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University of the Philippines

College of Law
Corporation Law (Law 106)
2nd Semester, AY 2013-2014

COURSE OUTLINE

Chapter I – INTRODUCTION

Role of Corporation in Modern Business


Definition and Attributes of a Corporation
Sec. 2, Corporation Code
Laws Governing Philippine Corporations
Choice of Business Organizations
The Individual Proprietorship
The Partnership
Art. 1767, Civil Code
The Close Corporation
Sec. 96, Corporation Code
The Limited Partnership
The Joint Venture
The Business Trust
Government Regulation of Corporations
By the Legislature
By the SEC
Sec. 3, PD 902-A
Cases:
Union Glass vs. SEC
Abejo vs. de la Cruz
Effect of Corporation Code on Existing Corporations
Sec. 148, 76, Corporation Code

Chapter II – CLASSIFICATION OF PRIVATE CORPORATIONS

Stock and Non-stock Corporations


Sec. 3, 87, 88, Corporation Code
Case:
CIR vs. Club Filipino Inc.
Corporation Sole
Sec. 110, Corporation Code
Parent and Subsidiary Corporations; Holding Companies; Affiliate Corporations

Chapter III – FORMATION AND ORGANIZATION OF CORPORATION

Who May Form Corporation


Sec. 10, Corporation Code
Must be natural persons
At least five incorporators
Residence requirement; citizenship requirement on in certain areas
Restrictions on stock ownership of closely knit groups
Sec. 140, 97, Corporation Code
Steps in Formation of Corporation
1. Promotional stage
Sec. 2, Rev. Securities Act
2. Drafting articles of incorporation
Sec. 14, 15, Corporation Code
(1) Corporate name
Phil. First Insurance Co. vs. Hartigan, et. al.
(2) Purpose Clause
Sec. 88, Corporation Code
(3) Principal Office of the Corporation
(4) Term of Existence
Sec. 11, Corporation Code
(5) Incorporators and Directors; number and qualifications
(6) Capital stock; subscription; payment
Sec. 13, Corporation Code
(7) Other matters
(8) Close Corporations
Sec. 96, Corporation Code
3. Filing of articles; payment of fees
4. Examination of articles; approval or rejection by SEC
5. Issuance of certificate of incorporation
Sec. 19, Corporation Code
Defective Attempts to Incorporate; De Facto Corporation
Sec. 20, Corporation Code
(1) Use of corporate powers
(2) Law subsequently declared void
Mun. of Malabang vs. Pangandapun, et. al.
(3) “Substantial” or “colorable” compliance
Bergeron vs. Hobbs, et. al.
Harril vs. Davis
Hall et al vs. Piccio et al
Corporation by Estoppel
Sec. 21, Corporation Code
Empire Mfg. Co. of Grand Rapids vs. Stuart
Lowell-Woodward Hardware Co. vs. G.R. Woods, et al
Cranson vs. IBM
Salvatierra vs. Garlitos, et al
Albert vs. University Publishing Co.
Internal Organization of Corporation
1. By Laws
Sec. 36, 46, 47, Corporation Code
Fleischer vs. Botica Nolasco
Govt. of Philippine Islands vs. El Hogar Filipino
2. Election of directors and officers; commencement of business
Sec. 22, 25, Corporation Code

Chapter IV – THE CORPORATE ENTITY

Theory of Corporate Entity: Its Effects


Gallagher vs. Germania Brewing Co.
Stockholders of Guanzon & Sons, Inc. vs. Register of Deeds of Manila
Caran vs. CA
Palay vs. Clave
Disregarding Corporate Entity
US vs. Milwaukee Refrigerator Transit Co., et al
State ex rel. Atty. General vs. Standard Oil Co.
Laguna Transporation Co., Inc. vs. SSS
Marvel Building Corp., et al vs. David
Palacio vs. Fely Transportation Company
Tan Boon vs. Jarencio
McConnel vs. CA
National Marketing Corp. vs. Associated Financing Company
Claparols vs. CIR
Villa Rey Transit, Inc. vs. Ferrer
National Federation vs. Ople
Cease vs. CA
Delpher Trade Corp. vs. IAC
Parent-Subsidiary Relationship
Garnett vs. Southern Railway Co.
Koppel, Inc. vs. Yatco
Liddell and Co., Inc. vs. CIR
Yutivo vs. CTA
Stone vs. Eacho
Berkey vs. Third Ave. Ry. Co.
La Campana Coffee Factory vs. Kaisahan
Nationality of Corporations
Sec. 15, par. 11, Corporation Code

Chapter V - PROMOTER'S CONTRACTS PRIOR TO INCORPORATION

Liability of Corporation for Promoter's Contracts


McArthur vs. Times Printing Co.
Clifton, et al vs. Tomb
Cagayan Fishing Dev. Co., Inc. vs. Sandiko
Corporate Rights Under Promoter's Contracts
Builders' Duntile Co. vs. Dunn Mfg. Co.
Rizal Light and Ice Co., Inc. vs. The PSC and Morong Electric Co., Inc.
Personal Liability of Promoter on Pre-Incorporation Contracts
Wells vs. Fay & Egan Co.
How and Associates, Inc. vs. Boss
Quaker Hill, Inc. vs. Parr
Compensation of Promoters
Fiduciary Relationship between corporation and promoter
Old Dominion Copper Mining and Smelting Co. vs. Lewisohn

Chapter VI - CORPORATE POWERS

General Powers of Corporation


Sec. 36, 45, Corporation
Specific Powers
Implied Powers
The Ultra Vires Doctrine
Republic of the Philippines vs. Acoje Mining Co., Inc.
Carlos vs. Mindoro Sugar Co., et al
Govt. of the Philippine Islands vs. El Hogar Filipino
Bissel vs. Michigan Southern & NIR Co.
Pirovano, et al vs. De la Rama Steamship Co.
Harden, et al vs. Benguet Consolidated Mining Co., et al

Chapter VII - CONTROL AND MANAGEMENT OF CORPORATION

Allocation of Power and Control


Who Exercises Corporate Powers
1. Board of Directors or Trustees
Sec. 23, Corporation Code
(1) Board must act as a body in a meeting
Sec. 25, Corporation Code
(2) Requirements of Meeting
Sec. 53, Corporation Code
(3) Close Corporations
Sec. 97, Corporation Code
Ramirez vs. Orientalist Co. and Fernandez
Salvador P. Lopez, et al vs. Hon. Vicente Ericta, et al
Zachary, et al vs. Milin, et al
Kaplan, et al vs. Block
PNB vs. CA

2. Corporate Officers and Agents


Sec. 25, Corporation Code
Yu Chuck vs. Kong Lipo
The Board of Liquidators vs. Heirs of Maximo M. Kalaw, et al
Zamboanga Transportation Co. vs. Bachrach Co.
Acuña vs. Batac Producers Cooperative Marketing Association, Inc., et al
3. Board Committees
Sec. 35, Corporation Code
Hayes vs. Canada, Atlantic & Plant SS Co. Limited

4. Stockholders or members
(1) Requirements of stockholders' or members' meeting, and of voting
Notice
Sec. 50, Corporation Code
Board of Directors vs. Tan, et al
Place of meeting
Sec. 51, 93, Corporation Code
Quorum
Sec. 52, Corporation Code
Vote
Sec. 137, 89, 56, 55, Corporation Code
Non-voting stocks or members
Sec. 6, Corporation Code
Where all stockholders present
Sec. 51, Corporation Code
Logan Johnston, et al vs. Louis A. Johnston, et al
(2) Where no meeting called
Ponce, et al vs. Encarnacion

5. Instances where stockholders' or members' action is necessary


(1) Election of directors or trustees
Sec. 24, 92, 93, Corporation Code
Quorum required
Manner of voting
In close corporations
Qualifications and disqualifications of directors
Sec. 23, Corporation Code
Detective & Protective Bureau Inc. vs. Hon. Gaudenciao Cloribel, et al
Gokongwei vs. SEC, et al
Term of director or trustee
Sec. 92, 108, Corporation Code
Vacancies in the board
Sec. 29, Corporation Code
(2) Removal of directors
Sec. 28, Corporation Code
Roxas, et al vs. De la Rosa, et al
Angeles, et al vs. Santos, et al
Campbell vs. Leow's Inc.
(3) Fundamental changes
Amendment of articles of incorporation
Sec. 16, 103, Corporation Code
Sale or other disposition of substantially all assets
Sec. 40, Corporation Code
Investment in another business corporation
Sec. 42, 36, Corporation Code
De la Rama vs. Ma-Ao Sugar Central
Gokongwei vs. SEC
Merger and consolidation
Sec. 77, Corporation Code
Appraisal Right
Sec. 81, 82, 83, 84, 86, 105, Corporation Code
Increase and decrease of capital stock
Sec. 38, Corporation Code
Adoption, amendment and repeal of by-laws
Sec. 48, Corporation Code
(4) Other insurance requiring stockholders' action
Declaration of stock dividends
Management contracts
Sec. 44, Corporation Code
Fixing consideration for on-par shares
Sec. 62, Corporation Code
Fixing compensation of directors

6. Deadlocks in close corporations


Sec. 104, Corporation Code
Devices affecting control
1. The proxy device
Sec. 58, Corporation Code
In re Giant Portland Cement Co.
State ex rel Everett Trust & Savings Bank vs. Pacific Waxed Paper Co., et al
Alejandrino vs. De Leon
Campbell vs. Leow's Inc.
Rosenfield vs. Fairchild Engine & Airplane Co.
Duffy vs. Loft Inc.
2. Voting Trust
Sec. 59, Corporation Code
Abercrombie vs. Davies
Everett vs. Asia Banking Corp.
Mackin, et al vs. Nicollet Hotel, Inc.
National Investment & Development Corp. vs. Aquino
3. Pooling and voting agreements
Sec. 100, Corporation Code
Ringling vs. Ringling Bros.-Barnum & Bailey Combined Shows, Inc.
EK Buck Retail Stores vs. Harkert
Sensabaugh vs. Polson Plywood Co.
McQuade vs. Stoneham, et al
Clark vs. Dodge, et al
4. Cumulative voting
5. Classification of shares
Sec. 6, Corporation Code
Gottschalk, et al vs. Avalon Realty Co., et al
6. Restriction on transfer of shares
7. Prescribing qualification for directors
Sec. 7, Corporation Code
8. Management contracts
Sec. 44, Corporation Code
Sherman & Ellis, Inc. vs. Indiana Mutual Casualty Co.
9. Unusual voting and quorum requirements
Sec. 97, Corporation Code
Benintendi vs. Kenton Hotel

Chapter VIII - DUTIES OF DIRECTORS AND CONTROLLING STOCKHOLDERS

Sec. 31, Corporation Code


Duty of Diligence: Business Judgments Rule
Otis & Co. vs. Pennsylvania R. Co., et al
Montelibano, et al vs. Bacolod-Murcia Milling Co., Inc.
Litwin vs. Allen
Walker vs. Man
Steinberg vs. Velasco
Barnes vs. Andrews
Pool vs. Pool
Foster vs. Bowen
Lowell Hoit & Co. vs. Detig
Bates vs. Dresser
Fiduciary Duties; Conflict of Interests
1. The self-dealing director
Sec. 32, Corporation Code
Palting vs. San Jose Petroleum, Inc.
Mead vs. E.C. McCullough
Piccard vs. Sperry Corp.
2. Fixing compensation of directors and officers
Sec. 30, 87, Corporation Code
Govt. of the Phil vs. El Hogar Filipino
Barretto vs. La Previsora Filipina
Central Cooperative Exchange, Inc. vs. Tibe
Fogelson vs. American Woolen Co.
Kerba vs. California Eastern Airways
3. Using inside information
Sec. 36, 30, 53, Sec. Act
Strong vs. Repide
Taylor vs. Wright
Gokongwei vs. SEC
4. Seizing corporate opportunity
Sec. 34, 31, Corporation Code
Singer vs. Carlisle
Irving Trust Co. vs. Deutsch
Litwin vs. Allen
5. Interlocking directors
Sec. 33, Corporation Code
Globe Woolen Co. vs. Utica Gas & Electric Co.
Close Corporation
Sec. 97, Corporation Code
Duty of Controlling Interest
Insuranshares Corporation vs. Northern Fiscal Corporation
Duty of Creditors

Chapter IX – THE RIGHT OF INSPECTION

Basis of Right
What Records Covered
Sec. 74, 75, Corporation Code
Extent of and Limitations on Right
1. Limitations as to time and place
2. Purpose
Who May Exercise Right
Remedies Available if Inspection Refused
W.G. Philpotts vs. Philippine Manufacturing Co. and F.N. Berry
Pardo vs. Hercules Lumber Co.
Gonzales vs. PNB
Veraguth vs. Isabel Sugar Co.
Gokongwei vs. SEC
Slay vs. Polonia Publishing Co.
Klein vs. Scranton Life Ins. Co.

Chapter X – DERIVATIVE SUITS

Nature and Basis of Derivative Suit: Distinguished from Individual and Representative Suit
Requirements Relating to Derivative Suit
Pascual vs. Orozco
Evangelista vs. Santos
Liken vs. Shaffer
Keenan vs. Eshleman
Otis & Co. vs. Pennsylvania R. Co.
Republic Bank vs. Cuaderno
Reyes vs. Tan
Chase vs. CFI of Manila
Holmes vs. Camp
Gamboa vs. Victoriano
San Miguel Corp. vs. Kahn

Chapter XI — FINANCING THE CORPORATION; CAPITAL STRUCTURE

A. Sources of Financing

B. Capital Structure

C. Capital and Capital Stock Distinguished

D. Shares of Stock; Kinds


Section 6
1. Common Stocks
2. Preferred Stocks
a. Preference as to dividends
i. Participating and non-participating
ii. Cumulative and non-cumulative
iii. Discretionary dividend type
iv. Mandatory dividend type
v. Earned cumulative or dividend credit type

b. As to voting rights
Ellingwood v. Wolf’s Head Oil Refining

c. Preference upon liquidation


Hay v. Hay

d. Preference stockholder is not a creditor


Augusta Trust Co. v. Augusta Hallowell

3. Par or no par shares


4. Treasury shares
Sec. 9
5. Redeemable shares
Sec. 8
6. Founder’s shares

E. Nature of Subscription Contract


Sec. 66
Garcia v. Lim Chu Sing

1. Pre-incorporation subscription
Sec. 13
Sec. 61
Utah Hotel Co. v. Madsen
Wallace v. Eclipse Pocahontas Coal Co.

2. Post-incorporation subscription
Sec. 60
Sec. 80
Bayla, et. al. v. Silang Traffic Co., Inc.

F. The Pre-emptive right to shares


1. Basis of right; common law rule
2. Extent and limitations under Code
Sec. 39
3. In close corporations
Sec. 102
4. Waiver of preemptive right
Datu Benito v. SEC
5. When issue is in breach of trust
6. Remedies when denied
Stoke v. Continental Trust Co.
Thom v. Baltimore Trust Co.
Fuller v. Krogh
Dunslay v. Avenue M. Garage & Repair Co.
Ross Transport Inc. v. Crothers

G. Debt Securities
1. Form of Borrowings
2. Bonds and Debentures
3. Convertible Securities; stock options
Meritt-Chapman & Scott Corp. v. New York Trust Co.
4. Hybrid Securities
John Kelley Co. v. Commissioner of Int. Revenue
Jordan v. Allen
5. The Trust indenture
Alladin Hotel Co. v. Bloom

H. Requirements under Revised Securities Act


1. Purpose and history of Securities Act
2. Registration of securities
Palting v. San Jose Petroleum Co.
3. Exempt securities and transactions
4. Registration of brokers, dealers and salesmen
5. Registration of stock exchanges
6. Remedies of investor; SEC powers

I. Underwriting Securities

Chapter XII — CONSIDERATION FOR ISSUANCE OF SHARES

A. Form of Consideration
Sec. 32

B. Liability on Watered Stocks


Sec. 65
Triplex Shoe Co. v. Rice & Hutchins, Inc.
McCarty v. Langdeau
Rhode v. Dock-hop Co.
Bing Crosby Minute Maid Corp. v. Eaton

C. How Payment of Shares Enforced


Sec. 13
Sec. 67
Sec. 68
Sec. 69
Sec. 70
1. Delinquency sale; requisites
2. Court action
Lingayen Gulf Electric Power Co., Inc. v. Baltazar
Miranda v. Tarlac Rice Mill Co.
Da Silva v. Aboitiz & Co., Inc.
National Exchange Co. v. Dexter
Lumanlan v. Cura

D. Effect of Delinquency
Sec. 71

E. Rights and Obligations of Holders of Unpaid but Non-delinquent Stock


Sec. 72
Sec. 66
Sec. 63
Sec. 64
Fua Cun v. Summers
Baltazar v. Lingayen Gulf Electric Power Co., Inc.
Nava v. Peers Marketing Corp.

F. Issuance of Certificate

G. Lost or Destroyed Certificate


Sec. 73

Chapter XIII — DIVIDENDS AND PURCHASE BY CORPORATION OF ITS OWN


SHARES

A. Form of Dividends
Nielson & Co. v. Lepanto Consolidated Mining Co.

B. Source of Dividends
Sec. 43
Berks Broadcasting Co. v. Crammer
Lich v. United States Rubber

C. Dividend Declaration Discretionary with Board


Sec. 43
Keough v. St. Paul Milk Co.
Dodge v. Ford Motor Co.
D. Preferences as to Dividends
Wabash Railway Co. v. Barclay
Burk v. Ottawa Gas & Electric Co.

E. When Right to Dividends Vests; Rights of Transferee


McClaran v. Crescent Planning Mill Co.

F. Liability for Illegal Dividends


1. Directors
2. Stockholders

G. Purchase by Corporation of its Own Shares


1. Limitations on power; proper purposes and existence of surplus
Sec. 41
2. Remedies in case of improper purchase

Chapter XIV — AMENDMENTS OF CHARTER

A. Amendment by Legislature
Sec. 145

B. Amendment by Stockholders
Sec. 36 (4)
Sec. 16
1. Limitations on power
2. Grounds for rejection of amendment
Sec. 17
3. Amendment changing stockholders’ rights
Sec. 81
Hartford Accident & Indemnity Co. v. W.S. Dickey Clay Mfg. Co.
Marcus .v R.H. Macy & Co., Inc.
Keller v. Wilson & Co., Inc.
4. Effectivity of amendment
5. Special amendments
a. Increase of capital stock
Sec. 38
b. Reduction of capital stock
Sec. 122
Philippine Trust Co. v. Rivera
Shaw v. Noyes
c. Change in corporate term
Sec. 37
Sec. 11
6. Amendments in close corporations
Sec. 103

Chapter XV — TRANSFER OF SHARES

A. Manner and Effectivity of Transfer


Sec. 63
1. Indorsement of stock certificate; registration in corporate books
2. Effect of lack of registration
Uson v. Diosomito
Escano v. Filipinas Mining Corp.
3. No registration of transfer of unpaid shares
4. Remedy if registration refused
Hager v. Bryan
Rivera v. Florendo

B. Restrictions on Transfer; Close Corporation


1. General rule: free transferability of shares
2. Exception: in close corporations
Sec. 96
Sec. 97
Sec. 98
Sec. 99
3. Intrinsic validity of various kinds of restrictions
4. Formal validity of restrictions
Fleischer v. Botica Nolasco
Lawson v. Household Finance Corp.
Allen v. Biltmore Tissue Corp.
Elson v. Schmidt

C. Unauthorized Transfers
1. Certificate indorsed in blank; when quasi-negotiable
2. Forged transfers
J. Santamaria v. Hongkong & Shanghai Banking Corporation, et. al.
A. de los Santos, et. al. v. J.H. McGrath, Atty. General of the United States

D. Collateral Transfers
Chua Guan v. Samahang Magsasaka, Inc. et. al.

E. Non-transferability and Termination of Membership in Non-stock Corporations


Sec. 90
Sec. 91

Chapter XVI — DISSOLUTION

A. Cause of Dissolution
1. Expiration of original, extended or shortened term
Sec. 120
2. Voluntary dissolution when no creditors affected
Sec. 118
3. Voluntary dissolution where creditors affected
Sec. 119
Sec. 122
Lebold v. Inland Steel Co.
4. Dissolution by minority in close corporations
Sec. 105
Financing Corp. v. Teodoro
5. Failure to organize and commence business; cessation of business for 5 years
Sec. 22
Art. 3, Code of Commerce
6. Involuntary dissolution
a. Revocation of certification of registration by SEC
Sec. 121
Sec. 6, PD 902-A
Sec. 2, Rule 66, Rules of Court
b. Quo Warranto proceedings
Government v. El Hogar Filipino
Government v. Philippine Sugar Estates
Republic v. Security Credit
Republic v. Bisaya Land Trans. Co.

B. Effects of Dissolution; Winding Up and Liquidation


Sec. 122
1. Loss of juridical personality
Buenaflor v. Camarines Industry
National Abaca Corp. v. Pore
2. Executory contracts
Sec. 145
3. Methods of liquidation
4. Distribution of assets after payment of debts
Board of Liquidators v. Kalaw
China Banking Corp. v. Michelin & Co.
Sumera v. Valenia
Republic v. Marsman Development Co.
Tan Chiong Bia v. Commissioner of Internal Revenue

C. Distribution of Assets of Non-stock Corporations


Sec. 94
Sec. 95

Chapter XVII — CORPORATE COMBINATIONS

A. Purposes of Combinations; Methods


Sec. 20

B. Merger and Consolidation


1. Nature and distinction
2. Only de facto merger under Corporation Law
3. Express authority to merge granted by Code; requirements
Sec. 76
Sec. 77
Sec. 78
Sec. 79
Sec. 80
4. Remedies of creditors and dissenting stockholders; appraisal right
Petry v. Hardwood Electric Co.
Ducasse v. American Yellow Taxi Operators
Hottenstein v. York Ice Machinery
C. Sale of Substantially All Assets
1. Legal requirements
2. No assumption of liabilities; exceptions
3. Remedies of dissenting stockholders; appraisal right
4. Compared with merger and consolidation
Reyes v. Blouse
Farris v. Glen Alden
Edward J. Nell Co. v. Pacific Farms, Inc.

D. Exchange of Stocks

Chapter XVIII — FOREIGN CORPORATION

A. Definition, Status

B. Methods of Entry of Investment

C. Permitted Areas of Investment


1. Partially nationalized areas
2. Preferred areas; incentives for investment therein
3. Non-preferred areas of investment

D. Legal Requirements Prior to Transaction of Business


Sec. 123
1. BOI certificate 490
Art. 48, Omnibus Investment Code
Art. 49, Omnibus Investment Code
2. SEC license to do business
Sec. 125
Sec. 126
3. Certificate from appropriate governmental agency

E. Effects of Failure to Secure SEC License


Sec. 133
Sec. 21-A, RA 166 as amended by RA 638
Marshall Wells v. Elser
Western Equipment & Supply Co. v. Reyes
Atlantic Mutual Ins. Co. & Continental Ins. Co. v. Cebu Stevedoring Co.
General Garments Corp. v. Director
Levifan Industries v. Salvador
Le Chmise Lacoste v. Fernandez
Converse Rubber v. Universal Products
Home Ins. Co. v. Eastern Shipping

F. What Constitutes Transacting Business


Art. 44, Omnibus Investment Code
Mentholatum v. Mangaliman
Far East International v. Nankai Kogyo
Facilities Management Corp. v. de la Osa
Pacific Vegetable Oil Co. v. Singson
Aetna Casualty & Surety Co. v. Pacific Star Line
Topweld Manuel v. ECED
Antam Consolidated v. CA
Claude Neon Lights Federal Inc. v. Phil. Advertising Corp.
Philippine Products v. Primateria

G. How Courts Acquire Jurisdiction Over Foreign Corporations


Sec. 128
Sec. 14, Rule 14, Rules of Court
General Corp. of the Phil. V. Union Insurance

H. Laws Governing Licensed Foreign Corporations


Sec. 129
Grey v. Insular Lumber CO.
Income Tax Liability

I. Merger of Licensed Foreign Corporation


Sec. 132

J. Withdrawal of Foreign Corporation


Sec. 136

K. Revocation and Suspension of License


Sec. 134
Sec. 247, PD 612
Sec. 16, RA 337 as amended

L. Existing Licensed Foreign Corporations

Chapter XIX — SPECIAL AND MISCELLANEOUS PROVISIONS

A. Special Corporations
1. Educational corporations
a. Stock and non-stock
b. Temporary permit
c. Government recognition
d. Special requirement to be University
e. Incorporation under the Code
Sec. 108
f. Educational foundations
2. Religious Corporations
a. Corporation Sole
b. Religious societies
Sec. 116
B. Close Corporations
C. Miscellaneous Provisions