PROXY vs VOTING TRUST AGREEMENT Atty.

Espedido’s opinion: My suspicion is, the language

of the law must have been misunderstood because the
PROXY VOTING TRUST law says he has the authority to transfer UNLESS the
AGREEMENT trustee agreement says otherwise. I suspect that it is the
No legal title to the shares Acquires legal title to the other way around. It should have been logical that the
of the stockholder shares of the stockholder general rule is that it should not be delegated UNLESS it
Revocable at any time Irrevocable for a definite was otherwise provided.
unless coupled with and limited period of time
interest
Can only act at the Not limited to any MEETINGS
specified SH’s meeting particular meeting 2 KINDS OF MEETINGS
Votes only in the absence Can vote and exercise all (1) Meeting of the Stockholders
of the owner of stock the rights of the (2) Meeting of the Board of Directors
transferring SH even when
the SH is present WHEN MEETINGS ARE CONDUCTED
Shorter duration Longer duration REGULAR SPECIAL
Need not be notarized nor Notarized and filed with MEETING MEETING
a copy be filed with the SEC STOCKHOLDER’S (a) Held Anytime
SEC MEETING annually on deemed
No right of inspection of Has such right a date fixed necessary or as
corporate books in the bylaws provided in the
(b) On any date bylaws
Situation 1. Stockholder attends the meeting – AFTER April
proxy is revoked 15 of every
You were given the proxy and attended the meeting. year as
determined
However in the meeting, you saw the stockholder who
by the BOD
you are representing. When an issue was about to be
resolved, the SH voted. What do you think will
DIRECTOR’S Held monthly Held anytime
happen?
MEETING UNLESS the upon:
The stockholder’s vote prevails because the presence of bylaws provide (a) the call of
the stockholder revokes the proxy. otherwise the
president
or
Situation 2. Trustor attends the meeting – (b) as
trustee’s vote prevails; no revocation of VTA provided in
On the other hand, a voting trustee attended the meeting the bylaws
and the trustor also appeared. Which vote should
prevail?
The trustee’s vote shall prevail.
POSTPONEMENT OF STOCKHOLDER’S REGULAR
MEETING
Situation 3. Trustee delegates authority to a proxy General Rule: Written notice and reason thereof
The trustee authorized somebody else to appear in shall be sent to ALL stockholders at least 2 weeks prior
the meeting because he had something else to do. He to the date of meeting
told his son to represent him (trustee) in the – UNLESS a different period is required under the bylaws,
meeting. When the son went there, the stockholder was law, or regulation
also there. Whose vote will prevail? Can the trustee
transfer this right to someone else? Is this the
intention of the law? UNJUST REFUSAL TO CALL A MEETING
The proxy’s right will prevail. Section 58, last paragraph [continuation on the discussion of postponement]
provides: “The voting trustee or trustees may vote by
proxy or in any manner authorized under the bylaws If despite the postponement, still it was not held, a
unless the agreement provides otherwise.” stockholder can petition the Commission to order the
conduct of a meeting.
Atty Espedido: That is a very dangerous provision. It is  The petitioning stockholder shall preside thereat
basic that delegated power cannot be further delegated. UNTIL at least a majority of the stockholders or
But, it is the law. members present have chosen from among
themselves, a presiding officer.
The stockholder precisely executed the trust agreement  IMPORTANT: In case where the Commission will
and even transferred title to the trustee basically because order the conduct of the meeting, ANY NUMBER
of trust. The proxy of the trustee might not be trusted by OF THE STOCKHOLDER PRESENT shall already
the stockholder. It will be very dangerous if we allow the be considered as a quorum. Such that, when
proxy to represent. out of the 100 stockholders, 5 only came, it
shall be constitute a quorum.
A delegated power cannot be delegated. BUT it is the
Atty. Espedido: Very dangerous. This may also be
law. It is provided by law.
prone to abuses.
Note: When quorum is not attained, any SH present in
the meeting shall constitute a quorum.
QUORUM
Quorum is the number of shareholders needed in order to
validly conduct a meeting.
2 KINDS OF QUORUM
(1) Simple quorum – 50% + 1
(2) Qualified Quorum – any number greater than
the simple quorum
Situation. Quorum in a non-stock corporation
10 members in a non-stock corporation in order to hold
a meeting. Before the meeting, 3 already died. What
will be our quorum?
The quorum is 4 because the remaining members are
only 7. In a non-stock corporation, the dead
members cannot be represented.
Note: In so far as non-stock corporation is concerned,
quorum is based on the majority of the living
members.
MANAGEMENT CONTROL DEVICES
KINDS
1. Management Contract
2. Proxy
3. Voting Trust Agreement
4. Trust Agreement
MEANING OF MANAGEMENT CONTROL DEVICES
These are devices that are used to attain the particular
result that the management wants. They will be able to
control the results or predetermine the outcome of
their acts. They will guarantee the accomplishment
of the objective of the management.
VOTING AGREEMENT
A Voting Agreement is an agreement among a block of
stockholders. They vote whether on their own, or at the
instance or influence of the management. The
stockholders simply group themselves and agree
on how they intend to vote on a particular issue.
Management may influence a group of stockholders,
telling them that “this is how you should vote”. In order
to ensure that they will abide by the agreement on how
to vote, they may execute a voting agreement. They
could designate any or some to cast their vote in behalf
of all the other signatories to that voting agreement.
If the management could have this, more or less they
can predetermine the outcome of the results/vote.
This is a way of PREDICTING the outcome of the
results of any issue that may require approval
during a stockholders meeting.
TITLE VII – STOCKS AND STOCKHOLDERS
SECTION 59. 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.
How can you become a stockholder?
(1) Subscription of an unissued shares of the
corporation
(2) Direct purchase of existing shares from another
stockholder
(3) Purchases stock from publicly listed
corporations
(4) By exercising stock option
When would you subscribe?
(a) Preincorporation subscription – before
incorporation
(b) After incorporation
PRE-INCORPORATION SUBSCRIPTION
– SECTION 60
SECTION 60. Pre-incorporation Subscription. — A
subscription of shares in a corporation still to be formed shall
be irrevocable for a period of at least six (6) months from the
date of subscription, unless all of the other subscribers
consent to the revocation, or the corporation fails to
incorporate within the same period or within a longer period
stipulated in the contract of subscription. No pre-
incorporation subscription may be revoked after the articles
of incorporation is submitted to the Commission.
PRE-INCORPORATION SUBSCRIPTION
General Rule: The individual agrees to subscribe prior to
incorporation and said contract is IRREVOCABLE for
at least 6 months
Exception: revocable in the following instances:
(1) ALL of the other subscribers CONSENT to the
revocation; or
(2) The Corporation fails to incorporate within the
same period or
(3) Within a longer period stipulated in the contract
of subscription
SECTION 61 – CONSIDERATION FOR STOCKS
SECTION 61. 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:
(a) Actual cash paid to the corporation;
(b) 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;
(c) Labor performed for or services actually rendered to the
corporation;
(d) Previously incurred indebtedness of the corporation;
(e) Amounts transferred from unrestricted retained earnings
to stated capital;
(f) Outstanding shares exchanged for stocks in the event of
reclassification or conversion;
(g) Shares of stock in another corporation; and/or
(h) Other generally accepted form of consideration.
Where the consideration is other than actual cash, or consists
of intangible property such as patents or copyrights, the
valuation thereof shall initially be determined by the
stockholders or the board of directors, subject to the
approval of the Commission.
Shares of stock shall not be issued in exchange for
promissory notes or future service. The same considerations
provided in this section, insofar as applicable, may be used
for the issuance of bonds by the corporation.
The issued price of no-par value shares may be �fixed in the
articles of incorporation or by the board of directors pursuant
to authority conferred by the articles of incorporation or the
bylaws, or if not so fixed, by the stockholders representing at
least a majority of the outstanding capital stock at a meeting
duly called for the purpose.
PAYMENT OF SUBSCRIPTIONS
How do you pay subscriptions?
(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;
(6) Outstanding shares exchanged for stocks in the
event of reclassification or conversion;
(7) Shares of stock in another corporation; and/or
(8) Other generally accepted form of
consideration
CANNOT PAY WITH A PROMISSORY NOTE
General Rule: Shares of stock shall not be issued in
exchanged for promissory notes.
Exception: Except if the corporation is the one
indebted to the person. If the corporation has debts
against the person, then the corporation may allow this
by issuing shares of stocks.
LABOR OR SERVICES ACTUALLY RENDERED
Rule: Services here do not refer to future services but
pertains to ACTUAL services rendered.
Illustration. The person planned to join the corporation
as a Vice President. Later on, he was eventually
appointed as VP. Can he be given shares of stocks by
telling the corporation, “I am paying my shares of
stock out of my salary for the first month.” Is that
allowed?
No, that is not allowed because services here do not refer
to future services.
MANNER OF PAYMENT
Are you supposed to pay in full?
The stockholder may either pay in full but this is not
required.
When is balance payable?
The balance shall be paid on:
(a) The date indicated in the subscription
contract; or
(b) When the BOD calls
OPTIONS IN APPLICATION OF PAYMENT
In the absence of provisions in the by-laws to the
contrary, a corporation may apply payments made by
subscribers either:
(1) Payment pro rata to each and all the entire
number of shares subscribed for;
Example. Apply the 50,000 to all the 100
subscribed shares. In effect, there is no single
share fully paid
Note: If it is a proportional payment or pro rata –
the stockholder cannot be issued a Stock Certificate.
(2) Full payment for corresponding number of
shares – apply payment to as many shares as may
be covered by that payment.
Example: Apply it to the 50 shares. Therefore the
50 shares are fully paid.
Note: The corporation may issue to the stockholder
a Stock Certificate on the appropriate number of
shares covered.
GOOD WILL
Rule: Good will may be used to pay subscription
because this is considered property. To determine the
value of a good will, it shall be appraised by the SEC.
ISSUED PRICE OF NON-PAR VALUE
(A) It may be fixed in the:
(a) Articles of Incorporation; or
(b) By the BOD pursuant to authority conferred by
the AOI or the bylaws
(B) If not fixed by the abovementioned – fixed by
the stockholders representing at least a
majority of the OCS at a meeting duly called for
the purpose
Important: Once the stockholder fully pays, he is
given a Certificate of Stock.
 SECTION 62 – CERTIFICATE OF STOCK AND
TRANSFER OF SHARES
SECTION 62. Certificate of Stock and Transfer of
Shares. — The capital stock of corporations shall be divided
into shares for which certificates signed by the president or
vice president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be
issued in accordance with the bylaws.
Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates
indorsed by the owner, his attorney-in-fact, or any 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 certficate or certificates,
and the number of shares transferred. The Commission may
require corporations whose securities are traded in trading
markets and which can reasonably demonstrate their
capability to do so to issue their securities or shares of stocks
in uncertificated or scripless form in accordance with the
rules of the Commission.
No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the
corporation.
SIGNATURES REQUIRED IN A CERTIFICATE OF
STOCK
(1) Signed by the president or vice-president
(2) Countersigned by the secretary or assistant
secretary
NATURE OF CERTIFICATE OF STOCKS
(1) It is a personal property
(2) It is transferrable
(3) It is NOT a negotiable instrument
1 CERTIFICATE OF STOCK CAN BE OFFERED AS
COLLATERAL
Note: Shares of stock so issued are personal
property.
Once a certificate of stock is given, the stockholder may
offer it as collateral to the bank or he can exercise his
right as an owner to dispose or sell it.
2 CERTIFICATE OF STOCK IS TRANSFERRABLE
It is transferred through indorsement + delivery
3 A CERTIFICATE OF STOCK IS NOT A NEGOTIABLE
INSTRUMENT
Distinction:
NOT NEGOTIABLE TRANSFERRABLE
It is not negotiable Stock certificate can be
because it does not transferred from one
contain a promise or person to another so as
order to pay a sum to constitute the
certain in money transferee as the lawful
owner thereof.
Note: Here, it is not negotiable because it does not
contain a promise or order to pay a sum certain in
money. Although it may contain an order to deliver a
certain number of stocks.
REQUISITES OF A NEGOTIABLE INSTRUMENT
Section 1. Form of Negotiable Instruments. – An
instrument to be negotiable must conform to the
following requirements: WUPOD
(a) It must be in writing and signed by the maker or
drawer
(b) Must contain an unconditional promise or order to
pay a sum certain in money
(c) Must be payable on demand, or at a fixed or
determinable future time
(d) Must be payable to order or to bearer
(e) Where the instrument is addressed to a drawee, he
must be named or other indicated therein with
reasonable certainty.
MANNER OF TRANSFERRING
NEGOTIABLE STOCK CERTIFICATE
INSTRUMENT
(1) Payable to order indorsement + delivery
indorsement + delivery
(2) Payable to bearer –
delivery
Note: A Certificate of Stock may be transferred through
indorsement + delivery.
Atty. Espedido: At the back portion of that certificate is
an indorsement portion – it simply states that this
certificate covering a no. of shares is being transferred to
xxx. The date and place is indicated, and then sign. So,
whoever becomes a transferee becomes the
shareholder.
PROCEDURE
(1) Indorsement + Delivery
(2) Transferee presents it to the corporation
(3) It is shown to the Secretary
(4) The Secretary records it in the stock and transfer
book of the corporation. On the other page, it will
indicate the name of the transferee.
(5) Once the transferee is recorded, the name of the
new stockholder will now be recorded in the stock
and transfer book.
EFFECT IF NOT RECORDED IN THE STOCK AND
TRANSFER BOOK
Rule: No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in
the books of the corporation
Thus, if it is not recorded in the stock and transfer book,
the transfer will only be binding upon the parties.
Atty. Espedido: You should call the corporate secretary
and warn him not to issue it to anyone.
If it is not in the books, it will not affect third parties.
Thus, the stockholder can sell it again.
Summary of effect if not recorded in the stock and
transfer book:
 Valid and binding as to the parties (corporation
and subscriber)
 Not binding to 3rd parties
PURPOSE OF INDORSEMENT
The purpose of indorsement is in order to bind third
parties. Because of this indorsement, any third party can
go to the secretary and have his name registered in the
stock and transfer book.
Atty. Espedido: But this usually doesn’t happen since
the holder thereof will just call the secretary and warn the
secretary as to the fact of the loss of the certificate.
MANDAMUS AS REMEDY FOR REFUSAL TO RECORD
TRANSFER OF STOCK IN YOUR NAME
What if the secretary refuses to record or transfer
the stock in your name?
You have the right to go to court and FILE A
MANDAMUS case. You have the right to be recognized –
have that right to register the transfer in your name
Note: The secretary only has a ministerial duty to
comply with the indorsement.
STOCK OPTIONS
STOCK OPTIONS
It is the privilege granted to any person to decide WON to
buy a stock at a period of time on a specific rate.
Note: You do not already own these shares.
However, you can make money out of this.
You can sell this privilege or exercise the option. For
example, if it was priced at 1peso and you exercise the
option to buy it, you may sell the stock at a fair value of 2
pesos.
Options are money. Options are valuable.
Options are viable profits.
[option ka lang. oof]
WATERED STOCKS
SECTION 64. Liability of Directors for Watered Stocks.
— A director or officer of a corporation who: (a) consents to
the issuance of stocks for a consideration less than its par or
issued value; (b) consents to the issuance of stocks for a
consideration other than cash, valued in excess of its fair
value; or (c) having knowledge of the insufficient
consideration, does not file a written objection with the
corporate secretary, shall be liable to the corporation or its
creditors, solidarily with the stockholder concerned for the
difference between the value received at the time of issuance
of the stock and the par or issued value of the same.
Story of the watered chicken
You go to the market and buy a chicken. When weighed,
the chicken’s weight is 1.5 kg and then you bought it.
However, when you went home and checked the weight
of the chicken, it is already 1.2kg. This is because the
chicken was injected with water and then placed inside
the freezer so the water becomes ice. When placed in the
weighing scale, the chicken now weighs heavier. So when
the chicken’s weight was already 1.2kg, all the water was
gone. This is why they call it the watered chicken.
WATERED STOCKS
Stocks which are sold at less than the par value. You pay
less for more stocks.
If you were able to subscribe to a water stock, the value
paid will not reflect the actual value of the shares.
How could water stocks exist?
(1) When the value of the thing that you used in paying
the stocks is LOWER THAN THE PAR VALUE OF THE
SHARE– DISCOUNTED STOCKS
(2) Did NOT PAY anything at all – BONUS STOCKS
(3) Consideration is valued in excess of its fair value
PARTIES LIABLE
(1) The directors who consented to the sale of the
share at less than par value
(2) Shareholder who bought the watered stock
Note: Issuance of watered stock is a valid stock. The
issuance is valid BUT the purchase is ILLEGAL.
Illustration. Such that when the investor subscribed, he
can say that you cannot get back his shares. He is correct
because the issuance is valid BUT he can be compelled
to pay the difference.
Atty. Espedido: WHAT IS NOT VALID IS THE
CONSIDERATION. THE ISSUANCE IS VALID.
Who was at a loss?
The corporation because the capital indicated and
determined through the par value NO LONGER REFLECT
THE TRUE CAPITAL BASED ON PAR VALUE.
Situation. 100 shares issued at 1 peso par value =
Php 100 capital; 1 share was sold at 50% = Php
99.50 capital
If a share for example was sold at a discounted 50%,
and 100 shares were all issued at a par value of
PHP1/share – the capital should be Php 100.
But since one share was sold at 50% discount , then
the capital is PHP99.50 when it should have been
PHP100 if there was no watered stock.
Because of that watered stock, our capital is now less
than what it should be.
Follow up questions: Who are the parties
responsible?
The directors who agreed that the sale will be sold at
that discounted price.
How do we compel the directors if they do not
pay?
We have to go to court.
Who could authorize the filing of the case in a
corporation?
Normally, it is the directors. But because the directors
themselves is responsible for the watered stock, they will
never authorize the filing of the case. The remedy is to
file a derivative suit.
DERIVATIVE SUIT WATERED STOCKS IS APPLICABLE ONLY TO
What is a derivative suit? NEWLY ISSUED SHARES (VIRGIN SHARES)
A derivative suit is filed by a stockholder in behalf
of a corporation. Situation. Treasury shares with a par value of
Php10/share were sold at Php5/share – not a
Note: The cause of action belongs to the water stock
corporation, but the stockholder files the action on There are treasury shares. The BOD needed cash, and
behalf of the corporation. Instead of the directors filing they decided to sell these treasury shares. The par value
the suit, it would now be the stockholders. is at PHP10/share. The board decided to sell it at
PHP5/share. Is this a watered stock?
No, because watered stocks only applies to freshly issued
DERIVATIVE SUIT IS NOT THE SAME AS A shares.
REPRESENTATIVE SUIT
There were watered stocks issued. Fortunately, the
DERIVATIVE SUIT REPRESENTATIVE SUIT corporation was about to be disowned. The existing
Filed on behalf of a A class suit where a assets were not enough to pay all the creditors. Would
corporation person files in behalf of a the creditors, in the presence of watered stocks,
class who have common would it be able to pursue some more other than
interest or are similarly the existing assets?
situated A: Yes. This is supposed to be part of the asset.

A derivative suit is not a representative suit because a

representative suit is a CLASS SUIT – a person files
in behalf of a class who have a common interest or are COVERAGE FOR NEXT MEETING:
similarly situated. Continue Title VI until Corporate Books and
Records (Title VIII)
On the other hand, a derivative suit is filed on behalf of
a corporation, not on behalf of a person similarly
situated to the corporation. It is the corporation that
is injured, not the stockholder.

This is allowed by law because the person who is required

to act (BOD) refuses to act.

REQUISITES FOR A DERIVATIVE SUIT TO

PROSPER [Taken from Dy’s wow notes]
1. Injury to the corporation
2. The person suing must be a stockholder at the time
of the injury
3. Suing on behalf of the corporation.

OTHER INSTANCES IN WHICH A DERIVATIVE SUIT

MAY PROSPER [Taken from Dy’s wow notes]
1. Disloyalty of directors
2. Self-dealing directors
3. Interlocking directors

RR’s answers:
1. Directors assent to acts that are patently illegal
2. Grossly negligent
3. Conflict of interest
4. Disloyalty