaid subscription
1. By board action in accordance with the procedure laid
down in sections 67 to 69 of the code
2. By a collection case in court as provided for in section
70
Are subscribers of shares of stocks not fully paid, liable
to pay interest?
- General rule is they are not liable to pay interest
because the code says unless requires in the by-laws
- Aside from the mandate of the law that subscribers to
shares of stock must pay the full value of their
subscription, they may likewise be required to pay
interest on all unpaid subscriptions if so imposed in the
contract or in the corporate by-laws at such rate as may
be indicated thereat or the legal rate if not so fxed.
Unless so required or provided, however, subscribers to
shares of stock, not fully paid, are not liable to pay
interest on their unpaid subscriptions. The code thus
provides:
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
fxed in the by-laws. If no rate of interest is fxed in the
by-laws, such rate shall be deemed to be the legal rate.
(37)
Until a call is made, they are not due and payable, but
still subject to the provisions of the contracts
Procedures in case of sale of delinquent stocks
- Section 68. Delinquency sale. - The board of directors
may, by resolution, order the sale of delinquent stock
and shall specifcally 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 ofce of the
corporation is located.
Unless the delinquent stockholder pays to the
corporation, on or before the date specifed 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 ofer
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 certifcate 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 certifcate of stock covering such shares.
Should there be no bidder at the public
auction who ofers 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. (39a-46a)
Who is the winning bidder in a delinquency sale?
- Bidder who shall ofer to pay the full amount of the
balance on the subscription together with accrued
interest, cost of advertisement and expenses of sale, for
the smallest number of shares or fraction of a share.
X Co. has 1M authorized capital stock
500 thousand is already subscribed
A subscribed to 100 thousand shares, 50 thousand is
already paid leaving 50 thousand unpaid
The corporation is at a loss of 250 thousand, the board
decides to make a call for the payment of the unpaid
subscriptions, however A could not paid, hence declared
delinquent and decides to sell his share at a public
auction
55 thousand is to be paid, remaining balance plus cost
and expenses
BIDDERS:
X-55K FOR 99,900 shares
Y-55K FOR 99,500 shares
Z-55K FOR 99,000 shares (winning bidder)
Assume there is no bidder, may the corporation bid?
- NO. It cannot bid because the law says, subject to the
provisions of this CODE. Section 68 and 41 should be
reconciled. Section 68 states that:
Should there be no bidder at the public
auction who ofers 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. (39a-46a)
- There was no unrestricted retained earnings in the
example given therefore the corporation cannot bid ,
section 41, it states that:
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
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
44
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 Code. (a)
What if the shares of A were sold without compliance of
the requirements? May A question the sale?
- The law prescribes two conditions before an action to
recover delinquent stocks irregularly sold may be
allowed. These are:
1. The party seeking to maintain such action frst pays or
tenders to the party holding the stock the sum for which
the same was sold, with interest from the date of the
sale at the legal rate; and,
2. The action shall be commenced by the fling of a
complaint within six months from the date of the sale.
- The reason for such is the stability of transactions of the
shares of stock
Suppose in the example, since there are no unrestricted
retained earnings, hence the corporation cannot bid, is
the corporation left without any recourse?
- 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)
Velasco vs. Poizat
- The subscriber is as much bound to pay the amount of
the share subscribed by him as he would be to pay any
other debt, and the right of the company to demand
payment is no less incontestable.
- Two available remedies: the frst and most special
remedy given by the statute consist in permitting the
corporation to put up the unpaid stock and dispose of it
for the account of the delinquent subscriber. The other
remedy is by action in court.
De Silva vs. Aboitiz and Co.
- Discretionary on the part of the board of directors to do
whatever is provided in the said article relative to the
application of the part of the 70 percent of the proft
distributable in equal parts on the payment of the
shares subscribed to and fully paid
Lingayen Gulf vs. Baltazar
- Exception: pursuant to a bona fde compromise or to set
of a debt due from the corporation, a release supported
by consideration, will be efectual as against dissenting
stockholders and subsequent and existing creditors. A
release which might originally have been held invalid
may be sustained after a considerable lapse of time
Apocada vs. NLRC
- Set-of is without any legal basis
- It was premature
- Unpaid subscriptions will become due and payable only
upon certain instance
- Call or if there is a stipulation in contract
- If no call and no stipulation in contract then it will not
be demandable or payable at all
Lumanlan vs. Cura
- Trust Fund Doctrine- subscription to the capital of a
corporation constitute a fund to which the creditors
have a right to look for satisfaction of their claims and
that the assignee in insolvency can maintain an action
upon any unpaid stock subscription in order to realize
assets for the payment of its debts.
PNB vs. Bitulak
- Where it not for the promise, the defendants would have
not subscribed
- Trust Fund Doctrine, it is established doctrine that
subscriptions to the capital of a corporation constitute a
fund to which creditors have a right to look for
satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid
stock subscription in order to realize assets for the
payment of its debts.
- A corporation has no power to release an original
subscriber to its capital stock from the obligation of
paying for his shares, without a valuable consideration
for such release; and as against creditors a reduction of
the capital stock can take place only in the manner and
under the conditions prescribed by the statute or the
charter or the articles of incorporation.
Edward Keller and Co. vs. COB
- May the stockholder be held liable for the debts of the
corporation? YES. To the extent of their unpaid
subscription
- As to the liability of the stockholders, it is settled that a
stockholder is personally liable for the fnancial
obligations of a corporation to the extent of his unpaid
subscriptions
Is there a prescriptive period wherein a demand for
unpaid subscription should be made?
- NO. Garcia vs. Suarez case
Garcia vs. Suarez
- Never became due and payable until there is a call made
- Prescription will not run until and unless there is
demand
- Prescription should be determined from the time
demand has been made and not from the time of
subscription
If declared delinquent, what would be the efect as to
the owner of said shares?
- Section 71. Efect 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
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
45
pays the amount due on his subscription with accrued
interest, and the costs and expenses of advertisement, if
any. (50a)
- However if the shares are not delinquent, subscribers to
the capital of a corporation, though not fully paid, are
entitled to all the rights of a stockholder, according to
section 72
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.
(n)
May the rules governing delinquency sale apply to a
non-stock corporation? Are there unpaid shares in a
non-stock corporation?
- Rules governing stock corporations, when applicable,
also applies to a non-stock corporation
- There are delinquent shareholders also in a non-stock
corporation. Example is membership dues
A corporation paid 50% of subscription and was later on
declared delinquent when he could not pay upon call; A
is also a director of the corporation. Will A, upon
declaration of delinquency , still be able to exercise his
right as a director?
- Yes, he loses all his right as a stockholder except his
right to receive dividends
- He remains to be a director, only qualifcation to be a
director is he must own at least 1 share and since it still
stands in his name pending the sale, he remains to be
and act as a director
- Even if there is sale, he may still be director because the
winning bidder may not bid or pay for all the shares or
there might be remaining shares, which would be
credited in favor of the delinquent stockholder
- Section 43 provides:
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 frst 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. (16a)
Stock corporations are prohibited from
retaining surplus profts in excess of one hundred
(100%) percent of their paid-in capital stock, except: (1)
when justifed by defnite corporate expansion projects
or programs approved by the board of directors; or (2)
when the corporation is prohibited under any loan
agreement with any fnancial 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. (n)
When a certifcate of stock is loss or destroyed, what
must be done by the owner thereof?
- Section 73. Lost or destroyed certifcates. - The following
procedure shall be followed for the issuance by a
corporation of new certifcates of stock in lieu of those
which have been lost, stolen or destroyed:
1. The registered owner of a certifcate of
stock in a corporation or his legal representative shall
fle with the corporation an afdavit in triplicate setting
forth, if possible, the circumstances as to how the
certifcate was lost, stolen or destroyed, the number of
shares represented by such certifcate, the serial
number of the certifcate and the name of the
corporation which issued the same. He shall also
submit such other information and evidence which he
may deem necessary;
2. After verifying the afdavit 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 ofce, once a
week for three (3) consecutive weeks at the expense of
the registered owner of the certifcate 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 certifcate, and the
number of shares represented by such certifcate, 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 certifcate of stock, the
right to make such contest shall be barred and said
corporation shall cancel in its books the certifcate of
stock which has been lost, stolen or destroyed and issue
in lieu thereof new certifcate of stock, unless the
registered owner fles a bond or other security in lieu
thereof as may be required, efective 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 certifcate 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 certifcate of
stock which has been lost, stolen or destroyed, the
issuance of the new certifcate of stock in lieu thereof
shall be suspended until the fnal decision by the court
regarding the ownership of said certifcate 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
ofcers, no action may be brought against any
corporation which shall have issued certifcate of stock
in lieu of those lost, stolen or destroyed pursuant to the
procedure above-described. (R.A. 201a)
- The rationale of the above-quoted law is to avoid
duplication of certifcates of stock and the avoidance of
fctitious and fraudulent transfers.
When will the replacement certifcate be issued?
- The code provides 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 certifcate
of stock, the right to make such contest shall be barred
and said corporation shall cancel in its books the
certifcate of stock which has been lost, stolen or
destroyed and issue in lieu thereof new certifcate of
stock,
Could it be issued earlier than 1 year?
- Yes it can be, the code states that:
unless the registered owner fles a bond or
other security in lieu thereof as may be required,
efective for a period of one (1) year, for such amount
and in such form and with such sureties as may be
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
46
satisfactory to the board of directors, in which case a
new certifcate 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 certifcate of stock which has been
lost, stolen or destroyed, the issuance of the new
certifcate of stock in lieu thereof shall be suspended
until the fnal decision by the court regarding the
ownership of said certifcate of stock which has been
lost, stolen or destroyed.
May corporate ofcers be held liable for the
unauthorized issuance?
- YES, the code provides that:
Except in case of fraud, bad faith, or
negligence on the part of the corporation and its
ofcers, no action may be brought against any
corporation which shall have issued certifcate of stock
in lieu of those lost, stolen or destroyed pursuant to the
procedure above-described. (R.A. 201a)
Assuming the last paragraph is not there; would it be
not the same, that they should be held liable due to
fraud, bad faith or negligence?
- YES. Section 31 provides that:
Section 31. Liability of directors, trustees or
ofcers. - Directors or trustees who willfully 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 afairs of the corporation or
acquire any personal or pecuniary interest in confict
with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting
there from sufered by the corporation, its stockholders
or members and other persons.
When a director, trustee or ofcer 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 confdence, 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 profts which
otherwise would have accrued to the corporation. (n)
Certifcate of stock was lost, the owner transfers his
shares by way of a notarized deed will it be valid?
- He cannot do so, if a certifcate of stock is issued by a
corporation, a mere notarized deed will not sufce
- Deed of assignment was not sufcient since there was
no endorsement (Rural Bank of Lipa vs. CA)
Rights and liabilities of stockholders
- RIGHTS
1. Participation in the management of the corporate afairs
by exercising their right to vote and be voted upon either
personally or by proxy as provided for under sections 50
and 58 of the code;
2. To enter into a voting trust agreement subject to the
procedure, requirements and limitations imposed under
section 50;
3. To receive dividends and to compel their declaration if
warranted under section 43;
4. To transfer shares of stock subject only to reasonable
restrictions such as options and preferences as may be
allowed by law inclusive of the right of the transferee to
compel the registration of the transfer in the books of
the corporation as provided for in section 63;
5. To be issued a certifcate of stock for fully paid-up
shares in accordance with 64;
6. To exercise pre-emptive rights as provided for in section
39;
7. To exercise their appraisal right in accordance with the
provision of section 81 and in those instance allowed by
law such as section 42 and 105;
8. To institute and fle a derivative suit;
9. To recover shares of stock unlawfully sold for
delinquency as may be allowed under section 69;
10. To inspect the books of the corporation subject only to
the limitations imposed by section 73;
11. To be furnished by the most recent fnancial statement
of the corporation as by section 75;
12. To be issued a new stock certifcate in lieu of the lost or
destroyed one subject to the procedure laid down in
section 73;
13. To have the corporation dissolved under section 118 to
121, and section 105 in a close corporation;
14. To participate in the distribution of the assets of the
corporation upon dissolution under section 122;
15. In the case of a close corporation, to petition the SEC to
arbitrate in the event of a deadlock as allowed under
section 104; and,
16. Also in the case of a close corporation, to withdraw
therefrom, for my reason, and compel the corporation to
purchase his shares as provided for under section 105.
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
47
- LIABILITIES
1. To pay to the corporation the balance of his unpaid
subscriptions subject to the provision of section 67 to
70;
2. To pay interest on his unpaid subscription if required by
the by-laws or by the contract of subscription in
accordance with section 66;
3. To answer to the creditors for the unpaid portion of his
subscription under the TRUST FUND DOCTRINE;
4. To answer the water in his stocks as provided for in
section 65;
5. To be liable, as general partners, for all debts, liabilities
and damages of a determinable corporation as
envisioned under section 21 (corporation by estoppel);
and,
6. To be personally liable for torts, in the event that a
stockholder in a close corporation actively participates
in the management of the corporate afairs.
CORPORATE BOOKS AND RECORDS
What are these books and records that are required to
be kept?
- Section 74. Books to be kept; stock transfer agent. -
Every corporation shall keep and carefully preserve
at its principal ofce 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 ofcer 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 ofense 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
ofce of the corporation or in the ofce 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 fxed 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. (51a and 32a; P.B. No. 268.)
To summarize:
1. Records of all business transactions which include,
among others, journals, ledger, contracts, vouchers and
receipts, fnancial statements and other books of
accounts, income tax returns, and voting trust
agreements which must be kept and carefully preserved
at its principal ofce;
2. Minutes of all meetings of stockholders or members and
of the directors or trustees setting forth in detail the
date, time, and place of meeting, how authorized, the
notice given whether the same be regular or special, and
if special, the purpose thereof shall be specifed, those
present and absent, and every act done or ordered done
there at which ,must likewise be kept at the principal
ofce of the corporation; and,
3. Stock and transfer book showing the names of the
stockholders, the amount paid or unpaid on all stocks
for which subscription has been made, a statement of
every alienation, sale or transfer of stock made, if any
the date thereof, and by whom and to whom made
which must also be kept at the principal ofce of the
corporation or in the ofce of its stock transfer agent.
These corporate books and records, inclusive of all
business transactions and minutes of meetings, are
subject to inspection by any of the directors, trustees,
stockholders or members of the corporation at
reasonable hours on business days and a copy of
excerpts of said records may be demanded. In fact, in so
far as fnancial statement is concerned, the Code clearly
provides:
Section 75. Right to fnancial 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 fnancial statement,
which shall include a balance sheet as of the end of the
last taxable year and a proft 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 fnancial report of the
operations of the corporation for the preceding year,
which shall include fnancial statements, duly signed
and certifed by an independent certifed public
accountant.
However, if the paid-up capital of the corporation is less
than P50,000.00, the fnancial statements may be
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
48
certifed under oath by the treasurer or any responsible
ofcer of the corporation. (n)
May books and records be examined? Who may
examine? Can they copy them? In whose expense?
- Yes, according to the code:
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.
Is there any defense available that could be raised? By
the corporate ofcers to justify the refusal?
- Yes, the code provides that:
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.
What is the stock and transfer? Where should stock and
transfer be kept? Can it be kept elsewhere?
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 ofce of
the corporation or in the ofce 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.
Stock and transfer agent
- Records every movement
- Person who monitors movement by the minutes or by
the hours
- Non-stock corporation- stock and transfer books
- Club share- membership
Are stockholders entitled to fnancial statements?
- Yes, they are entitled to a copy, the code provides that:
Section 75. Right to fnancial 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 fnancial statement,
which shall include a balance sheet as of the end of the
last taxable year and a proft 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 fnancial
report of the operations of the corporation for the
preceding year, which shall include fnancial statements,
duly signed and certifed by an independent certifed
public accountant.
However, if the paid-up capital of the
corporation is less than P50,000.00, the fnancial
statements may be certifed under oath by the treasurer
or any responsible ofcer of the corporation. (n)
- Audited fnancial statement fled in the SEC, 120 days
from the end of the fnal year, or must be fled on or
before April of each year
- Must be stamp received by the BIR
Those in the stock exchange
- Disclosure of any matter that have to do with increasing
and decreasing
- If not kulong violation of securities and regulation act
Why is this right of inspection granted to a stockholder?
- The basis of the right of the stockholder to inspect the
books and records of the corporation for a proper
purpose is to protect his interest as a stockholder. Thus,
it has been said that:
The right of the shareholders to ascertain
how the afairs of his company are being
conducted by its directors and ofcers is
founded by his benefcial interest through
ownership of shares and the necessity of self-
protection. Managers of some corporations
deliberately keep the shareholders in
ignorance or under misapprehension as to
the true condition of its afairs. Business
prudence demands that the investor keep a
watchful eye on the management and the
condition of the business. Those in charge of
the company may be guilty of gross
incompetence or dishonesty for years and
escape liability if the shareholders cannot
inspect the records and obtain information.
Is there any distinction of the right of inspection of a
stockholder and that of a director?
- Yes, as compared to a stockholder or member, the right
of a director or trustee to inspect and examine corporate
books and records is considered absolute and
unqualifed and without regard to motive. This is
because a director supervises, directs and manages
corporate business and it is necessary that he be
equipped with all the information and data with regard
to the afairs of the company in order that he may
manage and direct its operations intelligently and
according to his best judgment in the interest of all the
stockholders he represents. Thus, while stockholders
and members are entitled to inspect and examine the
books and records as provided in sections 74 and 75
they may not gain access to highly sensitive and
confdential information. In the case of directors. it is
not denied that they have such access. This would
include, among others,
a. Marketing strategies and pricing structure;
b. Budget for expansion and diversifcation;
c. Research and development;
d. Sources of funding, availability of personnel,
proposals of mergers or tie-ups with other frms
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
49
May this right be exercised, other than by the
stockholders themselves?
- Yes, while the right is founded on stock ownership thus
personal in nature it may be made by the stockholders
agent or representative since it may be unavailing in
many instances
What if the right of the stockholder to inspect is denied?
What is his remedy?
1. Mandamus
2. Damages either against the corporation or responsible
ofcer who refused the inspection
3. Criminal complaint for violation of his right to inspect
and copy excerpts of all business transactions and
minutes of meeting. Section 74 provides that Any ofcer
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 ofense which shall be punishable
under Section 144 of this Code. The latter provision
imposes a penalty of a fne of not less than P1,000 but
not more than P10,000 or an imprisonment for not less
than 30 days but not more than 5 years, or both, at the
discretion of the court. If the refusal is pursuant to a
resolution or order of the board, the liability shall be
imposed upon the directors or trustees who voted for
such refusal.
Defense of the responsible corporate ofcer
1. That the person demanding has improperly used any
information secured through any prior examination of
the records or minutes of such corporation or of any
other corporation;
2. That he was not acting in good faith or for a legitimate
purpose in making his demand;
3. The right is limited or restricted by special law or the
law of it creation.
W.G. Philpotts vs. Philippine Manufacturing Co.
- The right of inspection given to a stockholder can be
exercised either by himself or by any proper
representative or attorney-in-fact, and either with or
without the attendance of the stockholder
- The right may be regarded as personal, in the sense that
only a stockholder may enjoy it; but the inspection and
examination may be made by another. Otherwise it
would be unavailing in many instances.
o Note: Usually hires an auditor or accountant to
safeguard his interest
Pardo vs. Hercules Lumber Co.
- The law is clear, it may be exercised during reasonable
hours on any business days, the by-laws cannot deny
this right all together
- The general right given by the statute may not be
lawfully abridged to the extent attempted in this
resolution. It may be admitted that the ofcials in
charge of a corporation may deny inspection when
sought at unusual hours or under other improper
conditions; but neither the executive ofcers nor the
board of directors have the power to deprive a
stockholder of the right altogether.
- The corporation, or its responsible directors and ofcers
cannot unduly restrict this right of inspection and may
not arbitrarily set a few days of the year within which
the stockholder may make the inspection.
- A by-law unduly restricting the right of inspection is
undoubtedly invalid
Vegaruth vs. Isabela Sugar Co.
- Directors of a corporation have the unqualifed right to
inspect the books and records of the corporation at all
reasonable hours.
- We do not conceive, however, that a director or
stockholder has any absolute right to secure certifed
copies of the minutes of the corporation until these
minutes have been written up and approved by the
directors.
May a stockholder of a holding company inspect the
books and records of a subsidiary?
- It depends
- The right of the stockholders to examine corporate
books extends to wholly-owned subsidiary which is
completely under the control and management of the
parent company where he is such a stockholder. But if
the two entities (subsidiary and parent) are legally being
operated as separate and distinct entities, there is no
such right of inspection on the part of the stockholder of
the parent company.
AYALA- HOLDING COMPANY/PARENT COMPANY
SUBSIDIARIES: BPI/GLOBE/AYALA LAND (not wholly-
owned subsidiary)
o HOLD ATLEAST 50 +1 shares in order to be a
PARENT COMPANY
A, is a stockholder of Ayala, does he have a right to
inspect the records of its subsidiaries?
- If wholly owned pwede, but its subsidiaries are not
wholly owned kaya hindi pwede
Gokongwei vs. SEC
- San Miguel corporation owns all of the shares of stock of
San Miguel International
- It is wholly-owned
- It would be in accord with equity, good faith and fair
dealing to construe the statutory right of petitioner as
stockholder to inspect the books and records of such
wholly-owned subsidiary which are in respondent
corporations possession and control
If being operated as separate and distinct corporations,
there is no such right
Telecommunications- special franchise, it is a legislative
grant
Gonzales vs. PNB
- Provisions of the old law was unqualifed, when it
granted stockholders the right to inspect
- However, whole seemingly enlarging the right of
inspection, the new code has prescribed limitations to
the same. It is now expressly required as a condition for
such examination that the one requesting it must not
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
50
have been guilty of using improperly any information
secured through a prior examination and that the
person asking for such examination must be acting in
good faith and for a legitimate purpose in making his
demand
- Admittedly, he sought to be a stockholder in order to pry
into transactions entered into by the respondent bank
even before he became a stockholder. His obvious
purpose was to arm himself with materials he can use
against the respondent bank for acts done by the latter
when the petitioner was a total stranger to the same.
- Bank was created by a special law, it has its own charter
and primarily governed by the law creating them
- The bank is only subject to the inspection of the Central
Bank and any information pertaining to the bank is
confdential and shall not be revealed to any person
other than the President of the Philippines, the
Secretary of Finance and the Board of Directors, nor
shall any information relative to the funds in its custody,
its current accounts or deposits belonging to private
individuals, corporations or other entities except by
order of a Court of Competent Jurisdiction, hence
inspection sought to by the petitioner is violative of the
provisions of its charter and is even subject to penal
sanctions
Assuming you are a stockholder of PNB, and then it was
privatized, may you already have the right to inspect?
- No, unless its charter has been altered or repealed it is
still subject to the same law
3 stages in the life of a corporation
- Formation or birth
- We now discuss the union of the corporation
- The last would be its death or dissolution
MERGER AND CONSOLIDATION
Merger and consolidation
- In corporate parlance it is called spin-of
- Almost a year ago San Miguel separated its brewery
business
- San Miguel Corporation is now a full time holding
company; it can later on absorb the company
- Corporations are granted by the code to merge or
consolidate
- most common type of corporate recognition
- not the same in every case
- but most common in the weal fnancial or insolvent
condition, aim is to bring it back to its fnancial
capability
- also a method of recapitalization
o purchase and sale of corporate assets is another
form of corporate reorganization
How do you value the assets of the merging corporation,
do you consider goodwill?
First secure favorably recommendation of government
agency
- Section 79. Efectivity of merger or
consolidation. - The articles of merger or of
consolidation, signed and certifed as herein above
required, shall be submitted to the Securities and
Exchange Commission 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 frst be
obtained. If the Commission is satisfed 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 certifcate of merger or of
consolidation, at which time the merger or consolidation
shall be efective.
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 Code 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. (n)
Merger
- A union efected by absorbing one or more existing
corporations by another which survives and continues
the combined business
- It is the uniting of two or more corporations by the
transfer of property to one of them which continue in
existence, the other or the others being dissolved and
merged therein.
A B
A transfers all assets, properties, rights, obligations,
liabilities to B
B issues shares of stocks in exchange of the transfer
A is then dissolved and B SURVIVES
o Parties to a merger are called constituent
corporation
Consolidation
- The uniting or amalgamation of two or more existing
corporations to form a new corporation
- In merger there is a surviving corporation, the others
are dissolved, while in consolidation, all constituent are
dissolved and a new one organized
A B
C
Like all other corporate acts, it emanates from the board
1. The board of directors or trustees of each constituent
corporations shall approve a plan of merger or
consolidation setting forth the matters required in
section 76;
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
51
2. Approval of the plan by the stockholders representing
2/3 of the outstanding capital stock or 2/3 of the
member in non-stock corporations of each of such
corporations at separate corporate meetings called for
the purpose;
3. Prior notice of such meeting, with a copy or summary
of the plan of merger or consolidation shall be given
to all stockholders or members at least two (2) weeks
prior to the scheduled meeting, either personally or
registered mail stating the purpose thereof;
4. Execution of the articles of merger or consolidation by
each constituent corporations to be signed by the
president or vice-president and certifed by the
corporate secretary or assistant secretary setting
forth the matters required in section 78;
5. Submission of the articles of merger or consolidation
in quadruplicate to the SEC subject to the requirement
of section 79 that if it involve corporations under the
direct supervision of any other government agency or
governed by special laws the favorable recommendation
of the government agency concerned shall frst be
secured and;
6. Issuance of the certifcate of merger or
consolidation by the SEC at which time the merger or
consolidation shall be efective. If the plan, however, is
believed to be contrary to law, the SEC shall set a
hearing to give the corporations concerned an
opportunity to be heard upon proper notice and
thereafter, the Commission shall proceed as provided in
the Code.
Although merger and consolidation is an express power
granted to corporation, it is subject to limitations, as
maybe proscribed by law
What would be the efect of merger or consolidation?
<sec. 80>
1. There will only be a single corporation. In case of
merger, the surviving corporation or the consolidated
corporation in case of consolidation;
2. The termination of the corporate existence of the
constituent corporations, except that of the surviving
corporation or the consolidated corporation;
3. The surviving corporation or the consolidated
corporation will possess all the rights, privileges,
immunities and powers and shall be subject to all the
duties and liabilities of a corporation organized under
the Code;
4. The surviving or consolidated corporation shall possess
all the rights, privileges, immunities and franchises of
the constituent corporations, and all property and all
receivables due, including subscriptions to shares and
other choses in action, and every other interest of, or
belonging to or due to the constituent corporations shall
be deemed transferred to and vested in such surviving
or consolidated corporation without further act and
deed; and,
5. The rights of creditors or any lien on the property of the
constituent corporations shall not be impaired by the
merger or consolidation.
Is there a liquidation process in case of merger or
consolidation?
- None, there is nothing to distribute
Associated Bank vs. CA
- By virtue of a specifc provision in the merger agreement
- Although the subject promissory note names CBTC as
the payee, the reference to CBTC in the note shall be
construed, under the very provision of the merger
agreement, as a reference to petitioner bank, as if such
reference (was a) direct reference to the latter for all
intents and purposes
- Section 80 par. 4 states:
The surviving or the consolidated corporation
shall thereupon and thereafter possess all the rights,
privileges, immunities and franchises of each of the
constituent corporations; and all property, real or
personal, and all receivables due on whatever account,
including subscriptions to shares and other choses in
action, and all and every other interest of, or belonging
to, or due to each constituent corporation, shall be
deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed;
and
- Without further acts, meaning it is automatic
When do merger and consolidation become efective?
What if the SEC fails to act on it without fault
attributable to the corporation involved?
- It will never become valid until and unless the SEC gives
its stamp of approval
- It will be up to the constituent corporation to follow it up
- It will never take efect until the SEC gives its approval
and issues the articles of merger
o Granted 3 years to wing up unless there is a
trustee to wing up its afairs
Could there be liquidators and winding up with respect
to the corporation in consolidation and merger?
- No, there is none
- No assets properties or rights to collect, they are
transferred
- No debts and liabilities to pay because they become the
liabilities of the surviving corporations
- No properties transferred because they will be the
properties of the surviving corporations
o Hardest part is the fnancial act, regarding how
many shares would be issued, probability of
collection and the like
o In merger and consolidation, there is due diligence
and an economist is usually hired
APPRAISAL RIGHT
Defne appraisal
- Right to withdraw from the corporation and demand
payment of the fair value of his shares after dissenting
from certain corporate acts involving fundamental
changes in corporate structure <sec. 81>
What property? When may this right be exercises?
- Section 81 provides:
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:
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
52
1. In case any amendment to the articles of
incorporation has the efect 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. (n)
May it be exercised by a stockholder who dissents to the
act of a business other than a primary purpose?
X Co. inc
Principal ofce is in Quezon city, it was changed to
Paranaque
A objects and makes a written demand. May he exercise
his right of appraisal?
- It is not available in all amendments of the corporation
- It must be changing or restricting the rights of any
stockholder
What if the principal ofce is changed from QC to TAWI-
TAWI, will it change or afect the rights of A?
- To some it may change or restrict the rights to others it
may not
How is the right exercised?
- According to section 82 of the code:
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
afected, the corporation shall pay to such stockholder,
upon surrender of the certifcate or certifcates 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 fndings of the
majority of the appraisers shall be fnal, and their award
shall be paid by the corporation within thirty (30) days
after such award is made: Provided, That no payment
shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its
books to cover such payment: and Provided, further,
That upon payment by the corporation of the agreed or
awarded price, the stockholder shall forthwith transfer
his shares to the corporation. (n)
X Co.
Principal Ofce- QC, it was changed to Manila
A objects and makes a written demand for payment of
fair value of shares. Can he make a demand of payment
of shares?
True or False, no stockholder in a stock corporation can
ever demand if the principal ofce is amended, changing
it from QC to Manila
- False, a stockholder in a close corporation may for any
reason compel the close corporation that he be paid the
fair value of his shares
Can he exercise his appraisal rights in the frst place?
He hasnt even paid his subscription in full.
May a stockholder who hasnt paid his subscription in
full exercise his appraisal rights?
- Yes, he can exercise his appraisal rights, by reconciling
the provisions of section 72, section 82 and section 86
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. (n)
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
afected, the corporation shall pay to such
stockholder, upon surrender of the certifcate or
certifcates 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 fndings of the
majority of the appraisers shall be fnal, and their award
shall be paid by the corporation within thirty (30) days
after such award is made: Provided, That no payment
shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its
books to cover such payment: and Provided, further,
That upon payment by the corporation of the agreed or
awarded price, the stockholder shall forthwith transfer
his shares to the corporation. (n)
Section 86. Notation on certifcates; rights of
transferee. - Within ten (10) days after demanding
payment for his shares, a dissenting stockholder shall
submit the certifcates 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 certifcates
bearing such notation are transferred, and the
certifcates 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. (n)
- Notation is not mandatory, it is even discretionary
because the code provides at the option of the
corporation because it never issued one for that matter
since the subscriptions are not yet fully paid
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
53
May the corporation be compelled to pay the interest of
A
300 T, 150T, 150T and 0 unrestricted retained earnings
No stockholder may be able to compel the corporation to
pay the value of his shares if the corporation has no
unrestricted retained earnings
- False, a stockholder of a close corporation may for any
reason, provided only that the corporation has sufcient
assets to cover its debts and liabilities
o General rule: there should be unrestricted retained
earnings
o Exception: section 105 close corporation
The procedure and requirements for the valid exercise of
this rights are:
1. The stockholder must have voted against the proposed
corporate action in any of the instances allowed by law
for the exercise of the right of appraisal;
2. The written demand for payment must be made by the
dissenting stockholder within thirty (30) days after the
date on which the vote was taken thereon. Failure to
make the demand within the said period shall be
deemed a waiver on the part of the stockholder
concerned to exercise his appraisal right;
3. Surrender of the certifcate of stock by the dissenting
stockholder for notation in the corporate books and the
payment by the corporation of the fair market value of
the said shares as of the day prior to the date on which
the vote was taken. If the stockholder and the
corporation cannot agree on the fair market value
thereof, the same shall be determined in accordance
with the provision of paragraph 2 of section 82;
4. The fair value of the shares of the dissenting stockholder
must be paid by the corporation only if it has
unrestricted retained earnings in its books to cover
such payment. If the corporation has no unrestricted
retained earnings, the dissenting stockholder may not,
therefore, be able to efectively exercise his appraisal
rights;
5. Upon payment of the shares by the corporation, the
dissenting stockholder shall transfer his shares to the
corporation.
What would be the efect if the stockholder exercises his
appraisal rights? What happens to his voting and
dividend rights if he exercises his appraisal rights?
- It will be suspended, with a limitation of 30 days, as
provided for by section 83 of the code:
Section 83. Efect 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. (n)
How do you compare the rights of a stockholder,
declared delinquent compared to a dissenting
stockholder exercising his appraisal rights
What if a stockholder exercising his appraisal rights is
also a director, will he also lose his rights as a
stockholder?
- The shares remain to stand in his name until he is paid,
unless there is a stipulation in the by-laws
When may the right to be paid the value of his shares
cease? Can he withdraw his right of appraisal?
- Yes, he may withdraw, but there must be consent by the
corporation as provided for by section 83 of the code:
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. (n)
Instances when the right of a dissenting stockholder to
be paid the fair value of his shares ceases.
1. When he withdraws his demand for payment and the
corporation consents thereto;
2. When the proposed action is abandoned or rescinded by
the corporation;
3. When the proposed action is disapproved by the SEC
where such approval is necessary;
4. When the SEC determines that he is not entitled to
exercise his appraisal right;
5. When he fails to submit the stock certifcate within ten
(10) days from demand to the corporation for notation
that such shares are dissenting shares; and,
6. If the shares are transferred and the certifcate
subsequently cancelled.
Who bears the cost of appraisal?
- It depends
- The corporation bears the cost if
a. The price ofered by the corporation is lower than
the fair value of the shares of the dissenting
stockholder as determined by the appraisers;
b. Where an action is fled by the dissenting
stockholder to recover such fair value and the
refusal of the stockholder to receive payment is
found by the court to be justifed.
- Dissenting stockholder will be liable for the cost and
expenses of appraisal when
a. When the price ofered by the corporation is
approximately the same as the fair value
ascertained by the appraisers;
b. Where the action fled by the dissenting
stockholder and his refusal to accept payment is
found by the court to be unjustifed.
Notes on Corporation Law
Notes come in handy only when you have studied
GTan; ASoguilon; VVillanueva
54
The dissenting stockholder may also sell, transfer or
assign his shares
Section 86. Notation on certifcates; rights of
transferee. - Within ten (10) days after demanding
payment for his shares, a dissenting stockholder shall
submit the certifcates 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 certifcates
bearing such notation are transferred, and the
certifcates 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. (n)
NON-STOCK CORPORATIONS
What is a non-stock corporation?
- A non-stock corporation is one where no part of its
income is distributable as dividends to its members,
trustees, or ofcers, subject to the provisions of this
code on dissolution
What provision of the code will govern non-stock
corporations? Would the provision governing stock
corporations also apply to non-stock corporations?
- Yes, 2
nd
par. Of section 87 provides:
The provisions governing stock corporation,
when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specifc
provisions of this Title. (n)
How is the right to vote exercised in a non-stock
corporation compared to a stock corporation
May a member in a non-stock corporation vote
cumulatively?
- General rule is NO
May it be granted or allowed by the by-laws?
- Yes
May the right to cumulative voting be denied in a stock
corporation?
- No, Doctrine of Limited Capacity
May members in a non-stock corporation vote by proxy?
- Yes, section 89 provides that:
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)