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INTRODUCTION
Definition and attributes of a corporation
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.
A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a
creature without any existence until it has received the imprimatur of the state acting according to law." A corporation will
have no rights and privileges of a higher priority than that of its creator and cannot legitimately refuse to yield obedience to
acts of its state organs. (Tanyag v. Benguet Corporation)
A corporation has four (4) attributes:
(1)
(2)
(3)
(4)
It is an artificial being;
Created by operation of law;
With right of succession;
Has the powers, attributes, and properties as expressly authorized by law or incident to its existence.
Stock
Definition
Non-Stock
Purpose
Distribution of Profits
Composition
Stockholders
Members
Voting by mail
Not possible.
Governing Board
Election of officers
Place of meetings
Transferability of interest or
membership
Transferable.
Who exercises
Powers 23
Corporate
In the case at bar, nowhere in the AOI or by-laws of Club Filipino could be found an authority for the
distribution of its dividends or surplus profits.
REQUIREMENTS
COMMENTS
Definition
Characteristic
natural persons
Number
Age
of legal age
Residence
majority should
Philippines
be
residents
of
the
12345-
STEPS
a. Promotional Stage (See SEC. 2.
Definitions)
COMMENTS
Promoter
Process:
a) SEC shall examine them in order to determine whether they
are in conformity w/ law.
b) If not, the SEC must give the incorporators a reasonable
time w/in w/c to correct or modify the objectionable portions.
Grounds for rejection or disapproval of AOI:
a) AOI /amendment not substantially in accordance w/ the form
prescribed
b) purpose/s are patently unconstitutional, illegal, immoral, or
contrary to government rules & regulations;
c) Treasurers Affidavit is false;
d) required percentage of ownership has not been complied
with (Sec. 17)
e) corp.s establishment, organization or operation will not be
consistent w/ the declared national economic policies (to be
determined by the SEC, after consultation w/ BOI, NEDA or any
appropriate government agency -- PD 902-A as amended by PD 1758,
Sec. 6 (k))
COMMENTS
Corporate Name
(2)
A corporation can only have one (1) primary purpose. However, it can
have several secondary purposes.
Principal Office
Term of Existence
Purpose Clause
Capital Stock
Other matters
CORPORATION BY ESTOPPEL
(Sec. 21)
Distinguish a de facto corporation from a corporation by estoppel.
The de facto doctrine differs from the estoppel doctrine in that where all the requisites of a de
facto corporation are present, then the defectively organized corporation will have the status of a de jure
corporation in all cases brought by and against it, except only as to the State in a direct proceeding. On
the other hand, if any of the requisites are absent, then the estoppel doctrine can apply only if under the
circumstances of the particular case then before the court, either the defendant association is estopped
from defending on the ground of lack of capacity to be sued, or the defendant third party had dealt with
the plaintiff as a corporation and is deemed to have admitted its existence.
(De facto has status of de jure corpo, except separate personality against State, provided all requisites are present)
The Supreme Court found that Aruego represented a non-existent entity and induced not only Albert but
the court to believe in such representation. Aruego, acting as representative of such non-existent principal, was
the real party to the contract sued upon, and thus assumed such privileges and obligations and became
personally liable for the contract entered into or for other acts performed as such agent.
The Supreme Court likewise held that the doctrine of corporation by estoppel cannot be set up against
Albert since it was Aruego who had induced him to act upon his (Aruego's) willful representation that
University had been duly organized and was existing under the law.
When adopted:
(a) No later than one (1) month after receipt from SEC of official
notice of issuance of Cert. of incorporation.
Requirement:
Contents of By-laws - Subject to the provisions of the Constitution, this Code, other
special laws, and the articles of incorporation, a private corporation may provide in its bylaws for:
1)
the time, place and manner of calling and conducting regular or special meetings of the directors or
trustees;
2)
the time and manner of calling and conducting regular and special meetings of the stockholders or
members;
3)
the required quorum in meetings of stockholders or members and the manner of voting herein;
4)
the form for proxies of stockholders and members and the manner of voting them;
5)
the qualifications, duties and compensation of directors or trustees, officers and employees;
6)
the time for holding the annual election of directors or trustees and the mode or manner of giving notice
thereof;
7)
the manner of election or appointment and the term of office of all officers other than directors or
trustees;
8)
9)
10) such other matters as may be necessary for the proper or convenient transaction of its corporate
business and affairs.
Where the SEC grants a license to a foreign corporation, it is deemed to have approved its
foreign-enacted by-laws. Sec. 46 of the Corporation Code which states that by-laws are not valid
without SEC approval applies only to domestic corporations.
A board resolution appointing an attorney-in-fact to represent the corporation during pre-trial is not
necessary where the by-laws authorize an officer of the corporation to make such appointment.
1)
2)
3)
4)
Since corporate property is owned by the corporation as a juridical person, the stockholders have no
claim on it as owners, but have merely an expectancy or inchoate right to the same should any of it
remain upon the dissolution of the corporation after all corporate creditors have been paid. Conversely, a
corporation has no interest in the individual property of its stockholders, unless transferred to the
corporation. Remember that the liability of the stockholders is limited to the amount of shares.
of the corp, no sufficient proof exists on record that he used the corp to defraud private respondent. He cannot,
therefore, be made personally liable because he appears to be the controlling stockholder. Mere ownership by a
single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of
itself sufficient ground for disregarding the separate corporate personality.
MAGSAYSAY V. LABRADOR (180 SCRA 266)
The case of the assignment by Senator Magsaysay of a certain portion of his shareholdings in SUBIC granting
his sisters the right to intervene in a case filed by the widow against SUBIC.
The words "an interest in the subject," to allow petitioners to intervene, mean a direct interest in the
cause of action as pleaded, and which would put the intervenor in a legal position to litigate a fact alleged in the
complaint, without the establishment of which plaintiff could not recover.
Here, the interest, of petitioners, if it exists at all, is indirect, contingent, remote, conjectural,
consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right
in the management of the corporation and to share in the profits thereof and in the properties and assets thereof
on dissolution, after payment of the corporate debts and obligations.
While a share of stock represents a proportionate or aliquot interest in the property of the corp, it does
not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate
property being equitable and beneficial in nature. Shareholders are in no legal sense the owners of corporate
property, which is owned by the corp as a distinct legal person.
Where the corporation was formed by and consisted of the members of a partnership whose business and
property was conveyed to the corporation for the purpose of continuing its business, such corporation is
presumed to have assumed partnership debts.
MARVEL BLDG. CORP. V. DAVID (94 Phil. 376; 1954)
The fact that:
shows that other shareholders may be considered dummies of Castro. Hence, corporate veil may be pierced.
where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.
Case at bar: Union sought to pierce corporate veil alleging that the creation of Acrylic is a devise to evade the
application of the CBA Indophil had with them (or it sought to include the other union in its bargaining
leverage).
SC: Legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable
for a corporate debt or obligation. Union does not seek to impose such claim against Acrylic. Mere fact that
businesses were related, that some of the employees of Indophil are the same persons manning and providing
for auxiliary services to the other company, and that physical plants, officers and facilities are situated in the
same compound - not sufficient to apply doctrine.
NAFLU V. OPLE (143 SCRA 125; 1986)
Libra/Dolphin Garments was but an alter ego of Lawman Industrial, therefore, the former must bear the
consequences of the latter's unfair acts. It cannot deny reinstatement of petitioners simply because of cessation
of Lawman's operations, since it was in fact an illegal lock-out, the company having maintained a run-away
shop and transferred its machines and assets there.
Here, the veil of corporate fiction was pierced in order to safeguard the right to self-organization and
certain vested rights which had accrued in favor of the union. Second corporation sought the protective shield of
corporate fiction to achieve an illegal purpose.
ASIONICS PHILS. v. NLRC (290 SCRA 164)
A corporation is invested by law with a personality separate and distinct from those of the persons
composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a
single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of
itself sufficient ground for disregarding the separate corporate personality.
Where there is nothing on record to indicate the President and majority stockholder of a corporation had
acted in bad faith or with malice in carrying out the retrenchment program of the company, hecannot be held
solidarily and personally liable with the corporation.
are one and the same, and that Villarama and/or the Corporation is qualified from operating the CPCs by virtue
of the agreement entered into between Villarama and Pantranco.
Given the evidence, the Court found that the finances of Villa-Rey, Inc. were managed as if they were
the private funds of Villarama and in such a way and extent that Villarama appeared to be the actual owner of
the business without regard to the rights of the stockholders. Villarama even admitted that he mingled the
corporate funds with his own money. These circumstances negate Villarama's claim that he was only a parttime General Manager, and show beyond doubt that the corporation is his alter ego. Thus, the restrictive clause
with Pantranco applies. A seller may not make use of a corporate entity as a means of evading the
obligation of his covenant. Where the Corporation is substantially the alter ego of one of the parties to
the covenant or the restrictive agreement, it can be enjoined from competing with the covenantee.
Close Corporations
CEASE V. CA (93 SCRA 483; 1979)
The Cease plantation was solely composed of the assets and properties of the defunct Tiaong plantation
whose license to operate already expired. The legal fiction of separate corporate personality was attempted to be
used to delay and deprive the respondents of their succession rights to the estate of their deceased father.
While originally, there were other incorporators of Tiaong, it has developed into a closed family
corporation (Cease). The head of the corporation, Cease, used the Tiaong plantation as his instrumentality. It
was his business conduit and an extension of his personality. There is not even a showing that his children were
subscribers or purchasers of the stocks they own.
DELPHER TRADES V. CA (157 SCRA 349; 1988)
The Delpher Trades Corp. is a business conduit of the Pachecos. What they really did was to invest their
properties and change the nature of their ownership from unincorporated to incorporated form by organizing
Delpher and placing the control of their properties under the corporation. This saved them inheritance taxes.
This is the reverse of Cease; however, it does not modify the other cases. It stands on its own because of
the facts.
Parent-Subsidiary Relationship
Q:
Q: What are the criteria by which the subsidiary can be considered a mere
instrumentality of the parent company?
1.
2.
3.
4.
the parent corp. owns all or most of the capital stock of the subsidiary.
the parent and subsidiary have common directors and officers
the parent finances the subsidiary
the parent subscribes to all the capital stock of the subsidiary or otherwise causes its
incorporation
5.
6.
7.
8.
9.
10.
11.
GARRETT VS. SOUTHERN RAILWAY (173 F. Supp. 915, E.D. Tenn. 1959)
This case involved a Workers Compensation claim by a wheel moulder employed by Lenoir Car Works.
The plaintiff sought to claim from Southern Railway Company, which acquired the entire capital stock of
Lenoir Car Works. Plaintiff contended that Southern so completely dominated Lenoir that the latter was a mere
adjunct or instrumentality of Southern.
The general rule is that stock ownership alone by one corporation of the stock of another does not
thereby render the dominant corporation liable for the torts of the subsidiary, unless the separate corporate
existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is but an
instrumentality or adjunct of the dominant corporation.
In the case, it was found that there were two distinct operations. There was no evidence that Southern
dictated the management of Lenoir. In fact, evidence shows that Marius, the manager of the subsidiary, was in
full control of the operation. He established prices, handled negotiations in CBAs, etc. Lenoir paid local taxes,
had local counsel and maintain a Workmens Compensation Fund. There was also no evidence that Lenoir was
run solely for the benefit of Southern. In fact, a substantial part of its requirements in the field of operation of
Lenoir was bought elsewhere. Lenoir sold substantial quantities to other companies. Policy decisions remained
in the hands of Marius. Hence, the complaint against Southern Railway was dismissed.
KOPPEL VS. YATCO (77 Phil. 496; 1946)
This case involved a complaint for the recovery of merchant sales tax paid by Koppel (Philippines), Inc.
under protest to the Collector of Internal Revenue. Although the Court of First Instance did not deny legal
personality to Koppel (Philippines), Inc. for any and all purposes, it dismissed the complaint saying that in the
transactions involved in the case, the public interest and convenience would be defeated and would amount to a
perpetration of tax evasion unless resort was had to the doctrine of "disregard of the corporate fiction."
The facts show that 99.5% of the shares of stocks of K-Phil were owned by K-USA. K-Phil. acted as a
representative of K-USA and not as an agent. K-Phil. also bore alone its own incidental expenses (e.g. Cable
expenses) and also those of its principal. Moreover, K-Phils share in the profits was left in the hands of KUSA. Clearly, K-Phil was a mere branch or dummy of K-USA, and was therefore liable for merchant sales tax.
To allow otherwise would be to sanction a circumvention of our tax laws and permit a tax evasion of no mean
proportion and the consequent commission of a grave injustice to the Government. Moreover, it would allow
the taxpayer to do by indirection what the tax laws prohibit to be done directly.
LIDDELL & CO. VS. CIR (2 SCRA 632; 1961)
Liddel Motors Inc. was an alter ego of Liddel & Co. At the time of its incorporation, 98% of the Liddel
Inc.s stock belonged to Frank Liddel. As to Liddel Motors, Frank supplied the original capital funds. The bulk
of the business of Liddel Inc. was channeled through Liddel Motors. Also, Liddel Motors pursued no other
activities except to secure cars, trucks and spare parts from Liddel Inc. and then sell them to the general public.
To allow the taxpayer to deny tax liability on the ground that the sales were made through another and
distinct corporation when it is proved that the latter is virtually owned by the former or that they were
practically one and the same is to sanction the circumvention of tax laws.
While a corporation could not have been a party to a promoter's contract since it did yet
exist at the time the contract was entered into and thus could not possibly have had an agent who
could legally bind it, the corporation may make the contracts its own and become bound thereon
if, after incorporation, it:
(1)
(2)
It must be noted, however, that the contract must be adopted in its entirety; the corporation
cannot adopt only the part that is beneficial to it and discard that which is burdensome.
Moreover, the contract must be one which is within the powers of the corporation to enter, and
one which the usual agents of the company have express or implied authority to enter.
McARTHUR V. TIMES PRINTING CO. (48 Minn. 319, 51 N.W. 216; 1892)
It is not a requisite that a corporation's adoption or acceptance of a promoter's contract be expressed, but
it may be inferred from acts or acquiescence on the part of the corporation, or its authorized agents, as any
similar original contract might be shown.
The right of agents to adopt an agreement originally made by promoters depends upon the purposes of
the corporation and the nature of the agreement. The agreement must be one which the corporation itself could
make and one which the usual agents of the company have express or implied authority to enter into.
CLIFTON v. TOMB (21 F. 2d 893; 1921)
Whatever may be the proper legal theory by which a corporation may be bound by the contract
(ratification, adoption, novation, a continuing offer to be accepted or rejected by the corporation), it is necessary
in all cases that the corporation should have full knowledge of the facts, or at least should be put upon such
notice as would lead, upon reasonable inquiry, to the knowledge of the facts.
CAGAYAN FISHING DEV. CO. v. SANDIKO (65 Phil. 223; 1937)
A promoter could not have acted as agent for a corporation that had no legal existence. A corporation,
until organized, has no life therefore no faculties. The corporation had no juridical personality to enter into a
contract.
Also see Caram v. CA
Should the other contracting party fail to perform its part of the bargain, the corporation
which has adopted or ratified the contract may either sue for:
(1)
(2)
Specific performance; or
Damages resulting from breach of contract.
The fact of bringing an action on the contract has been held to constitute sufficient adoption or
ratification to give the corporation a cause of action.
BUILDERS DUNTILE CO. v. DUNN (229 Ky. 569, 17 S.W. 2d 715; 1929)
When the corporation was formed, the incorporators took upon themselves the whole thing, and ratified
all that had been done on its behalf. Though there was no formal assignment of the contract to the corporation,
the acts of the incorporators were an adoption of the contract. Therefore the corporation has the right to sue for
damages for the breach of contract.
RIZAL LIGHT V. PSC (25 SCRA 285; 1968)
The incorporation of (Morong) and its acceptance of the franchise as shown by this action in prosecuting
the application filed with the Commission for approval of said franchise, not only perfected a contract between
the municipality and Morong but also cured the deficiency pointed out by the petition. The fact that Morong
did not have a corporate existence on the day the franchise was granted does not render the franchise invalid, as
Morong later obtained its certificate of incorporation and accepted the franchise.
GENERAL RULE:
EXCEPTION:
WELLS VS. FAY & EGAN CO. (143 Ga. 732, 85 S.E. 873; 1915)
Individual promoters cannot escape liability where they buy machinery, receive them in their possession
and authorize one member to issue a note, in contemplation of organizing a corporation which was not formed.
(see Campos' notes p. 258-259). The agent is personally liable for contracts if there is no principal. The making
of partial payments by the corporation, when later formed, does not release the promoters here from liability
because the corporation acted as a mere stranger paying the debt of another, the acceptance of which by the
creditor does not release the debtors from liability over the balance. Hence, there is no adoption or ratification.
HOW & ASSOCIATES INC. VS. BOSS (222 F. Supp. 936; 1963)
The rule is that if the contract is partly to be performed before incorporation, the promoters solely are
liable. Even if the promoter signed "on behalf of corporation to be formed, who will be obligor," there was here
an intention of the parties to have a present obligor, because three-fourths of the payment are to be made at the
time the drawings or plans in the architectural contract are completed, with or without incorporation. A
purported adoption by the corporation of the contract must be expressed in a novation or agreement to that
effect. The promoter is liable unless the contract is to be construed to mean: 1) that the creditor agreed to look
solely to the new corporation for payment; or 2) that the promoter did not have any duty toward the creditor to
form the corporation and give the corporation the opportunity to assume and pay the liability.
QUAKER HILL VS. PARR (148 Colo. 45, 364 P. 2d 1056; 1961)
The promoters here are not liable because the contract imposed no obligation on them to form a
corporation and they were not named there as obligors/promissors. The creditor-plaintiff was aware of the
inexistence of the corporation but insisted on naming it as obligor because the planting season was fast
approaching and he needed to dispose of the seedlings. There was no intent here by plaintiff-creditor to look to
the promoters for the performance of the obligation. This is an exception to the general rule that promoters are
personally liable on their contracts, though made on behalf of a corporation to be formed.
OLD DOMINION VS. BIGELOW (203 Mass. 159, 89 N.E. 193; 1909)
A promoter, notwithstanding his fiduciary duties to the corporation, may still sell properties to it, but he
must pursue one of four courses to make the contract binding. These are: 1) provide an independent board of
officers in no respect directly or indirectly under his control, and make full disclosure to the corporation through
them; 2) make full disclosure of all material facts to each original subscriber of shares in the corporation; 3)
procure a ratification of the contract after disclosing its circumstances by vote of the stockholders of the
completely established corporation; or 4) be himself the real subscriber of all the shares of the capital stock
contemplated as a part of the promotion scheme. The promoter is liable, even if owning all the stock of the
corporation at the time of the transaction, if further original subscription to capital stock contemplated as an
essential part of the scheme of promotion came in after such transaction.
CORPORATE POWERS
General Powers of Corporation (Sec. 36)
Of succession by its corporate name for the period of time stated in the articles of incorporation and
the certificate of incorporation;
To amend its articles of incorporation in accordance with the provisions of this Code;
To adopt by-laws not contrary to law, morals, or public policy, and to amend or repeal the same in
accordance with this Code;
In case of stock corporations, to issue of sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a nonstock corporation;
To purchase, receive, take, grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with
such real and personal property, including securities and bonds of other corporations, as the
transaction of the lawful business of the corporation may reasonably and necessarily require, subject
to the limitations prescribed by law and the Constitution;
(NOTE: There are two (2) general restrictions on the power of the corp. to acquire and hold
properties:
To make reasonable donations, including those for the public welfare of for hospital, charitable,
cultural, scientific, civic, or similar purposes:
Provided that:
To establish pension, retirement and other plans for the benefit of its directors, trustees, officers and
employees; and
To exercise such other powers as may be essential or necessary to carry out its purpose or purposes
as stated in its articles of incorporation.
A sale is deemed to substantially cover all the corporate property and assets if such sale
renders the corporation incapable of continuing the business or accomplishing the purpose
for which it was incorporated.
Implied Powers
Under Sec. 36, a corporation is given such powers as are essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation. This phrase gives rise to such a wide range of implied powers, that it
would not be at all difficult to defend a corporate act versus an allegation that it is ultra vires.
A corporation is presumed to act within its powers and when a contract is not its face necessarily beyond its
authority; it will, in the absence of proof to the contrary, be presumed valid.
Ultra vires acts are those acts beyond the scope of the powers of the corporation, as defined by its charter or laws
of state of incorporation. The term has a broad application and includes not only acts prohibited by the charter, but acts
which are in excess of powers granted and not prohibited, and generally applied either when a corporation has no power
whatever to do an act, or when the corporation has the power but exercises it irregularly.
Parties to the ultra vires contract will be left as they are, if the contract has been fully executed on
both sides. Neither party can ask for specific performance, if the contract is executory on both sides.
The contract, provided that it is not illegal, will be enforced, where one party has performed his part,
and the other has not with the latter having benefited from the formers performance.
Any stockholder may bring an individual or derivative suit to enjoin a threatened ultra vires act or
contract. If the act or contract has already been performed, a derivative suit for damages against the
directors maybe filed, but their liability will depend on whether they acted in good faith and with
reasonable diligence in entering into the contracts. When the suit against the injured party who had
no knowledge that the corporation was engaging in an act not included expressly or impliedly in its
purposes clause.
Ultra vires acts may become binding by the ratification of all the stockholders, unless third parties are
prejudiced thereby, or unless the acts are illegal.
2. El Hogar owned a lot and bldg. at a business district in Manila allegedly in excess of its reasonable
requirements, held valid bec, it was found to be necessary and legally acquired and developed.
3. El Hogar leased some office space in its bldg.; it administered and managed properties belonging to
delinquent SHs; and managed properties of its SHs even if such were not mortgaged to them.
Held: first two valid, but the third is ultra vires bec. the administration of property in that manner is more
befitting of the business of a real estate agent or trust company and not of a building and loan ass'n.
4. Compensation to the promoter and organizer allegedly excessive and unconscionable.
Held: Court cannot dwell on the issue since the promoter is not a party in the proceeding and it is the corp.
or its SHs who may bring a complaint on such.
5. Issuance of special shares did not affect El Hogar's character as a building and loan ass'n nor make its loans
usurious.
6. Corporate policy of using a depreciation rate of 10 % per annum is not excessive, bec. accdg. to the SC, the
by-laws expressly authorizes the BOD to determine each year the amount to be written down upon the expenses
of installation and the property of the corp.
7. The Corp. Law does not expressly grant the power of maintaining reserve funds but such power is implied.
All business enterprises encounter periods of gains and losses, and its officers would usually provide for the
creation of a reserve to act as a buffer for such circumstances.
8. That loans issued to member borrowers are being used for purposes other than the bldg. of homes not invalid
bec. there is no statute which expressly declares that loans may be made by these ass'ns solely for the purpose of
bldg. homes.
9. Sec. 173 of the Corp. Law provides that "any person" may become a SH on a bldg. and loan ass'n. The word
"person" is used on a broad sense including not only natural persons but also artificial persons.
BISSEL v. MICHIGAN SOUTHERN ( 22 NY 258; 1860)
Two railroad corporations contend that they transcended their own powers and violated their own
organic laws. Hence, they should not be held liable for the injury of the plaintiff who was a passenger in one of
their trains.
Held: The contract between the two corporations was an ultra vires act. However, it is not one tainted with
illegality, therefore, the accompanying rights and obligations based on the contract of carriage between them
and the plaintiff cannot be avoided by raising such a defense.
PIROVANO v. DELA RAMA STEAMSHIP (96 Phil 335 , 1954)
This case involved the issue of whether or not the defendant corporation performed an ultra vires act by
donating the life insurance proceeds to the minor children of Pirovano, the deceased president of the defendant
company under whose management the company grew and progressed to become a multi-million peso
corporation.
Held:
NO.
From this, it is obvious that the corporation properly exercised within its chartered powers the act of
availing of insurance proceeds to the heirs of the insured and deceased officer.
HARDEN v. BENGUET CONSOLIDATED (58 Phil 141)
A contract between Benguet and Balatoc provided that Benguet will bring in capital, eqpt. and technical
expertise in exchange for capital shares in Balatoc. Harden was a SH of Balatoc and he contends that this
contract violated the Corp.Law which restricts the acquisition of interest by a
mining corp. in another mining corp.
Held: Harden has no standing bec. if any violation has been committed, the same can be enforced only in a
criminal prosecution by an action of quo warranto which may be maintained only by the Attorney-General.
(c)
(i)
(ii)
(iii)
Nationality
(iv)
+1
By a vote of the SHs holding or representing at least 2/3 of the outstanding capital stock, or by a vote of at
least 2/3 of the members entitled to vote, provided that such removal takes place at either a regular meeting of the
corporation or at a special meeting called for the purpose. In both cases, there must be previous notice to the
SHs / members of the intention to propose such removal at the meeting.
Removal may be with or without cause. However, removal without cause may not be used to deprive minority
SHs or members of the right of representation to which they may be entitled under Sec. 24 of the Code.
(e) How vacancy filled (Sec. 29)
If vacancy due to removal
or expiration of term:
Note:
(f)
or
Directors or trustees so elected to fill vacancies shall be elected only for the unexpired
term of their predecessors in office.
Note: In no case shall the total yearly compensation of directors, as such directors, exceed 10%
of the net income before income tax of the corporation during the preceding year.
(g)
(h) Liability (See subsequent discussion under Duties of Directors and Controlling Stockholders.)
(i) In general (Sec. 31)
(ii) Business judgment rule
(iii) Dealings with the corporation (Sec. 32)
(iv) Contracts between corporations with interlocking directors (Sec. 33)
(i)
(v)
(vi)
In this case, the Board of Regents of the University of the Philippines terminated the ad interim
appointment of Dr. Blanco as Dean of the College of Education by not acting on the matter. In the transcript of
the meeting which was latter agreed to be deleted, it was found out that the BOR, consisting of 12 members,
voted 5 in favor of Dr. Blanco's appointment 3 voted against, and 4 abstained.
The core of the issue is WON the 4 abstentions will be counted in favor of Dr. Blanco's appointment or
against it. The SC held that such abstentions be counted as negative vote considering that those who abstained,
3 of which members of the Screening Committee, intended to reject Dr. Blanco's appointment.
ZACHARY VS. MILLIN (294 Mic. 622; 1940)
The issue in this case is regarding the validity of the director's meeting at the company's laboratory on
December 8, 1937 wherein Zachary was removed as president of the company. Zachary that he was not notified
of the meeting thus, the action was void. On the other hand, the defendants contend that the notice requirement
was waived by Zachary's presence at the meeting.
The SC held that the validity of the meeting was not affected by the failure to give notice as required by
the by-laws, provided that the parties were personally present. Since all the parties were present at the meeting
of December 8, and understood that the meeting was to be a directors' meeting, then the action taken is final and
may not be voided by any informality in connection with its being called.
PNB VS. CA (83 SCRA 238; 1978)
The action was brought by the mortgagor (Tapnio) against PNB for damages in connection with the
failure of the latter's board of directors to act expeditiously on the proposed lease of the former's sugar quota to
one Tuazon.
The Supreme Court held that while the PNB has the ultimate authority to approve or disapprove the
proposed lease since the quota was mortgaged to PNB, the latter certainly cannot escape liability for observing,
for the protection of the interest of the private respondents, that degree of care, precaution and vigilance which
the circumstances justly demand in approving or disapproving the lease of the said sugar quota.
Violation of Corporation Code committed within 6 yrs. prior to the date of election or
appointment
The doctrine of apparent authority provides that a corporation will be liable to innocent
third persons for the acts of its agent where the representation was made by the agent in the
course of business and acting within his/her general scope of authority even though, in the
particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud
upon his/her principal or some other person for his/her own ultimate benefit.
2. Two other directors approved his actions and expressed satisfaction with the advantages obtained by him in
securing the chattel mortgage.
3. The corporation took advantage of the benefits of the chattel mortgage. There were even partial payments
made with the knowledge of the three directors.
ACUNA V. BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION (20 SCRA 526;
1967)
Acuna entered into an agreement with Verano, manager of PROCOMA, in which the former would be
constituted as the latter's agent in Manila. Acuna diligently went about his business and even used personal
funds for the benefit of the corporation. During the face-to-face meeting with the board, Acuna was assured that
there need not be any board approval for his constitution as agent for it would only be a mere formality. Later
on, the board disapproved the agency and did not pay him. The SC ruled that the agreement was valid due to
the ratification of the corp. proven by these acts:
1. He was assured by the board that no board approval was necessary.
2. He delivered P 20,000, performed his work with the knowledge of the board.
3. Due to acquiescence, the board cannot disown or disapprove the contract.
Board Committees
The By-laws of the corporation may create an executive committee, composed of not less than 3
members of the Board, to be appointed by the Board. The executive committee may act, by majority vote
of all its members, on such specific matters within the competence of the board, as may be delegated to it
in either (1) the By-laws, or (2) on a majority vote of the board.
However, the following acts may never be delegated to an executive committee:
(1)
(2)
(3)
(4)
HAYES V. CANADA, ATLANTIC AND PLANT S.S CO., LTD. (181 F. 289; 1910)
In this case, the Executive Committee:
a) removed the Treasurer and appointed a new one
b) fixed the annual salary of the members of the Executive Committee
c) amended the by-laws by giving the President the sole authority to call a stockholder's meeting and a
board of directors meeting
d) amended the composition of the ExeCom by limiting it to just 2 persons.
Was these actions valid?
No, because the Executive Commmittee usurped the powers vested in the board and the stockholders. If
their actions was valid, it would put the corp. in a situation wherein only two men, acting in their own pecuniary
interests, would have absorbed the powers of the entire corporation. "Full powers" should be interpreted only in
the ordinary conduct of business and not total abdication of board and stockholders' powers to the ExeCom.
"FULL POWERS" does not mean unlimited or absolute power.
Stockholders or Members
In the following basic changes in the corporation, although action is usually initiated by the board of directors or
trustees, their decision is not final, and approval of the stockholders or members would be necessary:
(1)
(2)
(3)
(4)
(5)
BOARD OF DIRECTORS AND ELECTION COMMITTEE OF SMB VS. TAN (105 Phil. 426; 1959)
Meeting was invalid for lack of notice. By-laws provide for a 5-day notice before meeting. March 26
posting not enough for March 28 election.
JOHNSTON VS. JOHNSTON (61 O.G. No. 39, 6160; 1965)
As a general rule, a quorum at a stockholders' meeting, once reached, cannot be nullified by a
subsequent walkout.
However, the proceedings can be nullified if the walkout was for a reasonable and justifiable cause. In
this case, F. Logan Johnston, who owned and/or represented more than 50% of the corporation's outstanding
shares, was prohibited from voting the shares of the Silos family (which he had validly purchased) and of the
minor children of Albert S. Johnston (of whom he was guardian) on the ground that such shares must first be
registered in the names of the wards, thereby prompting the walkout. The Court of Appeals held that the
walkout was neither unreasonable nor unjustifiable. It noted however that there was no formal declaration of a
quorum before the withdrawal from the meeting by F. Logan Johnston.
Section 21 of the Corporation Law provides that a corporation may prescribe in its by-laws the
qualifications, duties, and compensation of its directors.
A stockholder has no vested right to be elected director for he impliedly contracts that the will of the
majority shall govern.
Amended by-laws are valid for the corporation has its inherent right to protect itself.
VOTING
Pooling agreement
- Pooling agreements refer to agreements between 2 or more SHs to vote their shares the same
way. They are different from voting trust agreements in that they do not involve a transfer of stocks
but are merely private agreements between 2 or more SHs to vote in the same way.
- Sec. 100, par. 2 of the Corporation Code provides for pooling and voting agreements in close
corporations. Although there is no equivalent provision for widely-held corporations, Justice and Prof.
Campos are of the opinion that SHs of widely-held corporations should not be precluded from
entering into voting agreements if these are otherwise valid and are not intended to commit any
wrong or fraud on the other SHs that are not parties to the agreement.
Proxy Device
Sec 58. Proxies. Stockholders and members may vote in person or by proxy in all meetings of stockholders
or members. Proxies shall be in writing, signed by the stockholder or member and filed before the scheduled
meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the
meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at
any one time.
Character: agency relationship; revocable at will (by express revocation, by attending the meeting) and by
death, except when coupled with interest or is a security.
IN RE GIANT PORTLAND CEMENT CO. (21 A.2d 697; 1941)
Even if stocks are sold, the stockholder of record remains the owner of the stocks and has the voting
right until the by-law requiring recording of transfer in the transfer book is complied with. Thus, a proxy given
by the stockholder of record even if he has already sold the share/s of stock remains effective.
STATE EX REL EVERETT TRUST V PACIFIC WAXED PAPER, (159 A.L.R. 297; 1945)
The general rule is that a proxy is revocable even though by its express terms it is irrevocable. The
exceptions are: (a) when authority is coupled with interest; (b) where authority is given as part of a security and
is necessary to effectuate such a security. It is coupled with interest when there is interest in the share
themselves (such as a right of first refusal in case of sale) and the rights inherent in the shares (such as voting
rights; capacity to obtain majority).
DUFFY V LOFT (17 Del. Ch. 376, 152 A. 849; 1930)
Where a stockholders meeting was validly convened, the proxies must be deemed present even if the
proxies were not presented, provided: (a) their existence is established; (b) the agents were so designated to
attend and act in SHs behalf; (c) the agents were present in the meeting.
Q: Is it valid for the corporation to pay the expenses for proxy solicitation?
A: In the case of Rosenfeld v. Fairchild Engine and Airplane Corp. (128 N.E. 2d 291; 1955), it was held
that in a contest over policy (as opposed to a purely personal power contest), corporate directors have the
right to make reasonable and proper expenditures, subject to the scrutiny of the courts when duly
challenged, from the corporate treasury for the purpose of persuading the SHs of the correctness of their
position and soliciting their support for policies which the directors believe, in all good faith, are in the best
interests of the corporation. The SHs, moreover, have the right to reimburse successful contestants for
the reasonable and bona fide expenses incurred by them in any such policy contest, subject to like court
scrutiny.
However, where it is established that such monies have been spent for personal power, individual gain
or private advantage, and not in the belief that such expenditures are in the best interest of the
stockholders and the corporation, or where the fairness and reasonableness of the amounts allegedly
expended are duly and successfully challenged, the courts will not hesitate to disallow them.
Voting Trust
A Voting Trust Agreement (VTA) is an agreement whereby the real ownership of the shares is separated from the
voting rights, the usual aim being to insure the retention of incumbent directors and remove from the stockholders the
power to change the management for the duration of the trust.
Advantages
Accumulates power. Small shareholders are given the chance to have a representation in the BOD or at least a
spokesperson during stockholders meetings.
Continuity of management.
More effective than proxies because it is irrevocable.
Ensures that the required number of stockholders is met thereby facilitating smooth corporate operations.
Disadvantages
Rights given up by the shareholder in a VTA in exchange for the fiduciary obligation of the trustee:
Voting rights
Proprietary rights/naked title/legal ownership
Incidental rights such as to attend meetings, to be elected, to receive dividends)
certificates of stock in the name of the trustee/s shall be deemed cancelled and new certificates of stock shall
be reissued in the name of the transferors.
Want of consideration
Voting power not coupled with interest
Fraud
Illegal or improper purpose
What rights does a shareholder give up/ retain with a pooling agreement?
Shareholders retain their right to vote because the parties are not constituted as agents. However, the will
of the parties may not be carried out due to non-compliance with the pooling agreement.
If the enforcement of a particular contract damages nobody-not even the public, there is no reason for
holding it illegal. Test is WON it causes damage to the corporation and stockholders.
Straight voting:
2.
Cumulative voting:
(one candidate)
3.
Cumulative voting:
If A has 100 shares, there are 5 directors to be elected, and he only
(multiple candidates) wants to vote for two nominees, he can divide 500 votes between the
two, giving each one 250 votes.
2.
Baker & Carys formula (minimum no. of votes needed to elect multiple directors)
X= # of shares required
Y= # of shares represented at meeting
D= # of directors the minority wants to elect
D= total # of directors to be elected
X= Y x D + 1
D' + 1
NOTES
Levels playing field or at least ensures that the minority can elect at least one representative to the board of
directors (BOD)
Cannot of itself give the minority control of corporate affairs, but may affect and limit the extent of the
majoritys control
By-laws cannot provide against cumulative voting since this right is mandated by law in Section 24.
Common:
2.
Preferred:
share has preference over dividends and distribution of assets upon liquidation;
right to vote may be restricted (Sec. 6)
3.
Redeemable: share is purchased or taken up by the corporation upon the expiration of a fixed
period (Sec. 8); right to vote may be restricted (Sec. 6)
NOTES
Even though the right to vote of preferred and redeemable shares may be restricted, owners of these shares
can still vote on certain matter provided for in Sec. 6.
SEC requires that where no dividends are declared for three consecutive years, in spite of available profits,
preferred stocks will be given the right to vote until dividends are declared.
Provision granting right to vote to preferred stock previously prohibited from voting, constitutes diminution
of the voting power of common stock.
Provision in the articles of incorporation granting holders of preferred stock right to vote in case of default
in payment of dividends after July 1, 1951 was construed as denial by necessary implication of the right to
vote even prior to July 1, 1951.
Most common restriction: granting first option to the other stockholders and/or the corporation to acquire the
shares of a stockholder who wishes to sell them.
This gives to the corporation and/or to its current management the power to prevent the transfer of shares to
persons who they may see as having interests adverse to theirs.
As long as the qualifications imposed are reasonable and not meant to unjustly or unfairly deprive the minority of
their rightful representation in the BOD, such provisions are within the power of the majority to provide in the bylaws.
According to Gokongwei vs. SEC, aside from prescribing qualifications, by-laws can also provide for the
disqualification of anyone in direct competition with the corporation.
Founders shares
See Sec. 7 for definition
Exception to the rule in sec. 6 that non-voting shares shall be limited to preferred and redeemable shares
If founders shares enjoy the right to vote, this privilege is limited to 5 years upon SECs approval, so as to
prevent the perpetual disqualification of other stockholders.
Contract to manage the day-to-day affairs of the corporation in accordance with the policies laid down by the
board of the managed corporation.
BOD can and usually delegate many of its functions but it cant abdicate its responsibility to act as a governing
body by giving absolute power to officers or others, by way of a management contract or otherwise. It must retain
its control over such officers so that it may recall the delegation of power whenever the interests of the corporation
are seriously prejudiced thereby.
SHERMAN & ELLIS VS. INDIANA MUTUAL CASUALTY (41 F. 2d 588; 1930)
Although corporations may, for a limited period, delegate to a stranger certain duties usually performed
by the officers, there are duties, the performance of which may not be indefinitely delegated to outsiders.
In exchange for the numerical majority in the BOD, minority can ask for a stronger veto power in major
corporate decisions.
A requirement that there shall be no election of directors at all unless every single vote be cast for the same
nominees, is in direct opposition to the statutory rule that the receipt of plurality of the votes entitles a
nominee to election. (See Sec. 24)
Requiring unanimity before the BOD can take action on any corporate matter makes it impossible for the
directors to act on any matter at all. In all acts done by the corporation, the major number must bind the
lesser, or else differences could never be determined nor settled.
The State has decreed that every stock corporation must have a representative government, with voting
conducted conformably to the statutes, and the power of decision lodged in certain fractions, always more
than half, of the stock. This whole concept is destroyed when the stockholders, by agreement, by-law or
certificates of corporation provides for unanimous action, giving the minority an absolute, permanent and
all-inclusive power of veto.
The requirement of unanimous vote to amend by-laws is valid. Once proper by-laws have been adopted,
the matter of amending them is no concern of the State.
Device
Favorable To:
Limitations
Cumulative voting
Classification of shares
Restriction on transfer of
shares
*applicable only to close
corporations
See Sec. 98
Management contracts
MEETINGS
Meetings of Directors / Trustees
KINDS:
SPECIAL:
NOTICE:
Must be sent at least 1 day prior to the scheduled meeting, unless otherwise provided by
the by-laws.
Note:
WHERE:
QUORUM:
WHO PRESIDES:
KINDS:
Held annually on a date fixed in the by-laws. If no date is fixed, on any date in
April of every year as determined by the Board of Directors or trustees.
Notice: Written, and sent to all stockholders or members of record at least 2 weeks prior
to the meeting, unless a different period is required by the by-laws.
SPECIAL:
Notice: Written, and sent to all stockholders or members of record at least 1 week prior
to the meeting, unless otherwise provided in the by-laws.
Note:
WHERE:
In the city of municipality where the principal office of the corporation is located, and if
practicable in the principal office of the corporation. Metro Manila is considered a city or
municipality. (Sec. 51)
QUORUM:
WHO PRESIDES:
However, if due to the fault or negligence of the directors the assets of the corporation are wasted
or lost, each of them may be held responsible for any amount of loss which may have been proximately
caused by his wrongful acts or omissions. Where there exists gross negligence or fraud in the
management of the corporation, the directors, besides being liable for damages, may be removed by the
stockholders in accordance with Sec. 28 of the Code. (Campos & Campos)
GENERAL RULE: Contracts intra vires entered into by BoD are binding upon the
corporation and courts will not interfere.
EXCEPTION:
When such contracts are so unconscionable and oppressive as
to amount to a wanton destruction of the rights of the minority.
WHAT KIND OF DILIGENCE IS EXPECTED OF DIRECTORS?
Directors are expected to manage the corporation with reasonable diligence, care and prudence, i.e.
the degree of care and diligence which men prompted by self-interest generally exercise in their own
affairs. Thus, they can be held liable not only for willful dishonesty but also for negligence.
Although they are not expected to interfere with the day-to-day administrative details of the business
of the corporation, they should keep themselves sufficiently informed about the general condition of the
business.
WHAT FACTORS SHOULD BE CONSIDERED IN DETERMINING WHETHER REASONABLE
DILIGENCE HAS BEEN EXERCISED?
The nature of the business, as well as the particular circumstances of each case. The court should
look at the facts as they exist at the time of their occurrence, not aided or enlightened by those which
subsequently took place. (Litwin v. Allen)
A complaint was filed against a corporate director for failing to give adequate attention (he relied solely
on the Presidents updates on the status of the corp) to the affairs of a corporation which suffered depletion of
funds.
The director was not liable. The court said that despite being guilty of misprision in his office, still the
plaintiff must clearly show that the performance of the directors duties would have avoided the losses. When a
business fails from general mismanagement, business incapacity, or bad judgment, it is difficult to conjecture
that a single director could turn the company around, or how much dollars he could have saved had he acted
properly.
FOSTER V. BOWEN (41 N.E. 2d 181; 1942)
Cushing, a director and in charge of leasing a roller skating rink of the corp, leased the same to himself.
Minority stockholders filed suit against Bowen, the corporation's President, to recover for company losses
arising out of an alleged breach of fiduciary duty.
Bowen was held to be not liable because: (1) Cushing's acts were not actually dishonest or fraudulent;
(2) Cushing performed personal work such as keeping the facility in repair which redounded to the benefit of
the company and even increased its income; (3) Bowen did not profit personally through Cushing's lease; and
(4) the issue of the possible illegality of the lease was put before the Board of Directors, but the Board did not
act on it but instead moved on to the next item on the agenda. Absent any bad faith on Bowen's part, and a
showing that it was a reasonable exercise of judgment to take no action on the lease agreement at the time it was
entered into, Bowen was not liable.
LOWELL HOIT & CO. V. DETIG (50 N.E. 2d 602; 1943)
Lowell Hoit filed action against directors of a cooperative grain company for an alleged willful
conversion by the manager of grain stored in the company facility. The court said that the directors were not
personally liable. There was no evidence that the directors had knowledge of the transaction between the
manager and Lowell Hoit.
The court will treat directors with leniency with respect to a single act of fraud on the part of a
subordinate officer/agent. But directors could be held liable if the act of fraud was habitual and openly
committed as to have been easily detected upon proper supervision. To hold directors liable, he must have
participated in the fraudulent act; or have been guilty of lack of ordinary and reasonable supervision; or guilty
of lack of ordinary care in the selection of the officer/agent.
BATES V. DRESSER (40 S.Ct.247; 1920)
Coleman, an employee of the bank, was able to divert bank finances for his benefit, resulting in huge
losses to the bank. The receiver sued the president and the other directors for the loss.
The court said that the directors were not answerable as they relied in good faith on the cashiers
statement of assets and liabilities found correct by the government examiner, and were also encouraged by the
attitude of the president that all was well (the president had a sizable deposit in the bank). But the president is
liable. He was at the bank daily; had direct control of records; and had knowledge of incidents that ordinarily
would have induced scrutiny.
(1) The presence of the self-dealing director or trustee in the board meeting for which the
contract was approved was not necessary to constitute a quorum for such meeting;
(2) The vote of such self-dealing director or trustee was not necessary for the
approval of the contract;
(3) The contract is fair and reasonable under the circumstances;
(4) In the case of an officer, the contract has been previously authorized by the
Board of Directors.
In the event that either of or both conditions (1) and (2) are absent (i.e., the presence of the
director/trustee was necessary for a quorum and/or his vote was necessary for the approval of the
contract), the contract may be ratified by a 2/3 vote of the OCS or all of the members, in a meeting called
for the purpose. Full disclosure of the adverse interest of the directors or trustees involved must be made
at such meeting.
DOCTRINE:
A director of a corporation holds a position of trust and as such, he owes a duty of loyalty
to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter
to his own advantage and benefit. As corporate managers, directors are committed to seek the maximum
amount of profits for the corporation. This trust relationship "is not a matter of statutory or technical law.
It springs from the fact that directors have the control and guidance of corporate affairs and property and
hence of the property interests of the stockholders." (Prime White Cement Corp. v. IAC, 220 SCRA 103;
1993)
years. Among the conditions in the dealership agreement were that the corporation would sell to and supply Te
with 20,000 bags of white cement per month, and that Te would purchase the cement from the corporation at a
price of P 9.70 per bag.
Relying on the conditions contained in the dealership agreement, Te entered into written agreements
with several hardware stores which would enable him to sell his allocation of 20,000 bags per month. However,
the Board of Directors subsequently imposed new conditions, including the condition that only 8,000 bags of
cement would be delivered per month. Te made several demands on the corporation to comply with the
dealership agreement. However, when the corporation refused to comply with the same, Te was constrained to
cancel his agreements with the hardware stores. Notwithstanding the dealership agreement with Te, the
corporation entered into an exclusive dealership agreement with a certain Napoleon Co for marketing of
corporation's products in Mindanao. The lower court held that Prime White was liable to Te for actual and
moral damages for having been in breach of the agreement which had been validly entered into.
On appeal, the Supreme Court held that the dealership agreement is not valid and enforceable, for not
having been fair and reasonable: the agreement protected Te from any market increases in the price of cement,
to the prejudice of the corporation. The dealership agreement was an attempt on the part of Te to enrich himself
at the expense of the corporation. Absent any showing that the stockholders had ratified the dealership
agreement or that they were fully aware of its provisions, the contract was not valid and Te could not be allowed
to reap the fruits of his disloyalty.
SPECIAL
FACTS
DOCTRINE: IT DEPENDS.
Where special circumstances
or facts are present which make in inequitable to
withhold
information
from
the
stockholder,
the
duty
to disclose arises, and concealment is fraud.
In the case of Gokongwei v. SEC (89 SCRA 336; 1979), the Supreme Court, quoting from the
US case of Pepper v. Litton (308 U.S. 295-313; 1939) stated that a director cannot, "by the
intervention of a corporate entity violate the ancient precept against serving two masters He
cannot utilize his inside information and his strategic position for his own preferment. He cannot
violate rules of fair play by doing indirectly through the corporation what he could not do directly. He
cannot use his power for his personal advantage and to the detriment of the stockholders and
creditors no matter how absolute in terms that power may be and no matter how meticulous he is to
satisfy technical requirements. For that power is at all times subject to the equitable limitation that it
may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the
exclusion or detriment of the cestuis."
Interlocking directors
WHAT IS AN INTERLOCKING DIRECTOR?
An interlocking director is one who occupies a position in 2 companies dealing with each other.
WHAT IS THE RULE ON CONTRACTS INVOLVING INTERLOCKING DIRECTORS?
Except in cases of fraud, and provided the contract is fair and reasonable under the
circumstances, a contract between 2 or more corporations having interlocking directors shall not be
invalidated on that ground alone. This practice is tolerated by the Courts because such an arrangement
oftentimes presents definite advantages to the corporations involved.
However, if the interest of the interlocking director in one corporation is substantial (i.e.,
stockholdings exceed20% of the OCS) and his interest in the other corporation or corporations is merely
nominal, he shall be subject to the conditions stated in Sec. 32, i.e., for the contract not to be voidable,
the following conditions must be present:
(1) The presence of the self-dealing director or trustee in the board meeting for which
the contract was approved was not necessary to constitute a quorum for such
meeting;
(2) The vote of such self-dealing director or trustee was not necessary for the approval
of the contract;
(3) The contract is fair and reasonable under the circumstances;
(4) In the case of an officer, the contract has been previously authorized by the Board of
Directors.
In the event that either of or both conditions (1) and (2) are absent (i.e., the presence of the
director/trustee was necessary for a quorum and/or his vote was necessary for the approval of the
contract), the contract may be ratified by a 2/3 vote of the OCS or all of the members, in a meeting called
for the purpose. Full disclosure of the adverse interest of the directors or trustees involved must be made
at such meeting.
Note: The Investment House Law prohibits a director or officer of an investment house to be
concurrently a director or officer of a bank, except as otherwise authorized by the Monetary
Board. In no event can a person be authorized to be concurrently an officer of an investment
house and of a bank except where the majority or all of the equity of the former is owned by the
bank. (P.D. 129, Sec. 6, as amended)
The Insurance Code likewise prohibits a person from being a director and/or officer of an
insurance company and an adjustment company. (Sec. 187)
GLOBE WOOLEN CO. V. UTICA GAS & ELECTRIC (121 N.E. 378; 1918)
Maynard, president and chief stockholder of Globe but nominal SH in Utica Gas, obtained a cheap, 10year contract for Utica to supply power. Maynard did not vote during the meeting for the approval of the
contract.
Can Globe seek to enforce contract? The Supreme Court held that Globe could not enforce the contract
and that said contract was voidable at the election of Utica. It was found that based on the facts of the case, the
contract was clearly one-sided. Maynard, although he did not vote, exerted a dominating influence to obtain the
contract from beginning to end.
The director-trustee has a constant duty not to seek harsh advantage in violation of his trust.
or
the
by-laws
expressly
GOV'T OF THE PHILIPPINES VS. EL HOGAR FILIPINO (50 Phil. 399; 1927)
The compensation provided in sec. 92 of the by-laws of El Hogar Filipino which stipulated that 5% of
the net profit shown by the annual balance sheet shall be distributed to the directors in proportion to the
attendance at board meetings is valid. The Corporation Law does not prescribe the rate of compensation for the
directors of a corporation. The power to fix it , if any is left to the corporation to be determined in its by-laws. In
the case at bar, the provision in question even resulted in extraordinarily good attendance.
BARRETO VS. LA PREVISORA FILIPINA
This action was brought by the directors of defendant corporation to recover 1% from each of the
plaintiffs of the profits of the corporation for 1929 pursuant to a by-law provision which grants the directors the
right to receive a life gratuity or pension in such amount for the corporation.
The SC held that the by-law provision is not valid. Such provision is ultra vires for a mutual loan and
building association to make. It is not merely a provision for the compensation of directors. The authority
conferred upon corporations refers only to providing compensation for the future services of directors, officers,
and employees after the adoption of the by-law in relation thereto. The by-law can't be held to authorize the
giving of continuous compensation to particular directors after their employment has terminated for past
services rendered gratuitously by them to the corporation.
CENTRAL COOPERATIVE EXCHANGE INC VS. TIBE (33 SCRA 596; 1970)
The questioned resolutions which appropriated the funds of the corporation for different expenses of the
directors are contrary to the by-laws of the corporation; thus they are not within the board's power to enact. Sec.
8 of the by-laws explicitly reserved to the stockholders the power to determine the compensation of members of
the board and they did restrict such compensation to actual transportation expenses plus an additional P30 per
diems and actual expenses while waiting. Hence, all other expenses are excluded. Even without the express
reservation, directors presumptively serve without pay and in the absence of any agreement in relation thereto,
no claim can be asserted therefore.
FOGELSON VS. AMERICAN WOOLEN CO. (170 F. 2d. 660; 1948)
A retirement plan which provides a very large pension to an officer who has served to within one year of
the retirement age without any expectation of receiving a pension would seem analogous to a gift or bonus. The
size of such bonus may raise a justifiable inquiry as to whether it amounts to wasting of the corporate property.
The disparity also between the president's pension plan and that of even the nearest of the other officers and
employees may also be inquired upon by the courts.
KERBS VS. CALIFORNIA EASTERN AIRWAYS (90 A. 2d 652; 1952)
This is an appeal filed to enjoin the California Eastern Airways from putting into effect a stock option
plan and a profit-sharing plan. The SC held that the stock option plan was deficient as it was not reasonably
created to insure that the corporation would receive contemplated benefits. A validity of a stock option plan
depends upon the existence of consideration and the inclusion of circumstances which may insure that the
consideration would pass to the corporation. The options provided may be exercised in toto immediately upon
their issuance within a 6 month period after the termination of employment. In short, such plan did not insure
that any optionee would remain with the corporation.
With regard to the profit-sharing plan, it was held valid because it was reasonable and was ratified by
the stockholders pending the action.
Close Corporations
Sec. 97 provides that the AOI of a close corp. may specify that it shall be managed by the stockholders rather
than the BoD. So long as this provision continues in effect:
Generally, stockholders deemed to be directors for purposes of this Code, unless the context clearly requires
otherwise;
Stockholders shall be subject to all liabilities of directors. The AOI may likewise provide that all officers or
employees or that specified officers or employees shall be elected or appointed by the stockholders instead of
by the BoD.
Further, Sec. 100 provides that for stockholders managing corp. affairs:
They shall be personally liable for corporate torts (unlike ordinary directors liable only upon finding of
negligence)
If however there is reasonable adequate liability insurance, injured party has no right of action v.
stockholders-managers
A SH/director is still entitled to vote in a stockholders meeting even if his interest is adverse to a corporation. But
a stockholder able to control a corp. is still subject to the duty of good faith to the corp. and the minority.
Persons with management control of corporation hold it in behalf of SHs and can not regard such as their own
personal property to dispose at their whim.
The ff. acts are legal:
Transfer of managerial control through BoD resignation & seriatim election of successors if concomitant with
the sale and actual transfer of majority interest or that which constitutes voting control;
Disposal by controlling SH of his stock at any time & at such price he chooses
Selling corp. office or management control by itself, that is NOT accompanied by stocks or stocks are
insufficient to carry voting control;
Transferring office to persons who are known or should be known as intending to raid the corporate treasury
or otherwise improperly benefit themselves at the expense of the corp. (Insuranshares Corp. V. Northern
Fiscal);
Receiving a bonus or premium specifically in consideration of their agreement to resign & install the
nominees of the purchaser of their stock, above and beyond the price premium normally attributable to the
control stock being sold;
Duty to Creditors
General rule: Corporate creditors can run after the corp. itself only, and not the directors for mismanagement of a solvent
corp.
If corp. becomes insolvent, directors are deemed trustees of the creditors and should therefore manage its assets
with due consideration to the creditors interest.
If directors are also creditors themselves, they are prohibited from gaining undue advantage over other creditors.
In what instances does personal liability of a corporate director, trustee or officer validly attach
together with corporate liability?
When the director / trustee / officer:
I.
II.
Consents to the issuance of watered stocks, or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
III.
IV.
Agrees to hold himself personally and solidarily liable with the corporation;
Is made, by a specific provision of law, to personally answer for his corporate action.
(Tramat Mercantile v. CA, 238 SCRA 14)
In labor cases, particularly, corporate directors and officers are solidarily liable with the corporation for
the termination of employment of corporate employees done with malice or in bad faith.
In the instant case, there was a showing of bad faith: the Board Resolution retrenching the respondents
on the feigned ground of serious business losses had no basis apart from an unsigned and unaudited Profit and
Loss Statement which had no evidentiary value whatsoever.
Installments paid and unpaid on all stock for which subscription has been made, and the
date of any installment;
A statement of every alienation, sale or transfer of stock made, the date thereof, and by
whom and to whom made;
The stock and transfer book shall be kept in the principal office of the corporation or in the office of its
stock transfer agent, and shall be open for inspection by any director or stockholder of the corporation at
reasonable hours on business days.
WHAT IS A STOCK TRANSFER AGENT? (Sec. 75)
A stock transfer agent is one who is engaged principally in the business of registering transfers of
stocks in behalf of a stock corporation. He or she must be licensed by the SEC; however, a stock
corporation is not precluded from performing or making transfer of its own stocks, in which case all the
rules and regulations imposed on stock transfer agents, except the payment of a license fee, shall be
applicable.
WHO IS THE CUSTODIAN OF CORPORATE RECORDS?
In the absence of any provision to the contrary, the corporate secretary is the custodian of
corporate records. Corollarily, he keeps the stock and transfer book and makes the proper and necessary
entries. (Torres, et al. vs. CA, 278 SCRA 793; 1997)
Ordinary stockholders, the beneficial owners of the corporation, usually have no say on how business affairs
of the corp. are run by the directors. The law therefore gives them the right to know not only the financial health of the
corp. but also how its affairs are managed so that if they find it unsatisfactory, they can seek the proper remedy to protect
their investment.
WHAT IS THE NATURE OF THE RIGHT TO INSPECT?
PREVENTIVE :
REMEDIAL:
2.
By-laws
These are expressly required to be open to inspection by SH/members during office hours (Sec.
46). Note: There is no similar provision as to AOI, but these are filed with the SEC anyway.
3.
4.
5.
6.
1.
The exercise of this right is subject to reasonable limitations similar to a citizens exercise of the right to
information. Otherwise, the corp. might be impaired, its efficiency in operations hindered, to the prejudice of SHs.
2.
Such limitations to be valid must be reasonable and not inconsistent with law ( Sec. 36[5] and 46).
3.
A corp. may regulate time and manner of inspection but provisions in its by-law which gives directors absolute
discretion to allow or disallow inspection are prohibited.
Limitations as to time and place:
Such business days should be THROUGHOUT THE YEAR. BoD cannot limit such to merely a few
days within the year. (Pardo v. Hercules Lumber)
4.
5.
Inspection should be made in such a manner as not to impede the efficient operations
6.
Place of inspection: Principal office of the corp. SH cannot demand that such records be taken out of the
principal office.
7.
As to purpose:
PRESUMPTION: that SHs purpose is proper. Corp. cannot refuse on the mere belief that his motive is
improper (sec 74).
BURDEN OF PROOF: lies with corp. which should show that purpose was illegal.
To be legitimate, the purpose for inspection must be GERMANE to the INTEREST of the stockholder as
such, and it is not contrary to the interests of the corporation.
Legitimate:
Not legitimate:
Belief in good faith that a corp. is being mismanaged may be given due course even if later, this is proven
unfounded.
Every director, trustee, stockholder, member may exercise right personally or through an agent who can better
understand and interpret records (impartial source, expert accountant, lawyer).
As to VTA: both voting trustee and transferor
SH of parent corp. over subsidiary:
If the two are operated as SEPARATE entities
: NO right of inspection
The person demanding has improperly used any information secured through any prior
examination; or
(2) Was not acting in good faith; or
(3) The demand was not for a legitimate purpose.
DERIVATIVE SUITS
Nature and Basis of derivative suit
Suits of stockholders/ members based on wrongful or fraudulent acts of directors or other persons:
a.
Individual suits - wrong done to stockholder personally and not to other stockholders
(ex. When right of inspection is denied to a stockholder)
b.
c.
But since the directors who are charged with mismanagement are also the ones who will
decide WON the corp. will sue, the corp. may be left without redress; thus, the stockholder is
given the right to sue on behalf of the corporation.
Suing stockholder is merely the nominal party and the corp. is actually the party in interest.
A SH can only bring suit for an act that took place when he was a stockholder; not before.
(Bitong v. CA, 292 SCRA 503)
Stockholder/ member must have exhausted all remedies within the corp.
2)
3)
Any benefit recovered by the stockholder as a result of bringing derivative suit must be
accounted for to the corp. who is the real party in interest.
4)
If suit is successful, plaintiff entitled to reimbursement from corp. for reasonable expenses
including attorneys' fees.
The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the
Board of Directors that exercises its corporate powers and not in the president or officer thereof.
It was JAKA's Board of Directors, not Senator Enrile, which had the power to grant Bitong
authority to institute a derivative suit for and in its behalf.
The basis of a stockholder's suit is always one in equity. However, it cannot prosper without first
complying with the legal requisites for its institution. The most important of these is the bona
fideownership by a stockholder of a stock in his own right at the time of the transaction complained
of which invests him with standing to institute a derivative action for the benefit of the corporation.
Capital Structure
WHAT IS MEANT BY CAPITAL STRUCTURE?
This refers to the aggregate of the securities -- instruments which represent relatively long-term
investment -- issued by the corporation. There are basically 2 kinds of securities: shares of
stock and debt securities.
CAPITAL
DEFINITION
CONSTANCY
FLUCTUATING
Stock which
entitles the owner
of such stocks to
an equal pro rata
division of profits
PREFERRED
Stock which entitles
the holder to some
preference either in the
dividends or
distribution of assets
upon liquidation, or in
PAR
NO PAR*
TREASURY
both
by lawful means.
VALUE
VOTING RIGHTS
Depends if its
common or
preferred.
PREFERENCE UPON
LIQUIDATION
No advantage,
priority, or
preference over
any other SH in the
same class
No voting rights fo
as long as such
stock remains in th
treasury (Sec. 57)
NOTE: Only preferred and redeemable shares may be deprived of the right to vote. (Sec. 6, Corporation Code)
EXCEPTION: As otherwise provided in the Corporation Code.
* No-par value shares may not be issued by the following entities: banks, trust companies, insurance companies, public utilities,
building & loan association (Sec. 6
Subscriptions constitute a fund to which the creditors have a right to look for satisfaction of their
claims.
The assignee in insolvency can maintain an action upon any unpaid stock subscription in order to
realize assets for the payment of its debts.
A subscription contract subsists as a liability from the time that the subscription is made until
such time that the subscription is fully paid.
Pre-incorporation subscription
RULE: When a group of persons sign a subscription contract, they are deemed not only to make a continuing offer to the
corporation, but also to have contracted with each other as well. Thus, no one may revoke the contract even prior to
incorporation without the consent of all
the others.
WHEN IS A PRE-INCORPORATION SUBSCRIPTION IRREVOCABLE?
1)
(1)
unless all
revocation; or
of
the
other
subscribers
consent
to
the
(2)
unless the incorporation of said corporation fails to
materialize within the said period or within a longer period as
may be stipulated in the contract of subscription
2) After the AOI have been submitted to the SEC (Sec. 61)
UTAH HOTEL CO V. MADSEN (43 Utah 285, 134 Pac. 557; 1913)
Sec 332 in express terms confers powers upon the stockholders to regulate the mode of making
subscriptions to its capital stock and calling in the same by-laws or by express contract.
Since it may be done by express contract, this shows that it was intended that a contract to that effect may be
entered into even before the corporation is organized, and the contract agreement is enforced if the corporation
is in fact organized.
Post-incorporation subscription
NOTE:
1)
2)
3)
cash;
more
productive
Note: In Nos. (2) and (3), such acts require approval of 2/3 of the OCS or
2/3 of total members.
In Close Corporations
In close corporations, the preemptive rights extends to ALL stock to be issued, including re-issuance of treasury
shares, EXCEPT if provided otherwise by the AOI. (Sec. 102). Note that the limitations in Sec. 39 do not apply.
Injunction;
Mandamus;
Cancellation of the shares (NOTE: but only if no innocent 3rd parties are
In certain cases, a derivative suit
prejudiced)
Debt Securities
Borrowings
Borrowings are usually represented by promissory notes, bonds or debentures.
Oftentimes, a financial institution will be willing to lend large amounts to private corporations only
on the condition that such institution will have some representation on the Board of Directors. The role of
such representative is to see to it that his institution's investment is protected from mismanagement or
unfavorable corporate policies.
MERRITT-CHAPMAN & SCOTT CORP. VS. NEW YORK TRUST CO. (184 F. 2d 954;
1950)
If the corporation is allowed to declare stock dividends without taking account of the warrant holders
(who have not yet exercised their warrant), the percentage of interest in the common stock capital of the
corporation which the warrant holders would acquire, should they choose to do so, could be substantially
reduced/diluted. Thus, the corporation is wrong in contending that a warrant holder must first exercise his
warrant before they may be issued stock dividend.
Hybrid securities
Because preferred shares and bonds are created by contract, it is possible to create stock which approximates
the characteristics of debt securities. Hybrid securities, as the name implies, therefore combine the features of preferred
shares and bonds.
Determining the true nature of the security is crucial for tax purposes. The American courts use the following
criteria:
(1) Is the corporation liable to pay back the investor at a fixed maturity date?
(2) Is interest payable unconditionally at definite intervals, or is it dependent on earnings?
(3) Does the security rank at least equally with the claims of other creditors, or is it subordinate to them?
WHAT IS THE NATURE OF THE SECURITY AND THE PAYMENT MADE?
BONDS
STOCK
WHAT IS PAID?
Interest
Dividends
TO WHOM PAID?
Creditor-investor
Stockholder
WHEN PAID?
NATURE
Expense
Not an expense
TAXABILITY
CANNOT be deducted
MATURITY DATE?
Yes
No
RANK ON
DISSOLUTION
Superior to stockholders,
inferior to corporate
creditors
JOHN KELLY VS. CIR TALBOT MILLS VS. CIR (326 U.S. 521; 1946)
In the Kelly case, the annual payments made were interest on indebtedness (therefore, a bond is held)
because there were sales of the debentures as well as exchanges of preferred stock for debentures, a promise to
pay a certain annual amount if earned, a priority for the debentures over common stock and a definite maturity
date in the reasonable future.
In the Talbot Mills case, the annual payments made were dividends and not interest (therefore, shares are
held), because of the presence of fluctuating annual payments with a 2% minimum, and the limitation of the
issue of notes to stockholders in exchange only for stock. Besides, it is the Tax Court which has final
determination of all tax issues which are not clearly delineated by law.
The payments made, regardless of what they are called, are in fact dividends (on stocks) because of the
absence of a maturity date and the right to enforce payment of the principal sum by legal action, among other
factors.
The following criteria should be used in determining whether a payment is for interest or dividends:
(1) maturity date and the right to enforce collection;
(2) treatment by the parties;
(3) rank on dissolution;
(4) uniform rate of interest payable or income payable only out of profits;
(5) participation in management and the right to vote.
It must be noted that these criteria are not of equal importance and cannot be relied upon individually. E.g.
treatment accorded the issuance by the parties cannot be sufficient as this would allow taxpayers to avoid taxes
by merely naming payments as interest.
(1) debtor-corporation
(2) creditor-bondholder
(3) trustee: representative of all the bondholders
cash;
property actually received by the corporation: must be necessary or convenient for its use
and lawful purposes;
labor performed for or services actually rendered to the corporation
(NOTE: Future services are NOT acceptable!);
previously incurred indebtedness by the corporation;
amounts transferred from unrestricted retained earnings to stated capital;
outstanding shares exchange for stocks in the event of reclassification or conversion
future services
promissory notes
value less than the stated par value
Watered Stocks
(2)
Upon payment of less than its par value in money or for cost at a discount;
(3)
Upon payment with property, labor or services, whose value is less than the par value of
the shares; and
(4)
In the guise of stock dividends representing surplus profits or an increase in the value of
property, when there are no sufficient profits or sufficient increases in value to justify it.
PRIVATE TRIPLEX SHOE V. RICE & HUTCHINSTC \L 1 "TRIPLEX SHOE V. RICE &
HUTCHINS" (72 A.L.R. 932; 1930)
In this case, the stocks issued to the Dillman faction were no par value shares, the consideration for which
were never fixed as required by law. Hence, their issuance was void. Moreover, the stocks were issued to the
Dillmans for services rendered and to be rendered. Future services are not lawful consideration for the issuance of
stock.
McCarty agreed to purchase shares of a corp. with a downpayment of only $20, with the balance due to be
evidenced by a note. McCarty failed to pay a big portion of the balance. The Court affirmed the judgement against
McCarty for the balance due on the contract.
McCarty contends that the contract is void. But the law only prohibits the issuance of stock. If it is
understood that the stock will not be issued to the subscriber until the note is paid, the contract is valid and not
illegal.
If a security such as a note, which is not a valid consideration, is accepted, the law does not say that such
note, or the stock issued for it, shall be void. What is void by express provision of law is the fictitious increase of
stock or indebtedness. The law was designed for the protection of the corporation and its creditors. It emphasizes
the stockholders obligations to make full and lawful payment in accord with its mandate, rather than furnish him
with a defense when he has failed in that obligation. Its purpose is to give integrity to the corporations capital.
None of these objects would be promoted by declaring a note given by a subscriber for stock uncollectible in the
hands of a bona fide stockholder.
Issuance of Certificate
Certificate of stock
CONDITION FOR ISSUANCE:
BEARS:
AMOUNT ISSUED:
1. kind of shares
2. date of issuance
3. par value, if par value shares
Signatures of the proper officers, usually president
or secretary, as well as the corporate seal
For no more than the number of shares authorized in
articles of incorporation; excess would be void
interests therein. The certificate is not stock in the corporation but is merely evidence of the holder's
interest and status in the corporation, his ownership of the shares represented thereby, but is not in law
the equivalent of such ownership. It expresses the contract between the corporation and the SH, but it is
not essential to the existence of a share in stock or the creation of the relation of shareholder to the
corporation. (Tan v. SEC, 206 SCRA 740)
Unpaid Subscriptions
Unpaid subscriptions are not due and payable until a call is made by the corporation for payment.
(Sec. 67)
Interest on all unpaid subscriptions shall be at the rate of interest fixed in the by-laws. If there is
none, it shall be the legal rate. (Sec. 66)
It was held that the Board call became immaterial in insolvency which automatically causes all unpaid
subscriptions to become due and demandable.
Chua Soco bought 500 shares of China Banking Corp. at par value of P100.00, paying the sum of
P25,000.00, 50% of the subscription price. Chua mortgaged the said shares in favor of plaintiff Fua Cun to
secure a promissory note for the sum of P25,000.00. In the meantime, Chua Soco's interest in the 500 shares
were attached and levied upon to satisfy his debt with China Banking Corp. Fua Cun brought an action to have
himself declared to hold priority over the claim of China Bank, to have the receipt for the shares delivered to
him, and to be awarded damages for wrongful attachment, on the ground that he was owner of 250 shares by
virtue of Chua Soco's payment of half of the subscription price.
The Court held that payment of half the subscription price does not make the holder of stock the owner
of half the subscribed shares. Plaintiff's rights consist in an equity in 500 shares and upon payment of the
unpaid portion of the subscription price he becomes entitled to the issuance of certificate for the said 500 shares
in his favor.
Effect of delinquency
The holder thereof loses all his rights as a stockholder except only the rights to dividends;
2.
Dividends will not be paid to the stockholder but will be applied to the unpaid balance of his
subscription plus costs and expenses. Also, stock dividends will be withheld until full
payment is made.
3.
Such stockholder cannot vote at the election of directors or at any meeting on any matter
proper for stockholder action.
4.
5.
WHAT IS THE PROCEDURE FOR THE CONDUCT OF A DELINQUENCY SALE? (Sec. 68)
WHAT IS THE PROCEDURE FOR THE ISSUANCE OF NEW CERTIFICATES TO REPLACE THOSE
STOLEN, LOST OR DESTROYED? (Sec. 73)
(1) File an affidavit in triplicate with the corporation. The affidavit must state the following:
(a) Circumstances as to how the certificates were SLD;
(b) Number of shares represented; and
(c) Serial number of the certificate
(d) Name of issuing corporation
(2) The corporation will publish notice after the affidavit and other information and evidence have
been verified with the books of the corporation, (Note however that this is not mandatory. The
corporation has the discretion to decide whether to publish or not.)
The notice will contain the following information:
(a)
(b)
(c)
(d)
(e) Effect of expiration of 1 year period from publication and failure to present contest
within that period.
(3) SLD certificate is removed from the books if after one year from date of last publication, no
contest is presented.
NOTE: One-year period will not be required if the applicant files a bond good for
1 year.
(4) The corporation will then issue new certificates.
However, if a contest has been presented to the corporation, or if an action is pending court
regarding the ownership of the SLD certificate, the issuance of the new certificate shall be
suspended until the final decision by the court.
NOTE: Should corporation issue new certificates without the conditions being fulfilled and a third
party proves that he is the rightful owner of the shares, the corporation may be held liable to the
latter EVEN IF it acted in good faith.
NOTE: Even if the above procedure was followed, if there was fraud, bad faith, or negligence on
the part of the corporation and its officers, the corporation may be held liable.
TRANSFER OF SHARES
HOW ARE SHARES OF STOCK TRANSFERRED?
By delivery of the certificate/s indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer. (Sec. 63)
WHAT ARE THE REQUISITES FOR A VALID TRANSFER?
(1) Delivery;
(2) Indorsement by the owner or his attorney-in-fact or other persons legally authorized to make
the transfer
Indorsement of the certificate of stock is a mandatory requirement of law for an
effective transfer of a certificate of stock. (Razon v. CA, 207 SCRA 234)
(3) Recording of the transfer in the books of the corporation (so as to make the transfer valid as
against third parties)
Until registration is accomplished, the transfer, though valid between the parties,
cannot be effective as against the corporation. Thus, the unrecorded transferee cannot
enjoy the status of a SH: he cannot vote nor be voted for, and he will not be entitled to
dividends.
UNAUTHORIZED TRANSFERS
that relying on the stock certificate, the purchaser believes the possessor to be the owner
thereof or has authority to transfer the same.
This proceeds from the theory of quasi-negotiability which provides that in endorsing a certificate in blank,
the real owner clothes the possessor with apparent authority, thus, estopping him later from asserting his
rights over the shares of stock against a bona fide purchaser.
Quasi-negotiability does not apply in cases where the real owner:
a.
b.
Forged Transfers
A corporation does not incur any misrepresentation in the issuance of a certificate made pursuant
to a forged transfer. It can always recall from the person the certificate issued, for cancellation.
In case where the certificate so issued comes into the hands of a bona fide purchaser for value
from the original purchaser, the corporation is estopped from denying its liability. It must recognize both
the original and the new certificate. But if recognition results to an over-issuance of shares, only the
original certificate may be recognized, without prejudice to the right of the bona fide purchaser to sue the
corporation for damages.
takes it without prejudice to such rights or defenses as the registered owner or credit may have under the law,
except in so far as such rights or defenses are subject to the limitations imposed by the principles governing
estoppel.
Collateral Transfers
Shares of stock are personal property. Thus, they can either be pledged or mortgaged. However, such pledge or
mortgage cannot have any legal effect if it is registered only in the corporate books.
Where a certificate is delivered to the creditor as a security, the contract is considered a pledge, and the Civil
Code will apply.
If the certificate of stock is not delivered to the creditor, it must be registered in the registry of deeds of the
province where the principal office of the corporation is located, and in case where the domicile of the stockholder is in a
different province, then registration must also be made there.
In a situation where, the chattel mortgage having been registered, the stock certificate was not delivered to the
creditor but transferred to a bona fide purchaser for value, it is the rule that the bona fide purchaser for value is bound by
the registration in the chattel mortgage registry. It is said that such a rule tends to impair the commercial value of stock
certificates.
NON-TRANSFERABILITY
IN NON-STOCK CORPORATIONS
Although shares of stock are as a rule freely transferable, membership in a non-stock corporation is personal and
non-transferable, unless the articles of incorporation or by-laws provide otherwise. The court may not strip him of his
membership without cause. (Sec. 90)
Cash
2.
Property
3.
scrip - certificate issued to SHs instead of cash dividends which entitles them to a certain amount
in the future
Stock dividends
Stock dividends are distribution to the SHs of the companys own stock.
Stock dividends cannot be declared without first increasing the capital stock unless unissued
shares are available.
New shares are issued to the SHs in proportion to their interest.
No new income unless sold for cash.
Civil fruits belong to the usufructuary and not to the naked owner.
Can only be issued to SHs.
Whenever fractional shares result, corp may pay in cash or issue fractional share warrants.
Stock Dividend
Voting requirements
for issuance
Board of Directors
Board of Directors +
2/3 OCS
Effect on delinquent
stock
premium on par stock i.e. difference between par value and selling price of stock by corp
since this is regarded as paid-in capital; but SEC allowed declaration of stock dividends
out of such premiums
transactions involving treasury stocks which are considered expansions and contractions
of paid-in capital;
If subscribed shares have not been fully paid, the unpaid portion of subscribed capital stock is an asset,
and as long as the net capital asset (after payment of liabilities) including this unpaid portion is at least
equal to the total par value of the subscribed shares, any excess would be surplus or earnings from which
dividends may be declared. However, if a deficit exists, subsequent profits must first be applied to cover
the deficit.
Restrictions on dividend distribution include:
BOD has discretion whether or not to declare dividends and in what form.
Exception:
However, such discretion cannot be abused and the BOD cannot accumulate surplus profits
unreasonably on the excuse that it is needed for expansion or reserves.
2.
BOD should declare dividends when surplus profits of the corporation exceed 100% of the
corporation's paid-in capital stock.
Exceptions:
(a) When justified by definite corporate expansion projects or programs approved by the Board;
(b) When creditors prohibit dividend declaration without their consent as a condition for the loan,
and such consent has not yet been secured;
(c) When retention is necessary under special circumstances obtaining in the
corporation, e.g. when there is a need for special reserve for probable contingencies. (Sec.
43)
4.
The corporation may be subjected to additional tax when it fails to declare dividends, thereby
unreasonably accumulating profits. (See Sec. 25, NIRC)
5.
The dividends received are based on stock held whether or not paid. However, if the stocks are
delinquent, the amount will first be applied to the payment of the delinquency plus costs and
expenses; stock dividends will not be given to a delinquent SH.
Preference as to Dividends
BURK V. OTTAWA GAS & ELECTRIC CO. (123 Pac. 875; 1912)
An action was brought by the preferred SHs of Ottawa against the directors of Ottawa to (1) require the
directors to account for all the property and assets of the corporation, (2) declare such dividends from the net
profits of the business of such co. as should have been declared since 1 Jan. 1906, and (3) restrain the officers
and directors during the pendency of the action from paying out any of the money or disposing of the assets of
the company except such amounts as should be necessary to pay the actual necessary current expenses of
conducting the business of the corporation.
The BOD maintained that the corporation's funds were exhausted by expenditures for the extension of
the cos plant, hence it was unable to declare dividends. Expenditures were said to be necessary and for the
betterment of the plant.
Were the corp funds were wrongfully diverted, and were preferred SHs entitled to dividends?
The case was remanded to the trial court, with instructions to make further findings to protect the
preferred SHs in their rights.
The fair interpretation of the contract between Ottawa and its SHS is that if in any year net profits are
earned, a dividend is to be declared. To hold otherwise, meaning if the BOD had absolute discretion when to
declare dividends and when not to, when the corporation has funds for such dividends, would result in
temptation to unfair dealing, giving one party the option to pay the other or not. In the case at bar, the
accumulated profits would be lost forever since the dividends were non-cumulative.
Preferred SHs, however, are not generally creditors until dividends are declared. In the case at bar, if
dividends should have been declared to such SHs, they are considered creditors from that time.
communicated to the
NOTE: When no dividends are declared for 3 consecutive years, preferred SHs are given
the right to vote for directors until dividends are declared.
NOTE: The extent of the SHs share in the dividends will depend on the capital contribution;
NOT the number of shares he has.
WHAT ARE THE REQUISITES FOR ACQUISITION BY THE CORPORATION OF ITS OWN SHARES?
(Sec. 41)
1.
2.
FOR WHAT PURPOSES CAN A CORPORATION ACQUIRE ITS OWN SHARES? (Sec. 41)
1.
2.
3.
To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
Corporation Code (Appraisal Right).
WHAT IS THE EFFECT OF DEMAND FOR PAYMENT IN ACCORDANCE WITH THE APPRAISAL
RIGHT? (Sec. 83)
All rights accruing to the shares, including voting and dividend rights, are suspended in accordance
with the Corporation Code, except for the right of the SH to receive payment of the fair value thereof.
Such suspension shall be from the time of demand until either:
(1) abandonment of the corporate action involved; or
(2) the purchase of the said shares by the corporation.
However, if said dissenting SH is not paid the value of his shares within 30 days after the award, his
voting and dividend rights shall immediately be restored.
WHAT ARE THE DUTIES OF THE DISSENTING STOCKHOLDER IN RELATION TO THE EXERCISE
OF THE APPRAISAL RIGHT?
The dissenting SH must submit the certificates of stock representing his shares to the corporation
for notation thereon that such shares are dissenting shares within 10 days after demanding payment for
his shares. Failure to do so shall, at the option of the corporation, terminate his rights under Title X of the
Corporation Code. (Sec. 86)
WHAT ARE THE EFFECTS OF TRANSFER OF THE CERTIFICATES BEARING THE NOTATION THAT
THEY REPRESENT DISSENTING SHARES?
If the certificates are consequently cancelled, the rights of the transferor as a dissenting SH cease
and the transferee has all the rights of a regular stockholder. All dividend contributions which would have
accrued on the shares will be paid to the transferee. (Sec. 86)
AMENDMENTS OF CHARTER
The charter of a private corporation consists of its articles of incorporation as well as the Corporation Code
and such other law under which it is organized.
Amendment by Legislature
Subject to the limitation that no accrued rights or liabilities be impaired, the legislature has the
power to make changes in existing corporations through an amendment to the Corporation Code.
Amendment by Stockholders
One of the powers expressly granted by law to all corporations is the power to amend its articles
of incorporation. This, in effect, is a grant of power to owners of 2/3 of the outstanding stocks to change
the basic agreement between the corporation and its stockholders, making such change binding on all the
stockholders, subject only to the right of appraisal, if proper.
(1)
(2)
PURPOSE:
must be legitimate
VOTE:
The appraisal right must be recognized in case the amendment has the effect of changing
rights of any stockholder or class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or extending or shortening the term of
corporate existence.
Extension of corporate term cannot exceed 50 yrs. in any one instance
(3)
A copy of the amended articles should be filed with the SEC, and with the proper
governmental agencies, as appropriate (e.g., in the case of banks, public utilities, etc.)
(4)
Original and amended articles should contain all matters required by law to be set out in said
articles.
(5)
(6)
Required percentage of ownership of capital stock to be owned by citizens of the Phils. has not
been complied with as required by the Constitution or existing laws;
Effectivity of amendment
Amendments take effect only from the approval by the SEC. However, such approval or rejection
must be made within six months of filing of amendment; otherwise it shall take effect even w/o such
approval (as of the date of filing), unless cause of delay is attributable to the corporation. (Sec. 16)
Special amendments
(1) All issued stock of all classes should be held by not more than 20;
(2) All issued stock shall be subject to one or more specified restrictions on transfer permitted by
law;
(3) Corporation should not be listed in the stock exchange or make any public offering of its
stock.
If any of these are deleted, then the corporation will cease to be a close corporation and will lose
the special privileges of such corporations. Thereafter, it will be governed by the general provisions of
the Code. Since such amendment involves a change in the nature of the corporation, even non-voting
stocks are given a voice in the decision. A stockholders meeting is required and a 2/3 vote must
approve the amendment, unless otherwise provided by the articles of incorporation.
DISSOLUTION
Modes of Dissolution
(b) Quo Warranto proceedings (See Sec. 5b, PD 902-A and Rule 66, Rules of
Court. Previously, the SEC had exclusive jurisdiction over quo warranto proceedings
involving corporation. Under the Securities Regulation Code or RA 8799, however, the
jurisdiction of the SEC over all cases enumerated under Sec. 5 of PD 902-A have been
transferred to the Regional Trial Courts.
The grounds for involuntary dissolution of a corporation under quo warranto proceedings
are:
(1) When the corporation has offended against a provision of an act for
its creation or renewal;
(2) When it has forfeited its privileges and franchises by non-user;
(3) When it has committed or omitted an act which amounts to a
surrender of its corporate rights, privileges or franchises;
(4) When it misused a right, privilege or franchise conferred upon it by
law, or when it has exercised a right, privilege or franchise in
contravention of law
(PNB v. CFI, 209 SCRA 294; 1992)
(4) Shortening of corporate term (Sec. 120)
NOTE: The simplest and most expedient way of effecting dissolution
is by shortening the corporate term and waiting for such term
to expire.
Illegal;
Fraudulent;
Dishonest;
Oppressive or unfairly prejudicial to the corporation
or any other SH;
Effects of Dissolution
Corporation ceases to be a juridical person and consequently can no longer continue transacting
its business.
Corporate existence continues for 3 years following dissolution for the ff. purposes only:
Corporation can no longer continue its business, except for winding up.
NOTE that the subsequent dissolution of a corporation may not remove or impair any right or remedy in
favor of or against, nor any liability incurred by, any corporation, its stockholders, members, directors,
trustees or officers. (Sec. 145)
The prevailing view is that executory contracts are not extinguished by dissolution. Sec. 145 of
the Code states that "No right or remedy in favor of or against any corporation.nor any liability
incurredshall be removed or impaired either by the subsequent dissolution of said corp. or by any
subsequent amendment or repeal of this Code or of any part thereof."
Liquidation
2.
Conveyance of all corporate assets to trustees who will take charge of liquidation.
If this method is used, the 3-year limitation will not apply provided the designation of the
trustees is made within said period. There is no time limit within which the trustee must finish
liquidation, and he may sue and be sued as such even beyond the 3-year period unless the
trusteeship is limited in its duration by the deed of trust. (See Nat'l Abaca Corp. v. Pore,
supra)
3.
Liquidation is conducted by the receiver who may be appointed by the SEC upon its
decreeing the dissolution of the corp.
As with the previous method, the three-year rule shall not apply. However, the mere
appointment of a receiver, without anything more, does not result in the dissolution of the
corporation nor bar it from the exercise of its corporation rights.
(3)
(4)
No corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities. (Sec. 122)
EXCEPTION:
TAN TIONG BIO V. CIR (G.R. No. L-15778; April 23, 1962)
The creditor of a dissolved corp. may follow its assets, as in the nature of a trust fund, once they pass
into the hands of the stockholders. The dissolution of a corp. does not extinguish the debts due or owing to it.
An indebtedness of a corp. to the government for income and excess profit taxes is not extinguished by
the dissolution of the corp. The hands of government cannot, of course, collect taxes from a defunct
corporation, it loses thereby none of its rights to assess taxes which had been due from the corporation, and to
collect them from persons, who by reason of transactions with the corporation hold property against which the
tax can be enforced and that the legal death of the corporation no more prevents such action than would the
physical death of an individual prevent the government from assessing taxes against him and collecting them
from his administrator, who holds the property which the decedent had formerly possessed. Thus, petitioners
can be held personally liable for the corporation's taxes, being successors-in-interest of the defunct corporation.
(1)
All liabilities and obligations of the corporation shall be paid, satisfied, and discharged, or
adequate provision shall be made therefor.
(2)
Assets held by the corporation upon a condition requiring return, transfer or conveyance,
and which condition occurs by reason of the dissolution, shall be returned, transferred or
conveyed in accordance with such requirements.
(3)
Assets received and held by the corporation subject to limitations permitting their use only
for charitable, religious, benevolent, education or similar purposes, but not subject to
condition (2) above, shall be transferred or conveyed to one or more corporations, societies
or organization engaged in activities in the Philippines substantially similar to those of the
dissolving corp. according to a plan of distribution adopted pursuant to Sec. 95 of the Code.
(4)
(5)
In any other case, assets may be distributed to such persons, societies, organizations or
corporations, whether or not organized for profit, as may be specified in a plan of
distribution adopted pursuant to Sec. 95.
* The plan of distribution of assets may be adopted by a majority vote of the Board of trustees
and approval of 2/3 of the members having voting rights present or represented by proxy at the
meeting during which said plan is adopted.
It must be noted that the plan of distribution of assets must not be inconsistent with the provisions
of Title XI of the Code.
CORPORATE COMBINATIONS
Techniques to achieve corporate combinations
(1) Merger (A + B = A)
(2) Consolidation (A + B = C)
(3) Sale of substantially all corporate assets and purchase thereof by another corporation;
(4) Acquisition of all / substantially all of the stock of one corporation from its SHs in exchange
for the stock of the acquiring corporation
Merger or Consolidation
(1) Majority vote of BOD + 2/3 vote of OCS or members at a meeting duly called for the
purpose;
(2) Compliance with the laws on illegal combinations and monopolies
Note, however, that after such approval by the SHs, the BOD may nevertheless, in its discretion,
abandon such sale or other disposition without further action or approval by the SHs. This, of course, is
subject to the rights of third parties under any contract relating thereto.
(1) If the disposition is necessary in the usual and regular course of business; or
(2) If the proceeds of the disposition be appropriated for the conduct of its remaining business
(Sec. 40)
IS THE APPRAISAL RIGHT AVAILABLE TO DISSENTING STOCKHOLDERS?
Yes. However, it must be stressed that this right is generally available only to dissenting
stockholders of the selling corporation, not the purchasing corporation. (It can be argued, though, that in
instances wherein the purchase constitutes an investment in a purpose other than its primary purpose,
stockholders' approval of such investment is necessary, and anyone who objects thereto will have the
appraisal right under Sec. 42.)
Exchange of stocks
In this method, all or substantially all the stockholders of the "acquired" corporation are made
stockholders of the acquiring corporation. With the exchange, the acquired corporation becomes a
subsidiary of the acquiring corporation. Although this method does not combine the 2 businesses
under a single corporation as in merger and sale of assets, from the point of view of the acquiring
(parent) corporation, there is hardly any difference between owing the acquired corporation's
business directly and operating it through a controlled subsidiary. In fact, the parent corporation
would have the power to buy all the subsidiary's assets and dissolve it, achieving the same result as
in the other methods of combination. (Campos & Campos)
FOREIGN CORPORATIONS
WHAT IS A FOREIGN CORPORATION? (Sec. 123)
A corporation formed and organized under laws other than those of the Philippines, regardless of
the citizenship of the incorporators and stockholders. Such corporation must have been organized
and must operate in a country which allows Filipino citizens and corporations to do business there.
In times of war:
100% EQUITY:
70%-30% EQUITY:
Advertising
60%-40% EQUITY:
Other industries.
Application under oath setting forth the information specified in Sec. 125;
Duly executed certificate under oath by authorized official/s of the jurisdiction of the
company's incorporation, attesting to the fact that the laws of the country of the applicant
allow Filipino citizens and corporations to do business therein, and that the applicant is an
existing corporation in good standing;
Statement under oath of the president or any other person authorized by the corporation
showing that the applicant is solvent and in good financial condition, and setting forth the
assets and liabilities of the corporation within 1 year immediately prior to the application.
Once the licensee ceases to do business in the Philippines, these deposited securities shall be returned, upon the
licensee's application and proof to the satisfaction of the SEC that the licensee has no liability to Philippine residents or
the Philippine government.
Note: Foreign banking and insurance corporations are the exceptions to this requirement.
(1) The corporation will not be permitted to maintain agency in the Philippines;
(2) The corporation will be subject to penalties and fines;
(3) The corporation will not be permitted to maintain or intervene in any action before Philippine
courts or administrative agencies; it can be SUED.
Isolated transactions
ATLANTIC MUTUAL V. CEBU STEVEDORING (G.R. No. 18961; Aug. 31, 1966)
A foreign corp. engaged in business in the Phil. can maintain suit in this jurisdiction if it is duly licensed.
If a foreign corp. is not engaged in business in the Phil., it can maintain such suit if the transaction sued upon is
singular and isolated, in which no license is required. In either case, the fact of compliance with the requirement
of license, or the fact that the suing corp. is exempt therefrom, as the case may be, cannot be inferred from the
mere fact that the party suing is a foreign corp. The qualifying circumstance, being an essential part of the
element of the plaintiffs capacity to sue, must be affirmatively pleaded. In short, facts showing foreign
corporations capacity to sue should be pleaded.
Curing of defect
NOTE: Sec. 160 of R.A. 8293 (Intellectual Property Code) provides that any foreign national or
juridical person who meets the requirements of Sec. 3 of the Act (i.e., is a national or is
domiciled in a country party to any convention, treaty or agreement relating to intellectual
property rights or the repression of unfair competition, to which the Philippines is also a
party, or extends reciprocal rights to Philippine nationals by law) and does not engage in
business in the Philippines may bring a civil or administrative action for opposition,
cancellation, infringement, unfair competition, or false designation of origin and false
description, whether or not it is licensed to do business in the Philippines under existing
laws.
WHAT IS CONSIDERED AS NOT DOING BUSINESS, AND THEREFORE NOT SUBJECT TO THE
LICENSING REQUIREMENT?
Mere investment as a shareholder and the exercise of the rights as such investor;
The Supreme Court held that the petitioner may be considered as doing business in the Philippines
within the scope of Sec. 14, Rule 14 of the Rules of Court:
Sec. 14. Service upon private foreign corp. - If the defendant is a foreign corp., or a non-resident
joint stock corporation or association, doing business in the Phil., service may be made on its
resident agent, on the government official designated by law to the effect, or to an y of its officers
or agents within the Philippines.
FMC had appointed Jaime Catuira as its agent with authority to execute Employment Contracts and
receive, on behalf of the corp., legal services from, and be bound by processes of the Phil. Courts, for as long as
he remains an employee of FMS. If a foreign corp. not engaged in business in the Phil., through an Agent, is
not barred from seeking redress from courts in the Phil., that same corp. cannot claim exemption done against a
person or persons in the Phil..
NOTE:
Under Sec. 12, Rule 14 of the 1997 Rules of Civil Procedure, the term "doing business"
has been replaced with the phrase "has transacted business," thereby allowing suits
based on isolated transactions.
PACIFIC VEGETABLE OIL V. SINGSON (G.R. No. 7917; April 29, 1955)
This is an action instituted by the plaintiff, a foreign corporation, against the defendant to recover a sum
of money for damages suffered by the plaintiff as a consequence of the failure of the defendant to deliver copra
which he sold and bound himself to deliver to the plaintiff. Defendant filed a motion to dismiss on the ground
that the plaintiff failed to obtain a license to transact business in the Phil and, consequently, it had no personality
to file an action.
Has appellant transacted business in the Philippines in contemplation of law?
Contrary to the findings of the trial court, the copra in question was actually sold by the defendant to the
plaintiff in the US, the agreed price to be covered by an irrevocable letter of credit to be opened at the Bank of
California, and delivery to be made at the port of destination. It follows that the appellant corporation has not
transacted business in the Phil in contemplation of Sec. 68 and 69 which require any foreign corporation to
obtain a license before it could transact business, or before it could have personality to file a suit in the Phil.. It
was never the purpose of the Legislature to exclude a foreign corporation which happens to obtain an isolated
order of business from the Phil., from securing redress in the Phil. Courts, and thus, in effect, to permit persons
to avoid their contracts made with such foreign corp.. The lower court erred in holding that the appellant
corporation has no personality to maintain the present action.
AETNA CASUALTY & SURETY CO. VS. PACIFIC STAR LINE (80 SCRA 635; 1977)
Aetna as subrogee of I. Shalom sued Pacific Star Line (PSL), the common carrier for the loss of Linen &
Cotton piece goods due to pilferage and damage amounting to US$2,300.00. PSL contends that Aetna has no
license to transact insurance business in the Philippines as gathered from the Insurance Commission and SEC .
It also argues that since said company has filed 13 other civil suits, they should be considered as doing business
here and not merely having entered into an isolated transaction.
Based on rulings in Mentholatum and Eastboard Navigation, the Supreme Court held that Aetna is not
transacting business in the Philippines for which it needs to have a license. The contract was entered into in
New York and payment was made to the consignee in the New York branch. Moreover, Aetna was not engaged
in the business of insurance in the Philippines but was merely collecting a claim assigned to it by consignee.
Because it was not doing business in the Philippines, it was not subject to Sec. 68-69 of the Corporation Law
and therefore was not barred from filing the instant case although it had not secured a license to transact
insurance business in the Philippines.
As a rule, jurisdiction over a foreign corporation is acquired by the courts through service of summons on its resident
agent.
If there is no assigned resident agent, the government official designated by law can receive the summons on their
behalf and transmit the same to them by registered mail within 10 days. This will complete the service of the summons.
Summons can also be served on any of the corporation's officers or agents within the Philippines. (See Sec. 128; Rule
14, Sec. 12, Rules of Court. Note that while Sec. 128 presupposes that the foreign corporation has a license, Rule 14
does not make such an assumption.)
Note that if there is a designated agent, summons served upon the government official is not deemed a valid process.
Johnlo Trading case holds that the service on the attorney of an FC who was also charged with the
duty of settling claims against it is valid since no other agent was duly appointed.
Service on Officers or Agents of an foreign corporations domestic subsidiary will only vest jurisdiction
if there is sufficient ground to disregard the separate personalities.
Failure to file its annual report or pay any fees as required by the Corporation Code;
(2)
(3)
Failure, after change of resident agent or of his address, to submit to the SEC a statement
of such change;
(4)
Failure to submit to the SEC an authenticated copy of any amendment to its AOI or by-laws
or of any articles of merger or consolidation within the time prescribed by the Code;
(5)
(6)
Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to
the Philippine government or any of its agencies or political subdivisions;
(7)
Transacting business in the Philippines outside of the purpose/s for which such corporation
is authorized under its license;
(8)
Transacting business in the Philippine as agent of or acting for and in behalf of any foreign
corporation or entity not duly licensed to do business in the Philippines; or
(9)
Any other ground as would render it unfit to transact business in the Philippines.
Educational corporations other than government-run institutions are governed first by special laws,
second, by the special provisions of the Corporation Code, and lastly, by the general provisions of the
Corporation Code. (Sec. 106)
At least 60% of the authorized capital stock of educational corporations must be owned by Filipino
citizens, and Congress may require increased Filipino equity participation therein. (With the
exception of educational institutions established by religious groups and mission boards, which are
not subject to this equity requirement.) However, control and administration of educational
institutions must be vested exclusively in citizens of the Philippines. (Art. XIV, Sec. 4 (2), 1987
Constitution) This means that no alien may be elected as a member of the BOD nor appointed as
Principal or officer thereof.
Once a school, college or university has been granted government recognition by the DECS, it must
incorporate within 90 days from the date of such recognition, unless it is expressly exempt by DECS
for special reasons. (Act 2706, Sec. 5) In addition, it must file a copy of its AOI and by-laws with the
DECS. Without the favorable recommendation of the DECS Secretary, the SEC will not accept or
approve such articles. (Sec. 107, Corporation Code)
Religious corporations
(Sec. 109-116)
Religious corporations are governed by Title XIII, Chapter II of the Corporation Code and by the general
provisions of the Code on non-stock corporations insofar as they may be applicable. (Sec. 109)
the holder of the office is an alien. This ruling is based on the fact that the corporation sole is not the owner but
merely the administrator of the property, and that he holds it in trust for the faithful of the diocese concerned.
(See Gana v. Roman Catholic Archbishop of Manila, 43 O.G. No. 8, 3225; 1947)
Close Corporations
(Sec. 96-105)
WHAT ARE THE REQUISITES OF A CLOSE CORPORATION? (Sec. 96)
A close corporation, within the meaning of the Corporation Code, is one whose articles of
incorporation provide that:
(1) All the corporation's issued stock of all classes, exclusive of treasury shares,
shall be held of record by not more than a specified number of persons not
exceeding 20;
(2) All the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by Title XII of the Code; and
(3) The corporation shall not list in any stock exchange or make any public offering
of any of its stock of any class.
Notes:
A narrow distribution of ownership does not, by itself, make a close corporation. (San
Juan Structural and Steel Fabricators v. CA, 296 SCRA 631)
A corporation shall not be deemed a close corporation when at least 2/3 of its voting
stock or voting rights is owned or controlled by another corporation which is not a close
corporation.
Mining
Oil
Stock Exchange
Bank
Insurance
Public Utilities
Educational Institutions
Corporations declared vested with public interest
"Regular" Corporation
No. of stockholders
No limit
Management
Managed by Board of
Directors
Meetings
Pre-emptive right
Buy-back of shares
Resolution of
deadlocks
Dissolution
corporation
Appraisal Right
Close corporation
"Regular" corporation
When availed of
Only
the
grounds
enumerated in Sec. 81
and Sec. 42
Miscellaneous Provisions
(Sec. 137-149)
The SEC has the power to issue rules and regulations reasonably necessary to enable it to perform
its duties under the Code, particularly in the prevention of fraud and abuses on the part of the
controlling stockholders, members, directors, trustees or officers. (Sec. 143)
Whenever the SEC conducts any examination of the operations, books and records of any
corporation, the results thereof must be kept strictly confidential, unless the law requires them to be
made public or where they are necessary evidence before any court. (Sec. 142)
All domestic and foreign corporations doing business in the Philippines must submit an annual report
to the SEC of its operations, with a financial statement of its assets and liabilities and such other
requirements as the SEC may impose. (Sec. 141)
No right or remedy in favor of or against, nor any liability incurred by, any corporation, its
stockholders, members, directors, trustees or officers, may be removed or impaired by the
subsequent dissolution of said corporation or by any subsequent amendment or repeal of the Code.
(Sec. 145)
Violations of the Corporation Code not otherwise specifically penalized therein are punishable by a
fine of not less than P 1,000.00 but not more than P 10,000.00 or by imprisonment for not less than
30 days but not more than 5 years, or both, in the discretion of the court. If the violation is committed
by a corporation, the same may be dissolved in appropriate proceedings before the SEC. (Sec. 144)