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CORPORATION LAW PART 1

Corporation - (sec 2)

Comparison of Partnership and Corporation

1. as to creation (by law, by operation o law)


2. as to name
3. purposes
4. as to management
5. as to contribution
6. as to the right of succession
7. as to sharing of profits
8. as to the extent of liabilities
9. as to the required minimum paid up capital
10. as to causes of dissolution

Incorporators
Corporators

AOI are signed only once. If amended, no signature is needed.

Stockholders
Members
Stock Corporation (2 requirements)
Non-stock Corporation (absence of any of the 2 requirements)

Hence, if a corporation has capital stock divided into shares, but is not authorized to declare dividends, it is a non-stock
corporation.

Forming a Corporation

File with the SEC the AOI and other required documents

Stock Corporations
1. Name Verification Slip
2. AOI
3. Treasurer’s Affidavit
4. Bank Certificate of Deposit
5. Authority to Inspect Bank Deposit
6. Undertaking to Change Corporate Name
7. Registration Data Sheet
8. Favorable endorsement from proper government agency in case of special corporations

Non-Stock Corporations
1. Name Verification Slip
2. AOI
3. Undertaking to Change Corporate Name
4. Registration Data Sheet
5. Modus Operandi (document which states how a non-stock corporation would operate)

Foundation (Non-stock); but SEC requires a minimum total contribution of P1 million

1. Name Verification Slip


2. AOI
3. Treasurer’s Affidavit
4. Bank Certificate of Deposit
5. Authority to Inspect Bank Deposit
6. Undertaking to Change Corporate Name
7. Registration Data Sheet
8. Favorable endorsement from proper government agency in case of special corporations
9. Modus Operandi

Contents of AOI
1. Corporate Name (must not be similar or confusingly similar with the name of an existing partnership or corporation)
SEC Rule: Words that cannot be used as the first word of a corporate name:

1. Philippine
2. Republic
3. National
4. State
These words are already reserved for use of GOCCs.

If your corporation is not supervised by the monetary board, you cannot add the words “Bank” or “Banking” in your corporate
name

If your corporation is not supervised by the Insurance Commissioner, you cannot add the words “Insurance” or “Insurer” in your
corporate name

CORPORATION LAW PART 2

Article 2
Purposes of the Corporation

A corporation can have only one primary purpose although it may have any number of secondary purposes for as long as they
are compatible with the primary and with one another.

Example:

Incompatible

Primary purpose - banking


secondary purpose - insurance as an insurer

Reason: Specific provision in the General Banking Act of 2000


“Any bank cannot engage in the business of insurance as an insurer.”

Banking is very incompatible with insurance because banking should as much as possible be risk free, insurance is assumption
of risk.

Article 3
Term of the Corporation

Rule 1: Maximum term of 50 years at any one time


Rule 2: Term may be extended before it expires
Rule 3: No limit on the number of extensions of the corporate term
Rule 4: The extension must not be earlier than 5 years before it expires except when there is a justifiable reason.

Article 4
Principal Place of Business

Exact address

Article 5
NNR of the Incorporators
Article 6
Number of Directors, NNR of the Incorporating Directors

Incorporating Directors - first set of directors of the corporation whose names appear in the AOI

Article 7
First Part: Amount of authorized capital stock, number of shares, value assigned to each share (PAR value)

Minimum par value: 1 centavo because that is the lowest denomination in our currency system

May a corporation issue shares without assigned value?

Yes! They are called no par value shares.

 they are issued for an assumed value of P5.00


 all subscriptions to no par value shares should be immediately paid up (fully paid)
 payment for no par value shares is considered capital contribution and therefore may not be used in payment of
dividends
 certain corporations are not allowed to issue to no par value shares e.g. bank, insurance, trust company, public
utilities, building and loan associations

Second part: Full name of subscribers, nationality, number of shares subscribed, value of subscription

Should the subscribers be natural persons?


No! they could include partnerships and other corporations

Ex. Organizing a subsidiary

Article 8
Name of Subscibers, the amount individually paid

Article 9
Name of the Treasurer

Article 10

CORPORATION LAW PART 5

Pre-emptive Rights

Exceptions:

New shares are issued to pay for a property that the corporation needs but for which the owner wants payment in shares

New shares are issued to comply with the legal requirement when the corporation go public

New shares are issued pursuant to a Stock Option Plan for officers/employees of the corp

Watered Stocks

When are stocks deemed to be watered?


-when they are issued but the corporation does not get the full fair value of the shares

Water stocks are valid

what are the consequences?


 the one who benefited could be obliged to pay the creditors whose claims against the corp could not be satisfied by
the assets of the corp
 the director who did not object to the issuance of watered stocks shall be solidarily liable with the beneficiary
 (they are liable to the extent of the difference between the full fair value and the value paid)

Book value is higher than par value

Delinquency of shares

When do shares become delinquent?


-when they are not fully paid according to the subscription agreement
-when they are not fully paid upon call (formal demand) of the corporation

Remedy in case of delinquency

1. file a case in court to recover deliquency/specific performance (in the RTC because it is an intra-corporate dispute)
2. sell the delinquent shares in a public auction (the corporation may bid only if it has sufficient surplus)
*every subscription agreement is one indivisible contract

A corporation may not bid for its own shares in a delinquency sale if it does not have sufficient surplus because there’llbe a
violation of the Trust Fund Doctrine

Trust Fund Doctrine

All subscriptions, both paid up and unpaid portions, constitute a trust fund for the benefit of the creditors of the corporation.

if the corporation had bid for its own shares, those shares become treasury shares.

Appraisal Right of a Stockholder

It is a right to demand payment of the fair value of his shares under certain conditions.

Conditions:

1. there is a resolution f the board authorizing any of the ff:


a. an amendment of the AOI or by-laws limiting or restricting the existing rights of the stockholders
b. investment of a corporate fund in another corporation
c. the sale or disposition of all or substantially all of the assets of the
corporation
d. merger or consolidation
1. resolution was ratified by the required number of votes (at least 2/3 of all outstanding shares)
2. the stockholder demanding payment of his appraisal right should have voted against ratification
3. he demands payment payment within 30 days from ratification
4. corporation must have sufficient surplus

CORPORATION LAW PART 6

Treasury Shares

1. Delinquency Sale
2. Appraisal Right
3. Elimination of fractional shares in stock dividends
4. when the corporation buy back from stockholders or from the open market
5. when the corporation receives the shares in a donation
6. when the corporation redeems its redeemable preferred shares (exception to the trust fund doctrine)
Fractional share - a share less than one whole share

Example: Corporation declared 10% stock dividend, you have 128 share, you are entitled to 12.8 shares

The corporation will pay for the fractional share, hence, it will become a treasury share

Treasury shares do not have voting rights and are not entitled to any form of dividends

are considered properties of the corporation and may be used in payment of dividends (property dividends)

Stock dividends are taken from the unissued shares of the corporation

Declaration of dividends is a business judgment

Board cannot be compelled to declare dividends

Only the board has the power to declare dividends

Surplus profits - net profits after income tax without impairment of the paid-up capital

Paid-up capital is impaired by losses

What is needed to declare dividends?

Board resolution for cash and property dividend


Board resolution plus ratification of at least 2/3 of the outstanding common shares

When should the board declare dividends?

CORPORATION LAW PART 7

Merger and Consolidation

Merger - the union of 2 or more corporations where one survives and the other or others are dissolved

Consolidation - the union of 2 or more corporations where all will be dissolved but a new one created

Why do corporations merge or consolidate?

1. To meet minimum paid capital requirements of the government regulator


2. For better profits
3. For better business opportunities
4. For better corporate image

Steps:
Exploratory Talks/Courtship
Resolution of the Board of Directors
Ratification by the Stockholders (2/3 votes of all outstanding shares)
Preparation of Articles of Merger/Consolidation
which shall state:
a. the name of the surviving corporation
b. the amount of capitalization (par value)
c. the number of directors
d. the valuation of shares

In the case of ordinary corporations, the articles of merger/consolidation is filed right away with SEC.
if a corporation is licensed by another government regulator, the articles shall first be filed with that govt regulator which shall
endorse the same to the sec

When does a merger or consolidation become effective?

Upon approval by the SEC

Dissolution of Corporations

What may cause?


1. Expiration of term
2. When the SEC cancels the Cert of Registration for any of the ff causes w/o any justifiable reasons:
a. Failure to file the by-laws within 30 days from the issuance of the certificate of registration
b. when the corporation fails to organize within 2 years from the issuance of cert of registration
c. when the corporation fails to comply with the reportorial requirements of the SEC
d. when the corporation fails to carry out its primary purpose for at least 5 years
1. when the court orders the dissolution of the corporation on a finding that it is already insolvent or that it was
organize purposely to commit a legal wrong

After dissolution, winding up or liquidation

How long does it take to liquidate a corporation?

3 yrs to file a claim

What shall be done with residual assets?

Distributed among stockholders/members


It is a foundation, it shall be escheated to the govt

What do you call the share in the residual assets received by the stockholders?
Liquidating dividends (to the extent of the return of mere capital, no income tax; any amount in excess of capital is subject to
income tax)

Classification of Corporations

Domestic - organized according to Philippine Law regardless of the nationality of the incorporators
Foreign - organized according to foreign law

May a foreign corporation do business in the Philippines?

Yes, but it should first register with the SEC as a foreign corporation
It needs to file certified true copies of incorporation documents in the country of origin
If not in english, an official translation of these documents in english
It must appoint a resident agent so that there would be somebody to receive summons and
other court processes
It must bring into the Philippines at least $200,000.00

May a foreign corp not registered as a foreign corp in the SEC sue before the Philippine courts?

Yes, only in isolated transactions, for the protection of its intellectual property rights (Lacoste v. Sujanani case)

Educational Corporations
May be stock or non-stock

Education Act of 1982 - educational corporations could be organized only as non-stock


The number of directors should be in multiples of 5
The term is 5 years except for the 1st batch

By reason of the principle of vested rights, educational stock corporations may remain as stock corporations

Corporation Sole - religious corp organized by the head of the religious sect or denomination

if it would encumber or dispose of real property needs judicial approval

Close corporations

The affairs of the close corporation, management may be by board of directors or the stockholders themselves

CORPORATION LAW PART 8

Securities - shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and
evidenced by a certificate, contract, instruments, whether written or electronic in character.

Promissory Note - if repayment period is more than 5 years, it is called a “bond”; if further backed up by a mortgage, it is called
“debenture”

Before a corporation could offer its securities to the public, it should first register its securities with the SEC

Purpose of prior registration:


To protect the public from being defrauded.

How do you commence the registration process with the SEC?

By filing with SEC the registration statement.


SEC will verify what had been represented by the corporation in the registration statement.

Upon approval by the SEC, if the securities would consist of certificates of stock for shares of stock (equity participation), those
shares should be listed with the Philippine Stock Exchange.

Purpose of Listing in the Philippine Stock Exchange:


1. To raise capital so that it can do an initial public offering
2. To have a convenient facility for the purpose of buying and selling shares of a corporation (called listing by
introduction)

Is registration with the SEC an assurance that the shares would be listed in the PSE?

No. (Puerto Azul case)

Backdoor Listing

A corporation merges with a dormant corporation whose shares are already listed in the PSE. The dormant corporation
survives.

CORPORATION LAW PART 9

Exempt Securities - those enumerated in the law that don’t require prior registration with the SEC

Exempted Securities - those which apply with the SEC for exemption

Exempt Securities (Sec. 9.1)


1. Securities issued by the State or its political subdivisions (reason: the state will not defraud its own citizens)
2. Securities issued by a foreign government that has diplomatic relationship with the Philippines
3. Securities issued by corporation under the supervision of office of the insurance commissioner, HLURB, or BIR
4. Securities issued by a bank except its own shares of stock (reason: banks are licensed to receive investments from
people)

Exempt Transactions (Sec 10.1)


1. Pre-incorporation subscription to the capital stock of the corporation
2. Stocks issued as dividends
3. Increasing authorized capital stock
4. Sale of levied shares

Exchange - a corporation licensed by the SEC for the purpose of putting up and maintaining the facilities for the trading of
securities (PSE)

Example:
Public market

Broker - person engaged in the business of buying and selling securities for the account of others (for licensing purposes, it is
the corporation)

Dealer - person who buys and sells securities for his/her own account in the ordinary course of business

Associated person of a broker or dealer" - employee therefor whom, directly exercises control of supervisory authority, but
does not include a salesman, or an agent or a person whose functions are solely clerical or ministerial

Salesman - natural person, employed as such as an agent, by a dealer, issuer or broker to buy and sell securities.

Licenses are valuable properties

License issued to a salesman is only for the broker he specified in his application.

If he resigns or is terminated, he needs to apply for another license for a new broker. However, he needs clearance from his
former broker before getting a new license.

Purchase Confirmation - document issued by the broker to a client who is buying shares through the exchange, which shall
state the number of shares purchase, the unit price, the rate of commission, and the total amount to be paid by the client who
is buying

Margin Trading - purchase of shares partly financed by an amount advanced by the broker

Sales Confirmation - document issued by the broker to a client who is selling shares through the exchange, which shall state
the number of shares purchase, the unit price, the rate of commission

Certificated Transaction - transactions evidenced by certificate (takes around 3 months to obtain)

Uncertificated Transaction - transactions evidenced by electronic or similar records

Can you sell your listed shares directly to a buyer?

Yes. This is the so-called Over-the-Counter transaction.

Over-the-Counter transaction - the sale of listed shares made directly between the buyer and seller and no longer coursed
through the exchange.

Advantages of Over-the-Counter
1. the buyer/seller does not pay commission to his broker
2. any transaction through the exchange is subject to tax at .5%
3. if the seller profits, the profit is subject to capital gains tax at 5% (for the 1st 100k) or 10% (excess) of the actual gain;
if seller wont make any profit, no tax

Disadvantages
1. you make all the documents
2. you make all the legwork
3. you might be buying counterfeit/fake certificates

Blue Sky Law (Act 2581) - any law relating to investments

Blue Chips - shares of corporations that regularly pay dividends

CORPORATION LAW PART 10

Tender Offer - done when a person or group of persons representing the same interest would like to acquire at least 15% of a
listed company or 15% of a company that is not listed but with assets worth not less than 50million and with no less than 200
stockholders each owning no less than 100 shares. that person or group of persons file with SEC a formal offer stating the
number of shares that they intend to acquire, and the price they are wiling to pay for said shares, and the manner of payment
for said price.

The SEC approves it, then publication in the newspaper.

Why 15%?
There is likelihood that you will get a seat in the board.

Boiler Room Operations - dealing on unlicensed securities by unlicensed persons. Illegal.

Boiler room operators don’t set up formal offices.

Derivatives - rights that are related to stock ownership. Includes options and warrants.

Wash Sales - form of stock price manipulation. illegal. (BW Resources Case)

Short Sales - the sale of shares by a person who does not own yet the shares when the prices are high. And when the prices
have gone down, he buys shares so he could deliver later on what he had sold. Legal. See civil code basis.

Section 25

Call - not the same meaning as in corporation law. Its a contract that gives the holder of the contract the right to sell a certain
number of particular securities at a given price and within a certain period.

Put - Its a contract that gives the holder of the contract the right to buy a certain number of particular securities at a given price
and within a certain period.

Straddle - Its a contract that gives the holder of the contract the right to buy/sell a certain number of particular securities at a
given price and within a certain period.

Ultra-vires Acts - acts not authorized by the AOI. May be corrected by ratification by the stockholders.

Par Value - the value of shares as stated in the AOI. Fixed.

Stock Split - 1 share is divided into more shares. Par value decreases.

Purpose: To make the shares available to small investors.

Reverse Stock Split - several shares are made into 1. Par value goes up.

Book value - fluctuating.


Total assets less total liabilities= net worth
net worth/ number of outstanding shares

The more treasury shares, the higher the book value.

Market value

Condominium Corporation - equivalent of homeowner’s association.