1: A corporation is created by a special law which is later declared unconstitutional.

What is the nature of the

corporation?

A: a corporation created by a law which is later declared unconstitutional does not exist even as a de facto
corporation as if it was not created at all. However, it will exist with respect to credits due on contracts entered by it
before the law was declared unconstitutional. (Jurisprudence)

2: Which is the correct quorum requirement?

A: the majority requirement provided for in the articles of incorporation or by-laws which may be greater than
but cannot be lower than the default requirement of simple majority (50% + 1) – the number of corporate officers
in their board meetings, the number of stockholders representing the majority of the outstanding capital stock in
stockholders’ meetings, the number of the members in case of non-stock corporations.

Note: changing of quorum and voting requirements requires amendment of by-laws and its certification by the SEC
that the same are not inconsistent with the Corporation Code.

No quorum or voting requirement in election of board of directors

3. What is the nature of the contract between the corporation and its President?

A: it is voidable at the option of the corporation. Contracts between the corporation and its directors are voidable
at the option of the corporation. However, it is valid and not voidable if in the board meeting, his (self-dealing
director) presence is not necessary to constitute a quorum (the actual quorum is more than the minimum
required) and his vote thereon is neither necessary for the approval of the contract; or, if his presence and vote
are necessary, it is nonetheless ratified in an ordinary or special meeting by the stockholders representing two-
thirds or 66.67% of the outstanding capital stock, or two-thirds or 66.67% of the members, in non-stock
corporations. Further conditions require full disclosure of the adverse interest of the directors or trustees
involved and that the contract is fair and reasonable under the circumstances.

4: Which vacancy in the Board may be filled by the stockholders?

A: stockholders may fill up vacancies in the board of directors when: (a) the vacancy occurred due to removal
(ouster); (b) the vacancy occurred due to expiration of term; (c) the vacancy results to a failure to constitute
quorum (as a hold-over officer only); (d) the vacancy occurred due to the resignation of a hold-over director or
due to the expiration of the hold-over term (unexpired term of his predecessor in office); (e) the vacancy occurred
due to an increase in the number of directors (per amendment of Articles of Incorporation)

5: Which act(s) of the corporation may be ratified by the stockholders?

A: the following acts may be ratified by stockholders: (a) contracts between the corporation and their directors or
trustees (self-dealing directors); (b) forbidden profits or business opportunities acquired by a director for
himself; (c) amendments in the Articles of Incorporation involving changes in the corporate term; (d) investment
of corporate funds to other corporations or for purposes other than the primary purpose; (e) amendments to
the plan of merger or consolidation; (f) ultra-vires acts which are not illegal per se (Jurisprudence).

Note: ratification and approval of stockholders are different. Ratification refers to recognition of corporate acts which
only requires approval of the board of directors or acts which are considered ultra-vires. There are more matters
requiring stockholders’ approval than stockholders’ ratification. However, their nature (that voting is required) is the
same as both requires expressive method since there can be no implied ratification.

6: Which among these may a non-voting share vote?

A: holders of non-voting shares shall be entitled to vote on the following matters: (a) amendment on the articles of
incorporation; (b) adoption and amendment of by-laws; (c) disposition of all or substantially all of the corporate
properties; (c) creation of or increasing bonded indebtedness; (d) increase or decrease of capital stock; (e) merger or
consolidation; (f) investment of corporate funds in other corporations or for purposes other than the primary purpose;
(g) dissolution of the corporation; (h) grant of compensation other than reasonable per diems to directors.

Note: certification of increase by the SEC is only required in increasing capital stock; there is no need for an
amendment in the Articles of Incorporation.

Non-voting shares has a right to vote in every matter involving disposition of corporate properties or assets.
Examples of non-voting shares are redeemable shares and preferred shares.

7: ABCDE Corporation. Director A was removed. Director B died. Who may fill the vacancy?

A: Director A may be filled by stockholders since the vacancy was due to removal. On the other hand, Director B may
be filled up by one of the remaining directors if they still constitute a quorum, otherwise, by the stockholders. In any
case the filler shall act as a hold-over officer which shall serve only for the unexpired portion of the term of the
predecessor. (See question number 4)

8: Requirement for board of director.

A: the following are required of every director: (a) ownership of a share in the capital stock recorded in the books of
the corporation (membership in case of a non-stock corporation); (b) must be of legal age and majority (if not, can
be represented by parent or guardian); (c) residency in the Philippines for the majority members to constitute
quorum.

9: Value of no-par value shares?

A: no-par value shares shall be at least PhP 5.00 per share.

Note: no-par value shares shall not be liable neither to the corporation nor its creditors but the consideration received
for it (and its subsequent profit) shall be treated by the corporation as part of the capital and shall not be available for
distribution as dividends.

10: A is president of X Corporation. He has a catering business which has contracted to cater food in meetings of X
Corporation. A was not present in the meeting approving the contract and it is fair and reasonable. What is the
nature of the contract?

A: the contract is valid because it was approved accordingly without the presence and vote of the self-dealing
director. (See question number 3)
 The doctrine of corporation by estoppel shall only exist (shall be conclusively presumed to have
corporate personality) the moment an ostensible corporation (persons who assume to act as a
corporation without authority to do so) enters into a contract with a third party; and, its corporators shall
be liable as general partners (jointly and severally) for all debts, liabilities and damages incurred as a
result thereof.

 Under the Corporate Entity Theory, the corporation has a personality separate and distinct from the
stockholders and its corporators; thus, stockholders and its corporators have limited liability unless the
corporate personality is used to (a) perpetrate and protect fraud, (b) to defeat public convenience, (c) to
justify a wrong, or (d) to defend a crime as proven with clear and convincing evidence (amounting to
more than preponderance of evidence beyond speculation and presumption) that (1) there is an absolute
control over the property, policy and business practices of the corporation, (2) the control has been used
to commit a violation on the adverse party’s legal right, (3) the act at least proximately caused an injury
or unjust loss to the adverse party.

 No share may be deprived of voting rights except preferred or redeemable shares; there must be a
class of share which has a complete voting rights;

Preferred shares must be issued as a par-value share and it has preference in distribution of assets in
liquidation and distribution of dividends and other preferences stated in its classification in the Articles of
Incorporation which are not violative of the Corporation Code

Redeemable shares has a fixed period and may be issued and be re-acquired later by the corporation
upon the expiration of such period regardless of the existence of unrestricted retained earnings.

No-par value shares are deemed fully paid and non-assessable and its holder shall not be liable
neither to the corporation nor its creditors (directors shall only be liable to creditors) but the
consideration received for it (and its subsequent profit) shall be treated by the corporation as part of the
capital and shall not be available for distribution as dividends.

Founders’ shares has certain rights and privileges not enjoyed by other classification of shares including
exclusive right to vote and be voted upon in the election of directors limited for a maximum period of 5 years
commencing from the date of to SEC approval. Only founders’ shares may be effectively limited or
deprived of its conferred rights and privileges, specifically said exclusive right to vote and be voted
upon.

Treasury shares are shares issued and fully paid for but subsequently reacquired and may be re-issued
further. (not the same as redeemable share because this has no period)

(A no-par value shares are not the same as non-voting shares. See question 6 and 9 for non-voting shares
voting rights)

 There is no specific quorum and voting requirement in the election of Board of Directors. The
candidates receiving the highest number of votes shall be declared elected. The voters may also
vote by proxy but no delinquent stock shall be voted. The method of election may be in any form but it will
be by ballot if requested by any stockholder or member. The manner shall be cumulative in a stock
corporation while straight voting in a non-stock corporation, unless cumulative voting is allowed by
the AoI or By-Laws.
  Distribution of dividend does not equate to a decrease in capital. What is distributed are surplus
profits, an income from derived from capitalization.

6. Paid stock should be 25% of their respective subscribed share.

FALSE. 25% of TOTAL.

7. Majority of the BOD must be citizens.

FALSE. Majority must be residents.

8. No minimum authorized capital stock required.

FALSE. By analogy, P5,000 (Section 12 & 13)

9. De Facto corporation has the same rights, liabilities and obligations as the de jure

corporation.

TRUE.

10. Corporation may exist without certificate of registration.

TRUE.

III. OBJECTIVES.

PART 1. ENUMERATION.

A. 2 exception to the rule that for there to be a valid act there must be majority at

which there is a quorum.

1. Election in vacancy

2. Unless otherwise provided in the by-laws.

B. 2 exceptions that corporation may not acquire shares without Unrestricted

Retained Earnings.

1. Redeemable Shares
2. Deadlocks and withdrawal of stockholder in non-stock corporation.

C. 2 exceptions to the rule that persons dealing with the corporation admits its legal

existence.

1. There is fraud.

2. Third party is the one claiming.

D. 4 instances where personal liability of a director or officer may validly attach.

1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, gross

negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the

corporation, its stockholders or other persons;

2. He consents to the issuance of watered stocks or who, having knowledge thereof, does

not forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made, by specific provision of law, to personally answer for his corporate action.

PART 2. EXPLANATION.

1. Transferability of shares is an advantage as well as a disadvantage.

Advantage: Easy return of investment on stockholders through sale of such.

Disadvantage: Easy uniting of incompatible interests.

2. “As such director” in compensation of directors.

10% of the net income ceiling as compensation of directors pertain only to compensation as

a director. Compensation may exceed 10% of net income if director is performing functions

other than a director.

3. Doctrine of Secondary Meaning.

A word or phrase originally incapable of exclusive appropriation with reference to an article

on the market, because geographically or otherwise descriptive, might nevertheless have

been used so long and so exclusively by one producer with reference to his article that, in

that trade and to that branch of the purchasing public, the word or phrase has come to

mean that the article was his product. (Lyceum of the Philippines, Inc. vs.CA)

4. Pre-emptive right is absolute in a closed corporation.

It is absolute because there is no public offering. Stockholders should not be more than 20

or it ceases to be a close corporation.

PART IV. CASE ANALYSIS

1. How may a minority be represented in a board of director.

Cumulative voting. [Illustrate in numbers. Compute]

2. 10 Million authorized capital stock. 5 Million paid-up. 10 Million profit. May they be

compelled to declare dividends?

Yes. Stock corporations are prohibited from retaining surplus profits in excess of 100% of

their paid-in capital stock.

(Section 43)

2. What justifications if any may be given to refuse declaration of dividends.

a. When justified by definite corporate expansion projects or programs approved by the

board of directors; or

b. When the corporation is prohibited under any loan agreement with any financial institution

or creditor, whether local or foreign, from declaring dividends without its/his consent, and

such consent has not yet been secured; or

c. When it can be clearly shown that such retention is necessary under special

circumstances obtaining in the corporation, such as when there is need for special reserve

for probable contingencies.

(Section 43)

4. May the BOD declare the 10 Million as stock dividends?

No. Overissuance. No stocks may be issued more than the authorized capital stock.

5. 10 Million cash dividends declared on September 10. A sold his shares to Z on

September 15. On September 30, cash dividend is given. Who has the right to

dividend?

A. Owner at the time of declaration has the right unless there is agreement to the contrary.

6. May F, a minority director, be removed?

Yes. Provided there is just cause.

(Section 28)

7. X Corp is a manufacturing business. Its plant, warehouse and office is located in a

single compound. Is stockholders approval required?

Yes. Not capable of continuing business.

8. X is a realty business has a lone property of 10 hectares of land in BGC and sold it

Y Corporation. Is stockholders approval required?

No. Selling land is usual and regular course of a realty business.

(Section 40)