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LAW ON PRIVATE CORPORATIONS Corporation Code of the Philippines BP Blg.

68 TITLE I - GENERAL PROVISIONS


SCOPE OF THE CODE The Corporation Code is an act which: 1. Provides for the incorporation, organization and regulation of private corporations; 2. Defines their powers and provides for their dissolution; 3. Fixes the duties and liabilities of directors or trustees and other officers thereof; 4. Declares the rights and liabilities of stockholders or members; 5. Prescribes the conditions under which corporations including foreign corporations may transact business; 6. Provides penalties for violations of the Code; and 7. Repeals all laws and parts of laws in conflict and inconsistent with the Code. THEORIES ON FORMATION OF A CORPORATION 1. Concession theory A corporation is an artificial creature without any existence until it has received the imprimatur of the state according to law, through SEC 2. Theory of corporate enterprise or economic unit The corporation is not merely an artificial being, but more of an aggregation of persons doing business, or an underlying business unit STATUTORY DEFINITION (Section 2) A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

Doctrine of ultra vires acts a corporation, being a mere creation of law, can exercise only those powers which are conferred by law.
(Sec. 45)

ATTRIBUTES OF A CORPORATION: 1. It is an artificial being; 2. It is created by operation of law; 3. It has the right of succession; and 4. It has only the powers, attributes and properties expressly authorized by law or incident to its existence. DISTINCTIONS BETWEEN A PARTNERSHIP AND A CORPORATION: PARTNERSHIP CORPORATION 1. Creation Mere agreement of the parties By law or by operation of law

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At least 2 persons From the moment of execution of the contract

2.No. of incorporators 5-15 incorporators (except corporation sole) 3.Commencement of juridical personality From the date of issuance of the Cert. of Inc. by the SEC

4.Powers May exercise any power authorized by the partners (provided it is Can exercise only the powers expressly granted by law or implied not contrary to law, morals, good customs, public order, public from those granted or incident to its existence policy) 5.Management When management is not agreed upon, every partner is an agent Vested in the board of directors or trustees of the partnership 6.Effect of mismanagement A partner as such can sue a partner who mismanages Suit against a member of the BOD/T who mismanages must be in the name of the corporation 7.Right of Succession No right Has right of succession 8.Extent of liability to third persons Partners are liable personally & subsidiarily (sometimes solidary) SHs are liable only to the extent of the shares subscribed by them for partnership debts to 3rd persons (limited liability feature) 9.Transferability of interest Partner cannot transfer his interest in the partnership so as to SH has generally the right to transfer his shares w/o prior consent of make the transferee a partner w/o the unanimous consent of all the other SHs because corporation is not based on this principle the existing partners because partnership is based on the principle of delectus personae 10.Term of existence Any period of time stipulated by the partners May not be formed for a term in excess of 50 years extendible to not more than 50 years in any 1 instance 11.Firm name Limited partnership is required by law to add the word Ltd. to its Any name provided it is not the same as or similar to any reg. firm name name 12.Dissolution May be dissolved at any time by any or all of the partners Can only be dissolved with the consent of the State 13.Governing law New Civil Code Corporation Code SIMILARITIES BETWEEN A PARTNERSHIP AND A CORPORATION: 1. Juridical personality separate and distinct from that of the individuals composing it; 2. Can act only through agents;

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3. 4. 5. 6.

Composed of an aggregate of individuals (except corporation sole); Distributes its profits to those who contribute capital; Can be organized only where there is a law authorizing its organization; A partnership is taxable as a corporation.

FOUR BASIC ADVANTAGES OF CORPORATE ORGANIZATIONS: 1. Strong separate juridical personality Case: If A, Inc. buys the share of J, Inc., which later turns out to be insolvent; will A, Inc. answer for the debts of J, Inc.? (Edward J. Nell vs. Pacific Farms, 15 SCRA 415) GR: Where a corporation buys all the shares of another corporation, this will not operate to dissolve the other corporation and as the two corporations still maintain their separate corporate entities, one will not answer for the debts of the other. Exceptions: a.) If there is an express assumption of liabilities; b.) There is consolidation or merger; c.) If the purchase was in fraud of creditors; d.) If the purchaser becomes a continuation of the seller. N.B. Unlike a partnership which may be dissolved by many causes, either by the withdrawal, death, insolvency, etc. of a partner, the right of succession of a corporation allows it to maintain its separate juridical personality in spite of what happens to the stockholders or members who constitute it. 2. Limited Liability to Investors - Stockholders are personally liable for corporate debts and liabilities only to the extent of what they have invested (paid-up capital) and what they have promised to invest in the corporation (unpaid subscription) 3. Free Transferability of Units of Ownership - Doctrine of delectus personae in partnership is not applicable and that stockholders hold their shares as personal property with rights to dispose, assign or encumber them as they may desire 4. Centralized Management - All corporate powers are vested in the Board of Directors or Trustees - Stockholders or members no management powers, only to elect directors or trustees

DOCTRINE OF CORPORATE PERSONALITY - A corporation is a legal or juridical person with a personality separate and apart from its individual stockholders or members composing it and from other corporations to which it may be connected.

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Rudimentary is the rule that a corporation is invested by law with a personality distinct and separate from its stockholders or members by legal fiction and convenience, it is shielded by a protective mantel and imbued by law with a character alien to the persons comprising it. (Lim vs. CA, 323 SCRA 102) Certificate of Registration/Incorporation by the SEC issuance thereof is the operative act for the existence of a corporation Once Certificate of Registration is issued, the corporation acquires a personality distinct and separate from that of its stockholders or members. Effects of Doctrine of Separate Personality: 1. The corporation may not be held liable for acts or liabilities of shareholders; 2. May acquire and possess properties as well as bring legal action in its name; 3. Properties so acquired or conveyed to the corporation is the property of the corporation, vice versa 4. No personality to bring action for recovery of property belonging to individual shareholders or members 5. Not entitled to moral damages (except: when it has established a good reputation that is debased, resulting in its humiliation in the business realm) Note: It was held that a juridical person such as a corporation can validly complain for libel or any form of defamation and claim for moral damages because Art. 2219 (7) of the Civil Code does not qualify whether the plaintiff is a natural or a juridical person. (Filipinas Broadcasting vs. Ago Med., GRN 141994, June 17, 2005)

Some cases on separate juridical personality: 1. Walter Smith vs. Ford (GRN 42420, Nov. 20, 1936) obligation of the President of a corporation incurred in his personal capacity cannot be collected from the corporation where he is an officer 2. Business day Information Systems vs. NLRC (221 SCRA 9) President/manager cannot be held personally liable for the money claims of discharged corporate employees unless he acted with evident bad faith in terminating their employment.

DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY - Under this doctrine, a corporation will be looked upon as a separate legal entity as a general rule, and until sufficient reason to the contrary appears; but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, defend crime, or when used as a mere alter ego, the law will regard the corporation as an association of persons (the corporation and the persons who compose it are treated as identical). - To do this, the courts must be sure that the corporate fiction was misused, to such an extent that injustice, fraud or crime was committed upon another. It is the protection of the interests of innocent third persons dealing with the corporate entity which the law aims to protect by this doctrine. (Traders Royal Bank vs. CA, 269 SCRA 15) - There must be clear and convincing evidence. The wrongdoing must be clearly and convincingly established. It cannot be presumed.

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3 Classes of Piercing: 1. Fraud cases when a corporation is used as a cloak to cover fraud or to do wrong 2. Alter ego cases when the corporation is merely a farce since the corporation is an alter ego, business conduit or instrumentality of a person or another corporation 3. Equity cases to achieve justice or equity Control Test used in determining the applicability of the doctrine (Alter ego cases) 1. Control must be complete domination, not only of finances 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 duty, or dishonest and unjust acts in contravention of plaintiffs legal right; and 3. The aforesaid control and breach of duty must approximately cause the injury or unjust loss complained of. Cases where piercing applied: 1. The corporate entity is being merely used as an alter-ego of the controlling officers or stockholders, such as when the officers and directors of two corporations are practically the same and both corporations hold office in the same room; 2. When the corporate officers do fraudulent or illegal acts in the name of the corporation, such as illegal dismissal or unfair labor practices; 3. When one tries to evade civil liability by incorporating the properties or the business; 4. Where the corporate fiction was used as a means to perpetrate a social injustice or as a vehicle to evade obligations or confuse the legitimate issues; 5. Where it was used to avoid a judgment credit, to avoid inclusion of corporate assets as part of the estate of a decedent, to avoid liability arising from debt; 6. When used to avoid a contractual commitment by the main stockholders or officers against his contracted non-competition commitment. When piercing not applicable: 1. When other remedies are still available because piercing is a remedy of last resort, e.g. when the corporation employed fraud in the foreclosure proceedings where the remedy of annulment based on vice of consent is available (Umali vs. CA, 189 SCRA 529); 2. Not allowed in fraud cases unless the remedy sought is to make the officer or another corporation pecuniary liable for corporate debts; 3. Cannot be allowed when there is no wrong committed; 4. Where there is no allegation, much less even a scintilla of substantiation that the parties interest in the corporation are so considerable as to merit a declaration of unity of their civil personalities;

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5. Cannot be employed to allow fraud, e.g. where seller of real property wishes to avoid the consequences of a sale to a corporate entity by claiming that the broker through whom the seller transacted sale was also the President of the corporate buyer, when such fact was known to her from the beginning (Araneta Inc. vs. Tuazon de Paterno, 91 Phil 786). CLASSIFICATION OF CORPORATIONS (Sec. 3): 1. Stock Corporation one whose capital stock is divided into shares and which is authorized to distribute to shareholders dividends or allotments of the surplus profits on the basis of the share held; created and operated for the purpose of making a profit 2. Non-stock Corporation does not issue stocks nor distribute dividends to its members; not created for profit but for the public good and welfare OTHER CLASSIFICATIONS: 1. As to number of persons who compose them a.) Corporation aggregate more than one member or corporator b.) Corporation sole composed of one member or corporator only and his successors, such as a bishop 2. As to whether for religious purposes or not a.) Ecclesiastical organized for religious purposes b.) Lay organized for a purpose other than for religion 3. As to whether they are for charitable purposes or not a.) Eleemosynary for charitable purposes b.) Civil for business or profit 4. As to State or by whose laws they have been created a.) Domestic incorporated under the laws of the Philippines b.) Foreign formed, organized, or existing under any laws other than those of the Philippines 5. As to their legal right to corporate existence a.) De jure existing in fact and in law b.) De facto (Sec 20) existing in fact but not in law; there exists a flaw in its incorporation (Note: illustrate case where A,B,C,D,E formed a corporation but D and E failed to sign by omission in good faith) -One which has not complied with all the requirements necessary to be a de jure corporation but has complied sufficiently to be accorded corporate status as against third parties although not against the state. Examples: 1.) AOI fails to state all matters required by law; 2.) Name of the corp. closely resembles that of a pre-existing corp. that it will tend to deceive the public; 3.) Incorporators or certain number of them are not residents of the Philippines; 4.) Acknowledgement of the AOI or certificate of incorporation is insufficient or defective in form or acknowledged before the wrong officer;

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6.

7.

8.

9.

5.) Violation of Filipino ownership; 6.) Minimum paid-up capital stock has not been paid to and received by the corporate treasurer contrary to his affidavit The only way to question its corporate existence is in a direct proceeding by the state (quo warranto) through the Solicitor General. Private individuals cannot raise the objection in such a case either directly or indirectly, and nobody can raise the objection collaterally. As to whether they are open to the public or not a.) Close limited to selected persons or members of a family b.) Open open to any person who may wish to become a stockholder or member thereto As to their relation to another corporation a.) Parent or Holding one which is so related to another corporation that it has the power either, directly or indirectly to, elect the majority of the directors of such other corporation b.) Subsidiary one which is so related to another corporation that the majority of its directors can be elected either, directly or indirectly, by such other corporation As to whether they are corporations in a true sense or only in a limited sense a.) True one which exists by statutory authority b.) Quasi-corporation exists without formal legislative grant, exception to the rule that a corporation can exist only by authority of law 1.) Corporation by prescription one which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power and which, by fiction of law, is given the status of a corporation, e.g The Roman Catholic Church 2.) Corporation by estoppel (Sec 21) one which in reality is not a corporation, either de jure or de facto, because it is so defectively formed, but is considered a corporation in relation to those only who, by reason of their acts or admissions, are precluded from asserting that it is not a corporation As to whether public or private a.) Public formed or organized for the government of a portion of the State b.) Private formed for some private purpose, benefit or end; it may either be a stock or non-stock, government-owned or controlled or quasi-public

IMPORTANT CLASSES OF PERSONS (Sec 5) 1. Promoter one who by contract of lease or services or agency, initiates and undertakes the pre-incorporation steps until the actual formation of the corporation; lays the groundwork for corporate existence 2. Corporators those who compose the corporation, whether stockholders or members; includes incorporators, stockholders or members 3. Incorporators those corporators mentioned in the articles of incorporation as originally forming and composing the corporation and who executed and signed the articles of incorporation as such 4. Stockholders owners of shares of stock in a stock corporation; also called shareholders

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5. Members corporators of a corporation which has no capital stock 6. Subscribers persons who have agreed to take and pay for original unissued shares of a corporation formed or to be formed 7. Underwriter a person who guarantees on a firm commitment and/or declared best effort basis the distribution and sale of securities of any kind by another company
Components of a corporation: Incorporators, Corporators, Stockholders/Members, Promoter, Board of Directors/Trustees, Executive Committee, Officers of the corporation

CLASSIFICATION OF SHARES (Sec 6) General Rule: The shares of stock in a corporation may be divided into classes or series of shares, or both, any of which classes of series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation. Exceptions: 1.) No share may be deprived of voting rights except those classified and issued as preferred or redeemable shares. 2.) There shall always be a class or series of shares which have complete voting rights. 3.) 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, except that banks, public utilities, insurance companies, trust companies, and building and loan associations (BPI-TB) shall not be permitted to issue no par value shares of stock. N.B. There can be no privilege or restriction on any share other than what is provided for in the articles of incorporation. WHO CAN CLASSIFY SHARES: 1. Incorporators The classes and number of shares which a corporation shall issue are first determined by the incorporators as stated in the AOI filed with the SEC. 2. BOD and SHs After the corporation comes into existence, they may be altered by the BOD and the SHs by amending the AOI pursuant to Sec. 16
Doctrine of Equality of Shares Under the law, except as otherwise provided by the AOI and stated in the certificate of stock, each share shall be in all respects equal to every other share. (Sec. 6, par. 5)

CAPITAL STRUCTURE 1. Capital stock amount fixed in the corporate charter to be subscribed and paid in cash, in kind or in property at the organization of the corporation or afterwards and upon which the corporation is to conduct its operation 2. Capital value of the actual property of the corporation whether in money or property 3. Authorized capital stock capital stock divided into shares of par values as specified in the AOI 4. Subscribed capital stock amount of the capital stock subscribed whether fully paid or not 5. Outstanding capital stock portion of the capital stock issued to subscribers except treasury shares 6. Paid-up capital stock portion of the subscribed or outstanding capital stock that is paid 7. Unissued capital stock portion of the capital stock that is not issued or subscribed; does not vote and draws no dividends

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Atty. Jonathan B. Tambol

8. Legal capital amount equal to the aggregate par value and/or issued value of the outstanding capital stock. CLASSES OF SHARES 1. Common shares basic class which is ordinarily and usually issued without extraordinary rights and privileges and the owners thereof are entitled to a pro-rata share in the profits of the corporation and in its assets A stockholder who owns at least one common share has the following rights: a.) Right to vote at meetings; b.) Right to dividends; c.) Right to examine corporate books. 2. Preferred Shares those which entitle the shareholder to some priority on dividends and asset distribution; always with par value and enjoy preferences in dividends, voting, and corporate property upon dissolution (Sec. 6) Preferences may be: a.) Stated in the AOI; or b.) Fixed by BOD when authorized by AOI, provided such terms and conditions shall be effective upon filing of a SEC certificate Kinds of Preferred Shares: a.) Preferred shares as to assets preference in distribution of assets after liquidation b.) Preferred shares as to dividends to receive dividends at fixed rates before any dividends at all are paid to common stockholders 1.) Cumulative preferred share payment of current dividends + dividends in arrears 2.) Non-cumulative preferred share current dividends only 3.) Participating preferred share stipulated dividends at the preferred rate + right to participate in the remaining profits 4.) Non-participating preferred share stipulated dividends only 5.) Cumulative-participating preferred share combination of the cumulative & participating 3. Redeemable shares (callable) those which permit the issuing corporation to redeem or purchase its own shares (Sec. 8); redeemable at a fixed date or at the option of either the corporation or SH or both at a redemption price; may be issued only when expressly so provided in the AOI 4. Treasury shares earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, donation, redemption, or through some lawful means (Sec. 9); only surplus earnings may be used for its purchase; may again be disposed for a reasonable price; no voting right, no right to dividends while they remain in the treasury Delinquent shares the corporation may bid at a public sale 5. Founders shares issued to organizers and promoters of a corporation in consideration of some supposed right or property (Sec. 7) 6. Par value share one with a specific money value fixed in the AOI and appearing in the certificate of stock for each share of stock of the same issue; primary purpose is to fix the minimum subscription or issue price of the shares, thus, assuring creditors that the corporation would receive a minimum amount for its stocks 7. No par value share one without any stated or par value appearing on the face of the certificate of stock; has always an issued value; same rights with holders of par value stock

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Limitations: a.) Cannot have an issued price of less than P5.00; b.) Entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends; c.) Cannot be issued as preferred stocks; d.) Cannot be issued by BPI-TB; e.) AOI must state the fact that it issued no par value shares as well as the number of said shares; f.) Once issued, deemed fully paid and non-assessable 8. Voting share with right to vote; given to common stock, withheld from preferred N.B. The rule is not one stockholder, one vote but one share, one vote because representation in a corporation is commensurate to extent of ownership. 9. Non-voting share without right to vote; preferred or redeemable shares * Matters where non-voting shares can vote upon (MAIDS) a.) Merger or Consolidation b.) Amendment of AOI c.) Adoption & amendment of by-laws d.) Incurring, creating or increasing bonded indebtedness e.) Increase/decrease of capital stock f.) Investment of corporate funds g.) Dissolution h.) Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property Note: election of directors or trustees (Sec. 24) not included 10. Promotion share issued to promoters, or those in some way interested in the company, for incorporating the company, or for services rendered in launching or promoting the welfare of the company, such as advancing fees for incorporating, advertising, attorneys fees, surveying 11. Share in escrow subject to an agreement wherein share is deposited by the grantor with a third person to be kept by the depositary until the performance of a certain condition or the happening of a certain event contained in the agreement 12. Watered stock issued not in exchange for its equivalent value either in cash, property, share, stock dividends, or services - includes stocks: a.) issued without consideration (bonus share) b.) issued as fully paid when the corporation has received a lesser sum of money than its par or issued value c.) issued for a consideration other than actual cash such as property or services, the fair valuation of which is less than its par or issued value d.) issued as stock dividend when there are no sufficient retained earnings to justify it

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TITLE II - INCORPORATION & ORGANIZATION OF PRIVATE CORPORATIONS NUMBER & QUALIFICATIONS OF INCORPORATORS (Sec 10) 1. natural persons; 2. not less than 5 but not more than 15; 3. of legal age; 4. majority must be resident of the Philippines (not necessarily citizens of the Philippines except when the law requires minimum Filipino participation); Nota Bene: Filipino Citizenship requirement a.) 100% Filipino owned 1.) Mass media; 2.) Retail trade (less than US$ 2,500,000); 3.) Small-scale mining; 4.) Private security agencies; b.) 80% Filipino owned private radio communications network c.) 70% Filipino owned 1.) Pawnshop; 2.) Advertising d.) 60% Filipino owned 1.) Utilization, exploration, development of natural resources 2.) Public utilities 3.) Banking e.) 40% Filipino owned 1.) Financing companies regulated by the SEC; 2.) Investment houses regulated by the SEC 5. each must own or subscribe to at least one share There must be at least five (5) stockholders in a stock corporation. STEPS IN THE CREATION OF A CORPORATION 1. Promotion a promoter is a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefore. a.) Discovery b.) Investigation c.) Assembly 2. Incorporation a.) Drafting and execution of AOI by the incorporators and other documents required for registration of the corp.; b.) Filing with the SEC of the AOI;

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c.) Payment of filing and publication fees; and d.) Issuance by the SEC of the certificate of incorporation. 3. Formal organization and commencement of the transaction of the business a.) Adoption of By-Laws and filing of the same with the SEC; b.) Election of BOD/T and officers; c.) Establishment of principal office; d.) Providing for subscription & payment of capital stock. Incorporators vs. Corporators: INCORPORATORS signatory to articles of incorporation do not cease to be such (Once an incorporator, forever an incorporator) number is limited to 5-15 must have contractual capacity

CORPORATORS stockholder of stock corporation or member of non-stock corporation cease to be such if they are no longer stockholders no restriction as to number may be such through a guardian

CORPORATE TERM (Sec 11) - 50 years maximum, extendible to not more than 50 years at any single instance - May be shortened or extended - Any number of extensions, no limits, perpetual life - Can only be extended before it expires and within the last 5 years of its existence Exception: unless there are justifiable reasons for an earlier extension as may be determined by SEC - If there is an extension, the AOI must be amended; requires the 2/3 votes of the OCS (Sec. 16); those opposing stockholders can exercise their appraisal right (Sec. 37)
Remember: 50-50-5 Rule

Doctrine of Relation The filing and recording of a certificate of extension after the term cannot relate back to the date of the passage of the resolution of the stockholders to extend the life of the corporation. However, the doctrine of relation applies if the failure to file the application for extension within the term of the corporation is due to the neglect of the officer with whom the certificate is required to be filed or to a wrongful refusal on his part to receive it.

MINIMUM CAPITAL STOCK REQUIRED OF STOCK CORPORATIONS (Sec 12 & 13) Capital stock no minimum requirement as long as the paid up capital is not less than P5, 000.00 at least 25% of authorized capital stock must be subscribed by the stockholders at the time of incorporation at least 25% of the total subscription must be paid at the time of subscription
Remember: 25-25 Rule + P5,000 rule

N.B. These are mandatory requirements.

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CONTENTS/FORMS OF AOI (Sec 14, 15) Articles of Incorporation (AOI) the document prepared by the persons establishing a corporation and filed with the SEC containing the matters required by the code CONTENTS OF ARTICLES OF INCORPORATION: 1. Name of corporation; 2. Purpose/s, indicating the primary and secondary purposes; 3. Place of principal office; 4. Term/duration; 5. Names, citizenship, and residences of incorporators; 6. Number, names, citizenship and residences of directors/trustees 7. If stock corporation, amount of capital stock, number of share and in case of par value stock corporation, the par value of each share; 8. Names, residences, number of shares and amounts of subscription of subscribers which shall not be less than 25% of authorized capital stock; 9. Names, residences and amount paid by each subscriber on their subscription, which shall not be less than 25% of total subscription; 10. Name of treasurer elected by subscribers; and 11. If a corporation engages in a nationalized industry, a statement than no transfer of stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal minimum. CORPORATE NAME (Sec 18) The corporation acquires juridical personality under the name stated in the certificate of incorporation. It is the name of the corporation which identifies and distinguishes it from other corporation, firms, or entities. Limitations: 1. Names which are identical, deceptively similar to that of any existing corporation; 2. A name already protected by law; 3. A name which is patently deceptive, confusing or contrary to existing laws State can no longer be used as the first word of a corporate name (SEC Circular) deceptively similar there is tendency that the ordinary person will be misled into thinking that such name is the same with another one Case: Converse vs. Universal Rubber Products (147 SCRA 154) Universal Converse is confusingly similar to Converse Requisites: a.) Complainant corporation acquired prior right over the use of the name b.) Proposed name is either identical, deceptively or confusingly similar to that of any existing corporation or patently deceptive, confusing or contrary to existing laws

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Change of name must comply with the formalities prescribed by law 1. Amendment of the AOI 2. Filing of the amendment with the SEC 3. Once approved, SEC issues an amended certificate of incorporation under the amended name PURPOSES OF CORPORATION - Must be lawful; if purpose is patently unconstitutional, illegal, immoral, or contrary to government rules and regulations, the same is a ground for the rejection or disapproval by the SEC of the AOI; cannot be formed for the practice of a profession, e.g., law, medicine, etc. - Must be definitely stated - Primary purpose must be stated - Secondary purposes must be compatible with the primary purpose and with one another PRINCIPAL OFFICE - Must be the exact complete address (SEC requirement); must be the city or town, not merely the province - Metro Manila can no longer be stated as principal office - Change of address a.) Change of city or municipality amendment of the AOI to be filed with the SEC b.) If located within the same city or municipality notice only regarding the change of address COMMENCEMENT OF CORPORATE EXISTENCE - A corporation commences to have juridical personality and legal existence only from the moment the SEC issues to the incorporators a certificate of incorporation under its official seal. Once issued, the certificate becomes the charter or corporate franchise from which the authority of the corporation to operate as such flows. Religious corporations from and after the filing with the SEC of the AOI, the chief archbishop, etc. shall become a corporation sole Cooperatives upon registration with the Cooperatives Development Authority (RA 6938, Sec. 16) AMENDMENT OF AOI (Sec 16) Corporate Charter an instrument or authority from the sovereign power bestowing the right or privilege to be and act as a corporation. PROCEDURE FOR AMENDMENT OF AOI 1. resolution by at least a majority vote of the Board; and 2. vote in a meeting or mere assent of 2/3 of the OCS, or in case of non-stock, by the members subject to the appraisal right of dissenting stockholders

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Appraisal Right right of a stockholder to demand the fair value of his share after dissenting from a proposed corporate action involving a fundamental change in the corporation in the cases provided by law; Sec 81-86 Corporations Governed by Special Law (banks, banking & quasi-banking institutions, building & loan associations, trust companies & other financial intermediaries, insurance companies, public utilities, educational institutions) AOI or amendment thereto must be accompanied by a favorable recommendation of the appropriate government agency, to the effect that such AOI or amendment is in accordance with law. GROUNDS FOR REJECTION/DISAPPROVAL OF AOI or AMENDMENT (Sec 17) 1. No substantial compliance with the required form 2. Purpose/s are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations 3. Treasurers affidavit is false 4. Citizenship requirement has not been complied with Keyword: NUT-C WHAT CANNOT BE AMENDED IN THE AOI: - Those matters referring to facts existing as of the date of the incorporation, such as: 1. Name of incorporators; 2. Names of original subscribers to the capital stock of the corporation and their subscribed and paid up capital; 3. Treasurer elected by the original subscribers; 4. Members who contributed to the initial capital of a non-stock corporation; 5. Date and place of execution of the AOI; 6. Witnesses to and acknowledgment of the articles. ARTICLES OF INCORPORATION vs. BY-LAWS: Articles of Incorporation Essentially a contract between the corporation and the stockholders/members; between the stockholders/members inter se; and between the corporation and the State (must be notarized) Executed before incorporation

A condition precedent in the acquisition of corporate existence Amended by a majority of the directors/trustees and stockholders representing 2/3 of the

By-Laws Rule for the internal government of the corporation but has the force of a contract between the corporation and the stockholders/members and between the stockholder and members themselves Usually executed after the incorporation although Sec. 46 allows simultaneous filing of the two A condition subsequent May be amended by a majority vote of the BOD and majority vote of OCS or a majority of the

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outstanding capital stock or 2/3 of the members in case of non-stock corporations Power to amend/repeal articles cannot be delegated by the stockholders/members to the BOD/BOT

members in non-stock corporations Power to amend/repeal by-laws or adopt new by-laws may be delegated by the 2/3 of the OCS or 2/3 of the members in case of non-stock corporation

NON-USE OF CORPORATE CHARTER & CONTINUOUS INOPERATION (Sec 22) 1. Non-user for 2 years when the corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved (automatic). 2. Non-user for 5 years when the corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation; not automatic, requires notice and hearing. TITLE III BOARD OF DIRECTORS/TRUSTEES/OFFICERS BOARD OF DIRECTORS & TRUSTEES (Sec 23) QUALIFICATIONS: 1. For a stock corporation, ownership of at least one share of the capital stock of the corporation in his own name, and if he ceases to own at least one share in his own name, he automatically ceases to be a director. For a non-stock corporation, only members of the corporation can be elected to the BOT. What is material is the legal title to, not beneficial ownership of the stocks appearing on the books of the corporation. A person who does not own a stock at the time of his election or appointment does not disqualify him as a director if he becomes a shareholder before assuming the duties of his office. 2. A majority of the directors/trustees must be residents of the Philippines. 3. Must not have been convicted by final judgment of an offense, punishable by imprisonment for a period exceeding 6 years, or a violation of the Corporation Code committed within 5 years prior to the date of his election or appointment. (Sec 27) 4. Must be of legal age. 5. Only natural persons can be elected directors/trustees. 6. Other qualifications as may be prescribed in the by-laws of the corporation or in special laws or regulations. TERM OF OFFICE - Hold office for one (1) year until their successors are elected and qualified Holdover Principle If no election is conducted or no qualified candidate is elected, the directors or trustees shall continue to act as such in a hold-over capacity until an election is held and a qualified candidate is so elected.

Law3 Private Corporations

Atty. Jonathan B. Tambol

GENERAL RULE Unless otherwise provided in the Code, all corporate powers and prerogatives are vested directly in the Board of Directors or Trustees. Exceptions: 1. In case of an Executive Committee authorized in the by-laws; 2. Contracted manager which may be an individual, a partnership or another corporation (Note Sec. 44 if contracted manager is another corporation); 3. Close corporations stockholders may directly manage the business of the corporation instead, if the AOI so provide. Principle on delegation of board power the Board may validly delegate some of its functions and powers to officers, committees or agents N.B. The power to purchase real property is vested in the board. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the board, whose approval will finalize the transaction. A corporation can only exercise its powers and transact its business through its board of directors and through its officers and agents when authorized by a board resolution or by its by-laws. (Sps. Firme vs. Bukal Enterprises, GRN 146608, Oct. 23, 2003) ELECTION OF DIRECTORS OR TRUSTEES (Sec 24) STOCK CORPORATION NON-STOCK Presence during election Owners of a majority of the Majority of the members OCS, in person or by proxy, entitled to vote in person or by must be present at the election proxy, if allowed in its AOI or of the directors. by-laws, must be present. Manner of voting Cumulative voting is Cumulative voting is generally mandatory; a matter of right not available unless allowed by granted by law to each SH with the AOI or by-laws, since each voting rights member is entitled only to one vote METHODS OF VOTING A. Straight Voting every SH may vote such number of shares for as many persons as there are directors to be elected. To illustrate: If A owns 10 shares of stock in a corporation and there are 5 directors to be elected, he is entitled to 50 votes which he may give to the 5 candidates he chose by giving 10 votes each. The votes are distributed equally among the 5 candidates of his choice without preference. B. Cumulative Voting for one candidate a SH is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal.

Law3 Private Corporations

Atty. Jonathan B. Tambol

To illustrate: In the above example, A may cast all the 50 votes in favor of any one candidate. Suppose there are 50 shares and 40 of these shares are owned by A while the remaining 10 shares are owned by B, C, D and E. if there are 5 directors to be elected, A is entitled to 200 votes. The highest number of votes that A can give each of his 4 candidates is 50. So, there is one remaining slot to complete the 5 directors. B, C, D and E can now cumulate their votes in favor of one candidate and thus secure representation in the board. C. Cumulative Voting by distribution a SH may cumulate his shares by multiplying also the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit. To illustrate: If A owns 10 shares, he is entitled to 50 votes if there are 5 directors to be elected. A may distribute his votes to candidates E, F and G by giving E, 20 votes, F, 15 and G, 15. Any combination may be adopted as long as the total number of votes cast by him does not exceed 50 votes which is the number of shares owned by him multiplied by the number of directors to be elected. Note: Formula for determining the votes needed in cumulative voting: D = [A x B] / [C + 1] + 1 E=DxC A Total number of outstanding shares entitled to vote B Number of directors desired to be elected C Total number of directors to be elected D Number of shares necessary to elect desired number of directors E Number of votes required to elect desired number of directors Members of non-stock corporations may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate, unless otherwise provided in the AOI. Limitations: 1. At any meeting of SH/members called for the election of D/T, there must be present either in person or by proxy, the owners of the majority of the OCS or majority of the members entitled to vote. 2. Election must be by ballot if requested by any voting member/SH. 3. A SH cannot be deprived in the AOI/by-laws of his statutory right to use any of the methods of voting in the election of directors. 4. No delinquent stock (unpaid subscription) shall be voted. 5. The candidates receiving the highest number of votes shall be declared elected. A majority vote is not necessary, only plurality. However, it is necessary that there is a quorum and in the absence thereof, election shall be considered invalid. CORPORATE OFFICERS; QUORUM (Sec 25) Quorum such number of the membership of a collective body as is competent to transact its business or do any other corporate act 1. As stipulated in the AOI/by-laws (greater majority); or 2. Majority of the number of directors or trustees plus 1

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Atty. Jonathan B. Tambol

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: election of officers 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.

CORPORATE OFFICERS 1. President must be a director and may not concurrently be the treasurer or secretary 2. Vice-President has the authority to act or to perform any duty of the office in the absence of the president or if the position of president becomes vacant 3. Treasurer may or may not be a director 4. Secretary need not be a director unless required by the by-laws; must be a resident and citizen of the Philippines 5. Other officers as may be provided in the by-laws N.B. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as: a.) President and Secretary, or b.) President and Treasurer at the same time. Authority of officers is generally derived from law; by-laws; or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business. Doctrine of Apparent Authority If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be stopped from denying the agents authority. CLASSIFICATION OF POWERS OR AUTHORITY: 1. Inherent authority to act and bind the corporation which the officer has by reason of his office although it may not be sanctioned by express authority 2. Express every power or authority expressly conferred upon him by law and the by-laws of the corporation 3. Implied includes all incidental authority as is necessary, usual and proper to effectuate the main authority expressly conferred 4. Apparent or Ostensible when in the usual course of the business, an officer or agent is held by such corporation or has been permitted to act for it in such way as to justify third persons who deal with him in assuming that he is doing an act or making a contract within the scope of his authority. 5. Authority by estoppel when a corporation, by its voluntary act, places an officer or agent in such a position or situation that persons of ordinary prudence are justified in assuming that he has authority to perform the act in question REMOVAL OF DIRECTORS/TRUSTEES; VACANCIES (Sec 28, 29) Requisites:

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1. With or without cause, by a vote of 2/3 of OCS or by 2/3 of the members in a non-stock corporation Exception: when a director has been elected by virtue of the minoritys exercise of cumulative voting rights, such director may be removed only for cause. (Sec. 28) 2. Takes place either at a regular/special meeting called for the purpose 3. With previous notice of the time and place of such meeting, as well as of the intention to propose such removal May be called at the instance of any SH or member: a.) If officers refuse to call a meeting to consider the removal of the director b.) With due notice VACANCIES IN THE OFFICE OF DIRECTOR OR TRUSTEE A vacancy in the office of director or trustee may be filled as follows: 1. By the Stockholders or Members: a.) If the vacancy results from the removal by the SHs/members; b.) Expiration of term; c.) If the vacancy occurs other than by removal or by expiration of term such as death, abandonment, resignation or disqualification, if the remaining directors/trustees do not constitute a quorum for the purpose of filling the vacancy; d.) If the vacancy may be filled by the remaining directors/trustees but the board refers the matter to the SHs/members; e.) If the vacancy is created by reason of an increase in the number of directors or trustees. 2. By the members of the Board (if still with quorum) at least a majority of them are empowered to fill any vacancy occurring in the board OTHER than by: a.) Removal by the SHs/members; or b.) Expiration of term. COMPENSATION OF BOARD MEMBERS (Sec 30) G.R.: Directors are not entitled to receive any compensation except for reasonable per diems. Exceptions: 1. When their compensation is fixed in the by-laws; 2. When granted by the vote of stockholders representing at least a majority of the OCS at a regular or special meeting Limitation: the amount of compensation shall not exceed 10% of the net income before income tax of the corporation during the preceding year. LIABILITY OF DIRECTORS/TRUSTEES & OFFICERS (Sec 31) Three-fold duties of Directors: 1. Duty of Obedience to direct the affairs of the corporation only in accordance with the purposes for which it was organized Based on Sec. 25 The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws. 2. Duty of Diligence directors and officers are required to exercise due care in the performance of their functions.

Law3 Private Corporations

Atty. Jonathan B. Tambol

Based on Sec. 31 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 affairs of the corporation shall be liable jointly and severally for all damages resulting there from, suffered by the corporation, its stockholders or members and other persons. 3. Duty of Loyalty the director or officer owes loyalty and allegiance to the corporation a loyalty that is undivided and an allegiance that is influenced by no consideration other than the welfare of the corporation. Based on Sec. 31 directors or trustees who acquire any pecuniary or personal interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting there from. Nature of Powers of Board of Directors or Trustees 1. Theory of original power powers of the board are original and undefeated. The SHs or members do not confer, nor can they revoke those powers. 2. They are derivative only in the sense of being received from the State in the act of incorporation. BUSINESS JUDGMENT RULE - The board is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts. (Montelibano vs. Bacolod-Murcia Milling, GRN 15092, May 18, 1962) - Courts cannot undertake to control the discretion of the board of directors about administrative matters as to which they have the legitimate power of action, and contracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority. (Gamboa vs. Victoriano, GRN 40620, May 5, 1979) Consequences: a.) Resolution, contracts and transactions of the Board cannot be overturned or set aside by the SH or members and not even by the courts under the principle that the business of the corporation has been left to the hands of the Board; and b.) Directors and duly authorized officers cannot be held personally liable for acts or contracts done with the exercise of their business judgment. Exceptions: 1.) When the Corporation Code expressly provides otherwise; 2.) When the Directors or officers acted with fraud, gross negligence or in bad faith; 3.) When Director or officers act against the corporation in conflict-of-interest situation.

LIMITATIONS ON POWERS OF BOD/T 1. Limitations imposed by the Constitution, statutes, AOI or by-laws 2. Cannot perform constituent or those acts which involve fundamental changes in the corporation which require the approval of its SHs/members. 3. Cannot exercise powers not possessed by the corporation.

Law3 Private Corporations

Atty. Jonathan B. Tambol

PERSONAL LIABILITY OF DIRECTORS G.R. Directors and officers are not solidarily liable with the corporation. Exceptions: In the following cases, personal liability may be incurred by directors and trustees or the officers in some cases, when they: 1. Willfully and knowingly vote for and assent to patently unlawful acts of the corporation (Sec 31); 2. Are guilty of gross negligence or bad faith in directing the affairs of the corporation (Sec 31); 3. Acquire any personal or pecuniary interest in conflict of their duty (Sec 31); 4. Consent to the issuance of watered stocks, or, having knowledge thereof, fails to file objections with the secretary (Sec 65); 5. Agree or stipulate in a contract to hold himself personally liable with the corporation; or 6. By virtue of a specific provision of law. Note: A director is not liable for misconduct of co-directors or other officers unless: 1.) He connives or participates in it; or 2.) He is negligent in not discovering or acting to prevent it REMEDIES IN CASE OF MISMANAGEMENT The remedies of the stockholders in the event of mismanagement or abuse of powers are the following: a.) Receivership; b.) Injunction if the act has not yet been done; c.) Dissolution if abuse amounts to a ground for quo warranto but Solicitor General refuses to act; d.) Derivative suit or complaint filed with SEC

CONTRACTS OF SELF-DEALING DIRECTORS, TRUSTEES OR OFFICERS (Sec 32) Self-dealing D/T/O those who personally contract with the corporation in which they are directors, trustees or officers - Such contracts are VOIDABLE at the option of the corporation UNLESS: a.) The presence of such D/T in the board meeting approving the contract was not necessary to constitute a quorum for such meeting; b.) The vote of such D/T in the board meeting approving the contract was not necessary for the approval of the contract; c.) The contract is fair and reasonable under the circumstances; d.) In the case of an officer, there was previous authorization by the BOD. If conditions a or b is absent, said contract may be ratified by the vote of the SHs representing at least 2/3 of the OCS or 2/3 of the members in a meeting called for the purpose, provided that full disclosure of the adverse interest of the director/trustee involved is made at such meeting and the contract is fair and reasonable. CONTRACTS BET. CORPORATIONS WITH INTERLOCKING DIRECTORS (Sec 33)

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Atty. Jonathan B. Tambol

Corporation with Interlocking Directors one, some or all of the directors in one corporation is/are also a director in another corporation. Interlocking directorship by itself is not prohibited under the Corporation Code. However, the by-laws may contain provisions that disallow the same. A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone. These contracts are valid provided that: 1.) The contract is not fraudulent; and 2.) The contract is fair and reasonable under the circumstances. But if the interlocking directors interest in one corporation or corporations is substantial (exceeding 20% of the OCS), then all the conditions prescribed in Sec. 32 on self-dealing directors must be present with respect to the corporation in which he has nominal interest.

DISLOYALTY OF A DIRECTOR (Sec 34) Doctrine of Corporate Opportunity A director who, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, is guilty of disloyalty and should therefore account to the latter for all such profits by refunding the same. Application: Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a business opportunity which: 1.) The corporation is financially able to undertake; 2.) From its nature, is in line with corporations business and is of practical advantage to it; and 3.) The corporation has an interest or a reasonable expectancy. Note: The rule shall apply notwithstanding the fact that the director risked his own funds in the venture. A business opportunity ceases to be corporate opportunity and transforms to personal opportunity where the corporation refuses or is definitely no longer able to avail itself of the opportunity. EXECUTIVE COMMITTEE (Sec 35) - A body created by the by-laws and composed of not less than 3 members of the board which, subject to the statutory limitations, has all the authority of the board to the extent provided in the board resolution or by-laws. - May act by a majority vote of all of its members. - Its decisions are not subject to appeal to the board. However, if the resolution of the ExeCom is invalid, i.e., not one of the powers conferred to it, it may be ratified by the board. - If the ExeCom is not validly constituted, the members thereof may be considered as de facto officers. Limitations of the powers of the ExeCom - It cannot act on the following: 1. Matters needing stockholder approval; 2. Filling up of board vacancies;

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Atty. Jonathan B. Tambol

3. Amendment, repeal or adoption of by-laws; 4. Amendment or repeal of any resolution of the board which by its express terms is not amendable or repealable; and 5. Cash dividend declaration Code of Corporate Governance Applicability: The Code of Corporate Governance shall be applicable to: 1. Corporations whose securities are registered or listed; 2. Corporations which are grantees of permits/licenses and secondary franchise from the Commission; and 3. Public companies. Public Company any corporation with a class of equity securities listed on an exchange or with assets in excess of 50 million pesos and having 200 or more holders, at least 200 of which are holding at least 100 shares of a class of its equity securities. Corporate Governance a system whereby shareholders, creditors and other stakeholders of a corporation ensure that management enhances the value of the corporation as it competes in an increasingly global market place. Mandatory corporate governance rules are necessary for 2 reasons: 1.) To overcome the collective action problem resulting from the dispersion among stockholders; and 2.) To ensure that the interests of all relevant constituencies are represented.

APPRAISAL RIGHT (Title X, Secs. 81-86) - Refers to the right of stockholders to demand the fair value of his shares after dissenting from a proposed corporate action involving a fundamental change in the corporation in cases provided by law A. When Right of Appraisal may be exercised: 1.) Extend or shorten corporate term (Sec. 11); 2.) Restriction of rights or privileges of shares through amendment of the AOI (Sec. 16); 3.) Sale of all or substantially all corporate assets (Sec. 40); 4.) Equity investment in non-primary purpose business (Sec. 42); 5.) Merger or consolidation (Sec. 77); All the above require the 2/3 votes of the OCS. The appraisal right refers only to stockholders who have actually dissented from the above transactions. B. Procedure for the Exercise of the Right: 1.) Written demand must be submitted by the dissenting stockholder on the corporation for the payment of the fair value of the shares within 30 days from the date the vote was taken. (Failure to do so shall mean waiver of the right.) Effect: The dissenting stockholder loses all rights as a stockholder including dividend rights; only one right remains and that is the right to receive payment of the fair value of his shares. 2.) Within 10 days from demand, the dissenting stockholder must submit his certificates of stocks for notation that such certificates represent dissenting shares. (Failure to do so shall mean waiver of the right.)

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Atty. Jonathan B. Tambol

N.B. If such shares are subsequently disposed of and new certificates are issued to the transferee, the right of appraisal is automatically extinguished, the transferee becomes a regular stockholder of the corporation. a.) 60 days from the approval of the corporate action, the corporation and the dissenting stockholders shall agree as to the fair value of the dissenting shares. If no agreement is reached after the 60-day period, it shall be determined and appraised by 3 disinterested persons: one appointed by the SH; another appointed by the corporation; and the third person to be chosen by the two thus appointed. 3.) Findings of the majority of the appraisers shall be final and the award shall be payable within 30 days after it is made. 4.) The dissenting stockholder can only be paid if there are unrestricted retained earnings. Nota Bene: If the dissenting stockholder is not paid within 30 days from after the award, he shall automatically be restored to all his rights as stockholder. C. Outline of Instances when Right of Appraisal is Lost: 1.) Failure to make written demand within 30 days after the vote was taken on the corporate act; 2.) Failure to surrender the certificate of stock within 10 days from demand for notation; 3.) Non-existence of unrestricted profits to cover payment of the fair value of dissenting shares within 30 days from date of award; 4.) Subsequent transfer of the shares which have been annotated when new certificates of stock are issued; 5.) When the corporation consents a demanding stockholder to withdraw the exercise of appraisal right; 6.) Abandonment of corporate action; 7.) Disapproval of action by SEC. D. Who shall bear the Cost of Appraisal 1.) Corporation a.) where the value as determined by the appraisers is higher than what was offered by the corporation to the dissenting stockholder; or b.) if action is filed to recover the fair value of the shares and the stockholders refusal to receive payment is justified. 2.) Dissenting stockholder a.) if the value determined by appraisers is approximately the same as the price offered by the corporation; or b.) where an action to recover is filed and the refusal of such stockholder to receive payment is unjustified.

TITLE IV POWERS OF CORPORATIONS


CORPORATE POWERS AND CAPACITY (Sec 36) Kinds: 1. Express those expressly authorized by the Corporation Code and other laws, and its AOI 2. Incidental those that are incidental to the existence of the corporation 3. Implied those that can be inferred from or necessary for the exercise of the express powers. Classification of Implied Powers: a.) Acts in the usual course of business;

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Atty. Jonathan B. Tambol

b.) c.) d.) e.)

Acts Acts Acts Acts

to protect debts owing to the corporation; which involve embarking in a different business usually to collect debts out of profits; to protect or aid employees; to increase business

GENERAL POWERS & CAPACITY 2 Sources of Express Powers: a.) Those enumerated in Sec. 36, generally; b.) Purpose clause of the AOI, specifically 1. To sue and be sued; 2. Succession by its corporate name for the term of its existence; 3. Adopt and use a corporate seal; 4. Amend its AOI; 5. Adopt by-laws not contrary to law, morals or public policy and to amend or repeal the same; 6. Issue or sell stocks (stock corporations) or to admit members (non-stock corporations); 7. Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with all types of properties; 8. Enter into merger or consolidation; 9. Make reasonable donations; 10. Establish pension, retirement and other plans for the benefit of its directors, trustees, officers and employees; and 11. Such other powers as may be essential or necessary to carry out its purpose/s as stated in the AOI. OTHER POWERS: 1. Extension or shortening of corporate term (Sec 37); 2. Power to increase or decrease capital stock/Power to incur, create or increase bonded indebtedness (Sec 38); 3. Power to deny pre-emptive right (Sec 39); 4. Sell, dispose, lease, encumber all or substantially all or corporate assets (Sec 40); 5. Power to acquire own shares (Sec 41); 6. Invest corporate funds in another corporation or business or for any other purpose other than the primary purpose (Sec 42); 7. Power to declare dividends out of unrestricted retained earnings (Sec 43); 8. Power to enter into management contract (Sec 44). ULTRA VIRES acts performed by a corporation in excess of its corporate powers and which are generally not binding on the corporation. An ultra vires act is merely voidable which may be enforced by performance, ratification, or estoppel, while an illegal act is void and cannot be validated. Requisites for valid ratification of an ultra vires act:

Law3 Private Corporations

Atty. Jonathan B. Tambol

1.) Act or contract must be consummated, not merely executory; 2.) Creditors are not prejudiced, or all of them have given their consent; 3.) Rights of the public or the State are not involved; and 4.) All the stockholders must give their consent. Rules on the effects of ultra vires acts: 1.) A wholly executor ultra vires contract or act cannot be enforced nor can damages be recovered for its breach; 2.) A wholly executed ultra vires contract or act shall not be interfered with as between the parties or persons whose rights are derived therefrom; but the State can always question said contract or act; 3.) When an ultra vires act is executed on one side but executor contract on the other side who received benefits therefrom, recovery can be had by the former; and 4.) The title of the corporation to property cannot be questioned on the ground that it acquired the property through an ultra vires contract of transfer.

POWER TO EXTEND OR SHORTEN CORPORATE TERM (Sec 37) Requirements: a.) Majority vote of the BOD/T; b.) Written notice of the proposed action and the time and place of meeting shall be served to each stockholder or member either by mail or personal service; c.) Ratification in a meeting by 2/3 of the OCS or 2/3 of the members, as the case may be. This actually requires the amendment of the AOI; meeting must be duly called for the purpose; dissenting stockholders may exercise appraisal right. The extension of corporate life cannot be made within the 3-year liquidation period, because that would constitute new business. POWER TO INCREASE OR DECREASE CAPITAL STOCK; INCUR, CREATE OR INCREASE BONDED INDEBTEDNESS (Sec 38) Requirements: a.) Majority vote of the members of the BOD/T; b.) 2/3 vote of the OCS or the members, as the case may be, in a meeting duly called for the purpose with notice previously given; c.) Certificate of said corporate act shall be signed by majority of the members of the Board and the Chairman and Secretary of the stockholders meeting; Corporate act shall take effect from and after SEC approval. d.) Certificate must be accompanied by the Treasurers Affidavit certifying compliance with the 25%-25% requirements as to stock subscription. No decrease in capital stock shall be approved by SEC if it will prejudiced corporate creditors; Bonds issued by the corporation shall be registered with SEC which is given the power to determine the sufficiency of the terms of such bonds. Note Well:

Law3 Private Corporations

Atty. Jonathan B. Tambol

a.) When a corporation increases capital stock, stockholders are entitled to a PRE-EMPTIVE RIGHT to subscribe to a sufficient number of shares in order to maintain their previous relative strong power. The corporation must give the stockholder a reasonable period within which to exercise such right. b.) Dissenting stockholders cannot exercise the right of appraisal in this case. POWER TO DENY PRE-EMPTIVE RIGHT (Sec 39) Pre-emptive Right the shareholders right to subscribe to all issues or disposition of shares of 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 right not available in the following: 1.) Shares to be issued to comply with laws requiring stock offering or minimum stock ownership by the public; 2.) Shares issued in good faith in exchange for property needed for corporate purposes; 3.) Shares issued in payment of previously contracted debts; 4.) In case the right is denied in the AOI. DISPOSITION OF ALL OR SUBSTANTIALLY ALL CORPORATE ASSETS Requirements: a.) Majority vote of the members of the Board; b.) 2/3 votes of the OCS or members, as the case may be, in a meeting called for the purpose. Dissenting stockholder may exercise their right of appraisal. Despite approval by the stockholders or members, it is not mandatory for the Board to continue with the disposition. Note Well: a.) 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. b.) Disposition of properties in the regular course of the business does not need approval by or authority of stockholders or members. POWER TO ACQUIRE OWN SHARES (Sec. 41) - For legitimate business purposes and subject to the condition that there are unrestricted retained earnings to cover the shares purchased or acquired. Instances when corporation may buy its own stocks: 1.) To complete fractional shares; 2.) To collect indebtedness or in case of delinquency sales; and 3.) The exercise of right of appraisal. TRUST FUND DOCTRINE: The capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors.

Law3 Private Corporations

Atty. Jonathan B. Tambol

Basis of Trust Fund Doctrine a.) Sec. 43 the corporation can declare dividends only out of unrestricted retained earnings. b.) Sec. 122 no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.

POWER TO INVEST FUNDS IN ANOTHER CORPORATION OR BUSINESS FOR NON-PRIMARY PURPOSE (Sec. 42) Requirements: a.) Majority vote of the BOD/T; b.) Ratification by 2/3 of OCS or 2/3 of the members, as the case may be. Right of appraisal may be exercised by dissenting stockholders. Note: Where the investment is reasonably necessary to accomplish the primary purpose, a board resolution is sufficient. POWER TO DECLARE DIVIDENDS (Sec. 43) GR: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock. Exceptions: 1.) When justified by definite corporate expansion projects or programs approved by the board; 2.) When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its 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 a need for special reserve for probable contingencies. Form of Dividends: a.) Cash Dividend can be declared by the board only b.) Property Dividend may be payable in bonds or in stock of another corporation c.) Stock Dividend declared by the board but requires the approval of 2/3 of the OCS at a regular or special meeting duly called for such purpose; cannot be issued to non-stockholders even for services rendered POWER TO ENTER INTO MANAGEMENT CONTRACT (Sec 44) Requirements: a.) Resolution of the board; and b.) Majority vote of the OCS or members, as the case may be, in a meeting called for the purpose. DERIVATIVE SUIT - An action brought about by minority shareholders in the name of the corporation to redress wrongs committed against the corporation, for which the directors refuse to sue - A remedy designed by equity and has been the principal defense of the minority shareholders against the abuses of the majority. Requisites for filing: a.) Party bringing suit should be a shareholder as of the time of the act or transaction complained of;

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Atty. Jonathan B. Tambol

b.) He has extinguished intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and c.) Cause of action actually devolves on the corporation, the wrongdoing or harm having been caused to the corporation and not to the particular stockholder bringing the suit.

TITLE V BY-LAWS
BY-LAWS rules of action adopted by a corporation for its internal government and for the regulation of conduct, and prescribe the rights and duties of its stockholders or members towards itself and among themselves in reference to the management of its affairs. FUNCTIONS: 1. Supplement the AOI; 2. Provide for details not important enough to be stated in the AOI; 3. Continuing rule for the government of the corporation and the individuals composing it; 4. Define the rights and duties of corporate officers and directors/trustees and of stockholders/members towards the corporation and among themselves; 5. Source of authority for corporate officers and agents of the corporation. REQUISITES FOR THE VALIDITY OF THE BY-LAWS: 1. Must not be contrary to law nor with the Corporation Code; 2. Must not be contrary to morals and public policy; 3. Must not impair the obligations of contracts Amendments to the by-laws cannot impair the obligation of existing contracts or any vested right, e.g., the right of an employee to security of tenure cannot be adversely affected by any amendment in the by-laws, hence his services can only be terminated for causes provided for by law. 4. Must be general and uniform; 5. Must be consistent with the charter or AOI; and 6. Must be reasonable, not arbitrary or oppressive. ADOPTION OF BY-LAWS REQUIRED VOTES: A. If adopted prior to incorporation must be signed and approved by all the incorporators and filed with the SEC together with the AOI. B. If adopted and filed after incorporation affirmative vote of the SHs representing at least a majority of the OCS or majority of the members (non-stock) shall be necessary; it shall be signed by the SHs/members voting for them. A copy thereof duly certified by a majority of the D/T and countersigned by the secretary of the corporation shall be filed with the SEC which shall be attached to the original AOI

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Effectivity upon approval of the SEC Effect of non-filing within the required period Failure to submit the by-laws within 30 days from incorporation does not automatically dissolve the corporation. It is merely a ground for suspension or revocation of its charter after proper notice and hearing. The corporation is, at the very least, a de facto corporation whose existence may not be collaterally attacked.

CONTENTS OF BY-LAWS (Sec. 47) 1. Time, place and manner of calling and conducting regular or special meetings of the directors/trustees; 2. Time and manner of calling and conducting regular or special meetings of the stockholders/members; 3. Required quorum in meetings of stockholders or members and the manner of voting therein; 4. Form of proxies of stockholders and members and the manner of voting them; 5. Qualifications, duties and compensation of directors, trustees, officers and employees; 6. Time for holding the annual election of directors or trustees and the mode or manner of giving notice; 7. Manner of election of appointment and the term of office of all officers other than directors or trustees; 8. Penalties for violation of the by-laws; 9. In case of stock corporations, the manner of issuing certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business. AMENDMENT/REPEAL/ADOPTION OF NEW BY-LAWS (Sec. 48) a.) With SHs/Members approval: 1.) Majority vote of the members of the Board; 2.) Majority of the OCS/members in a meeting duly called for the purpose b.) By the Board of Directors/Trustees: 2/3 of the OCS/members may delegate to the board the power to amend/repeal/adopt new by-laws Such power of the board may be revoked by majority vote of the OCS/members. The power to adopt the first original by-laws cannot be delegated to the BOD/T; only the power to adopt new by-laws that will supplant the old by-laws can be validly delegated. AOI vs. BY-LAWS: AOI

BY-LAWS Nature Condition precedent in the Condition subsequent acquisition of corporate (absence merely furnishes a existence ground for the revocation of the franchise) Purpose Essentially a contract For the internal government between the corporation and of the corporation but has the SHs/members; between the force of a contract

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the SHs/members inter se; between the corporation and and between the corporation the SHs/members, and and the State between the SHs/members Time of execution Executed before May be executed after incorporation incorporation (may be filed simultaneously with the AOI) Amendment Amendment by a majority of May be amended by a the D/T and 2/3 of the majority vote of the BOD and OCS/members majority of the OCS/members

TITLE VI MEETINGS
KINDS OF CORPORATE MEETINGS 1. Meetings of stockholders or members: a.) Regular held annually on a date fixed in the by-laws, or if not fixed, on any date in April as determined by the board b.) Special held at any time deemed necessary or as provided in the by-laws 2. Meetings of directors or trustees: a.) Regular held by the board monthly, unless the by-laws provide otherwise b.) Special held by the board at any time upon the call of the president or as provided in the by-laws Where? anywhere in or out of the Philippines, unless the by-laws provide otherwise. Note: Whenever there is no person authorized to call a meeting, the SEC, upon petition of a stockholder or member, and on the showing of good cause, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice. PLACE AND TIME OF MEETINGS OF SHS/MEMBERS (Sec. 51) - In the city or municipality where the principal office of the corporation is located, and if practicable, in the principal office of the corporation. Even if the meeting be improperly held or called, any business transacted at such meeting shall be valid if within the powers or authority of the corporation, and provided that all the stockholders or members of the corporation are present or duly represented at the meeting. QUORUM OF MEETINGS (Sec. 52) - Unless otherwise provided for in the Code or in the By-Laws, a quorum shall consist of the stockholders representing a majority of the OCS or a majority of the members in case of non-stock corporations.

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A corporation may prescribe a greater voting requirement in its AOI or by-laws in order to protect the rights of the minority stockholders or members. Such higher number is also the number necessary to constitute a quorum. Once a quorum is called and the meeting was called to order, even if some people walked out and the people left are less than the majority, the proceedings will be valid so long as there is a quorum when the meeting was called to order. For stock corporations, the quorum referred to in Sec. 52 of the Corporation Code is based on the number of outstanding voting stocks. For non-stock corporations, only those who are actual, living members with voting rights shall be counted in determining the existence of a quorum during members meetings. Dead members shall not be counted.

REQUIREMENTS OF A VALID MEETING: 1. Must be held at the proper place; 2. Must be held at the stated date and at the appointed time or at a reasonable time thereafter; 3. Must be called by the proper person: a.) The person/s designated in the by-laws has authority to call stockholders or members meeting. b.) In the absence of such provision in the by-laws, it may be called by a director or trustee or by an officer entrusted with the management of the corporation. c.) A stockholder or member may make the call or order of the SEC whenever for any cause, there is no person authorized to call a meeting. d.) The special meeting for the removal of directors or trustees may be called by the secretary or by a SH/member. 4. There must be previous notice. Regular meeting written notice must be sent to registered SHs or members at least 2 weeks before the meeting Special meeting written notice must be sent at least one week 5. There must be a quorum. Note: The President shall preside at all meetings of the directors or trustees as well as of the stockholders or members, unless the bylaws provide otherwise. RULES ON MEETING/VOTING APPLICABLE TO CERTAIN KINDS OF SHARES 1. Delinquent shares shall not be entitled to vote. 2. Treasury shares have no voting rights while they remain in the treasury. 3. Fractional shares shall not be entitled to vote. 4. Escrow shares shall not be entitled to vote. 5. Unpaid shares, if not delinquent, are entitled to all the rights of a SH including the right to vote. MANNER OF VOTING A SH/member may vote: 1. Directly (in person); or 2. Indirectly, through representative a.) By means of a proxy;

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b.) By a trustee under a voting trust agreement; or c.) By executors, administrators, receivers, or other legal representatives duly appointed by the court. PROXIES (Sec. 58) May refer to: 1. The written authority given by one person to another so that the second person can act for the first; 2. The person authorized by an absent SH or member to vote for him at a SHs or members meeting; 3. The instrument which evidences the authority of the agent. REQUIREMENTS FOR VALIDITY: (WSF-V5) 1. In writing; 2. Signed by the SH/member concerned; 3. Filed before the scheduled meeting with the corporate secretary; 4. Valid only for the meeting for which it was intended, unless otherwise provided in the proxy; 5. No proxy shall be valid and effective for a period longer than 5 years at any one time. The right to vote by proxy may be exercised in any of the following instances: 1. Election of the board of directors or trustees; 2. Voting in case of joint ownership of stock; 3. Voting by trustee under voting trust agreement; 4. Pledge or mortgage of shares; 5. As provided for in its by-laws Nota Bene (Note well): Stockholders or members may attend and vote in their meetings by proxy (Sec. 58); BUT directors cannot do so. Directors must always act in person (Sec. 25). EXTENT OF AUTHORITY 1. General proxy confers a general discretionary power to attend and vote at annual meetings 2. Limited proxy restricts the authority to vote to specified matters only and may direct the manner in which the vote shall be cast WHO MAY PROXY A stockholder or member may appoint any person he sees fit to represent him. Since a proxy acts for another, he may act as such although he himself is disqualified to vote his shares. The same person may act as proxy for one or several stockholders or members. Directors or trustees cannot attend or vote by proxy at board meetings but they may act as proxies in stockholders meetings.

VOTING TRUSTS (Sec. 59)

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Voting Trust Agreement an agreement whereby one or more stockholders transfer their shares of stocks to a trustee, who thereby acquires for a period of time the voting rights (and/or any other rights) over such shares; and in return, trust certificates are given to the stockholder/s, which are transferable like stock certificates, subject, however, to the trust agreement. LIMITATIONS: a.) Cannot be entered into for a period exceeding 5 years at any one time except when it is a condition in a loan agreement, however, said contract shall automatically expire upon full payment of the loan. b.) The agreement must not be used for purposes of fraud. c.) It must be in writing and notarized and specify the terms and conditions thereof. d.) A certified copy of the agreement must be filed with the corporation and with the SEC. e.) The agreement shall be subject to examination by any stockholder of the corporation. f.) Unless, expressly renewed, all rights granted in the agreement shall automatically expire at the end of the agreed period. VOTING TRUSTS VS. PROXY Voting Trusts Proxy Nature Trustee votes as owner rather Proxy holder votes as agent than as mere agent Notarization Agreement must be notarized Proxy need not be notarized Legal title Trustee acquires legal title to Proxy has no legal title to the the shares of the transferring shares of the principal SH Manner of voting Trustee may vote in person or Proxy must vote in person by proxy unless the agreement provides otherwise Actions allowed Trustee is not limited to act at Proxy can only act at a any particular meeting specified stockholders meeting (if not continuing) Restrictions on voting A trustee can vote and A proxy can only vote in the exercise all the rights of the SH absence of the owners of the even when the latter is stock. present. Period Must not exceed 5 years at any Usually of shorter duration one time except when the although under Sec. 58 it

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same is made a condition of a cannot exceed 5 years at any loan one time Separability of ownership and voting right Voting right is divorced from Right to vote is inherent in or the ownership of stocks inseparable from the right to ownership of stock Revocability Agreement is irrevocable Revocable anytime except one which is coupled with interest

TITLE VII STOCKS AND STOCKHOLDERS


Ways 1. 2. 3. to become a Stockholder of a corporation: Subscription contract with the corporation; Purchase or acquisition of shares from existing SHs; and Purchase of treasury shares from the corporation.

SUBSCRIPTION CONTRACT (Sec. 60) - Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed The subscribed shares need not be paid in full in order that the subscription may be valid. The subscription contract is a consensual contract that is perfected upon the meeting of the minds of the parties. The name of the subscriber is recorded in the stock and transfer book, and from that time, such subscriber becomes a SH of record, entitled to all the rights of a SH. Until the stocks are fully paid, it continues to be a subsisting liability that is legally enforceable. KINDS OF SUBSCRIPTION CONTRACT: a.) Pre-incorporation subscription Sec. 61 b.) Post incorporation subscription entered into after the incorporation for the acquisition of unissued stock c.) Conditional one which is subject to a condition, which may be a past event unknown to the parties or a future, uncertain event d.) Absolute not subject to any condition and the subscriber becomes liable on the subscription and acquires the rights of a SH from the time it is accepted e.) Subscription with a special term one where the corporation agrees to do something, the fulfillment of which not being a condition precedent to the accrual of a liability of the subscriber or the acquisition of the rights of a stockholder. PRE-INCORPORATION SUBSCRIPTION (Sec. 61) - One entered into before incorporation which constitutes a binding contract among the subscribers. - Irrevocable for a period of at least 6 months from the date of subscription unless:

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a.) All of the other subscribers consent to the revocation, or b.) The incorporation fails to materialize. It shall likewise be irrevocable after the submission of the AOI to the SEC.

STOCK OPTIONS - A privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a corporation within a certain period and under the terms and conditions of the grant exercisable by the grantee at any time within the period granted UNDERWRITING AGREEMENT - An agreement between a corporation and a third person, termed the underwriter, by which the latter agrees, for a certain compensation, to purchase a stipulated amount of stocks or bonds, specified in the underwriting agreement, if such securities are not purchased by those to whom they are first offered. CONSIDERATION FOR STOCKS (Sec. 62) Valid Considerations in Subscription Agreements: 1. Cash actually received; 2. Property, tangible or intangible, actually received and necessary or convenient for its use and lawful purposes REQUISITES: a.) The property is actually received by the corporation; b.) The property is necessary or convenient for its use and lawful purposes; c.) It must be subject to a fair valuation equal to the par or issued value of the stock issued; d.) The valuation thereof shall initially be determined by the incorporators or the board of directors; and e.) The valuation is subject to the approval by the SEC. 3. Labor or services actually rendered to the corporation; 4. Previously incurred corporate indebtedness; 5. Amounts transferred from unrestricted retained earnings to stated capital; 6. Outstanding shares in exchange for stocks in the event of reclassification or conversion Note: Shares of stock shall not be issued in exchange for promissory notes or future services. However, there is no prohibition on the use of checks, bills or notes in payment of the cash consideration. SOURCES OF CORPORATE CAPITAL a.) Funds furnished by shareholders; b.) Borrowings; and c.) Profits and stock dividends SHARES OF STOCK

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Interest or right which owner has in the management of the corporation, and its surplus profits, and, on dissolution, in all of its assets remaining after the payment of its debt.

CERTIFICATE OF STOCK - Paper representation or tangible evidence of the stock itself and of the various interests therein REMEDIES WHERE CORPORATION REFUSES TO ISSUE CERTIFICATE: (SM-DR) 1. Suit for specific performance of an express or implied contract; 2. Petition for mandamus; 3. Suit for damages where specific performance cannot be granted; 4. Rescind contract of subscription and recover the consideration paid ISSUANCE OF THE CERTIFICATE OF STOCK (Sec. 64) Requisites: 1. The certificate must be signed by the President or Vice-President, countersigned by the secretary or assistant secretary; 2. Must be sealed with the seal of the corporation; 3. Certificate must be delivered; 4. The par value, as to par value shares or full subscription as to no par value shares must first be fully paid; BASIS: Doctrine of Indivisibility of Subscription subscription is one, entire, indivisible and whole contract, which cannot be divided into portions. 5. Original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from the stockholder. ACTIONS BY STOCKHOLDERS OR MEMBERS: 1. Derivative Suit 2. Individual Suit 3. Representative Suit LIABILITY OF DIRECTORS FOR WATERED STOCKS (Sec. 65) Watered Stock stock issued not in exchange for its equivalent either in cash, property, share, stock dividends, or services. Includes: a.) Issued without consideration (bonus share); b.) Issued as fully p[aid when the corporation has received a lesser sum of money than its par or issued value (discount share); c.) Issued for a consideration other than actual cash such as property or services the fair valuation of which is less than its par or issued value; and d.) Issued as stock dividend when there are not sufficient retained earnings or surplus to justify it.

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Atty. Jonathan B. Tambol

DELINQUENCY SALE (Sec. 68) 1. If the subscription contract fixes the date for payment , failure to pay on such date shall render the entire balance due and payable with interest. 30 days therefrom, if still unpaid, the shares become delinquent, as of the due date, and subject to sale, unless the board declares otherwise. 2. If no date is fixed in the subscription contract , the board of directors can make the call for payment, and specify the due date. The notice of call is mandatory. A mere demand is insufficient. The failure to pay on such date shall render the entire balance due and payable with interest. 30 days therefrom, if still unpaid, the shares become delinquent, as of the date of the call, and subject to sale, unless the board declares otherwise. Note: A CALL is the resolution or formal declaration of the board that the unpaid subscriptions are due and payable. PROCEDURE FOR THE SALE OF DELINQUENT STOCKS 1. Resolution of the board 2. Notice of sale 3. Publication of the notice 4. Sale at public auction 5. Transfer of the stock so purchased in the books of the corporation 6. Credit Remainder in favor of the delinquent stockholder PROCEDURE FOR ISSUANCE OF NEW CERTIFICATE OF STOCK IN LIEU OF LOST, STOLEN OR DESTROYED ONES 1. Affidavit of Loss by the registered owner 2. Verification by the corporation 3. Publication of a notice (once a week for 3 consecutive weeks) 4. One year waiting period from the date of last publication 5. Contest 6. Replacement if no contest within the 1 year period RIGHTS AND REMEDIES OF STOCKHOLDERS 1. Rights as to Control and Management a.) Attend and vote in person/proxy at stockholders meetings (Secs. 50, 58); b.) Elect and remove directors (Secs. 24, 28); c.) Approve certain corporate acts (Sec. 52); d.) Compel the calling of meetings (Sec. 50); e.) To have the corporation voluntarily dissolved (Secs. 118, 119); f.) Enter into a voting trust agreement (Sec. 59); g.) Adopt/amend/repeal the by-laws or adopt new by-laws (Secs. 46, 48). 2. Proprietary Rights a.) Transfer of stock in the corporate book (Sec. 63); b.) Receive dividends when declared (Sec. 43);

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c.) Issuance of certificate of stock (Sec. 63); d.) Participate in the distribution of corporate assets upon dissolution (Sec. 118, 119); and e.) Pre-emption in the issue of shares (Sec. 39). Note: Right of pre-emption extends to treasury shares in case of their reissuance. 3. Remedial Rights a.) Inspect corporate books (Sec. 74); b.) Recover stock unlawfully sold for delinquency (Sec. 69); c.) Demand payment in the exercise of appraisal right (Secs. 41, 81); d.) To be furnished recent financial statements (Sec. 75); and e.) To bring suits

TITLE VIII CORPORATE BOOKS AND RECORDS


BOOKS TO BE KEPT; STOCK TRANSFER AGENT (Sec. 74) 1. Book of all business transactions; 2. Book of minutes of all meetings of SHs/members; 3. Book of minutes of all meetings of D/T; 4. Stock and transfer book, in case of stock corporations. Corporate Records required by the SEC to be kept and/or registered: 1. Books of Account; 2. List of Stockholders or Members; and 3. Financial Records. Persons given the right to inspect Corporate Books: 1. Any D/T/SH/member; 2. Voting trust certificate holder; 3. SH of a sequestered company; and 4. Beneficial owner of shares Rights of stockholders to corporate books and records: 1. Right of inspection; 2. Right to demand a list of SHs; 3. Right to demand a detailed auditing of business expenditures; 4. To examine books of the corporations subsidiary; 5. Right to financial statements. (Sec. 75) Limitations on the Right of Inspection:

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a.) Must be exercised during reasonable hours on business days; b.) Person demanding the right has not improperly used any information obtained through any previous examination of the books and records of the corporation; and c.) Demand is made in good faith or for a legitimate purpose. Remedies if Inspection Denied: a.) Mandamus; b.) Damages; c.) Criminal Suit

TITLE IX MERGER AND CONSOLIDATION


Common Forms of Corporate Combinations: 1. Sale of assets; 2. Lease of assets; 3. Sale of stock; 4. Merger; 5. Consolidation MERGER - a union whereby one or more existing corporations are absorbed by another corporation which survives and continues the combined business CONSOLIDATION union of two or more existing corporations to form a new corporation called the consolidated corporation PROCEDURE FOR MERGER/CONSOLIDATION: 1. Approval of plan 2. Submission to stockholders or members for approval 3. Execution of formal contract 4. Submission to SEC for approval 5. Conduct of hearing by SEC 6. Issuance of certificate by SEC Note: The plan may still be amended before the same is filed with the SEC, however, any amendment thereto must be approved by the majority vote of the board members or trustees of the constituent corporations and affirmed by the vote of 2/3 of the OCS or members. SECS APPROVAL AND EFFECTIVITY OF MERGER OR CONSOLIDATION (Sec. 79) General Rule: When one corporation buys all the shares of another corporation, this will not operate to dissolve the other corporation and as the two corporations still maintain their separate corporate entities, one will not answer for the debts of the other.

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EXCEPTIONS as to non-assumption of Liabilites: 1. If there is an express assumption of liabilities; 2. If there is a consolidation or merger; 3. If the purchase was in fraud of creditors; and 4. If the purchaser is merely a continuation of the seller. LEGAL EFFECTS OF MERGER/CONSOLIDATION: 1. There is automatic assumption of liabilities of the absorbed corporation or constituent corporations which are dissolved. 2. The absorbed or constituent corporations are ipso facto dissolved by operation of law without necessity of any further act or deed but there is no winding up or liquidation of their assets for the surviving corporation automatically acquires all the liabilities of the constituent corporation. 3. Permits the transfer of the assets to the purchaser and the distribution of the consideration received in a single operation. 4. Involve exchanges of properties, a transfer of the assets of the constituent corporations in exchange for securities in the new or surviving corporation but neither involves winding up of the affairs of the constituent corporations in the sense that their assets are distributed to the stockholders. 5. Dissolution of the constituent corporations cannot be made to retroact to a date prior to the ratification of the SHs but the transfer of the assets and liabilities of the constituent corporations could be made effective retroactively as of the date the said board of directors so resolved. 6. Consent of the creditors not necessary.

TITLE XI NON-STOCK CORPORATIONS


CONCEPT (Sec. 87) - A non-stock corporation is one where no part of its income is distributable as dividends to its members. - Even if there is a statement of capital stock, for as long as there is no distribution of retained earnings to its members, the corporation is non-stock. - Any profit which it may obtain as an incident to its operations shall, whenever necessary or proper, be used in furtherance of the purpose/s for which it was organized. PURPOSES (Sec. 88) Non-stock corporations may be formed or organized for: 1. Charitable 2. Religious 3. Educational 4. Professional

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5. Cultural 6. Fraternal 7. Literary 8. Scientific 9. Social 10. Civic service Or similar purposes like: 1. Trade 2. Industry 3. Agricultural 4. And like chambers Or any combination thereof. RULES ON CONVERSION 1. Stock to non-stock corporation may be made by mere amendment of the AOI - The effect of this is that after the conversion, the SHs now become the members of the non-stock corporation and thus will no longer have any pecuniary interest in the corporation. Neither are they entitled to any share in the profit that may be obtained out of the operations or activities of the non-stock corporation. Hence, there is in fact no distribution by the stock corporation, by conversion, it its assets to its stockholders. 2. Non-stock to stock corporation cannot be converted by mere amendment of its AOI because the conversion would change the corporate nature from non-profit to monetary gain - What the corporation should do is to dissolve itself and its members may decide to organize a stock corporation. STOCK VS. NON-STOCK STOCK

NON-STOCK Nature Has capital stock, divided into Does not have shares and may shares and with authority to not distribute profits to its distribute dividends to its members stockholders Meeting/Voting of members/SHs SHs and directors must act in a Members may be allowed by meeting, except where a mere the by-laws to vote by mail or assent is sufficient or a formal other similar means meeting unnecessary Manner of voting Cumulative voting is available Cumulative voting not in the election of directors available unless otherwise

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provided in the AOI/by-laws Proxy SHs may vote by proxy Members may be deprived of the right to vote by proxy in the AOI/by-laws Non-transferability of membership SHs may transfer their shares Members cannot transfer their membership unless allowed by the AOI/by-laws Directors/trustees Directors cannot exceed 15 in Trustees may exceed 15 in number number Term of Director/trustee Term of a director is 1 year Term of a trustee is 3 years; 1/3 of the Board shall be elected annually Election of officers Officers are elected by the Officers may be directly BOD elected by the members unless otherwise provided in the AOI/by-laws Place of meeting SHs meetings shall be held in By-laws may provide that the city or municipality where members of a non-stock principal office of corporation corporation may hold their is located, and if practicable in meetings at any place within the principal office the Phils.

TITLE XII CLOSE CORPORATIONS


- Special kind of stock corporation 1. Whose articles of incorporation should provide that: a.) The number of SHs shall not exceed 20; b.) Issued stocks are subject to transfer restrictions, with a right of preemption in favor of the SHs or the corporation; and c.) The corporation shall not be listed in the stock exchange or its stocks should not be publicly offered; or

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2. Whose stocks, at least 2/3 of the voting stocks or voting rights of which are not owned or controlled by another corporation which is not a close corporation. Non-compliance with any of the requirements shall not make the corporation a close corporation within the meaning of the Corporation Code.

CHARACTERISTICS: 1. SHs may act as directors without need of election and therefore are liable as directors; 2. SHs who are involved in the management of the corporation are liable in the same manner as directors are; 3. Quorum may be greater than mere majority; 4. Transfer of stocks to others, which would increase the number of SHs to more than the maximum are invalid; 5. Corporate actuations may be binding even without formal board meeting, if the SH had knowledge or ratified the informal action of the others; 6. Pre-emptive right extends to all stock issues; 7. Deadlocks in board are settled by the SEC. on the written petition by any SH; and 8. SH may withdraw and avail of his right of appraisal. N.B.: Special rules are provided for close corporations because it is essentially an incorporated partnership. ORDINARY STOCK CORPORATION vs. CLOSE CORPORATION ORDINARY STOCK CLOSE CORPORATION CORPORATION Articles of Incorporation Need only contain the general Must contain the special matters enumerated in Sec. 14 matters prescribed by Sec. 97, of the code aside from the general matters in Sec. 14 (failure to do so precludes a de jure close corporation) Ownership of stocks Its status as an ordinary stock 2/3 of its voting stock or voting corporation is not affected by rights must not be owned or the ownership of its voting controlled by another stock or voting rights corporation which is not a close corporation Classification of directors Its articles cannot classify its Its articles may classify its directors directors Election/appointment of officers

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Corporate officers and Its articles may provide that employees are elected by a any or all of the corporate majority vote of all the officers or employees may be members of the board of elected or appointed by SHs directors Management Business of the corporation is May be managed by the SHs if managed by the board of the AOI so provide, but they directors are liable as directors Pre-emptive right Subject to the exceptions Subject to no exceptions found in Sec. 39 unless denied in the articles Appraisal right May be exercised by a SH only May be exercised and in the cases provided in Secs. compelled against the 81 and 42 of the Code corporation by a SH for any reason Purchase of its own shares Must always be made from the In case of an arbitration of an unrestricted retained earnings intra-corporate deadlock by the (except as regards redeemable SEC, the corporation may be shares) ordered to purchase its own shares from the SHs regardless of the availability of URE Remedy of arbitration Not a remedy Available remedy in case the directors or SHs are so divided respecting the management of the corporation Note: The following cannot be a close corporation: (BIMPOSE) a.) Banks; b.) Insurance companies; c.) Mining companies; d.) Public utilities; e.) Oil companies; f.) Stock exchanges; g.) Educational institutions;

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h.) Other corporations declared to be bested with public interest VALIDITY OF RESTRICTIONS ON TRANSFER OF SHARES (Sec. 98) It is mandatory for the AOI of a close corporation to provide that all of the issued stocks of all classes be subject to one or more restriction. The restriction on transfer is in the nature of a right of first refusal in favor of the SHs which can be waived by the SH, if the latter fails to exercise the option to purchase within the period stated in the articles and by-laws. Any transfer made should not result in exceeding the number of SHs as allowed by the Code. Note: Under Sec. 99, good faith is not a defense because there is a conclusive presumption of knowledge of the restriction. EFFECTS WHERE STOCKHOLDERS ARE MANAGERS (Sec. 100) 1. No longer necessary to elect directors; 2. SHs concerned shall be deemed the directors; 3. SHs shall have the same liabilities as directors; 4. To the extent that the SHs are actively engaged in the management or operation of the business and affairs of a close corporation, the SHs shall be held to strict fiduciary duties to each other and among themselves; and 5. The SHs shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. DEADLOCKS (Sec. 104) - Arise when the directors or SHs are so divided respecting the management of the business and affairs of the corporation that the votes required for any corporate action cannot be obtained and as a result, business and affairs can no longer be conducted to the advantage of the SHs generally - In this case, the SEC shall have the power to arbitrate the dispute and in the exercise of such power, the SEC shall have the authority to: a.) Cancel or alter any provision in the articles of incorporation or by-laws; b.) Cancel, alter or enjoin any resolution of the corporation; c.) Direct or prohibit any act of the corporation; d.) Require the purchase at their fair value of shares of any SH either by any SH or by the corporation regardless of the availability of URE; e.) Appoint a provisional director; f.) Dissolve the corporation; or g.) Grant such other relief as the circumstances may warrant.

TITLE XIV DISSOLUTION


The extinguishment of the corporate franchise and the termination of corporate existence; the complete destruction of the corporation and within contemplation of the law, is equivalent to its death.

Law3 Private Corporations

Atty. Jonathan B. Tambol

METHODS OF DISSOLUTION (Sec. 117) A. Voluntary 1.) Application for dissolution with SEC: a.) Where no creditors are affected; b.) Where creditors are affected; 2.) Shortening of the corporate term by amending the articles of incorporation B. Involuntary 1.) Expiration of the corporate term; 2.) Failure to organize and commence business within 2 years from the date of issuance of the certificate of incorporation (Sec. 121) 3.) Legislative dissolution; 4.) Quo warranto suit against a de facto corporation; 5.) Minority stockholders suit for dissolution on justifiable grounds; or 6.) SEC dissolution, upon complaint and after notice and hearing, on the following grounds: a.) Corporation was illegally organized; b.) Continuous inactivity (subsequent to incorporation, organization and commencement of business) for at least 5 years; c.) Serious dissention in the corporation; d.) Commission by the corporation of illegal or ultra vires act or violations of the Code. EFFECTS: 1. Transfer of legal tile to corporate property to the SHs who become co-owners thereof; 2. Continuation of corporate business merely as an association without juridical personality; 3. Conveyance by the SHs of their respective shareholdings toward the creation of a new corporation to continue the business of the old; 4. Reincorporation of the dissolved corporation by re-filing new articles of incorporation and by-laws; 5. The corporation continues as a body corporate for 3 years for purposes of winding up; and 6. Cessation of corporate existence for all purposes upon the expiration of the winding up period of 3 years. VOLUNTARY DISSOLUTION WHERE NO CREDITORS ARE AFFECTED (Sec. 118) Requirements: 1. Majority vote of the board of directors or trustees; 2. Resolution adopted by the affirmative vote of the SHs owning at least 2/3 of the OCS or at least 2/3 of the members at a meeting called for such purpose. VOLUNTARY DISSOLUTION WHERE CREDITORS ARE AFFECTED (Sec. 119) Requirements:

Law3 Private Corporations

Atty. Jonathan B. Tambol

1. 2. 3. 4. 5.

Petition shall be filed with the SEC; Signed by a majority of its board of directors or trustees or other officers having management of its affairs; Verified by its president or secretary or one of its directors or trustees; Shall set forth all claims and demands against it; Resolved upon by the affirmative vote of the SHs representing at least 2/3 of the OCS or by at least 2/3 of the members at a meeting called for that purpose.

CORPORATE LIQUIDATION (Sec. 122) Liquidation the process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance, if any, is to be distributed to the SHs or members. N.B.: A dissolved corporation continues to be a body corporate for 3 years from the time it is dissolved for the purpose of liquidation or winding up its corporate affairs. The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity nor those of its owners and creditors alike. (Sec. 145) METHODS: 1. By the corporation itself through its board of directors/trustees; 2. By a trustee to whom the corporate assets have been conveyed; and 3. By a management committee or rehabilitation receiver appointed by the SEC. Note: a.) The 3-year period of liquidation does not apply to methods 2 and 3 as long as the trustee or the receiver is appointed within the said period. b.) But the word trustee as used in the corporation statute must be understood in its general concept which could include the counsel to whom was entrusted the prosecution of the suit filed by the corporation. c.) The board of directors may also be permitted to complete the corporate liquidation by continuing as trustees by legal implication. d.) The question as to the right of priority of a claimant against the assets of a corporation that is being dissolved and liquidated becomes of importance only when the assets of the corporation are not sufficient to pay all claims. LIQUIDATION vs. REHABILITATION LIQUIDATION REHABILITATION Nature Connotes a reopening or reorganization

Connotes a winding up or settling with creditors and debtors Continuity of corporate life

Law3 Private Corporations

Atty. Jonathan B. Tambol

Winding up process so that assets may be distributed to those entitled

Contemplates a continuance of corporate life in an effort to restore the corporation to its former successful operation

TITLE XV FOREIGN CORPORATIONS


Formed, organized or existing under any law other than those of the Philippines and whose laws allow Filipino citizens and corporation to do business in its own country or state. (This definition espouses the incorporation test and the reciprocity rule and is significant for licensing purposes.)

APPLICATION TO EXISTING FOREIGN CORPORATION (Sec. 124) - It is not permitted to transact or do business in the Philippines until it has secured a license for that purpose from the SEC and a certificate of authority from the appropriate government agency. APPLICATION FOR A LICENSE (Sec. 125) Reasons why a license is important: 1. To place them under the jurisdiction of the courts; 2. To place them in the same footing as domestic corporations; and 3. Protection for the public in dealing with said corporations. RESIDENT AGENT (Secs. 127-128) - An individual, who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated in a written power of attorney by a foreign corporation authorized to do business in the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against the foreign corporation. GROUNDS FOR REVOCATION OF LICENSE 1. Failure to file annual reports required by the Code; 2. Failure to appoint and maintain a resident agent; 3. Failure to inform the SEC of the change of residence of the resident agent; 4. Failure to submit copy of amended articles or by-laws or articles of merger or consolidation; 5. A misrepresentation in material matters in reports; 6. Failure to pay taxes, imposts and assessments; 7. Engage in business unauthorized by SEC; 8. Acting as dummy of a foreign corporation; and 9. Not licensed to do business in the Philippines.

Law3 Private Corporations

Atty. Jonathan B. Tambol

DOCTRINE OF ISOLATED TRANSACTIONS - Foreign corporations, even unlicensed ones, can sue or be sued on a transaction or series of transactions set apart from their common business in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of business transaction. INSTANCES WHEN A FOREIGN CORPORATION MAY SUE IN THE PHILIPPINES WHETHER OR NOT LICENSED TO DO BUSINESS: 1. To seek redress for an isolated business transaction; 2. To protect its corporate reputation, name, and goodwill; 3. To enforce a right not arising out of a business transaction, e.g., tort that occurred in the Philippines; 4. When the parties have contractually stipulated that Philippines is the venue of actions; 5. When the party sued is barred by the principle of estoppel and/or principle of unjust enrichment from questioning the capacity of the foreign corporation; and 6. Recovery of misdelivered property.

Law3 Private Corporations

Atty. Jonathan B. Tambol