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Regulatory Framework for Business Transactions

Corporation Law Handout

I. Attributes of Corporation
a. It is an artificial being.
i. Doctrine of separate personality
ii. Piercing the veil of corporate fiction as an exception to doctrine of separate personality
1. Fraud cases
2. Alter ego cases
3. Defeat public convenience cases
4. Equity cases
iii. Limited liability rule
iv. Implications for being artificial being
1. Constitutional Rights
2. Right to Moral Damages
b. It is created: (1) by operation of law in case of private corporation or (2) by enactment of special law in case of
public corporation.
i. Concession theory
c. It enjoys the right of succession.
i. Maximum term of private corporation
ii. Period for renewal of term of private corporation
iii. Effect of failure to renew the term within the deadline for renewal
d. It has the powers, attributes, properties expressly authorized by law or incident to its existence.
i. Types of powers of corporation
1. Express powers
2. Implied or necessary powers
3. Incidental or inherent powers
ii. Status of ultra vires acts or contracts of corporation
1. Ultra vires acts which are illegal per se
2. Ultra vires for failure to comply with voting formality required by law
3. Ultra vires for being outside the primary and secondary purposes of the corporation
iii. Status of ultra vites acts or contracts of corporation
e. Advantages of forming a corporation
i. Continuity of existence
ii. Limited liability on the part of investors
iii. Strong juridical personality
iv. Legal capacity to act as a distinct unit
v. Centralized management
vi. Ease in transferability of shares
vii. Ease in raising funds
f. Disadvantages of forming a corporation
i. High cost of formation
ii. Little voice of stockholders in management
iii. Weakened credit rating because of limited liability feature
iv. Greater degree of governmental regulation
v. More taxes

II. Types of Corporation


a. As to formation and nature
i. Public corporation
1. Municipal corporation
2. Government owned and controlled corporation
ii. Private corporation
1. Purely private corporation
2. Quasi-public corporation a.k.a. public utility
iii. Corporation by prescription
b. As to purpose
i. Civil corporation
ii. Lay corporation
iii. Eleemosynary
iv. Religious corporation
1. Corporation sole
2. Corporation aggregate
c. As to being subject to direct attack by the state
i. De jure corporation
ii. De facto corporation
iii. Ostensible corporation or corporation by estoppels
d. As to nationality
i. Domestic corporation
ii. Foreign corporation

e. As to control or ownership
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i. Holding or parent corporation
ii. Subsidiary corporation
iii. Affiliates
iv. Associates
f. As to presence of stocks and distribution of dividends
i. Stock corporation
ii. Nonstock corporation

III. Types of shares in a corporation


a. As to rights
i. Common stocks or ordinary shares
ii. Preferred stocks or preference shares
iii. Redeemable preference shares
iv. Treasury shares
b. As to voting
i. Voting shares
ii. Nonvoting shares
1. Corporate acts when voting shares may still vote (I3 AM SAD)
a. Incurring, creating or increasing bonded indebtedness
b. Investments of corporate funds in another corporation or another business purpose
c. Increase or decrease of capital stock
d. Amendment of Articles of Incorporation
e. Merger or consolidation of corporations
f. Sale or disposition of all or substantially all of corporate property
g. Adoption and amendment of by-laws
h. Dissolution of the corporation
c. Presence of par value
i. Par value shares
1. Minimum par value
2. Minimum issue price of par value
3. Legal capital in case of par value shares
ii. No par value shares
1. Minimum stated value
2. Minimum issue price of no-par value shares
3. Legal capital in case of no-par value shares
iii. Corporations that cannot issue no-par value shares (BLTBPI)
1. Building and Loans Association
2. Trust Company
3. Bank
4. Public utility
5. Insurance company
d. Other types of shares
i. Founder’s shares
ii. Promotion shares
iii. Escrow shares
iv. Watered shares

IV. Formation of Private Stock Corporation


a. Conditions precedent for acquiring juridical personality
i. Submission of Articles of Incorporation to SEC
1. Definition and nature of Articles of Incorporation
2. Contents of Articles of Incorporation
3. Required vote for amendment of Articles of Incorporation
ii. Capital stock requirement prior to incorporation
1. Minimum authorized capital stock
2. Minimum subscribed capital
3. Minimum paid-up capital
iii. Nationality requirement in certain industry
b. Juridical personality of corporation
i. Moment of start of juridical personality of corporation
ii. Effect of failure to formally organize within 2 years from the date of incorporation
iii. Effect of continuous inoperation for a period of at least 5 years after its formal organization

V. Governing body of a corporation


a. Governing board
i. Stock corporation
ii. Nonstock corporation
b. Number of members of the board
i. Stock corporation
ii. Ordinary nonstock corporation
iii. Educational nonstock corporation
iv. Corporation sole
c. Term of office of members of the board
i. Stock corporation
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ii. Ordinary nonstock corporation
iii. Educational nonstock corporation
d. Qualifications of members of the board
e. Election of the members of the board
i. Quorum for validity of meeting for election
ii. Electorate
iii. Required vote to elect
iv. Manner of voting
1. Stock corporation
2. Nonstock corporation
f. Filling up of vacancy in the board
i. By stockholders or members
ii. By remaining board of directors with quorum
g. Compensation or salary of board members
i. Required vote for granting compensation
ii. Maximum limit for salary
iii. Reasonable per diems
h. Three-fold duties of directors
i. Duty of loyalty
1. Contract with self-dealing director
a. Status
b. Requisites to be perfectly valid
c. Ratification in case of voidability
2. Contract between corporation with interlocking director
a. Status
b. Requisites to be perfectly valid
c. Ratification in case of voidability
3. Ratification of disloyalty of director
ii. Duty of obedience
iii. Duty of diligence
i. Creation of Executive Committee
i. Requirement for creation
ii. Membership of executive committee
iii. Powers that cannot be delegated to executive committee
1. Filling up of vacancy in the board
2. Adoption or amendment of by-laws
3. Approval of corporate acts requiring approval or ratification by stockholders
4. Distribution or declaration of cash dividends
j. Election of corporate officers
i. Required vote for election of corporate officers
ii. Qualification of corporate officers
1. President
2. Secretary
3. Treasurer
k. Required vote for approval of corporate action involving management or administration
i. Business judgment rule

VI. Rights of a stockholder


a. Doctrine of equality of shares
b. Right to participation in management through voting
i. Entitlement to vote
ii. How to vote
1. Personal
2. Through an agent by virtue a proxy agreement
a. Requirements of proxy for validity
b. Term of proxy
3. Through a trustee in a voting trust agreement
a. Requirement of proxy for validity
b. Term of voting trust
4. Differences between proxy and voting trust
5. Voting by co-owners
a. Unanimously
b. Exception to unanimous voting requirement of a co-owner
c. Propriety rights
i. Right to dividends
1. Entitlement to dividends
2. Requirement for declaration of dividends
3. Extent of right to dividends
a. Of full-fledged stockholder
b. Of subscribers which are not yet delinquent
c. Of subscribers which are already delinquent
ii. Right to inspect corporate books
1. Requirements for exercise of the right to inspect
2. Justified grounds for denial of this right
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3. Remedies if the denial of the right to inspect by the corporation is unjustified

iii. Preemptive right


1. Nature of preemptive right
2. Extent of preemptive right
3. Issuance of shares where preemptive right is not available
iv. Right of first refusal
1. Nature of right of first refusal
2. Requirement to be valid
v. Right to Appraisal
1. Nature of appraisal right
2. Grounds for exercise of appraisal right (AIM-CSC)
a. Amendment to the articles that has the effect of changing or restricting the rights of
shareholder, or of authorizing preference over those of outstanding shares
b. Investment of corporate funds in another corporation or in a purpose other than the
primary purpose.
c. Merger or consolidations
d. Changing corporate term whether shortening or extending
e. Sale, encumbrance or other disposition of all or substantially all of the corporate property
or assets.
f. In a Close corporation, a stockholder may for any reason, compel the corporation to
purchase his shares when the corporation has sufficient assets in its books to cover its
debts and liabilities exclusive of capital stock.
d. Remedial Rights
i. Individual suit
ii. Representative suit
iii. Derivative suit
e. Obligations of a stockholder
i. Limited liability rule
ii. Liability for watered stock

VII. Capital structure


a. Subscription agreement
i. Nature of contract of subscription
ii. Types of subscription contract
1. Pre-incorporation subscription
a. Period of irrevocability
b. Period for cancellation
2. Post-incorporation subscription
b. Consideration for issuance of shares of stocks
i. Valid consideration
1. Cash
2. Noncash asset
3. Preexisting obligation of the corporation
4. Services rendered
5. Conversion of other class of shares of stocks
6. Unrestricted retained earnings
ii. Invalid consideration
1. Promissory note
2. Future services
c. Shares of stocks
i. Nature of shares of stocks as an asset
ii. Requirements for issuance of shares
iii. Watered stocks
iv. Trust fund doctrine
d. Payment of balance of subscription
i. Accrual of interest for subscription
1. Subscription contract with stated maturity date
2. Subscription contract without stated maturity date
ii. Delinquency of shares
1. Moment of delinquency of shares
a. Subscription contract with stated maturity date
b. Subscription contract without stated maturity date
2. Effect to rights of subscribers for delinquency shares
3. Remedies of corporation for delinquent shares
a. Civil action
b. Sale of delinquent shares
i. To highest bidder
ii. Acquisition by corporation and placing them to treasury

e. Certificate of stock
i. Nature of the certificate of stock as instrument
ii. Requirements for issuance of certificate of stock
iii. Remedies of subscriber for unjustified refusal of issuance of certificate of stock
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iv. Requirements for valid transfer of shares of stocks
1. Under Civil Code
2. Under Corporation Code
v. Stock and transfer books

VIII. Dissolution and Liquidation of Corporation


a. Dissolution
i. Definition of corporate dissolution
ii. Modes of dissolution
1. Voluntary modes
a. Where creditors are not affected
b. Where creditors are affected
c. By shortening of corporate term
d. By merger or consolidation
2. Involuntary modes
a. By expiration of corporate term
b. Failure to formally organize within 2 years from incorporation
c. Legislative dissolution
d. Dissolution by SEC on grounds under existing laws
3. Ground for automatic dissolution or ipso facto dissolution by operation of law
a. By expiration of term
b. Failure to formally organize within 2 years from incorporation
c. Approval of shortened corporate term
d. Approval of certificate of merger or consolidation
4. Grounds which will not automatically dissolve a corporation
i. Being De facto
ii. Violation of laws
iii. Failure to submit annual report or financial statements
iv. Continuous inoperation for 5 years
v. Failure to submit by-laws within 30 days from incorporation

IX. Close Corporation


a. Characteristics of close corporation
b. Requirements to be classified as close corporation
c. Disqualified corporations to be classified as close corporation (I COME BSP)
i. Insurance companies
ii. Corporations vested with public interest
iii. Oil companies
iv. Mining companies
v. Educational institutions
vi. Banks
vii. Stock exchange
viii. Public utilities
d. Validity of restrictions on transfer of shares
i. Right of first refusal
ii. Right of first option
e. Preemptive rights of stockholders
f. Appraisal rights of stockholders
g. Deadlock in a close corporation

X. Nonstock corporation
a. Characteristics of nonstock corporation
b. Transferability of membership in a nonstock corporation
c. Revocation of membership in a nonstock corporation
d. Conversion of nonstock corporation to stock corporation
e. Converstion of stock corporation to nonstock corporation

XI. Foreign corporation


a. Test to determine nationality of corporation
i. Domestic corporation
ii. Foreign corporation
b. Requirements to do business in the Philippine for a foreign corporation
i. License to do business
ii. Resident agent of a corporation
c. Personality to sue and suability of a corporation
i. Domestic corporation
ii. Foreign corporation not doing business in the Philippines
iii. Foreign corporation doing business in the Philippines with license
iv. Foreign corporation doing business in the Philippines without license
XII. Merger and consolidation
a. Difference between merger and consolidation
b. Required vote for approval of merger and consolidation
c. Effectivity of merger and consolidation
d. Effects of merger and consolidation
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CORPORATE ACTS WHICH REQURE AT LEAST MAJORITY VOTE OF THE BOD ALONE
(EVP)
Corporate Act Salient Points
Majority vote of all the members of the
Election of officers (Sec. 25, CC)
BOD
Vacancies in BOD if NOT due to removal,  If the directors do not constitute a
Majority vote of remaining directors if
expiration of the term or increase in quorum, stockholders have the right
quorum still exists
number of directors (Sec. 29, CC) to elect
 Provided that there is unrestricted
Power to acquire own shares (Sec. 41,
Majority vote retained earnings
CC)
 Only for legislative purposes

CORPORATE ACTS WHICH REQUIRE AT LEAST MAJORITY VOTE OF THE BOD AND VOTE OF THE
STOCKHOLDERS REPRESENTING AT LEAST MAJORITY OF THE OCS (FAM)
Corporate Act Salient Points
Fixing the issued Price of No-
Majority of quorum of BOD, if Majority of OCS, if BOD is not
par value shares (Sec. 62, last
authorized by AOI or by-laws authorized by the AOI
par., CC)
Amendment may be made by
Amendment or repeal of By- the Board only after due
laws or Adoption of new By- Majority vote Majority of OCS delegation by the
laws (Sec. 48, CC) stockholders.
Non-voting shares can vote
Majority of OCS/members of
Majority vote of BOD of both
Management Contract (Sec. both managing and managed
managing and managed
44, CC) corporation and in some
corporation
cases 2/3 of OCS/members

CORPORATE ACTS WHICH REQUIRE VOTE OF THE STOCKHOLDERS REPRESENTING AT LEAST MAJORITY OF THE OCS
ALONE (FFAD)
Corporate Act Salient Points
 Reasonable per diems may be given
Fixing of compensation of  By-laws may provide for compensation
Majority of OCS
directors (Sec. 30, CC)  Limit: not more than 10% of the net income before income
tax
Adoption of By-laws
Majority of OCS/members  Non-voting shares can vote
(Sec. 46, CC)
 Candidates with the highest number of votes get elected
Election of Directors/trustees  Cumulative voting: No. shares x No. of directors to be
Majority of OCS/members
(Sec. 24, CC) elected
 Non-voting shares cannot vote
Fixing the issued Price of No-  Stockholders/Members shall vote if the BOD/BOT are not
Par value shares Majority of OCS authorized by the Articles of Incorporation and the by-laws
(Sec. 62, last par., CC) to fix the price

CORPORATE ACTS WHICH REQUIRE VOTE OF THE STOCKHOLDERS REPRESENTING AT LEAST 2/3
OF THE OCS ALONE
(PARDS)
Corporate Act Salient Points
 Only if the AOI or amendment thereto denies pre-
emptive right
Denial of pre-emptive right (Sec. 39, CC) 2/3 of OCS  Denial extends to shares issued in good faith in
exchange for property needed for corporate purposes
or in payment of previously contracted debts
Delegation of the power to Amend,
 Delegation can be revoked by majority OCS
Repeal or Adopt New By-laws to BOD 2/3 of OCS
 Non-voting shares cannot vote
(Sec. 48, CC)
 Notice and statement of purpose are necessary
 Must be made in a meeting called by the secretary on
President’s order or on written demand of majority of
Removal of Directors/Trustees
2/3 of OCS/members OCS
(Sec. 28, CC)
 Non-voting shares cannot vote
 Removal without cause cannot be used to deprive
minority stockholders of their right of representation
Ratification of act of disloyal director
2/3 of OCS
(Sec. 34, CC)
 The contract must be fair and reasonable under the
circumstances
 Full disclosure of adverse interest of directors/trustees
Ratification of a contract of self-dealing
2/3 of OCS/members involved is necessary
directors (Sec. 32, CC)
 Presence of director/trustee must be necessary to
constitute quorum OR the vote of director/trustee must
be necessary for the approval of the contract
CORPORATE ACTS WHICH REQUIRE AT LEAST MAJORITY VOTE OF THE BOD AND VOTE OF
STOCKHOLDERS REPRESENTING AT LEAST 2/3 OF THE OCS (ADAM-LI³ES)

Corporate Act Salient Points


Amendment of Articles of Majority vote Vote or written assent of 2/3 of  Non-voting shares can vote
Incorporation OCS/members  Appraisal right is available in
certain cases

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 Effective upon approval by
SEC, or date of filing if not
acted upon within six months
 Must be for a legitimate
purpose
Dissolution of Corporation  See sections 117-112
Majority vote 2/3 of OCS/members
(Secs. 118 and 119, CC)  Non-voting shares can vote
Adoption of plan of distribution
2/3 of members having voting
of assets of non-stock Majority vote of trustees
rights
corporation (Sec. 95 [2], CC)
 Non-voting shares can vote
 Appraisal right is available,
except when the plan is
abandoned
Merger or Consolidation Majority of BOD of constituent 2/3 of OCS/members of
(Sec. 77, CC) corporations constituent corporations  Any amendment to the plan
may be made provided it is
approved by majority vote of
the board and 2/3 of
OCS/members
 Majority of the board is
sufficient if the transaction
does not cover all or
substantially all of the assets
Sale, Lease, Exchange, of the corporation
Mortgage, Pledge, Dispose of
 Non-voting shares can vote
all or substantially all of Majority vote 2/3 of OCS/members
 Appraisal right is available
corporate assets
(Sec. 40, CC)  Notice is required
 If sale is abandoned,
director’s action is sufficient,
no need for ratification by
stockholders
 Meeting is required
 Non-voting shares can vote
 No appraisal right
 Notice requirement
 SEC prior approval Prior
approval of the SEC is
necessary for it is only from
Increase or decrease of and after the approval by the
Majority vote 2/3 of OCS/members SEC and the issuance by the
capital stock (Sec. 38, CC)
SEC of a certificate of filing
that the capital stock shall
stand increased or decreased
 Treasurer’s sworn statement
is necessary
 No decrease of capital stock
if it will prejudice right of
creditors
 Meeting is required
 Non-voting shares can vote
Incur, Create, Increase
 No appraisal right
Bonded Indebtedness Majority vote 2/3 of OCS/members
(Sec. 38, CC)  Notice is required
 Registration of bonds with
the SEC is necessary
 Non-voting shares can vote
 Appraisal right available
Investment of Corporate  Notice is required
Funds in another Corporation  Investment in the secondary
or Business or for any other Majority vote 2/3 of OCS/members purpose is covered
purpose other than primary  Stockholder’s ratification is
purpose (Sec. 42, CC) not necessary if the
investment is incidental to
primary purpose
 Non-voting shares can vote
 Appraisal right is available
Extension or shortening of
Majority vote 2/3 of OCS/members  Notice requirement
corporate term (Sec. 37, CC)
 Effected through an
amendment of the AOI
Issuance of Stock Dividends There must be unrestricted
Majority of the quorum 2/3 of OCS/members
(Sec. 43, CC) retained earnings

Matters in Articles of Incorporation or/and By-laws


Matters Usually Found in the By- Other Matters that May be Matters that may be found Matters that cannot be
Laws under Section 47 Included in the By-laws in Either Articles of provided for in the By-Laws
Incorporation or By-Laws and must be provided in the
articles of incorporation

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1. Time, place and manger of 1. Designation of time when 1. Providing for cumulative 1. Classification of shares of
calling and conducting regular and voting rights may be exercised voting in nonstock stock and preferences granted
special meetings of directors, by stockholders of record. (24) corporations. (24) to preferred shares. (6)
trustees, places for meetings of
directors or trustees may be
outside the Philippines if it so
provided in the by-laws.
2. Time and manner of calling and 2. Providing for additional 2. Providing for higher quorum 2. Provisions on founder’s
conducting regular and special officers for the corporation. requirement for a valid board shares. (7)
meetings of the stockholders or (25) meeting. (25)
members.
3. Required quorum in meetings of 3. Provisions for the 3. Limiting, broadening or 3. Providing for redeemable
stockholders and the manner of compensation of directors. denial of the right to vote, shares. (8)
voting. (30) including voting by proxy for
members in nonstock
corporations. (29)
4. Form for proxies of stockholders 4. Creation of an executive 4. Transferability of 4. Provisions on the purposes
and members and manner of committee. (35) membership in a nonstock of the corporation. (14, 15,
voting. corporation. (90) 36(11) and 45)
5. Qualifications, duties and 5. Date of the annual meeting 5. Termination of membership 5. Providing for the corporate
compensation of directors, or provisions of special in nonstock corporations. (91) term of existence. (13 and 14)
trustees, officers and employees. meetings of the stockholders
or members. (50 and 53)
6. Time for holding annual election 6. Quorum on meeting of 6. Manner of election and 6. Capitalization of stock
of directors or trustees, mode and stockholders or members. term of office of trustees and corporations. (14 and 18)
manner of giving notice thereto. (52) officers in nonstock
corporation. (92)
7. Manner of election or 7. Providing for the presiding 7, Manner of distribution of 7. Corporate name (39)
appointment and the term of office officer at meetings of the assets in nonstock
of all officers except directors and directors or trustees as well as corporations upon dissolution.
trustee. of stockholders or members. (94)
(54)
8. Penalties for violation of by-laws. 8. Procedure for issuance of 8. Providing for staggered 8. Denial of pre-emptive rights
certificate of shares of stock. board in educational (48)
(63) institutions. (108)
9. Manner of issuing stock 9. Providing for interest on
certificates. unpaid subscriptions. (66)
10. Such other matters necessary 10. Entries to be made in the
for the proper means of corporate stock and transfer book. (74)
business and affairs.
11. Providing for meetings of
the members in a nonstock
corporation outside of the
principal office of the
corporation. (93)
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