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CORPORATION LAW TSN

Based on the Lectures of Fr. Agustin Nazareno

FIRST EXAM COVERAGE law. It is a creature. In fact, it cannot act without


the agency of natural persons like you and me.
November 15, 2017 How does a corporation enter into
(Eliza Devilleres) contracts?
THE IMPORTANCE OF FORMALITY IN It cannot sign because it has no arm. The Board
CORPORATIONS of Directors pass a resolution approving the
corporation’s entrance into an agreement, and
This is where you have to grasp the importance designates the person who will sign for and in
of formality. For the acts of a corporation, reality behalf of the corporation. Without that natural
is not as important as the formality. person who will sign, there is no contract. In
other words, the corporation is dependent on
Why is it that formality is more important
an AGENT. That is the only time that you see
than reality?
that a principal must act through an agent. It
You will then later on find out that there is such a cannot act by itself. It has no arms, no mouth, no
thing as table meetings of the corporation. The feet. It does not exist, except in contemplation of
board is said to have met but they actually did the law. Now, that is why formality is very
not meet. But all the directors are made to sign important.
beforehand that they already met.
Formality: Whether or not there was a meeting.
What is the reality? If there was a meeting, whether or not there was
a a quorum in that meeting – because quorum
There was no meeting. But formally, there determines validity. Whether or not the
was a meeting because everybody signed an resolution was passed by the required majority –
ostensive minutes of the meeting. whether it be absolute majority or simple
majority or qualified majority (2/3 of the
Who will question whether or not there was a stockholders __ because there are different
meeting? If you sign that there was a gradations in the corporation).
meeting and you were not there, can you say
that there was no meeting – why did you
sign? Now that it the forest – the details. You have to
pay attention to those details. You have to know
all those details, esp. when you are a corporate
secretary of a corporation because that is your
If in that meeting, there was a crucial job. The lawyer in the Board is the one who
resolution that was passed, what is the thinks of the worst so that he can defend the
status of that resolution? Is it binding on the corporation. So that is the reason why details
corporation or is it not? and formality is very important.

It is binding because the formality is there. Now, we go back once more to the Civil Code.
We go back to the notion of PERONALITY. We
Where is the reality? are taught in Civil law that a PERSON is a
subject of rights and obligations. Only a
It is prima facie presumed that that there was a person has rights only a person has obligations.
reality because there was a formality. Because a person has rights and obligations,
only a person can sue and be sued. If you
Why is it that that is the NATURE OF
are not a person, you cannot be sued and
CORPORATE ACTS?
neither can you bring suit. Bisag unsa pa gani
Because, going back to the Civil Code, a nimo ka bright na iro, duklon cyas ulo, mukiha
JURIDICAL PERSON is an artificial being. ba cya? Does he have the personality to bring
Unlike natural persons (like you and me), we suit? NO! Because he is not a natural person.
have a physical existence. The corporation
What does it take to be a natural person?
does not have a physical existence. The
corporation exists in contemplation of the

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

All you have to be is to be born. Neither you, Jollibee. He founded Jollibee, it was his idea, he
much less me, decided that we will be persons. founded it, he pushed it, but it was funded by the
Not even your parents decided that you will be family of his wife. So it is the Lim family who
persons. They were hoping that they could have controls Jollibee. And now Caktiong and the wife
children, but they did not decided anymore than are estranged. So he decides to form his own
the rooster can meet the sunrise by crowing at corporation where he knows he is in control. His
dawn. Somebody else up there decided that you partner is Mr. Edgar Sia is the owner of Mang
will be a person. And so you are – you are the Inasal. Cokationg went and offered him a price
subject of rights and obligations. that he cannot refuse – P900M for 50% of Mang
Inasal. Those are the magic numbers. Mr. Sia
A corporation is a juridical person. That could not refuse because even if she sells 50%,
means, by fiat of law, by consent of the state, it he still runs Mang Inasal. He increased the
is a person – it has rights, it has obligations. branches from 300 to 700. Jollibee was the one
Because it has rights and obligations, it can file financing the expansion. By the time he reached
suit and it can be sued. And precisely because it 700 branches, Jollibee said that it is now time for
is a person, no stockholder can say – even if he us to buy you out – to buy your remaining 48%.
owns 99% of that outstanding shares of the This time it was over a billion pesos. He was
corporation – that he owns that corporation. paid over P1.4B, because it was already bigger
than the original. Together they formed Double
How can you own a person? Dragon. What are they selling? Katol? (Haha).
Unsa man ilang ginabaligya? Have you not
You cannot own a person. heard of Double Dragon? The price of its shares
of stock has already doubled in 3 yrs from the
How is that expressed in Civil Law?
time that there was an initial public offering.
The stockholders’ interest in the corporation is Their strategy is to capture, retail, upper retail of
always inchoate. business through secondary source. They put
up City Mall. Wa na dris Davao because this is
What is inchoate? not considered as a secondary city. But if you go
to Tagum, etc. there is City Mall – a lower cost
Dependent upon a condition that should the mall. BCD market. Retail is a very tricky
corporation dissolve, the corporation has business.
enough assets to be liquidated to answer for its
legally binding and valid obligations. After which,
there is still something left to be divided among
the stockholders in proportion to the ownership So, you have Uber valued at $70B more than
of the outstanding shares. That is the ownership any taxi company in the world and not owning a
of shareholders. single taxi. You have Air BnB that makes
available millions of goods without owning a
So strict language, you say na tag-iya na cyas single hotel. That could not have been done
corporation. Do you use that language? NO! But post-industrial revolution. It’s only done because
there is a caveat there. That is legally deficient we are now in the 3rd industrial revolution and
in language. When you are in a formal setting, that is the digital age. You will later on find out
you cannot use that language because it betrays that the certificate of stock which in law is a
your lack of grasp of basic principles in good evidence of ownership of shares is actually
Corporation Law. No one can own a a barrier for trading. As long as you keep the
corporation. Bisag si Gokongwei, Henry Sy pa. roster of your shareholders by the certificate of
Bisag ikaw pa nagimbento anang korporasyona. stock, you discourage trading. Now, it is de-
Have you heard of Double Dragon? It is a certified shares. It’s now digital shares.
corporation, the controlling stockholders of
which are Batman ad Robin. Bat man is What made the industrial revolution?
Caktiong – the founder and president of Jollibee.
Technology they say, made the industrial
Robin is Mr. Sia – the former owner of Mang
revolution. The invention of the spin engine and
Inasal. Together, they came and form this
the cotton gin. So that now instead of a family
corporation (Double Dragon). Double Dragon
making thread and sowing it into cloth, now it’s a
Story: (Why is Caktiong suddenly forming
factory that does it. They say that is what makes
Double Dragon? Because he does not own

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

the industrial revolution. Except that, supporting I give to you a decision of the Supreme Court –
that is the juridical person of limited liability – the PCGG vs. Pea in relation to Yuchengco vs.
corporation. Without the corporation, there Sandiganbayan wherein Supreme Court says
would have been no large-scale projects, “In PCGG v. Pea, this Court, describing the rule
because it is very difficult to martial huge of Marcos as a well-entrenched plundering
amounts if you do not have limited liability. regime of twenty years, noted the magnitude of
the past regimes organized pillage and the
CORPORATION v. PARTNERSHIP ingenuity of the plunderers and pillagers with the
assistance of the experts and best legal minds
CORPORATION PARTNERSHIP available in the market. The evidence presented
in this case reveals one more instance of this
1.) Ownership of 1.) You cannot grand scheme. This Court guardian of the high
shares can be transfer its standards and noble traditions of the legal
easily shares. The profession has thus before it an opportunity to
transferred transferee undo, even if only to a certain extent, the
2.) You cannot may not be damage that has been done.”
deny agreeable to
transferability the partners. So, it is official pronounced by the Court. Mao na
of shares in What binds inig mitindog kani na si Ferdinand Jr. basaha
the articles of the ning PCGG vs. Pena. Official na! It’s in the
incorporation partnership is books. Dapat sagpaon na siya ni-ini. Organized
of the parties. utmost trust plunder village, magnitude of which has never
You can only and been seen. Basta dili gani ka mubasa ning kaso
put some confidence. ni ug dili ka katubag… HAGBONG KA sa
limitations. 2.) The moment akoang klase. It’s not just a simple case of
that a partner missing the point; you are supposed to be
dies, the enlightened kay kahibalo ka sa balaod.
partnership is
dissolved. There’s a case here which the Supreme Court
removed from its Supreme Court records.
Ngano man? Kay naulaw sila. Ridon vs. AXN
Why do you need to study corporation law? Networks Philippines, it is an En Banc
Because it is the mistress of taxation. It helps Resolution but Per Curiam. It is just the Clerk of
taxation. The ultimate aim is tax. You want to Court and Vidal who says this decision is En
lower taxes, you have to go through importation. Banc. It was for 1 week in the website of the
You know that there are so many corporations Supreme Court but not in the SCRA because it
who have engaged into tax avoidance, like was removed. Ngano man? Nauwaw ang
Shell, etc? there are also Ivy League schools Supreme Court.
which have also these endowment funds which
are all in banks. Discussion about Mighty Corp. Why? Because Gamboa, in the case of Wilson
tax avoidance – P25B. Attorney’s fees of P250M Gamboa vs. Secretary of Finance, that is how
will go to Fortun and Narvasa and Narvasa. they questioned the Filipino composition in the
These gal who who will pocket it will be dancing share holders. Gamboa went straight to the
and smiling all their way to the bank will get Supreme Court for an order of prohibition
P100M – Talks about the alumni of ADDU. I’m against Secretary Teves, asking the court to
not bullshitting you (Haha). order Teves not to sell those shares. Because
that sale would make PLDT a foreign
corporation. The SC entertained it and entered
November 16, 2017 an En Banc decision, by Senior Justice Carpio
(Jennifer Lim) who wrote that decision in 2011 and 2012.

In 2014, Ridon et.al. went straight to the


We parted yesterday with the nationality of a Supreme Court and questioned why AXN, Fox
corporation. The most important issue on the News and all those foreign corporations are
nationality of a corporation is with respect to the allowed to function in the Philippines and even
control test. broadcast.

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

What is the rule with respect to 1. Mass media except recording studios –
communications media? The corporation Article 15 Section 7 of the Constitution.
allowed to stream in the Philippines by the 2. Retail trade business with trade-up
Constitution is 100% Filipino. capital of less than 2.5 million dollars
under RA 8762.
The SC issues an En Banc resolution dismissing 3. Private security agencies under RA
the petition unlike in Wilson Gamboa. It is 5487. Section 4 provides “Private
premature and it should go through the right security agencies must be Filipinos if
channels. they operate within the country.”

Why is it that they allowed Gamboa to go Ngano man nang American executives
straight to the SC? Even the SEC in Wilson nagdala ug foreign security along with
Gamboa followed and issued a memorandum helicopters to the Davao Coal Plant?
this is how we measure a corporation 60% We can only brush aside. We cannot
Filipino, 40% foreign. It was questioned again question that to court. It was said to be a
directly to the SC in ROI vs. SEC and PLDT diplomatic relation.
November 22. 2016. They questioned again the 4. Small scale mining under Section 3 of
memorandum and said that it does not follow the RA 7076. One of the most abused laws.
ruling in Gamboa. It is not small scale at all but hiding
under this law. You must be 100%
Who said it does not follow? The same people in Filipino.
the SC who wrote the in Gamboa. Carpio, 5. Utilization of natural resources under
Sereno, Leonnen, Jardeleza. They still Article 12 Section 2 of the Constitution
entertained it. Why? They should have 6. Cockpits under Section 5 PD 449.
dismissed it following Ridon. Gitangtang kay Should be all Filipino. Pilipino lagi nang
uwaw man kaayo. ni dagan dira pero ang manok foreign
man. Puros man imported.
Let us move to the first attribute that a
7. Manufacture, stock-repair and/or
corporation is an artificial being. That is why
distribution of nuclear weapons under
you cannot say that a stockholder owns a
Article 2 Section 8 of the Constitution.
corporation because it is a person even if that
8. Manufacture of firecrackers and other
person has no being. You cannot own a person
pyrotechnic devices. Section 5 RA 4783.
because it is a free- center, subject to rights and
Very unsafe!
obligations. In other words, it is the only entity in
reality that is given standing by the court. He can
This is why I’m so wary about nationality
sue and be sued-that is standing.
laws because it protects abusive
What is the difference of standing and the Filipinos. They have an unfair
personality to sue? ‘Pag about sa personality, advantage. The Filipinos suffer!
cause of action na. You might have standing but
25% FOREIGN- EQUITY
you are not the proper person to sue. You have
not suffered a wrong. You have no cause of 1. Private recruitment local or overseas
action that is why you have no personality to Article 27 PD 447 Labor Code. Must be
sue. 75% Filipino.
2. Construction and repair of locally funded
Muingon gani ang POEA that there should be no
works.
deployment to Iraq and Afghanistan, kinsa man
3. Construction of defense related
mu-sue? Association of Recruitment and
structures. 25% foreign maximum.
Manning Agencies. Daghan mi mag suffer ani,
wala na mi mapadala sa Iraq. The court says FILIPINO CORPORATIONS- 40% FOREIGN,
you have no personality to sue. It should be the 60% FILIPINO
OFW who should sue because they are the
ones standing to suffer directly to suffer a wrong. 1. Exploration, development and utilization
of natural resources under Article 12
WHAT ARE THE FULLY OR PARTIALLY Section 2 Constitution
NATIONALIZED CORPORATIONS?

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

2. Realty Corporations that own private Because Del Monte obtained ownership of the
lands under Article 12 Section 7 property in Bukidnon in 1899 before the LLA.
3. Operation and management of public They are not covered by it. Of course, they
utilities under Article 12 Section 11. transferred it later on to Campos. Del Monte now
4. Culture, milling, processing, trading is owned by Mr. Campos and his group – the
except retail of rice and corn and by Maveric group. Datu Puti, Mang Tomas. Where
products. Section 5 PD 194. did he get his money? You read Yuchiengco.
5. Adjustment companies. i.e. appraisers Because his father was a friend of Marcos even
before he became congressman. Mr. Campos
They are different from asset valuators was the one who was first to return hidden
who are employed in mergers and wealth entrusted to him by Marcos. He owned
acquisitions that come with value of the biggest pharmaceutical company in the
machineries and buildings and how they Philippines, UNILAB. It became really big
are to be reckoned with. There is a because at the time of Marcos, the DOH was
different body that controls it just like directly transacting with them. They did toll-
CPAs, CNAs they are asset valuators. manufacturing. Unlike in India, they just copy the
composition of medicines and produce their
In the Philippines, if you are an own. They say “To hell with copyright!”.
appraiser, the maximum capital is 25%.
If you exercise the profession is 100%.
That is why SGV split because they are *Talks about the current US President.*
beginning to be controlled by Ernst and
Young. Wa sila gisumbong ilahang
founder na si Washington Sycip who is
an American citizen. Born in the November 17, 2017 (1st Half)
Philippines but never changed his (Therese Candolita)
citizenship after he stay in Colombia. It
was allowed by the Laurel-Langley We are still in Section 2. The section which
Parity Act – Americans have the same gives us the definition of a Corporation.
rights as Filipinos for 30 years.
Section 2. Corporation defined. A
corporation is an artificial being created
In Quasha vs. Republic, Quasha was an by operation of law, having the right of
American lawyer who came to the Philippines succession and the powers, attributes ad
and started practicing here during the properties expressly authorized by law or
Commonwealth period. incident to its existence.

When the LLA was passed, he continued Attributes of corporations discussed in the first
practicing even after the 2nd World War. He hour:
bought properties one of which was in Forbes A. It is an artificial being
Park. Then, the LLA was about to end in 1965. B. Its legal personality is separate and
He went to the Supreme Court with a petition for distinct from the personality of its
declaratory relief. He was saying “I bought it in stockholders.
good faith. I am the owner of the land in fee- C. It is created by operation of law.
simple which I call home. What will happen after
Parity ends? Will I be stricken-off my land? Dili A. The first attribute is that a corporation is
mo maluuy nako na I am a simple lawyer from an artificial being. It has no physical existence.
Delaware”. But it is a being nonetheless. How many here
have taken up metaphysics? To exist you must
The one who wrote the decision was JBL Reyes, be something, either a stone, an animal, a tree.
that was his valedictory decision, his last You have to be something. But here, we
decision. He says when the parity ends, your postulate an existence that is a creature of the
right to own ends. So you better disinvest it. state by mere consent of the law. It does not
Transfer it. That want Americans did. Except, occupy space, does not have weight, you cannot
one person recognized by the Court, Del Monte touch it, you cannot smell it but it is there by
International. legal postulate. It has no physical existence.

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

Now, most of the Bill of Rights apply to the corporation has a personality separate and
corporation as a person, but the right against distinct from the personality of its stockholders
self-incrimination does not apply to a or officers or other constituents.
corporation. Why? Because the corporation has What is the exception to that rule?
no mouth and the freedom against self- 1. Piercing the veil of corporate entity –
incrimination is freedom against testimonial Laid down by the US Supreme Court in
evidence. The one who can invoke it is the case of United States vs Milwaukee
somebody who can express himself. The Refrigerator Transit Company; 142
corporation cannot express itself except through Federal Reports 247 (1905) as follows:
an agent. It needs to go through the formality of
passing a resolution. “When the notion of legal
Now, suppose you are paralyzed, such as when entity is used to defeat public
di ka katingog, di ka kasulat, pero gasiga pa ng convenience, justify wrong,
mata nimo. Di ka kasulti kay paralyzed ka, protect fraud or defend crime,
makapirma ba na sya ug contract? Di na sya the law will disregard the
kapirma ug contract pero makuha nimo iyang corporation as an association
thumbmark. Maka-communicate sya kay naa of persons.”
sya’y physical existence, ang corporation, wala There are 2 ways where Piercing The Veil has
man. The only way to go is through the formality been applied:
of a resolution, that’s why resolutions are 1. the first way is you have the corporation
important. and you have a dominant,
A corporation as an artificial being also means overwhelming, controlling stockholder
that it cannot accept new agents if it has no and he uses the corporation either to
agents anymore. They cannot act. To give you defeat public convenience, justify wrong,
an example, suppose here is a corporation with protect fraud or perpetrate crime. That is
5 incorporators, they are all classmates and they why the law will disregard the separate
are the same stockholders who are also in the legal entity of the corporation and the
Board of Directors. 5 sila veil is pierced. The dominant
incorporators/stockholders/sa Board kay sila ra stockholder using the corporation as a
nag-piliay sa ilang kaugalion. They love each conduit and he will be the only person
other, no complications. Unya karon considered by the court.
pagbakasyon nila sabay 5, ni-crash ilang
gisakyan, namatay ang 3. What happens? The 2. The 2nd way is that you have 2
corporation is paralyzed. 2 na lang man ang corporations, the mother and the
nahibilin. You cannot be elected a Director subsidiary, and it ends up that the
unless you are the owner of at least 1 share, subsidiary is just used by the mother
meaning you are a stockholder of the corporation. In fact the funds of the
corporation, so the Board of Director has no subsidiary are not placed in a separate
quorum, it cannot act, it cannot pass a bank account but co-mingled with the
resolution. This is why the corporation has to mother corporation. For all practical
be dissolved. When the formalities can no purposes, the officers of the mother
longer be done than it could end up that the corporation considers the officers of the
corporation will have to be dissolved. It’s not subsidiary corporation as a division of
like a person, amang na sya and paralyzed, naa the mother corporation and in so doing
pa man sya. Makalihok gihapon, thumbmark they avoid payment of tax, they
gihapon. Maski comatose pa, maka-transact pa. disregard their obligations under
That is when he needs an agent, you go to court contract, or they perpetrate crime. What
to be appointed as guardian of his properties does the court do? The court cancels
and another appointment to be the guardian of out the separate and distinct personality
his person. of the subsidiary and only the mother
B. Second attribute: The corporation has a corporation is considered.
separate personality from the personality of
its constituents, whether members or its So those are the 2 ways by which Piercing the
stockholders or its offices. That is the Veil is exercised. What are the cases that you
DOCTRINE OF LEGAL ENTITY. Mainly that the have to remember?

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

1. Mother corporation and subsidiary they are the stakeholders. Now that is prohibited
corporation - PNB vs Ritratto; 362 scra by the Constitution.
216 (2002) Section 16, Article XII on National
2. Then a corporation as a mere conduit of Economy and Patrimony which stated
a dominant overwhelming stockholder – that “Congress shall not, except by
Francisco vs Mejia; 326 scra 738 (2001) general law, provide for the formation,
The SC says in the case of a person dominating organization, or regulation of private
a corporation, what are the elements that must corporations. Government-owned and
be present to justify piercing the corporate veil controlled corporations may be
on the ground that the corporation is a mere created or established by special
alter ego: charters in the interest of common
good and subject to the test of
1. Control, not mere majority or complete economic viability.”
stock control, but complete domination not
only of finances but of policy and business By law means there is a charter. Baluyot vs
practice in respect to the transaction Holganza; 324 scra 248 (2000) where the SC
attacked so that the corporate entity as to said
this transaction had at the time no separate “The test to determine whether a
mind, will or existence of its own. corporation is government-owned and
2. Such control must have been used by the controlled or private in nature is
defendant to commit fraud or wrong, to simple: Is it ceated by its own charter
perpetuate the violation of a statutory or for the exercise of a public function or
other positive legal breach of duty, or a by incorporation under the General
dishonest and unjust act in contravention of Corporation Law? Those with special
plaintiff’s legal right; and charters are government corporations
3. The aforesaid control and breach of duty subject to its provisions, and its
must have approximately caused the injury employees are under the jurisdiction of
or unjust loss complained of. (Carillo vs the Civil Service Commission and are
PCMC; GR 224099; June 21, 2017) compulsory members of the GSIS.”

Question: Is the corporation that is disregarded That is the Charter Test.


ceases to be a corporation? Does it mean that The charter test is applied prospectively, it does
the said corp is cancelled as to its registration? not apply retrospectively. So it does not apply to
The application of piercing the veil of corporate the Philippine Society for the Prevention of
entity in a particular case does not deny the Cruelty to Animals, because it was issued a
corporation of legal personality for any and all charter by law on January 19, 1905.
purposes, but only for the particular transaction
or instance of which the doctrine is invoked. It is How does the coporation act? By passing its
a reference to a particular transaction. own laws equivalently through a resolution.
In Liban et al vs Gordon; January 18, 2011 en
General Rule: Doctrine of Corporate Entity banc resolution by J. de Castro. In 2010 the
(meaning separate legal personality) decision was penned by J. Abad. The original
decision as its stands is that the Red Cross is
Exception: Piercing the Veil of Corporate Entity neither private nor public, it has the
C. Third attribute, that a corporation is characteristics of both. Why public? Because its
created by operation of law. It is not created work is governmental, to respond to victims of
by law. Historically, a corporation was created human tragedy, either natural or man-made
by law, in the days where the King had all the calamities. But when Red Cross responds to
great powers, executive, legislative and judicial. victims of man-made tragedy such as terrorism,
All the King had to do was issue a decree that kidnapping of hostages, that is their private
the following group of people are now to be aspect. The court says neither public nor private
accepted as a corporation of limited liability, and but it has aspects of both.
shall be called, let’s say “East India Company
Ltd.” So all those who put their money there, Begin to distinguish by law or by operation of
law. All you have to do is comply with the

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

requirements of the general enabling law. good faith to be a corporation under this
Please take note that there is not just 1 general Code, and its right to exercise corporate
enabling law. Not just the Corporation Code. powers, shall not be inquired into collaterally
The Labor Code is also a general enabling law. in any private suit to which such corporation
Because a group of persons can so constitute may be a party. Such inquiry may be made
themselves and apply to be issued a cert of by the Solicitor General in a quo warranto
registration to be a union. And that union has a proceeding. (n)
separate and distinct personality from its
members. That is also creation of a juridical De facto corporation has at least four elements:
person by operation of law. 1. There is a general enabling act – the
Corporation Code.
In the Cooperative’s Code, when a group of 2. There is a xxx attempt to incorporate
persons at least 15, constitute themselves into a under such law.
cooperative they are issued a certificate of 3. There is an assumption of corporate
registration by the Cooperative Development power.
Authority then you have another juridical 4. Despite the fatal defect, a serious
personality. There are many ways to have a defect, it is issued a certificate of
separate juridical personality, not just one. But incorporation.
for us, that is the Corporation Code. Whether it
be by law or by operation of law, what is So a de facto corporation has a certificate of
common with the two is government incorporation but it is fatally defective. It is really
intervention. The consent in corporations not a corporation.
created by law is direct. The consent of
government in private corporations is Now what is the effect? It lacks consent of the
indirect. You comply with the requirements than state and yet the law says that nobody can
you are granted. attack this collaterally. You must attack it
directly. In other words, it stands as a
If you are not granted but you think you have corporation until it is impugned. You cannot
fully complied with the law, what is your attack it indirectly.
remedy? Mandamus. Because for SEC to grant
a certificate of registration is not discretionary, it What is an example of a de facto corporation?
is purely ministerial. An example is Sawadjaan vs. CA 459 SCRA
516 (2005). This corporation is in Loyola Heights
Villa. This is homeowners association versus the
November 17, 2017 (2nd Half) corporation. That the party employee is
(Marry Suan) Sawadjaan. What was the defect of that
corporation? it functioned for thirty years but it
So as we said, whether it is a corporation did not file any by-laws with the SEC. It just
created by law or created by operation of law, presumed it had all the laws but it did not have
the common denominator of the two is the any by-laws. It just followed the Corporation
consent of the state. That is the theory of Code. So there’s a big question mark as to the
concession, to the point of saying that the validity of all its acts. And yet, Sawadjaan
corporation is really a corporation of the state. acknowledge it as a true corporation and
became a member of it when he bought a piece
Without the consent of the state, there is no of land there. He cannot just say, you have a
corporation. Is that true? Many commentators fatal defect so I will stop paying my subdivision
say that there are exceptions to the rule. What dues. You must bring an independent suit to
are some of the exceptions? attack the invalid corporation.

First, you have a de facto corporation. A de How do you do that? You must bring a quo
facto corporation is defined in the Corporation warranto petition. Who brings the quo warranto?
Code in Section 20. It’s the solicitor general. This is a permissive quo
warranto. You must xxx the solicitor general to
Section 20. De facto corporations. – The due bring the action. You must prove your cause of
incorporation of any corporation claiming in action and its merits to the solicitor general.

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

Once you have convinced him, then you must One who assumes an obligation to an ostensible
put up a bond which is at the disposal of the corporation as such cannot resist performance
solicitor general if he loses the case, that is to thereof on the ground that there was in fact no
protect him against damages that may be corporation. So if you deal with this ostensive
awarded. And then, he files the quo warranto corporation and it is not really a corporation, you
proceeding. cannot later on say that you are not obligated
because you’re not a corporation. Your
There’s another way to attack it. You convince obligation is valid.
the SEC and the SEC brings a cancellation
proceeding under Section 6 of P.D. 902-8, the Again, that is an exception to the concession
expanded powers of the SEC. theory – that the corporation exists only by the
concession of the state. So you already see two
So de facto corporation, in effect, there is no exceptions.
state consent and yet it is protected. You cannot
attack it indirectly. Because of that principle in The third exception is the so-called corporation
labor, unions cannot also be attacked indirectly. by prescription. There is only one corporation
You have to bring the action to cancel union by prescription and that is pronounced by the
registration. That is now the uniform xxx with Supreme Court in Barlin vs. Ramirez 7 Phil.
respect to juridical persons. 41. This is in the 1990s.

And then you also have corporation by Barlin was the archbishop of Manila. Ramirez
estoppel. What is this? Under Section 21, you was the one who questioned why the archbishop
have the definition of corporation by estoppel. is allowed to organize and coordinate the
activities of the police in the city of Manila in
Section 21. Corporation by estoppel. – All order to celebrate the first international
persons who assume to act as a corporation Eucharistic congress. (chika)
knowing it to be without authority to do so
shall be liable as general partners for all So why was public money used to
debts, liabilities and damages incurred or commemorate a religious event? That is the
arising as a result thereof: Provided, whole issue. It’s sectarian and then you put up a
however, That when any such ostensible stand. It is a public corporation using
corporation is sued on any transaction government funds to glorify a religious event.
entered by it as a corporation or on any tort That is when the SC says, it is no longer
committed by it as such, it shall not be religious. Suwayig saway ang mga tao na dili ta
allowed to use as a defense its lack of magcelebrate ug pasko sa gobyerno. It is
corporate personality. religious from the beginning but by long tradition
One who assumes an obligation to an and practice, it has become culture. It is part of
ostensible corporation as such, cannot resist the culture. And it has even antedated the
performance thereof on the ground that there republic.
was in fact no corporation. (n)
So according to the SC, the Roman Catholic
This one clearly does not have a consent of the church is a corporation by prescription. It is in
state. They just pretend to be a corporation but reality part and parcel of the Philippine society.
they are not and they know they are not. Where a body of men have been for a long time
in the exercise of corporate powers, a
What happens? They cannot deny that they are presumption arises of an ancient character that
a corporation. They are a corporation because a charter was granted to their predecessors
they are estopped from denying that they are making the exercise of such powers by them
not, even if in reality they are not. They have the lawful and right. So this is the Roman Catholic
liabilities of general partners. That means they church.
absorb the liability of the corporation – every
single one of these persons that are involved in (chika about the Jesuit’s corporate name)
the simulated corporate existence.
FOURTH ATTRIBUTE: POWER OF
SUCCESSION

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

ships) Giilugan ng iyang bonds! So it is deemed


The fourth attribute is that the corporation has viable by many business savants.
the power of succession. Disabuse yourself of
the notion that succession which means that So why is our SC xxx? They just xxx service to
which it put out under the xxx. No, that’s not the power of succession.
succession.
FIFTH ATTRIBUTE: POWERS, ATTRIBUTES
Succession here means continuity. You have a AND PROPERTIES ARE EXPRESSLY
corporation. You have the persons that originally AUTHORIZED BY LAW OR INCIDENT TO ITS
formed it. Even after the persons who originally EXISTENCE
formed it died and then replaced, it is still the
same corporation. Let’s say that the first 50 Then there is the fifth attribute – that a
years is expired and then it renews its term for corporation’s powers, attributes and properties
another 50 years, that corporation that is in are those expressly authorized by law or
existence in the next 50 years is still the same incident to its existence.
corporation. There is continuity.
1. Express
But the corporation cannot write a will. Only a 2. Implied
natural person can write a will. 3. Inherent

So that is to the advantage of the corporation – Express are those that you can read from its
that the corporation can be perpetual by just Articles, those that are provided by the
renewing its term for an indefinite number of 50- Corporation Code, those that are provided by
year terms. It is capable of perpetual existence other special laws. Those are the express
by the power of succession. powers.

And many times that is necessary for projects Now, implied powers are those powers that are
that have very long gestation periods. Let’s say necessary if you have to exercise the express
the making of Suez Canal. That was more than power. Example, purpose clause of this
50 years. (chika about Suez Canal and Mr. corporation is to organize, xxx, operate, maintain
Nobel) a cement factory. That is the express power. It
cannot operate, maintain and build a cockpit. It’s
Soon, we will have that reality. Next year they not there in the purpose clause. What is there is
say they will sign a contract with the Japanese the cement factory. Now, how can you do it?
to build the subway in Manila. The subway will Implied powers! You can hire people, enter into
cost something like P35 billion. (chika about contract with people, employer-employee
drilling holes for subway and issuing 60 year relationship. Because if you cannot do that, how
bonds to fund it) can you build your cement factory? That is the
meaning of implied powers.
What is the legal reality that you negate? When
you are a corporation, the longest you exist Incidental powers or inherent powers are the
according to your term is 50 years. And yet you powers that define a corporation. All
issue 60 year bonds. The last 10 years, kinsay corporations necessarily have this power
muservice ana? You review and amend your because otherwise, it is no corporation.
Articles for another 50 years. That is the power
of succession. It’s like police power or power to tax or power of
eminent domain of the state. Without those
But the Philippine SC says, a corporation cannot powers, it is not a state. The Constitution does
enter into usufruct for more than 50 years not grant those powers. It merely recognizes
because its term is only 50 years maximum. those powers because those are what defines a
Pagkakitid sa utak. The corporation has power state. It’s not that you are a state first then you
of succession! have those powers. It is the power that makes
you a state.
In the States, they are issuing 100-year bonds.
(chika about Branson and Virgin Airlines, rocket

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

It is inherent for water to wet. If it does not wet, it That is why the SC berated the BIR. Just
is not water. Labayon kag ice, di ka mabasa because you make profits, you already tax his
pero mawad-an kag panimuot kay naigo man income. Di man! You are non-stock, non-profit.
ka. Solid man ng ice. It is not water. Wetness is Kung masayop ang BIR niini, sa ato pa murag
inherent in water. The longer it is no longer wet, lisod-lisod ni sya sabton.
it’s ice. It is no longer water.
Ngano man na si Henares nanggukod na man
So even if there is no more law, it is still there. na sya? Ang iyang gigukod, ang San Juan de
Because it is part and parcel of being a Dios Hospital. That is non-stock non-profit. It has
corporation. What are those powers? The power paid rooms and it has free wards for indigents.
to sue, the power to acquire and dispose of But their revenues exceed their expenses. So
properties (real or personal, tangible or they have profit. The BIR wants to tax them. The
intangible), the power to enter into contracts, lawyers of this corporation fought the BIR. Does
and so on. These are all inherent, incidental that make us stock corporation just because we
powers. It cannot be xxx, it can only be make profits? No. It is the proviso that you can
recognized. distribute dividends.

Now, that is the fifth attribute. You are taking up taxation now. First semester,
you took income tax. Now you are taking up
Now we go to Section 3, classes of corporations. business tax. For income to be taxable must be
realized income. Unrealized income is not
Section 3. Classes of corporations. – taxable. So if you are given stock dividends,
Corporations formed or organized under this there is no realization of income. There is no tax.
Code may be stock or non-stock When are you taxed on that dividend? Only
corporations. Corporations which have when you dispose of that dividend. Then that’s
capital stock divided into shares and are capital gains tax.
authorized to distribute to the holders of
such shares dividends or allotments of the Now, stock and non-stock. Later on, we will
surplus profits on the basis of the shares come to discussion on non-stock corporations.
held are stock corporations. All other There are only the purposes listed in Section 88
corporations are non-stock corporations. that allow you to be a non-stock corporation.
(3a) Because if the purpose is other than those listed
in Section 88, you are a stock corporation.
So we come to the first classification of
corporations: Section 4. Corporations created by special
1. Stock, or laws or charters. –Corporations created by
2. Non-stock special laws or charters shall be governed
primarily by the provisions of the special law
What is the key difference between the two? or charter creating them or applicable to
The proviso in the Articles of Incorporation that them, supplemented by the provisions of this
the corporation is allowed to distribute dividends. Code, insofar as they are applicable. (n)

If it is allowed to distribute dividends to its We have taken this up – created by law, created
stockholders, it is a stock corporation. If there is by operation by law.
no such provision, then it is a non-stock
corporation. So we are now beginning formation of a
corporation.
You are a non-stock corporation. You are not
allowed to distribute dividends. But you make Section 5. Corporators and incorporators,
profits. Your revenues that you derive from your stockholders and members. – Corporators
activity is larger than your expenses so you have are those who compose a corporation,
accumulated profits. Does that make you a stock whether as stockholders or as members.
corporation? No, it does not make you a stock Incorporators are those stockholders or
corporation. members mentioned in the articles of
incorporation as originally forming and

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

composing the corporation and who are government agency to a corporation, like public
signatories thereof. utility, the right to ply the roads between Davao
Corporators in a stock corporation and Tagum. That is your franchise.
are called stockholders or shareholders.
Corporators in a non-stock corporation are How about the right and privilege to exist as a
called members. (4a) corporation? That is a primary franchise. What is
the difference between primary franchise and
The significance of this terminology must be secondary franchise? Secondary franchise, with
understood together with what is said in Section the consent of government, can be sold for a
15 of the Corporation Code. consideration. But the primary franchise to exist
as a corporation cannot be sold. It is not
Section 15. Forms of Articles of commercially viable.
Incorporation. – Unless otherwise prescribed
by special law, articles of incorporation of all Now, where is the seat of right to exist as a
domestic corporations shall comply corporation? where is that located? It is located
substantially with the following form: among the incorporators. So who can bring a
xxx petition for mandamus to compel the SEC to
issue a certificate of registration? Even if you
So they give you a form here in the Articles. The have complied with all the requirements but the
standard is not literal compliance. It is just SEC has not issued you a certificate of
substantial compliance. More or less, you registration, you file a mandamus. Who can file
comply with the language here. But there are that? The one who has the right to be
several terminologies that must be used and it corporation. The seat where the right is vested,
cannot be changed. those are the incorporators.

What are those terminologies? The first one is Articles of Incorporation of XYZ Corporation.
Section 5. “Know all men by these presents, we the
1. Corporators undersigned incorporators have this day
2. Incorporators constituted and organized ourselves into a stock
3. Stockholders and profit corporation under the following terms
4. Members and conditions, to wit: (a) the name of the
corporation shall be XYZ Corporation, (b) the
These terminologies cannot be substituted. A term of the corporation is 50 years from and
corporation has constituents, persons who make after the issuance of the certificate of
up the organization. A sole proprietorship has incorporation.”
only one constituent. A partnership has the
partners as constituents. In a corporation, the Sugod na. We are here now, formation of a
constituents are either shareholders or corporation. That’s from Section 5 up to Section
stockholders if it is stock and profit corporation, 15. Ayaw lang mog basa ining sample ini. Read
or members if it is a non-stock non-profit as many Articles of Incorporation as you can
corporation. hold of. Naa na tanan sa internet. (chika about
articles of incorporation of BDO and all its
Members and stockholders are called corporate name in the articles)
corporators. But if you are a corporator that
signs the Articles of Incorporation, then you are
an incorporator. Not all corporators are
November 22, 2017
stockholders but all stockholders are
corporators. All the corporators are corporators (Ria Lumapas)
but not all corporators sign and so, they are not
all incorporators. Before we move on to our topic, I’m gonna give
you a copy of a bill now pending in Congress.
Why is it important? It is important to determine It’s HB 4501 authored by Congressman Arthur
where the seat is of the primary franchise. What C. Yap. Does he ring a bell? He was the former
is primary franchise, as opposed to secondary Agriculture Department Secretary of Gloria
franchise? Secondary franchise is awarded by a Arroyo. He replaced this guy. (Fr. can’t seem to

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

remember the name) Came from the family of go surfing, we go all the way to the States. And
the owners of La Panday. He’s very famous you need trunk lines for that, undersea cable,
because he cannot come home from the US. He because the internet is the most wired system of
was involved in the fertilizer scam. But communication, only the last line is not wired:
somebody up there in the stratosphere was your smartphone to the cell site is not wired. But
machinating, and he was just the signatory of everything else is wired, in between cell sites,
the checks. He’s indicted but he is a person of even the cloud that they say, there are huge
interest that’s why he is not coming back. I’m computer storage machines. Close to a hundred
beginning to forget names now. The same family gud ng Google, Facebook. Hain man nila
that owns pancake house. And then Arthur Yap gibutang ilang storage? Tua si kinatugnawang
took over. He was the student of Gloria Arroyo. country kay init man kayo na. So bisag ang
He ran for governor when GMA ended her term atong housemates adto sa America kung
and now he is congressman. magsurf sa net, FB man. Ang hapon di man
kabalo mag English, di tua lang sila nagutyok2x
This house bill proposes to redefine the meaning sa Japan. Naa pud sila kaugalingong FB sa
of the word public utility. This is the pertinent Japan pero dira lang sila kutob sa Japan. Kita
provision: ron, pirti ng grabeha kay ultimo maid or guard
ga-FB.
the term public utility shall mean electric power
transmission, so national grid is covered; electric Kadungog mo anang ARPU, average revenue
power distribution so Davao Light and Meralco; per user. US, it’s between 30-50 dollars a
water pipeline distribution, so Maynilad, Manila month. Diri sa Pilipinas, ang ARPU, may gani
Water is included; and sewerage pipeline makaabot 100 pesos. Kay register ka man lang
system unless otherwise subsequently provided dayun ug unli, 3 days unli surfing ug muadto pa
by law any existing law to the contrary gyud ka ug laing number ma extend pa gyud ug
notwithstanding, no other business or service one day. Di na nimo buhaton masuko man nimo
shall be deemed a public utility unless otherwise ang mga tao human mangutana dayun,
subsequently provided by law upon nganung hinay man?
recommendation by the National Economic There will be a 3rd or 4th that will come in, sa
Development Authority. sinugdanan gwapo kayo. Wa pa may sud. Abtan
na ug unom ka buwan o isa ka tuig, wa na sad.
So what happens? By a stroke of pen, Kabuang na sad.
telecommunications is no longer public utility.
Bus transportation, rail, no longer public utility. You know how much 25,000 cell sites cost?
You have the super majority? Lusot ni. Digong Asset base sa PLDT, which is 15 billion US
wants all these people to invest, unsaon nya dollars, Globe is about 8-9 dollars, i-combine na
pagpa-invest na 40% ra man ang foreign? Wa nimong duha, 25,000 cell sites. Pila man diay ng
na ron! Tungod ani, ang mga pikot makasulod naa sa Tokyo? Pirting mahala diay ana! More
na. Telecommunications, they are no longer than 100 billion dollars diay na! Mangutana ko,
covered by the 60-40. Kaingon kag buang2x na naa bay foreign investor muingon na bundakan
si digong, kaingon kag unggoy na si digong? nako ni ug 100 billion kay mabawi man nako na.
Tanawa ni o! Lusot ni sa majority. Basaha ninyo pero diri, mabawi na nimo ug unli? Ay sus.
ug mag-agik-ik mo ug katawa o diba maghilak Maabtan kag syam2x, tubuan kag side burns do!
mo. As far as I’m concerned all nationalism laws Di pa gihapon na. Mao na istoryang mingaw.
are stupid!
Let it not be said that I did not tell you about this.
Tanawa the city of Tokyo. I told you it has Sulod na na, mga Intsik, Hapon. I’m all for
125,000 cell sites. The entire Philippines has building infrastructure, sige buhata na. You
25,000 cell sites that’s why you understand know at the turn of the century, katung 1800-
ngano hina kayo atong telecommunication. Why 1900, that’s when New York built its subway.
don’t they put up more cell sites? Because the Katung panahon na gipusil si Rizal sa Luneta,
return of investment of adding more cell sites will nagkalot sila sa New York pagbuhat sa subway
not be sufficient to justify it business-wise. Kay nila. Kita diri, gipusil si Rizal. Pila ka kompanya
unli man tanan. Now, there’s another issue, nakadaog sa bidding? Walay nadaog kay walay
most of us when we use the internet, when we bidding. Kutob sa gusto mukalot, hala kalot mo.

13
CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

Unsa may imo? Hoboken to Manhattan buhat ko Not content na gi-change ang definition,
subway, 32 sila nagkalot, nag away2x na gud gibutang na gyud, explicit. This is not public
sila sa ilalom. Unsay nahitabo? Nahapay sila utility. Unsa may epekto ana? Do you think the
tanan except for 3 unya gobyerno mu-take over price of the shares of stock of PLDT or Globe
kay most of them were bonds guaranteed by the will rise? If you think it’s going up you better buy
government. That is why New York is the most now. Kay once this becomes a law it will be too
provided by way of public transport. That’s why late. Naa nay naghuwat dinha.
the population of New York has stabilized for
more than 100 years. Wa na nagtubo. It’s just So first we will go to shares of stock. Humana
not even 8 million people. Nganu man? Because man ta sa name of a corporation, articles of
there’s so much transport that you can live in the incorporation. (FGN asks Ms. Domingo what
outskirts. Nya muadto ka, buhata ng riles diri, topic the class was in)
bagsak ng presyo sa yuta sa Davao. Magpuyo
ka bisan Tagum ka pa o Digos, makaabot ka FGN: Okay we are still in constituents of a
dinhi in less than 30 mins, wa man trapik. Abot corporation. We are still in section 5.
ka diri trabaho ka, pauli ka sa inyo, maayo pa Corporators, incorporators, stockholders
ang hangin na gihanggab nimo. Gibuhat pa ng and members.
Digong samtang mayor sya, 30 years gud sya
mayor diri, nothing to show for!  Ug kinsa tung You will try to put this in modern math, what is
mga advisers sa kilid, ang Cebu dugay na kayo the set? The subset, and the sub subsets. The
sige float ug bonds, si Osmena na naglakaw2x biggest set here, the biggest genus is
nagkupot sa iyang tae, nag colonoscopy naman corporators, which may be divided into two
na sya. Naa naman nay bag. Sya mismo nag subsets: members and shareholders. You are
ingon “ako ray mayor gadala-dalag tae maski a shareholder if it is a stock and profit
asa.” Mao nay tao nag-float ug bonds. O karon, corporation. You are a member if it is a nonstock
way approval sa Congress, buhat sila ug bridge, corporation. Kaning incorporator is also a
ikatulong bridge. Ako dili ko against ana. Akong shareholder or a member. But he is so at the
inahan sultian ta mo, 1960s pa, palit sya ug yuta inception of the corporation’s existence. In other
dira sa Mactan. Piso ra ang yuta ikaw pa words before the corporation is formed he
magpatitulo. Nya wa man nya gibaligya hantud already intervenes, his name is in the articles
sa ni-70 years nalang. Tagpila naman ang yuta and he signs the articles of incorporation. He
ron? 6-7k per square meter, piso, ngadto sa 6-7 has liabilities with respect to what appears in the
thousand, walay investment manager makalupig articles of incorporation. If there's something
ana. illegal there then he is legally responsible. He
can be made to account for it. So, if you are an
Karon sige ra gihapon ta ug istorya, buhat ta ug incorporator, your name appears and then you
bridge didto sa Samal, sige lang gihapon ug sign.
istorya. Ang importante ana ang kwarta man.
Float kag bonds, baligya kag bonds. Cebu, How many incorporators when you form a
baligya man ug bonds, di gani paliton sa Cebu corporation? Not less than 5, not more than 15.
adto sila sa Hongkong, Singapore. Toll hantud But the original subscribers of shares of stock or
mabayran. Utility, gwapo ni. Gawas ani ron, wa the original members in case of nonstock can
nay utility. appear in the articles but they are not
incorporators if they do not sign.
Now, naa pa ni giingon diri:
Now, why do we belabor this? If you are a
Any existing law to the contrary notwithstanding minor, can you be an incorporator? You cannot
the following shall not be considered public utility be because you are not sui juris. You are limited
operation: electric power generation, electric in your personality, in your capacity to act. So
power supply in sec. 29 of RA 9136, crude oil you cannot be an incorporator if you are a minor,
and petroleum production, transportation in this less than 18. Can you be a shareholder? A
Act and EO 202, broadcasting, subscriber? Yes. Ownership does not
telecommunications and value added services in discriminate with respect to age. You can be an
RA 7835, other public services in this Act. owner of shares of stock even before you are
born. Your parent can donate to you while you

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

are still in the womb provided later on you are


born. So you can be a shareholder but you Who is the most famous person in the
cannot be an incorporator. Philippines who sold shares without a license
and went scot-free? El Shaddai, Brother
You are made an incorporator, your name Velarde. He sold shares of his broadcasting
appears there and there are only 5 of you, the corporation because he needed money. But
certificate of incorporation is issued. What nobody prosecuted him. All the politicians are
happens if later on you are convicted of afraid of him because he will only say one word
plunder? Niapil ka sa gobyerno human naapil ka to his followers that means you do not vote for
sa fertilizer scam. Convicted ka. Nya ang imong him. But he really sold shares.
corporation, ang isa ka incorporator kani,
convicted na sya of plunder. Kangil-ad sad ani. Now if you sell shares to the public, you will
So i-amend nato aron mawala ng ngan anang need a promoter and an underwriter. What is
tawhana na makauulaw. You cannot amend that the function of a promoter? In what way does he
part of the articles because it’s historical. Ma- differ from an underwriter?
amend ba nimo ang imong amahan? Ilisddan ni
nako. Wala. Di na nimo, maski adopted pa ka, A promoter brings together those who issue
natural father nimo magpabilin na. Di na nimo securities, whether shares of stock, bonds,
mailisdan ang historical facts. Mao nay bahin sa derivatives, futures contracts and then there are
corporation na dili ma-amend. Mao na that’s one those who are investors who buy these
thing you have to keep in mind. Ikaw ang instruments. Who are these? They are
abogado gipabuhat sa dokumento, unya you retirement funds, insurance companies, mutual
foresee that this corporation will live for many funds, hedge funds, he brings them together. He
years. Huna-hunaa nimo. Pilia ng mga tiguwang rents a place in Wall Street. He sends out
na hapit na mamatay ba. Mao na ibutang dinha invitations to the ones he knows are investors.
na founders. After pirma nila, patay sila, wa na. And he prepares a buffet. Mangadto na sila and
Kabaw na ka sa record. Di na madaot ang there is a presentation. So let’s say you are one
corporation. Pero batan-on imong gibutang, naa of these entrepreneurs, you have a new
pa na sya dugang panahon na magbuhat ug business that you are proposing. You are
binuang. Nya ikaw ang pasangilan. Sa proposing this new toilet that can be maintained
kadaghang tao na atong pilian nganu kato man without water. There was a contest sponsored
gyud sya? (Talks about Charles Manson, the by Bill Gates to solve the problem in Africa. Apil
serial killer as example). tanan, MIT, Harvard. Kinsay nakadaog? Wa
gyud mo. Toilets are the last thing for you.
May gani ang dagan way mutan-aw. Naa gani Toilets are just something, a matter of fact that
gamayng ligas tanang tao mahimong expert sa you’d rather not include in your conversations
articles of incorporation. So, you have to reckon because they are toilets. Dako kayo ng
with that. problema sa India. Sa Cannes, a foreign movie
about toilets. A woman suddenly finds out on the
Now, aside from these corporators, night that she’s married that there’s no toilet in
incorporators, stockholders, members, we said the house. Half of the houses in India have no
that we have these two characters that play a toilets. You bring a bottle of water, you walk
role in the formation of a corporation if your down the railroad and you do it somewhere
corporation sells shares to the public. The SEC there. Tutal ang makakita nimo muagi man lang.
has come out with a plan when you sell shares And the untouchables in India are those tribes
to the public. If you sell shares to more than 19 exclusively whose jobs are to clean toilets.
people then it’s like banking. If you accept Father whispers: naa bay Indian diri? Wa ma
deposits of more than 19 people then you are nay silay quota sa gobyerno. Mao na nanganhi
already engaged in banking. Wa gani kay na sila kay nakakwarta na sila pero di sila
lisensya priso ka because there is a criminal kasulod sa mga medical schools didto kay wa
liability for engaging in banking without a na sila quota. They are discriminated against by
license. So if you sell shares to more than 19 traditional practice. Mga lagum gyud sila. There
people it means you are violating the Securities is a gradation of darkness even among the dark!
Regulation Code and there is also a criminal (Fr. talks about mga kabaw na)
liability if you sell shares without a license.

15
CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

November 24, 2017 (1st Half) must assume liability and age is one of the
(Florienne Melendrez) limitations of the capacity to act of the person.

We are in formation of corporation. Forming a If you are to find out who are the stockholders of
corporation. a corporation, where do you go? Repository of
all the stockholders(?) in the corporation is the
A corporation whether stock or non-stock has stock and transfer book of the corporation.
constituents. And it is these constituents that That is where everything about the incorporators
make up the corporation. As it is placed in and shareholders is recorded. The subscription,
section 5, the constituents are divided into the balance, everything is there.
subsets from corporators.
Is it open to everybody? No. However, if you are
Section 5. Corporators and incorporators, listed in the stocks exchange, you are obligated
stockholders and members. – Corporators are to maintain a website. Or the Philippine Stocks
those who compose a corporation, whether as Exchange makes available a list of 100 biggest
stockholders or as members. Incorporators are stockholders of a corporation.
those stockholders or members mentioned in
the articles of incorporation as originally forming (Father tells about the list of the biggest
and composing the corporation and who are stockholders of Ayala Corporation as can be
signatories thereof. seen in the internet. MerMac Corp has been the
biggest stockholder since 2005 with 58% of the
Corporators in a stock corporation are called total outstanding capital stocks. Shows the
stockholders or shareholders. Corporators in a obituary of Mercedes Ayala McMicking to class.
non-stock corporation are called members. (4a) Story about the Ayala family. Father asks to look
up the biggest 100 stockholders of Ayala)
Corporators are the basic constituents of a
corporation. You are a shareholder or now we discussed 2 persons who are not in
stockholder of a corporation if it is stock and section 5 but are just as important--- the
profit corporation. So you are a corporator. But promoter and underwriter. If the corporation
not all corporator are shareholder or stockholder you are forming tries to sell to the public shares
because if it is non-stock, the corporator is a of stock, then you cannot help but employ the
member, not a stockholder. services of a promoter and underwriter.

Now, if in the by-laws your name appears and Underwriter enters into contract with the
you sign the by-laws, you are a corporator but corporation as to the sale of shares—how much
you are also more importantly an incorporator. he gets as a commission. If it is a corporation
still to be formed, then once you really enter into
What is the difference between a corporator and contract with the promoter and underwriter are
incorporator? the incorporators. When is the corporation in
existence? after the issuance of certificate of
incorporator- has certain liabilities attached to incorporation by the SEC. it is by consent of the
the articles of incorporation which is a public state and the agent of the state is the SEC.
document because it eventually ends up with the
Securities and Exchange Commission (SEC). it So if you are selling shares of the corporation
is possible that your are telling an untruth there. still to be formed and you engage an
You can say that this number of shares is underwriter, with whom is the underwriter in
already paid-up even when it is not. That is contract with? it is in contract with the
falsification of public document. That is a corporation but it is negotiated by the
notarized document. incorporators. Upon the formation of the
corporation, the corporation assumes the
So that is the difference between an ordinary obligations, the rights that the incorporators
corporator and incorporator. that is why you may agreed to.
be an ordinary corporator if you are a minor. You
can be a stockholder. But you cannot be an Is there a violation of contract law? The
incorporator if you are a minor because you corporation is the successor-in-interest of the

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CORPORATION LAW TSN
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incorporators. The incorporators act in and for utilities, and building and loan associations shall
behalf of this corporation still to be formed. not be permitted to issue no-par value shares of
stock.
So this promoter and underwriter are bound to Preferred shares of stock issued by any
the corporation. They must answer to the corporation may be given preference in the
corporation. distribution of the assets of the corporation in
case of liquidation and in the distribution of
The underwriter may agree to the so-called dividends, or such other preferences as may be
stated in the articles of incorporation which are
English type agreement- that in the event that not violative of the provisions of this Code:
the public does not take all of the number Provided, That preferred shares of stock may be
mentioned in the agreement of shares of stock, issued only with a stated par value. The board of
the underwriters will take shares which the directors, where authorized in the articles of
public will not take. So there is an assurance incorporation, may fix the terms and conditions
that all the shares they will issue will be bought. of preferred shares of stock or any series
thereof: Provided, That such terms and
conditions shall be effective upon the filing of a
(Father talks about Wallstreet having a certificate thereof with the Securities and
mathematical calculations of all the shares Exchange Commission.
which may be bought)
Shares of capital stock issued without par value
Best efforts type shall be deemed fully paid and non-assessable
Vs. and the holder of such shares shall not be liable
Firm commitment type – paliton na nako to the corporation or to its creditors in respect
tanan. Wala pa nagsugod gipalit na, sya na thereto: Provided; That shares without par value
bahala retail ana. may not be issued for a consideration less than
(Father did not explain further huhu) the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration
The promoter is one that brings the sellers and received by the corporation for its no-par value
buyers together. Sya na muadto kung nay mga shares shall be treated as capital and shall not
biddings, buhat siyag presentations, nay be available for distribution as dividends.
pagkaon diha. These are the rituals of selling
shares of stock in the market. Once you go into A corporation may, furthermore, classify its
a certain amount, you have to sell it in the big shares for the purpose of insuring compliance
market so you go abroad. with constitutional or legal requirements.
Except as otherwise provided in the articles of
So you have section 6 incorporation and stated in the certificate of
stock, each share shall be equal in all respects
Section 6. Classification of shares. – The to every other share.
shares of stock of stock corporations may be
divided into classes or series of shares, or both, Where the articles of incorporation provide for
any of which classes or series of shares may non-voting shares in the cases allowed by this
have such rights, privileges or restrictions as Code, the holders of such shares shall
may be stated in the articles of incorporation: nevertheless be entitled to vote on the following
Provided, That no share may be deprived of matters:
voting rights except those classified and issued 1. Amendment of the articles of incorporation;
as "preferred" or "redeemable" shares, unless 2. Adoption and amendment of by-laws;
otherwise provided in this Code: Provided, 3. Sale, lease, exchange, mortgage, pledge or
further, That there shall always be a class or other disposition of all or substantially all of the
series of shares which have complete voting corporate property;
rights. Any or all of the shares or series of 4. Incurring, creating or increasing bonded
shares may have a par value or have no par indebtedness;
value as may be provided for in the articles of 5. Increase or decrease of capital stock;
incorporation: Provided, however, That banks, 6. Merger or consolidation of the corporation
trust companies, insurance companies, public with another corporation or other corporations;

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7. Investment of corporate funds in another that is the maximum number of shares that you
corporation or business in accordance with this can issue. But take note that that is not the
Code; and maximum amount that you can issue because
8. Dissolution of the corporation. you may sell it at higher than par-value. What
Except as provided in the immediately preceding determines the issued price? It is your
paragraph, the vote necessary to approve a understanding of the market’s capacity to buy.
particular corporate act as provided in this Code Kung inilog imong share, patas-an nimo. Kung
shall be deemed to refer only to stocks with wa jud kisaw imong share then kutob r aka sa
voting rights. (5a) par-value. Mao nang kelangan jud ug
presentation.

After you give the name of the corporation, you (talks about Double Dragon corporation having a
give the place of its office, then you have the good presentation)
purpose of the corporation, the term of the
corporation, now you have to put the authorized but what is really the value of the shares? The
capital, subscribed capital, paid-up capital of the par-value is just the starting value, what is called
corporation. the nominal value.

Capital stock is divided into shares. So you enter (talks about inflation. 100 peso 10 years ago vs
into classification of shares. now)

you cannot issue shares at lower than par-value.


CLASSIFICATION OF SHARES If there is no par-value, what is the amount that
is critical? The issued value. The law says if you
First you have to divide shares whether they are have no par-value shares, you cannot issue no
par-value shares or no par-value shares. par-value shares at lower than 5 pesos.

What is a par-value share? All consideration received in the issuance of no


par-value shares are considered the full
Par-value share – has a nominal value as to its payment of the shares. No par-value shares that
share. are issued are issued as non-assessable until
entire consideration is already given. So you
No par-value share – does not have a nominal cannot purchase shares on installment if it is no
value. It is just one unit. par-value share.

Now the rule says if you have par-value shares Par-value: you can have subscription of
you cannot issue or sell it initially from the installment. Mubayad kag allowable
corporation to the subscriber at lower than par- downpayment and balance is to be paid on the
value. The minimum price of a par-value share date stated in the contract or on the date on call
upon issuance is the par-value. Can you sell it at of the board. Those are the two possible dates
higher than par-value? Yes you can. The when you can pay the balance of the
difference between the issued price and the par- subscription.
value is the premium of stock. You identify that
in the balance sheet. Now if the articles of the incorporation says:
1. “this is the authorized capital stock”
Example: 2. “this is the subscribed capital” then the
subscribed capital is at least 25% of the
Authorized capital at 10 million authorized capital stock.
Divided into 10 million shares at Php1.00 par-
value per share Now if you as a subscriber have a subscription
(So 1 peso is 1 share) of 100 shares, are you obliged to pay at least
And you multiply it by 10 million 25% of your subscription? That is Php25 that is
= authorized capital equivalent to 25 shares of the 100 shares total.

3 kinds of capital:

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CORPORATION LAW TSN
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authorized
subscribed a. Preference as to distribution of
paid-up assets at the time when the
corporation is dissolved. So
NO. You do not have to pay 25%. The obligation liquidating dividend. You can have
is in the aggregate. That the entire subscribed preference there. You will be first paid if
capital is at least 25% of the authorized and the the corporation is dissolved, ahead of
paid-up capital is at least 25% of subscribed. the common shares or other shares.
The whole obligation not the individual
shareholders. b. Or you can have preference in the
distribution of dividends. When the
Kung sugtan ka sa treasurer of the corporation corporation makes money, before any
na 20% imong bayran, okay. Some might pay other share receives dividends, you
the entire subscription. As long as the aggregate receive. And it’s a percentage. Let’s say:
paid-up capital is 25% of the subscribed, and the 8% preferred dividend. So 8% of par,
subscribed is 25% of the paid-up, that’s enough. that is what you get as dividend
preferred.
Classification of shares
Now, time and again the Supreme Court has
 Common shares – not found in the said: dividends can only be taken from
corporation code. profits, and profits is the result of the
 Preferred strenous and ordinary course of business
 Redeemable operation of a company.
 Founder’s shares
 Treasury shares – not a classification in So if the corporation has no profits, it cannot
the articles. You have a treasury share issue dividends.
because of what happens to you. If the
corporation repurchases or reacquires Q: Can a corporation borrow money in order
you, you become a treasury share. You to pay dividends?
stay in the treasury of the corporation. It
is not by virtue of presentation but what That is a trick question. But because a
happens to you. corporation may register profits, but because of
cash flow, it cannot pay out dividends if it does
not borrow. So it borrows in order to have cash,
November 24, 2017 (2nd Half) to pay cash dividends.
(Althea Astrid Gopo)
Now, if the corporation does not have
PREFERRED AND REDEEMABLE SHARE– accumulated retained earnings it cannot issue
dividends. So it cannot borrow if it has no
accumulated retained earnings. It does not have
According to section 6, you cannot classify
profits.
preferred or redeemable if there are no par
value shares. They must be par value shares.
Asa may corporation nga nag-ganansya pero
You cannot classify redeemable and preferred
way kwarta nga ikabayad? Cash flow ba. Cash
shares if there are no par value shares. They
flow. Kamong mga dili accountant, pa-explain
must be par value shares.
mo sa inyong mga accounting nga classmate
kung unsa ning cashflow.
Thereby, section 6 says, “only redeemable
shares and preferred shares may ble
That’s a problem of cashflow. Diri sa Pilipinas o,
classified as non-voting shares.”
the government needs money everyday, every
So, only par value shares may be deprived of
month; it has to pay salaries. But then they only
voting rights.
get collection from taxes, periodic times: when
income tax is paid, at the end of the year. How
Okay, let’s go to PREFERRED.
do they manage in between? Ah, that’s why the
government floats treasury bills every Monday,
Q: What do you mean by “preference”?

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Based on the Lectures of Fr. Agustin Nazareno

the Bangko Sentral. Because that is a problem you are actually two shares: you are common
of cash flow. Ang imong kinahanglan kada and you are preferred. Kay participating man ka.
adlaw, unya ang imong kita periodic. So wa kay
panggasto so kinahanglan manghuwam ka. Kinsa may buang nga corporation nga mu-issue
ana? Mao na nang mga gwapo gani kaayo nga
What does the law prohibit? It prohibits issuing shares. Buot pasabot ana, nagkagidlay na nang
dividends without profits. You might have profits corporation kay way mupalit kung ordinary
but you don’t have the cash flow. So you have to shares ra. So butangan nila na’g daghan kaayog
borrow and be able to pay it. features dira para paliton nimo. Kay
nanginahanglan silag capital pero way mupalit
You might be preferred. Bayran kag una. If you ana ug ordinary lang ang shares, way daghang
are preferred cumulative, cumulative prefered buloloy. So butangan nilag daghang features –
shares. Whats the maning? If in one year the cumulative, participating, naa pa gani nay
company cannot make the issuance of voting. Kay kasagran sa mga preferred, they are
dividends. It has profits but it cannot issue classified as non-voting. Preferred na gud ka,
dividends. What happens? Purdoy ka ana! Unya unya muboto pa ka. Mura na sad kag common
preferred man ka? Cumulative man ka? The stock. Wa kanay apil sa boto. Non-voting ka.
following year, you can ask payment for the Pero wa may mupalit nimo. Hala! Butangan
dividends paid for that year plus the year before nalang natog voting aron paliton gyud.
that was not paid you. That is called dividends in
arrears. Mu-cumulate na. Kay cumulative VOTING, NON-VOTING.
preferred man ka.
Q: What is the presumption.. if you are
Please keep this in mind clearly: no preferred shares and there is common
company, no corporation can guarantee the shares, are you voting or are you non-
payment of dividends every year. You cannot. voting? What is the assumption?
But a company may be able to issue
guaranteed cumulative preferred shares. The assumption is you are VOTING! Why?
Because there is an assumption that all shares
What’s the meaning of that? NOT that the same have equal rights, UNLESS otherwise provided
company who issued the shares is guaranteeing in the articles of incorporation and when it
preferred dividends every year, with or without comes to limitations to transfer shares also in
profits. But that there is another company that the certificate of stock. Feature of a corporation
guarantees it. This company will come to the shares are found in the articles of incorporation.
rescue if this subsidiary cannot pay the
dividends. It may borrow money, because that is You are an original share holder who bought
his expense, because he guaranteed this shares. Nagkahina na ang corporation. Walay
subsidiary. But the company itself who owns the mupalit sa iyang common shares. Muingon nang
shares cannot guarantee the preferred every corporation: we will create preferred shares, and
year. they will be voting shares. So mabotohan na; i-
amend na ang articles. You reclassify shares.
There are still remaining 1M common shares
PARTICIPATING PREFERRED. unissued. Then you will amend it, and you will
say 200K of these shares are now reclassified
Q: What is the meaning of participating as preferred, voting shares.
preferred?
When that resolution is passed, and you are
You get your preferred dividends. There is profit, a dissenting stockholder, you can exercise
you get your preferred dividends. After you get what is called “APPRAISAL RIGHT”.
it, there is still profits remaining. So now the
common shares will get their profits after you’ve Muingon kag “I want out in the corporation
gotten yours. But because you are participating, because you are giving more privileges to
you also go with the common to receive somebody other than me. Nauna gud ko dinhi!”
dividends. So kaduha ka muigo. Preferred ka so I can ask the corporation to value my shares
pa, common ka pa. Sa ato pa, in earning terms, then pay me because I am leaving this

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corporation. That is appraisal right. Mag-usab unrestricted retained earnings or


gani sila.. accumulated profits.

Preferred shares: That is the rule. Why is that the rule?


Because if it were not the rule, what would
1. Must be voting; cannot be non- prevent the corporation from forming?
voting. Maski pag valued up (?) It’s Formed na sya. Nangutang sya’g daghan
the only share that can be deprived of kaayo. Unya paghuman niyag pangutang,
vote; niingon sya “paliton nako’g balik tanan
ninyong mga shares. Hala panagan na
2. Like the redeemable shares, must mo!” Paliton niya. Unya, wa na na’y kwarta
be par value; cannot be no par value ang corporation, kay giuli man niya ang
shares; kwarta didto sa mga nag-increase ang
shares. Wa pa ma’y ginansya. There is no
3. Gets preferrence as to being paid unrestricted and retained earnings.
out in dissolution. It’s the senior
proprietary interest - senior to the And then in your articles you say, “this is
common shares. In terms of dividends, subscribed. Mao ning amount. This is paid
it’s also senior to the common shares; up.” And the public reads that, and they
rely that the corporation has money to
4. It may be convertible. Convertible answer for its validly incurred obligations.
preferred. What do you mean by Unya diay gisekreto diay’g uli ngadto sa
convertible shares? Convertible shares mga stockholders katong ilang kwarta nga
are preferred shares or some other gibayad sa shares.
share that may be converted to
common shares either at the option of That is a violation of what is called the
the shareholder/owner or at the option “TRUST FUND DOCTRINE”.
of the corporation. Convertible shares.
That is why redemption of shares, the buy-
So, daghan na tag nakit-an: preferred, back of shares by the corporation is not
ordinary, cumulative, participating, allowed unless there is unrestricted
convertible. retained earnings. However, if the shares
are redeemable shares classified under the
articles as such, that at certain point will be
REDEEMABLE SHARES. put back, then even if the corporation does
not have unrestricted retained earnings, it
Q: What are redeemable shares? may be purchased/re-acquired by the
coporation. So long as the corporation’s
In the articles of incorporation, it says, capital is not impaired, or the corporation’s
“these shares may be put back by the operation is not fatally injured by the
corporation at a pre-determined price. Now, redemption even if it does not have
it could be at the option of the stockholder unrestricted retained earnings.
or it could be at the option of the
corporation: Q: What happens when a corporation
redeems the shares even if it has no
a. At the option of the corporation, unrestricted retained earnings?
that is DIRECTORY.
In that instance, what is said in the articles
b. At the option of the stockholder, is already no longer true. There is this
that is MANDATORY. amount that is subsribed, there is 25% that
is paid-up – no more! Giuli man nimo! It’s
Now, the GENERAL RULE is: no no longer true. So what do you have to do?
corporation can pay the stockholder and You have to amend the articles of
get his shares if it does not have incorporation. You have to retire the shares
that you have redeemed. So that the

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Based on the Lectures of Fr. Agustin Nazareno

articles will reflect the true state of your So this is what Ford Motor Company did
capital stock. before it went public: it created founder
shares of Ford. But these founder shares
Q: But if you redeem with profits, do you have 10 times more vote than the rest of
have to retire the shares that are now the shaes. Now, these founder shares were
with the treasury? owned by the Ford family. And because of
this feature, it is the only car company that
They are now treasury shares because you remains under the control of its original
have redeemed/re-acquired them by paying founder today while all the rest have
the stockholder. You do not! Why? already – the founders have already lost
Because what is written in the articles control of the corporation. Like General
remains true! You did not give back the Motors, the original founder had long lost
articles that you paid. You paid out the control. Ford still controls it because Ford
profits. So the capital stock still remains created founder shares. Shares of stock
intact. So you do not have to amedn the that have ten times more voting rights than
articles of incorporation. the others. And that is allowed. That is
owned by the family. Actually it is owned by
– Break – the Ford Foundation.

Section 6 says that at all times there Now, if you are a member of the Ford
must be a classification of shares that Family, unya naa man gyud kay right.
must have COMPLETE VOTING RIGHTS. “Cash out na ko! Ibaligya na nako akong
You cannot split voting by classifying shares unya kwartahon na nako. Bahala na
shares. mo. I will go forth somewhere.”

Let’s say, these shares can only vote in the What is the solution of Ford Foundation?
election of directors; these shares can only Ford Foundation has, in the meantime,
vote when it is for questions of amending bought ordinary shares. They bought
the corporation for increase or decrease of ordinary shares. So if you have Ford
capital stock. You cannot split voting that shares that has 10 votes, you are
way. If you do that, there must still be a equivalent to 10 shares. But Ford has
class of shares that has complete voting bought ordinary shares. Kung ikaw gusto
rights. na ka mucash out, they will sell the
equivalent number of shares in ordinary
This is important because when we come shares and give you the cash. But then
to Founder Shares - Section 7, a Ford Founder Shares that have 10 times
corporation may classify shares as founder voting rights, they did not give you that. So
shares that have exclusive right to vote it’s still intact. So kinsa to’y mulaban nila,
(exclusive voting rights) and be voted for in lisud kaayo. Ka-napulo kadaghan na
the Board of Directors, but only for a limited shares imong kinahanglanon aron
period of five (5) years, non-renewable. mutumpag sa isa nila ka buok na share.
That’s why they remain under control, the
I’ll give you something from other Ford family.
jurisdictions that it not true in the
Philippines and which makes our securities Alright. That is not allowed in the
here by contrast, different from others. Philippines. You classify a share with
ten votes more than the ordinary. That is
For instance, in the US, you incorporate not allowed because of the principle of
according to the State. Most corporations in equality.
the US that were big, were incorporated in
the State of Delaware. And the Stae of Europe. They decided in the 70s and 80s
Delaware allowed enhanced voting rights that public owned corporations,
for certain classes of shares. government owned corporations, are very
inefficient because the officers are
appointed by politicians, and they are

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Based on the Lectures of Fr. Agustin Nazareno

answeable to their appointing powers. So than issued value before. Because it is


they were not profit-oriented. They were not presumed that the original capital that you
efficiency-geared. So they decided to contribute to the corporation when it issued
privatize – privatization, shrinking of is still remaining there. In other words, you
governments. already acquired with the use of
accumulated profits. So there is no
But they said, there are certain impairment of the capital stock of the
corporations, public utilities, that are crucial corporation by selling less than par value.
to national security. We cannot afford to
lose control. Communications. Petroleum. Q: What is the use of treasury shares?
Water. So what they did was, they still went
private but they provided in the articles of The man in the street thinks that the more
incorporation what they called a Golden money you have in business, the better for
Share – one share that can veto in the you. Kinahanglan mag-negosyo ka,
name of national security. If it casts its vote kinahanglan 5M capital padagan sa
against a particular measure in the name of negosyo. Pero naa kay 10M, ang extra 5M
national security, pildi ka na. That golden nimo gibutang nimo sa bangko, for siguro
share is held by the government. In all ra ba. Magkuha kag pedicab, dali ra kaayo
other instances of voting, wa na syay ka kahulbot, di ka kinahanglan manghiram.
round, usa ra sya ka vote. But when it Safe kaayo ka. Muingon ang mga tao,
exercises its veto vote, bisag pila pa mo “mao nay negosyo”.
kabuok dira, di mo makapildi niya. That is
the Golden Share. Beh, palista ka sa stock market. Daghan
kaayo kag cash. The market will punish
German Telecom. Telefunken. Naa nay you! What are you doing with all that cash?
Golden Share. The Petroleum company of Lost opportunity! Buang-buang ba ka nga
France. Naa nay Golden Share. magsugod kag business, diba mag expand
ka? Because the ideal financial situation is
In certain instances, the government will you just have enough cash, enough capital
just whip out that single share and to run your business. Not more. Because if
announce that this is the exercise of the you have more, you lose opportunity! That
veto power of the Golden Share. And that money could have made more money
measure cannot prosper. somewhere! If you have less money that is
needed to run, then your cost of operation
Diri sa Pilipinas, is it possible here? Can increases because you have to borrow
be. All we have to do is just legislate. money. And there is a cost to borrow
money. So the ideal cost picture for a
corporation is just enough money. Then
TREASURY SHARES. you are efficient.

If you are reacquired by a corporation, Pareho na sa car racing driver Formula


shares are reacquired, they go to the One. Ingon bitaw na sila, mupakusog kag
treasury. They have no voting rights, they dagan, ika’y kinakusgan, kinapaspasan
have no dividend rights, they just stay in mupadagan. Di man ikaw mao’y makadaog
the treasury. But they can be re-issued. ana. Ang makadaog sa Formula One,
those who can take on average, maximum
“Re-issued” for me is a common inaccurate speed all the curbs. This particular curb is
term. Because issuance is only once. taken at 120, 119, 120, 118. Ang uban
That’s actually sold. lagyo kaayo. But just enough. Why?
Because if you go more than the maximum,
And treasury shares can be sold to the lagpot ka. If you go less than the maximum,
public for a consideration less than par overtake-an ka. So enough ka lang. So the
value. trick of the best Formula One driver is
You can resell those shares for a memory. Gwapo kaayo kag memory. Kada
consideration less than par value or less corner, kada curb, naa kay memory. Sugod

23
CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

ka nag tapak ug brake, buhian nimo diri. na mu-unload. Kay kaduha man ka muigo.
Kakapoy ana. Mga maayo na sila’g But it will take time because you have to
memory. Kanang makadaog ana, di na sila play with the public perception of your
pinaka-paspas. value and what is relative to the price of
your shares.
350kph. Mubo pa gyud kaayo. Ang naga-
separate sa imong sampot ug sa dalan, 4 You know there is a corporation in the US
inches ra. (LOL) Mukibra (?) lang nag that has never declared – since its
gamay, pangos imong sampot ana! beginnings in the NY Stock Exchange in
the mid 1960s – it has never declared
That is the ideal finance-wise. Karon kay profits, either stock or cash. Never
daghan mag sigeg takeover. If you become declared. Par value, 5 pesos per share.
very profitable, you become the target. Now, it is trading at over $200K per share.
Non-profitable also, kining mga profitable Mupalit kag usa ka share – and many do
nga gusto muexpand, manguha nalang na that, there are so many analysts who buy
sila. They will just acquire by merger. just one share. Why? So they can attend
the annual stockholders meeting and listen.
Kung controlling interest ka, naa kay It is $200K per share. Wa may declare-
daghang treasury shares. Naa na gani’y declare ug profits.
gusto mu-takeover, release your treasury
shares at less than par value. Kinsa ma’y Now, di man na mahimo sa ato. You have
mupalit? Ikaw ra sad! Kinsa may mupalit, declare dividends – either stock or cash –
ang board may magbuot! Ikaw may nag the moment your accumulated unrestricted
control sa board. Baligya nimo ang treasury and retained earnings is as much as your
shares. Ang katong mu-takeover nimo, paid up capital. The moment it is 100% of
mupalit man at market rate. Mag sige syag your paid up capital, you are required to
gukod nimo ug daghan ka nang shares. It declare profits UNLESS there is a reason
becomes very expensive for him. After a for you to justify. Naay disaster or
while, mugive up na na sya. Kay daghan something like that – then maybe you will
man ni syag bala. be given postponement by the SEC.

See? That’s one of the uses of treasury But that is the rule in the corporation. You
shares. That is why people keep treasury cannot not declare. If you want to know, go
shares. to Youtube. Tyoe there and search Warren
Buffet. Very famous guy. He’s already in
Corporations have a buy-back policy once his 80s. He can survive just on burgers and
the market price does not reflect what they coke. Unhealthy food. 80s na siya. He runs
think is the real market value. If the real Berkshire Hathaway. It is just a ___
value from their estimate is $100 per share. company now. And there is not right or
And the market is trading your shares at reason for the way he buys subsidiaries.
$80. Muingon dayon na sila’g, well, my But he is the most successful investor in
shares are trading at a discount of 20%. the stock market. Warren Buffet. You will
Why should we invest on someone else. see him lecturing to Harvard Business
Let’s invest on ourselves – let’s buy our Students, Stanford Students. Simple kaayo
shares! na’g mga rules si Warren Buffet, makatawa
ka.
What is the effect? You reduce the number Okay, let’s continue next meeting.
of outstanding shares that will divide the
profits. So gamay nalang ang shares na
mudivide sa profits. Mutaas ang earnings
per share. Pag taas sa earnings per share, November 29, 2017
kita ang mga investors, musaka ang price (Carra Tito)
traded. O diba, edi kaduha ka muginansya.
Saka ang earnings per share, saka ang So there is a stock in the Philippines’ listed
price at which it is traded, meaning, ana ka corporation, not in pesos. So what does this

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CORPORATION LAW TSN
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make Del Monte? Del Monte is a foreign dungagan pa jud ug 2.5%. however, if the
corporation. It’s listed in Singapore but it is dividend rate is higher than the applicable step-
making its shares available in the Philippines. up rate, then there shall be no adjustment of the
The owner of Del Monte in Bukidnon is Nutri dividend rate. So if the 10-year US Bond
Asia. It’s the holding company. Del Monte is nibagsak, lower than that 6.5, and 10-year
listed in Singapore but it is owned by a needed the margin of 2.5, it is lower than 6.5,
Philippine corporation, Nutri Asia, one of the what will happen? So you can only go higher.
groups of Mr. Campos, the eldest main son of You are already guaranteed 6.5%. but is that
the original founder of Unilab. So that’s where really a guarantee? Of these are shares and the
they get their money. benchmark is a bond rate.

Now it says “preferred series A-2. How many of WHAT IS THE DIFFERENCE BETWEEN A
these series A-2 are issued? 8 million series. BOND AND A SHARE?
Assuming that it is issued at $10 million, what is
the gross amount that they’re supposed to get? The return of the share is dependent on the
$80 million dollars. But there is a proviso. It existence of retainer on its profits. The
says oversubscription of up to 8 million series A- returnable bond, regardless of whether you
2 preferred shares. So they can issue more if make profits or not, you have to pay the interest
there are more who are willing to buy. You are to the creditors. That is the big difference
off bringing 8 million but h ten there are so many between a bond and a share of stock.
lining up. How will they know that they are
called? Because their underwriters are WHAT IS THE DIFFERENCE BETWEEN A
swapped with first to buy. CLASS OF SHARES AND SERIES OF
SHARES?
WHO ARE THE UNDERWRITERS?
The class share is preferred redeemable. The
BDO, Capital Investment Corporation, series is preferred redeemable A-2 first class.
Chinabank. What else? All those listed there. Una pa to baligya. Mahalin gani tanan, naa pa
(refer to handouts) PNB Investment guro gusto ug up to another 8 million release,
Corporation, Chinabank, BDO Securities that is it. Another series. Because it says here
Corporation. 8,000 series A-2 preferres shares with
oversubscription option of up to 8 million series
Now what is the preference exactly? First of all, into preferred shares. So naa pa gani gusto
what kind of shares are these? It says preferred mupalit, mao na ginatawag sa Wall Street
shares but did you read the fine print (in the “GreenShoe.” Green shoe provision.
handout)? The corporation has an option that
upon the 5th anniversary, it can redeem its Now, the Philippine stock exchange can approve
shares. So redeemable. Preferred redeemable. anyone. Details of the offer can be found in the
supplement uploaded on the company’s
WHEN IS IT REDEEMABLE? website. The Philippine Stock Exchange
approves the listing of the abovementioned
On the 5th anniversary. So 5 years. securities on November 24, 2017. While the
Philippine Securities and Exchange Commission
What happens if the corporation is showing the (SEC) issued an updated permit to sell the
issuer, Del Monthe, does not redeem? There is securities of Del Monte’s Series A-2 preferred
a step-up date. Musaka ka. Unsa man isaka shares on November 27, 2017. Bag-o pa lang ni.
nimo? Your preferred rate of return can go up. Init kayo ni.
How? The benchmark rate is the 10-year US
Treasury Bond Rate. It says here, the dividends How much interest do you get in the bank? Wa
shall be adjusted on the step-up date to the sum pa 1%. Kini, 6.5%. Why profit? Unsaon man
of the 10-year US Treasury Bond Rate as of the nila paghatag ug preferred shares.. When
step-up date + initials spread + margin of 2.50% shares of stock are entitled to dividends only
per annum. So if the 10-year bond rate is when there is profit. You can only issue
already higher than the rate provided here. What dividend profits. And yet they are compelling it
is the dividend rate? 6.5%. if it is already higher, with bonds as if it were a bond. But the giving of

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CORPORATION LAW TSN
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preference of 6.5% and is not unconditional conditions shall be effective upon the filing of a
unlike a bond. It is still conditioned on the certificate thereof with the Securities and
registration of profits. So you can have Exchange Commission.
preferred shares series A, series B. if you go to Shares of capital stock issued without
PLDT, you can have preferred shares series A, par value shall be deemed fully paid and non-
B, up to A. And then they start again, AA, BB, assessable and the holder of such shares shall
etc. Preferred shares that are non-voting. not be liable to the corporation or to its
creditors in respect thereto: Provided; That
This one, is this voting or non-voting? Since shares without par value may not be issued for
there is no disclosure as to whether or not there a consideration less than the value of five
___, it must be voting. The presumption of (P5.00) pesos per share: Provided, further,
stocks have the same rights and properties That the entire consideration received by the
unless it is so provided in the articles or by-laws corporation for its no-par value shares shall be
of the corporation. treated as capital and shall not be available for
distribution as dividends.
Diba there was as time was when Del Monte A corporation may, furthermore,
was ruled by the technical team. Now, all classify its shares for the purpose of insuring
agricultures are ruled by finance. They have it compliance with constitutional or legal
passed around at one time. AKR was the owner requirements.
of Del Monte but they sold it so that now it is Except as otherwise provided in the
very huge. articles of incorporation and stated in the
certificate of stock, each share shall be equal in
Sec. 6. Classification of shares. - all respects to every other share.
The shares of stock of stock corporations may Where the articles of incorporation
be divided into classes or series of shares, or provide for non-voting shares in the cases
both, any of which classes or series of shares allowed by this Code, the holders of such
may have such rights, privileges or restrictions shares shall nevertheless be entitled to vote on
as may be stated in the articles of the following matters:
incorporation: Provided, That no share may be 1) Amendment of the articles of incorporation;
deprived of voting rights except those classified 2) Adoption and amendment of by-laws;
and issued as "preferred" or "redeemable" 3) Sale, lease, exchange, mortgage, pledge
shares, unless otherwise provided in this Code: or other disposition of all or substantially all
Provided, further, That there shall always be a of the corporate property;
class or series of shares which have complete 4) Incurring, creating or increasing bonded
voting rights. Any or all of the shares or series indebtedness;
of shares may have a par value or have no par 5) Increase or decrease of capital stock;
value as may be provided for in the articles of 6) Merger or consolidation of the corporation
incorporation: Provided, however, That banks, with another corporation or other
trust companies, insurance companies, public corporations;
utilities, and building and loan associations 7) Investment of corporate funds in another
shall not be permitted to issue no-par value corporation or business in accordance with
shares of stock. this Code; and
Preferred shares of stock issued by 8) Dissolution of the corporation.
any corporation may be given preference in the Except as provided in the immediately
distribution of the assets of the corporation in preceding paragraph, the vote necessary to
case of liquidation and in the distribution of approve a particular corporate act as provided
dividends, or such other preferences as may in this Code shall be deemed to refer only to
be stated in the articles of incorporation which stocks with voting rights.
are not violative of the provisions of this Code:
Provided, That preferred shares of stock may Alright, we have taken up the Articles of
be issued only with a stated par value. The Incorporation (AOI), the name, the principal
board of directors, where authorized in the office, the purpose, the term, and then the
articles of incorporation, may fix the terms and capital, the classification of shares, under
conditions of preferred shares of stock or any Section 6.
series thereof: Provided, That such terms and

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Now there is Section 6. I keep telling the class, secret ballots change it by written consent then
it is a kind of corporation. You have to know this send forms to stockholders and they will mail
Section 6. You cannot understand it? Outline it. back. They will think of the amendment if they
There are rules about voting rights, what shares agree or disagree. If they do not agree, they will
are voting rights, in relation to par on par value, say so. If they agree, they give their written
in relation to preferred redeemables, in relation assent.
to treasury shares. So you must be familiar with
the different ways of classified shares . So what will the corporate secretary do?
Mangolekta lang daan ug proxy. Koletkahon
Where the articles of incorporation provide for nimo dayon ang proxy. Naa na gani ka 2/3, you
non-voting shares in the cases allowed by this can already start mailing. Sigurado na b aka?
Code, the holders of such shares shall Ayaw pag-gasto-gasto kung wa pa ka kaibaw.
nevertheless be entitled to vote on the following Di man ni lumba sa kabayo na mangpusta ka.
matters In fact, you could not call a meeting the results
1) Amendment of the articles of incorporation; of which you do not know. Siguraduha na daog
2) Adoption and amendment of by-laws; ka. If you are willing to pass a resolution, they
3) Sale, lease, exchange, mortgage, pledge or they give you a proxy. Ikaw corporate secretary
other disposition of all or substantially all of amn ang pangutan-on, “O, do we have the
the corporate property; numbers?” Corp. Sec: “I don’t know.” Patay.
4) Incurring, creating or increasing bonded Mao na imong trabaho.
indebtedness;
5) Increase or decrease of capital stock; So I give you an example. Before, you only
6) Merger or consolidation of the corporation have common shares in your AOI. 25% of that
with another corporation or other are already issued and subscribed which is the
corporations; basic requirement. So if 1 billion authorized
7) Investment of corporate funds in another capital share at 1 peso par value, 240,000
corporation or business in accordance with shares at 1 par value each share has already
this Code; and been issued by way of subscription. Of that
8) Dissolution of the corporation. 24%, 50% is paid up. 12.5% is paid up. Now,
you want to raise more capital. You are thinking
of issuing the remaining 750,000 shares but
1) AMENDMENT OF THE ARTICLES OF your corporation is not making money. In fact, it
INCORPORATION (AOI) lost money. So what is the book value now?
Now we said in the amendment of the The book value now is lower than the par value.
AOI, the 2/3 vote that is necessary to approve So naa kay problema. You cannot issue your
the amendments of the parties ‘ stockholders shares at a price lower than the par value.
can be either in the form of secret ballots in a Kinsa kaya mupalit? At even par value when
meeting duly called for the purpose or just your book value is lower than par value, way
written assent. You read about that in \section mupalit sa imong shares. Langawon ka.
16, amending the AOI.
Unsa may solusyon ani?
Unless otherwise provided by this Code
or other special law and for legitimate #1 Solution: You do a road show. Pareha bas
purposes, any provision or matter stated a Dayang Dayang sa imong kaugalingon. Mag
in the AOI may be amended. make-up ka, palit ug gwapo na sanina, etc.
Don’t laugh because these are the terminologies
I told you, the incorporators cannot be changed. in the finance world. Do a road show. Once
The directors cannot be changed. They are they say an international roadshow, you cover
historical in nature. Now what if it is discovered the most likely source of capital – New York,
that one of you incorporators is Jack the Ripper London, Zurich, Singapore, Hong Kong, Tokyo.
(one of America’s serial killers)? Di na nimo ma- Kada lugar, mangita kag promoter kay muhimo
change. Wa na ka mahimo ana. Mamatay tao. kag imbestigasyon sa investors. Then make a
Dili na nimo mailisdan sa AOI. So not any presentation. Unsa imong role as CEO, CFO or
provisions but in the ___ that is changed does COO? After the presentation, you sit down and
not suffice a a meeting of the stockholders or

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they ask clarificatory questions. You are selling capital must also change. Why? Because for
your corporation. That is #1. every increase, 25% of the increase must be
subscribed. And then, of the subscribed, 55%
#2 Solution: the other solution is send must be paid up. It is here in Section 6, number
preferred shares in a preference that is 5.
attracting. Common sharese lang ))) voting.
Unya way siguro. Makakuha b aug dibidendo So that is an instance where you cannot use
basig way gawas na kwarta? Wa may written assent. You have to have a meeting duly
obligsasyon and corporation to issue cash called for the purpose.
dividends even if there are profits. So it’s not
attractive. So unsaon man niya paghatag ug In any case, the stockholders have a role to
preferred shares na wa man preferred shares? play. It is an indispensable role depending on
Then the consultant says, “amend your whether or not the stockholders are voting or
Articles.” Naa man gud ka 750,000 shares, non-voting shares.
magkuha ka 50,000 or 100,000 shares ba,
buhaton nag preferred. Unya, mao na imong i- Let us leave that for a while. Let us go Section
issue ug bag-o. now, so you are now to go 7.
through the process of amending the article.
Sec. 7. Founders' shares. - Founders'
shares classified as such in the articles of
INSTANCE OF AMENDING THE AOI. incorporation may be given certain rights and
Pangutan-on nimo ang corporate privileges not enjoyed by the owners of other
secretary, “Do we need a stockholder’s stocks, provided that where the exclusive right
meeting?” If the secretary knows the to vote and be voted for in the election of
Corporation Law, no need. Mere written assent directors is granted, it must be for a limited
is enough. Why? Because it is not one of the period not to exceed five (5) years subject to
cases provided for a meeting duly called for the the approval of the Securities and Exchange
purpose. It is a minor change. So, ingon nimo Commission. The five-year period shall
ang secretary na get the proceeding going. commence from the date of the aforesaid
Kuhaon nimo ang proxies. Kung daghan na, approval by the Securities and Exchange
anha pa ka magpadala ug forms for written Commission.
assent. Assuming of course, that the controlling
interest in the board has already a minimum of This classification of shares is temporary. You
majority vote of all the members of the board. cannot have founders’ shares for the entire time
Because of the cases mentioned in Section 6, it you have a corporation. The shares are good
requires majority votes first of directors or up to 5 years because that is what the Section
trustees. It is an absolute majority. If there are 7says. Founders’ shares, classified as such in
11, then 6 are needed for a quorum. If you only the AOI, is given certain rights and priviliges not
have 5 attendees, all 6 must vote because that enjoyed by the owner’s other stocks or by where
is the absolute majority of 11 people to vote. So their right to vote and be voted for in the election
that is an instance where you only need written of directors is granted, it must be for a limited
assent to amend the AOI. period not exceeding 5 years.

INSTANCE WHEN VOTING BY SECRET Some object to the approval of the SEC. The 5-
BALLOT IN THE MEETING DULY CALLED year period shall commence on the day of said
FOR THE PUROSE IS REQUIRED approval of the SEC.

What is an instance when you need voting by FOUNDERS’ SHARES DO NOT APPLY TO
secret ballot in the meeting duly called for the NON-STOCK CORPORATION.
purpose?
Christian School Inc., nagbutang sila ug proviso.
Increase or decrease of capital stocks. You will Ang kadtong founder, is honorary trustee for life
increase authorized capital. Once you increase kay siya man nagsugod sa Christian School.
authorized capital, you change that number. For life siya non-stock, non-profit corporation.
Once you change the number the subscribed But for 20 years, they operated that way until

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somebody questioned it before the SEC and public necessity. So when they exercise that
finally, it went to the Supreme Court. The vote, pildi ka na.
Supreme Court says that is VOID. They cannot
make somebody a director or trustee without In Asia, they say that there is 1 corporation that
voting. has that kind of power. Siam Cement of
Thailand. It is 10 times beigger than San
So founder shares must be provided in the Miguel.But cement is not even 1/10 of the sale
Articles. Kaning “added to the articles’ of Siam. Who is the controlling owner of Siam
amendment,” there is no proviso prohibiting it. Cement? The Royal Family of Thailand. They
So it can be added. Ako pa, founder ko, di ko have a veto power as to its direction. So unsa
mag founders’ shares dayon. Tig 5 years lang ang number 1 sales nila? candy resins. So
na. Mupalit ka ug shares, amend ka dayon, that’s how the Royal Family finance its life
muhatag ka dayon sa imong kaugalingon ug standing. Unlike in the UK, the Royal Family
another 5 years. Ikaw na ang muboto ug has approproations. Kanang mga kabayo nila,
botohan as directors. gikan na sa taxpayer’s money.

I told you about Ford Motors Company. There is


a reason why it is still controlled by the Fords. December 1, 2017
Because before, Henry Ford, the founder, listed (Miles Buhay)
the share of stock in Wall Street. He amended
the articles. He created a class called “founders’ Let us go to this very exciting process of
shares” and 2 shares had 10 times more voting creating a corporation.
rights than the ordinary shares. Then he
transferred it to Ford Foundation, nonstock, We have gone through the different
nonprofit, ang tag-iya sa share. And who are classifications of shares of stock because that is
these in the Ford Foundation? Only if you are a how the capital stock of the corporation is
Ford. If you’re not a Ford, you cannot af-Ford! divided. You have authorized capital and there’s
(HAHAHA!) So naa ka dinha. Now you want to a figure there. Then you have subscribed capital
cash out. Ingon ka ang equivalent sa akong and you’ll have a figure there. And you have a
shares dinha, kwartahon na nako kay di na ko paid-up capital, and you also have a figure
gusto ani niya. Unsa man buhaton sa Ford there.
Foundation? Mukuha sila sa reserves nila kay
as they gain profits, they set aside a sinking Alright, what do you have to remember? The
fund. Mamalit sila ug ordinary shares na authorized capital, the figure there, is always
equivalent sa imong 10 voting shares. Unya, bigger or best equal to the subscribed capital.
ibaligya nimo ang imong shares sa market, You cannot have the subscribed capital bigger
kwarta na nimo. Pero intact gihapon ang ilang than the authorized capital. The paid-up capital
Ford Shares na 10 times voting rights. So can only be equal to the subscribed capital but
hantod karon, 5th generation na, sila gihapon ga- cannot be bigger than the subscribed. Sa
control. Ang GM ug Chrysler, wala na. Thus, accounting, ang kinadak-an, mag-una. Unya
the CEO there is elected by the Ford Company. musunod ang mas gamay.
Di na sila gabutang ug Ford na CEO. They are Now, this is what you have to reconcile because
not hungry for that anymore. Di na sila commentaries say, the authorized capital is the
kinahanglan mutrabaho. limit that a corporation can brace by way of
capital. So it’s a ceiling no. Is it true? [No.] The
Mahimo man na diri. Muhimo ka ug class of number is not the ceiling. It is the number of
shares of stocks with 10 times voting rights. It’s shares derived from the authorized capital. That
allowed by the SEC. Voting for the ___. is the ceiling. Is it possible to raise more money
that the authorized capital? The answer is yes.
Now I also told you about the so-called “golden Why? Because a corporation can issue shares
share.” Mao nang golden shares sa gobyerno. higher than par value if the market can take it.
Thy want to have their pie and eat it too. Ila The authorized capital is the amount that is the
rang i-publicly sell ang mga shares of stocks. result of the total no.of shares that a corporation
Pero naa gihapon silay PC Ownership power can issue multiplied by the par value. That is the
because they can veto actions in the name of authorized value. You divide that authorized

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CORPORATION LAW TSN
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capital with the par value of shares then you revenues exceeds its expenses. Mao nang naay
have maximum no.of shares. profits and it is from there that you declare
dividends. That is the main traditional source of
Is that the hard and fast rule? Not exactly dividend.
because a corporation can issue different
classes of shares at different par values. You When you sell capital of the corporation; the
can have preferred shares with a par value of corporation sells assets and realized profit from
10. You can have common shares at a par value the sale of assets, is that part of profit? What’s
of 5. But most corps will not do that because you an example?
will just confuse the market. But there is no
prohibition against a corporation from classifying In the olden days, technology was such that
shares according to different par values. There when you were a telephone company, you
is even no prohibition in issuing par value needed huge buildings because the switches
shares and no par value shares. You can were big and you had to have generating power;
classify in your articles of incorporation par value you had to have big transformers because the
shares and no par value shares. But you will end telephone machinery needed bigger machines
up confusing the public and so, no too many so you had to have bigger real properties.
corps. If you want an example of different par
values, and it’s a successful corporation, you go With the advent of new tech the switches
to Warren Buffon Berkshire Hathaway. He has became smaller; switches became smaller. You
different par value shares that he has issued did not need real property anymore. PLDT now
after he was successful. People put in there is selling its real properties. They sold one here
money in Berkshire Hathaway because of to a developer. Obviously, when they bought
Warren Buffon and not because they know that 15 years ago, it was inexpensive. But now,
where he is going because nobody does. they are selling it several times higher than their
Story… Warren considers what is profitable. acquisition price. Is that profit? Is that the result
of strenuous day to day work? Security and
Classification of Shares Exchange Commission (SEC) says, that is part
Suppose you sell shares at higher than par of profit. You can declare dividends out of capital
value. Is it possible to sell shares at a premium gains. Cash and stock dividends. But premium
that is several times more than par value? It is. on stock, you need the permission of SEC if you
So much so that in the balance sheet you will have to declare dividends out of premium on
have common stock (Let us say 100M) and stock and you can only issue out of premium on
premium on stock; that excess of par value at stock NOT cash dividend, but stock dividend
which you issue shares. It might be 200M. It’s only.
possible. Rare but possible. Now when you have
that par value at premium of a stock, the If in the formation of the corporation you already
perception of people will already [be that they make money, you’re not operating yet the
will] win because you are already selling at corporation. But because you are already selling
above par value and you declare dividends out the corporation at so much higher than par
or premium on stock that you issued. Sobra- value, your premium is higher than your
sobra naman ang inyong kwarta. Premium on realization of consideration of stock at par value.
stock is in excess of par value that you issued That is rare. But that happens.
your stock for and because people have such You will find out later on that if your unrestricted
great faith in you, your premium on stock is retained earnings (these are capital accounts in
double your capital stock. Can you declare the balance sheet) is already in excess 100% of
dividends out of premium on stock? paid-up capital, you have to issue/give out
dividends. You cannot accumulate profits more
The general rule is, you declare your dividends than the paid-up capital unless you have a very
out of profits. What is profit? Profit according to good reason and you have to prove that to the
the SC is the positive result of recurring SEC.
business in the ordinary operation of the
corporation; the strenuous operation of the After authorized capital, subscribed capital and
corporation. Ginansya gani, results from the day paid-up capital in the articles of incorporation,
to day operation of the corporation by which its you have the provision that names the treasurer

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who shall act as such until his successor is fully juridical person cannot risk just one (1)
elected and qualified. So he is the interim signatory. Normally, corporations have
treasurer. He is named in the articles of several signatories.
incorporation. Actually, “treasurer” of the
corporation is a misnomer because there is still If the corporation is not formed (denied a
no corporation. It is still a corporation in the certificate of corporation):
process of coming into being. It begins to exist Who can act? Without the certificate of
the moment the SEC issues a certificate of incorporation, all you have is the
incorporation. So he is the treasurer of the contract entered into by the
interim corporation. incorporators.
1. So the incorporators have to go to
The period from the signing of the articles up to the bank and say, “This is the list of
the day the SEC issues a certificate. The those who had subscription and who
moment that there is a certificate of put in money. You have to help us
incorporation issued, the corporation must give this money back to their lawful
organize. Then the corpo elects the directors owners because the corporation did
and then the directors elect now the treasurer. not go through.
The interim treasurer may be elected so that he
will also become the treasurer of the Pareho ra nag Donation propter nuptias.
corporation. When the marriage ceremony did not go
through, unsa may mahitabo atong mga
What is the duty of the interim treasurer? donation? What happens to those
He is the one who collects the paid-up capital donations propter nuptias? The
and deposits it in the bank. He tells the bank, “I donations are ineffectual because it is
am a trustee because this is for the corporation given by reason of marriage, and there
the papers of which are still with the SEC and is no marriage. So you give it back to
it’s not yet formed. So I am the trustee of the where it came from. If the father of the
funds of this corporation still to be formed groom donated a condominium unit, it
because these are all pre-incorporation (before must be returned (ouch) to him.
being a corporation) payments of the So that is what the incorporators do.
subscription. They go to the bank. They give a list
and they contact these people and they
Q: If that interim treasurer is suddenly hit by say, “Get back your money from the
lightning and dies, what happens to the money? bank. Appear in the bank with proper
If the corporation is formed: identification.” That is what will happen.
1. The Board will pass a resolution
appointing the treasurer after the Board How about the theory that if a corporation does
is constituted by the stockholders in the not go through, a de facto partnership is
organization. formed? Is that correct? Is there a de facto
2. With that resolution and appointment he partnership created if a corporation that is
[new treasurer] will just go the bank and formed fails to acquire a certificate of
say, “Here am I, I am the successor of incorporation? No.
the one who passed away and so I will
take charge. I am the treasurer.” The SC said that the intent to form a corporation
3. The Board will pass another resolution does not contain within it a partnership. So there
that the corporation will open a bank is no implied partnership formed if the
account in this particular bank. It could corporation does not succeed. Implied
be the bank where the deceased interim partnership is not within the intent to form a
treasurer put the money or it could be corporation.
another bank in which case the
treasurer will transfer the money to the What will happen is the paid-up capital will be
new bank. distributed.
4. With that resolution will be provided the
signatories to the official account of the Now if there is somebody who donates to the
corporation. Not just one (1) signatory, a corporation, let us say a piece of land which the

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corporation needs. Who is the donor? The Let us take a look at the grounds for rejecting or
parent of one of the incorporators whose disapproving a corporation under Section 17.
subscription and paid-up portion of his Sec. 17. Grounds when articles of incorporation
subscription is the biggest among all the or amendment may be rejected or disapproved.
incorporators and subscribers. What happens to – The Securities and Exchange Commission
the donation? The donation is ineffectual and it may reject the articles of incorporation or
will be reconveyed to the donor. There is disapprove any amendment thereto if the
reconveyance. same is not in compliance with the
requirements of this Code: Provided, That
If you need to count it as part of the capital, the the Commission shall give the incorporators
donation must be registered with the Registry of reasonable time within which to correct or
Deeds then the title is transferred to the modify the objectionable portions of the
corporation. But the corporation is not given a articles or amendment. The following are
certificate of incorporation. So, there will be grounds for such rejection or disapproval:
reconveyance. (1) That the articles of incorporation or
any amendment thereto is not
If the interim treasurer runs away with the substantially in accordance with the
money, what is that? Is that theft? Is that estafa? form prescribed herein;
Does the interim treasurer have the right to the (2) That the purpose or purposes of the
physical possession of the money? Yes! Asa pa corporation are patently
may lain nilang butangan ug kwarta? If he puts unconstitutional, illegal, immoral, or
himself as the sole signatory as the trustee, contrary to government rules and
does he have the right to title to the monies? regulations;
Until the corporation is formed, he has the right. (3) That the Treasurer’s Affidavit
That is why he is the signatory. No other concerning the amount of capital
incorporator is the signatory; He alone. stock subscribed and/or paid is false;
Therefore, that is estafa because he is the (4) That the percentage of ownership of
trustee. the capital stock to be owned by
citizens of the Philippines has not
The treasurer executes the treasurer’s affidavit. been complied with as required by
The treasurer’s affidavit is separate and distinct existing laws or the Constitution.
from the articles of incorporation although it is No articles of incorporation or amendment to
always attached to the articles of incorporation. articles of incorporation of banks, banking
Why? Because he takes personal responsibility and quasi-banking institutions, building and
and liability - criminal and civil - as to the loan associations, trust companies and other
compliance of the corporation. The treasurer financial intermediaries, insurance
says “under oath that at least 25% of the companies, public utilities, educational
authorized is subscribed.” And then “the 25% of institutions, and other corporations
the sub is paid-up”. Not only paid-up but governed by special laws shall be accepted
“received by me”. Walay lain nidawat, ako ra. In or approved by the Commission unless
cash or property, in the amount of not less than accompanied by a favorable
5K in accordance with the Corporation Code.” recommendation of the appropriate
Then he signs it. government agency to the effect that such
articles or amendment is in accordance with
Minus gani anang gisulti sa treasurer; less than law. (n)
25% of the authorized is paid-up, who is to
blame? It is the treasurer. The assumption is he (1) That the articles of incorporation or
pocketed the difference. He is the only one who any amendment thereto is not
received it, he says. That is the weight of the substantially in accordance with the
treasurer’s responsibility. form prescribed herein;

(5 min break. Chika ni Clemm and friends sa Remember that the compliance is not
recording. LOL) necessarily literal, but just substantially the
same as to its form.

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(2) That the purpose or purposes of the gives his account no. and executes the waiver.
corporation are patently So the SEC can verify and call the bank.
unconstitutional, illegal, immoral, or “This is the SEC and we are on verification.
contrary to government rules and Please call this number after we put the phone
regulations; down.” Tawag ang banko balik. “We are
interested in this corporation still to be formed.
What is your purpose? To develop 100 hectares How much money is in the bank account of the
of Cannabis for medicinal purpose. Is that interim treasurer?” Mailhan kung namakak.
recognized here in the Philippines? No, walay Bahala nag masobra, dili lang makulang sa
mutuo nimo. 100 hectares for medicinal 25%.
purpose? Ay, negosyo. (4) That the percentage of ownership of
the capital stock to be owned by
What is your purpose? To enable desirous citizens of the Philippines has not
single Filipina to the brides of western and other been complied with as required by
foreign gentlemen. Declared by SEC to be illegal existing laws or the Constitution.
because it is immoral. Mail-order brides as a
purpose is immoral according to the SEC. What This might be a thing of the past. A law limiting
about those in the internet? Those are foreign- public utilities is about to be passed.
based corporations. They are not allowed here You will place in your articles that you will be
to form a corporation for that purpose. paid the proportionate ownership of Filipinos
because this particular corporation is engaged in
You cannot put up a corporation whose purpose public utilities or the development of natural
is to practice a profession. You can only have a resources or whatever reason. SEC will check
partnership. That is why law firms have partners. that.
Accounting firms, they are partnerships. The
relationship between clients and attorneys is The SEC is usually very patient with articles of
personal. It is based on trust and confidence. It incorporation. They usually don’t reject. Ipa-usab
is personal. You cannot have a corporation lang kung niay mga mali. They’re very patient
acting as your counsel. The corporation cannot and yet some corporations still get past them
be subjected to criminal liability whereas a and there is a fatal defect. So you still end up
lawyer (natural person) can be made to answer with a de facto corporation.
criminally if he violates the canons of
professional ethics. They are especially very meticulous with respect
to banks, banking and quasi-banking institutions,
So those are the grounds for rejecting the building and loan associations, trust companies
articles of a corporation as to their purpose/s. and other financial intermediaries, insurance
Your primary purpose might be lawful and your companies, public utilities, educational
secondary purpose is not lawful. Or both your institutions, and other corporations governed by
primary and secondary purposes are lawful but special laws. They are closely scrutinized.
they are not legally combinable.
Suppose you have complied with everything and
Ex. Imong primary purpose: ospital. Secondary the SEC still does not issue a certificate of
purpose nimo: funeral parlor. Illegal na. incorporation and they did not give a reason.
But you won’t find that illegal in the US. What is your remedy? This is different from
Department for ICU for babies and department when you submit an amendment on your
for abortion in the same building. articles. When the SEC does not act on it for a
(Chika on visiting a former student who is a period of 6 months and the reason why the SEC
neonatal specialist in Toledo.) has not acted is not attributable to you who filed
(3) That the Treasurer’s Affidavit the amendment, then the amendment becomes
concerning the amount of capital effective for inaction by the SEC. That is Section
stock subscribed and/or paid is false; 16, last paragraph. But if it is articles of
incorporation, unya unom (6) na ka buwan wala
How can he determine if it is false? The lang giyapon certificate of incorporation, do you
treasurer has to execute a waiver of his rights become a corporation by the inaction? No. You
under the Secrecy of Bank Deposits Act. So he

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need to get that certificate of incorporation. How From that time that you have been issued your
do you get it? You need to file a mandamus. certificate of incorporation, you have 30 days to
If the SEC has objection to your name, it will be organize. You have 2 years to commence your
returned to you. You must not have confusingly business. If you have commenced your business
similar or similarly confusing corporation name. and you have organized and for some reason
All corporations now must have “incorporated” or you stop the works of your business, you have 5
“incorporation”. You cannot use an already years continuous non-operation. If you do not
protected name. You cannot use somebody work as a corporation for 5 years, what
else’s name. happens? It is a ground for revocation or
cancellation of your certificate of incorporation. If
(Story about Brother Eddy who was expelled you do not begin your work within 2 year after
from Iglesia ni Kristo Haligi ng Suhay at you have organized, then you are also in danger
Katotohan and put up his own corporation with of revocation or cancellation of your certificate of
the name Iglesia ni Kristo, H.S.K. This was incorporation. You must begin or you ask the
considered confusingly similar to an already SEC to condone your non-operation or non-
protected name) inception of business because your reason is
valid. What is a valid reason why you cannot
If your name is objectionable, the certificate of begin your business?
incorporation shall not be issued.
Now, you already know beforehand that the Ex. You want the business of rehabilitating the
name is acceptable because when you go to the rubber plantation in Basilan. The Philippine
SEC office and you pay a certain amount and marine commander however does not give you
you give your preferred name, they the clearance to do so. You communicate this
communicate with the data bank in SEC Manila situation to SEC. Is it a valid reason? It is up to
and find out if the name is already taken and SEC.
word will come back to you on the same day.
You have this name for 30 days for an amount Once a certificate of incorporation is issued it
of 200 Pesos. So you have that name, dali dali cannot be cancelled or revoked unless there is
na dayon ka ug buhat ug Articles ana. If you can notice and hearing. (Section 6, PD 902-A) There
file your Articles within 30 days, that name is has to be notice and hearing before the
yours. If you fail to submit, you pay another 200 cancellation or revocation of the certificate of
Pesos to extend to another 30 days to have that incorporation.
name reserved. You are allowed an extension.
Wala na gani, it’s up for grabs. That is how you (Story on Father Gus being the lawyer of
find out whether the name is already restricted Maryknoll Fathers and Brothers, Inc. which is
or already owned or is no longer open to be non-stock, non-profit. Father suggested to work
appropriate. towards the dissolution of the corporation but
Sec. 19. Commencement of corporate letting the government do the job. He suggested
existence. A private corporation formed or non-operation for 5 years). The SEC will put you
organized under this Code commences to in the twilight list. This corporation has not been
have corporate existence and juridical in operation for 5 years or more. They will send
personality and is deemed incorporated from you notice that you are in the list and you will be
the date the Securities and Exchange directed to show cause why your certificate of
Commission issues a certificate of incorporation should not be cancelled. And when
incorporation under its official seal; and we receive that, we will not act upon it.
thereupon the incorporators, You can have a corporation dissolved this way if
stockholders/members and their successors you have no debts. Otherwise, mag-una2x ug
shall constitute a body politic and corporate file ang imong creditors ug involuntary
under the name stated in the articles of insolvency.
incorporation for the period of time
mentioned therein, unless said period is The last paragraph of Section 22 says:
extended or the corporation is sooner This provision shall not apply if the failure to
dissolved in accordance with law. organize, commence the transaction of its
business or the construction of its works, or
to continuously operate is due to causes

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beyond the control of the corporation as may It means you accept it and sit down as BOD.
be determined by the Securities and You are elected and qualified.
Exchange Commission.
The SEC can still make you continue in You called for a director/stockholder’s meeting;
existence if the cause is not within your control. and then there is no quorum because less than
Wala na moy bag-ong member, is that within 50% of the share holders +1 is represented in
your control? No. Can the SEC consider that as the meeting. What happens? Can you go on to
a valid or reasonable excuse? I doubt it because elect the BOD? (Because Every annual meeting
it goes to the very essence. You need at least 5 you elect the BOD.)
to function as a corporation.
When you erase a corporation; when you cease Usually if it is a stock and profit corporation, you
as a corporation, it is just as, if not more than, do not have a stock holder’s meeting that failed
complicated with its formation. to have a quorum.

But if you have a non-stock non-profit


December 6,2017 corporation, like the corporation that is made up
(April Pareno) of the homeowners of Bell-Air Subdivision I, that
is more than 1k houses. And they do not bother
to send a proxy; proxy is allowed by the specific
We will begin with board of directors.
provisions of Bell-Air Homeowners Corporation.
Sec. 23. The board of directors or trustees.
What happens if they do not have a quorum?
- Unless otherwise provided in this Code, the
They have given notice so let’s go ahead with
corporate powers of all corporations formed
the election. Is that valid?
under this Code shall be exercised, all
business conducted and all property of such
No it is not valid. What happens is the entire
corporations controlled and held by the board
Board becomes a hold-over board. That is when
of directors or trustees to be elected from
the second part of the last sentence of 1st
among the holders of stocks, or where there
paragraph of section 23 takes effect. They
is no stock, from among the members of the
continue to hold office because there is no
corporation, who shall hold office for one (1)
successor that has been elected and qualified.
year until their successors are elected and
qualified.
The problem is, if a hold over director dies, does
he have an unexpired term?
Every director must own at least one (1) share
No, he does not have unexpired term because
of the capital stock of the corporation of which
he is just a hold-over. The Board of Directors
he is a director, which share shall stand in his
cannot elect another to replace him to serve the
name on the books of the corporation. Any
unexpired term. It has to be the stockholders to
director who ceases to be the owner of at
elect him or the homeowners who will elect the
least one (1) share of the capital stock of the
replacement.
corporation of which he is a director shall
thereby cease to be a director. Trustees of
But they can’t get a quorum, what happens?
non-stock corporations must be members
I-abort. Next meeting, wala gyapon quorum so
thereof. a majority of the directors or trustees
hold-over gyapon. Hantod maghinay hinay na
of all corporations organized under this Code
silang kamatay, wala na gyuy quorum na
must be residents of the Philippines.
mabilin. But I am telling you it is a problem of
90% of Home Owners Association that are high
What is the term of Board Of Directors?
end. The problem of condominiums. They are so
It is not right to say 1 year. It is 1 year until their
busy with some other businesses that their
successors are elected and qualified.
Homeowners Corporation is given second
priority or no priority at all.
What is the meaning of elected?
It means that the stockholders or members of
The Only corporation meeting of homeowners
the corporation cast a vote to elect you.
which is non-stock non-profit but has always
with quorum is Forbes Park. Why? Because the
What is the meaning of qualified?

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owners are not individuals but corporations. The donated the property to the Universty of the
owners of lots and homes in Forbes Park are all Philippines; but not before the UP signed a deed
corporations. of assignment so that executives will continue to
Ingon ka, why? Why in heaven’s name is it a live there for a sum of money, 25 years
corporation? renewable for another 25 years. That is why the
Because nobody sells land in Forbes Park. If UP is an owner of property next to the property
you want to sell your land, you sell the of Senator Boxer Manny Pacquiao.
corporation who owns the land.
Why? So that your capital gains tax will not be The rule in Forbes Park is that you can only
punitive in size. build of 60% of the lot; the rest is easement and
that includes for another development like
Ever since Pacquiao bought property in Forbes swimming pool. *Fr talks abt prop of Napoles*
Park, the price of property in Forbes Park is
400,000/sq.m. If the sale of 2,500 is according to market value,
The size of the property is 2,500 sq.m minimum; it will be 1 billion. How much is capital gains plus
how much is that at 400,000/sq.? doc stamps? What is 7.5% of that? 75 million.
1 billion. Why is it that expensive? Because Maghilak ka. Whereas if it is owned by a
BGC is already 450,000/sq.m. Ayala, the other corporation and you sell the corporation, you sell
side, is also 450,000/sq.m. That’s Forbes Park the shares of stocks of all the stockholders there
in between. who are under your control at par value, that is
the extent of your capital gains.
In Forbes Park, there is an annotation: you
cannot build more than two stories. It is limited, Let us say you are 95% owner of an outstanding
but the first 25 years is over. And it’s already 10 capital stock of a corporation. The moment you
years into the next 25 years when they reviewed are 95% owner, the business parlance term is
the annotations in the titles by the subdivision that corporation is wholly-owned by you. That is
owners. They elected to renew it. Pagkahuman business parlance ha, that is not legal.
15 years to go na lng, there is a potential it
becomes an extension of BGC or extension of The moment you own 50% + 1 of the
Ayala. That’s why corporations are the ones outstanding capital stock of a corporation, that
positioned in them corporation is called a subsidiary of the
owning corporation.
Do you know that UP has three lots there? You
may ask why? If you have studied your Property Wholly-owned, subsidiary, the next term is an
laws then you would have come across the case affiliate.
of Quasha vs Republic of the Philippines.
If the corporation outstanding capital stock is
They have land in Forbes Park. Two years owned less than 50% by another corporation,
before the end of parity, they filed a case this corporation is said to be an affiliate of the
straight to the SC. What was the case? owning corporation.
Petition for Declaratory relief.
I am an American under Parity; I own a
residential land in Forbes Park. What is the Why is it wholly-owned when it is only 95%? It’s
scope and extent of my right post-parity? Can I not 100%. Because you cannot own 100%.
continue to own? Am I still the owner?
That is the question he brought up. And it was Why?
JBL Reyes who wrote the decision. Because you need a Board of directors. And a
Board Of Directors constitutes, the smallest
JBL Reyes said you had parity while the number is 5. You cannot be elected as a
amendment lasted. After the amendment member of Board of Directors unless you own 1
expired, that is the end. You have to disinvest. share in the books of the corporation.
What the SC pronounce becomes law of the You own 95%, you have to allow co-ownership
land. So all the Americans in Forbes Park that by at least other 4 people, so that you will be at
had property had to think what are we going to least be followed.
do. What did they do? They conveniently

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The business language is accommodating. 95% and in either case, after previous notice to
is wholly-owned already. stockholders or members of the corporation of
the intention to propose such removal at the
Let us say you are 95% owner of outstanding meeting. A special meeting of the
capital stock, and then, all of a sudden, you die. stockholders or members of a corporation for
And in your will you already bequeath the the purpose of removal of directors or
shares of stocks of the corporation to your only trustees, or any of them, must be called by
daughter. You have other business and you the secretary on order of the president or on
disposed according to your will. Let us say you the written demand of the stockholders
die in February, just a week after the annual representing or holding at least a majority of
meeting of the corporation and all 5 directors are the outstanding capital stock, or, if it be a non-
already elected and you chose not to be one of stock corporation, on the written demand of a
the directors. You have a nominate, all, in fact, majority of the members entitled to vote.
are your nominates. You die, your daughter
becomes the stockholder that owns 95%. So the 95% owner can demand a special
meeting.
Can she say, I demand to attend the BOD
meeting? Can she demand attendance to a Should the secretary fail or refuse to call the
meeting of the BOD legally? special meeting upon such demand or fail or
refuse to give the notice, or if there is no
Unless she is elected to the Board, she cannot secretary, the call for the meeting may be
demand. addressed directly to the stockholders or
members by any stockholder or member of
Why? the corporation signing the demand. Notice of
Because the powers are directly given by the time and place of such meeting, as well as
Section 23. It is not a derivative power. It is a of the intention to propose such removal,
power granted by law, directly by law. must be given by publication or by written
“xx the corporate powers of all corporations notice prescribed in this Code.
formed under this Code shall be exercised, all
business conducted and all property of such
corporations controlled and held by the board of
directors xx”. Make no mistake bout that. What is qualified notice?
It contains not only the time, ate place of the
Can the majority stockholder, 95% owner of the meeting but also of that item in the agenda for
outstanding capital stock, can he remove all the which the meeting is called. If it is for removal,
directors? then you must state in the notice that this is a
meeting for the removal of the directors, so and
We go to section 28. so. Notice must be qualified.

Sec. 28. Removal of directors or trustees. - Must be given by publication and by written
Any director or trustee of a corporation may notice as prescribed in this code. The vacancy
be removed from office by a vote of the resulting pursuant to this section may be filled by
stockholders holding or representing at least election at the same meeting without further
two-thirds (2/3) of the outstanding capital notice or at any regular or special meeting called
stock, or if the corporation be a non-stock for that purpose.
corporation, by a vote of at least two-thirds
(2/3) of the members entitled to vote: Removal may be with or without cause:
Provided, That removal without cause may
From that first sentence, there is possibility that not be used to deprive minority stockholders
you can remove because you have 95% of the or members of the right of representation to
shares and not only 2/3. But let us continue. which they may be entitled under Section 24
of this Code.
Provided, That such removal shall take place
either at a regular meeting of the corporation
or at a special meeting called for the purpose,

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95% ka stockholder, ang tulo ana matangtang 1 month before the annual meeting, the stock
nimo without cause because they are deemed to transfer book is closed. If you buy or sell, it is not
be your representative, if you call a meeting. recorded. Because that day freezes the number
of voters for the annual meeting.
But the two, you cannot remove without cause,
because they deem to be the minority Is that valid?
representation. It has to be for cause that they The SC already said it is valid.
must be removed.
What is the reason for holding the validity of the
How do you guard against it? In most cut-off date 1 month before the annual meeting?
corporations, if you are the controlling investor, Because it will be chaotic if you do not have that
when you invite somebody to become a director, cut-off date. Suppose all 1 million decide to
make him sign a letter of resignation that is transfer their sales the day before election, how
undated. Ready na ka, aron dili ka can you process that? And you must grant
mamoroblema aning section 28. because theoretically they have the right.
It is a way of solving the orderly transfer
This is not asked in the Bar exam but please ownership and the keeping of the stock and
memorize the formula for the number of votes transfer book.
that is required to elect directors.
What is the formula? Corporation law, especially, stock and profit
corporation is all about control. Who controls the
(AB/C + 1) +1 = number of votes that can be corporation?
shares or proxies that is required to elect
directors. Muingon ka, magbuhat kog corpo na walay ga
control. 33% diri, 33% sad diri, 33% diri. Walay
ga control.
What does A stand for? AB over C. Do you know what you’re doing? You are
inviting chaos. Your proposal is that the purpose
A = total outstanding shares that are voting of the corporation is not fulfilled kay magsigeg
shares away. Equal force man sila.

B = desired number of directors In the formation of the corporation, drawing up of


the articles, you make sure that there is control
C = total number of directors you want elected and control is not necessarily padaghanay
or voted shares. You can have control even if you have
the smallest number of shares.

If you are swing interest, 40% and 40% magka-


You have to memorize this formula if you are the away gyud na sila gikan sauna. Musulod ka naa
secretary. kay 20%, ikaw naay control. Kay kung kinsa imo
dapigan, mao man ng madaog.
PLDT has more than 2 million stockholders.
Ngano kadaghan? Kay Marcos passed a law If you are the swing vote and you do it very well
favoring the Coangcos. If you wanted a in the articles of the corporation, even if you are
telephone connection, part of the fee you paid the minority, you will control. Classification of
PLDT for that telephone connection is for the shares is very important because in the end
purchase of preferred non-voting shares. what determines is control.
½ of the 2M stockholders of the PLDT has no
votes; only 1 million has voting powers. Section 24
So you count; but how can you count when Sec. 24. Election of directors or trustees. -
everyday it is being bought and sold in the stock At all elections of directors or trustees, there
market? How can you identify the value of A? must be present, either in person or by
representative authorized to act by written
PLDT has this thing called a “cut-off date”. proxy, the owners of a majority of the
outstanding capital stock, or if there be no

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capital stock, a majority of the members To allow or give chance to minority to have
entitled to vote. representation. That is why cumulative voting
cannot be denied in the by-laws in a profit and
Can you provide for a higher requirement for stock corporation.
quorum than simple majority?
The Securities and Exchange Commission’s In a non-stock, non-profit corporation, if the by-
opinion is: Yes, you can provide for a higher laws is silent, there’s only one vote per person,
requirement for quorum but you cannot reduce you cannot have cumulative voting.
the quorum to less than majority.

The election must be by ballot if requested by December 7, 2017


any voting stockholder or member. (Janice Molina)

Board of Directors or Trustees


Is the election to be by ballot?
No. Only if requested. If the corporation were a ship, the BOD is the
captain of the ship. Remember that analogy.
I will tell you how most elections are carried out. The captain of the ship, mao nay tinood nga
W corporation, they require cut-off of the stock manager, gusto ka makakitag tinood nga
and transfer vote one month before the annual manager, kapitan sa dakong bapor nga
meeting of the stockholders. The by-laws also overseas. Wa kay tabang ana ikaw ra, naay
require that those who want to put themselves magbuang buang ana nimo nga tripulante unsa
up as candidates to be directors must be man imong buhaton ana makiglayog nimo?
nominated by at least 10% of the outstanding desiplinahon nimo kay kon d na nimo
capital stock and the names must be submitted desiplinahon manunod nang uban.
before the cut-off.
So the BOD is the captain of the Corporation.
Ang mga minority they have to organize
themselves so they can submit somebody in Who elects the Board?
voting. As a general rule, it is the stockholders or the
members of the corporation. But there are times
The Corporation Code requires that you must when it is the BOD that elect the members of the
allow for cumulative voting. You cannot deny Board. In case a member dies, is incapacitated,
cumulative voting in a stock and profit resigned, or is disqualified, the one who elect is
corporation. the board itself. I will summarize it to you; there
are five (5) instances when the stockholders
What is “cumulative voting”? elect the board:
If you’re a stock holder, your maximum number
of votes is your number of shares multiplied by First Instance. Annual Meeting - usually Fiscal
number of director to be elected. That is your year. The annual meeting is dictated by the by
total number of votes laws, you cannot just change the date of the
annual meeting. It is provided in the by-laws and
Pila man imong shares? 10 normally it coincides with the cycle of the fiscal
Pila ka directors ang pillion? 11 year. Fiscal Year meaning the twelve month
11 x 10 = 110 period not necessarily coinciding with the
that is your maximum number. calendar but it is the accounting period to recon
the financial story of the corporation. Usually 2
How do you cast it? to 3 months at the end of the fiscal year, that is
You can cast it all on one candidate; you can the annual meeting in the by laws
divide it equally; or divide it according to the
proportion that you want. Why 2 to 3 months?
Because you have to give time to the
Why is it allowed to cumulate all its votes and independent external accountants to review the
put it in one candidate? Financial Statements of the Corporation
Because one of the items in the agenda of the

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annual meeting after you elect the directors is to written assent ha. And 2/3 must vote to remove
present the financial statements. The President you. If you are the representative of the majority,
together with the treasurer, they make a report. you can be removed by two-thirds vote of the
Why did we register laws? They explain. Why Stockholders with or without cause. Cause?
did we make less money? They also explain. nangawat ka, tangtang ka. Without cause? wa
Why did we make a lot of money? that's when ka, gisumhan ra sila sa imong hitsura!
they also explain. And then the stockholders
vote to accept the financial statement. After they When do you elect the replacement?
have voted, then that is the Financial Statement You can elect the replacement at the same
of the Corporation. But that is already audited. meeting of his removal.

What is the significance of audited Financial Fourth. When a director resigns, dies or is
Statements? incapacitated, and the remaining directors no
The significance of the audited FS is that a third longer constitute a quorum. The example is
party that is respected in his field certifies that Texas Instruments Philippines Inc., five directors
the number in the FS, Balance Sheet, and Profit in their corporation, nag inaugurate sila ug ika-
and Loss Statement reflects accurately the duhang factory sa Baguio. Ngano sa Baguio
financial story of the Corporation in accordance man? Bacause higher altitude and ostensibly the
with Generally Accepted Accounting Principles air in Baguio is contains less pollutants, they
(GAAP). Then you are not afraid to present it to manufacture, not ordinary chips but they
anybody. If there are investors, dia ra ang FS manufacture intelligent controlling chips. In fact
namo! naay magsukit sukit diha nga the likelihood of the Texas Instruments
Government Agency? Dia ra sagpaon nimo ana controlling chips in your smartphone is 70%
:) kay audited naman. Mao nay purpose ana nga because Texas Instrument manufactures 90% of
di ka mag tago-tago. all controlling chips. Mao nay technology nga
gitaguan sa Amercano. Japan and China? puro
You have an election then, annual meeting. One na memory pero pag abot na sa controlling
year man ang term or until the successor is chips, wa pa na nila buhi-i.
elected and qualified, one year ang term. Unya
mapatay sya in the middle of the term? patawag How about the 5 Directors of the Texas
kag stockholder's meeting para mupili sa mupuli Instruments?
nya? dili! Only the directors choose the The law requires that the majority in the BOD
replacement. If incapacitated? If napiang sya? must be a resident of the Philippines. There is
Incapacitated ba na? dili! He can still attend no citizenship requirement, majority is residents.
meeting by teleconferencing, by video That is what is required by the law.
conferencing, mahimo man. So he is not Now they were inaugurating a factory, the 3
incapacitated. Kani adto, incapacitated ka ana, Americans choose to fly, the 2 Filipinos decided
marayuma ka, ma gout ka, d naka kalakaw, to go by tag. but ang gisakyan sa Americano na-
incapacitated ka na. Karon dili na! dili ka crash man, patay ang 3.When a director dies,
incapacitated ug buhi lang imong utok. it’s only the BOD who elects the replacement but
the replacement is to be elected by at least the
Second Instance. When the numbers of BOD is majority of the Board. Absolute majority or at
increased - by an amendment to the Articles. least 3. Duha naman lang nahibilin? So they
Even if it's in the middle of the term, it is the have to call a stockholder's meeting. So that is
stockholders who elect the additional BODs the work.

When can they do that? Fifth. Recently decided case (2 years ago) - The
When the amendment is approved case of Bel-Air vs. SEC. Bel-Air is one of the
subdivisions created by the Ayalas. Pila mana
How is it approved? ka subdivision diha sa Makati? Forbs,
When the SEC issues a Certificate of Filing Dasmarinas, Bel-Air 1, Bel-Air 2,San Lorenzo.
Residential Subdivisions created out of the
Third. When the Director is removed - First of Ayala estate. In the middle is the Ayala Central
all, to remove a director you need a meeting Business District. This is one of the most
duly called for a purpose. Di na mahimo ang expensive Real Estate. Aron makabawi ka naa

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kay dapat at least 30 stories nga building, naay Can the Articles or the By Laws add
600 to 650T per square meter. qualification or disqualification to a
Directorship in that Corporation?
Ang Bel-Air mao na ila problema, walay quorum The Leading case is Gokongwei vs. SEC 89
kada magmeeting sila homeowners. Bel-Air SCRA 336. I remember this case because that
Homeowners Associations, Inc. Unsa may was 1977, I was still in Ateneo de Manila Law
meetingan ana? Gasto sa garbage, repair, school and the lawyer of Gokongwei was
security, discipline (husay) sa subdivision. What teaching us and the lawyer of San Miguel was
happens? 3 na ka-tuig walay quorum, so all the also teaching us. This is their issue, Gokongwei
directors were so called "hold-over directors" slowly accumulated shares of San Miguel. All
because a director is supposed to have a term you need to be elected to San Miguel, you need
of 1 year or until the successor is elected and only one-fifteenth of Outstanding Capital Stock.
qualified. Toa na sya sa "until elected and The story here is Gokongwei, after he has
qualified". Ni-resign man sya, ang director ni accumulated about one-twelfth of the
resign, pag resign niingon ang nahibilin nga sige Outstanding Capital Stock, he started getting
magpili ta ug replacement. Unya naa may bag-o proxies and one month before the annual
abogado, gi-challenge nya, niingon nga dili elections, they already submitted his name and
namo makapili kay hold-over man mo. Wa man nominations to be a director. So he is registered
xay term nga nahibilin, naghulat nalang sa puli. 1 month before, so San Miguel started floating
Wa man paminawa abogado, nagkaso sila articles in the newspaper that Gokongwei has
hangtod naabot sa SC. SC said correct, the antagonistic business against San Miguel, that
Board cannot elect the replacement if there is no Gokongwei is in San Miguel precisely to spy on
unserved portion of the term that is left behind the product developments of San Miguel so that
because he is a holdover director. So, that is he could have advance knowledge of where San
what happens. When the director resigns, dies, Miguel is now. Now, even before that, San
disqualified, incapacitated or in any way cannot Miguel already passed an amendment to their
continue to serve a remaining portion of his term Article. The amendment was this, if you have an
and the remaining director also are hold-over interest, personally or in another Corporation,
directors, they cannot elect the replacement. It financially or indirectly of a business that is in
must be the stockholders. competition with San Miguel or of any of its
product lines, then you are disqualified from
Those are the 5 instances that a director must becoming a member of a BOD. So they said,
be elected by the stockholders or the members you Gokongwei, you have antagonistic
of the Corporation. business.

Remember if the director dies, you have 30days What is SMC's antagonistic business?
to report. If he disqualified himself?, here is a Nakahinumdom mo atong Presto Ice cream?
question. There is a disqualification provision, Gokongwei had Presto IceCream, SMC had
Section 27. Magnolia. Gokongwei had Robina Feeds, SMC
had BMeg Feeds. So in competition. So they
Section 27. No person convicted by final said, Gokongwei, you cannot run for Board of
judgment of an offense punishable by Director of SMC. But d man nila mapugngan naa
imprisonment for a period exceeding six (6) naman siyay one-fifteenth, you just cumulate
years, or a violation of this code, committed that, dba cumulative voting? You cumulate that
within five (5) years prior to the date of his lingkod jud ka di ka ma prevent. So Gokonwei
election or appointment, shall qualify as a did not accept the warning of the secretary. He
director, trustee, or officer of any corporation filed a case with the SEC, the SEC ruled in favor
of SMC. The decision of the SEC is appealable
This is a disqualification. So if na-priso na gani to the CA but the lawyer decided to go to the SC
ka ug 6 years, di naka ma director or if you for the question of law.
violated any provision of the Corporation Code
or directive of the SEC within 5 years from your Can a stockholder be disqualified from
election, you cannot serve as a director or becoming a member of the BOD when he has
trustee. enough shares to be voted as director?
First, the SC divided the issue, can there be a

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disqualification added in the by-laws is not more than 10% of the net profit before tax.
preventing a stockholder to become a That ceiling does not include per diem. Per Diem
director? SC says yes. A corporation is free to is the expenses that you must incur in order for
add disqualification or additional qualification. you to perform the Director's duties.

Second, is there a valid disqualification here Probably you remember that PNB was still a
when his disqualification was voted upon by GOCC, it was the President who appointed the
the stockholder when the Outstanding directors and during the time of Ramos, he was
Capital stock was only one-third of the very grateful with this Dabawenyo, because he
present number of shares that is in__? helps during the elections, he appointed him as
gamay pa tong corporation niadto when this the director of PNB. PNB has a meeting once a
disqualification was set. The SC says yes, the month. Director’s fee? 100k per meeting
disqualification still operates later excluding per Diem. The per diem is not
included in the ceiling of 1/10th of the net
Is Gokongwei disqualified from running? SC income before tax.
answered, the presumption is Gokongwei can
run. If as the controlling share says that he is What is the Director's fee in PLDT? 250K, one
disqualified then he must be given his day in __. board meeting. If you are called in a committee
He must be investigated, he must be heard, and meeting, it is 150K. So once a month you have a
there must be an investigation as to whether he
meeting 250k, tawgon sad ka ug committee
really fits the disqualification. So it is not
automatic. If there is a disqualification in the by- meeting 150K.
laws, that still has to go to an investigation. The
order is to remand to the SEC but itw as settled
amicably. Gokongwei was first made a director December 8, 2017 (1st Half)
of San Miguel International in Hong Kong and (Lizette Estillore)
afterwards they offered him price he could not
refuse and so he made a lot of money. The Sec. 32. Dealings of directors, trustees or
money he got, he bought PCI bank together with officers with the corporation. - A contract of
the Lopez’s. Later on, they sold PCI bank to the corporation with one or more of its directors
Equitable Bank. or trustees or officers is voidable, at the option of
such corporation, unless all the following
Say, there were people in the board who are conditions are present:
also disqualified but they did not raise the 1. That the presence of such director or
objection later. One of them is Jaime Zobel de trustee in the board meeting in which
Ayala, used to sit on the board of SMC and yet the contract was approved was not
the Ayala's at that time owned Pure foods necessary to constitute a quorum for
because SMC bought them up and SMC had such meeting;
Monterey. Ngano gi-allow man nila si Ayala na 2. That the vote of such director or trustee
mulingkod diha? Naa sila BMeg, Ayala also had was nor necessary for the approval of
a Joint Venture with Harvel(?), high breed corn. the contract;
They allow Ayala because Ayala and Soriano 3. That the contract is fair and reasonable
are first cousins. under the circumstances; and
4. That in case of an officer, the contract
Director’s Compensation has a limit in the has been previously authorized by the
Corporation. What is the limit? It cannot be board of directors.
collectively more than 10% of the Net Income of
the Corporation before tax. When you are given Where any of the first two conditions set forth in
a problem about this, make sure that is a pure the preceding paragraph is absent, in the case
director because there are directors who are of a contract with a director or trustee, such
also officers of the Corporation. Let's see you contract may be ratified by the vote of the
are President and CEO of the Corporation and stockholders representing at least two-thirds
you are also a director, your compensation as (2/3) of the outstanding capital stock or of at
an officer does not have a limit, but your least two-thirds (2/3) of the members in a
compensation as a director has a limit. The limit meeting called for the purpose: Provided, That
full disclosure of the adverse interest of the

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directors or trustees involved is made at such 2nd requisites, these transactions can be ratified
meeting: Provided, however, That the contract is by the stockholders.
fair and reasonable under the circumstances.
What is the assumption behind this rule? If the
SELF-DEALING DIRECTOR are those who self-dealing director is a stockholder with 2/3 of
enter contract with the corporation of which they the outstanding capital stock, he is less likely to
are directors. Technically speaking, it is an take advantage of the corporation. Mura ka ug
anomalous dealing. A director is an agent of the nag-dunggab sa imong kaugalingon – imo na
corporation who acts for the corporation. Yet, a gud na ang 2/3 unya imo pang lawgawon ang
self-dealing director also acts for himself. corporation! Maluoy ka man sa imong
kaugalingon. Charity begins at home!
REQUISITES:
1. His presence in the meeting, which I’d like to point this out to you because there is
approved the transaction, must not be another applicable assumption applicable to
counted for purposes of quorum. directors. Now, the Securities Regulation Code
2. He cannot vote on said issue. requires of certain corporations to have
3. The contract is fair and reasonable independent directors at least 20% or at least 2,
under the circumstances whichever is lower, in the Board. These are
4. In case of an officer, the contract has Listed
been previously authorized by the board 1. Listed Corporations
of directors (SELF-DEALING OFFICER 2. Corporations with at least P50M assets
e.g. president of the corporation, and at least 200 stock holders, 100 of
general manager who is not a director) the stockholders owning at least 100
shares
If the 1st and 2nd requisites are not met, for as 3. Banks, financial institutions, and quasi-
long as the contract is fair and reasonable (In banks
NIRC, it is termed as arms length transaction),
there is no fair advantage that is given to the Who is an INDEPENDENT DIRECTOR?
director. 1. He cannot own more than 10% of the
outstanding capital stock of the
Illustration: You are a director of Bachelor Bus. corporation. The PSE raised the
You are also one of the biggest dealers in requirement. The law says not 10%.
second hand tires and brand-new tires in Davao. The PSE says not more than 5%.
As a director, you offer it to Bachelor Bus. This 2. He cannot be related to any of the
transaction must go through Section 32 of the controlling owners
Code. There’s a meeting. 3. He cannot be an employee of the
corporation or the external auditor, or
The presence of the director is not counted. consultant of the corporation, its mother
Tangtang na siya sa minutes for this particular or subsidiary
discussion on the transaction because in the
end the BOD will pass a resolution approving The whole thinking is you can think better for the
the transaction. That’s how a corporation acts! good of the corporation if you are not related to
the corporation – you are thinking of the general
Put it in record that he did not vote. The others welfare of the investing public. In Section 32, if
who voted shall still constitute as the majority of you have 2/3, you are thinking about the good of
the BOD. the corporation that is why you can ratify the
transaction. Asa ma’y tinuod ana? If you ask
Have a comparative pricing of others. “These me, none of those two. It’s the actual running of
are the pricing of others. This is the price that the corporation. It’s the oversight! In the end,
he gives. Therefore, it is fair and reasonable.” good governance is good governance in any
language provided that it exists.
It’s another story when this self-dealing director
owns 2/3 of the outstanding capital stocks Q: Are the directors prohibited from entering
because even with the absence of the 1st and into contracts with the corporation?

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A: No, they are not. But there is a formality that 2. The vote of such director/trustee is not
has to be done. necessary or not counted in the
approval of the contracts
3. The contract must be fair and
Sec. 33. Contracts between corporations reasonable
with interlocking directors. - Except in cases
of fraud, and provided the contract is fair and The corporation where that interlocking director
reasonable under the circumstances, a contract has only nominal interest needs to be ratified by
between two or more corporations having 2/3 of the outstanding capital stock or 2/3 of the
interlocking directors shall not be invalidated on members of the corporation. There has to be
that ground alone: Provided, That if the interest full disclosure of the adverse interest of the
of the interlocking director in one corporation is directors and the contract must be fair and
substantial and his interest in the other reasonable.
corporation or corporations is merely nominal,
he shall be subject to the provisions of the Kanusa man naa’y ratification kinahanglan 2/3?
preceding section insofar as the latter If your interest is less than substantial or if it is
corporation or corporations are concerned. nominal, the assumption is that you may favour
the corporation where your interest is
Stockholdings exceeding twenty (20%) percent substantial.
of the outstanding capital stock shall be
considered substantial for purposes of A director might act as an agent for another
interlocking directors. corporation and that other corporation has
nothing to do with that, but he brings in to the
Normally, it is the corporation who enters into a director. That is not covered. (Huh?)
contract of which the director is also a director
because he is also a stockholder, and he is Illustration: For example a corporation is putting
entering into contract with the corporation of up a building. They are opening it for bidders.
which he is also a director. This is what we call One of the directors is related to a well-known
INTERLOCKING DIRECTOR. construction company because his brothers are
architects and engineers. So dad-on niya ang
There is an INTERLOCKING DIRECTOR in a corporation sa iyang brothers. Is he a
croprations where one or some, or all of the stockholder there? No, he is not! How do you
directors of one corporation is/are a director in handle that? Then you enter into *** because
another corporation. *** requires full disclosure if a director brings a
business opportunity to the corporation through
If the interest of the interlocking director of a the board, then he must make full disclosure.
corporation are both substantial where Muiingon siya – “Kini akong giduso, I am related
stockholdings exceed 20% of the outstanding to them. My brothers are officers of the
capital stock, you become a substantial interest corporation and a major stockholder.” For
in the corporation, as far as interlocking directors delikadeza, muingon siya – “I better refuse
is concerned, then a contract between two or myself so you can freely discuss the merits and
more corporations having interlocking directors demerits of this transaction.” Sibat siya! Ang
shall not be invalidated on that ground alone, iyang proposal debatehon sa BOD and wala
except if the contract is fraudulent or not fair or siya diha kay related man siya. Mao na ang full-
reasonable. disclosure, honest, and transparent. Kinsa man
muingon ana? Ang corporate secretary.
The contract, as a general rule, is voidable if the
interest of the interlocking director in one of the *Father talks about SMC and derivative suit*
corporations is nominal, while substantial in the DERIVATIVE SUIT is filed by a stockholder in
other stockholdings in another corporation. It the name of the corporation.
will only be valid if the following conditions are
present: Who files the suit for the corporation? It’s not
1. The presence of such director/trustee in the corporation because it has no hands to sign
the board meeting in which the contract the complaint. It has to be the BOD who files
is approved was not necessary the suit. It files the suit by passing a resolution

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where a natural person, normally the President, 2.) Willfully and knowingly vote for or
is named who will act for and in behalf of the assent to patently unlawful acts of the
corporation. This is approved by the majority of corporation;
the BOD.
It was reported a week ago that the Mayor of the
If the corporation acts against the very agents IGACOS (Samal) said he has money for
who are supposed to act for him, the suit shall microfinance and he appointed the multi-
be filed through a derivative suit. A stockholder purpose cooperative of Samal that it will process
can file the suit in the name of the corporation. the applicants, after which they will release the
The stockholder is the representative party to microloans. The cooperative passed a resolution
the corporation because the mortal which provided that in gratefulness to the Mayor,
representatives of the corporation are it is giving the mayor a gift of P100,000. The
themselves the respondents. following year, they passed another resolution
giving P100,000. This is in violation of the Anti-
Only one share is needed for a stockholder to Graft and Corrupt Practices Act-“gifts by reason
validly file a derivative suit. At the time the of office.” The Mayor received the check and
controversy arose, you must be a stockholder. subsequently encashed it and deposited it in his
At the time you file the suit, you must still be a account. The check was recorded in the
stockholder. cooperative. There is no way he can deny that
he has not received the money.
*Fathers talks about the whereabouts of
Danding Conjuanco and SMC* Give a law that makes the director and the office
liable, criminally. An example is the violation of
Sec. 31. Liability of directors, trustees or the Trust Receipts Law. If the corporation is the
officers. - Directors or trustees who willfully and trustee, the officers are the ones who serve the
knowingly vote for or assent to patently unlawful prison term, not the corporation because it
acts of the corporation or who are guilty of gross cannot be put in jail.
negligence or bad faith in directing the affairs of
the corporation or acquire any personal or Section 13. Penalty clause. The failure of an
pecuniary interest in conflict with their duty as entrustee to turn over the proceeds of the sale of
such directors or trustees shall be liable jointly the goods, documents or instruments covered
and severally for all damages resulting by a trust receipt to the extent of the amount
therefrom suffered by the corporation, its owing to the entruster or as appears in the trust
stockholders or members and other persons. receipt or to return the said goods, documents or
instruments if they were not sold or disposed of
When a director, trustee or officer attempts to in accordance with the terms of the trust receipt
acquire or acquires, in violation of his duty, any shall constitute the crime of estafa, punishable
interest adverse to the corporation in respect of under the provisions of Article Thirteen hundred
any matter which has been reposed in him in and fifteen, paragraph one (b) of Act Numbered
confidence, as to which equity imposes a Three thousand eight hundred and fifteen, as
disability upon him to deal in his own behalf, he amended, otherwise known as the Revised
shall be liable as a trustee for the corporation Penal Code. If the violation or offense is
and must account for the profits which otherwise committed by a corporation, partnership,
would have accrued to the corporation. association or other juridical entities, the penalty
provided for in this Decree shall be imposed
upon the directors, officers, employees or other
officials or persons therein responsible for the
December 8, 2017 (2nd Half)
offense, without prejudice to the civil liabilities
(Zarah Domingo)
arising from the criminal offense.
Section 31 lists down the 3 ways in which a
Director is liable.
For instance, you import a machine (8-color
1.) When he votes for or consents to a printing machine from Italy). You obtain a loan
patently illegal act; from a corporation. You open a letter of credit in
the name of the corporation (bank), assigned to
you. You will be made to sign a trust receipt

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which provides that the proceeds of that, if you violation of the Doctrine of Corporate
are a printing press, go directly to the Opportunity? No.
corporation to service the debt. If you cannot
pay, that will amount to estafa. The proceeds The requisites of the Doctrine of Corporate
belong to the bank because it is the owner of Opportunity: The Doctrine says that if there is
that machine. presented to a corporate director a business
opportunity which:
That is the same case with Avon. You will be
asked to open an account and issue postdated 1.) The corporation is financially able to
checks so that you will work hard to sell them, undertake;
and at the same time, you will be made to sign 2.) From its nature is in line with the
trust receipts because Avon is the owner of the corporation’s business and is of
beauty products (pa-pula) and you are merely practical advantage to it;
an agent. If you cannot pay and you cannot 3.) One in which the corporation has an
return the beauty products, you are deemed to interest or a reasonable expectancy.
have appropriated these products for your
benefit. You have committed estafa. And then, wala nimu gihatag, imuhang gi-solo.
Then you must account for the profits, even if
The provision of law states that if it is the you spent you money in that business.
corporation who is the trustee in a trust receipts
contract, the officers, the members of the board, The Supreme Court said that it is not a case of
they are criminally responsible. They will answer violation of the Doctrine of Corporate
for the fine or imprisonment that is meted out to Opportunity. Cattle-fattening and Leather-
the corporation, jointly and severally liable. Hide/Cattle-Hide Tanning, Curing and Selling,
are 2 different businesses.
What is the “Doctrine of Corporate Opportunity”?
What is an example of a violation of the Doctrine
Section 34. Disloyalty of a director. – Where a of Corporate Opportunity? Bitong vs CA (1998)
director, by virtue of his office, acquires for
himself a business opportunity which should Bitong was the President of Jaka Corporation
belong to the corporation, thereby obtaining (the holding company of Juan Ponce Enrile).The
profits to the prejudice of such corporation, he corporation was named after Enrile’s two
must account to the latter for all such profits by children. It was the 2nd biggest owner of real
refunding the same, unless his act has been property along Ayala Avenue, the main avenue
ratified by a vote of the stockholders owning or of the Central Business District in Makati. Jaka
representing at least two-thirds (2/3) of the was in the development of high-rise
outstanding capital stock. This provision shall be condominium and a law was passed than when
applicable, notwithstanding the fact that the you are a high-rise developer, 10% of your
director risked his own funds in the venture. project must also be in low-cost housing. They
looked for lot where they will be putting up the
low-cost housing project. They found 3
‘Nangilog ko ug business sa corporation.’ You prospects: the first one was flat, already with
are all directors, you went to Australia. Cattle- electricity and NAWASA connection; the second
fattening is your business. As long as the cattle one was also flat but without water and
is still increasing its weight, you do not yet kill it. electricity; and the third one will require high cost
When it stops growing, that is the time you of development because it is not in a flat area,
slaughter it. While you were choosing a cow, which although having access to electricity, had
somebody came near you and told you they no access to water. Bitong said that Jaka will get
were looking for leather. It made an offer that the the third option. He got the first one for his own
former will make leather from their cattle and corporation which was also involved in real
they will buy it. You as director, you say this is property development. The SC said that it was a
my chance, I will not give this to the corporation. violation of the Doctrine of Corporate
When you went back to the Philippines, you put Opportunity because it was no longer
up a leather-tanning business. You get the skin speculative, the corporation needs that, it was
of the cow that will be slaughtered. Is that a in-line with the business. There are no ifs and
buts.

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If you compare this case with the previous If you are not careful, you will end up betraying
example, layo pa, daghan pa itranslate, agian. the corporation because you obtain an interest
There is a way of slaughtering to produce to your benefit, at the expense of the
leather—there is curing and stretching. In other corporation.
words, the process of producing leather is not
part of the business of cattle-fattening. Hence, EXECUTIVE COMMITTEE
there was no violation of the Doctrine of
Corporate Opportunity. Section 35. Executive Committee. –The by-laws
of a corporation may create an executive
There is a corporation that has a debt with committee, composed of not less than three
another corporation. The latter calls the directors members of the board, to be appointed by the
for a meeting. It was found out that although all board. Said committee may act, by majority vote
the former’s properties in the Philippines were of all its members, on such specific matters
already attached, a special information was within the competence of the board, as may be
received that the debtor corporation owned a delegated to it in the by-laws or on a majority
plane in Burbank, California. The directors vote of the board, except with respect to: (1)
agreed that they will hire a lawyer to attach the approval of any action for which shareholders’
property. Now, one of the directors stands up approval is also required; (2) the filling of
and goes outside and makes a phone call. He vacancies in the board; (3) the amendment or
called his lawyer in LA and told him that since repeal of by-laws or the adoption of new by-
the debtor corporation also had debts to him, he laws; (4) the amendment or repeal of any
instructed the said lawyer to go to Burbank and resolution of the board which by its express
attach the same property which the creditor terms is not so amendable or repealable; and (5)
corporation has agreed to attach. He is a a distribution of cash dividend to the
director of a corporation. He used his knowledge shareholders.
for his own benefit/ That I disloyalty.

If you are a director of a corporation, it is like Those are the exceptions which the Executive
partnership, if the debtor has a debt to a Committee cannot act.
partnership and a debt to you personally, not as
a partner, but in your other business, and both There are so many corporations who do not
obligations have ripened. Naa siya gihatag na want to call it Execom. They call it Mancom
payment pero dili paigo sa duha, sa usa ra. Asa (Management Committee). The problem with
man na i-apply kung ikaw ang mukulekta? To that is that it is the terminology that is found in
his debt to you or to the corporation? (But, FRIA (Financial Rehabilitation and Insolvency
charity begins at home.) You have, first and Act of 2010). It is a technical group which may
foremost, a fiduciary duty, which is higher than be appointed by the SEC in a distressed
your personal duty. It is higher. corporation. So, the correct term is Executive
Committee, not Mancom.
In the same way, when a friend requests that he
parks his car in your parking space while he is It says here that the by-laws of the corporation
away for a conference and your house got may create. Suppose there is no provision in the
burned and you chose to save your own car by-laws, can the board create an Execom? The
before your friend’s car, are you liable. Yes, you Supreme Court said YES. Why? Because the
are liable for it. That is a contract of deposit. You powers of the Board is plenary. It is supposed to
have an obligation as the depositary to attend to exercise such powers and create such
what is deposited ahead of your own. That is the committees to enable it to govern and administer
obligation that you accepted when he deposited the affairs of the corporation. So even if there is
it to you. When you deposit in the bank, it is no provision in the by-laws, the board can create
fungible so it is not a true deposit. It is a an Execom.
mutuum.
I will tell you the story of the Execom of the old
Contract of Deposit, Contract of Partnership, PCI Bank. PCI Bank was bought by the Lopez
Fiduciary nature of a corporation, mau ra na. It’s Group and the Gokongwei Group. They teamed
a common thread. up together, equal shares sila and they bought it
right after EDSA Revolution. The way it was

47
CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

bought is, the Romualdez shares, most of it, control, it will be 55%.” Lopez told Romualdez
were sequestered by government and the wait for my signal.
government said, since the Romualdez’s did not
contest, we are selling it. The way they sell it is Lopez went to Gokongwei and he told him “you
by obtaining dollar credits. At that time, the don’t have to attend the meeting because if you
Philippines had so much foreign debt. If you pay do, you will just be embarrassed. You will no
the foreign debt, you obtain credits equivalent to longer be in the Executive Committee, and I am
the debt that you paid. And that is how they and Romualdez will sell to Equitable Bank-Mr.
gained control over these different corporations Go, and that will be the end of you, you are just
that were for sale. So since Lopez did not have 35%, no premium, you will only be 2 nd beadle to
enough money to pay for everything, he teamed Mr. Go of Equitable Bank.” What did Gokongwei
up with Gokongwei who had money, but did not say “Okay I am selling with you.”
have enough to buy everything. So pareho sila,
they teamed up. 35%-35%, so 70% sila. Karun, Lopez said “Okay, we were in this together when
gipalit nila, pagkahuman palit nila, ingun dayun we came in, we will exit together.” And than was
si Gokongwei kay Eugenio Lopez “ since you te ultimate stabwound to Romualdez because
are more used to the public, you be the Romualdez grabbed Meralco from the Lopez’s
Chairman and President, tapos ako, Execom ra so Lopez did not have any qualms at all to
ko.” Lipay kayo si Eugenio kay siya man ang betray Romualdez.
starring, siya man ang chairman. Si Gokongwei,
Execom ra siya. Sa ngadtu-ngadtu na, That is the story of how it became Equitable
nakamatikud na si Lopez na ang mga Bank, then afterwards, it got into trouble
corporation ni Gokongwei ang sige kahuwam sa because of bankrun (remember that vice-
kwarta because it is the Execom that processes president who testified that it was Velarde
the loans, they meet every week. Ka-isa ra man himself who signed it but that was Estrada, edi,
magmeeting every month ang board. bankrun).

Nothing reaches the board unless it is approved Who got Equitable Bank? BDO. Equitable Bank
by the execom. So nawala na sa passing si is lost in BDO who bought it.
Eugenio Lopez Jr. Mauna niingun siya na
Sometimes, it is the Executive Committee who
ibaligya na natu. Who wants to buy 35% when
runs the corporation. Naa man na resolution ang
you do not control. So, niduol siya kang
Board of Directors, let us say for loans, P5
Gokongwei ingun siya “let’s sell together” so it’s
Million and below, approval of the Executive
60%, they have to pay a premium for control, not
Committee is enough and it is just ratified in
only the buying of the shares, but you add a
passing, paspas ra na kaayo. The Board begins
price to being in control of the corporation, that
to look at the loans once it is above P5 Million.
is the premium, because you get 70%. Ingun si
So for a big bank like Unibank or PCI Bank,
Gokongwei “no I am not interested in selling.” So
higher tingali ang threshold, P10 Million or P20
what did Eugenio Lopez Jr do? He did the
Million. So that was how Gokongwei made PCI
unthinkable, he went to Romualdez (mau nit u
Bank the financing company of his corporations
siyang gipriso ni Marcos unya gipa-eskapo sila)
kay siya man ang sa Execom, siya man
who was a minority stockholder with 20%.
gakupot. Is it not covered by the Interlocking
Giingnan niya si Romualdez “I am approaching
Directors? It is covered supposed to be if it was
you, I am asking for your help (hinay na tu sila,
the Board that approved it, but it is not the Board
wala na man tu sila sa Board), let us organize
that approved it, it was the Executive
and let us sell togather because the Equitable
Committee.
Bank is interested in buying.”
Alright, we are finished with the Board of
This is the time of Estrada. Gipahuwam ni
Directors. We are now with Powers of a
Estada sa SSS and GSIS ang Equitable Bank,
Corporation (Father hands in a handout to the
so naa siya kwarta ikapalit. So Romualdez said
class).
“Go atu ni ibaligya arun maka-kwarta ko kay I
will have a premium. If I sell by myself, there will
be no premium because there will be no control,
but if I sell together with Lopez, there will be

48