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LECTURE NOTES ON CORPORATIONS

INTRODUCTION AND PRELIMINARIES

1. In the Philippines, business enterprises are organized principally in one of four forms, the
single proprietorship, the general partnership, the limited partnership, and the corporation. The
choice of the form of organization is usually made by the original organizers and is dictated by
the requirements of the business.
a. Normally, a single proprietorship will be resorted to if there is a single owner who has
the ''necessary resources” for the intended business activity. Resort to partnerships and"
corporations are determined, to a large extent, by the need for resources and limitation
of liability. The choice between a partnership and a corporation on the other hand, is
determined by Economic factors.
b. Perhaps, the most significant economic reason for the continued use of-partners tax
based. A partnership's distributable Income is taxed once, while that of the corporation
is taxed twice, once at the corporate level and once again at the stockholder-level. Then
again, the same reason may be advanced in favor of a corporate structure as the
imposition of tax at the stockholder level may be delayed until there is a declaration of
dividends.
c. Another, though not necessarily less significant, is the nature of the business.
Traditionally, partnerships are ideal for short, term business ventures, where the
organizers do not foresee the continuance of their union after completion of the business
activity and would like to liquidate their investments quickly
d. A corporation and a partnership are distinguished as follows:
a) THE MANNER OF CREATION - a corporation is created by law, while a
partnership is created by agreement
b) TO THE NUMBER OF INCORPORATORS- a corporation generally
requires a minimum of 5 and a maximum of 5 incorporators, while a
partnership requires a minimum of 2. The exception is a corporation sole
c) COMMENCEMENT OF EXISTENCE - a corporation, commences to
have existence upon the issuance or a certificate of incorporation, while, a
partnership commences to have existence upon agreement
d) POWERS THAT MAY BE EXERCISED- a corporation can
oh1y~exercjse powers allowed by law, while a partnership can exercise
power not contrary to law or public policy
e) MANAGEMENT - a corporation is managed by a board, while a
partnership is managed by the managing partner
f) SUCCESSION- a corporation enjoys the right of-succession, while a
partnership does not
g) PERSONAL LIABILITY - as a general rule, stockholders do not have
personal liability beyond the value of their shares, while partners are liable
beyond what they have contribute
h) TRANSFERABILITY OF INTEREST - one's interest in a corporation is
transferable without consent, while that in partnership, requires consent
i) TERM OF EXISTENCE - a coloration can exist for terms of no more than
50 years- at any given time but subject to extension, while a partnership is
no limited as to term
j) DISSOLUTION – a corporation cannot be dissolved without. the consent
of the state, while a partnership can be dissolved without need for the
consent of the state

e. The Similarities are:


i. both have juridical personality
ii. can act only through its agent
iii. both are composed of an aggregate of individuals
iv. distribution of profits is given those who have contributed capital
v. both can only be organized if there is a law authorizing its registration
vi. both are taxed as corporation
f. Nonetheless, what is prevalent is the use of the corporate structure as the preferred
business organization. Reasons advanced for its use are: limitation of liability, capital
generation from equity, debt and income retention, organizational control, free
transferability of ownership, and succession.
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2. Other forms of business organizations that have been utilized to varying degrees are:
a. joint accounts
b. business trusts
c. joint ventures
d. cooperatives
e. syndicates.

a. Joint accounts or sociedad de cuentas en participacion are arrangements among


merchants who Interest themselves In the transactions of other merchants, contributing
thereto the part of the capital they may agree upon, and who participate in the favorable
or unfavorable results thereof in the proportion they may determine.
It is a form of business Association in which two or more persons interest
themselves in the business of another contributing thereto money, property, or industry;
and participating in the results of the business in the proportion that they may
determine.
b. A business trust is a legal relation whereby one person, called the trustor, conveys a
property to another for the benefit of ajperson called the beneficiary. The person in
whom confidence is reposed as regards the property is called the trustee.
A trust agreement can actually be entered into with a trust department of a
commercial or universal bank. Pertinent regulations issued by the Bangko Sentral ng
Pilipinas defines the term "trust business" as any activity resulting from a trustor-trustee
relationship or trusteeship involving the appointment of a trustee by a trustor for the
administration, holding, management of funds and/or properties of the trustor by the
trustee for the use, benefit or advantage of the trustor or of others called beneficiaries
In the United States, a business trust is called the "Massachusetts Trust" because
they were developed in Massachusetts from 1910 to 1925. It is defined as an
unincorporated business association established by a declaration or deed of trust, and
governed contributions to the capital required and accepting a fair share of the risks and
benefits of the undertaking in accordance with universally accepted cooperative
principles.

c. A Syndicate is a group of people who come together to work for a common aim. This
unincorporated business association is often encountered among insurance companies
who may be underwriting a, large risk or bonks who are lending 3 huge amount.
Syndication therefore the practice of dividing investment risk between several persons
in order to minimize individual risk.

ADVANTAGES AND DISADVANTAGES OF A CORPORATION


1. The advantages are:
a. the capacity to act as a legal unit
b. limitation of or exemption from, individual liability of shareholders;
c. continuity of existence;
d. transferability of shares
e. centralized management of board, of directors;
f. professional management;
g. standardized method of organization, and finance; and
h. easy capital generation.

2. The disadvantages are:


a. it is prone to "double taxation;
b. they are subject to greater governmental regulation and control;
c. corporation may be burdened with an Inefficient management if stockholders cannot
organize to oppose management;
d. limited liability of stockholders may at times translate Into limited ability to raise
creditor capital;
e. it is harder to organize compared to other business organizations;
f. it is harder or more complicated to maintain; and
g. the "owners" or stockholders do not participate in the day to day management.

SUBJECT COVERAGE

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1. These notes cover the Corporation Code, SEC Code of Corporate Governance, Corporate
Recovery, Securities Regulation Code, and other related laws.

THE CONSTITUTIONAL BASIS FOR ENACTMENT OF THE CORPORATION CODE


1. The constitutional basis for the Code is Section 16, Art. 12 of the 1973 Constitution which
provides: "Congress shall not, except by General law provide for the formation, organization or
regulation of private, corporations,, government owned or controlled corporations ( may be
created by or established by special charters in the interest of the public good and subject to
the test of liability.”

SCOPE OF THE CORPORATION CODE


1. The Corporation Code
a. Provides for the incorporation, organization and regulation of private corporations,
both stock and non-stock, including educational and religious corporations
b. Statement of corporate powers and provides for dissolution
c. Fixes the duties and liabilities of directors/trustees/officers
d. Declares the rights of stockholders or members
e. Prescribes the conditions under which it may conduct business
f. Provide penalties for violation of the Code
g. Repeal all laws or parts thereof that are inconsistent

CORPORATION DEFINED
1. The law defines a, corporation as an artificial being created by operation of law having the
right of succession and the powers, attributes and properties expressly authorized by law or
incident to its existence.
a. From the definition, the attributes of a corporation are:
i. created by operation of law
ii. it is an artificial being
iii. it only has the power, attributes and property expressly allowed by law or
incident to its existence
iv. it has the right of succession.
2. When a corporation is said to be created by operation of Law. It means that it cannot come into
existence without the consent or any
grant of authority from the sovereign government.
a. The grant of authority by the sovereign government is a
concession. Thus the concept known as the “Concession Theory” or Government
Paternity Theory" or the "Franchise Theory"
b. Distinguishing between Plenary or Corporate or General; Franchise which refers to the
privilege enjoyed by individuals to form a corporation, and the Secondary or Special
Franchise which refers to the privilege enjoyed by the (corporation} to be and to act as
a corporation.
c. Private corporations are generally organized and formed under the provisions of the
Corporation Code.
d. They can also be formed under special laws or charters which
then shall be the primary Jaw that will govern them to be
supplemented by the Corporation Code.
3. The corporation is said to be an artificial being that is invisible and intangible, it is said to exist
only in contemplation of Jaw. The law treats as though it were a person by process of fiction".
It is likewise said to be a juristic person resulting from a association of human beings being
granted legal personality by the state
a. Consequently, the corporation as a juridical person has a personality separate and
distinct from the persons composing it. In fact, this separate personality is recognized
under the Civil Code which begins the minute it is said to be duly constituted according
to law.
b. The Civil code also provides that as such it may acquire and possess property of all
kinds as well incur obligations and bring civil or criminal actions in conformity with
laws and regulations of their organizations
c. Property so required or conveyed to the corporation is the property of the corporation
and vice versa. It has no personality to bring action for recovery of property belonging
to stockholder or its members.
d. The interest of a stockholder/member is inchoate. It becomes actual, direct and existing
only upon liquidation of the assets of a corporation and its eventual Assignment to him.
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e. The obligations of a corporation are not obligations of its “stockholders or members
'and vice-versa. The principle though is subject to an exception, the Doctrine of
Piercing the Veil Of Corporate Fiction applies. This doctrine is also known as the'-
Doctrine of Disregarding the Fiction of Corporate Entity or Corporate Alter Ego
doctrine. It is an exception because the application of the doctrine seeks to hold the
stockholder or members of the corporation personally liable for corporate obligations.
f. For the doctrine to apply, any of following circumstances must obtain:
i. Corporate fiction is being used to defeat public convenience. The
convenience is the creation of a separate and distinct person from the
stockholder or members to facilitate the transaction of business. These are
referred to as the Alter-Ego cases. An example Is when a stockholder or member
who has an unsavory reputation utilizes corporate fiction to hide his true
identity for illegal purposes, or
ii. It justifies a wrong, protects fraud or defends crime. These are the referred to
as the Fraud cases.

g. To sustain the application of the doctrine-to alter-ego cases, resort has been had to the
instrumentality Rule. The requisites of which are:
i. There is complete domination of control of policy and business practice
ii. The control is used to commit the fraud
iii. The control used is the proximate cause of injury or loss

h. The residence of a corporation is ordinarily the place of incorporation. For venue


purposes, a domestic corporation is a resident of a particular province, city or
municipality.
i. Tort liability can be imposed on a corporation because generally speaking, the rules
governing liability of a principal or master for a tort committed by an agent or servant
are the same whether the principal or master be a natural person or a corporation.
Hence, when a tortous act is committed by an officer or agent of a corporation under
express direction or authority of the corporation, It would be liable
j. A corporation is a person, in proper cases, within the due process and equal protection
clause of the Constitution. Just like a natural person, It cannot be deprived of Its life and
property due process However, it cannot exercise constitutional rights is inconsistent
with its being an artificial being, such as protection of liberty. Note however that while
a corporation can invoke the right against unreasonable search and secure, there is a
legal way to obtain the required information as a corporation cannot refuse to produce
Its books and records lawfully required rely by the “appropriate government agency.
Hence, it has been held that when a corporation, vested a with special privileges and
franchises, is charged, with abuse of such privileges and franchises cannot claim a right
against self incrimination when directed to produce its books and records.
h. As a rule, no criminal action can lie against a corporation. A corporation cannot commit
felonies as provided for in the Revised Penal Code because artificial beings are
incapable of intent, nor can it actually perform an overt act.
i. To make a corporation criminally liable, the Supreme Court 0 clarified that it is
necessary that the statute, by express words or by necessary intendment include
corporations within the persons who could offend against criminal laws and the
legislature must at the same time establish a procedure applicable to corporations.
Hence, the court acquitted the president of a corporation who signed a trust receipt as
the law prevailing prior to the enactment of the Trust Receipts Law did not provide for
the existence of corporate criminal liability
j. It cannot be entitled to moral damages. Note the ruling in "Mambulao-Lumber vs..
PNB” allowing recovery of moral damages for a besmirched reputation which was
modified by the case of Acme Shoe vs. Court of Appeals when the Supreme Court said
that: mental suffering can only be experienced by one having a nervous system and it
flows from real ills, sorrows and grief of life, all of which cannot be suffered by
respondent banks as an artificial person. The subsequent case of Solid Homes vs. Court
of Appeals provided that there is not abandonment of the Mambulao ruling because it is
not ah en banc decision. This was followed by Asset Privatization Trust vs. Court of
Appeals, which restated Mambulao, then again by ABS-CBN v Court of Appeals stated
that Mambulao is an obiter dictum, then BPI vs. Casa Montessori Internationale, which
again cited Mambulao and held that for breach of the fiduciary duty required of a bank,
a corporate client may claim moral damages when its good reputation is besmirched by
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the breach, and social humiliation results therefrom. The latest Is Filipinas Broadcasting
Network, Inc. vs. Ago Medical and Educational Center23 where it was held that Article
221 The Civil Code allows the recovery of moral damages on cases of libel, slander or
any other form of defamation without qualification as to whether the plaintiff is a
natural or juridical person. While the court may allow the grant of moral damages to
corporations, it is not automatically granted; there ’must be proof of the existence of
actual basis of the damage and its causal relation to the defendant's acts.
k. When a corporation is said to have only those powers of properties expressly authorized
by law or incident to its existence, we look to what is provided for by law or Its charter
first, then determine the causal connection between the act or power with what is
express.
l. This attribute is a recognition of what is known as the "Theory of Special or Limited
Capacities”. The opposite of this theory is the "Theory of General "Capacities"
whlchTnairitaTns that a corporation can exercise any and all powers that may be
exercised by persons.
m. Partnerships, corporations can only exercise those expressly authorized by law, can be
implied or are necessary to carry out its purposes, such as acts In the usual course of
business or Incidental to y its existence because they attach to a corporation upon its
creation and said to be inherent such as the right of succession or to sue. Natural
persons or partnerships, on the other hand can exercise or perform any act provided! it
is not contrary to law. The reason being that corporations owe their existence to the
state, while natural persons or partnerships.

Express and Implied powers can further be distinguished as follows:


(a) Express powers deal with main business, object or purposed of the corporation, while
Implied powers deal with the means and methods of attaining the object or purpose
(b) Express powers are determined by the language of the law and its charter while
Implied powers may change according to .time, place and circumstances,
(c) Test of Express powers is whether they are found in the Words of the law or charter
while the Test of Implied powers is whether they are purely incidental to Its express
powers and is reasonably necessary to their being carried out

The right of succession refers to its continued existence unaffected by anything that happens to its
stockholders or members limited only by the term stated in its Articles of Incorporation.

It does not contemplate Corporate Immortality but rather a continuity of existence irrespective of that
of its components.

Under the Code, the term of a corporation is fifty (50) years is subject to renewal.

KINDS OF CORPORATIONS

There are two basic kinds of corporations.


1. A stock corporation is one whose capital stock Is divided into shares and are authorized to
distribute to the holders of such shares dividends or allotments of the surplus profits on the
basis of the shares held.
2. A non stock corporation Is one where no part of its income is distributable as dividends to Its
members, trustees or officers, and when any profit is obtained as an incident if its operations
shall, whenever necessary or proper be used for the furtherance of the purpose/s for which the
corporation was organized
3. These general types of corporations have also been distinguished as civil corporations referring
to those organized for the benefit, pecuniary or otherwise, of its members as opposed to an
eleemosynary or charitable corporation that is organized to administer a charitable trust
4. The provisions on stock corporations apply in the absence of specific provisions covering non-
stock corporations.

DIFFERENCES BETWEEN STOCK AND NON STOCK CORPORATIONS


1. Subject to the Articles of Incorporation or By-Laws, the right to vote may be limited,
broadened or denied to some extent.
a. Unless.so provided, each member is entitled to one vote.

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b. In exercising the right, he may vote by proxy and also by mail or other similar means
as authorized by the Articles of Incorporation or By-Laws with the approval of and
under conditions prescribed by the SEC.
2. Membership and all rights, are personal and non transferable unless provided by the Articles of
Incorporation or By-Laws.
a. It may be terminated in the manner and for the uses provided in the Articles of
Incorporation or By-Laws
b. Note that courts have no power to strip membership as it constitutes an unwarranted
and undue interference with the right of a corporation to determine its membership.
c. Termination of membership .carries with it all rights to property and other privileges
unless By-Laws provide otherwise. Note that admission is an expressly granted power
in the Corporation Code.

3. It may have any number of trustees as fixed in the Articles of Incorporation or By-law from
the ranks of its membership.
a. The term of the original trustees is such that 1/3 of their number shall serve for a year,
the second 1/3 for two years and the third 1/3 for three years
b. Trustees subsequently elected shall then serve for a term of three years. Trustees
elected to fill vacancies, shall only serve for the unexpired portion.
4. The members elect corporate officers, unless otherwise provided by Articles of Incorporation
or By-Laws.

5. Meetings can be held outside the place of principal business. Provided, there be notice of the
date, time, and place and should always be in the Philippines

PROBLEMS CONCERNING NON-STOCK CORPORATIONS


1. A non stock corporation cannot amend its Articles of Incorporation and convert itself into a
stock corporation as the members are not Entitled to share in the profits of the corporation as /
all present and future profits belong to the corporation. By converting to. a stock corporation it
will be deemed to have distributed corporate P assets among members without a. prior
dissolution. On the other hand, if it were a stock corporation at the onset, it maybe converted to
a non-stock corporation as the corporation is not distributing assets without dissolution, but
rather, they are waiving-their rights.to any profits/dividends.
2. XY is a recreational club which was organized to operate a golf course for its members with an
original authorized capital stock of PHP 100,000,000.00. The Articles of Incorporation or the
By Laws provided for declaration of dividends although there was a provision that after its
dissolution all its assets shall be given to a charitable corporation. In this case, XY is a stock
corporation as the power to declare dividends is inherent in a stock corporation and the
provision allowing for distribution of Its assets to a charitable corporation does not prohibit a
declaration of dividends before dissolution.
PURPOSE OF ORGANIZATION
1. Non-Stock Corporations may be organized for the following purposes: charitable, recreational,
fraternal, religious, trade, cultural, educational, literary, scientific, professional, social, civic
service, industry, agricultural, chambers or any combination subject to special provisions

DISTRIBUTION OF ASSETS UPON DISSOLUTION


1. The assets of a non stock "corporation are to be distributed in accordance with the following
rules:
a. Liabilities and obligations of the corporation shall be paid, satisfied or discharged, or
adequate provisions made therefore
b. Assets held' under a condition requiring return, transfer] conveyance and which
condition occurs by reason of dissolution shall be returned, transferred and conveyed.
c. Assets received and held by the corporation subject to limitations permitting use only
for charitable, religious, benevolent, educational or similar purposes, but not subject to
return, transfer or reconveyance by reason of dissolution shall be transferred to
corporations undertaking similar activities pursuant to the plan of dissolution
d. Other assets shall be distributed in accordance with the Articles of Incorporation or By-
Laws determining the distributive rights of its members or0as provided
e. In any other case, assets shall be distributed „ to such persons, societies or organizations
whether organized for profit or not as provided in the plan of distribution.

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2. The plan of distribution must be consistent with the distribution rules above-outlined. This plan
is adopted pursuant to a majority vote of the Board of Trustees, then submitted for the
affirmative vote of 2/3 of the members having voting rights at a regular or special meeting,
prior notice having been given.

ADDITIONAL DISTINCTIONS BETWEEN CORPORATIONS


1. As to the state of incorporation- it is a domestic corporation if incorporated under Philippine law
or a foreign corporation if incorporated under the laws of another country. Note though that for
purposes of transacting, business in the Philippines, it must be one whose state of incorporation
allows Filipino corporations of citizens to do business therein.
2. As to whether it is open to the public or not it is a closed corporation when it limits stockholders
to a number not exceeding 20, has limitations on transfers and does not list in the stock exchange
or makes any public offering of its shares 41 or it is an open corporation when its stocks are
publicly traded

i. A corporation that goes from close to open is said to be “going public” public.", while one
that goes from being open to close is said to be “going private”

3. As to whether it is a public or private corporation- a public, A corporation is one that is formed


for the government of a portion of the state for the general good, while a private corporation is
one that is formed to undertake a private activity which includes government owned or
controlled corporations. It also includes quasi-public corporations that have accepted from the
state a franchise involving 0 o the performance of a public activity for profit.

4. As to legal right to exist- it is de jure, a corporation by estoppels or a corporation by prescription.


i. A de jure corporation is one that is considered as a legally constituted corporation, having
fully complied with all the requirements of law.
ii. A de facto corporation is one that is so defectively created as not be a de jure corporation,
but nevertheless Is the result of bona fide attempt to incorporate under existing statutory
authority coupled wit the exercise of the corporate powers and is recognized by the courts as
such upon grounds of public policy in all proceedings, except upon a direct attack by the
State questioning its corporate existence;
iii. The requisites of a de facto corporation are:
1. There is a valid law under which the corporation may be recognized.
2. There is a bona fide attempt in good faith to incorporate
3. There is an actual valid exercise of corporate powers.
iv. In general a de facto corporation is deemed to have substantial legal existence except as
against the state. Consequently it has the same corporate power and liabilities like a de jure
corporation. It is obliged to pay taxes contracts that are entered, into are valid and binding, it
is allowed to bring suit
v. Its existence is not open to a collateral attack. The only way by which is can be; attacked is
by way of quo warranto proceedings to determine the right to the use or exercise of a
franchise or office and to oust the holder from his enjoyment of the same, that is initiated by
the Solicitor General because (a) it is the state's right or authority that is usurped (b) it would
produce endless confusion if it's existence is questioned in every suit that it is a party to (c) it
is in the public interest to maintain the validity of the business transactions entered into with
de facto corporations,
vi. A corporation by Estoppel arises when the persons assume to act as a corporation knowing it
to be without authority to do so; in this case said persons shall be liable general partners for
debts, liabilities and damages and it cannot as a defense, neither can one dealing with it
resist performance. Hence, one who assumes an obligation to an ostensible corporation as
such; cannot resist-performance thereof on the ground that there was in fact no corporation.
vii. A corporation by prescription is one that is not formally organized as such but has been duly
recognized for a substantial length of time as a corporation with rights and duties that are
enforceable under the law. In the Philippines, the Roman Catholic Church is recognized as
such.

COMPONENTS OF A CORPORATION
1. The components of a corporation are:
a. Corporators are those who compose the corporation either as stockholders or members
b. Incorporators ate those stockholders or members mentioned in the articles as originally
forming the corporation and are signatories thereof
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2. Other components are:
a. Promoters are those who bring about the incorporation and organization of a corporation
b. Subscribers are those who have agreed to take out and pay for original unissued shares of a
corporation formed or to be formed.
c. Subscribers become stockholders upon payment of the agreed consideration for the purchase
of shares a£ provided for in their subscription contracts.
d. As to number of components. It is a corporation it consists of more than one member, or a
corporation sole if it consists of only one member.
e. A corporation sole is an ecclesiastical corporation as it is composed entirely of a spiritual
personas established to further a religion and perpetuate the rights or a church. The opposite
of an ecclesiastical corporation is a lav corporation,

NUMBER AND QUALIFICATIONS OF INCORPORATORS


1. The required number and qualification of Incorporators are:
a. 5 not more than 15 persons, exception when It is a corporation sole
b. Capacity to enter into contract, the act of forming a corporation being a contractual in
nature. Further, the articles must be acknowledged to
secure the state against the possibility of a fictitious name to be subscribed and to
furnish proof of signatures.
c. A majority must be residents of the Philippines. It is mandatory requirement because the
business is to be conducted in the Philippines
d. They must be residents of the Philippines. It Is a mandatory requirement because the
business is to be conducted in the Philippines
e. They must own or subscribe to at least one share of stock

CAPITALIZATION
1 Stock /corporations shall not be required to have a minimum authorized capital stock, except as
otherwise provided by special laws, subject, to the provisions of Section 13 providing that 25% of
the authorized capital stock must be subscribed and 25% of which must be paid up, the remaining
balance to be payable on a date fixed or upon call, which in no case shall be less than Php 5,000.00
a. Examples of capitalization requirements as fixed by law are:
Universal Bank- PHP 4,950,000,000.00. Commercial Bank PHP
2,400,000,000.00, Thrift Bank in Metro-Manila PHP 325,000,000.00 and a Rural Bank in
Baguio PHP 6,500,000.00.
b. Corporations/may subscribe but cannot be considered in determining compliance with
25/25 rule because they are not incorporators. Such however is debatable as Section 13
states authorized capital stock without qualification

PROCESS OF INCORPORATION:
1) The process of incorporation begins with the execution of the Articles of Incorporation, which
Upon return by the SEC, together with the Certificate of Incorporation constitutes it as the
Charters of the corporation.
2) The Articles of Incorporation is the document prepared by the person's region of decomposing the
Corporation and subsequently filed with the SEC containing requirements of law. When a group of
persons which to create a corporation, they would have to execute documents and comply with the
requirements of this state before being given juridical personality, since such is a mere privilege.
This is another explanation for what is known as the “Concession Theory”
a. in addition, since incorporation involves the execution of contracts among members, between
members and the Corporation, and between members or the Corporation and the state, the
process of incorporation is known as the “Contract Theory”.

CONTENTS OF THE ARTICLES OF INCORPORATION


1. Name of the corporation - it is from the name that a corporation acquires juridical personality; it is
through the name that it exercises the power of succession, it is how it is distinguished from
another corporation.
a. If the name is identical, deceptively, or identical or confusingly similar to that of an existing
corporation, or to any name already protected by law, or patently deceptive or contrary to law
it cannot be allowed.
b. The change of name does not dissolve the corporation and becomes effective only upon
approval of the amendment of the articles.

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c. Use of corporate name is a right in REM. If a corporate name of another corporation is
confusingly similar to its corporate name, it is entitled to seek its cancellation as the
appropriation of a dominant part is considered an infringement. Test is priority adoption.
d. The SEC has authority to deny the registration corporate name that is in its estimation cause
confusion.
e. It must not be contrary to law. Example: section 1, RA 226 prohibits the use of the emblem,
seal, and name of the United Nations.
2. Specific purpose for which it is being incorporated. If it has more than one, the articles must state
what is the primary purpose to facilitate its classification.
a. Provided, and on stock corporation may not include the purpose that would change or
contradict its nature as such.
b. Other reasons why the purpose is required are:
i. This operates as authorization to management to enter into contracts, the
directors, officers are made aware of the scope of the allowable business
activity.
ii. Persons who invests will know where and in what kind of business this money
will go.
iii. Third persons can be made aware whether the corporations this transaction
within its authority.

3. These were principal office is located is required for effective regulation / supervision. It refers to
the place where the books and records are kept.
a. Change of address to another city or municipality requires amendment of the articles . If
otherwise, note is sufficient.

4. Statement of Name, nationalities and residences of incorporators determines prima facie compliance
with constitutional and legal requirements.

5 Term of existence is for a maximum of 50 years from date of incorporation unless sooner
dissolved or the term is extended.
a. Be extended for periods not exceeding 50 years at any instance the amendment of the
articles. Provided, no extension can be made earlier than five years prior to original or
subsequence expiry date unless justifiable reasons for an earlier extension is given to the
SEC.
b. amendment requires majority board action, confirmed by 2/3 of stockholders or members,
who shall have the right of appraisal available.
c. If delay in affecting amendment is due to the neglect of the office with whom it is required
to be filed or a wrongful refusal on its party to receive it, it would be considered as having
been file before the expiry date. This is known as the DOCTRINE OF RELATION. If due to
the force majeure without the intervention of the Corporation, it can also be considered as
filed on time.
d. In the event of failure to have the term extended, the remedy is to re-incorporate. The
requisites of which are:
i. meeting of stockholders to affirm the decision to re-incorporate. Those who are not
willing will have to be their participation after provisions for liabilities have been made
ii. copy of passed resolution signed by all stockholders voting for re- incorporation
countersigned by the president and secretary is submitted to the SEC with the new
articles of incorporation
iii. deed of assignment of assets and liabilities, including the name of the defunct
Corporation to the new one is to be attached to the Articles.

6. Number of directors or trustees which shall not be less than 5 nor more than 15.

7. Names, nationalities and residences of the persons who shall serve as directors / trustees until the
first regular election.

8. If a stock corporation, the following must be stated:


1. amount of authorized capital stock
2. number of shares into which it is divided; if it be with or without par value
3. names, nationalities, residences of original subscribers and the amount subscribe and
paid.

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ii. Defining topic of stock and related terms: ()authorized capital sto - is the amount fixed in the
articles to be subscribed and paid, or agreed to be paid by stockholders in money, property
services or other means at the organization of the corporation and after wards and upon which
it is to conduct business () subscribed capital stock - is the amount of capital stock that is
subscribed () outstanding capital stock is the portion of capital stock issued and held by
persons other than the corporation itself () unissued capital stock - is the portion of capital
stock not issued or subscribed () paid up capital stock - is the portion of subscribed or
outstanding capital stock that is paid () Legal Capital - is the amount equal to the aggregate
par value in or issued value of outstanding capital stock.
iii. Shares or stocks or the representation of ones’ right or interest in a corporation, its
management from the right to vote, incorporate earnings may be of dividends, and property
upon dissolution.
iv. The authorized capital stock when divided into shares may:
1. further be divided into classes/series or both, having rights, privileges or restrictions as
stated in the Articles. Absent such, they are equal in all respects. This classification
may also be undertaken for the purpose of complying with constitutional or legal
requirements.
2. When so classified, they may further be divided into common shares entitled to a pro-
rata division of profits or preferred shares that are given preference in the distribution
of assets, dividends or other privileges, provided such are not in violation of the
Corporation Code or do not have a right greater than corporate creditors. Such
preferences are decided by the board, as it may be authorized to fix terms and
conditions, which shall be effective only upon filling of the appropriate certificate with
the SEC.
3. if shares are classified as common, they may or may not have par value except when it
is a bank, trust company, utility, building or loan association.
4. If the shares are classified as preferred, it
a. should always have par value
b. it may be deprived of voting rights, together with redeemable shares but if so,
there must be class/series which shall have full voting rights or In addition, even
if voting rights are not enjoyed, holders of such shares shall still vote in the
following instances:
i. amendment of articles
ii. adoption or amendment of by laws
iii. Sale, lease, exchange, pledge or other disposition of all or substantially all
of corporate property
iv. increase/decrease of corporate bonded indebtedness
v. increase/decrease of corporate capital stock
vi. merger/consolidation
vii. nvestment in another Corporation or business, and
viii. dissolution.
5. If shares are without par value, they:
a. are considered fully paid and none assessable, meaning the stockholder is no
longer liable to the corporation
b. cannot be issued for less than P5.00
c. entire consideration is treated as capital, thus not available for dividends.
6. Shares may also be classified as:
a. FOUNDER’s Share (Preferred shares) - which are classified in the articles as
having been given certain rights or privileges not enjoyed by others. Provided, if
the exclusive right to vote and they voted for in the election of the Board of
Directors, it should be for a limited period not exceeding five years subject to
SEC approval.
b. REDEEMABLE SHARES which the Corporation may issue when expressly
allowed by the Articles and may be purchased and taken up by the Corporation
upon the expiration of a fix period, regardless of the existence of unrestricted
retained earnings and such other terms and conditions stated in the articles and
the certificate of stock. Note though that they hold the power that the Supreme
Court has held in the case of Republic Planters Ban v. Agana, Sr. that the
Corporation after redemption, must have sufficient assets in its books to cover
debts and liabilities inclusive of capital stock. As a rule, redeemable shares are
not to be re-issued unless allowed by its Articles

Page 10 of 43
c. TREASURY SHARES are shares that have been issued and paid for but
subsequent reacquired by purchase, redemption, donation or any other lawful
means. It may again be disposed of for a reasonable price as determined by the
board. Note that its acquisition must be always be funded by surplus profits,
otherwise it violates the TRUST FUND DOCTRINE as capital is impaired.

9. If non-stock, amount of capital, names, nationalities, residences of contributors and amounts.

10. such other matters that are not inconsistent with law, which they incorporate diversity be
necessary and convenient. Note, if the corporation is to engage in nationalized business activity, a
prohibition must be stated that it will not allow any transfer of stock or interests that will reduce its
ownership to less than the percentage required by law.

FORM AND ATTACHMENTS TO ARTICLES:


1. The Articles, as we've been in Filipino or English, must be accompanied by
a. treasures affidavit indicating compliance with the 25/25 rule
b. if favorable recommendation, if required, and
c. should be up knowledge to guard against fictitious names and signatures.

PROCEDURE FOR AMENDMENT


1. Unless otherwise provided by the code or special law, amendments make the place by (a) a
majority vote of the board, and (b) 2/3 vote or written asset of outstanding capital stock or
members (c) the original and amended articles are then submitted to the SEC with underscoring,
duly certified by corporate secretary and majority of the directors that it has been duly approved
by the record vote (d) in case of corporations that are regulated by another government agency, a
favorable recommendation must be submitted likewise.
a. The rule that allows written assent does not apply when the object of the amendment is to
extend or shorten the term or the increase or decrease capital stock.
2. The amendments are effective (a) Upon approved by the SEC, or (b) from date of fighting with the
SEC If not opted upon within six months from date of fighting for a cause not attributable to the
Corporation.
a. This rule is not applicable to an amendment the short end of term as a means to dissolve the
corporation.
3. If it is a foreign corporation amending its articles, it must file within 60 days, and shall be
authenticated copy of its articles of incorporation which should not enlarge or alter the purpose for
which it was granted a license.
4. Amendments may be rejected or disapproved if (a) not substantially in accordance with the
prescribed form (b) purpose is unconstitutional, illegal, immoral or contrary to government rules or
regulations (c) treasurer’s Affidavit is false (d) required percentage of ownership of capital stock has
not been complied with (e) no favorable recommendation for banks, quasi banking, building and loans
associations, trust companies and other financial intermediaries, Insurance companies, public utilities,
corporations and other government corporations covered by special laws indicating that the
amendments are in accordance with law is submitted. Provided, that the Corporation be given by the
SEC a reasonable time within which to correct or modify the objectionable portions of the articles or
amendments thereto.

COMMENCEMENT OF CORPORATE EXISTENCE


1. A corporation commences to have existence from the issuance by the SEC Of a certificate of
incorporation under its official seal. The effect of which is to constitute its stockholders or members
and their successors as a BODY POLITIC and CORPORATE under the name and for the term stated
in the articles.

(SEARCH)

CORPORATE MANAGEMENT
1. There are three levels of control in the corporate hierarchy:
a. the board - which Dicker means corporate policy and prescribes the manner of general
management of its business activities. Towards this end, the law provides that all corporate
powers of all corporations formed under it shall be exercised, all business conducted and all
property held by a board of directors or trustees. This is for the purpose of efficiency in
exchange for profits.

Page 11 of 43
b. The corporate officers - ward charge with the mandate to execute the decisions of the board
and who, oftentimes, determining the best manner by which the business is to be run.
c. The stockholders or members - who are considered as having residual power over
fundamental corporate changes as they are required by law to give their assent by the
exercise of the right to vote. Note though that they hold the power to elect themselves to the
board. In fact, the authority to elect is vested solely in them. Directors cannot indirectly
usurp such authority or disregard an election conducted pursuant to such authority.

2. The directors are the executive representatives of the Corporation who are charged with the
administration of its internal affairs and management and use of its assets. A corporation can only
act through its directors and officers. The board is the central power, which authorizes the executive
agents to enter into contracts and to embark on the business. It must be noted that in the exercise of
corporate powers that:
a. with the exception of powers reserved by law to stockholders or members any action by
them is advisory in a resolution passed not recognizing the board is without effect.
b. The powers that are expressly reserved by law to the stockholders or members are: (a)
removal of directors or trustees (b) granting of compensation, other than for diems, the
directors (c) Rectification of acts of self-dealing directors or trustees, interlocking directors,
disloyal directors (d) The litigation of power to amend by laws (e) calling off a meeting,
upon good cause, when no person is authorized call it (f) wend management of the close
Corporation is vested in the stockholders.
c. The courts or the SEC can not interfere unless the acts are so unconscionable and oppressive
so as to amount to a wanton destruction of the rights of the majority. As long as they are
undertaken in good faith, they are not reviewable. This is known as the BUSINESS
JUDGMENT RULE.
d. The principal remedy to internal dissension our corporate elections as the majority must be a
allowed to rule as long as he keeps within the powers provided in the charter.

QUALIFICATIONS FOR ELECTION:


1. A stockholder or member who would like to be elected to the board should possess the following
qualifications:
a. You must own at least one share or at least it should be listed in his name as owner, if it is a
nonstock corporation, he must be a member.
b. What matters is legal title to the share. A person who does not hold beneficial title, like the
voting trustee in a voting trust agreement is allowed to be elected as a director.
c. A pledgee / mortgatee on the other hand cannot be elected. She may not be a stockholder for
the present time but upon assumption of office, it is absolutely necessary that he must own at
least one share of stock.
d. One who has been elected director as a nominee of the PCGG which holds the shares
pursuant to sequestration is a de facto direct or as the shares may only be voted by its
members or proxies.
e. Ownership is absolutely necessary upon the assumption to the office of an elected director.
Hence, a person can be elected even if he does not own the stock at the time of election. If
he is not a stockholder, he may be considered an ex-officio member without voting rights in
the board.
f. Between husband and wife, if both are listed as owners, they are qualified to be elected but
only one can be elected, unless they own shares listed in their individual names.

2. Every developer must continuously own at least a share during his term, otherwise, you shall cease
as the director. Any subsequent purchase does not return the director to his previous position.

3. The majority must be residents of the Philippines as the business is primarily undertaken in the
Philippines.

4. Him us that have been convicted by final judgment of an offense punishable by a period in excess of
6 six years or a violation of the code, committed within a period of five years prior to the date of
election.

5. Citizenship in the instances required by law. Example: corporation engaged in mass media is
required to be 100% owned and managed by Filipinos.

Page 12 of 43
6. Such other qualifications that may be provided by the by-laws. Example: he must have paid for his
subscriptions in full. Disqualifications may also be provided. Example: engaging in competing
business, unjustified absences during the previous term, unless the stockholder resigns his current
employment with the Corporation.
a. It would not be acceptable, however, if the by-laws Will provide that the qualifications or
disqualifications shall be subject to the judgment or determination of the board, What is
required is that the same shall be expressly spelled out In the bylaws. Absent the provision,
a corporation can not require additional qualifications other than that prescribed by law.
b. A proposal that the directors come from the ranks of corporate officers is not in accordance
with law. They must come from the stockholders or members of the Corporation.
c. While no age requirement has been provided by law, a stipulation allowing a minor to be
elected as a member of the board is not some corporate practice as they have limited
capacity to act. It has also been said that since incorporators are required to be of legal age,
the same requirement should be applied to subsequent directors.

HOW ELECTED:
1. From among the holder of shares or members or a term of one year until their successors are elected
and qualified.
2. Note though that in a nonstock corporations, the terms of trustees is between 1 to 3 years for the
original trustees, then 3 years for those subsequently elected and for educational corporations it is
between 1 to 5 years for though subsequently elected.

REQUIRMENT FOR VALID ELECTION:


1. The requirements for embedded election are
a. the presence of a majority of the capital stock or members authorized to vote
b. election must be made by ballot, if requested
c. number of votes to elect must be obtained

2. In a nonstock Corporation, unless otherwise provided in the Articles / By-Laws, A member has as
many votes as there are trustees but only one vote goes to each candidate.

3. In a stock corporation, a stockholder has as many votes as he has shares, if the by-laws are silent,
he can:
1. Vote the number of shares for us many persons as there are directors to be elected or
2. Cumulate his votes be giving one candidate as many votes as there are number of directors
to be elected.
a. Ex. 100 shares x 5 direct verse means he has 500 votes and he can give one candidate or
3. He may distribute to as many candidates as he deems fit PROVIDED that the total number
of shares cast shall not exceed the number of shares owned multiplied by the number of
directors to be elected
4. Cumulative Voting are allowed if no election can be had because the required majority of
stockholders or members cannot be had but it cannot be adjourned sine die or indefinitely.
5. Neither is voting by zones and out as implied from section 24 when it says that the majority
of the capital stock or members is required to be present in a meeting. Note that the SEC
only allows teleconferencing or via videoconferencing for meetings of the board.
6. Stock that is delinquent or in the treasury do not have voting rights.

NUMBER OF DIRECTORS/TRUSTEES
1. The number of directors to be addicted in a stock corporation are 5no more than 15.
2. In a non stock Corporation, there should be at least 5 but in the nonstock educational corporation,
there should be at least 5 no more than 15
3. In a close Corporation, there may be no board when the stockholders equity to manage the
corporation themselves. In a Corporation sole, there is no board.

INDEPENDENT DIRECTORS:

1. An independent director is a person who, apart from these fees and shareholdings, is
independent of management and free from any business or other relationship which could, or
could reasonably the perceived to, but the reality interfered with his exercise of independent
judgment in carrying out his responsibilities as a director.

Page 13 of 43
a. He must (a) not have any personality, financial, her professional ties with the Corporation, its
affiliates, and subsidiaries that may adversely affect his ability to act objectively (b) not have
been employed in an executive capacity by the Corporation, related to companies or any of its
substantial shareholders within the last five years (d) not engaged in any transaction with the
Corporation, pretty good companies or any of its substantial shareholders, other than those
conducted at arms length and are immaterial or insignificant.
b. Other qualifications (a) Ownership of at least one share (b) college dread weight or has
engaged or exposed to business of the Corporation for not less than five years, and a person of
integrity, probity and hard-working.
c. An independent director must not own more than 2% of the shares of the company and/or
covered companies or any of its substantial shareholders as per RA 8799.

2. Object is to minimize the incidence of front of and conduct can the board and is meant to call
attention the deviations from the path of good corporate governance.

3. Independent directors are required in the following instances


a. issuers of registered securities to the public, requires at least 2 or 20% of the board, whichever
is lesser.
b. In bank requires at least 2.
c. As stock or securities exchange requires at least 3, and the president must be an independent
director.
d. Finance companies, investment houses, brokers, investment companies, preneed companies
and subsidiaries of foreign corporations operating and are listed in the Philippine Stock
exchange requires at least 1.

LIMITATIONS ON THE EXERCISE OF CORPORATE POWERS BY THE BOARD:


1. The action requires certification of the stockholder our members. Example: investment of
corporate funds in another corporation or business other than the primary business of the
corporation.
2. The removal of directors which requires that (a) it must take place at the regular meeting of the
Corporation or special meeting called for that purpose (b) there must be previous notice to
stockholders or members of the intention to propose such removal. The notice must be specific
and in writing, by publication or sending of a copy of the notice (c) The removal is affected by
2/3 vote of capital stock / members entitled to vote except that a director elected by cumulative
voting cannot be removed as it affects is to deprive minority stockholders or members of the
representation.
a. Any special meeting the cause removed by is to be called by the Secretary on order of
the President or upon written demand of stockholders representing at least a majority
of the outstanding capital stock or of the members. If the Secretary, refuses, does not
exist, or fails to give notice, the call for a meeting may be addressed directly to
stockholders or members by the stockholders or members signing the demand.
b. The election of new directors may take place in the same meeting.
3. In close corporations, when its articles provide that it be managed by the stockholders.

DELEGATION OF CORPORATE POWERS


1. Generally, the exercise of corporate powers can be delegated.
2. There can be no delegation if the (a_power rests only with stockholders / members (b)
effect of delegation is to cede entire supervision / control over the corporation (c) when the
by-laws work authorization for an act restricts the delegation.
3. A valid delegation can take place when the Corporation, Acting through board and by
resolution, designates a particular person/s or entity to exercises specific corporate power
subject to the above stated limitations.
a. Or when an executive committee has been created by and under the provisions of
the bylaws.
b. The committee is a body composed of no less than 3 members of the board to whom
corporate powers are delegated to assure prompt and speedy action and solution
without the necessity of board meetings and manages the Corporation between
meetings of the board. It may act by majority vote on such matters that are within
the competence of the board as may be delegated to it in the bylaws or on majority
vote of the board.
c. The committee has no power to act on: (a) approval of option requiring stockholder
or member approval. (b) filling of vacancies in the board (c) Amendment or repeal
Page 14 of 43
of bylaws in the adoption of a new by-laws (d) amendment or repeal of any board
resolution which by its terms is not so repealable or amendable. (e) distribution of
cash dividends to stockholders

FORMAL ORGANIZATION

1. Immediately after the election, the directors of the corporation must formally organize, by the
election of a president, who shall be the director, a treasurer, who may or may not be a director,
as secretary who must be a resident and citizen of the Philippines and such others as may be
provided for in the by-laws.
a. Any person may hold concurrent positions except that of the President-Secretary our
President-Treasurer.
b. And appointive or elected public official cannot serve as a corporate officer of any
private bank except when the service is incidental the financial assistance provided by
the government or a GOCC to the bank or unless otherwise provided.
2. 30 after election the secretary or any other officer shall submit to the SEC the names,
nationalities and residents of the directors/trustees/officers elected.
a. Should any one of them die, or cease to hold office, such shall immediately be reported
to the SEC.
3. Should a vacancy arises due to causes other than remove on or expiration, it may be filed by
the board by majority vote of the remaining directors if still constituting a quorum.
a. Otherwise, the vacancy should be filed by the stockholders or members in a regular or
special meeting, the stockholder or member so designated or elected shall only serve the
unexpired portion of the term.
4. Designating the losing candidate who polled The highest number of votes in the immediately
preceding election to fill up a vacancy which is automatic in nature is contrary to law as an
elections required.
a. Where a heartbreak office is not specifically indicated in the roster of corporate offices
in the bylaws of the Corporation, the board of directors may also be empowered under
the bylaws to create additional offices as may be necessary.
b. If the bylaws provide, the board may create a board of advisors was function should be
purely advisory and should not in any manner be granted the authority to participate in
the management and control of the affairs of the Corporation since they belong
exclusively to the board.
c. A newly elected board is not bound by the choice of officers of the previous board as it
violates the law as immediately after the election, the newly elected board must for
formally organized by electing the corporate officers. A provision that provides that the
incumbent Vice-Chairman should automatically be the Chairman of the succeeding
board, if elected, is not allowed
5. The power to elect corporate officers is a power that is to be exercised by the board and cannot
be delegated.

HOW CORPORATE POWERS ARE EXERCISED


1. Corporate powers are exercised and performed by the board through meetings. This so
because it must act as a body and a decision must be always be reached after affording
opportunity for consultation. In addition, Directors are trustees have the power to act other
than as a board.
2. The exceptions are:
a. directors happened to be the only stockholders
b. act is undertaken by someone authorized by the board
c. stockholders wave the necessity of having a meeting
d. when there is an executive committee
e. when the Corporation enters into a management contract
f. when the act is ratified at a subsequent meeting.
3. The requisites of a valid board meeting are:
a. meeting of the directors/trustees should be assembled as board. (Directors/trustees
cannot attend or vote by proxy as their personal judgment is required
b. presence of a required quorum
c. the decision is reached by a majority vote of the quorum or by a entire board as required
by law
d. meet at the time, place and manner provided in the bylaws.
Page 15 of 43
4. In the absence of a provision in the by-laws, a majority of the directors/trustees as is stated in
the articles of incorporation shall constitute a quorum.
5. The formula for determining the majority this one half plus one of the entire numbers of
directors/trustees notwithstanding the existence of vacancies in the board.
6. A quorum once established is not broken by the subsequence withdrew one of a part of a
faction of those present, unless the transaction requires the affirmative vote of a greater
proportion.

WHAT IS CORPORATE GOVERNANCE AND CORRESPONDING THE GENERAL


RESPONSIBILITY OF DIRECTORS/TRUSTEES

1. Corporate governance is a system whereby shareholders, creditors, and other stakeholders of


incorporation ensure that management enhances the value of the corporation as it competes in
an increasingly global marketplace.
2. It prescribes that the board of directors is primarily responsible for the governance of a
corporation.
3. Hence, a director’s office is one of trust and confidence. He should act in the best interest of the
Corporation in a manner characterized by transparency, accountability and fairness. He should
exercise leadership, Prudence and integrity in directing the Corporation towards sustained
progress over the long-term. A director assurance certain responsibilities the different
constituents or stakeholders, who have the right to expect that the institution is being run in a
prudent and sound manner.

THREE FOLD DUTIES OF DIRECTORS


1. They must be diligent. Compliance with the duty of diligence requires the exercise of
reasonable care, prudence, and equate knowledge and skill.
a. The meaning and extent of the duty of diligence is to be understood to mean that those
who voluntarily take the position of directors undertake that they possess, at least,
ordinary knowledge and skill, and that they will use such in the performance of their
obligations.
b. The level of care, skill and diligence that is required is that which an ordinary prudent
band with exercise in similar circumstances (Campos and Lopez-Campos). Such,
however, varies, depending on the nature of the business of the corporation. Example: a
director of a banking corporation is held to a higher standard of diligence as compared
to a director in a manufacturing corporation.
c. Consequently, a directors should exert effort to obtain a basic understanding of the
business of the corporation. He must be familiar with its operations. He should be able
to prepare himself for board meetings to be able to make an informed decision.
d. This duty is specifically imposed by the Corporation code, when it provides that:
directors are trustee willfully and knowingly vote for or assent the patently unlawful
acts of the Corporation or who are guilty of gross negligence In directing its affairs shall
be liable jointly and severally are all damages resulting therefrom suffered by the
Corporation, its stockholders or members and other persons.
e. Corollary to this duty of diligence is the protection afforded to directors under the
“BUSINESS JUDGMENT RULE”. If in the course of management, they arrive at the
decision for which there is a reasonable basis and they acted in good faith, as the result
of their independent judgment, and uninfluenced by any consideration, other than what
they believe to be for the best interests of the Corporation, it is not the function of the
court to say that it should have acted differently and to charge the directors for any loss
or expenditures incurred.
2. They must be loyal to be keeping the interest of the Corporation above personal motives.
Compliance with this duty requires that the director act in a manner characterized by
transparency, accountability and fairness.
a. The basic principle to be observed is that a director should not use his position to make
profit or to acquire benefit the advantage for himself and/or his related interests. He
should avoid situations that may compromise his impartiality. If an actual or potential
conflict of interest should arise on the part of directors or senior's executives, it should
be fully disclosed in the concerned director should not participate in the decision-
making. A direct or who has a continuing conflict of interest of a material nature should
consider incubating or resigning.
b. This duty is specifically imposed by the Corporation: in the provisions regarding self-
dealing directors, interlocking directors and disloyal directors.
Page 16 of 43
c. The general rule is that a contract between a self-dealing director/appropriation this
voidable at the option of the Corporation. Notwithstanding, the contract shall be valid
when (a) presence of the director/trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum (b) is the vote is not necessarily
approve the contract (c) that the contract is fair and reasonable under the circumstances.
In the case of an officer, the contract has previously approved by the board. If however,
conditions (a) and (b) Are absent, the contract may be ratifed by 2/3 vote of the
outstanding capital stock in the meeting duly called for such purpose with full
disclosure of the adverse interest being made at the meeting and that the contract is
nevertheless fair and reasonable. Note that there is no requirement that the Corporation
suffer damage.
d. The rules that obtains as far as contracts between corporations with interlocking
directors is that the contract is valid as long as there is no fraud and the contract is fair
and reasonable. However, if a director's interest in one Corporation is substantial in his
interest in the other Corporation/s is nominal, the contract shall be subject to the
provisions of Section 32 insofar as the Corporation/s where he has a nominal share as it
is as if the Corporation is transacting with the self-dealing director. Shareholdings in
excess of 20% of the outstanding capital stock shall be considered substantial.
e. When a director is disloyal by virtue of his office, he acquires for himself a business
opportunity which should belong to the Corporation, thereby obtaining profit, you must
account for it by refunding the same to the Corporation, even if the director risk his own
funds in the venture, unless, his act is rectified by a vote of the stockholders owning or
representing 2/3 of outstanding capital stock. This is also known as the DOCTRINE OF
CORPORATE OPPORTUNITY. The provision does not apply if: (a) he acts in good
faith, (b) the Corporation is unable to undertake the opportunity or the same is not
essential to the Corporation
f. the duty of loyalty of a director precludes the director from acquiring an opportunity
that is open to the Corporation because that is in effect competing with the Corporation,
oftentimes with the advantage of inside information thus depriving it of the profits that
it would have otherwise earned. Whether the particular opportunity is one which
properly belongs to the Corporation is a question of fact which must be decided in the
light of the circumstances of each case. This rule is premised on the principles of
“trust”. It is the position of domination and control that makes the thing of corporate
opportunity objectionable.
g. Distinguishing between Section 31 and Section 34, the former speaks of the acquisition
of any personal or pecuniary interest in conflict with his duty in respect to a matter
reposed in him in confidence as to which equity imposes a disability to deal in his own
behalf, he shall be liable as trustee it must account for all the profits that would have
otherwise accrued to the Corporation. What is violated is the trust specifically reposed,
thus there is no ratification, the latter speaks of a violation of the general trust that is
reposed on a director.
h. Action for a violation of this GP is the liability for damages under Section 31 of the
Corporation code and forfeiture of all the benefits obtained.
3. They must be obedient by keeping within the powers of the corporation. The duty of obedience
simply means that directors are bound to observe the limits of their authority. They should not
perform acts which are beyond the powers of the corporation, there should be shown to act in
situations where the law has given such prerogative the stockholders. Should they go beyond
the limits, they are personally responsible for any damages which the Corporation may suffer
unless they acted in good faith and with due care in the exercise of their business judgment.
a. This means that the board must keep within the powers of the institution as prescribed
in the articles of incorporation, by-laws, and existing laws, rules and regulations.
Conduct and maintain the affairs of the institution within the scope of its authority and
prescribed in the charter and in existing laws, rules and regulations.
b. The above principle is embodied in the concept of ULTRA VIRES pronounce in the
Corporation code that: no corporation under this code shall process her exercise any
corporate powers except those conferred by this code in its articles of incorporation and
except such as are necessary or incidental to the exercise of the powers so conferred.

PERSONAL LIABILITIES OF A DIRECTOR

1. Directors are to be held to be personally liable if he: (A) Willfully and knowingly assents or
votes about the unlawful act of the Corporation (b) he is guilty of gross negligence or bad
Page 17 of 43
faith in directing the affairs of the Corporation. Example is illegal dismissal of employees
when attended by bad faith or malice, where they would be solidarity liable with the
Corporation. (c) acquisition of any personal or backing any interest in conflict with his duty
in respect of matter reposed in him in confidence, (d) Consents to the issuance of watered
stocks or having knowledge of the issuance of watered stock does not quantify the
corporate secretary in writing of the fact of issuance (e) Agrees to be personally liable (f) is
made liable by specific provision of law.

COMPENSATION FOR DIRECTORS


1. Directors as a rule do not receive compensation other than reasonable per diems.
2. Other or additional compensation may be granted only if (a) fixed in the bylaws (b) Is granted
by a majority vote of stockholders at the regular or special meeting but in no case shall
compensation exceed 10% of the income before income tax of the preceding year.
3. In computing any additional compensation, per diems Are not included to determine whether
the limit has been reached.

CORPORATE POWERS
1. Every corporation incorporated under the code has the power to: (a) to sue and be sued
in its corporate name (b) to succession by its corporate name for the time stated in its
article and certificate of incorporation (c) to adopt and use a corporate seal.Note that
Secton 63 Requires stock certificates to be sealed, although not a mandatory
requirement, it has been held to be desirable to have a seal as it is prima fascia evidence
that the instrument to which it is attached is the act of the Corporation (d) to amend its
articles in accordance with the provisions of the code. With appropriate provision is
Section 14 As far as the amendments pertaining to the name, place of principal
business, term, an authorized capital stock of the Corporation (e) to adopt bylaws not
contrary to law, morals and public policy and to amend or repeal the same (f) in cases of
stock corporations, the issue or sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of the code. If it is a nonstock Corporation, to admit
members and obtain capital by increasing the number of persons sharing the same
purpose or mission. (g) to purchase, receive, take or grant, hold, convey, lease, pledge,
mortgage or otherwise dealing with real and personal property, including securities and
bonds of other corporations as the transaction of the lawful business of the Corporation
the reasonably and necessarily require, subject to the limitations prescribed by law in
the Constitution. NOTE that investments as long as stated in the articles, like involving
the purchase of shares or securities are valid, if not stated that stockholders approved is
required. (h) to enter into mergers and consolidations with other corporations as
provided by section 76-80 (i) to make reasonable donations, including those for public
welfare or for hospitals, charitable, cultural, scientific, civic or similar purposes
EXCEPT the nations indeed of any political party or a candidate or for purposes
partisan political activity (j) to establish pension, retirement other than plans for the
benefit of directors, trustees, officers and employees. The purpose is to create or foster
better relations between the Corporation and its employees, which ideally should result
in greater productivity (k) to exercise such power as may be essential or in a society to
carry out the purposes stated in the articles.
2. The power to extend or shorten the corporate term Is undertaken by a majority vote off
the board and vote of 2/3 of the stockholders holding the corporation's outstanding
capital stock or members at the meeting, of which they were given we can notice
addressed to them at the given address as shown in the books of the Corporation
deposited at the post office or delivered personally.
i. In case of an extension, a stockholder is allowed to exercise his appraisal right.
This is also allowed when the term is shortened.
ii. The general rule of assumed approval under section 16 is not applicable as the
date of approval by the SEC maybe before the effectivity date of the extension,
the determining compliance in section 11 or shortening, which may be in the
nature of a voluntary dissolution which requires the consent of the state.
3. Power to increase or decrease capital stock, incur create or increase corporate bonded
indebtedness is undertaken by a majority vote of the board and vote of 2/3 of the
stockholders holding the showing compliance Corporation's outstanding capital stock or
members must favor the increase or decrease at the meeting to which they would have
received written notice addressed to their residences as shown in the books deposited at
the post office or delivered personally.
Page 18 of 43
i. For nonstock corporations, the same requirement is required but it creates or
increases Corporate bonded indebtedness
ii. after the meeting - a certificate in duplicate must be signed by a majority of the
directors, countersigned by the chairman and secretary of the meeting stating
that: (a) requirements of this section have been complied with (b) amount of
decrease or diminution of capital stock (c) if capital is increased (1) amount of
capital stock or number of shares subscribed (2) names, nationalities, residences,
of persons subscribing and the number or amount subscribed by each, the amount
paid in cash or property (3) or, amount of capital stock or number of par value
stock allotted to each stockholder if such increase is for the purpose of making
effective a stock dividend therefore authorized (d) any bonded indebtedness to be
incurred, created or increased (e) actual indebtedness of the corporation on the
date of the meeting (g) vote authorizing the increase or diminution of the capital
stock, or the incurring increasing or creating of corporate bonded indebtedness.
iii. One copy of the certificate is kept in the corporate officer, the other filed with the
SEC and attached its articles. Other attachments required are proof of the transfer
of cash or property to the Corporation and a treasurer’s affidavit showing
compliance with the 25/25 rule. If corporate bonded indebtedness, the
registration of the Bond for the SEC the determinate sufficiency of terms.
iv. From and after SEC approval and compliance of a certificate of filling, the
capital stock shall stand increased or decreased or the bonded indebtedness has
been incurred created or increased. Provided, no decrease shall be approved if
creditors are prejudice or terms of bond issue is not sufficient.
v. The limitation on when the decrease of capital stock is that it will not be allowed
if it would relieve stockholders of the obligation to pay for their subscription
without valuable consideration. Hence, all subscriptions must be paid.
vi. An increase in excess of the amount stated in the articles is Ultra vires As there
must be an amendment of the articles and a reduction / increase of the capital
stock can only decrease in the manner provided for by law.
vii. The ways of increasing or decreasing capital stock are as follows:
viii. Increase / decrease the number of shares without increasing / decreasing par
value (b) increase / decrease par value without increasing the number of shares,
or (c) both.
ix. A reduction creates a surplus if capital is not impaired by losses. The surplus can
be distributed to stockholders as long as the surplus is over and above the par
value of the outstanding capital stock as reduced and other corporate
indebtedness, and the assets so distributed will not be required to carry out the
business.
x. Bonds are undertakings that are fully secured. It has involves 3 parties (a)
Borrowing Corporation (b) bond holder (c) trustee or holder of the security.
4. Preemptive rights referring to the right subscribe on issues or disposition of shares in
proportion by stockholders shareholdings may be denied.
i. The reason for its and I once is to preserve a stockholders unaltered and
unimpaired influence in the Corporation. It does not apply to shares originally
unsubscribe or undisposed
ii. As a general rule, preemptive rights exist but maybe restricted were denied by
the articles or an amendment thereto. It will not exist when (a) the shares are
issued in compliance with laws requiring stock offerings or minimum stock
ownership (b) the shares are issued in good faith with approval of stockholders
representing 2.3 Of the outstanding capital stock in exchange for property needed
for corporate purposes or in payment of a previously contracted debt
iii. If the preemptive right is offered but not exercised, it does not follow that it will
be offered to other stockholders.
iv. If restricted by an amendment, a stockholder may exercises his appraisal right
5. The power the cause the sale, lease, exchange, mortgage, pledge or other disposition of
all or substantially all of corporate assets is undertaken by a majority vote of the board
and 2/3 vote of Stockholders are members, written notice having been given.
i. In a nonstock corporation where there are no members with voting rights, the
vote of majority of the trustees will be sufficient authorization
ii. The disposition should not result in violation of laws or illegal combination and
monopolies. An example would be when the sale violates the Bulk Sales Law.

Page 19 of 43
iii. The contemplated disposition is when the Corporation is rendered incapable of
continuing the business or accomplishing its purpose. It does not apply to
dispositions that are necessary and in the regular course of business order
proceeds of which are to be appropriated for the conduct of its remaining
business.
iv. Authorization, notwithstanding, the disposition may be abandoned with the board
and its corporate officers without further approval by stockholders or members
v. In case of dissent, the right of appraisal maybe exercised.
6. The power to acquire its own shares can only be undertaken if it is for a legitimate
corporate purpose/s provided that it has unrestricted retained earnings.
i. The conditions that must obtain to be able to exercise the power are: (a) capital is
not impaired (b) there must be unrestricted retained earnings. (c) that it be for a
legitimate and proper purpose (d) the Corporation in good faith and without
prejudice the stockholder rights (e) Condition of corporate affairs where it.
Absent the conditions, there is a violation of the Trust Fund Doctrine which holds
that the assets of the corporation as represented by its capital are trust funds that
are to be maintained unimpaired and to be used by the corporation to pay its
creditors and that no distribution of the same can be made without provisions for
the payment of corporate debt
ii. The legitimate corporate purposes for acquisition are: (a) elimination of
fractional shares or those less than 1 share (b) to collect or the compromise and
indebtedness to the Corporation arising out of an unpaid subscription in a
delinquency shares and to purchase delinquent shares at the auction (c) to pay
dissenting or withholding stockholders entitled to the payment of their shares.
iii. Other legitimate purposes are (a) Exercise of the right of appraisal when there is
an amendment of the articles, shortening or extending of the term, investment in
other businesses, merger or consolidations, sale or other disposition of corporate
assets, with no one in the close Corporation (b) redemption of shares (c)
Decrease of capital stock (d) deadlock in a close Corporation.
7. The power to invest its funds in another corporation or business can be undertaken by a
majority vote of the board and 2/3 vote of stockholders or members.
i. The investment contemplated by the provision is an investment in another
Corporation her business or for any other purpose other than stated as its primary
purpose
ii. If the investment is reasonably necessary to accomplish its purpose as stated in
the articles, stockholder or member approval is not necessary.
iii. In case of dissent, the right of appraisal may be exercise.
8. A stock corporation has the power to declare dividends
i. Dividends referred to the part or portion of the profits of a corporation, set aside,
declared and ordered by the board to be paid ratably the stockholders. As
distinguished from profits, profits are the source of dividends but not all profits
are dividends until so declared or set aside
ii. The board may declare dividends out of unrestricted retained earnings or total
assets less liabilities and total capital, payable in cash, in property or in stock one
stockholders on the basis of outstanding stock held by them. The basis is the total
subscription
iii. Provided, however, that any cash dividend due on delinquent stock shall first be
applied to the unpaid balance, costs, and expenses or if it be a stock dividend, it
is withheld until the unpaid subscription is paid.
iv. If a stock dividend is declared, it may only be issued with approval of the
stockholders representing 2/3 of the outstanding capital stock at meeting duly
called for the purpose.
v. Dividends are usually declared at the end of a fiscal year as earlier profits may be
offset by losses.
vi. Only stockholders are entitled to a dividend as it is an incidence or stock
ownership. An exception is when it is made to be about the stockholder on record
at the specified date. If so, it is the seller who is entitled to the dividend, except
when there is a contrary stipulation. The rule also applies to other unrecorded
dispositions.
vii. The right of a stockholder the dividend is immediate if it is a cash dividend. The
corporation becomes a debtor of the stockholder. If it is a stock dividend, it is

Page 20 of 43
subject to stockholder vote and an increase of capital stock, if it comes from a
new issuance.
viii. Dividend declaration is generally discretionary but becomes mandatory when its
surplus profits are in excess of 100% of paid in capital stock. However, the
mandatory character shall not obtain: (a) when justified by definite corporate
expansion projects or programs approved by the board (b) When it is prohibited
by a loan agreement with any financial institution or creditor from declaring
dividends without its consent is not yet obtained (c) when it can be shown that
such attention is necessary under special circumstances obtaining in the
Corporation, as there is a need for a special reserve for probable contingencies
ix. No action can be brought against a corporation because it is not a matter of right
but of consensus.
x. Kinds of dividends are: (a) cash dividend (b) stock dividend (c) Property
dividend (d) option a dividend as the stockholder is given the option to receive
cash / stock / property (e) composite which is payable partly in stock / cash /
property (f) preferred when payable to one class of stock in priority over another
(g) commutative when contracted to be paid by the certain date at a certain time
(h) scrip if given in the form of a writing issued the stockholder to entitle him to
payment for dividend in cash as the company has it as property and not in cash.
xi. Cash dividends as distinguished from stock dividends: (a) cash dividend is a
disbursement of accumulated earnings, while stock dividend is not a
disbursement (b) a cash dividend causes assets to diminish while a stock
dividend process assets to increase (c) a cash dividend when declared becomes
property of the stockholder, wireless stock dividend is still part of capital and can
still be reached by creditors. (d) a cash dividend does not increase capital, while a
stock dividend increases capital (e) the declaration of a cash dividend creates a
corporate debt, while that of stock dividend does not create the debt (f) a cash
dividend is declared by the board, why the stock dividend is declared by the
board with stockholders concurrence.
9. A stock dividend distinguished from stock split is that the former increases capital while
the latter does not increase capital.
i. The power to enter into a management contract can be undertaken with the
approval by a majority vote of the board in majority vote of the stockholders our
members or both by the management and the managing Corporation.
ii. Provided, if stockholders representing the same interests of both the managing in
the manage Corporation owned or controlled more than 1/3 of the outstanding
capital stock entitled to vote of the management Corporation or a majority of the
board of the managing Corporation likewise constitute the majority of the board
of the managed Corporation, the contract must be approved by 2/3 vote of the
outstanding capital stock or of the manage Corporation.
iii. Any contract whereby a corporation undertakes to manage or operate on or
substantially all of the business of another corporation is a management contract
even if called a service or operating contract.
iv. The duration of the management contract cannot be for periods longer than
5years at any given time. EXCEPT when it relates to exploitation, development
or utilization of natural resources which is to be governed by pertinent rules and
regulations.
v. By way of limitation in a management contract, in interpreting its provisions, it
must be read as subjecting its terms to the right of the board of the manage
Corporation gives specific duties or recall the delegation, as to hold otherwise
violate section 23 of the Code.
10. Ultra Vires acts are acts that are in violation of the code as it provides that: no
corporation shall possess or exercise corporate powers except those conferred by the
code, it's articles and except as such are necessary or incidental to the exercise of the
powers to conferred
i. A rectification it's possible provided the act is not illegal.
ii. If the contract entered into by the Corporation is Ultra Vires, The following
apply: (a) if merely executory on both sides, it cannot be enforced by either (b) If
fully performed, neither party can set it aside (c) if performed on one side,
recovery is allowed as retention of benefits without performance cannot be
allowed

Page 21 of 43
iii. If ultra vires in part only and if separable, it is valid as to the part not ultra vires,
invalid as to the other part.
11. The ultra vires doctrine may be invoked by: (a) the state is a corporation allows its
existence to the state, its powers are limited by the grant of authority by the state (b)
Stockholders as they have a right to expect and insist that the corporation adhere to the
limits of its granted powers (c) Strangers, if they are party to the contract (d)
competitors only if allowed by the statue (e) creditors, it acts are in fraud of creditors.

PAGE 186

BY-LAWS.

1. BY-LAWS are: the rules of action adopted by a corporation for its internal government and for
the government of its stockholders or members and those having the direction, management
and control of its-affairs in relation to the corporation and among themselves
a. The nature of power to have by-laws is inherent in a corporation.
b. Distinguished from a resolution; approved by-laws is a permanent rule of action and
mode' of conduct of corporate affairs while a resolution ordinarily applies to g single act
of the corporation.
2. Before—Incorporation It is to be approved and signed by all incorporators and filed
simultaneously with the Articles

1.1 Note that the adoption can take place even after to, the actual jjjcaiBfiratiiHL
2. After incorporation within a month after receipt of the certificate or incorporation.
3. By-laws are adopted by the affirmative vote of stockholders or
a. Members representing a; majority of the outstanding capital stock or its members. -
3.1 It is to be signed by stockholders or members and is kept in the principal office
subject to inspection.
3.2 A copy certified by a majority of the directors / trustees countersigned by the
corporate secretary is filed with the SEC and attached to the Articles.157
4. The By-laws are rendered valid upon the Issuance by the SEC of a certification that it is not
inconsistent with the Code.
4.1 If the corporation is regulated by specific agencies, it requires a •certification
from said agency that the By-laws are in accord with their ^gqulsttKfns.
5. The non-adoption of by-laws does not result In the demise of the corporation. This can be
implied from the act that while it is given the power to adopt by-laws, it doesn’t make It a
matter of necessity to exercise the power to ensure corporate life or to validate corporate
5.1 However, the non-adoption, ground for a suspension or a revocation of its
corporate franchise.

ELEMENTS OF VALID BY-LAWS

1. The elements of valid by-laws are: (a) they must not be contrary to the code, it is void if
contrary to the code (b) not be contrary to moral or public policy (c) must not impair
obligations of contract - as a general rule (d)^they must be general and uniform in application
(e) they must be consistent with the Charter / Articles (f) they must be reasonable or capable of
compliance.
2. By-laws cannot affect 3rd persons that deal with the corporation unless they have full
knowledge of the pertinent portion of the by-taws affecting their transaction.159 Notice to third
persons will not be presumed. A contract signed by the chairman of the board, even if
mentioned in the by-laws as an authorized signatory is valid.
3. No provision in the By-Laws may be adopted If it is contrary to law. (Tolerance cannot be
considered ratification. The practice no matter how long continued cannot give rise to vested
right if it is contrary to law.

CONTENTS QF BY-LAWS
1. The By-Laws should contain the following: (a) Time, place, manner of calling and conduct and
regular or special meetings of Directors or Trustees, stockholders or members (b) Required
quorum in meetings of stockholders or members and the manner of voting (c) Form of proxies
of stockholders or members and the manner of voting them (d) Qualifications, duties and
compensation of directors, trustees officers, and employees (e) Time of the holding of elections
of Directors/Trustees and the manner of giving notice thereof (e) Manner of election or
Page 22 of 43
appointment and the terms of officers other than Directors/Trustees (f) Penalties for violation
of By-laws (g) In stock corporation manner of issuing certificates (h) Such other matters as
may be necessary for the proper conduct or convenient transaction of its corporate business
and affairs.
2. Amendments to the by-laws can be undertaken by a majority vote of- the Board and majority
vote of stockholders or members in a meeting duly called for that purpose. By vote of the
Board, if the power to amend has been delegated by 2/3 vote of the outstanding capital' stock
or members.
a. Provided that the delegated authority may be revoked by majority vote of stockholders
or members at a regular or special meeting. Note the omission)of the place at a meeting
duly called for the purpose.
3. The amendment is then attached to the original by-laws in the.
a. Office of the corporation and a copy thereof duly certified under oath
b. by the secretary and a majority of the Board is filed with the SEC. It is effective upon
issuance by SEC of a certification that it is not Inconsistent with the Code.
4. By-laws are distinguished from the Articles as follows: (a) Articles Is the fundamental law. By-
laws provide rules or regulations (b) Articles executed before incorporation, By-laws are
usually executed after incorporation (c) The filing of Articles is a condition precedent to
incorporation, while the filing of By-laws is a condition
5. In case, of a conflict between the Articles and the By-laws, the former shall prevail as the Code
provides that the contents of the y latter shall be subject to the contents of the former. Hence, if
the articles provide for a definite number of directors, a contrary provision in the By-laws must
yield to the stated number In the former.

MEETINGS

WHEN HELD
1. Regular meetings of stockholders/members are held/annually on- the date fixed in the By-Laws
or any date In April as determined by the Board Special meetings are held at anytime as
deemed necessary or as fixed in the By-Laws
2. Regular meetings of directors/trustees are held monthly unless otherwise provided, Special
meetings are held at anytime upon call of the president.

NOTICE (REQUIREMENTS
a. Regular meetings of stockholders/members require 2 week notice, while special
meetings require 1 week notice, unless .the By- Laws provide otherwise.
b. Regular meetings of directors/trustees require one day notice unless otherwise provided.
c. Notice can however be impliedly or expressly waived.

WHERE MEETING IS TO BE HELD


1. Stockholders/members are to be held in the city or municipality where the principal
office is located.
2. Board meetings can be held anywhere In or outside of the Philippines unless the By-
laws provide otherwise.

WHO PRESIDES
1. In oil instances, the president presides unless otherwise provided.
2. Where the meeting is called by a stockholder or a member upon showing of good cause
to the SEC, the stockholder or member is allowed to preside until a presiding officer is
elected.

WHO CALLS
1. Person designated in the By-Laws - director/ trustee or officer entrusted with
managing petitioning stockholder or member, in cases of removal, the corporate
secretary or a stockholder or member in proper instances."

VALIDITY OF ACTIONS
In stockholder or member consisting of a majority of the business so transacted shall be corporation.
meetings, there being a outstanding capital stock valid within the powers

Page 23 of 43
1. Even if meeting is improperly called or held within the-powers of the corporation and
all stock holders or members are present or by their representatives

2. Note the following instances when only a majority is required of stockholders or


members: (a) election of the members of the Board (b) removal of directors or trustees
(c) approval of management contracts (d) adopt by laws/amend/or repeal or
revoke power delegated to the Board (e) fix issued price of no par value shares179 (f)
fixing compensation of directors
3. In directors or trustees meetings, there being a quorum, all acts are valid. But if not
undertaken in a duly convened meeting, they are generally invalid but may be ratified.

WHY ARE MEETINGS NECESSARY


1. Meetings are necessary because corporate powers are vested in the Board or
stockholders or members as a body and not as
individuals.
2. It serves as protection and assurance' to stockholders or members as it affords them an
opportunity to be heard and to discuss, the matter at hand and vote thereon.

Requisites of a valid meeting of stockholders or members


The requisites are:
1. Held at the proper place
2. Held at the stated date and time or at a reasonable time thereafter
3. Called by the proper person
4. Previous notice must be given
5. There must be quorum.

WHEN ARE MEETINGS NOT NECESSARY


1. The instances when meetings are not necessary are (a) when a corporation amends its articles
and written assets is sufficient (b) when there is an agreement to be bound despite the absence
of a meeting (c) when the Articles of a close corporation allows directors to take action without
a meeting

CAN MEETINGS BE POSTPONED


1. As a rule, meetings may be postponed but annual meetings be postponed if the purpose is to extend
the term of office of directors or trustees.

COMPENSATION FOR ATTENDING STOCKHOLDER OR MEMBER MEETINGS


1. They are not entitled 4:o payment for attending meetings as they are exercising a right of rendering a
service. Note that Section 47(5) only allows compensation for directors, trustees or officers.

HOW ARE MATTERS TAKEN UP IN MEETINGS PUT INTO FORMAL FORM


1. They are formalized by the exercise of the right to vote

WHO ARE ENTITLED TO VOTE


1. Stockholder or members are entitled to vote as it is through the exercise of the right to vote that
they are able to participate in management
a. The right to vote Is inherent )in stock ownership or in membership.184 Provided, they
remain ds such In the books of the corporation as of the date fixed in the-notice.
b. If the stock is co-owned, the consent oft all is necessary to vote the stock, except where
all of them have executed a proxy.
c. If owned in an and/or capacity, any one can vote the stock
2. The right to vote cannot be exercised if the: (a) shares are delinquent (b) shares are non-voting,
unless the matter to be voted upon allows them to vote (c) when the shares are In the treasury
shares
3. Although, not stockholders the following may exercise the right to voted (a) Pledgees or
mortgagees when they are given the right and such is recorded in the books of the
corporation188 (b) Executors, administrators, receivers and other legal representatives appointed
by the Court (c) heirs of the stockholder who have executed a judicial or extra-judicial
settlement, registered with the Registry of Deeds upon presentation of the settlement to the
corporate secretary.

Page 24 of 43
MANNER OF VOTING
The right to vote may be exercised in person or by proxy
1. The right to vote by proxy cannot be exercised in board meetings.
2. A proxy is a formal authorization given by the holder of the stock who has the right to vote, or
by a member, to another person to exercise the voting right of former.
a. In another sense, it can also refer to the person who was authorized.
3. The requisites of a valid proxy as provided by law are it must be in writing and signed by the
stockholder or member (b) filed before the scheduled meeting with- the corporate secretary (c)
it should not be valid and effective for a period of 5 years at anyone time it is valid only for the
meeting for which it is intended unless otherwise provided.
a. The By-laws may provide for other requisites. The board cannot prescribe other
formalities besides that provided by the Code if the By laws does not so provide. Absent
such provisions, compliance with what is prescribed by the Code is sufficient
b. As when, absent a requirement in the By-laws as to notarization, the proxy is valid as
the Code only requires it to be written.
c. The writing must show the intention to empower the person to whom it is given to act
as agent in voting the stock, and to enable the corporate officers to know that such
authority is given.
4. The common kinds are (a) General, which confers general discretionary power that is
continuing, or (b) Limited, which limits the power conferred.
5. When a proxy is given to two or more persons, they must agree on the vote unless the proxy
provides otherwise or discriminates. If there Is no agreement, the majority will prevail
a. If only one of them will attend the meeting, he will be deemed authorized to exercise
the powers of a proxy.
6. When the stockholder intends to designate several proxies, the number of shares of stock
represented by each proxy must be specifically indicated in the proxy form.
a. If some forms do not indicate the number, the shareholdings as indicated shall be tallied
and compared with that appearing In the books, the balance, if any shall then be allotted
to the holder of the proxy without a number indicated.
b. If all the proxies are blank, the shareholdings shall be distributed equally among all the
proxies.
c. The number of proxies may be limited by the By-laws.,
7. A revocation of the proxy can be done expressly or impliedly, by writing, orally or by conduct,
with notice or without at anytime-except if coupled with an Interest, referring to an instance
where the proxy giver has incurred liability and Is looking at the grant of the right to vote to
another as a means of reimbursement or indemnity
a. As regards Several proxies: (a) last proxy revokes all previous proxies (b) if undated,
date of postmark if matted or time of presentation, If not mailed
8. Since a proxy is a corporate control device, solicitation of the same should be undertaken In
accordance with law, which requires among others, the submission to the SEC of preliminary
copies o£ the Information Statement and Proxy Form at least 10 business days prior to the date
definitive copies of such materials shall first be sent or given to security holders.
a. The proxy solicitation rules shall apply to: (a) an issuer which has sold a class of its
securities pursuant to a registration under Section 12 (b) an issuer with a class of
securities listed for trading on an exchange (c) an issuer with assets of at least PHP
50,000,000.00 or such amount as the Commission may prescribe, and having 200 or
more holders each having at least 100 shares of a class of its equity securities.
9. The right to appoint a proxy, cannot be denied in a stock corporation. In a non stock
corporation it can be denied.

VOTING TRUST AGREEMENTS


1. A voting trust agreement is an agreement in writing whereby one or more stockholders of a
stock corporation transfers their share to any person/s or corporation having authority to act as
a trustee or the purpose of vesting in such person voting or other rights pertaining to the shares
for a certain period not exceeding that fixed in the Code and upon terms and conditions stated
in the agreement.
a. The statute does not apply to agreements-whereby stockholders agree to bind
themselves to each other as shall vote their shares. These are called pooling agreements
generally a stockholder exercises wide liberality in voting and his motives, while for
personal profit, are not objectionable "or may be determined by whims or caprices, so
long as he does not violate a duty owed to other stockholders.

Page 25 of 43
b. The limitations applying to voting trust agreements are: (a) it should not be executed for
a period not excess of 5 years except if executed as a condition for a loan, in which case
It should expire upon payment (b) it should not be executed to circumvent the law
against monopolies and Illegal combinations in restraint of trade or used for purposes of
fraud, such as fixing prices or a merger/consolidation to create a monopoly
c. The other requirements are: (a) must be in writing, notarized 'containing and specifying
all terms and conditions (b) it should must be filed with the SEC, otherwise it is
ineffective or unenforceable [ (c) it should be subject to examination (d) It should
automatically expire at the end of the agreed period
d. Some uses of voting trust agreements are: (a) concentrate stockholder control in one or
few persons, who primarily through the election of directors can control corporate
affairs utilized by founders or incorporators to retain control.
2. If a voting trust agreement is validly executed, the shares of the trustor are cancelled and new
ones are Issued to the trustee and noted in the corporate books that the transfer is pursuant to a
voting trust agreement
a. The trustee then delivers or executes voting trust certificates, which are transferable like
shares, to evidence the trustors' ownership and right to dividends.
b. Both the shares and voting trust certificates are then cancelled upon the expiration of
the term and new certificates are issued to the' trustor.
c. The voting trustee shall then be allowed to: (a) possess the right to vote (b) exercise the
right to vote in person or by proxy (c) has the right of inspection (d) since he is the legal
bidder, he can be elected as a director

DISTINCTION BETWEEN PROXY AND A VOTING TRUST


1. The distinctions between a proxy and a voting trust are: (a) proxy has no legal title, a voting
trustee has legal title (b) the proxy is generally revocable, while a voting trust generally is not
revocable (c) proxy can only act at a specified meeting unless it is continuing, a trustee Is not
so limited (d) proxy can only vote if stockholder or member is not present while a trustee votes
nevertheless (e) a proxy is usually shorter in duration than a voting trust
2. Other distinctions: (a) a voting trustee can appoint a proxy, while a proxy, as a rule, cannot
further delegate his authority (b) a voting trustee votes in his own name, while a proxy is an
agent of the shareholder. .

STOCKS AND STOCK HOLDERS ACQUISITION OF STOCKS


1. A person may become a stockholder of a corporation by acquiring a share through a purchase
from the corporation or other shareholders.
2. The purchase from the corporation is primarily effected by means of a subscription contract if
the object are unissued shares
a. A subscription contract is any contract for the acquisition of unissued stock in an
existing corporation or one that is still to be formed regardless of whether It is referred
to as a purchase or some other contract. This is so to prevent the avoidance of
provisions of the code insofar as pre-incorporation subscription contracts.
b. The kinds of subscription contracts are pre-incorporation and I Post Incorporation
contracts.
c. A pre-incorporation is irrevocable for a period of at least 6 months, counted from the
date of subscription because there is a need to ensure that the corporation shall have
capital to undertake the »business for which it was created. The irrevocable nature of
the contract shall stand unless all subscribers’ consent to the revocation or the
corporation falls to materialize- within the period or such-period fixed in the contract.
However, no pre-incorporation subscription /contract can be revoked if the Articles
have already be in submitted to 1 the SEC.
d. Distinguished from a stock option which refers to the privilege granted to a party to
subscribe to a certain portion of unissued stock within a certain period.
3. If the object of the purchase are-Issued scares, they may be /purchased from other
shareholders or from the corporation Itself when it disposes of treasury shares

PAYMENT FOR UNISSUED SHARES


1. Shares are paid for by or any combination of: (a) cash (b) property - tangible or intangible,
actually received by the corporation and necessary or convenient for Its use and lawful purpose
at a fair valuation equal to par or issued value (c) labor performed or services actually rendered
(d) previously Incurred Indebtedness (e) amounts transferred from unrestricted retained

Page 26 of 43
earnings to stated capital (f) outstanding shares exchanged for stocks in the event of a
reclassification or conversion.
a. Regarding items (b) to (f), the valuation must be determined by the incorporators or the
Board subject to approval by the SEC
b. Shares cannot be issued in exchange for promissory notes or future services because
they are supposed to and are intended to represent a value received by the corporation
to form part of its capital
c. The enumeration of acceptable consideration is also acceptable as consideration for the
issuance of bonds.
2. The amount to be paid is the par value, as fixed or if no par value, the value which may be
fixed in the Articles or by the Board pursuant to the authority conferred by the Articles / By
Laws or in its absence by the stockholders in a meeting duly called by a majority vote of the
outstanding capital stock.

WHEN PAYMENT FOR SHARES MUST BE MADE


1. They are payable on: (a) date fixed the subscription contract, or upon call.
a. A call is the act of the board in declaring due and payable unpaid;) subscriptions in full
or such percentage, In either case, with accrued interest, counted from date of
subscription, If so required by the Bylaws and at the rate fixed thereon. If no interest
rate is fixed, the legal rate. Absent such provisions for the collection of Interest and a
rate, it cannot be collected
b. The purpose of the call is to fix the period of payment but is not necessary if the,
corporation is Insolvent or payment is provided for in the contract.
2. The requisites of a valid call| are: (a) made in the manner provided by law, it requires a
resolution and notice (b) it must be made by the board (c) operate uniformly among all
shareholders
3. If no payment is made 30 days after due date or after the date stated in the call, the shares shall
be considered to foe delinquent,
4. Consequently:, (a) they shall not be voted for or be entitled to vote or representation at a
shareholders meeting (b) no rights may be exercised, except the right to receive dividends.
a. This situation will obtain until the amount due, interest and expenses are paid.
5. If the subscriber is hot delinquent, he exercises all rights of a shareholder.

REMEDIES TO ENFORCE A DELINQUENCY


1. A corporation may collect the unpaid subscription by judicial action. However, absent any date
for payment in the subscription contract, a call is still necessary.
2. Another option is to conduct a delinquency sale.
1. A delinquency sale requires: (a? Resolution by the Board ordering the sale of delinquent
stocks, specifying the amount due, interest, and the date, time, place which shall not be
less than 30 days nor more than 60 days from the date of delinquency (b) Notice is sent
to the subscriber personally or by registered mail and published in a newspaper of
general circulation in the province or city where the corporation has its principal office
once a week for 2 consecutive weeks.
2. At the auction sale, the winning bidder shall be the one who shall pay the full amount of
the balance and all expenses for the least number of shares. Note that there is^ no
deficiency because the winning bid cannot be less than the amount due.
3. The stock so purchased Is transferred In the name of the purchaser, the rest if any goes
to the delinquent subscriber
3. If there is no bidder at the auction sale, the corporation may purchase the shares. Note that the
highest bidder's bid may be rejected by the Board as in a public auction sale, the corporation is
not making an offer to sell but rather the purchaser is offering to buy.
4. If delinquent stock Is sold, It may be recovered or^ the ground that: (a) There is a defect or
irregularity In the notice of sale (b) There is a defect or irregularity in the sale itself. Provided,
the party bringing the action pays to the person holding the stock the sum paid, plus legal
interest from date of sale and the action is brought within six ■months from date of sale.

STOCK CERTIFICATES
1. A stock certificate/is the written instrument signed by the proper officer of a corporation
stating or acknowledging that the person named therein is the owner of a designated
number of shares of stock
2. It is issued once the consideration, plus interest and expenses j due on a delinquency, if
any, have been paid.
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3. Partial payments are pro-rated among all the shares. Note that in the case of Baltazar v.
Lingayen Gulf a certificate was issued for less than the number subscribed provided the
par value of each of the [stocks represented by the certificate has been fully paid. The
basis is Section 37 of the old law. Hence, By-laws of older corporations may carry such
a provision
4. The formal requirements for/the issuance of a stock certificate are: (a) signed by the
president or vice-president (b) countersigned by the corporate secretary or assistant
secretary (c) sealed with the [ corporate seal (d) issued in accordance with the by-laws
5. Note that a stock certificate is not essential to the creation of a stockholder relationship
as regards the corporation In the absence of a f statute or agreement.

WATERED STOCK
1. The definition of watered stock is stock issued not in exchange for its equivalent in cash,
property, shares stock dividends or 'services
a. Includes stock that is Issued (a) without consideration (b) issued as fully paid when the
corporation receives a sum less than par or issued value (c) issued for a consideration
other than cash, the fair valuation of which is less than par or issued value (d) stock
dividend j without sufficient returned earnings or surplus.
2. The director or officer consenting or having knowledge, and does not express that same in
writing and files it with the corporate secretary shall be solidary liable with the shareholder to
the corporation and its creditors for the difference between the fair value received at the time of
issuance and its actual par or issued value
a. There is liability because a party giving credit to a corporation is entitled to rely upon
its ostensible capitalization as the basis for the credit given. Thus if watered stock is
issued, the ostensible capital is in excess of real assets, thereby he recover less.
3. Only originally Issued stock may be watered, as a subsequent transfer is a sale, the provision
says issuance
4. A subsequent increase in value will not eliminate the "water", as the last paragraph of Section
65 states that point of reckoning of liability is issuance

NATURE OF STOCK CERTIFICATES


1. Stock certificates are in the nature of personal property.
2. Transfers may be effected by delivery and indorsement.
a. However, no transfer shall be valid between the parties unless it is recorded in the books
of the corporation.
b. What is to be recorded are the names of the transferor and transferee, date, number of
shares and number of the certificate.
c. It must be recorded by the corporate secretary or the designated stock and transfer
agent, if one has been appointed. Otherwise, it is invalid.
d. No share over which the corporation holds an unpaid claim or a delinquency shall be
transferable.
3. If the By-laws do not provide otherwise delivery and sale may also be through another
document but an indorsement is a mandatory requirement.
4. If what is transferred is a subscription, the corporation must consent by resolution because the
transfer constitutes a novation requiring the consent of the creditor.
5. The registration of transfer to: (a) enable the corporation to know at all times who its
shareholders are as mutual rights and obligation exists between them (b) to afford the
corporation a right or opportunity to object or refuse consent to a transfer in case it has a (c) to
avoid a fictitious or fraudulent transfer.
6. An unregistered transfer is: (a) valid between transferor and transferee (b) 4nvalid against the
corporation except if} notice is given invalid against corporate creditors when the-veil of
corporation fiction is pierced or there is liability for watered stocks (d)invalid against creditors
of transferors (e) transferor has the right to vote and be voted upon until challenged (f)
transferor can collect the dividends
7. Since the law did not prescribe a period within which registration of transfer should be
affected, the action to enforce the right does not accrue until a demand is made and such is
refused. Hence, an action for mandamus can be made even after 24 years.

LOST CERTIFICATES
— The procedure tor the procurement of lost or replacements certificates are:
The registered owner or legal representative shall file an affidavit In triplicate setting forth
(a) circumstances of the loss, theft, or destruction (b) number of shares, number of
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certificate and name of the corporation (c) such other matter or evidence he may deem if
necessary
Upon verification of the affidavit and books, the corporation shall cause notice of loss to be
published at shareholder's expense for 3 consecutive weeks, stating the specifics of loss and
that l year from date of publication, should no contest be presented, it will cancel and issue
new certificates.
The publication requirement can be dispensed with if the shareholder files a bond or surety
good for 1 year satisfactory to the board.
Provided, in any case, if contest or suit is brought/presented, the issuance of the certificate
shall be suspended until a final decision of the court or determination of ownership is made.
— Except in case of fraud, bad faith or negligence of the corporation, no action can be brought
against It for issuing a certificate/s pursuant to the procedure laid down by law.

RIGHTS OF STOCKHOLDERS
1. Under the Corporation Code, stockholders exercise and enjoy the following rights (c) right to
attend and vote at meetings (b) elect or remove directors (c) approve corporate acts (d) adopt
amend by-laws (e) compel the calling of a meeting (f) issuance of a stock certificate (g) receive
dividends (h) receive property upon dissolution (i) Transfer stock (j) pre-emption (k) inspection
of books (I) secure financial statements (m)recover stock at delinquency if unlawfully sold
(n)enter into voting trust agreements (n) exercise the right of appraisal (o)participate in
dissolution (p) bring derivative suits.
a. A summary of rights can be had as, fallows: (a) right to dividends (b) right to participate
in management (c) right to share in corporate property upon dissolution.
2. Note that a subscriber cannot exercise the right to demand the issuance of a stock certificate.

DERIVATIVE SUIT
1. A derivative suit one brought by one or more stockholder/s or member in the name of the
corporation and in its behalf to redress wrongs committed against It or to protect or vindicate
corporate rights whenever the officials of the corporation refuse to sue, are the ones to be sued
or hold control of the corporation.
a. It is an available remedy In cases where the officers are over compensated or there is a
refusal to take action without sufficient explanation.
2. The requisites for its institution are (a) there must be an
existing cause of action (b) That demand to sue has been made, unless demand is useless (c)
That he must have been a stockholder or member at the time the act was committed unless it be
continuing (d) action is brought In the corporate name.
a. Additional requisites are; no appraisal rights are available for activity complained of
and that it is not a nuisance or harassment suit
b. The shareholder is a nominal party, the real party in interest is
the corporation. It is an indispensable party.
c. The number of shares held is of no consequence. What is required is that the party-
bringing suit is a shareholder without regard
to the number of shares held.
3. An action brought in the name of the shareholder is an individual
suit or if the act is committed against shareholders as a group, it is a
representative suit.
CORPORATE BOOKS
1. The following corporate books and records must be kept and
preserved at its principal office
a. Record of all business transaction
b. Minutes of stockholders or Board meetings, setting forth: time and place, how
authorized, notice given, whether regular or special, those present/absent, every act
done or ordered. Upon demand, the time that the a director, trustee or officer entered
or left, the yeas and [the nay, and any protest may be recorded in full
c. Stock and Transfer book which should contain a record of all stocks, names of
stockholders, installments paid/unpaid, statement of alienation, date thereof and
other matters prescribed by the By-Laws. Note though that the stock and transfer
book can be except with the stock and transfer books or one principally engaged In
the business of registering transfers of stocks in behalf of a corporation.
2. All books are available for inspection at reasonable hours on business days, and in cases
of records other than the stock and transfer book, a demand in writing for excerpts can be made.

Page 29 of 43
3. Any officer or agent refusing inspection shall be liable for damages and a violation of
theCode.
a. Provided, that if refusal is due to a resolution or order of the board, liability will
attach to the director or trustee voting for it.
b. Further, it is a valid defense against party seeking information or Inspection that (a)
he has Improperly used any information served in a prior examination even of
another corporation (b) not acting in good faith (c) purpose is not legitimate.
4. A stockholder may examine the books and records of a wholly owned subsidiary as
long as it utilizes the same office and has identical directors as the parent corporation.

RIGHT OF SHAREHOLDER OR MEMBER TO FINANCIAL STATEMENTS


a. A stockholder has the right to request in writing a copy of Financial Statements, which
the corporation must comply with within 2 days from receipt, by furnishing the party
making the request with copies of the corporation's balance sheet and profit or loss
statement showing in reasonable detail its assets and liabilities and the result of its
operations.
b. At the regular meeting of the stockholders, the Board must present a financial report of
operations for the preceding year, to include financial statements duly signed and
certified by a CPA except when its paid up capital is less than PHP 50,000.00, in which
case, a certificate under oath by the treasurer or responsible officer is sufficient.

MERGERS and CONSOLIDATIONS

WHAT ARE MERGERS AND CONSOLIDATIONS

1. Mergers refer to the absorption by one corporation by another, which Is "called the “surviving
corporation, while Consolidations refer to the combination of two or more corporations to form
a new corporation, called the consolidated corporation,
2. The procedure for a merger or consolidation is as follows:
a. The Board of each corporation shall execute a plan of merger or consolidation setting
forth: (a) names of the corporations proposing to merge or consolidate (b) the terms of the
merger or consolidation and the manner of carrying it into effect (c) statement of changes,
if any, in the articles of the surviving corporation, in case of a merger or with respect to the
consolidated corporation, all statements required by Section 14 to be contained in the
Articles of Incorporation (d) such other provisions that may be deemed necessary
b. Upon approval by a majority vote of each of the Boards, the plan of merger/consolidation
shall be submitted to the stockholders of each of the corporations at separate meetings duly
called, notice of which having been given at least 2 weeks prior to the date of the meeting,
personally or by registered mail Note that the vote requirement is 2/3 of the outstanding
capital stock, provided a dissenting stockholder may exercise the right of appraisal, the
exercise of which can be extinguished if the plan is abandoned.
c. Any amendment of the plan shall be subject to the same procedure.
d. After approval, the Articles of Merger/Consolidation will be executed by each of the
constituent corporations signed by the President or Vice President, certified by the
Corporate Secretary or |Assistant Corporate Secretary stating: (a) the plan of merger or
consolidation (b) in stock corporations, the number of shares outstanding and in non stock
corporations, the; number of members (c) in each corporation, the number of shares or
members voting for or against the plan.
e. Articles of Merger/Consolidation signed and certified shall be submitted to the SEC for
approval together with a favorable recommendation in cases of banks, building and loan
associations, trust companies, insurance companies, public utilities and educational
institutions.
f. The effectivity of the merger/consolidation is upon the issuance by the SEC of a certificate
of merger/consolidation.
g. Note that it after investigation, the SEC has reason to believe that it is contrary to law, it
may give the corporations an opportunity to be heard after notice of time, date, and place is
given to each corporation, at least 2 weeks prior to the hearing.

EFFECTS OF A MERGER OR CONSOLIDATION


1. The effects of a merger or consolidation are
a. The constituent corporations become the surviving corporation in case of a merger, and
the consolidated corporation in case of a consolidation
Page 30 of 43
b. The separate existence of the constituent corporations shall cease except that of the
surviving or consolidated corporation
c. The surviving or consolidated corporation shall possess all the rights, privileges
immunities and powers and shall be subject to al duties and liabilities of a corporation
organized by or under the corporation code
d. The surviving or consolidate corporation shall thereupon and thereafter possess all the
rights, privileges franchise of each of the constituent corporations and all property, real
or personal, and all receivables due on whatever account. Including subscriptions of
shares and other chooses of action and all and every Interest of or belonging to or each
of the constituent corporations shall be taken and deemed transferred and vested, in the
surviving / consolidated corporation without further act or deed.
e. The surviving or consolidated corporation shall be responsible and liable for all
liabilities and obligations of each of the constituent corporations in the same manner as
the surviving or consolidated corporation had itself incurred the liability or obligation.
Any claim, action or proceeding pending by or against the constituent corporations may
be prosecuted by or-against the constituted or surviving corporation as the case may be.
Neither shall the rights of creditors or lien upon property of any of the constituent
corporation be Impaired by the merger or consolidation

2. In a case, the issue resolved by the court was: "Does the surviving corporation have a right to
enforce a contract entered into by the absorbed company subsequent to the date of the merger
but prior ""to issuance of a certificate of merger by the SEC". The court held in the affirmative
as the merger agreement contains a stipulation that all references to the absorbed corporation
shall be deemed a reference to the surviving corporation.

3. The employees of the dissolved corporation shall be assumed by the surviving corporation.
Their tenure should be treated as having started when they started with the dissolved
corporation.

DISTINGUISH BETWEEN MERGER OR CONSOLIDATION AND THE SALE OF ASSETS

1. They can be distinguished as follows:


a. In a merger or consolidation, there is no contract of sale, while in a sale of assets, a sale
is always involved
b. In a merger or consolidation, there is automatic assumption of liabilities, in a sale of
assets, generally the buyer is not liable) except when (a) he expressly/impliedly
assumes liability (by in a de facto B. merger or consolidation (c) where the purchasing
corporation is merely a continuation of the selling corporation that eventually dissolves
itself (d) where the transaction is fraudulently entered into to avoid liability for debts.
c. In a merger or consolidation, there is continuance of the enterprise, in the sale of asset, a
liquidation is usually contemplated
d. In a merger or consolidation, title to assets is transferred virtue of law, in a sale of
assets, title is transferred by virtue of contract
e. In a merger or consolidation, one or all the constituent corporation/s are dissolved, in a
sale of assets, there is no dissolution by the selling corporation

TERMS RELATED TO A MERGER OR CONSOLIDATION


1. Due Diligence - is the process of investigation by a party, disinterested or otherwise, into a
business transaction for the purpose of providing information with which to evaluate the
advantages and disadvantages of the same
2. Corporate Take - Over is the process of acquisition of control or possession over a corporation
3. Poison Pill - is a financial tactic or provision used by a company to make an unwanted takeover
prohibitively expensive or less desirable. Example: Sale of assets at a discount to stockholders.
4. Tender Offer – a public officer to purchase a specified number of shares from shareholders.
Usually the purchase is at a premium, meaning at a price higher than the par value of the stock.
5. Corporate Raiding – gaining control of a company for purpose of liquidating its assets at a
profit.

RIGHT OF APPRAISAL
1. The right of appraisal Is the right of stockholder to demand payment of the fair value of its
shares after dissenting from a proposed corporate action involving a fundamental change in the
corporation in the cases, provided for by law.
Page 31 of 43
2. It is available where (a) Articles are amended and such has the effect of changing or restricting
the rights of a shareholder or a class of shares or authorizing preferences in any respect superior
to those outstanding shares of any class (b) extending or shortening the corporate term (c) In
cases of sale, lease, exchange transfer, mortgage, pledge or disposition of all or substantially all
of corporate assets or property (d) In cases of mergers/consolidations (e) investment by the
corporation in another corporation or business other than its primary purpose (f) a stockholder
in a close corporation for any reason may compel the said corporation to allow the exercise of
his appraisal rights.

HOW IS IT EXERCISED
1. After voting against the proposed corporate action, a written demand must be made on the
corporation within 30 days after the date on which the vote was taken for payment of the fair
value of his shares
a. If no demand is made within 30 days, he is deemed to have waived the exercise of the
right
2. The stockholder must submit his certificate of stock within 10 days for notation that such
shares are dissenting shares
a. If the certificate is not submitted for notation within 10 days, the corporation may
consider the exercise of the right terminated at its option
3. Upon a demand all rights accruing to the share are suspended including voting rights, only the
right to receive the fair value is not suspended i2iil, if there is no payment within 30 days after
the award, he is restored to all his rights.
a. However, the exercise of the right after demand is made shall cease if: (a) stockholder
withdraws his demand and the corporation consents (b) proposed action is abandoned or
rescinded (c) SEC disapproves the action, if its approval is necessary (d) SEC
determines that the stockholder is not entitled to the exercise of the right, in the effect is
that he is restored to all rights and accrued dividends are paid to him.
4. The corporation then pays the stockholder the fair value upon surrender of the certificate.
a. The value paid is the value as of the day prior to the date on which the; vote is taken,
excluding any depreciation or appreciation in anticipation of the corporate action.
b. If the fair value cannot be determined within 60 days from the date corporate action was
approved, it shall be appraised by 3 disinterested persons one chosen by the
stockholder, one chosen by the corporation and one chosen by both representatives. A
decision of a majority shall be final and the award paid within 30 days after such award
is made.
c. The cost of the valuation shall be shouldered as follows: (a) the corporation, unless the
fair value as ascertained is equal to or approximates that which it offered, then it will
assessed against the shareholder (b) if suit is brought to recover payment, the
corporation shall be liable unless the shareholder Is found to have an unjustifiable
reason not to receive payment
d. Provided, in all cases (a) no payment can be made if the corporation has no unrestricted
retained earnings, and (b) that the shareholder shall forthwith transfer his shares to the
corporation
5. A transfer pending exercise of the right of appraisal shall cause the rights of the transferor as a
dissenting stockholder to cease and the transferee shall have all the rights of stockholder
including the dividends which would have accrued to the Shares as by so buying, it indicates
his desire to be a stockholder

CLOSE CORPORATIONS

CLOSE CORPORATION DEFINED


1. A close corporation is a corporation whose articles provide that: All the corporation's issued
stock of all classes, exclusive of treasury shares, shall be held of record by not more than a
specified of persons not to exceed 20.
a. All issued stock of all classes shall be subject to one or more specified restrictions on
transfer permitted In this title. Any restriction can be put provided: (a) the restriction
must appear in the articles of incorporation by-laws as well as the certificate of stock,
otherwise it is not. binding on a purchaser in good faith (b) it or they should not be
more onerous than that granting the existing stockholders or the corporation the option
to purchase the shares with such reasonable terms, conditions or periods stated therein.
Page 32 of 43
If at the end/expiration of the period, a stockholder/s or the corporation falls to exercise
the option to purchase, the transferring stockholder may sell his shares to any third
person. Example: fixing a price below actual/market value, prescribing a longer holding
period or a transfer without consent of the board
b. The corporation must not list in any stock exchange or make any public offering of any
of its stock of any class.
c. Notwithstanding, if, 2/3 of its voting stock or voting rights is owned or controlled by
another corporation which is not a close corporation within the meaning of the Code,
the corporation shall not be deemed a close corporation.
2. Other provisions of the Code shall have supplemental effect in the absence of express
provisions found in the title on close corporations.
3. No close corporation can be formed if will be engaged in the following business activities:
mining, stock exchange, banks, Insurance company, public utility or educational corporations
or are otherwise vested with public interest.
4. The number of shareholders is mandatory.
a. In case of the death of a stockholder, if his heirs will cause the number to exceed 20,
their remedy Is to put only In the name of one of them or they can create a corporation
to hold the shares.
5. Distinguishing a close corporation from an ordinary stock corporation: (a) there is a limitation
on shareholders in the former, none exists in the latter (b) there are restrictions of transfer in the
former, none exists in the latter (c) there are qualifications that may be imposed for
shareholders in the former, qualifications are not normally imposed in the former
(d) a public offering of shares is prohibited in the former, there can be a public
offering of shares in the latter (e) the former may be managed by, shareholders, the latter is
always managed by a board.
6. Distinguished from a "closely held corporation" referring to the number of shareholders at a
particular time, indicating that they are ''few in number or a corporation whose shares are
owned by a relatively small number of shareholders. Even corporation can be stockholders of a
closed corporation provided however that the corporation which is a stockholder is not a close
corporation within the meaning of the code, it must not own 2/3 of the voting stock or voting
rights.

CONTENTS OF THE ARTICLES OF INCORPORATION OF A CLOSE CORPORATE


1. In addition to what is required by Section 14 of the Code, the Articles of Incorporation of a
close corporation may provide for:
a. Classification of shares or rights and the qualifications for owning or holding then and
restrictions on their transfer
b. Classification of directors into one or more classes each of which may be voted for or
elected solely by a particular class of stock
c. Greater quorum or voting requirements for stockholder or board meeting
d. Provide that the corporation's business shall be managed by the stockholder rather than the
board as long as (a) no meetings of stockholders are necessary to be called to elect
directors (b) unless the context clearly requires otherwise, stockholders shall be deemed
directors for the purpose of applying the provisions of the code (c) stockholders and the
corporation shall be subject to all liabilities of director
e. May provide that all officers or employees or that specified officers; shall be elected or
appointed by stockholders instead of the Board.
2. Note that the term of directors for a close corporation is 1year as it is a stock corporation, while
those in non-stock corporations will have a term of 3 years and in an educational corporation
the term is for 5 years.
RULES TO APPLY TO TRANSFERS OF STOCK IN BREACH OF QUALIFYING
CONDITIONS
1. A person holding stocks in a close corporation in conclusively presumed to have notice of the
fact of his Ineligibility to be a stockholder if he is not entitled under any of its provisions in the
Articles of Incorporation to be a holder of record of stock and the certificate for such stock
conspicuously shows the qualifications of the persons entitled to be holders.
2. If the Articles of Incorporation state the number of persons not exceeding 20 entitled to be
holders of stock and the certificate for such stock states such fact, the person to whom stock is
issued or transferred that will exceed the number is conclusively presumed to have knowledge
or notice of such fact

Page 33 of 43
3. If stock certificate conspicuously shows a restriction on transfer, the transferee is conclusively
presumed to have notice of the fact that he has acquired stock in violation of the restriction, If
such acquisition violates the restriction.
4. The effects of such is that the corporation may at its option refuse to register the transfer of
stock in the name of the transferee have the corporation may record if it is consented to by all
the stockholders or if the close corporation had amended its Articles and effect of such
amendment is to terminate the status of the corporation as a close corporation as long as the
purpose of the amendment Is either: (a) delete/remove provision required under the title to be
contained in the Articles of Incorporation. Example: restrictions (b) reduce quorum or voting
requirement.
5. It will require a 2/3 vote of the outstanding capital stock or such higher proportion as fixed In
the Articles, whether with or without voting rights. No written assent is allowed.
6. Other related matters: (a) the manner of transfer is the same as stock corporations (b) transfers
are not limited to transfers for value (c) it does rot Impair/prejudice the right of the transferee to
rescind or recover on the warranty express or implied

VALIDITY OF STOCKHOLDER AGREEMENTS


1. Agreements signed by and among all the stockholders executed before the formation or
organization of the corporation shall survive incorporation and shall continue to be valid and
binding if such be their intent as long as they are not Inconsistent with the Articles, irrespective
of whether or not they are embodied in the Articles or not, but aspects requiring it to be
embodied must be so embodied. Examples: (a) agreements between stockholders to sell their
shares to each other must be embodied (b) agreement to stay in the corporation for a definite
period
2. Agreement between 2 or more stockholders in writing and signed by them may provide that in
exercising any voting rights, the shares held by them shall be voted as provided, as they may
agree or as determined by the procedure agreed between them. Example: voting trust
agreements.
3. No provision in any written agreement signed by a stockholder relating to any phase of
corporate affairs shall be invalidated as between the parties on the ground that its effect is to
make them partners among themselves. Example: contracts as to the use of dividends
4. Neither will an agreement among some or all of the stockholders in a close corporation be
invalidated on the ground that it relates to conduct of business of the corporation as to restrict
or interfere in the discretion of the board. Provided that such shall impose on stockholders who
are partners thereto liabilities for a managerial acts reposed on directors. Example, consultation
agreements not to deal with particular entities or deal with particular entities only.
5. To the extent that a stockholder is actively engaged in the management or operation of the
business affairs of a close corporation stockholder shall be held to strict fiduciary duties to each
other and among themselves, said stockholder shall be personally liable for corporate torts
unless the corporation has obtained reasonably adequate insurance.

EFFECTS OF ACTIONS TAKEN WITHOUT BOARD MEETINGS OR TAKEN DURING


IMPROPERLY HELD ONES
1. The general rule is that all actions are valid If: (a) signed and written consent of all directors is
obtained before or after the action (b) all stockholder have actual or implied knowledge and no
prompt objections In writing Is made (c) directors are accustomed to take informal action with
express or implied acquiescence of all stockholder (d) all directors have express or implied
knowledge of the action in question and no one makes a prompt objection In writing and the
by-laws do not provide otherwise.
2. If a directors meeting is held without call or notice, an action taken within corporate powers is
deemed ratified by the director who fail to attend unless he promptly files a written objection
with the secretary after having knowledge therefore.

PRE-EMPTIVE RIGHTS
1. In a close corporation, pre-emptive rights extend to all stock issued, including a re-issuance of
treasury shares, whether for money, property, personal services or in payment of corporate
debts unless the Articles otherwise provide.

DEADLOCKS
1. Deadlocks occur if directors or stockholders are so divided regarding the management of the
corporation's business and affairs that the necessary vote cannot be obtained, the consequence
Page 34 of 43
of which is that the business and affairs of the corporation can no longer be conducted to the
advantage of stockholders
2. Deadlocks are resolved by the SEC, who upon written petition, may arbitrate and in the
exercise of Its powers (a) cancel or alter a provision in the articles, by-laws or agreements (b)
cancel, alter or enjoin any resolution or act of the corporation or its board, stockholder or
officers or other parties to the action (c) prohibiting or greeting any art of the corporation, its
board, officers, stockholders or parties party o the action (d) requiring the purchase at fair
market value of the shares a stockholder, either by the corporation earning or by any other
stockholder (e) appointing a provisional director who shall be impartial neither a stockholder
nor a creditor of the corporation, its subsidiaries or affiliates and whose further qualifications, if
any may be determined by the corporation (f) dissolving the corporation (g) granting such other
relief as the circumstances may warrant.
a. Note that the provisional director: (a) Is not a receiver and does the right to notice, vote
until removed by the SEC or all stockholders his compensation is determined by agreement
with the corporation, approved by the SEC, or fixed by agreement
b. The petition to resolve a deadlock is initiated by written petition
by any stockholder notwithstanding any contrary provision in the article by-laws or
agreements

WITHDRAWAL OR DISSOLUTION
1. Without prejudice to other remedies, a stockholder may for any reason compel the corporation
to purchase his shares at their fair market value, which shall not be less than par or issued value
when the corporation has sufficient assets to cover debts and liabilities, elusive of capital stock.
2. Provided also, that a stockholder may by written petition to the SEC compel dissolution when:
(a) the acts of director, officers or persons in control are: (1) Illegal; (2) fraudulent; (3)
dishonest; (4) oppressive or unfairly prejudicial to the corporation; (5) corporate assets are
being misapplied or wasted.

SPECIAL CORPORATIONS

EDUCATIONAL CORPORATIONS
1. Are stock or non-stock corporations organized to provide facilities for teaching or instruction
and are governed by special laws and by general provisions of the code.
2. Prior to its incorporation, a favorable recommendation must be obtained from the Department
of Education.
a. A Non-stock corporation is a corporation whose capital stock is not divided into shares. No
part of its income is distributable as dividends to its members, trustees or officers. Any
income obtained as an incident of its operations shall be used for the furtherance of the
purpose to which it has been organized.

MANAGEMENT OF A NON-STOCK EDUCATIONAL CORPORATION


1. The Board of Trustees shall not be less than 5 no more than 15 members but always in
multiples of 5, so classified so that 1/5 of its members shall have terms that expire every year
and those subsequently elected shall serve for a term of. five years
2. Any vacancies are only filled up for the unexpired portion but if organized as a stock
corporation, the provisions applicable to stock corporations shall govern
3. For the conduct of its business, a majority of the board shall constitute a quorum.

RELIGIOUS CORPORATIONS
1. Are corporations incorporated by one or more persons and are classified as either a corporation
sole or religious society and is to be governed by this chapter and generally by other provisions
governing non stock corporations.
a. They are corporations composed of entirely spiritual persons and which is organized for
the furtherance of a religion or for perpetrating the rights of the church or for the
administration of church or religious work or property
2. A Corporation sole is one formed by the archbishop, bishop, priest, minister, rabbi, Or other
presiding elder of a religious denomination sector church for the purpose of administering and
managing as trustee-the affairs property and temporalities or money revenues of such religious
denomination, sect, or church.
a. The Articles of Incorporation must provide (a) that he is the archbishop bishop, priest,
minister, rabbi or presiding elder (b) rules are not inconsistent with his becoming a
corporation sole nor is it prohibited ' (c) that he is charged with the administration of its
Page 35 of 43
temporalities and the management of its affairs within its territorial jurisdiction (d) the
manner vacancies are filled (e) place where the principal office is located.
b. A corporation sole is deemed incorporated once the Articles are submitted to the SEC
together with an affidavit of affirmation. Henceforth he becomes a corporation sole
c. Property may be bought or encumbered by a corporation sole. Authority may also be
obtained from the RTC if no internal rules govern the same.
d. Vacancies can, be filled by the, filing with the SEC of his commission or certificate of
election or proof of assumption.
e. The dissolution takes place by the filing with the SEC of a verified declaration of
dissolution setting forth: (a) name (b) reason for dissolution (c) authorization for
dissolution (d) name and address of the persons who will supervise dissolution or
winding up of its affairs. Upon SEC approval, it ceases to carry on its operations.
3. A Religious Society is the same as a corporation sole as far as purposes are concerned but
Incorporation Is brought about by 2/3 vote 5 or written consent of its members, who then file
its articles with the SEC, verified by affidavit of the presiding elder, secretary, clerk or member
stating that: (a) that the society is a religious organization of some religious denomination, sect
or church (b) that 2/3 of its member have given their written consent or vote to incorporate at a
J duly convened meeting of the body (c), that its incorporation is not forbidden by competent
authority or by is constitution, rules, regulations or discipline of the religious denomination,
sect or church to which it belongs (d) that its purpose is to manage or administer its affairs,
properties or estate (e) location of Its principal office ,which s ^ must be in the Philippines (f)
names, nationalities and residences of I § the trustees elected to serve the first year or such
other period as prescribed, which board must not be less than 5 or more than 15
4. The rules or the law on non stock corporations will govern them if applicable or in the absence
of an express provision of law.

DISSOLUTION
1. Dissolution is the extinguishment of its franchise to be a corporation at the termination of its
corporate existence.
a. A corporation formed under the code, may be dissolved voluntarily or involuntarily.
b. What is covered by de jure dissolution, or one that is adjudged and determined by
judicial sentence, or brought about by an act of or with the consent of the state, or
which results from the expiration of the period of corporate life, as opposed to a fact
dissolution that is brought about by cessation of business insolvenc
2. The steps in dissolution are: (a) termination of corporate existence as far as the right to go on
doing ordinary business (b) winding up of corporate affairs, payment of debt, distribution of
assets no creditors prejudiced
a. A corporation is really dissolved after liquidation. A corporation can still exercise
corporate powers while the liquidation phase is not yet terminated.

MANNER OF VOLUNTARY DISSOLUTION


1. With no creditors prejudiced.
a. It is Initiated by a majority vote of the Board and a resolution adopted by the
outstanding capital stock or members at a meeting to be held upon call of the Board
after publishing notice of the time, lace and object For 3 consecutive weeks In a
newspaper or general circulation and notice to a shareholder or member given by
registered mail or delivered personally 30 days prior to the meeting. A copy of the
Resolution is then certified by a majority of the Board, countersigned by the secretary
submitted to the SEC.
b. It will take effect upon Issuance by the SEC of a Certificate of Dissolution
2. With creditors prejudiced.
a. It is initiated by the filing of a petition with the SEC, signed by a majority of the
Board or other officers having management, verified by President, Secretary or one of
its directors or trustees.
b. The petition will set forth: (a) all claims and demands against it (b) that
dissolution was resolved upon the affirmative vote of 2/3 of outstanding capital stock or
members at a duly called meeting. If the SEC finds the petition to be in proper form, an
order will be issued fixing date on or before which objections may be made, which date
shall not be less than 30 days nor more than 60 days after the entry of the order.
Publication will also required once a week for 3 weeks and posted in 3 public places. 5
days after the date fixed, the SEC will try all issues, objections and if all material
allegations are true.
Page 36 of 43
c. The dissolution takes effect upon judgment directing disposition of assets and payment
of debts, and if required, appoint a receiver.261

3. Amendment to shorten the term


a. It is initiated by a majority vote of the Board and subject to the affirmative vote of 2/3
of the outstanding capital stock or members, followed by the submission to the SEC of
the amended articles duly certified by the secretary and a majority of the Board together
with an affidavit of publication.
b. The dissolution takes effect upon expiration of the shortened term without further
proceedings.

INVOLUNTARY DISSOLUTION
1. It is undertaken by the SEC upon the filing by a real party in
interest of a verified complaint, after proper notice or bearing on the
following grounds or instances contemplated by law
a. Expiration of the term provided in the Articles of Incorporation.
Note that this can voluntary if the corporation will, dissolve upon expiration.
b. Legislative enactment as the enactment of laws carry with it the power to amend or
repeal but is limited by the non-impairment clause of the Constitution.
c. Failure to formally organize and commence transaction of
business within 2 years from date of incorporation
d. Dissolution by judicial decree on the grounds of:
a. the corporation has offended against a provision of an act for its creation or
renewal. Note: de facto corporations
b. when It has forfeited its privileges and franchises by non-user
c. when it has committed an act or omitted an act which amounts to a surrender of
corporate rights, privileges or franchise
d. when It has misused a right privilege or franchise or used it In violation of the
law by order of the SEC in cases of a violation of the code deadlocks and
mismanagement in a close corporation, suspension, or revocation of the
Certificate of Registration/Incorporation when:
i. there is fraud In its procurement
ii. serious misrepresentation as to1 its activities
iii. refusal to comply or willful defiance of SEC orders
iv. continuous cooperation for 5 years
v. failure to file By-laws
vi. failure to file required reports

POWER OF A SHAREHOLDER TO BRING ABOUT DISSOLUTION


1. As a general rule, a shareholder cannot, sue to demand dissolution unless they are unable to
obtain redress and protection for their rights or violations warrant quo warranto proceedings."08

EFFECTS OF DISSOLUTION
1. The effects of dissolution are:
a. legal title to corporate property is vested in shareholders
b. corporation ceases as a body politic to continue the business for which it was organized
c. it cannot be revived
d. dissolution does not, by itself imply the diminution or extinguishment of rights
e. upon expiration of the winding up period of 3 years, the corporation ceases, it can no
longer sue or be sued

LIQUIDATION
This is the 2nd phase of dissolution.
1. It pertains to the winding up of the affairs of the corporation by reducing its assets in money,
settling with creditors, and apportioning the amount of profit and loss.
2. During liquidation, a corporation continues to exist as a body corporate for the purpose of
a. prosecuting and defending suits by or against it
b. enable it to settle and close its affairs
c. enable it to dispose of and convey property and distribute assets but it should not be for the
purpose of continuing the business

Page 37 of 43
MANNER OF LIQUIDATION

1. The corporation can undertake liquidation by (a) itself (b) a duly appointed receiver under
Section 119, (c) a trustee, where the property is conveyed to the trustee holding the same In
trust for the benefit of shareholders, members, creditors and other Interested parties.
2. Note that receivers or trustees can act as such beyond the statutory 3 year period of liquidation.
a. Pending suits upon expiration of the three year period may still he prosecuted by the
handling lawyer who will then be constituted as a trustee for such purpose

DISTRIBUTION OF ASSETS IN A STOCK CORPORATION:


1. The preference will apply only if assets are Insufficient to pay the claims.
2. It is as follows: (a) creditors (b) shareholders, members, directors', officers who are also
creditors (c) shareholders in proportion to shareholdings in the absence of a contrary provision.
a. If the shares are divided into classes, preferred shareholders before common
shareholders.
a. Shareholders may get more than the fair market value. If assets are just enough, they get
the par value or Issued value, or less if the assets are insufficient
3. If   creditors   or   shareholders   cannot   be   found,   the   assets   will   be   escheated   in   favor   of   the
municipality or city where the assets are found.
4. Note   that   assets   can   only   be   distributed   upon   lawful   dissolution   and   payments   of
debts/liabilities.
a. The exceptions are: (a) Decrease of capital stock under Section 18 (b) Redeemable
shares under Section 8 (c) Treasury shares under section 9 (d) Acquisition by the
corporation of its own shares under section 41 (e) Dividends under Section 43 (f)
Deadlocks under Section 104 (g) Withdrawal under Section 105.

DISTRIBUTION OF ASSETS IN A NON-STOCK CORPORATION


1. The assets of a non stock corporation are to be distributed in accordance with the following
rules:
a. Liabilities and obligations of the corporation shall be paid, satisfied or discharged, or
adequate provisions made therefore Assets held under a condition requiring return,
transfer, conveyance and which condition occurs by reason of dissolution shall be
returned, transferred and conveyed
b. Assets received and held by the corporation subject to limitations permitting use only
for charitable, religious, benevolent, educational or similar purposes, but not subject to
return, transfer or reconveyance by reason of dissolution shall be transferred to
corporations undertaking similar activities pursuant to the plan of dissolution
c. Other assets shall be distributed in accordance with the Articles of Incorporation or By-
Laws determining the distributive rights of its members or as provided
d. In any other case, assets shall be distributed to such persons, societies or organizations
whether organized for profit or not as provided in the plan of distribution.

2. The Plan of Distribution as outlined above must be consistent with Section 94


a. This is adopted pursuant to a majority vote of the Board of Trustees, then is submitted
for the affirmative vote of 2/3 of the members having voting rights at a regular or
special meeting, prior notice having been given.

FOREIGN CORPORATIONS
1. A foreign corporation is one formed or organized or existing under any laws other than the
Philippines whose laws allow Filipino citizens and corporations to do business in its own
country or state.
2. These corporations can transact business after it has obtained a license and a certificate of
authority from the appropriate government agency. Corporations already doing business in the
Philippines with licenses can continue operating but must comply with the provisions of the
Code within 2 years.

PROCEDURE IN THE APPLICATION FOR A LICENSE


1. Submit to the SEC the following documents:
a. Articles and Bylaws, certified In accordance with law and translated to an official
language if necessary
b. Application containing
i. date and term of incorporation
Page 38 of 43
ii. address of the principal office of the corporation in the country or state of
Incorporation
iii. name and address of a resident agent authorized to accept summons and process
in all legal j proceedings and pending establishment of the office, all notices
affecting the corporation
iv. place in the Philippines where it intends to operate
v. the purpose which it intends to pursue in transacting business which should be
stated in the authority, for which it is to be issued a license under Section 126
vi. name and address of present directors
vii. statement of authorized capital stock and the number of shares issued duly
itemized
viii. statement of outstanding capital stock and the aggregate number issued
ix. statement of amount actually paid in
x. such other information that may be necessary or appropriate to determine
whether corporation is entitled to a license

2. Attached to the application are:


a. Certificate under oath of the officials of the jurisdiction of Its Incorporation attesting
that its laws allow Filipino citizens and corporations to do business thereon
b. Statement under oath by the president or authorized officer showing to the satisfaction
of the SEC that it is solvent and in sound financial condition: setting forth its assets and
liabilities as of its date not exceeding 1 year prior to the filing of its application
c. Compliance with laws applicable to particular corporations and obtain the necessary
authority from the appropriate regulating agency
d. Power of Attorney designating a resident agent.

3. The Resident Agent can be an individual or a corporation who is a resident of and is transacting
business in the Philippines.
a. If it be an individual, he must be of good moral character and of sound financial
standing.
b. The power of attorney must contain a provision that the foreign corporation consents to
service of summons and legal notice and that service on the resident agent is admitted
and held as valid as if served on the duly authorized officer at its given address. It
should also be accompanied by an agreement executed by the proper authority of the
corporation that if there be cessation of business or if they shall be without a resident
agent, service may be made on the SEC as if service has been made upon it, the SEC in
turn must transmit the same by mall to the head office within 10 days, service is then
complete.

SERVICE OF SUMMONS ON A FOREIGN CORPORATION


1. The rules on service of summons on a foreign corporation are
a. On the resident agent. If made on another If it has a resident agent is inefficacious. It is
also exclusive.
b. On the SEC, if the corporation ceases to do business or there is no resident agent
c. Any of its officers or agents in the Philippines if the foreign corporation has neglected
or refused to appoint a resident agent.
d. If the foreign corporation Is not doing business, service may be made upon any agent,
as provided for by the 1997 Rules on Civil Procedure

WHEN IS THE LICENSE ISSUED


1. The license is Issued when the SEC Is satisfied that the foreign corporation has complied with
all requirements of the code and other laws and will be valid as long as it remains a corporation
under the country/state of Incorporation or the license is surrendered, revoked, suspended or
annulled
2. After the license has been issued:
a. The corporation must deposit within 60 days With the SEC for the benefit of present
and future creditors securities satisfactory' to the SEC consisting of bonds, evidences of
indebtedness of the government or any of its political subdivision, shares of registered
companies with the Board of Investments, shares in domestic corporations listed in the
stock exchange, insurance companies or banks, or any combination thereof with a
market value of PHP 100,000-00, except, If it is a bank, insurance company, foreign

Page 39 of 43
non-stock, foreign corporation with a representative office or regional or area HQ in the
Philippines.
b. The deposit is to increase by 20% of the licensee's income in excess of PHP
5,000,000.00 within six months from the end of a fiscal year and if the value decreases
by 10% but the SEC may release part of the securities if it increases by 10%. The SEC
may also allow substitution.
c. The deposit is subject to return after cessation of business and satisfactory showing that
it has no liabilities to Philippine residents or the government
3. The corporation shall transact business only for the purpose/s for which it was granted a
license.
a. In the conduct of its business it will now be governed by laws, regulations or rules
applicable to the same class of corporations in the Philippines except, those related to
its creation, formation, organization, dissolution or to fix the relations and
responsibilities of shareholders.
b.
TRANSACTION OF BUSINESS only for the purpose for which the corporation was issued a
License.

1. Upon the grant of a license, foreign corporations can now transact business. A license is no
longer absolutely necessary. It matters only when access to the course is the issue.
a. If it is without a license, it can still transact business but the difference is that if it is
transacting business with a license it is permitted to maintain or intervene in any action
suit or proceeding in any court or administrative agency with the Philippines, otherwise
it ' cannot maintain suit but may be proceeded against before Philippine courts on any
valid cause of action.
b. Therefore if the foreign corporations Is: (a) transacting business with a license, it has
access (b) not transacting business and has no license, it has access (c) transacting
business without a license, it has no access (d) transacting business without license but
subject qualifications/exceptions, it has access. What Is thus necessary is to determine
what constitutes transacting business
2. The Rule is that there is no general rule as each case must be determined in the light of the
obtaining circumstances or the below guidelines:
a. Is the foreign corporation continuing the business or enterprise for which it was
organized or whether it has retired from it and turned it over to another?
b. Are the acts of the foreign corporation indicative of a purpose on its part to engage in
some part of its regular business?
c. Transacting business is not determined by number of transactions or volume. A single
act is not merely incidental or casual but is of such a character as to distinctly indicate a
purpose to do other business in the state or the performance of act/s for which it was
created
d. The volume or amount of business is not entirely determinative of whether it is
transacting business or not.
e. Continuity of conduct and intention to continue or establish a continuous business such
as the appointment of an agent will constitute doing business.
3. Transacting business can thus be Inferred from: (a) continuous business acts or transactions (b)
isolated transaction or business act If an inference can be drawn or of such a character as
distinctly to indicate a purpose or the part of the foreign corporations to do business and to
make the state the base of its operations for the conduct of its ordinary business
4. Exceptions to the general rule are:
a. When the foreign corporation is suing to seek redress for an isolated business transaction,
which is a transaction or a series of transactions set apart from the common business of a
foreign enterprise in the sense that there is no Intention to engage in the progressive pursuit
of the object/purpose of the business organization. This is an exception as it Is not the
intention of the law to favor a domestic corporation who later on repudiate
obligations on account of the foreign corporation's lack of a license
i. The requisites for its application are (a) It must disclose that it is not doing
business in the Philippines and is suing under the Isolated a Business
Transaction Rule (b) It must prove its juridical personality as a foreign
corporation (c) It must name its duly authorized representatives or resident
agent.
b. The foreign corporation is suing to protect its name, reputation and goodwill. If the foreign
corporations are well known through products bearing its corporate and trade names, it has
Page 40 of 43
a legal right to maintain an action and it is also allowed by treaties to which the Philippines
is a party to.
c. The foreign corporation is suing to enforce a right not arising out of business transaction
with a party in the Philippines. Example: failure of a shipping corporation to deliver goods
shipped by the foreign corporation or an insurer-subrogee sues to recover from a Philippine
carrier for the amounts paid to an insured.
d. To hold it liable for acts and omissions. Conversely, if a foreign corporation is allowed to
sue without a license, it may also be sued in the Philippines for acts done to persons in the
Philippines. It means that it cannot avoid suit due to the lack of a license. A foreign
corporation shall not be allowed to impugn jurisdiction due to the lack 0f a license.
5. That notwithstanding the above-situations, the Supreme Court has ruled
a. That the contract that is entered into is not void ab ignition. Thus, when a foreign
corporation which is doing business without a license contracts with a third party, any
defect will subsequently be cured if it obtains a license to transact business
b. If a foreign corporation is doing business In the Philippines without a license, the move of
the defendant to dismiss the complaint that said foreign corporation filed might still be
neutralized by invoking the doctrine of estoppel.
c. The Supreme Court adopted the in pari delicto rule holding that no remedy could be
afforded to the parties because of their presumptive knowledge that the transaction was
tainted with illegality. The Court said that equity couldn't lend its aid to the enforcement of
an alleged right claimed by virtue of an agreement entered into in contravention of law.
d. The prohibition against doing business without a license is subject to penal sanctions under
Section 144 of the Code.

HOW IS A SURRENDER EFFECTED


1. Subject to existing laws and regulations, It may file a petition for withdrawal of the license but
no certificate of withdrawal can be granted if the following requirements are not met:
a. All claims that have accrued in the Philippines have be^n paid, compromised or settle
b. All taxes, imposts, assessments, penalties, If any, lawfully due the Philippine
Government, any of its agencies or political subdivisions have been paid
c. The petition for withdrawal has been published in a newspaper of general circulation in
the Philippines once a week for 3 consecutive weeks
2. The formal requirements are (a) letter petition of the resident agent (b) payment of filing fee (c)
resolution of the Board authorizing the closure of the Philippine office (d) latest balance sheet
(e) proof of publication (f) surrender of the license.
a. Courts can review the action of the SEC approving withdrawal as the law should not be
interpreted to mean that the foreign corporations is now permitted to escape the results
of a pending action before the courts with all the deposited securities if it gets SEC
approval.
b. Withdrawal subjects the corporation to the provisions of Section 122 as to liquidation as
it operates as quasi-dissolution.

HOW IS A REVOCATION SUSPENSION OR ANNULMENT EFFECTED

1. Without prejudice to the other grounds, a suspension or revocation of the license may arise
when the foreign corporation:
a. Fails to pay fees or file annual reports
b. Fails to appoint and maintain a resident agent
c. Fails, after change of a resident agent or his address, to submit to the SEC a statement
of such change
d. Fails to submit an authenticated copy of any amendment of its Articles/By- Laws or any
articles of merger or consolidation within the time prescribed
e. Misrepresentation of any material matter in the application, report, affidavit or other
document submitted pursuant to the required documents
f. Failure to pay any and all taxes, Imposts, assessments, penalties
g. Transacting business outside the purpose/s for which it was issued a license
h. Transacting business in the Philippines as an agent of or acting in behalf of a foreign
corporation or entity not duly licensed In the Philippines
i. Any other ground that would render it unfit to transact business.

Page 41 of 43
2. Upon a revocation, the SEC shall Issue a certificate of revocation furnishing the appropriate
government agency and it shall also mail to the corporation at its registered office in the
Philippines a notice of revocation with a corresponding certificate of revocation.
3. Effect on contracts entered into (a) If prior to revocation, they are valid (b) If after revocation,
they are Invalid and unenforceable as far as the foreign corporations.

AMENDMENTS OF THE ARTICLES OR BY-LAWS


1. Amendments are to be governed by the laws of the country of incorporation but it must within
60 days after the effectivity of the amendment file with the SEC and appropriate government
agency, a duly authenticated copy of the Articles or By-Laws clearly underscoring the changes,
duly certified by the authorized official of the state of incorporation J2iil the filing thereof shall
not of Itself enlarge or alter the purpose for which foreign corporations was granted a license
2. If so enlarged or amended it must obtain an amended licensed or if it changes its corporate
name by submitting an application with the SEC favorably enclosed by the appropriate
regulating agency.

MERGERS/CONSOLIDATIONS
1. If the foreign corporation merges or consolidates with a domestic corporation, it will be
allowed if such is permitted by Philippines laws and law§ of the state of incorporation,
provided it complies with the laws of the Philippines on merger or consolidation
2. If it merges or consolidates with another corporation in the country or state of incorporation, it
shall file a duly certified copy of the Articles of Merger or Consolidation with the SEC and
appropriate regulating agency within 60 days from its date of effectivity.
3. Provided, that if the absorbed Corporation Is the foreign corporation, the corporation must file
a petition to withdraw its license because it is in effect dissolved. Not a change of name as its
identity ceases to exist.

SEE:. European Resources CASE 435 SCRA 246 re doing business.

RULES TO OBSERVE WHEN SUING A FOREIGN CORPORATION OR VICE VERSA


1. The burden of proof to show that it is a foreign corporation transacting business or suing under
any of the exceptions is: on the foreign corporations by affirmatively pleading such fact
2. The defendant must specifically deny the allegation of a foreign corporation's capacity to sue
3. Proof of doing business is not necessary before jurisdiction is acquired
4. For purposes of suit, a foreign corporation is a resident of the Philippines on account of their
being found and operating In the Philippines

RESIDENCE is where the corporation prosecutes the corporate enterprise. See STATE INVESTMENT
v. CITIBANK, 203 SCRA 9

miscellaneous PROVISIONS

Sec. 137 - OCS - total number shares of stock issued to subscribers or S/H whether fully or partially
paid excluding Treasury shares Distinguished from - issued - all OCS Issued but not all Issued from
OCS (Treasury shares)
Subscribed - all subscribed are outstanding but not all OC are subscribed (paid)

Sec. 138 - N/S and Special Corporation may designate another have for the boards
Sec. 139 - authority for the SEC to collect fees
Sec. 140 - right of NEDA to congress regarding limits for S/H in corporations vested with public
Interest
Sec. 141 - annual reports together with financial statements for stock corporation
Sec. 142 - confidentiality of by the SEC except when the law requires disclosure or are necessary as
evidence Sec. 143 - right of the SEC to make rules
Sec. 144 - violations of the code fine of 1,000 no more than 10,000 30 days imprisonment no more
than 5 years or both If committed by a corporation it may be dissolved without prejudice to filing of a
proper action
Sec. 145 - amendments or repeal
Sec. 146 - repealing clause
Sec. 147 - separability
Sec. 148 - application to existing corporation - 2 years
Sec. 149 - Effectivity
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An agreement of co-shareholders to mutually grant a right of first refusal to each other, by itself, does
not constitute a violation of the provisions of the Constitution limiting land ownership to Filipinos or
Filipino corporations. If the foreign shareholdings exceeds 40%, It is not their ownership that is
adversely affected, but rather the capacity if the corporation to own land. The fact of land ownership by
the corporation cannot deprive the stockholders of the right of first refusal. No law disqualifies a
person from purchasing shares in a landholding corporation even if the latter will exceed the allowed
foreign entity. This right belongs to the stockholders, while the right to the land belongs to the
corporation. They are separate and distinct.

INTRACORPRATE DISPUTES:
1. Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associations between any or all of them ad the corporation,
partnership or association of which they are stockholders, members, or association of which
they are stockholders, members or association respectively between such corporation,
connected with the regulation of the internal affairs of the corporation.
2. Jurisdiction
a. jurisdiction to hear an Intracorporate dispute is determined by (a) the status of the
relationship between the parties, and (b) nature of the question that Is the subject of the
controversy.
b. If the controversy Involves the contractual rights and obligations of the
parties/stockholders and not the enforcement of rights and obligations under the
Corporation Code, Jurisdiction belongs to the regular courts.
c. A Special Commercial Court likewise has Jurisdiction over: (a) devices and schemes
employed by or any acts of the board of directors and/or the stockholder, partners,
members of association and organization, business associates, Its officers or partners
amounting to fraud, and misrepresentation which may be detrimental to the Interest of the
public (b) controversies In the election or appointment of directors, trustees, officers, or
managers of such corporation, partnership or association (c) petitions for suspension of
payments or corporate rehabilitation.

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