The Corporation Code

of the Philippines

June 29, 2011

Lecture 4
Suits by Stockholders
and Members
 Derivative Suits-
 Brought by one or more
stockholders/members;
 In the name and on behalf of the
corporation;
 To redress wrongs committed against it;
 The officials of the corporation refuse to
sue or the ones to be sued, or has
control of the erring persons or
corporations.
Suits….
 Requisites of Derivative Suits:
 The Party bringing suit should be a
shareholder as of the time of the act or
transaction complained of;
 He has exerted intra-corporate
remedies;
 The harm should have been done against
the corporation.
Suits…
 Individual Actions
 Brought by the shareholder in his own
name against the corporation when a
wrong is directly inflicted against him
 Representative Actions
 Brought by the stockholders in behalf of
himself and all other stockholders
similarly situated when a wrong is
committed against a group of
stockholders
Pre-emptive Right (Section 39)
 The shareholder’s right to subscribe
to all assets or disposition of shares
in any class in proportion to his
present stockholdings, the purpose
being to enable the shareholder to
retain his proportionate control in the
corporation and to retain his equity in
the surplus.
Pre-emptive…

 It does not apply to shares that are

being reoffered by the corporation
after they were initially offered
together with all the shares.
Right to vote…
 The right to participate in the
corporate affairs by giving the
stockholder the right to attend
meetings after due notice and the
right to vote thereat in person or
through a proxy or trustee;
Right to vote…
 Proxy
 Proxy Form- in writing, signed by the
stockholders or member and filed before the
scheduled meeting with the corporate secretary;
 Period of validity-unless otherwise provided in
the proxy, it should be valid only for the meeting
for which it is intended.
 No proxy shall be valid and effective for a
period longer than five years at any one time.
Right to vote…

 Executed by one or more stockholders;

 For the purpose of conferring upon a
trustee or trustees the right to vote and
other rights pertaining to the shares;
 For a period not exceeding five years at any
one time.
 Condition for a loan agreement, period may
exceed five years or until full payment of
the loan. (Section 59)
Some limitations on the right to vote

 Holders of delinquent stocks are not

entitled to vote;
 A transferee of stock cannot vote if his
transfer is not registered in the stock and
transfer book of the corporation;
 A stockholder is still entitled to vote even if
the shares are mortgaged or pledged
unless he authorizes the creditor in writing
to vote.
Appraisal Right…
 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 (Section 81)
 Upon demand all rights accruing to
the shares shall be suspended.
(Section 83)
Instances where it may be exercised

 Extension or reduction of corporate term;

 Change in the rights of stockholders;
 Corporation has authorized the board to
invest corporate funds in another business
or purpose;
 Corporation decides to sell or dispose of all
or substantially all assets of the
corporation;
 Merger and consolidation.
Requisites for the exercise
of appraisal right
 The stockholder must be a dissenting
stockholder;
 The stockholder must make a demand in
writing on the corporation within 30 days
after the vote was taken;
 The proposed action is any of those
enumerated earlier;
 The fair market value should be agree upon
or determined by a commission;
Extinguishment
of appraisal right
 The stockholder withdraws the
demand with the consent of the
corporation;
 The proposed action is abandoned;
 The SEC disapproves the action.
Collection of
unpaid subscription
 Extra-judicial sale in case of default
within 30 days from the date
specified in the contract of
subscription or from the date stated
in the call made by the BOD
(Section 67)
 Judicial action
 Collection from cash dividends and
withholding of stock dividends
Call…
 A declaration by the board of
directors that the unpaid
subscriptions are due and payable to
the corporation
Right to inspect books…
 Requisites:
 It must be exercised at reasonable hours on
business days;
 The stockholder has not improperly used any
information he secured through any previous
examination;
 Demand is made in good faith or for a legitimate
purpose
 Mandamus is the proper remedy if the
stockholder is being improperly deprived of his
right to inspect.
Merger vs. Consolidation
 Merger is one where a corporation
absorbs the other and remains in
existence while the other is dissolved.
 Consolidation is one where a new
corporation is created and
consolidating corporations are
extinguished.
 It becomes effective only upon the
approval of the SEC.
Effects of merger
or consolidation
 The constituent corporations shall become a
single corporation;
 The separate existence of the corporation
will cease except the surviving corporation
and the consolidated corporation;
 The surviving or consolidated corporation
will enjoy the same rights and privileges as
well as obligations under the law;
 All liabilities of the constituent shall pertain
to the surviving or consolidated
corporations.
Procedure:
• The BOD shall draw up a plan of
merge or consolidation, which should
contain the following:
• Names of the corporation involved;
• Terms and mode of carrying it;
• Statement of changes in the Articles of
Incorporation, if any.
Procedure:
 Plan of merger shall be approved by a
majority of each of the involved corporation
at separate meetings;
 The concurrence of 2/3 of the OCS
stockholders or members;
 Any amendment to the Plan must be with
the approval of the majority of the BOD and
concurred in by 2/3 of the OCS
stockholders /members;
 The Articles of Merger or Consolidation shall
be submitted to the SEC.
Merger or Consolidation
Adoption/Amendment of the Plan of Merger/Consolidation

Corporation Corporation
A B

Majority of BOD Approval Majority of BOD

Concurrence of 2/3 Concurrence of 2/3

Concurrence
of OCS/members of OCS/members

Articles of M/C submitted

to SEC
Dissolution…
 Extinguishment of the franchise of a
corporation and the termination of its
corporate existence.
 Modes of dissolution:
 Voluntary Dissolution
 Dissolution by shortening corporate term
 Involuntary dissolution
Voluntary dissolution where no
creditors are affected (Section 118)
Meeting of
BOD/BOT
Notice to SS Publication
30 days prior to 3 consecutive
meeting/ RM weeks
Resolution to
Dissolve
Approval of Approval of 2/3
Majority of Certification of OCS/members
BOD/BOT majority of BOD/
BOT/ Secretary

Submission to
SEC

SEC issues Certificate of Dissolution

Voluntary dissolution where creditors
are affected (Section 119)

Approval of 2/3
OCS/members

Filing with SEC

Order for Publication for

Notice to
Hearing of 3 consecutive
SS/members
objections weeks

Hearing Proper

Judgment
Section 119…
 Objections must be filed no less than
30 days nor more than 60 days after
the entry of the order;
 After the expiration of such period,
hearing should be conducted within
five days;
 Judgment may include procedure of
disposing the assets and the
assignment of receivers.
Involuntary Dissolution
(Section 121)
 Filing of verified complaint based on the
following grounds:
 Failure to organize within 2 years from
incorporation;
 Continuously inoperative for five years;
 Failure to file by-laws;
 Continuance is not feasible;
 Fraud in procuring Certificate of Registration;
 Serious misrepresentation;
 Failure to submit required reports
Effects of dissolution
 Transfer of legal title to corporate property
to the stockholders;
 Cessation of the existence of the corporate
body;
 Possible creation of a new corporation;
 Possible reincorporation of the dissolved
corporation;
 Continuation of the body corporate for
liquidation purposes.
Modes of Liquidation
 By the BOD as trustees of the
corporate assets;
 Through a trustee to whom the
properties are conveyed;
 By a management committee or
rehabilitation receiver
Foreign corporation…
 Corporation formed, organized or
existing under any law other than
those of the Philippines and whose
laws allow Filipino citizens and
corporations to do business in its
own country or state;
Foreign…
 Engaging in business implies a
community of commercial dealings
and arrangements and contemplates
to some extent the performance of
acts or works or the existence of
some functions normally incident to
and in progressive prosecution of the
purpose and object of its
organization.
Suability of foreign corporations
• Foreign corporations doing business
in the Philippines:
• With license, may sue and be sued;
• Without license, cannot sue but may be
sued in the Philippines
• Foreign corporations not doing business
in the Philippines on isolated transaction
may sue and be sued.
Doing business…
 Soliciting orders;
 Service contracts;
 Opening offices, whether called liaison
offices or branches;
 Appointing representative or distributors
domiciled in the Philippines and who stay
for periods totaling to 180 days in a year;
 Participating in the management and
supervision of domestic firms;
 Other analogous circumstances.
Issuance of license
 The SEC will issue a license to the
foreign corporation to do business in
the Philippines, provided the following
are met:
 Appointment of a resident agent
 Either a Filipino or a domestic corporation;
 Power of attorney to SEC to receive
processes
Requisites…
 Must prove that the foreign corporation’s
country grants reciprocal rights to Filipinos
and Philippine corporations;
 Establish office in the Philippines;
 Bring in assets;
 In the event of insolvency, undertaking that
the Filipino creditors will be preferred;
 Franchise and patents must remain in the
Philippines if possible;
Requisites….
 Must file a bond of P100,000.00
 Within six months of each fiscal year,
the SEC shall require the deposit of
additional securities equivalent to
25% of the amount in excess of
P5,000,000.00 of the gross income
Grounds for revocation
of license
 Failure to file annual report or pay
fees as required;
 Failure to appoint or maintain
resident agent;
 Failure to inform SEC about change of
resident agent;
 Failure to file with SEC authenticated
articles of incorporation;
Grounds….
 Misrepresentation in its reports;
 Failure to pay taxes;
 Doing business outside the line of
business;
 Other analogous circumstances.
Close Corporations
 The Articles of Incorporation must
state that the number of stockholders
will not exceed 20;
 The Articles of Incorporation must
contain a restriction on the transfer of
stocks;
 The stocks cannot be listed in the
stock exchange nor should it be
publicly offered.
The following cannot be
close corporations
 Mining companies;
 Oil companies;
 Stock exchanges;
 Banks;
 Insurance corporations;
 Public utilities;
 Educational institutions;
 Other corporations declared to be vested
with public interest
Deadlocks in close corporations
 SEC may intervene to perform such
functions as are necessary;
 The stockholders are themselves the
members of the BOD without need of
election;
 When they manage, they are liable as
directors;
 The stockholders are liable for tort;
Questions for discussion…
 What are the ways through which the
business organization is regulated based on
the Corporation Code of the Philippines?

 In what ways does the Corporation Code

extend protection to creditors of the
business organization?

 In what ways are stockholders protected

based on the Corporation Code?