Chapter VII - CONTROL AND MANAGEMENT OF CORPORATION Allocation of Power and Control Who Exercises Corporate Powers 1.

Board of Directors or Trustees Sec. 23, Corporation Code (1) Board must act as a body in a meeting Sec. 25, Corporation Code (2) Requirements of Meeting Sec. 53, Corporation Code (3) Close Corporations Sec. 97, Corporation Code Ramirez vs. Orientalist Co. and Fernandez Salvador P. Lopez, et al vs. Hon. Vicente Ericta, et al Zachary, et al vs. Milin, et al Kaplan, et al vs. Block PNB vs. CA 2. Corporate Officers and Agents Sec. 25, Corporation Code Yu Chuck vs. Kong Lipo The Board of Liquidators vs. Heirs of Maximo M. Kalaw, et al Zamboanga Transportation Co. vs. Bachrach Co. Acua vs. Batac Producers Cooperative Marketing Association, Inc., et al 3. Board Committees Sec. 35, Corporation Code Hayes vs. Canada, Atlantic & Plant SS Co. Limited 4. Stockholders or members (1) Requirements of stockholders' or members' meeting, and of voting Notice Sec. 50, Corporation Code Board of Directors vs. Tan, et al Place of meeting Sec. 51, 93, Corporation Code Quorum Sec. 52, Corporation Code Vote Sec. 137, 89, 56, 55, Corporation Code Non-voting stocks or members

Sec. 6, Corporation Code Where all stockholders present Sec. 51, Corporation Code Logan Johnston, et al vs. Louis A. Johnston, et al (2) Where no meeting called Ponce, et al vs. Encarnacion 5. Instances when stockholders' or members' action is necessary (1) Election of directors or trustees The right to vote for the directors is a right of ownership which can be waived in exchange for preferences and privileges. Thus, preferred and redeemable shares as non-voting are allowed to be issued. S: Sec. 24- Election of Directors or Trustees - Requires presence either in person or by proxy so a meeting of stockholders is required. NS: Sec. 92- Election and Terms of Trustees - No person shall be elected as trustee unless he is a member of the corporation. - Unless otherwise provided in the AOI or the BL, officers on NS Corp may be directly elected by members. NS: Sec. 93- Place of Meetings Quorum required - For a valid election of Directors and Trustees, a majority of the outstanding capital stock or if there be none then a majority of the members entitled to vote. - Quorum depends on the number of outstanding voting stocks. Manner of voting - Sufficient if by viva voce or hand-raising vote unless a vote by ballot is requested - Stock Corps: Cumulative voting in the election of directors is mandatory. o Number of Votes= Number of Shares x Number of Directors to be Elected o This right to cumulative voting cant be curtailed by any provision of the BL. o The right to cumulative voting is not an absolute right to have a representative in the board. - A stockholder can vote for such number of shares as are registered in his name on the books of the corp at the time of the election or at any given time as provided in the BL. ex. 2 weeks before election But if BL is silent, then the reckoning point is at the time of the election. - Plurality and not majority of votes is required. In close corporations Close Corps: Sec. 97 (2)- Articles of Incorporaton - AOI may provide that each class will be entitled to a representative in the board regardless of the number of shares within such class. Qualifications and disqualifications of directors

A Director must own at least 1 share which should be registered in his name on the books of the corp. Sec. 23- Board of Directors or Trustees - If a Dir disposes of all his stocks during his term then he ipso facto ceases to be a Dir. - The deletion of the phrase in the Corp Code that a director must own the share in his own right legalizes the election of trustees and other persons who in fact are not the beneficial owners of the shares registered in their names, holding them only for the benefit of the real owners. - A majority of the directors or trustees must be residents of the Philippines to safeguard against inactivity. - There is no citizenship requirement for Dir or Trustees except in nationalized industries. In partially nationalized industries, aliens can be elected as Dir or Trustees but only in such number as is proportional to the alien equity in the corp. Even then no alien director can be appointed as officer or to any other position where he can participate in the management of the business of the corp. - As to banks, the General Banking Act gives the Monetary Board authority to prescribe additional qualifications of bank directors. The Insurance Commissioner also has the same authority with respect to insurance company directors. - The BL may not do away with the qualification provided in the law but it can add more qualifications and impose disqualifications. ex. a BL can provide that a Dir must own more than 1 share - Sec 27 of the Code disqualifies any person from being a Dir, Trustee or Officer if he has been convicted by final judgment of an offense punishable by imprisonment of more the 6 years or of a violation of the Corp Code within 5 years prior to the date of his election or appointment. Detective & Protective Bureau Inc. vs. Hon. Gaudenciao Cloribel, et al Gokongwei vs. SEC, et al Term of director or trustee - Sec 23 limits the term of a Director or Trustee from to 1 year. So a corp must hold elections annually. But until such elections is held, the incumbents hold over even after their terms are over. NS: Sec. 92 Educational NS: Sec. 108 - Stock vs. Non-Stock Corp: Unless the AOI otherwise provide, the term of the trustee is 3 years in all NS corps except educational corps where their term is 5 years. But their terms should be staggered. o The AOI or the BL may provide for a shorter or longer term or preclude staggering of terms. o But for stock corps, the BL cannot provide for longer or shorter term than 1 year nor can there be staggering of terms.

Where educational corps are organized as stock corps then the general rules in Sec 23 will apply to them. Secs 92 and 108 prevail over Sec 23 which also includes trustees.

Vacancies in the board - Vacancies may be caused by death, removal, resignation etc. o Resignation may be made orally or in writing. - In Stock corps, vacancy created by expiration of term takes place at the same time for all seats in the board. But they hold over until successors are elected. - In Nonstock corps, where staggering of terms is allowed, vacancies in only one or some of the board is possible. Sec. 29- Vacancies in the Office of the Director or Trustee - The remaining Dir or Trustees can fill up the vacancies to avoid expense and inconvenience of calling a SH or members meeting or they can also refer it to SH or members. But in the following cases, vacancies are to be filled up by SH or members in a meeting called for that purpose: 1. When the remaining Dir or Trustees dont constitute a quorum 2. If vacancy is caused by removal of a Dir or Trustee 3. If vacancy is caused by expiration of terms 4. In case of increase in the number of Dir or Trustees as a result of an amendment of the AOI authorizing the increase (2) Removal of directors - Only SH or members have the power to remove the Dir or Trustees elected by them. Sec. 28- Removal of Directors or Trustees - Removal of Dir or Trustee before his term is over is one way for SH or members to protect themselves from fraud, incompetence etc. - There is no cumulative voting in the removal of Dir or Trustees. - Note the last clause in the provision. In this situation, removel must be for cause. - The vacancy created may be filled in in the same meeting without need of further notice. It may also be done in another meeting called for the purpose after the required notice has been given (the 1-week notice required in Sec 50 for special meetings unless the BL otherwise provides). The remaining members if the board cannot fill up the vacancy since Sec 29 prohibits them from doing so. - Stock Corp vs. Non-stock Corp: o Vote required in Stock Corp is 2/3 of the outstanding capital stock vs. Vote required in Non-Stock Corp 2/3 of members entitled to vote theres really no difference considering that Sec 6 provides that the vote necessary to approve a particular act as provided in this Code shall be deemed to refer only to stocks with voting rights except in enumerated instances but removal of a Dir is not one of them Roxas, et al vs. De la Rosa, et al Angeles, et al vs. Santos, et al

Campbell vs. Leow's Inc. (3) Fundamental changes - In the following changes in the corp, although action is initiated by the BoD or BoT, their decision is not final. Approval of the SH or members is necessary: 1. Amendment of the AOI 2. Increase or Decrease of Capital Stock 3. Incurring, Creating or Increasing Bonded Indebtedness 4. Sale, Lease, Mortgage or other Disposition of Substantially All Corporate Assets 5. Investment of Funds in Another Business or Corp or for a Purpose other than the Primary Purpose for which the Corp was organized 6. Adoption, Amendment and Repeal of BL 7. Merger and Consolidation 8. Dissolution of a Corporation Amendment of articles of incorporation - The AOI embody the basic agreement of the SH or members. So any change therein pursuant to the power to amend granted by the Code must be with the consent of the SH or members. Sec. 16-Amendment of Articles of Incorporation - Note that there is no requirement of a SH or members meeting. All that is required is a written assent. - Compare it with Secs 37, 38, 39, 42, 43 and 44 which all require a meeting. - Changes as to the term period and as to capital stock involve amendments to the AOI but the each is covered by a special provision which requires a meeting of the SH or members, with notice. Close Corps: Sec 103- Amendment of AOI - The required provisions referred to in Sec 103 are those that make it legally a close corporation. Any amendment as to those provisions will deprive the corp of special privileges given only to close corps. Sec 103 prevails over Sec 16 which does not require a SH meeting. Sale or other disposition of substantially all assets - These are acts of ownership already so BoD cannot act alone and must seek approval of SH or members. Sec. 40- Sale or Other Dispositions of Assets - Unlike Sec 16, Sec 40 requires a meeting with notice. Investment in another business corporation Sec 42- Power to Invest Corporate Funds in Another Corp or Business for Any Other Purpose Sec 36- Corporate Powers - A corp, regardless of its primary purpose, cannot invest in another corp even if the SH approve of it. Sec 39 limits such investment to one which may be reasonably and necessarily required by the lawful business of the corp. Any other kind of investment will be ultra vires.

However, if the AOI expressly allow the corp to invest in another corp or business, then such is intra vires the corporation by agreement of the parties. Where there is no such provision in the AOI then the AOI must first be amended to provide for such a power. In both cases, approval of the SH to so invest must still be obtained pursuant to Sec 42. But if the investment is reasonable necessary to accomplish the corps primary purpose as stated in the AOI (Sec 42) or is reasonable required by the transaction of the lawful business of the corp (Sec 36.7) then such is intra vires. The authority of the BoD to invest corporate funds is limited by the primary purpose of the corp, any investment outside of it needs the approval of the SH. Statements regarding the secondary purpose of a corp is usually made to allow for future expansions without need of amending the AOI. It doesnt imply the power of the BoD to so invest without SH approval.

De la Rama vs. Ma-Ao Sugar Central Gokongwei vs. SEC Merger and consolidation Merger- union of 2 or more corps where one absorbs the others Consolidation- a union of 2 or more corps with the formation of a new single corp extinguishing all the former corps - Both involve organic changes in the corp so it needs the consent of SH of all the corps involved. Sec. 77-Stockholders or Members Approval Appraisal Right - A SH who dissented and voted against the proposed action can choose to get out of the corp by demanding payment of the fair value of his shares. The law presumes that he did not foresee such changes when he bought his shares. - Appraisal Right is granted in case any of the following 4 fundamental changes take place: 1. Amendment of AOI which has the following effects: a. Changes rights of any SH or class of shares b. Authorizing preferences in any respect superior to those of outstanding shares of any class c. Changing term period of corp existence 2. Sale or Other Disposition of all or substantially all corp assets 3. Merger or Consolidation 4. Investment in another corp, business or purpose (Sec 42) Sec. 81- Instances of Appraisal Right - Note that not all amendments in the AOI will grant appraisal rights. Sec 82 How Right is Exercised - If SH was absent or abstained in the meeting, he does not have appraisal right.

The fair value should not include any appreciation/depreciation in value caused by the subject corp action. Important condition attached: there must be unrestricted retained earnings to cover it. This is for the protection of both corp creditors and remaining SH. The bought in shares then become treasury shares which may be resold at a price fixed by the BoD. The costs and expenses of the appraisal are borne by corp unless the fair value ascertained is approximately the same as that offered by the corp. in this case, the SH shoulders the costs and expenses. If SH forced to bring an action then corp has to pay for the costs unless refusal of SH to accept the payment was unjustified.

Sec 83 Effect of Demand and Termination of Right Sec 84 When Right to Payment Ceases - If the corp refuses or fails to pay the fair value of the shares within 30 days from award the SH is restored to all his rights ipso facto. - If the corps inability to pay is because the unrestricted retained earnings are not sufficient to cover such payment, the voting and dividend rights of the SH are also restored. The same effect results if corp abandons the action or when SEC decides the SH is not entitled to the appraisal right or when the demand is withdrawn by SH with consent of corp. Without such consent, the SH cannot withdraw his demand. Sec 86- Notation on certificate; right of transferee - If the dissenting SH sells his shares before getting paid then his right to payment ceases and his transferee acquires the right of a regular SH. Close Corps: Sec 105-Withdrawal of Stockholder or Dissolution of Corporation - Another situation where the SH can get back from the corp his investment before its dissolution (the first is by availing of his appraisal right) refers to close corps. Sec 105 makes close corps very similar to partnerships. A SH can withdraw from a close corp but this will not effect its dissolution. - The Code protects the corporate creditors by requiring that the assets of the corp should be sufficient to cover its debts and liabilities, exclusive of capital stock. - Note the difference with Sec 82 which requires the existence of unrestricted retained earnings sufficient to cover the payment of the shares. In Sec 105, since the liability for capital stock is excluded then the remaining SH in the close corp do not receive any protection. On the other hand, retained earnings imply that there is a surplus of assets over and above all liabilities, inclusive of liability for capital stock. Increase and decrease of capital stock, Creation or increase of bonded indebtedness - Though an amendment of the AOI, an increase or decrease of capital stock is covered by Sec 38. - The creation or increase of bonded indebtedness, although not an amendment to the AOI, effects a significant change in the financial set-up of the corp. Bonds impose a financial burden on SH so their consent to the issuance should be obtained. - No appraisal right in these 2 instances.

Sec. 38-Power to increase or decrease capital stock; incur, create or increase bonded indebtedness Adoption, amendment and repeal of by-laws - Any change in the internal rules of the org affects the contract of the SH so it needs their consent. But its not the same as an amendment to the AOI so the SH has no appraisal right. Sec. 48-Amendments to by-laws - Power to amend BL may be delegated to the BoD/T by 2/3 vote but revocation requires only a majority vote. - Will such a delegation still continue even if the capital stock if the corp has greatly increased since the delegation was made? Yes, as supported by Sec 48 - The 2/3 vote for delegation of power to amend refers only to voting stocks since this is not one of the instances covered by Sec 6. The same is true with respect to the power to revoke. - As with the original BL, any amendments to it take effect only upon SECs issuance of a certification that they are not inconsistent with law. (4) Other instances requiring stockholders' action Declaration of stock dividends - Stock dividens, unlike cash dividends, deprive the SH of the right to participate in the current profits of the corp which to the extent of such stock divs, are ploughed back to the corp. So SH approval is necessary. - Since not covered by Sec 6, only voting shares can vote. Management contracts - One entered into between between 2 corps where one agrees that it corporate affairs will be managed by the other - SH or members of BOTH corps must approve of it. Sec. 44-Power to Enter into Management Contract - Non-voting stocks have no say in the approval of management contracts as per Sec 6. Fixing consideration for on-par shares Sec. 62-Consideration for Stocks - The right of SH to fix the issued value of no-par shares arise only if the AOI do not fix it and the BoD have not been authorized by the AOI or the BL. - Non-voting stocks cannot participate. Fixing compensation of directors Sec 30- Compensation of Directors - If BL or AOI do not fix their compensation, then they are only entitled to a reasonable per diem. Other compensation may only be granted upon approval of a majority of the SH. - Such compensation must not exceed 10% of the net income before tax of the prior year. 6. Deadlocks in close corporations

The AOI of a close corp may provide for a greater quorum and voting requirement than that prescribed by law in bothe Dir and SH meetings. - The AOI may also provide that the management of the corp shall be with the SH rather than the BoD. Sec. 104- Deadlocks - SEC has a wide discretion: can prohibit Dir or SH to act and even order dissolution. - SEC can act even on the petition of only one SH, regardless of number of stocks. - A provisional Dir may also be appointed by SEC to break the deadlock by casting the deciding vote. Devices Affecting Control - The corp powers and the power to bind corps are vested exclusively in the BoD except in specific instances provided for by law. - General Rule: Extent of control is proportional to the number of shares of SH. - Common problem: Effect of the transfer of some or all of his stocks by one of the parties to the agreement, although in close corps, this problem is minimized by contractual restrictions on the transfer. If the control arrangement is embodied in the BL or AOI, a transferee is bound by it. But if it is only a private agreement among SH then transferee not bound by it unless he had notice of the agreement. 1. The proxy device - 2 ways to understand proxy. First, it refers to the person authorized by the SH to vote in his behalf. Second, it may refer to the paper evidencing the authority. - The general rules on agency apply to the proxy. Sec. 58-Proxies - Proxies most useful in widely-held corps since it is often difficult to get a quorum. So incumbent management solicit the proxies of SH. - Proxies may not be appointed orally. The written proxy should be filed with the corp secretary before the meeting. - May the BL prohibit proxy? No. When the right is given by statute, a SH cannot be deprived of it by any BL. - BUT in Non-stock corps, the Code allows a waiver of such right provided this is made in the AOI or in the BL (see Sec 89). - BL may impose reasonable conditions as to the form and manner of voting by proxy. - A proxy may be general or limited. o General- gives the power to vote In re Giant Portland Cement Co. State ex rel Everett Trust & Savings Bank vs. Pacific Waxed Paper Co., et al Alejandrino vs. De Leon Campbell vs. Leow's Inc. Rosenfield vs. Fairchild Engine & Airplane Co. Duffy vs. Loft Inc. 2. Voting Trust Sec. 59, Corporation Cod

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Abercrombie vs. Davies Everett vs. Asia Banking Corp. Mackin, et al vs. Nicollet Hotel, Inc. National Investment & Development Corp. vs. Aquino Pooling and voting agreements Sec. 100, Corporation Code Ringling vs. Ringling Bros.-Barnum & Bailey Combined Shows, Inc. EK Buck Retail Stores vs. Harkert Sensabaugh vs. Polson Plywood Co. McQuade vs. Stoneham, et al Clark vs. Dodge, et al Cumulative voting Classification of shares Sec. 6, Corporation Code Gottschalk, et al vs. Avalon Realty Co., et al Restriction on transfer of shares Prescribing qualification for directors Sec. 7, Corporation Code Management contracts Sec. 44, Corporation Code Sherman & Ellis, Inc. vs. Indiana Mutual Casualty Co. Unusual voting and quorum requirements Sec. 97, Corporation Code Benintendi vs. Kenton Hotel