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CHAPTER I - INTRODUCTION
  JOINT VENTURE PARTNERSHIP
No personality Has a personality
KINDS OF BUSINESS ORGANIZATION distinct and separate Separate and
from the persons Distinct
A. SOLE PROPRIETORSHIP composing it
Single or Particular Usually has a
- One conducted for profit by a lone or undertaking general business of
single individual who owns all the particular kind
assets, personally owes and answers all Corporations may Generally,
the liabilities or suffers all the losses and enter into joint Corporations can’t
enjoys all the profits to the exclusion of ventures enter into
others. Partnership.
- It eliminates the bureaucratic process
common corporations. The proprietor
make his own decision and can act GENERALLY, Corporations can’t enter into
without any delay. Partnership.
- Unlimited personal liability for all debts - Reason: identity of the corpo is lost or
and obligation, can be held liable merged with that of another and
beyond his capital, even personal discretion of the officials is placed in
properties not used in business can be other hands not permitted by law of its
attached or foreclosed. creation.
EXCEPTION allowed if the ff. are met:
B. PARTNERSHIP 1. Articles of incorporation expressly
authorized the corporation to enter
- Two or more persons bind themselves into Partnership.
to contribute money, property, or 2. The agreement of the Articles of
industry to a common fund with the Partnership must provide that all the
intention of dividing the profits among partners will manage the
themselves. (Article 1767 NCC) partnership.
- It may be brought about by express or 3. The article of Partnership must
implied contract. stipulate that all the partners are
- There is personal relationship and shall be jointly and severally
(Fiduciary) among partners. For this liable for all obligations of the
reason, Death and Incapacity of one of partnership.
the partners would result in its
dissolution. D. CORPORATION

C. JOINT VENTURE - B.P. 68


- Corporation is an artificial being, created
- Partakes the nature of a Partnership by operation of law, having the right of
Contract and it is created for the succession and the powers, attributes
purpose of prosecuting a particular and properties expressly authorized by
business transaction. law or incident to its existence. (Section
- It does not entail a continuing 2)
relationship among parties.
- However, this is not entirely true HISTORY
because partnership can be particular or England and in Rome > Spanish Law “sociedad
universal. In effect, a joint venture is a anonimas > Code of Commerce of Spain
form of partnership and should be extended in Philippines (1988) > American
governed by the law of Partnership. Regime- Corporation Law (April, 1906) > B.P. 68
Corporation Code (approved May 1, 1980).

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CHAPTER II – DEFINITION AND DISADVANATGES OF THE CORPORATE


ATTRIBUTES FORM OF BUSINESS

1. For a Valid Corporate Act, FORMAL


Corporation - Corporation is an artificial being, PROCEEDINGS, such as board
created by operation of law, having the right of meetings are required.
succession and the powers, attributes and 2. Business transaction is limited to the
properties expressly authorized by law or State of Incorporation unless it has
incident to its existence. (Section 2) obtained a license or authority in the
foreign State.
Four ATTRIBUTES of a Corporation 3. Shareholder’s limited liability tends to
limit the credit available to the
1. ARTIFICIAL BEING, has a personality corporation as a separate legal entity.
separate and distinct from the persons 4. Shares of stocks are transferable and
composing it. may result to conflicting interest.
2. CREATED BY OPERATION OF LAW, 5. Minority shareholder practically has no
consent of State is needed and not by say
mere agreement only. 6. Large scale enterprises, stockholders
3. RIGHT OF SUCCESSION, death, voting rights may become merely
incapacity of civil interdiction does not fictitious and theoretical because of
result to dissolution. disinterest in management, wide-scale
4. POWERS, ATTRIBUTES AND ownership and inaccessible place of
PRPERTIES EXPRESSLY meeting.
AUTHORIZED BY LAW OR 7. Double Taxation
INCIDENT TO OTS EXISTENCE, 8. Subject to governmental regulation such
as submission of reportorial
Q: Can Corporation Recover Moral requirements.
Damages?
LBC Express, Inc vs CA- A Corporation,
CORPORATION PARTNERSHIP
being an artificial being has no feelings, no
emotions, no senses; therefore, it cannot
Created by law or by Created by mere
experience physical suffering and mental
operation of law agreement
anguish.
There must be at Formed by two or
Filipinas Broadcasting Network vs Ago
least 5 incorporators more natural
Madical Education Center- Article 2219 (7) NCC
except Corporation persons
does not qualify whether plaintiff is a natural or
Sole
juridical person.
Can only exercise Can do anything
Article 2219 – Moral Damages may be
such powers and provided not
recovered in the following and analogous cases:
functions granted by contrary to law,
(7) Libel, Slander or any other form of law and those morals, good
defamation. incidental to its customs and public
existence order.
ADVANATAGES OF CORPORATE FORM OF Must transact its GR: Any partners
BUSINESS business through the may transact
board of directors business
1. Capacity to act as a single unit unless validly XPN: If there is a
2. Limited shareholder’s Liability delegated contrary agreement.
3. Continuity of existence Right of Succession No right of
4. Feasibility of greater undertaking succession because
5. Transferability of shares it is based on trust
6. Centralized management and confidence
7. Standardized method of organization, Can ordinary There must be a
management and finance transfer, sell or consent of partners
assign his shares of
stock without
consent of other

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stockholder
Limited Liability Partners are liable CHAPTER III- CLASSIFICATION
Pro rata except if OF CORPORATION
Limited Partner and
after all the
A. Classes of Corporations under the
partnership property
Corporation Code
has been exhausted,
for all partnership
Section 3
liability
Existence is limited May exist for an
1. Stock Corporation
to 50 yrs but indefinite period
renewable subject only to
- Corporations which have capital stock
causes of dissolution
divided into shares and are authorized
provided for by law
to distribute to the holders of such
Cannot be dissolved Partners may
shares dividends or allotments of the
by mere agreement, dissolve it at will or surplus profits on the basis of the shares
the consent of State at any time deem fit. held are stock corporation.
is necessary Requisites
a. Capital Stock divided into
shares
b. They are authorized to
distribute dividends or
allotments as surplus profits
to its stockholders on the
basis of the shares held by
each of them.

2. Non-Stock Corporation

- All other private corporations (s.2)


- Those where no part of their income is
distributable as dividends to its
members, trustees or officers subject to
the provisions on distribution. (s.87)
- Primarily exist for purposes other than
profit but it does not follow that they
cannot make profits as an incident to
their operations. > Distinction is profits
obtained by the Non-stock corp can’t be
distributed as dividends but for
furtherance of their purpose only.

CIR vs Club Filipino


For liability to attach, the operator must
be engaged in the business as a bar keeper and
restaurateur. The term business refers to
activities for profits or livelihood. The Club is not
engaged in business of resto and bar. Profits
obtained by the Bar and Resto of the Club is
used only for the furtherance of its purpose. Also
the club failed to comply with the requisites of
stock corporation.

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B. Corporations created by special laws or


charters 11. Corporation by estoppel

- Corporations created through


legislative act for the interest of the common
good.
- GOCC operate under special law or
charter such that registration with the SEC is not
required to acquire legal personality.

GR: Not immune from suits because


once it enters into contract it divests itself of its
sovereign character.
XPN: Unless expressly provided.

PNOC-EDC vs NLRC

The law that will govern the employees


of a GOCC will depend on manner of its
creation. If created by-
1. Special Law or Charter- It is
governed by Civil Service Law
2. Corporation Code- governed by
Labor Code

C. Other Classes of Corporations

1. Public and Private Corporations

2. Ecclesiastical or Lay Corporations

Ecclesiastical
a. Religious societies
b. Corporation Sole

Lay Corporations
a. Eleemosynary corporations
b. Civil Corporations

3. Aggregate and Sole Corporations

4. Close and Open Corporations

5. Domestic and Foreign Corporation

6. Parent or Holding Companies and


Subsidiaries and Affiliates

7. Quasi-public Corporation

8. Quasi Corporation

9. De jure Corporation

10. De facto corporation

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CHAPTER IV- FORMATION AND incorporation, will become a


ORGANIZATION OF CORPORATIONS contract. In this case, promoter will
not assume liability, whether corpo
will accept it or not.
3 Stages in the life of a corporation 2. The promoter may make a Contract
binding himself, with the
1. Creation understanding that if the
a. Promotional Stage – Act of getting corporation, once formed, accepts
a corporation organized including or adopts the contracts, he will be
procurement of subscription to its relieved of responsibility
capital stock. 3. By Binding himself personally and
Promoter- organizer who brings assume the responsibility of looking
persons to unite in forming a to the proposed corporation, when
corporation. formed, for Reimbursement.
b. Process of Incorporation –
Drafting the Articles of b. PROCESS OF INCORPORATION
Incorporation, Preparing the
necessary supporting documents Section 14 Contents of Article of
and filing with SEC. Incorporation
c. Organization and
Commencement of Business –
1. PREFATORY PARAGRAPH-
Overt acts after incorporation such specify the nature (stock or non-stock)
as adoption of by-laws, election of of the corporation to prevent difficulties
corporate officers and other acts of administration and supervision.
tending show intent of transacting its
business. Q: Why is there a need for PP?
Because law subjects different
2. Reorganization or Quasi- corporation to different requirements.
reorganization
2. CORPORATE NAME
3. Dissolution and Winding Up
3. PURPOSE

a. PROMOTIONAL STAGE 4. PRINCIPAL OFFICE

- Organizers/Promoters bring together 5. TERM OF EXISTENCE


persons interested in the business
venture. - it shall exist for a period not exceeding 50
- They enter into contract either in their years from date of incorporation.
own name or the proposed corpo. Since
corpo has no legal existence yet at this -it may be extended for an Unlimited times by
stage. amendment of Articles as long as each
- The corpo may make the contracts its extension does not exceed 50 years.
own after due corporation, and may
become bound by such contracts by GR: No extension can be made earlier than 5
Ø Adopting or ratifying years prior to the original or subsequent expiry
Ø Accepting its benefits with dates
knowledge of the terms. XPN: Justifiable reasons for earlier extension as
may be determined by SEC.
GR: Prometer is Personally Liable
XPN: Promoter is not liable if 6. INCORPORATORS
1. Promoter make a CONTINUING
OFFER on behalf of the corporation, 7. DIRECTOS/ TRUSTEES
which, if accepted after

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8. CAPITALIZATION CONFUSION, FRAUD and EVASION and


difficulties in SUPERVISION.
9. NO TRANSFER CLAUSE - seek a “VERIFICATION SLIP” from RD of the
Commission and if name is available they can
Although the provision provides that Reserve such name.
only corporations who will engage in
business reserved fully or partially to Section 18
Filipinos will put it. The SEC still Statutory Prohibition in the use of
requires all STOCK corporations to Corporate name. To come within the scope,
include the same; to enable the State to
determine whether such a corporation 2 Requisites must be proven
would contribute to the sound balanced
development of the Phil. Economy. 1. That the complaint corporation acquired
PRIOR RIGHT over the use of such
corporate name
10. TREASURER 2. The proposed name is either:
Treasurer elected will receive all a. IDENTICAL
subscriptions, contributions or donations b. DECEPTIVELY or COFUSINGLY
paid or given by the subscribers or similar to that of any existing
members until his successor is elected corporation or to any other name
and qualified. already protected by law
c. PATENTLY DECEPTIVE,
11. EXECUTION CLAUSE CONFUSING or CONTRARY to
Incorporators sign the document existing law. (Philips Export vs CA)
with an indication as to where it was
signed and when the same was Note: Read page 29 for guidelines imposed by
executed. SEC in implementing Sec 18.
There are 2 disinterested
witnesses who will witness the signing Red Line Transportation vs Rural Transit-
of incorporators. The law give a corporation no express or implied
authority to assume another name that is
unappropriated. A corporation cannot change its
12. ACKNOWLEDGEMENT name except in the manner provided by law. A
Corporation cannot assume the name of another
- Notary Public, and incorporators and corporation as its trade name.
signatories will execute and sign in their
own free, voluntary act and deed. Universal Mills vs Universal textile Mills- In
this case, the name is not identical but
Articles of Incorporation is a three fold confusingly similar that even the test of
contract reasonable care and observation as the public
1. Between the corporation and the are generally capable of using and may be
State expected to exercise.
2. Corporation- Signatories
3. Signatories- State Lyceum vs CA- “Doctrine of Secondary
Meaning” a word or phrase originally incapable
of exclusive appropriation with reference to an
article in the market, because geographically or
CORORATE NAME otherwise descriptive, might nevertheless have
been used so long and so exclusively by one
-The principal means of distinguishing a producer with reference to his article that, in that
corporation not only from stockholders or trade and to that branch of the purchasing
members but also from other firms and entities. public, the word or phrase has become to mean
- A corporation once formed cannot use any that the article was his product.
other name, unless it has been AMENDED in Q: What if Western Lyceum (prior
accordance with law. This is to avoid user) filed the case, will the court rule
in their favor?

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3. Stock brokers can have no other line of


Philips Export vs CA- Corporation’s right to business not peculiar to them.
use its corporate name is a right in rem. PEBV
are known in the Philippines and abroad as Note: Read pages 39-41
Philips Group of Companies. Proof of actual
confusion need not be shown. It suffices that Section 17- If the Corporate purpose includes
confusion is Probably or likely to occur. any purpose under the supervision of another
government agency, prior clearance and/or
Amendment or Change in Corporate Name approval of the concerned government agencies
The SEC still needs to approve any or instrumentalities will be required.
change in corporate name.
Any change upon the corporate identity 4 General Limitations on the Purpose Clause
or name does not affect the rights of the
corporation or lessen its obligations. It does not 1. Lawful
become a new corporation. 2. Specific or stated concisely
3. If there is more than one purpose, the
PURPOSE CLAUSE primary as well as the secondary ones
must be specified
c. Defining the Scope of the authority of 4. Capable of being lawfully combined
the corporate enterprise or undertaking.
d. Sec. 45 A Corporation has only such
powers as are expressly granted by the PRINCIPAL OFFICE
law, articles and those incidental to
such conferred powers, those f. Located in the Philippines
reasonably necessary to accomplish its g. Specify the province, city or
purpose and incidental to its existence. municipality.
e. “Ultra Vires” authority beyond corporate h. Principal office is not the same with
power. Place of Operation
Reasons for Requiring a statement of Importance of knowing the residency of the
purpose corporation
1. For the STOCKHODER, to know within a. Chattel mortgage- must be
lines of business his money is to be put
registered in registry of deeds
2. For the BOARD OF DIRECTORS and
MANAGEMENT, to know on what lines where the principal office is
of business they are authorized to act. located
3. ANYONE WHO DEALS WITH b. Validity of summons
COMPANY may ascertain whether a c. Validity of the meetings (s.51)-
contract entered is within the general city or municipality where
authority of the management. principal office is located
d. Venue of actions
Other special laws prohibit certain business Clavacelli Radio System vs
undertaking from having any other purpose Antillon- If action is not upon a
not peculiar to them.
written contract but based on
1. Educational, religious, and other non- Tort, the same must be file in the
stock corporations cannot include any municipality where the defendant
other purpose which would change or or any of the defendants resides
contradict its nature or to engage in any or may be served with summons.
enterprise to make profits for its
members. Defendant resides- place of
2. Insurance companies cannot engage in business
commercial banking at the same time, Served with Summons- if the
and vice versa (what is prohibited is to corporation is not a resident in
engage in both activity)
Philippines, It may be served

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through its agents found in undertaking EXCLUSIVE for Filipino


Philippines. Citizens.
3. Number of D/T must not be less than 5
but nmt 15.
Q: What if based on written
XPN:
contract, where will be the a. Educational Corporations registered as
Venue? non-stock corporation whose number of
trusted, though nlt5 and nmt 15, must be
INCORPORATORS divisible by 5

Corporators- All persons who compose the Q: What about IBP it has 21 members?
corporation at any given time and need not be If a stock corporation it can be more
among those who execute the Articles at the than 15 members (Sec. 92)
start of the formation and organization.
Q: PSBA has 30 boards, are they violating
Incorporators- Those person mentioned in the the law?
articles as originally forming the corporation and Stock corpo can have more than 15
who are signatories of the Articles. directors. (Sec. 108)

Qualification if Incorporators b. In close corporations where all the


stockholders are considered as
1. Natural Person; XPN: Cooperative and members of the board of directors
corporations primarily organize to hold thereby allowing 20 members in the
equities in rural banks. board.
(Note: while corporations cannot qualify c. Sole Corporation
as incorporators they may still be d. Merger of Banks, they can retain their
shareholders) respective member of boards but not to
exceed 25 D/T
2. Nlt 5 but nmt 15
3. Legal age, however, to be a shareholder DISQUALIFICATIONS OF D/T
they must be represented by their
guardian, parents or administrator. a. Convicted of Final Judgment of an
offense punishable by imprisonment for
4. Majority are residents of the Philippines a period exceeding 6 years
5. Each must own or be a subscriber to at b. Violation of this Code committed within
least 1 share capital stock. 5 years prior to the date of his election
or appointment
DIRECTORS/TRUSTEES
(NOTE: The Corporation can provide for
additional Qualifications and
Directors- Governing board in stock corporation
Disqualifications)
Trustees- Non-stock

Qualification of D/T
CAPITALIZATION
1. Every director must own at least 1 share
of the capital stock of the corporation by Capital- broadly covers all the assets of a
which he is a director. corporation used in the conduct of business.
Trustees of non-stock corpo
must be a member. Authorized Capital- signifies the maximum
2. Majority of D/T must be a Resident in amount fixed in the articles to be subscribed and
Philippines paid-in or secured to be paid by the subscibers.
XPN: Aliens, WON residents of the A.k.a Maximum number of shares that the
Philippines, may not qualify or be corporation can issue (Unless the Article is
elected as such, in any business amended)

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100k  is  the  Paid-­‐up  capital,  which  is    within  25%  of  the  
Subscribed Capital Stock- Total number of subscribed  capital  
shares and its total value for which there are -­‐  it  is  not  required  that  each  of  the  subscribers  will  pay  
contracts for their acquisition or subscription. It 25%  
which  is  250k.  
is the stockholder’s equity account showing that
part of the authorized capital stock which has
been paid or promised to be paid, or that portion Corporation cannot exceed more than 1-
of the authorized capital stock which has been M it is the maximum amount it cannot issue
subscribed by the subscribers or stockholders. more unless Articles will be amended.
Maximum shares it can issue is 1M shares
Q: What is the minimum subscribed unless amended.
capital?
At least 25% of the authorized Penalty: Max Fine of 500M and imprisonment
capital stock must be subscribed. for 20 years.

Paid up Capital- Actual amount or value which Q: What is the Minimum for a
has been actually contributed or paid to the domestic corporation? In no case shall the
corporation in consideration of the subscriptions paid- up capital be less than 5k
made thereon. It may either be in cash, property
or in the form of services actually rendered to Q: Is there a minimum authorized
the corporation. capital imposed by the code? If there is
Section 62 - means that payment to minimum paid-up logically there should also be
subscription to the capital stock of a corporation a minimum capital =5000
may be paid in varied forms (personal or real
property). So long as they are capable of SHARES OF STOCK CORPORATION AND
valuation and is fairly valued. THEIR CLASSIFICATION

Shares of stock- designate the units into which


the proprietary interest in a corporation is
divided. They represent the proportionate
integers or units, the sum of which constitutes
the capital stock of the corporation.
Capital structure It is the interest or right which the
Foundation- minimum paid-up capital stockholder has in the management of the
3M corporation and in the surplus profits and, in
Authorized capital 1 M No. of shares case of dissolution, in all of its assets remaining
1M/share par value 1.00 after the payment of its debts.

Q: Are Corporation authorized to


Subscribed Capital classify their shares? Yes based on section 6.
50 K A Certificate of Stock- Document or instrument
50 K B evidencing the interest of a stockholder in the
C 250K corporation. Merely an evidence of ownership.
D
E Purpose of classification
1. To specify and define the rights and
privileges of the stockholders;

PAID UP =62,500 2. For regulation and control of the


issuance of sale of corporate securities
for the protection of purchasers and
stockholders. (e.g. close corpo)
250k  (outstandibgstock)  is  25%  of  the  authorized   3. As a management control device.
capital  stock  that  is  subscribed.  
(founder’s shares)

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4. To comply with statutory requirements share, each share is presumed to be


particularly those which provide for equal and have the right to vote
certain limitations on foreign ownership
and shares like overseas employment XPN: Unless, the articles and the
certificate of stock provide otherwise.
agencies requiring to own at least 75%
of the shares of stock thereof.

5. To better insure return on investment


Ø PREFERRED STOCKS
which can be affected through the Stock that give a holder a preference over
issuance of redeemable shares or the holder of common stocks with respect to the
preferred shares, i.e., granting the payment, of dividends and/or with respect to
holders thereof, preference as to distribution of capital upon liquidation.
dividends and/or distribution of assets in YOU MUST STATE THE PREFERENCE
case of liquidation; and, BECAUSE IF NOT THEY ARE PRESUMED TO
BE EQUAL
6. For flexibility in price, particularly, no par
Q: How can there be a Preferred shares?
shares may be issued or sold from time
a. They can be issued only with stated par
to time at different price depending on
value, and;
the net worth of the company since they
b. The preferences must be stated in the
do not purport to represent an actual of
articles of incorporation and in the
fixed value.
certificate of stock, otherwise; each
share shall be presumed equal.

1. Preference as to dividends
-­‐ Holder of such share has the privilege of
being paid with dividend first before any
other stockholders are paid in the event
that there are profits available for
7.
payment of dividends.
Q: What Advantage & Privilege will one -­‐ The guaranty is not absolute because
have against the other? None, they will be the BOD has the discretion to determine
presumed equal if no restrictions in the Articles whether dividends are to be declared
(Note: they are nor presumed common stock) out of the unrestricted retained earnings
GR: Equal
of the corporation.
XPN: If a specific type of share
is indicated in the Articles. -­‐ The amount of preference is stated in
the “contract of subscription” and is
usually on a fixed percentage or
Ø COMMON STOCKS specified amount.
-­‐ one which entitles its owner to an equal -­‐ If after paying the preferred stocks no
pro rata division of profits and without more surplus profits remain the not so
any preference or advantage in respect preferred stockholders has no recourse.
over any other stockholder or class of
stockholders. GR: However, if the remaining surplus
profits substantial, the other
-­‐ It usually carries with it the right to vote, stockholders can possibly receive a
bigger dividends than the preferred
and frequently, the exclusive right to do
holders. (Preferred dividends is non-
so. participating)
XPN: Unless there is a stipulation in the
-­‐ GR:If there are more than one kind of articles on the participation of preferred

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holder in the surplus profits. possible bias.


I Unless the directors, in failing to
a. Participating Shares and Non- declare dividends have abused their
Participating shares discretion in withholding the declaration,
the dividend right of stockholders of the
Participating shares the holders are still particular year cannot be made up in
given the right to participate with the subsequent years.
common stockholders in dividends
beyond their stated preference. b.2 Mandatory if Earned- impose a
positive duty on directors to declare
A & B- Preferred stockholders as dividends every year when profits are
indicated in the Articles that they will earned. It gives the holders the right to
receive the preference for the amount of annual profit and leave the directors no
100k discretion to withhold dividends.
Their right will not be lost by
C, D, & E- Common stock holders failure to declare dividends each year.

-Corporation has 150k unrestricted b.3 Earned Cumulative or Dividend


dividend. Pay first A&B 100k credit type –Gives the holder the right to
- if Corpo have a 600k cash dividends. arrears in dividends if there were profits
A&B will be paid 100k and C, D, & E the earned during the previous years but
will divide the remaining 500k. But if A dividends were not declared. The right
&B is participating stockholder they will to receive dividends is merely
also have a share in the surplus profits. postponed.

b. Cumulative and Non-Cumulative


Preferred Shares

Cumulative Preferred Shares- those that


entitle the owner thereof to payment not
only of current dividends but also back
dividends not previously paid whether or
not, during the past years, dividends A and B- Preferred Stock 100k
were declared or paid. C, D, and E- Common shares
In order that a preferred stock 201
may be considered cumulative the same 1 2012 2013 2014
must be indicated in the Articles. 150 Declaration
k 200k 0 400k of dividends
Non-Cumulative Preferred Shares – x x x 400k
those which grant the holders of such 100 100 100 100
shares only to payment of current (14) (14) (14) (14) Cumultive
dividends but not back dividends, when Non-
and if dividends are paid, to the extent 100k Cumulative
agreed upon before any other Discretionar
stockholders are paid the same. 100k y
Advantage- it avoid undue 100k Mandtory
accumulation of arrears of dividends. 100 100(12 (400)1
(11) ) 4 Earned
Types of Non-Cumulative
Preferred Shares Q: What if they did not declare
dividends rights for the previous years? May
b.1 Discretionary Dividend Type- gives they be denied dividend rights because they
the holder the right to have dividends are non holders of non-cumulative? It
paid thereon in a particular year depends on the type on non-cumulative share.
depending on the judgment or discretion NOTE: YOU CANNOT COMPEL THE
of the BOD who might be subject to

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CORPORATION TO DECLARE DIVIDENDS XPN: Unless such vote is clearly


UNLESS IT EXCEEDS 100 % PAID UP withheld (Preferred or Redeemable
CAPITAL SEC. 43 Shares only)
Section 43. Power to declare
dividends. - The board of directors of a stock 3. Preference Upon Liquidation
corporation may declare dividends out of the
unrestricted retained earnings which shall be -­‐ This preference must also be indicated,
payable in cash, in property, or in stock to all otherwise they are placed in the same
stockholders on the basis of outstanding stock footing with other shareholders.
held by them: Provided, That any cash dividends -­‐ If the preferred stock is cumulative, the
due on delinquent stock shall first be applied to liquidation preference usually includes a
the unpaid balance on the subscription plus right to any arrears of cumulative
costs and expenses, while stock dividends shall dividends in priority to any distribution of
be withheld from the delinquent stockholder until assets to the common stockholders.
his unpaid subscription is fully paid: Provided,
further, That no stock dividend shall be issued Ø PAR AND NON-PAR VALUE
without the approval of stockholders SHARES
representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special Par- fixed amount
meeting duly called for the purpose. (16a)
Par Value Shares- those whose value are
fixed in the articles of incorporation.
Stock corporations are prohibited from retaining
-To fix a minimum subscription or
surplus profits in excess of one hundred (100%) original issue price to the shares and
percent of their paid-in capital stock, except: (1) indicates the amount which original
when justified by definite corporate expansion subscribers are suppose to contribute to
projects or programs approved by the board of the capital as the basis of the privilege
directors; or (2) when the corporation is of profits haring with limited liability.
prohibited under any loan agreement with any - the par value indicated however is not
the true value of the shares because the
financial institution or creditor, whether local or
same may fluctuate depending on the
foreign, from declaring dividends without its/his networth of the corporation.
consent, and such consent has not yet been -Par value shares cannot be issued or
secured; or (3) when it can be clearly shown that sold by the corporation at less than the
such retention is necessary under special par because it will violate the provisions
circumstances obtaining in the corporation, such on “Watered Stock” which are shares
issued at less than the par where the
as when there is need for special reserve for
stockholders will remain liable for the
probable contingencies. (n) difference between what he paid and
the actual par value thereof.
Earned Cumulative No Par Value Shares- those whose issued price
Cumulative are not stated in the certificate of stock but
Allowed to receive Allowed to receive which may be fixed in the articles, or by the BOD
only if earned. back dividends for when so authorized by the articles and by-laws,
previous years or in the absence, by stockholders themselves.
whether or not
they were earned. Code allows a stock corporation to issue
no par value shares but they are subject to
certain limitations provided in S. 6
2. Preference as to voting rights
1. Shares of capital stock issued shall
GR: A preferred stockholder have the be deemed fully paid and non-
right to vote (S.6) assessable a

  12  
 

2. That shares without par value may bonded indebtedness;


not be issued for a consideration
less than the value of five (P5.00) 5. Increase or decrease of capital stock;
pesos per share
3. That the entire consideration 6. Merger or consolidation of the
received by the corporation for its corporation with another corporation or other
corporations;
no-par value shares shall be treated
as capital and shall not be available
7. Investment of corporate funds in
for distribution as dividends. another corporation or business in accordance
4. They cannot be issued as preferred with this Code; and
stock
5. They cannot be issued by banks, 8. Dissolution of the corporation.
trust companies, insurance
companies, public utilities and
building and loan association Q: Can stockholders deny the
common shares the right to vote? No, only
Advantages of No par value Redeemable and preferred shares
1. Flexibility in price
2. Evasion of danger of liability upon Q. May the Common share be
effectively denied of their right to vote? Yes,
waters stock in case of overvaluation
if there is Founder’s share for a maximum period
3. Disappearances of personal liability of 5 years (provided in the Code)

Ø Voting or Non-Voting Shares Q: Who can vote in the following


instances?
Voting Shares gives the holder the right a. Amendment of Articles- holders of
to vote and participate in the management of the voting and non-voting share
corporation through the exercise of such right, b. Management of Corporation-
either at the election of the BOD or in any matter
those with Voting share only
requiring the vote of stockholders.
Non-Voting Shares –holder has no voice
Ø Distinction between the subscribed
in the election of BOD and some other matters
requiring stockholders vote. and outstanding stocks?

GR: Stockholders can’t be denied of their right Section 137. Outstanding capital stock
to vote defined. - The term "outstanding capital stock",
XPN: Unless provided in the Articles, and only as used in this Code, means the total shares of
Preferred, redeemable shares, and those
stock issued under binding subscription
provided in the code (Founder’s shares) can be
deprived of voting rights. agreements to subscribers or stockholders,
XPN to XPN: Even if deprived of their right to whether or not fully or partially paid, except
vote, they can still vote in the following treasury shares. (n)
instances. (S.6)
1. Amendment of the articles of -­‐ Voting and dividend rights, it refers to
incorporation; the outstanding capital stocks
-­‐ Only outstanding stocks are allowed to
2. Adoption and amendment of by-laws; vote and receive dividends
-­‐ Actually the same
3. Sale, lease, exchange, mortgage,
pledge or other disposition of all or substantially
all of the corporate property; Ø Founder’s Shares
-­‐ Code does not define it
4. Incurring, creating or increasing -­‐ Presumed to be shares of stock which

  13  
 

are issued to the founder’s of a creditors of the corporation for the


corporation. difference since the full value had
-­‐ The five year period fixed by law is non- previously been paid in full.
extendible because it may result to -­‐ Treasury shares have no dividend or
perpetual disqualification of other voting rights since such is only granted
stockholders to elect and be elected. to outstanding shares of stock. Treasury
Section 7. Founders’ shares. – shares may, however, be declared as
Founders’ shares classified as such in dividends since they are properties of
the articles of incorporation may be the corporation.
given certain rights and privileges not
enjoyed by the owners of other stocks,
Q: Why is TS not entitled to vote? “Although
provided that where the exclusive right
authorities may differ on the exact legal and
to vote and be voted for in the election
accounting status of so-called treasury shares,
of directors is granted, it must be for a
they are more or less in agreement that treasury
limited period not to exceed five (5)
shares are stocks issued and fully paid for and
years subject to the approval of the
reacquired by the corporation either by
Securities and Exchange Commission.
purchase, donation, forfeiture or other means.
The five-year period shall commence
Treasury shares are therefore issued shares but
from the date of the aforesaid approval
being in the treasury they do not have the status
by the Securities and Exchange
of outstanding shares. Consequently, although a
Commission.
treasury share, not having been retired by the
corporation re-acquiring it, may be re-issued or
Ø Redeemable Shares sold again, such shares, as long as it is held by
the corporation as a treasury share, participates
-Those issued by a corporation subject neither in dividends, because dividends cannot
to redemption as may be provided by the terms be declared by the corporation to itself, nor in
of the subscription contract. meetings of the corporation as voting stock, for
-Grants the issuing corporation the right otherwise equal distribution of voting powers
to purchase or reacquire the shares at its option among stockholders will be effectively lost and
or at the option of the holder based on the face the directors will be able to perpetrate their
or issued value plus specified premium. control of the corporation, though it still
- Redemption may either be optional or represents a paid for interest in the property of
mandatory either at a fixed or future dates. the corporation. The foregoing essential features
of a treasury stocks are lacking in the
questioned shares.
Generally a corporation can reacquire its own In this case, and under the terms of the
shares if it has unrestricted retained earnings trust agreement, the shares of stock of Reese
participated in dividends which the trustee
Exception: redeemable shares may be received and the said shares were voted upon
reacquired irrespective of retained earnings by the trustee in all corporation meetings. They
were not, therefore, treasury shares.”

Ø Treasury Capital or Treasury A


Shares B 50k
-­‐ shares of stock which have been issued C
and fully paid for, but subsequently D
reacquired by the issuing corporation by E
purchase, redemption, donation or
If C will not pay on time prescribed then it
through some other lawful manner.
will be sold in Public Bidding and if
-­‐ This may again be issued for a price, corporation will win the 50k shares of “C” will
even for less than par, and the then become Treasury Shares. It will
purchaser will not be liable to the become the property of the corporation. As

  14  
 

a treasury share it don’t have voting and Municipalities 2.5M


dividend rights and once issued they Pawnshop- 100k
become outstanding stocks again.
Q: Is there a minimum capital required?
When the law speaks of outstanding No minimum capital requirement in
rights it does not include treasury shares order that a corporation may be duly
Ø Treasury shares may be reissued incorporated except in special cases and
provided that at least 5K should be paid-in.
-­‐ They are actually assets of the (s.12)
corporation
-­‐ Once re-issued they become
outstanding stocks again Restrictions and Preferences on Transfer of
-­‐ The corporation may cancel them; in Shares
effect there will be a reduction in the GR: Corporations are not required to provide for
outstanding capital stocks restrictions and preferences regarding the
-­‐ The code does not require ordinary transfer, sale, assignment of shares in their
corporations to provide for restrictions, Articles
but it does not likewise prohibit XPN: Close Corporations (s.96)
restrictions XPN to XPN: They can as long as embodied in
-­‐ Example: right of first refusal Articles. Failure to provide in the Articles will not
-­‐ The restriction must be contained in the bind purchaser in good faith even if indicated in
articles of incorporation the by-law.
-­‐ If provided in by-laws but not in the In a Close corporation such restrictions
articles of incorporation then it will not and preferences must be embodied in the
be binding Articles, Stock certificate and by-laws.
-­‐ Restrictions and preferences are
mandatorily required in close
corporations
-­‐ If it does not provide restrictions it is not COMMENCEMENT OF CORPORATE
a close corporation EXISTENCE
-­‐ Specified persons- close corporations
-­‐ If not one of those specified you are not -GR: Reckoned at the time of the issuance of
included because there is exclusivity in Certificate of Incorporation or Registration under
close corporations it’s official seal.
-­‐ Should also be in the by-laws not only in
the articles of incorporation XPN: A Corporation can still exist even if there is
no Certificate
Homeowner’s Association
Cooperatives
CAPITALIZATION Corporation in Special Charter-
S.12 legislature
S.13
Corporation by Estoppel
GR: at least 25% of the subscribe capital
Corporation Sole- exist upon filing of
must be paid
Articles in Sec
XPN: That in no case shall be “Paid-up”
capital be less than 5k
Cagayan Fishing Devt vs Sandiko
A corporation should have a full and
There are instances where the SEC requires
complete organization and existence as an
the payment more than the 25% paid up capital.
entity before it can enter into contract or transact
e.g.
any business.
Holding companies- 100k
Investment House- 300k If the company could not and did not
acquire the four parcels of land here involved, it
Overseas Recruitment Agencies- 3M
follows that it did not have the resultant right to
Financing Companies- w/n MM 10M
dispose the same by the defendant.
Other cities 5M

  15  
 

DEFECTIVELY FORMED It follows therefore that it possess all the


CORPORATIONS powers, attributes and liabilities that attach to a
de jure corporation in relation with all persons,
except to the State.
1. De Facto Corporation
Q: What is then the importance if they are
2. Corporation by Estoppel
subject to the same right?
Distinctions

De Jure De Facto
DE FACTO CORPORATION Corporate existence Can be Directly
cannot be directly attacked in a Quo
-­‐ one that is so defectively created as attacked warrranto proceeding.
not to be a de jure corporation but (Only the State can
nevertheless exists, for all practical institute)
purposes, as a corporate body, by virtue
of its bona fide attempt to incorporate Municipality of Malabang vs Benito
under existing statutory authority, The mere fact that Balabagan was
coupled with the exercise of corporate organized at the time when the statute had not
powers. been invalidated cannot conceivably make it a
de facto corporation, there is no other valid
-­‐ It exist as corporation separate and statute to give color of authority to its creation.
distinct if the following conditions are
met Q: If Certificate of Registration is not ye
issued by SEC, can there be a de facto
§ Requisites: corporation? They know that there is no
existing corporation. They can’t claim in GF that
1. There is a valid law under which the there is a Corporation
corporation could have been created as
a de jure corporation; Hall vs PICCIO
FELC only signed the Articles but SEC
2. An attempt, in good faith, to form did not approve its incorporation yet.
corporation according to the SEC has no jurisdiction. First, It did not
requirements of law (colorable obtain a Certificate of Incorporation. They are
compliance); not in goof faith. Collateral Attack is applied only
with existence of errors and irregularities, but not
3. A user of corporate powers; the with a TOTAL OR SUBSTANTIAL DISREGARD
transaction in some ways as it were a OF THE LAW. Second, Not a suit in which
corporation. corporation is a party, it is a suit among
stockholders for purposes of dissolution. Even
4. Good faith in claiming to be doing the existence of de jure corporation may be
business as a corporation terminated in a private suit for its dissolution
between stockholders, without the intervention
- Existence of a de facto corporation cannot of the State.
be Collaterally attacked either by the State
or person. However, its existence may be CORPORATION BY ESTOPPEL
Directly attacked by the State in Quo
warranto proceeding. - One that is so defectively formed as not to be
either de jure or de facto corporation but which
Q: Are rights and obligation of directors etc. are considered as corporations in relation only to
of a de jure corporation same as in a de facto those who cannot deny their corporate existence
corporation? Yes, the same law applies. A de due to their agreement, admission, or conduct.
facto corporation is, in all respects, similarly
situated with a de facto corporation except that
the State may question its existence in a direct -­‐ serious defects in its incorporation or
proceeding.

  16  
 

organization. among those assuming to form a corporation,


who know that it has not been registered, there
Q: What is the Liability of Directors and is no corporation by estoppel.
Shareholders? Is there a Shareholder
Limited Liability? No, they will be considered Albert vs. University Publishing Co., Inc.
as General Partners.
(Petitioner signed the contract stating that he is
Q: May a corporation by estoppel exist the President of University – a non existing
between and among stockholders? Yes, it corporation.
applies when persons assumes to form a
corporation and exercise corporate functions One who has induced another to act upon his
and enter into business relations with Third willful misrepresentation that a corporation was
person. duly organized and existing under the law,
cannot, thereafter set up against his victim the
Doctrine of Estoppel applies to: principle of corporation by estoppel. Such
persons becomes liable for the contracts
Corporation – entered into by such ostensible corporation.

Those who participates in holding out an Salvatierra vs. Garlitos


association as a corporate body and thereby
induced persons to deal with it as such are GR: A person who has contracted or dealt with
estopped to deny the representation to their an association in such a way as to recognize its
prejudice. They cannot avoid liability on the existence as a corporate body is estopped from
ground of lack of personality to be sued. denying the same in an action arising out of
such transaction or dealing
There must be a representation of corporate
existence or admission of its existence. XPN1: this doctrine may not be held to be
applicable where fraud takes part in the said
Third Party not between stockholders transaction.

The mere fact that one contracts or otherwise Chiang Kai Shek School vs. CA
deals with an association or its agents will not
estop that person from denying that it is a Persons who have continuously and for
corporation, especially if that person does not a long period misrepresented themselves as a
know that it claims to be a corporation, but corporation as estopped from denying such
rather supposes that it be doing business as an personality to defeat claims against it.
unincorporated association.
Asia Banking Corp. vs. Standard Products
Doctrine of corporation by estoppel applies Co., Inc
against a third party only when he tries to
escape liability on a contract from which he has XPN 2: In the absence of fraud, a person who
benefited on the irrelevant ground of defective has contracted or dealt with an association in
corporation. such a way as to recognize and in effect admit
its legal existence as a corporate body is
Lozano vs De los Santos thereby estopped to deny its corporate existence
in an action leading out of or involving such
Jeepney driver’s association case contract or dealing, unless the existence is
attacked for causes which have arisen since
Corporation by estoppel is founded on making the contract or other dealing relied
principle of equity and is designed to prevent on as an estoppel.
injustice and unfairness. It applies when persons
assume to form a corporation and exercise International Express Travel & Tours
corporate functions and enter into business Services, Inc. vs. CA
relations with third persons. Where there is no
third person involved and the conflict arises only XPN2: The doctrine of estoppel applies to a third

  17  
 

party only when he tries to escape liability on a 1. Organizational meeting of stockholders


contract from which he has benefited. It does not to elect its board of directors
apply when the third party is the one claiming
from the contract. 2. Adoption of by-laws

Q: Does Doctrine of Estoppel applies to 3. Meeting to elect corporate officers,


foreign Corporation? Yes. The doctrine of adopt seal..
estoppel applies to foreign as well as domestic
corporations. Foreign corporations doing Organize or Organization -the election of
business in the Philippines may sue in Philippine officers, providing for the subscription and
courts although not authorized to do business payment of capital stock, the adoption of by-
here against the Philippine citizen who had laws, and such other steps as are necessary to
contracted with and been benefited by said endow the legal entity with the capacity to
corporation. (Georg Grotjahn GMBH & Co. vs. transact the legitimate business for which it was
Isnani) created.

-There must be substantial compliance with


requirements of law.
If a corporation by estoppel exists and enters
into a contract or transacts business with a third Commencement of Business Transaction
party, the latter has three remedies:
RULE1: Code requires that corporation to
1. He may file a suit against the ostensible commence the transaction of its business within
corporation to recover from the corporate two years from the date of its incorporation,
properties; otherwise, its corporate powers ceases and it
shall be deemed dissolved. Dissolution is
2. He may file the case directly against the automatic.
associates personally who held out the
association a corporation; and XPN: If its failure is due to
causes beyond its control as may be
3. Against both the ostensible corporation and determined by SEC.
persons forming it, jointly and severally.
RULE 2: If the Corporation has commenced its
As regards the liability of the associates of business but subsequently becomes inoperative
the alleged corporation, only those who actively continuously for a period of 5years, the same
participated in holding out the association as a shall merely be a ground for SUSPENSION or
corporation should be held personally liable. REVOCATION of franchise or certificate.

ORGANIZATION AND
COMMENCEMENT OF BUSINESS
CORPORATE ORGANIZATION

After the issuance of the certificate of


incorporation or registration, the corporation
must formally organize and commence its
business lest it will be deemed dissolved. XPN:
Causes beyond its control

“Formal Organization” Process of structuring


the corporation to enable it to effectively pursue
the purpose for which it was organized. It
includes:

  18  
 

CHAPTER V- CORPORATE CHARTER CORPORATE ENTITY THEORY


AND ITS AMENDMENTS
As a legal entity, corporation is possessed a
personality separate and distinct from the
individual stockholders or members.

CORPORATE CHARTER The properties it possess belongs


exclusively to the corporation, such that a
“Corporate charter” – an instrument or authority personal creditor of stockholders cannot attach
from the sovereign power, bestowing rights and corporate properties to satisfy their claims.
power.
However, the remaining properties in
The corporate charter is a three-fold contract: dissolution will be distributed to stockholders
(subject to Preference)
1. Between the corporation and the state
Sulo ng Bayan, Inc. vs. Gregoria Araneta,
2. Between the corporation and the stockholders Inc.
or members
A corporation is a distinct legal entity to be
3. Between and among the stockholders or considered as separate and apart from the
members themselves individual stockholders or members who
compose it, and is not affected by the personal
- The common notion is that Charter is Similar to rights, obligations and transactions of its
Article but The charter of corporations created stockholders or members. Conversely, a
under the Corporation Code consists of the corporation has no interest in the individual
articles of incorporation and the Corporation property of its stockholders unless transferred to
Code inclusive of the by-laws adopted the corporation, even in case of a one- man
thereunder and all pertinent provisions of any corporation.
statute governing them.
A corporation has no personality to bring an
Charter Franchise action for and in behalf of its stockholders or
members for the purpose of recovering property
an instrument or Right or Privilege itself which belongs to said stockholders or members
authority from the to be and act as a in their personal capacity.
sovereign power, corporation or to do a
bestowing rights and certain act while There cannot be a cause of action without an
power charter applies to the antecedent primary legal right conferred by law
instrument by which upon a person. There can be no wrong without a
the state vests right or corresponding right.
privilege.
Caram vs CA

Petitioners were not involved in the initial


Kinds of franchises: stages of the organization of the airline.
Petitioners were merely among financiers whose
2. Primary franchise – the right or privilege of interest was to be invited and who were in fact
being a corporation which the state persuaded, on the strength of the project study,
confers upon the applicant for this to invest in the proposed airline.
faculty.
As a bona fide corporation should alone be
3. Secondary franchise – the powers and liable for its corporate acts as duly authorized by
privileges vested in, and to be exercised its directors and officers
by the corporate body as such.

  19  
 

Rustan Pulp and Paper Mills, Inc. vs. IAC crime, confuse legitimate issues, or to
circumvent the law or perpetuate deception, or
The president and manager of a corporation an alter-ego, adjunct or business conduit for the
who entered into and signed a contract in his sole benefit of a stockholder or a group of
official capacity, cannot be made liable stockholders or another corporation.
thereunder in his individual capacity in the
absence of stipulation to that effect due to the Palacio vs Fely Transportation
personality of the corporation being separate
and distinct from the person composing it. Calingsan and defendant transportation is
regarded as one person. It is evident that
(Corporations are juridical person and operate Calingsan’s main purpose in forming the
through its officers. Officers only act on behalf of corporation is to evade his subsidiary civil
corporation and can’t be held liable for debts of liability resulting from the conviction of his driver.
corporation)
This is one case where the defendant
Cruz vs Dalisay corporation should not be heard to say that it
has a personality separate and distinct from its
A corporation has a personality distinct and members when to allow it to do so would
separate from its individual stockholders or sanction the use of the fiction of corporate entity
members. The mere fact that one is president of as a shield to further an end subversive of
a corporation does not render the property he injustice.
owns and possesses the property of the
corporation, since the president, as an
individual, and the corporation are separate
entities. Marvel Building Corpo vs David

(Final judgment against corporation can’t be The fact that twenty-five certificates were
held against stockholder even if they are signed by the president of the corporation, for no
president or the majority stockholder) justifiable reason, the fact that two sets of
certificates were issued, the undisputed fact that
Palay Inc. vs. Clave Maria B. Castro had made enormous profits
and, therefore, had a motive to hide them to
Mere ownership by a single stockholder or by evade the payment of taxes, the fact that the
another corporation of all or nearly all of the other subscribers had no incomes of sufficient
capital stock of a corporation is not, of itself, magnitude to justify their big subscriptions, the
sufficient ground for disregarding the separate fact that the subscriptions were not receipted for
corporate personality. and deposited by the treasurer in the name of
the corporation but were kept by Maria B. Castro
Soriano vs. CA herself, the fact that the stockholders or the
directors never appeared to have ever met to
In a right of action against the corporation, the discuss the business of the corporation, the fact
officers may not be held personally liable as long that Maria B. Castro advanced big sums of
as they act within the scope of their authority. money to the corporation without any previous
arrangement or accounting, and the fact that the
books of accounts were kept as if they belonged
to Maria B. Castro alone — these facts are of
patent and potent significance. What are their
necessary implications? Maria B. Castro would
not have asked them to endorse their stock
PIERCING THE VEIL OF certificates, or be keeping these in her
CORPORATE FICTION possession, if they were really the owners. They
never would have consented that Maria B.
Piercing the veil of the corporate fiction is Castro keep the funds without receipts or
resorted to only in cases where the corporation accounting, nor that she manages the business
is used or being used to defeat public without their knowledge or concurrence, were
convenience, justify wrong, protect fraud, defend they owners of the stocks in their own rights.

  20  
 

credits extended for the cars and


vehicles.
Yutivo vs CA
CIR vs Norton & Harrison
It is an elementary and fundamental principle
of corporation law that a corporation is an entity A taxpayer may gain advantage of doing business
separate and distinct from its stockholders and thru a corporation, if he pleases, but the revenue
from other corporation petitions to which it may officers in proper cases, may disregarded the separate
be connected. However, "when the notion of corporate entity where it serves but a shield for tax
legal entity is used to defeat public convenience, evasion and treat the person who actually may take
justify wrong, protect fraud, or defend crime," the benefits of the transactions as the person accordingly
law will regard the corporation as an association taxable.
of persons, or in the case of two corporations
merge them into one. To allow a taxpayer to deny tax liability on the
ground that the sales were made through another and
The shareholders in SM are mere nominal distinct corporation when it is proved that the latter is
stockholders holding the shares for and in behalf virtually owned by the former or that they are
of Yutivo, so even conceding that the original practically one and the same is to sanction a
subscribers were stockholders bona fide Yutivo circumvention of our tax laws.
was at all times in control of the majority of the
stock of SM and that the latter was a mere La Campana Coffee vs KKM
subsidiary of the former.
In the present case Tan Tong appears
SM is under the management and control of to be the owner of the gaugau factory. And the
Yutivo by virtue of a management contract coffee factory, though an incorporated business,
entered into between the two parties. is in reality owned exclusively by Tan Tong and
his family. As found by the Court of industrial
1. Controlling majority of the Board of Relations, the two factories have but one office,
Directors of Yutivo is also the controlling one management and one payroll, except after
majority of the Board of Directors of SM. July 17, the day the case was certified to the
Court of Industrial Relations, when the person
2. Principal officers of both corporations who was discharging the office of cashier for
are identical. both branches of the business began preparing
separate payrolls for the two. And above all, it
3. Both corporations have a common should not be overlooked that, as also found by
comptroller in the person of Simeon Sy, the industrial court, the laborers of the gaugau
who is a brother-in-law of Yutivo's factory and the coffee factory were
president, Yu Khe Thai. interchangeable, that is, the laborers from the
gaugau factory were sometimes transferred to
4. Cash or funds of SM, including those of the coffee factory and vice-versa. In view of all
its branches which are directly remitted these, the attempt to make the two factories
to Yutivo , and subject to withdrawal appears as two separate businesses, when in
only by Yutivo. SM’s being under reality they are but one, is but a device to defeat
Yutivo’s control, the former’s operations the ends of the law (the Act governing capital
and existence became dependent upon and labor relations) and should not be permitted
the latter. to prevail.

5. SM is a branch or department of Yutivo Emilio Cano Enterprise vs CIR

6. Arrastre charges is paid by Yutivo A factor that should not be overlooked is


that Emilio and Rodolfo Cano, are here indicted,
7. Yutivo financed principally the business not in their private capacity, but as president and
of SM and actually extended all the manager of Emilio enterprises. Having been
credit to the latter not only in the form of sued officially, their connection with the case
starting capital but also in the form of must be deemed to be impressed with the

  21  
 

representation of the corporation. The SEC en banc explained the


“instrumentality rule” which the courts have
Telephone Engineering Service vs WCC applied in disregarding the separate juridical
personality of corporations as follows:
Petitioner even admitted that TESCO “Where one corporation is so organized and
and UMACOR are sister companies operating controlled and its affairs are conducted so that it
under one single management and housed in is, in fact, a mere instrumentality or adjunct of
the same building. Although respect for the the other, the fiction of the corporate entity of the
corporate personality as such, is the general ‘instrumentality’ may be disregarded. The
rule, there are exceptions. In appropriate cases, control necessary to invoke the rule is not
the veil of corporate fiction may be pierced as majority or even complete stock control but such
when the same is made as a shield to confuse domination of finances, policies and practices
the legitimate issues. that the controlled corporation has, so to speak,
no separate mind, will or existence of its own,
Tesco’s denial at this stage that it is the and is but a conduit for its principal. It must be
employer of the deceased is obviously an kept in mind that the control must be shown to
afterthought, a device to defeat the law and have been exercised at the time the acts
evade its obligations. This denial also complained of took place. Moreover, the control
constitutes a change of theory on appeal which and breach of duty must proximately cause the
is not allowed in this jurisdiction. injury or unjust loss for which the complaint is
made.”
Claparols vs CIR
The test in determining the
Respondent Court's findings that indeed applicability of the doctrine of piercing the
the Claparols Steel and Nail Plant, which ceased veil of corporate fiction is as follows:
operation of June 30, 1957, was SUCCEEDED
by the Claparols Steel Corporation…It is very “1. Control, not mere majority or complete stock
clear that the latter corporation was a control, but complete domination, not only of
continuation and successor of the first entity, finances but of policy and business practice in
and its emergence was skillfully timed to avoid respect to the transaction attacked so that the
the financial liability that already attached to its corporate entity as to this transaction had at the
predecessor…This "avoiding-the-liability" time no separate mind, will or existence of its
scheme is very patent, considering that (1) 90% own;
of the subscribed shares of stocks of the
Claparols Steel Corporation (the second 2. Such control must have been used by the
corporation) was owned by respondent (herein defendant to commit fraud or wrong, to
petitioner) Claparols himself, and (2) all the perpetuate the violation of a statutory or other
assets of the dissolved Claparols Steel and Nail positive legal duty, or dishonest and unjust act in
Plant were turned over to the emerging contravention of plaintiff’s legal rights; and
Claparols Steel Corporation.
3. The aforesaid control and breach of duty must
It is very obvious that the second
proximately cause the injury or unjust loss
corporation seeks the protective shield of a
complained of.
corporate fiction whose veil in the present case
could, and should, be pierced as it was
deliberately and maliciously designed to evade The absence of any one of these elements
its financial obligation to its employees. prevents ‘piercing the corporate veil. ‘ in
applying the ‘instrumentality’ or ‘alter ego’
NAFLU vs Ople doctrine, the courts are concerned with reality
and not form, with how the corporation operated
and the individual defendant’s relationship to
AC Ransom vs NLRC that operation. “ (INSTRUMENTALITY RULE)

Concept Builders vs NLRC Mcconel vs CA

  22  
 

While the mere ownership of all or payment of private respondent's claim is not
nearly all of the capital stock of a corporation is supported by the facts. Philsa's corporate
a mere business conduit of the stockholder, that personality therefore remains inviolable.
conclusion is amply justified where it is shown,
as in the case before us, that the operations of Thus, at the time Philsa allowed its
the corporation were so merged with those of license to lapse in 1985 and even at the time it
the stockholders as to be practically was delisted in 1986, there was yet no judgment
distinguishable from them. To hold the latter in favor of private respondent. An intent to evade
liable for the corporation's obligations is not to payment of his claims cannot therefore be
ignore the corporation's separate entity, but implied from the expiration of Philsa's license
merely to apply the established principle that and its delisting.
such entity can not be invoked or used for
purposes that could not have been intended by
Neither will the organization of Philsa
the law that created that separate personality. International Placement and Services Corp. and
its registration with the POEA as a private
Tan Boon Bee vs Jarencio employment agency imply fraud since it was
organized and registered in 1981, several years
A Corporation can only hold properties before private respondent filed his complaint
that are necessary to its business (Doctrine of with the POEA in 1985.
Limited Liability).
For the separate juridical personality of a
Cease vs CA corporation to be disregarder, the
wrongdoing must be clearly and
The Board of Directors and stockholders convincingly established.
belong to one family the head of which Forrest
L. Cease always retained the majority stocks Indophil textile mill union vs Calica
and hence the control and management of its
affairs. The fact that the businesses of private
respondent and Acrylic are related, that some of
the employees of the private respondent are the
The accounts of the corporation and
same persons manning and providing for
therefore its operation, as well as that of the
auxilliary services to the units of Acrylic, and that
family appears to be indistinguishable and
the physical plants, offices and facilities are
apparently joined together. As admitted by the
situated in the same compound, it is our
defendants the corporation 'never' had any
considered opinion that these facts are not
account with any banking institution or if any
sufficient to justify the piercing of the corporate
account was carried in a bank on its behalf, it
veil of Acrylic.
was in the name of Mr. Forrest L. Cease.
The legal corporate entity is disregarded
only if it is sought to hold the officers and
stockholders directly liable for a corporate debt
WHEN PIERCING THE CORPORATE or obligation. In the instant case, petitioner does
FICTION IS NOT JUSTIFIED not seek to impose a claim against the members
of the Acrylic.
Remo, JR vs. IAC
Hence, the Acrylic not being an
Corporate fiction cannot be disregarded in extension or expansion of private respondent,
the absence of intent to defraud in corporate the rank-and-file employees working at Acrylic
transactions. should not be recognized as part of, and/or
within the scope of the petitioner, as the
Del Rosario vs NLRC bargaining representative of private respondent.

In this regard we find the NLRC's (Atty. Ladia- La campana an Indophil has
decision wanting. The conclusion that Philsa same issues but different facts. In La campana,
allowed its license to expire so as to evade 2 corporations are located in the same

  23  
 

compound, owned and controlled by same if there is more liability then


company, one single payroll and employees are shareholder may be liable
interchangeable) with such liability unlike if
only assets it doesn’t
PNB vs Ritratto include liability.

Mere corporate ownership of all the stocks


of another corporation will not justify their
being treated as single entity.
AMENDMENT OF THE CORPORATE
YU vs NLRC CHARTER

There being not the least indication that Steps to be followed for an effective amendment
the second corporation is a dummy or of the articles of incorporation:
serves as a client of the first corporation, the
fiction of separate and distinct corporate i. Resolution by at least a majority of the board
entities cannot be disregarded and brushed of directors or trustees. 
aside.
ii. 2. Vote or written assent of the stockholders
The genuine nature of the sale to Twin representing at least 2/3 of the outstanding
Ace is evidenced by the fact that Twin Ace was capital stock or 2/3 of the members in case of
only a subsequent interested buyer. At the time non-stock corporation. 
when termination notices were sent to its
employees, TDI was negotiating with the First iii. Submission and filing of the amendments with
Pacific Metro Corporation for the sale of its the SEC as follows:
assets. Only after First Pacific gave up its efforts
to acquire the assets did Twin Ace or Tanduay a. The original and amended
Distillers come into the picture. Respondents- articles together shall contain all
employees have not presented any proof as to the provisions required by law to
communality of ownership and management to be set out in the articles of
support their contention that the two companies incorporation. Such articles, as
are one firm or closely related. The doctrine of amended, shall be indicated by
piercing the veil of corporate entity applies when underscoring the change or
the corporate fiction is used to defeat public changes made.
convenience, justify wrong, protect fraud, or
defend crime or where a corporation is the mere b. A copy thereof, duly certified
alter ego or business conduit of a person. To under oath by the corporate
disregard the separate juridical personality of a secretary and a majority of the
corporation, the wrong-doing must be clearly directors or trustees stating the
and convincingly established. It cannot be fact that such amendments
presumed. have been duly approved by the
required vote of the
stockholders or members.

Q: How to purchase a Corporation? c. Favorable recommendation of


the appropriate government
agency concerned in the case
1. Purchase of existing stocks-
where the corporation is under
Purchaser will merely be a
its supervision.
stockholder
Q: What is the vote required for
2. Purchase of Corporate stockholders? – Vote or Written assent of
assets stockholders representing at least 2/3 of the
Outstanding Capital Stocks.
Shares must be bought
with due diligence because

  24  
 

Q: Do you include non-voting shares? – Yes, Is the business act performed in April 8
Sec 6 of Corpo Code an “ultra vires act”?

A- 200k (non-voting) No, because the SEC did not act


upon it. The effectivity of the amendment
B- 200k (B-E is Voting stock) retroacts from date of filing.

C- 200k

D- 200k Special Amendments:

E- 200k a. Extension or shortening of corporate


term (Sec. 37)
A is absent but gave his written assent; B
objected; B-E are present. b. Increase or decrease of capital stock
(Sec. 38)
If there will be change in purpose, from
general contractor to realty contractor, c. Incurring, creating or increasing
can there be an amendment? Yes, this is bonded indebtedness (Sec. 38)
only ordinary amendment and there is vote
and written assent of “A”, so there is 2/3 From these provisions, it is apparent
vote. that a meeting of the stockholders or members
would be required unlike in Section 16 where the
Will this apply if there is a decrease in “written assent” of stockholders or members
capital stock? would suffice.

No, because that is under special The action undertaken under Section
amendment. In that case, ratification in 37 & 38 must be voted upon at a duly
meeting is needed. Meeting duly called for constituted meeting. Special amendment is also
that purpose. subject to the approval of the SEC and may be
rejected or disapproved on grounds provided for
by section 17.

Q: Amendment for decrease in capital stock


is filed last Jan. 31 and up to date August,
Time when the amendments shall take effect: 2014 SEC did not act upon it. What if the
corporation performed a business act last
a. Upon approval of the SEC; or April, what will be the effect?

b. From the date of filing with the SEC if It is an Ultra vires act because
not acted upon with 6 months from the approval of SEC is still needed.
date of filing for a cause not attributable
to the corporation. (Note: not applicable
to special amendments because in Sp.
Amendment SEC must approve and PROVISIONS SUBJECT TO
issue Articles) AMENDMENT

Q: Q: What provisions may be amended?

Amendment filed in Jan. 31, 2014 GR: Section 16 “Unless otherwise provided by
the Code or by special law, any provision or matter
It performed a business act on April 8, stated in the articles of corporation is subject to
2014 amendment.”

The Sec did not act upon it. XPN: Matters which are fait accompli are not

  25  
 

subject to change. Procedure to amend the corporate term:

• Name of incorporators, D/T (but 1. Approval by a majority vote of the board


number of D/T can be or directors or trustees.
changed)
2. Written notice of the proposed action
• Name of treasurer originally and the time and place of meeting shall
elected by the subscribers or be served to each stockholder or
members to act as such until member either by mail or by personal
his successor is elected and service.
qualified
3. Ratification by the stockholders
• Number of shares originally representing at least 2/3 of the
subscribed and paid out of outstanding capital stock or 2/3 of the
the original authorized capital members in case of non-stock
stock corporations.

• Date and place of execution of 4. In case of extension of corporate term,


the articles of incorporation the extension should be for periods not
exceeding 50 years in any single
• Signatories and instance, and provided that no extension
acknowledgment can be made earlier than 5 years prior
to the original or subsequent expiry
date(s) unless there are justifiable
• “no transfer clause”
reasons for an earlier extension as may
be determined by the SEC.
• Sec. 96 Restrictions and
transfers of shares can be
5. In cases of extension of corporate term,
amended but not in closed
a dissenting stockholder may exercise
corporation
his appraisal rights.
Q: Articles Executed: Jan, 2000. Maria
Q: The term expires today, may you go to
mabaho incorporator and resident in tondo
SEC to renew term? No, the term of the
and after she married Mr. Mabango. Can she
corporation already expired.
amend her name in the Articles?
(PNB vs CIR) No need to institute a quo
No, because in the year 2000 when
warranto proceeding because term is
she signed the Articles her real name is
already indicated in the Articles
Mabaho.
Alhamba Cigar vs SEC

GR: A corporation ipso facto dissolved as


Change in Corporate Name soon as that time expires
Any change upon a corporate identity XPN: Unless previously amended
or name does not affect the rights and
obligations of the corporation. (Philippine First To renew a charter- to revive a charte
Insurance Co. vs. Hartigan) which has expired
Q: May the corporation after 10 years of existence To extend a charter- to increase the
be amended for 15 years only? Yes, if its shorten time of his existence.
the period. No, if extension. Why?
Extension may be made only before the
AMENDMENT OF THE CORPORATE term provided in the corporate charter expires.
TERM §

  26  
 

CHAPTER  VI-­‐  BOARD  OF   are reasonable and necessary to carry


out the corporate purpose
DIECTORS/  TRUSTEE  AND  
3. Those that are inherent or acts that go
OFFICERS   with the office (General business, they
can employ those that are necessary in
the conduct of business)
POWERS OF THE BOARD
4. Those that are apparent or those acts
which although not actually granted, the
Board of D/T has authority to
principal knowingly allows or permits it
to be done
1. Exercise corporate powers
5. Power arising out of customs, usage or
2. Conduct all business
emergency (Kalaw case)
3. Control and hold all properties of the
Ramirez vs. Orientalist Co.
corporation
(In this case, there was an informal meeting
Board of D/T is the supreme authority in
made by Fernandez the Secretary of the
matters of management of the regular and
Corporation. Directors is aware of the contract
ordinary business affairs of the corporation.
entered by Fernandez, therefore, there was
apparent authority to bind contract.)
The authority of the board of directors does
not extend to the fundamental changes in the
The fact that the power to make corporate
corporate charter.
contracts is thus vested in the board of directors
does not signify that a formal vote of the board
Equitable Principle: Stockholders may have
must always be taken before contractual liability
all the profits but shall turn over the
can be fixed upon a corporation; for the board
management of the enterprise to the Board of
can create liability, like an individual, by other
Directors.
means than by a formal expression of its will.

The power to make corporate contracts


resides primarily in the company's board of
Classification of Powers of Corporate directors; but the board may ratify an
agents/officers (Nature of agency unauthorized contract made by an officer of the
created) corporation. Ratification in this case is held to
have occurred when the board, with knowledge
D/T are the chief administrators to whom the that the contract had been made, adopted a
board delegated the power to manage the resolution recognizing the existence of the
corporation. But D/T may delegate them to contract and directing that steps be taken to
individual director, officers or agents. enable the corporation to utilize its benefits.

Corporation is bound by the acts of its Where a corporate contract has been effected
corporate officers if they act within the scope of with the approval of the board of directors, a
the five classification of powers of corporate resolution adopted at a meeting of stockholders
agents refusing to recognize the contract or repudiating
it is without effect.
1. Those expressly conferred or those
granted by the articles of incorporation, Barreto vs. La Previsora
the by-laws or by official act of the board
of directors Contracts between a corporation and third
persons must be made by or under the authority
2. Those that are incidental or those acts of its board of directors and not of it
as are naturally and ordinarily don which stockholders.

  27  
 

(All corporate transactions emanates from regarding Education.


Board of Directors and not stockholders.
Lee vs. CA
Stockholders opinion is merely advisory
except for certain instances- merger, In order to be eligible as a director, what is
consolidation, voting of D/T, amendment of other material is the legal title to, not beneficial
parts of Articles) ownership, of the stock as appearing on the
books of the corporation. “In his own right”

Legal right, it is sufficient that he is in the


QUALIFICATIONS AND name of the books insofar as stock ownership is
DISQUALIFICATIONS  concerned.

Qualifications: Q: Should the stockholder be the beneficial


owner of the sale?
1. Directors must own at least one (1) share of the
capital stock of the corporation. Trustees must be A (1000/s) assigns to B in trust for C. Is B
members. qualified to be the director even if he is no
the beneficial owner? Yes, he has legal title
2. A majority of the directors or trustees must be
residents of the Philippines. What if he assigns it to his mistress? Not
valid, contrary to law.
Disqualifications:
Q: Previous PNB case, How can there be
1. Conviction by final judgment of an offense Directors if its share is owned by PNB main
punishable by imprisonment for a period (referring to PNB in HK)?
exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to the They assign nominal share to their nominees
date of election or appointment. in trust for certain period of time.

2. Other disqualifications under applicable Detective and Protective Bureau vs. Cloribel 
special laws.
If no election is conducted or no qualified
Section 23 & 27 are merely minimum candidate is elected, the incumbent director
requirement shall continue to act as such in a hold-over
capacity until the election is held and a qualified
Section 45-additional requirement for candidate is so elected.
member of Board
Valle verde vs Africa
Q: May there be a governing board of
directors created in Phil consisting solely of TERM TENURE
foreigners? Yes, provided majority are
residents in Philippines. However, we need the time during represents the term
to consider our nationalization law which which the officer may during which the
mentions on up to what extent can claim to hold the incumbent actually
office as of right, and holds office
foreigners subscribe in the business.
fixes the interval after
Otherwise, they will violate the Anti Dummy
which the several
Act. incumbents shall
succeed one another.
GR: Foreigner can be a D/T
term is fixed by statute tenure may
XPN: Foreigners can’t sit and it does not change be shorter (or, in case
simply because the of holdover, longer)
XPN to XPN Art. 16 of the Constitution, office may have than the term for

  28  
 

become vacant, nor reasons within or Q: What is the term of office of members of
because the beyond the power of Board?
incumbent holds over the incumbent.
in office beyond the GR: They shall serve for one year until his
end of the term due to successor is qualified and duly elected. This 1
the fact that a year period is only applicable to stock
successor has not corporation because trustees has no
been elected and has determinate time.
failed to qualify.
XPN: 1. Close Corporation

3. Non-stock- 3 years

4. Non-stock educ- 5 years

Based on the above discussion, when


Section 23 of the Corporation Code declares ELECTION AND VOTING
that “the board of directors…shall hold office for
one (1) year until their successors are elected Stock Corporation Non-Stock corporation
and qualified,” we construe the provision to
mean that the term of the members of the Majority of the Majority of the members
board of directors shall be only for one year; outstanding capital stock, entitled to vote,
their term expires one year after election to the in person or by their duly
office. The holdover period – that time from the authorized representative GR: in person or
lapse of one year from a member’s election to authorized as such by
the Board and until his successor’s election and Written proxy, must be XPN by proxy, if
qualification – is not part of the director’s original present at the election. allowed in its articles,
term of office, nor is it a new term; the holdover
must be present in the
period, however, constitutes part of his
election.
tenure. Corollary, when an incumbent member
of the board of directors continues to serve in a
holdover capacity, it implies that the office has GR: Viva Voce same
a fixed term, which has expired, and the
incumbent is holding the succeeding term. XPN: On the request of
any stockholder or
After the lapse of one year from his member, the election
election as member of the VVCC Board, must be by ballot
Makalintal’s term of office is deemed to have
already expired. That he continued to serve in In the election of the GR: No Cumulative
the VVCC Board in a holdover capacity cannot members of the Board of Voting
be considered as extending his term. Directors,
With the expiration of Makalintal’s term of CUMULATIVE XPN: Unless allowed by
office, a vacancy resulted which, by the terms of VOTING is a matter of th articles of
Section 29 of the Corporation Code, must be right incorporation or by-laws
filled by the stockholders of VVCC in a regular or
special meeting called for the purpose. To a member may cast
assume – as VVCC does – that the vacancy is as many votes as
caused by Makalintal’s resignation in 1998, not there are trustees to
by the expiration of his term in 1997, is both be elected but may not
illogical and unreasonable. His resignation as a cast more than one
holdover director did not change the nature of vote for one candidate.
the vacancy; the vacancy due to the expiration
of Makalintal’s term had been created long
before his resignation.

  29  
 

No delinquent stock G- 50k


shall be voted.
H- 50k

I- 50k

________
The election may be adjourned if, for any
reason, no election is held, or if the required total 1M
quorum is not obtained. However, it may not be
adjourned indefinitely. A-E are siblings and holds majority o the
stock
Candidates receiving the highest number of
votes shall be declared elected. The reason why a cumulative voting
is right granted by law is to allow the minority to
Cumulative Voting have rightful representation in the BOD.

Is a matter of right granted by law to T or F- there is a specific quorum


stockholders in stock corporation, to multiply his requirement in election of Directors but there
number of shares to number of directors, the is no specific voting requirement. –True (?)
total number is the total number that he may
cast, Provided, it shall not exceed the number of What if A is absent and B-I are present, is
shares he can vote. there a quorum? Yes, because B-I are present,
even if A did not give a notice for his proxy.
Vote such number of shares for as
many persons as there are directors to be In the case above, if the shares of all
elected; the minority will be combined (200k*5=1M) and
choose to elect one director they can now have
Cumulate said shares and give one 1 seat who will represent them.
candidate as many votes as the number of
directors to be elected multiplied by the number Officers to be elected (Immediately after the
of his shares shall equal; election of D/T, they must formally organize for
the election of officers)
Distribute them on the same principle
among as many candidates as he shall see fit. 1.President, who shall be a director

Q: What is quorum? Majority of the outstanding 2.Treasurer, who may or may not be a director
capita stock (person or proxy)
3.Secretary, who shall be a resident and citizen
Q: Do you include non-voting shares? No, of the Philippines
they are not entitled to vote and its not included
in Section 6 4.Such other officers as may be provided for in
the by-laws.
A-200k
Any two or more positions may be held
B-200k concurrently by the same person at the
same time except the president-
C-200k secretary or president-treasurer.

D-100k 

E-100k VALIDITY AND BINDING EFFECT OF


ACTIONS OF CORPORATE
F- 50k OFFICERS

  30  
 

General rule: the quorum requirement for a third persons dealing in good faith with such
valid board meeting is the majority of the officers or agents.
number of the directors or trustees as fixed in
the articles of incorporation. This apparent authority may result
from (1) the general manner by which the
Exception: The articles of incorporation or the corporation holds out an officer or agent as
by-laws may provide for a greater majority. having power to act or, in other words, the
apparent authority with which it clothes him to
General rule: To have a valid corporate act, the act in general, or (2) the acquiescence in his
decision of at least a majority of the directors or acts of a particular nature, with actual or
trustees present at a meeting at which there is a constructive knowledge thereof, whether within
quorum is required. or without the scope of his ordinary powers.

Exception: The election of corporate officers Lopez vs. Fontecha


requires the vote of a majority of all the
members. Any action of the board without a meeting and
without the required voting and quorum
(Note: An actin of the Board without a meeting requirement will not bind the corporation unless
and without the required voting and quorum subsequently ratified, expressly or impliedly.
requirement will not bind the corporation unless
subsequently ratified, expressly or impliedly.) (If not a valid or binding act by the BOT/D it
can be ratified impliedly or expressly.)
General rule: Individual directors cannot bind
the corporation by their individual acts. Pua Casim & Co. vs. Neumark and Co

Exceptions: GR: A business manager or other officer has no


implied power to borrow money in its behalf.
1. By delegation of authority;
XPN: Where a general business manager of a
2. Where expressly conferred; or corporation is clothed with apparent authority to
borrow money and the amount borrowed does
3. Where the officer or agent is clothed with not exceed the ordinary requirements of the
actual or apparent authority. business, the authority is implied and that the
corporation is bound..
Yao Ka Sin Trading vs. CA
(In this case, corporation needs a fund and
Although an officer or agent acts that the person who contracted the loan is the
without, or in excess of, his actual authority if he president, GM and principal stockholder, in a
acts within the scope of an apparent authority sense, to be almost the whole corporation and
with which the corporation has clothed him by was clothed with apparent authority to do
holding him out or permitting him to appear as everything necessary for the conduct of
having such authority, the corporation is bound business.
thereby in favor of a person who deals with him
in good faith in reliance on such apparent Yu Chuck vs. Kong Li Po
authority, as where an officer is allowed to
exercise a particular authority with respect to the An invalid contract may be validated by the
business, or a particular branch of it, ratification only of the board of directors; the
continuously and publicly, for a considerable president has no authority to ratify such contract.
time.
Francisco vs. GSIS
Also, if a private corporation
intentionally or negligently clothes its officers or Silence coupled with acceptance of benefits
agents with apparent power to perform acts for constitutes a binding ratification.
it, the corporation will be estopped to deny that
such apparent authority is real, as to innocent Board of liquidators vs. Kalaw

  31  
 

A corporate officer entrusted with the general by the secretary, on order of the president or
management and control of its business, has on the written demand of the stockholders
implied authority to make any contract or do any representing a majority of the outstanding
other act which is necessary or appropriate to capital stock, or a majority of the members
the conduct of the ordinary business of the entitled to vote. Should the secretary fail or
corporation. refuse to call the special meeting upon such
demand or fail or refuse to give notice, or if
As such officer, he may, without any special there is no secretary, the call for the meeting
authority from the Board of Directors, perform all may be addressed directly to the
acts of an ordinary nature, which by usage or stockholders or members by any
necessity are incident to his office, and may bind stockholder or member signing the demand.
the corporation by contracts in matters arising in
the usual course of business. Where similar acts Q: May the stockholders or members be
have been approved by the directors as a matter remove without just cause? Qaulifiy, General
of general practice, custom, and policy, the rule: Directors or trustees may be removed with
general manager may bind the company without or without just cause.
formal authorization of the board of directors.
Exception: Removal without just cause
Buenaseda vs. Bowen & Co., Inc. may not be used to deprive minority
stockholders or members of the right of
Lack of repudiation, acquiescence and representation to which they may be entitled
acceptance of benefits are equivalent to an under Sec. 24.
implied ratification by the Board of Directors and
binds the corporation even without formal PD 902-A grants the court the power and
resolution passed and recorded. authority to remove or oust a director and it can
do so, even motu propio by the appointment of a
 Express ratification: through formal board management committee.
action.
I n case of a deadlock in a close corporation,
 Implied ratification: Silence or acquiescence; the SEC is authorized to issue an order
Acceptance and/or retention of benefits; or By cancelling, altering, or enjoining any resolution
recognition or adoption. (Lopez realty by or other act of the corporation or its board of
Estoppel) directors or directing or prohibiting any act of the
corporation or the board of directors thereby
REMOVAL AND FILLING UP OF effectively taking away the rights of the directors
VACANCIES to act as managers of the corporation.

Requirements for removal of directors: Q: Is disqualification different from removal?


Yes
1. The removal should take place at a
general or special meeting duly called Q: May the members of the Board be
for that purpose; disqualified? Yes, Section 23 & 27

2. The removal must be a vote of the Q: May they be removed from offices? Sec 28
stockholders representing at least 2/3 of
the outstanding capital stock or 2/3 of Q: Who will preside the meeting in removal?
the members in case of non-stock
corporations; A- D 200k/s each

3. Previous notice to the stockholders or E- elected minority representative


members of the proposed removal and
the time and place of meeting either by E-G 50k/s each
publication or by written notice.
____
The special meeting must be called

  32  
 

1M 1. Election of stockholders or members

May the majority call for stockholders 2. Regular or special meeting duly called
meeting to oust E? Qualify. No, for unjust for that purpose
causes. Yes, for just causes.
3. Or in the same meeting authorizing the
Q: May the stockholders or members be increase of D/T if so stated in the notice of
remove without just cause? Qaulifiy, Yes if the meeting.
majority stockholder. No, if removal without just
cause will deprive minority stockholders or Q: When is vacancy filled up? At the same
members of the right of representation. meeting without further notice or at any
subsequent general or special meeting after
Vacancies proper notice?

Q: What are the 3 exceptions to the rule that Q: Up to when can they fill-up?
remaining member of the board may be file-
up the vacancy? Q Who will fill-up the vacancy by removal?
Vote of majority of stockholders note remaining
1.Removal
Q: If A, B, C, D calls for a meeting and holds
2.Term has expired to fill-up the vacancy by removal of F, may
they do so? Yes, because they are not acting
3. Vacancy due to removal may be filled by an as board but as stockholders.
election at the same meeting without further
notice. There are 2 meetings involved

Requirements in filling up vacancies 1. Board of D/T meeting

Any vacancy occurring in the board of 2. Stockholders meeting


directors or trustees other than by removal by
the stockholders or members or by expiration of Q: Can the Board of D/T fill-up he vacancy in
term, may be filled up by case of increase in D/T? No, only stockholders
or members.
1. Vote of at least majority of the remaining
D/T, if still constituting a quorum Q: If there is an increase in D/T, is there a
need for notice?
2. Regular or Special meeting called for
the purpose Yes, same meeting or subsequent meeting.
(compare to the other filling up)
3. A D/T elected must only fill the
Unexpired term of his predecessor-in- Q: A, B, C, D, E, F are elected a yea ago and
interest. no meeting was called so they hold office as
a Hold over, subsequently F resigned. May
Tenure is only for the unexpired the Board of D elect for the vacancy?
term. In the event that successor is not
qualified, the law provide that the No, only stockholders, sec 29. Why? The
supposed predecessor shall hold office term of office already expired and only holds
until his successor is duly elected and office in a hold over capacity.
qualified. If his successor is not
qualified he continues to cat as a Q: If the Director is removed from office
director in a hold-over capacity. when will the vacancy be filled up?
(Detective vs Cloribel)
Same meeting or subsequent meeting (is
Any D/T to be filled by reason of an increase there notice req)
in the number od D/T shall be filled only by

  33  
 

Section 26- Report of Election of D/T and executing duties of the office.
officers
Whether or not the court can look into
1. The secretary, or any other officer of the the reasonableness of compensation of directors
corporation shall Submit in SEC a report and officers? Gr: Court will not review the
within 30 days after the election fairness of official salaries XPN: wrongdoing,
oppression, or possible abuse of fiduciary
2. Submit the names, nationalities and position.
residences of D/T or officers elected
If there is wastage of corporate assets, the
3. Should a D/T or officers die, resign or in courts may be justified to look into the
any manner cease to hold office, his reasonableness and fairness of the
heirs in case of his death, the secretary, compensation despite the fact that the grant
or any other officer of the corporation, or thereof is authorized pursuant to the by-laws
the D/T or officer himself, shall and by the vote of the majority of the holders of
immediately report such fact to the SEC. the outstanding capital stock of the corporation.

Objective of section 26 is to give public Central Cooperative Exchange vs. Tibe, Jr.
information.
The board may not grant compensation upon
itself without authorization of the by-laws or in
contravention of the by-laws.
4. § Any change in the
constitution of the board of directors or Western Institute of Technology, Inc. vs.
trustees must be reported to the SEC. Salas

Members of the board of directors may


receive compensation, in addition to reasonable
COMPENSATION OF DIRECTORS per diems, when they render services to the
corporation in a capacity other than as directors
General rule: Directors shall not receive any or trustees
compensation, as such directors, except for
reasonable per diems. Govt. vs. El Hogar Filipino

Exceptions: The fact that the amount paid as


compensation to directors under a by-law
1.When there is a provision in the by-laws fixing provision has increased beyond what would
their compensation; probably be necessary to secure adequate
service from them is a matter that cannot be
2.When the stockholders, by a majority vote the corrected by the court. The remedy is in the
outstanding capital stock grant the same; and hands of the stockholders who have the power
at any lawful meeting to change the rule.
3.If the director renders extra-ordinary or (Judicial intervention is not proper, corporation
unusual service. are artificial being and act through its officers-
Corporate entity doctrine)
In no case shall the total yearly
compensation of directors, as such directors, Rogers vs Dy
exceed 10% of the net income before income
tax of the corporation during the preceding year. Bonuses given is approved by stockholders.
(it may exceed 10% if not for directors, example Much weight is given to the decisions of
if director is acting as a chairman. stockholders. However, the amount reach up to
83 Million and causes wastage in corporate
Directors are not entitled to assets. The reasonableness and fairness can
compensation because their interest in the then be questioned by court even if included in
corporation is presumed to be the motive for by-laws.

  34  
 

LIABILITY OF CORPORATE OFFICERS members or other persons shall be imposed


upon directors or trustees:
GR: Corporate directors, officers or agents are
not generally liable for obligations incurred by 1. Who willfully and knowingly vote for or
the corporation through their acts if they did so assent to patently unlawful acts of the
within the scope of authority and in good faith. corporation; (violation of obedience)

XPN: Personal liability of a corporate director, 2. Who are guilty of gross negligence or
trustee or officer along with the corporation may bad faith in directing the affairs of the
validly attach, as a rule, only when: corporation; (violation of diligence).
Directors are required to manage the
1.He assents (a) to a patently unlawful act of the corporate affairs with reasonable care
corporation, or (b) for bad faith, gross and prudence. This is because the
negligence in directing its affairs, or (c) for liability of directors is not limited to willful
conflict of interest, resulting in damages to the breach of trust or excess of power, but
corporation, its stockholders or other persons; extends also to negligence.

2.He consents to the issuance of watered stocks 3. Who acquire any personal property or
or who, having knowledge thereof, does not pecuniary interest in conflict with their
forthwith file with the corporate secretary his duty as such directors or trustees.
written objection thereto; (violation of loyalty)

3.He agrees to hold himself personally and Business judgment rule – directors
solidarily liable with the corporation; or are not liable for losses due to imprudence or
honest error of judgment. Questions of policy
4.He is made, by specific provision of law, to and management are left solely to the honest
personally answer for his corporate action. decision of the board of directors and the courts
(Tramat Mercantile, Inc. vs. CA) are without authority to substitute its judgment
as against the former.
Sections 31, 32, 34, 65, 74
and also 97, where a stockholder, to the extent Montelibano vs. Bacolod Murcia Milling, Co.,
that he takes an active part in the management Inc.
and operation of the business affairs of a close
corporation, is liable for corporate torts. Resolutions passed in good faith by
the board of directors are valid and binding, and
Where a check is drawn by a whether or not it will cause losses or decrease in
corporation, company or entity, the person or profits are not subject to the review of the court.
persons who actually signed the check in behalf
of such drawer shall be liable under this Act. General rule: A director is not liable for
(Sec. 1, BP 22) misconduct of co-directors or other officers.

In labor cases, corporate directors Exceptions:


and officers are solidarily liable with the
corporation for the termination of employment of 1. He connives or participates in it; or
corporate employees done with malice or in bad
faith. (not based in labor code but due to bad 2. He is negligent in not discovering or acting to
faith) (Uichico vs. NLRC) prevent it.

THREE-FOLD DUTY OF DIRECTORS Q: what is duty of loyalty?

Three-fold duty of directors: 1. Obedience 2. D/T/O of private corporation, while not


Diligence 3. Loyalty regarded as trustee are considered in equity as
bearing a “fiduciary relation” to the corporation
Solidarily liability for all damages and its stockholders. Thus as fiduciaries, they
suffered by the corporation, its stockholders or are expected and are obliged to act with utmost

  35  
 

candor and fair dealing or the interest of the any interest adverse to the corporation, he is
corporation and without selfish motives. the corporation in bound to account for
respect to any matter such profits unless his
The duty of loyalty is violated in the reposed in him in act is ratified by the
following instances: confidence as to which stockholders owning or
equity imposes a representing at least
i. When a director or trustee acquires any disability upon him to 2/3 of the outstanding
personal or pecuniary interest in deal in his own behalf capital stock.
conflict with his duty as such director or is not subject to
trustee; ratification by the
stockholders.
ii. When he attempts to acquire or
acquires, in violation of his duty, any If the violation of If the acquisition is
interest adverse to the corporation in loyalty consist of merely that of a
respect to any matter which has been matter which has been business opportunity
reposed in him in confidence, as to reposed in him in which has not been
which equity imposes a disability upon confidence the same is reposed in him in
him to deal in his own behalf; and not subject to confidence, the ssme
ratification may be subject to
iii. When he, by virtue of his office, ratification of
acquires for himself a business stockhlders
opportunity which should belong to the
corporation, thereby obtaining profit to
the prejudice of such corporation.
(maybe ratified)

Forbidden Profits- Section 31 and 34 of the Realty Corporation and A is the President. A
Code makes reference to forbidden profits. BLDA company owned by Z is engage in
Forbidden in the sense that directors and PDAF. Z approach A to sold his property for
officers are fiduciary representatives of the only 100M because they are friends. A
corporation and a such they are not allowed to bought the property. Can this be ratified?
obtain any personal profit, commission, bonus or
gain for their official actions. They may also refer This is forbidden profits and violates the
to those arising from transactions of directors corporate opportunity doctrine. This may be
with third persons which may involve ratified (s. 34), he merely secure a business
misappropriation of corporate opportunities and opportunity rightfully belonging to the
disloyal diverting of business. corporation.

Corporate opportunity doctrine – It places Q: Z writes a letter to the corporation


a director of a corporation in the position of a coursed through the President and offered
fiduciary and prohibits him from seizing a the said property for sale for 100M. President
business opportunity and/or developing it at the calls for directors meeting. They agreed to
expense and with the facilities of the purchase it and make a loan. Then E went to
corporation. He cannot appropriate to himself a Z and offered him to buy to property for
business opportunity which in fairness should 105M cash. Can this be ratified?
belong to the corporation.
Sec. 31 p (2) They’ve learned that such
property is for sale in the meeting. Since he
already have a knowledge about the transaction
Section 31 Section 34 this is a matter reposed in him in confidence.

where a director is where the director Strong vs. Repide


liable to account for acquires for himself a
profits if he attempts to business opportunity Directors are liable for fraud committed by
acquire or acquires which should belong to concealment of information as to the state and

  36  
 

probable result of the negotiations for the sale of 4. The contract is fair and reasonable
corporate assets which may affect the price of under the circumstances.
the corporation’s stock.
Q: Assume in the Previous example that
(Buyer concealed his identity in order to BCDA is now owned by corporation. “A”
purchase the property in a lower value) offers to acquire BCDA and they agreed to
sell it. What is this situation called? SELF
SELF-DEALING DIRECTORS (loyalty) DEALING DIRECTORS

One who deals or transacts business with is


own corporation. Such dealings are voidable. Q: In the same situation, Corporation is
selling the BCDA to two entities who went to
GR: A contract of the corporation with one or acquire it for 105M. 50% DP and 50% 5 years
more of its directors or trustees or officers is to pay. “A” wants to acquire the same
voidable, at the option of such corporation, property but in cash. Board want to sell it to
A. what is the status of the contract? Valid
XPN: Unless all of the following conditions are because following conditions in the exception is
present: (Valid and Enforceable)) present. No need for ratification because all are
present.
1. That the presence of such director or
trustee in the board meeting in which Prime White Cement Corp. vs. IAC
the contract was approved was not
necessary to constitute a quorum for In the absence of express delegation,
such meeting; a contract entered into by the president, on
behalf of the corporation, may bind the
2. That the vote of such director or corporation if the board should ratify the same
trustee was not necessary for the expressly or impliedly. Furthermore, the
approval of the contract; president as such may bind the corporation by a
contract in the ordinary course of business,
3. That the contract is fair and provided the same is reasonable under the
reasonable under the circumstances; circumstances. These rules only apply where
and the president or other officer, purportedly acting
for the corporation, is dealing with a third
4. That in case of an officer, the contract person, i.e., person outside the corporation. It
has been previously authorized by the does not apply to self-dealing directors or
board of directors. officers.

XPN to XPN* Where any of the first two Mead vs. Mc Cullough
conditions set forth in the preceding paragraph is
absent, in the case of a contract with a director or A director or officer may in good faith
trustee, such contract may be ratified, provided: and for an adequate consideration purchase
from a majority of the directors or stockholders
1. The contract is ratified by the vote of the property even of an insolvent corporation.
the stockholders representing at least
two-thirds (2/3) of the outstanding INTERLOCKING DIRECTORS
capital stock or of at least two-thirds
(2/3) of the members A director in one corporation who deals
or transact business with another corporation of
2. Such ratification is made at a meeting which he is also a director.
called for that purpose;
This may involve a violation of loyalty,
3. Full disclosure of the adverse interest since he occupies the position of a director in
of the directors or trustees involved is two corporations dealing with each other. There
made; and may be a divided allegiance.

  37  
 

Thus, the prevailing view is these construction corporation and “A” owns 22%
contracts are not voidable merely by reason of stock in Y corporation. Is there an
conflicting duties or interest as to corporations interlocking director?
represented, even when a majority or all of the
directors are common to both corporations. It is Yes, A is an interlocking director. Contract is
recognized that such a contract will be upheld if valid because it is both substantial stock.
there is no bad faith or unfairness or collusion.
Without such a rule, contracts between a What if 18% and 20%?
corporation and its subsidiaries would usually be
impossible. X company Y company

Sec. 33. Contracts between corporations with 20% 22% Voidable


interlocking directors. - Except in cases of fraud,
and provided the contract is fair and reasonable 18% 205 Valid
under the circumstances, a contract between
two or more corporations having interlocking 22% 25% Valid
directors shall not be invalidated on that ground
alone: Provided, That if the interest of the
Substantial Substantial Valid
interlocking director in one corporation is
substantial and his interest in the other
corporation or corporations is merely nominal, 20% 20% Valid
he shall be subject to the provisions of the
preceding section insofar as the latter Nominal Nominal Valid
corporation or corporations are concerned.
 
Stockholdings exceeding twenty (20%)
percent of the outstanding capital stock shall be
considered substantial for purposes of
interlocking directors.

GR: Valid
DERIVATIVE SUIT
XPN: Void if there if fraud, unfair and
unreasonable Suits that stockholders may bring
against erring directors or officers:
XPN to XPN: If however, the interest of the
interlocking director in one corporation is 1. Individual or personal suit – one
substantial (more than 20%) and merely nominal brought by the shareholders for direct
in the other, the contract becomes voidable. injury to his rights, such as denial of his
right to inspect corporate books and
In effect, a director who owns a substantial records or pre-emptive right;
interest in one corporation dealing with another
where he has a nominal interest is a regarded 2. Representative of class suit - ; and
as a self-dealing director in so far as the latter
corporation is concerned. 3. Derivative suit – an action based on
injury to the corporation – to enforce a
Q: Is there an instance that it is merely corporate right – wherein the
voidable? If interlocking director has substantial corporation is joined as a necessary
and nominal share it will be under sec 31 which party, and recovery is in favor of the
is generally voidable. corporation.

Q: A stockholder in a corporation who


was not such at the time of the transactions
“A” president of XCO realty owns 20% stock. complained of, or whose shares had not
“A” entered into a contract with “Y” devolved upon him since by operation of law,

  38  
 

can not maintain a derivative suit unless such In a derivative suit, the injury complained of is
transactions continue and are injurious to the primarily to the corporation, so that the suit for
stockholder, or affect him specifically in some the damages claimed should be by the
other way. (Pascual vs. Orozco, et al.) corporation rather than by the stockholders. The
stockholders may not directly claim those
When the board is under the damages for themselves for that would result in
complete control of the principal defendants in the appropriation by, and the distribution among
the case, demand upon such board to institute them of part of the corporate assets before the
action and prosecute the same is not required. dissolution of the corporation and the liquidation
The law does not require litigants to do useless of its debts and liabilities. (Evangelista vs.
acts. (Everett vs. Asia Banking Corporation) Santos)

The corporation should be made a Rules, requirements and procedure so that a


party, in order to make the court‟s judgment derivative suit may proceed or prosper:
binding upon it, and thus bar future relitigation of
the issue. On what side the corporation appears 1. The party bringing the action
is not important. (Republic Bank vs. Cuaderno) should be a stockholder as of the time the act or
transaction complained of took place, or whose
The minority shareholder who is suing shares have evolved upon him since by
for and in behalf of the corporation must allege operation of law. This rule, however, does not
in his complaint before the proper forum that he apply if such act or transaction continues and is
is suing on a derivative cause of action on behalf injurious to the stockholder or affects him
of the corporation and all other shareholders specifically in some other way. The number of
similarly situated who wish to join. This is shares is immaterial.
necessary to vest jurisdiction upon the tribunal in
line with the rule that it is the allegations in the 2. He has tried to exhaust intra-
complaint that vest jurisdiction upon the court or corporate remedies, i.e. he has made a demand
quasi-judicial body concerned over the subject on the board of directors for the appropriate
matter and nature of the action. (Western relief but the latter had failed or refused to heed
Institute of Technology, Inc. vs. Salas) his plea. Demand, however, is not required if the
company is under the complete control of the
The bona fide ownership by a directors who are the very ones to be sued (or
stockholder of stock in his own right suffices to where it becomes obvious that a demand upon
invest him with standing to bring a derivative them would have been futile and useless) since
action for the benefit of the corporation. The the law does not require a litigant to perform
number of his shares is immaterial since he is useless acts.
not suing in his own behalf, or for the protection
or vindication of his own particular right, or the 3. The stockholder bringing the
redress of a wrong committed against him, suit must allege in his complaint that he is suing
individually, but in behalf and for the benefit of on a derivative cause of action on behalf of the
the corporation. (SMC vs. Khan) corporation and all other stockholders similarly
situated, otherwise, the case is dismissible.
Where corporate directors are guilty
of breach of trust – not mere error of judgment 4. The corporation should be made
or abuse of discretion – and intra-corporate a party, either as party-plaintiff or defendant, in
remedy is futile or useless, a stockholder may order to make the court‟s judgment binding upon
institute a suit in behalf of himself and other it.
stockholders and for the benefit of the
corporation, to bring about a redress of the 5. Any benefit or damages
wrong inflicted directly upon the corporation and recovered shall pertain to the corporation.
indirectly upon the stockholders. (Reyes vs. Tan,
et al.) EXECUTIVE COMMITTEE

The stockholders in a derivate suit cannot An executive committee may be created when
allege or vindicate their own individual interests authorized by the by-laws.
or prejudice. (Gamboa vs. Victoriano, et al.)

  39  
 

General rule: The executive committee may CHAPTER VII- CORPORATE


act, by majority vote of all its members, on such
specific matters within the competence of the POWERS AND AUTHORITY
board, as may be delegated to it in the by-laws
or on a majority vote of the board.

Exceptions: Classification of corporate authority:

1. Approval of any action for which 1. Those expressly granted or


shareholders' approval is also required; authorized by law inclusive of the
corporate charter or articles of
2. The filling of vacancies in the board; incorporation

3. The amendment or repeal of by-laws or 2. Those impliedly granted as are


the adoption of new by-laws; essential or reasonably necessary to the
carrying out of the express powers
4. The amendment or repeal of any
resolution of the board which by its 3. Those that are incidental to its
express terms is not so amendable or existence.
repealable; and
Powers expressly granted
5. A distribution of cash dividends to the
shareholders. 1. Power to sue and be sued (Sec. 36)

2. Power of succession (Sec. 36)

3. Power to adopt and use a corporate


seal (Sec. 36)

4. Power to amend its articles of


incorporation (Sec. 36)

5. Power to adopt, amend or repeal by-


laws (Sec. 36)

6. Power to issue or sell stocks/ to admit


members (Sec. 36)

7. Power to acquire or alienate real or


personal property (Sec. 36)

8. Power to enter into merger or


consolidation (Sec. 36)

9. Power to make reasonable donations


(Sec. 36)

10. Power to establish pension, retirement,


and other plans (Sec. 36)

11. Power to extend or shorten corporate


term (Sec. 37)

12. Power to increase or decrease capital


stock (Sec. 38)

  40  
 

13. Power to incur, create or increase authorized. (E.B. Villarosa & Partner Co., LTD.
bonded indebtedness (Sec. 38) vs. Benito)

14. Power to deny pre-emptive right (Sec. When you make a special appearance in
39) court on behalf of the corporation it does not
mean that you are the in-house counsel
15. Power to sell or dispose corporate because he was only employed for that specific
assets (Sec. 40) purpose.

16. Power to acquire own shares (Sec. 41) This rule on Summons applies only if
corporation is sued by third party because if intra
17. Power to invest corporate funds in corporate case, another law. (See appendix)
another corporation or business or for
any other purpose (Sec. 42) 1.

18. Power to declare dividends (Sec. 43) 2.

19. Power to enter into management 3. Corporation and State- if stockholder is


contract (Sec. 44) denied to inspect accounts, what will then apply
is summons to statutory officers or officers
POWER TO SUE AND BE SUED indicated in by-laws or their respective
secretaries. Therefore, it can only be given to
A juridical entity is separate and distinct director (statutory officer)
from the persons compromising it.
POWER OF SUCCESSION
The residence of the corporation is the place
of its principal office as may be indicated in its Right of succession – a corporation
articles of incorporation and may, therefore, be persists to exist despite the death, incapacity,
sued only at that place. (CRS vs. Antillon) civil interdiction or withdrawal of the
stockholders or members thereof because it has
Service of summons upon a corporation must a personality separate and distinct from officers
be made upon: or stockholders.

1. President POWER TO ADOPT AND USE COMMON


SEAL
2. Managing partner,
Statutes empowering corporations to
3. General manager, make and own a seal are not mandatory but
merely permissive. Because a corporate seal
4. Corporate secretary, performs no further or greater function than to
impart a prima facie evidence of the due
5. treasurer, or execution by the corporation of a written
document or obligation.
6. In-house counsel (Sec 11, Rule 14)
Q: When is putting seal mandatory?
Strict compliance with the mode of
service is necessary to confer jurisdiction of
the court over a corporation. The officer
upon whom service is made must be one POWER TO AMEND ARTICLES OF
who is named in the statute; otherwise the INCORPORATION
service is insufficient. (Delta Motor Sales
Corp. vs. Mangosing) General rule: Amendment of the articles of
incorporation is a matter of right (Note:
Under the new rules, service of summons procedure differs for special amendments)
upon an agent of the corporation is no longer

  41  
 

Exception: Corporations created by special law. Real or personal properties must be acquired,
However, Congress may repeal or amend it held or conveyed as the transaction of the lawful
charter. business of the corporation may reasonably and
necessarily require. Furthermore, it shall be
POWER TO ADOPT BY-LAWS. subject to the limitations imposed by law and the
Constitution.
A corporation, once formed is required
to adopt its by-laws, not contrary to law, morals Luneta Motors Co. vs. A.D. Santos, Inc.
or public policy, within one month from receipt of
official notice of the issuance of certificate of A corporation cannot undertake acquisition of
incorporation or registration. property which would have no purpose and
would have no necessary connection with its
POWER TO ISSUE OR SELL STOCKS legitimate business.
AND ADMIT MEMBERS
Govt. vs. El Hogar (?)
The power of a corporation to issue or
sell stock is an inherent right except only as it A corporation whose business may properly
may be regulated by law or by the articles of conducted in a populous center may acquire an
incorporation. (e.g Where it sells or issues appropriate lot and construct thereon an edifice
stocks of other corporation, Securities with facilities in excess of its own immediate
Regulation Code). requirements.

As to admission and termination of Dir. of Lands vs. CA


members, it is a prerogative granted by law to
non-stock corporations and the manner, A corporation may register alienable public
requirements or procedure for such admission or lands if it has been held by it, personally or
termination may be contained in its articles of through its predecessor-in-interest, openly,
incorporation or by-laws. continuously and publicly within the prescribed
statutory period of 30 years under the Public
POWER TO ACQUIRE/ALIENATE Land Law, as amended, since it is converted
into private property by mere lapse of
PROPERTY
completion of said period.
GR: A corporation is expressly empowered by
( in the previous cases, printing machine is
law to acquire or alienate real or personal
acquired by a drugstore, court said that it is not
properties
within the lawful business of corporation)
XPN: 1. Section 36- it must be for the lawful
Q: RCBC Towers is owned by Rural Bank, it
transaction of business as may be reasonably
leases a part of the building to several
and necessarily require.
foreign embassy. Can the bank lease the
building to other companies? This is an Ultra
5. Section, Article XII of Constitution-
vires act but can be ratified or that is stated as
Private corporations may not hold alienable
their additional purpose.
lands of public domain (except agricultural
lands) but only by lease for a period not
exceeding 25 years renewable for nmt 25 POWER TO ENTER INTO MERGER OR
years, and not to exceed 1000 H CONSOLIDATION

XPN: SC: A corporation may register POWER TO MAKE REASONABLE


alienable public lands if it has been held by DONATIONS
it, personally or through his predecessor-in-
interest, openly, continuously and publicly GR: A pure gifts of funds or property by a
within the prescribed period of 30 years corporation not created for charitable purpose is
under the Public Land Law, since it is not authorized and would constitute violation of
converted into private property by mere rights of stockholders.
lapse of such period.

  42  
 

XPN: Unless empowered by statute. Because corporate existence.


profit is owned by the stockholders and not
corporation These powers which are impliedly
conferred are
XPN to XPN: Corporation can donate if it will
benefit the them, such as for promotional. 1. Privilege of having the right of
succession
Limitations imposed upon corporate donations:
2. Capacity to sue and be sued
1. The donation must be reasonable;
3. Capacity to purchase properties
2. It must be for public welfare, or for
hospital, charitable, scientific, cultural or 4. Adopt Corporate seal
similar purpose; and
5. Authority to adopt and amned by-
3. It shall not be in aid of any political party laws.
or candidate, or for purpose of partisan
political activity. As to powers “essential or necessary”
no uniform rule. Each case must depend upon
Q: Is sports and fraternal included in no. 2? its particular facts and circumstances.
No
The test to be applied is whether the act
In practice, they still give donations they just in question is in direct and immediate
indicate it as miscellaneous expense. furtherance of the corporation’s business, fairly
incident to the express powers and reasonably
necessary to their existence.

POWER TO ESTABLISH PENSION, Classification of implied powers:


RETIREMENT AND OTHER PLANS
1. Acts in the usual course of business
This is allowed because it will promote
the convenience, welfare and benefit of the 2. Acts to protect debts owing to the corporation
employees or officers.
3. Embarking on a different business
Republic vs. Acoje Mining Co., Inc.
4. Acts in part or wholly to protect or aid
While as a rule an ultra vires act is one employees
committed outside the object for which a
corporation is created as defined by law of its 5. Acts to increase business
organization and therefore beyond the powers
conferred upon it by law, there are however (A manuf company sold its plant but the
certain corporate acts that may be performed proceeds of sale is use to build a more
outside of the scope of the powers expressly complex facility, this is usual. But not if
conferred if they are necessary to promote the the new building is sold again, this must
interest or welfare of the corporation. This is result to amendment of Articles.)
vital for the improvement of its employees.
A corporation has authority to do what will
POWER TO EXERCISE SUCH OTHER legitimately tend to effectuate the express
POWERS ESSENTIAL OR NECESSARY purposes and objects; that it may ordinarily do
all things that are convenient, suitable or
TO CARRY OUT ITS PURPOSES
necessary to enable it to fully perform the
(IMPLIED POWERS) undertaking designated in its charter, and for
which it is organized.
Powers incidental are those that attach
to the corporation from the date of its
Examples:
incorporation which may likewise be inherent to

  43  
 

Teresa Electric Power Co., Inc. vs. PSC stockholder or member at his place of
residence, either by mail or personal
Operation and maintenance of an service;
electric plant for a cement factory.
5. In case of extension, the same cannot
The articles provides that the be made ealier than five (5) years prior
corporation may secure form government to the original or subsequent expiry date
franchises that are necessary or related to unless there are justifiable reasons for
business. an earlier extension;

NPC vs. Vera 6. In case of extension, the same must


be made during the lifetime of the
NPC‟s undertaking of stevedoring corporation;
services for its power plant.
7. Any dissenting stockholder may
The charter creating NPC provided exercise his appraisal right;
that they may exercise those things that may
reasonably necessary to carry out the business. 8. Submission of the amended articles
with the SEC; and
Powers vs. Marshall
9. Approval thereof by the SEC.
International School‟s imposition of a
development fee for expansion and Q: A corporation registered 10years ago and
maintenance. with term of 50 years, can they amend it
now? It depends. Yes, if shorten the term. No, if
By-laws provides that school has the it is extended unless there is justifiable reason.
right to exercise such powers and do such
things as may be lawfully exercise or perform by POWER TO INCREASE/DECREASE
the corporation. The law authorizes the school to CAPITAL; INCUR, CREATE OR
add fees provided with approval of Secretary of INCREASE BONDED INDEBTEDNESS
DepEd.
Requirements and procedure:
POWER TO EXTEND/SHORTEN
CORPORATE TERM 1. Approval by the majority vote of the
board of directors or trustees;
Section 37 not 16.
2. Ratification by the stockholders
Requirements and procedure: representing at least 2/3 of the
outstanding capital stock or 2/3 of the
1. Approval by the majority vote of the members in case of non-stock
board of directors or trustees; corporations;

2. Ratification by the stockholders 3. The ratification must be at a meeting


representing at least 2/3 of the duly called for that purpose;
outstanding capital stock or 2/3 of the
members in case of non-stock 4. Prior written notice of the proposed
corporations; action must be made stating the time
and place of meeting addressed to each
3. The ratification must be at a meeting stockholder or member at his place of
duly called for that purpose; residence, either by mail or personal
service;
4. Prior written notice of the proposal to
extend or shorten the corporate term 5. A certificate in duplicate must be signed
must be made stating the time and by a majority of the directors of the
place of meeting addressed to each corporation, countersigned by the

  44  
 

chairman and the secretary of the 2. Increasing the number of existing


stockholder‟s meeting, setting forth shares without increasing the par value
thereof; and
(1) That the requirements of this section
have been complied with; 3. Increasing the number of existing
(2) The amount of the increase or shares and at the same time increasing
diminution of the capital stock; the par value of the shares.
(3) If an increase of the capital stock,
the amount of capital stock or number of shares PV
of no-par stock thereof actually subscribed, the
names, nationalities and residences of the ACS 1M 1M/s 1:00
persons subscribing, the amount of capital stock Increase 2M 1M/s 2:00
or number of no-par stock subscribed by each, 2m/s 1:00
and the amount paid by each on his subscription
1.5m/s 1.5:00
in cash or property, or the amount of capital
stock or number of shares of no-par stock
allotted to each stock-holder if such increase is
for the purpose of making effective stock Q: May a stock corporation convert itself
dividend therefor authorized; to a non-stock corporation, vice versa?
(4) Any bonded indebtedness to be
incurred, created or increased; Stock to Non stock, yes, they can assign
(5) The actual indebtedness of the the proprietary right to another person
corporation on the day of the meeting;
(6) The amount of stock represented at Non stock to stock, No, dissolve the
the meeting; and corporation first because there are certain
(7) The vote authorizing the increase or rights that’s for stock corporation only.
diminution of the capital stock, or the
incurring, creating or increasing of any ?In increasing capital stock there is no
bonded indebtedness. limitation but must first

6. In case of increase in capital stock, 25% 1. pay liabilities


of such increased capital must be
subscribed and that at least 25% of the 2. acquisition of business
amount subscribed must be paid either
in cash or property; 3.

7. In case of decrease in capital stock, the


same must not prejudice the right of the
creditors; Existence of unissued or
unsubscribed share out of the original capital
8. Filing of the certificate of increase and stock will not prohibit the increase of capital
amended articles with the SEC; and stock.

9. Approval thereof by the SEC. Reasons for decreasing capital stock:

(Note: The SEC requires the submission or filing 1. To reduce or wipe out existing deficit
of the amended articles in any case where there where no creditors would thereby be
are changers thereto) affected;

3cways of increasing the capital stock: 2. When capital is more than what is
(decreasing also) necessary to procreate the business or
reduction of capital surplus; or
1. Increasing the par value of the existing
number of shared without increasing the 3. To write down the value of its fixed
number of shares; assets to reflect the present actual value
in case where there is a decline in the

  45  
 

value of the fixed assets of the unpaid stock subscription in order to realize
corporation. assets for the payment of its debts.

There must be a valid reason for Madrigal & Co. vs. Zamora
decreasing the capital structure. The
reasons above are not exclusive. A reduction of capital stock may not be used as
a subterfuge, a deception as it were, to
Examples of decrease in capital camouflage the fact that a corporation has been
making profits to obviate a just sharing to labor.
Trading company who wants to
engage in grocery business has a capital of A corporation which has the power to borrow
2M but their business permit was denied or raise money, to contract for labor or services,
because the Mayor owns all the grocery or otherwise contract a debt has the implied
stores in the area. Instead, they just build a power to issue bonds in payment or as a
sari-sari store. So what they will do is to security provided it violates no prohibition or
reduce capital. restriction in its charter or any other statutes.

A manufacturing company has a Corporate bonds must be registered and


capital of 2M, it appears that some approved by the SEC before they are issued.
ingredients are harmful, so instead of selling The procedure and requirements in S 38 is the
them they just burn it. The corporation now same as in increasing or decreasing capital
has a deficit of 5M, they can just decrease stock except that the certificate does not have to
the capital so that third person will not be state the matters required in subsection 2 & 3
affected thereof.

A taxi corporation bought a taxi Bond- obligation of a state, its subdivision or


amounting to 1M each. Due to wear and tear a private corporation, represented by a
its resale value only amounts to 500k and certificate or an instrument for the principal and
these are the only assets of corporation. It by detachable coupons for the payment of
can decrease its capital to show that they interests. It is one where an obligor obliges
are still a good corporation and they will not himself to pay a certain sum of money to
affect third parties. another at a day named.

Philippine Trust Company vs. Rivera POWER TO DENY PRE-EMPTIVE RIGHTS

A corporation has no power to release an Pre-emptive right – is a right granted by law


original subscriber to its capital stock from the to all existing stockholders of a stock corporation
obligation of paying for his shares, without a to subscribe to all issues or disposition of shares
valuable consideration for such release; and as of any class, in proportion to their respective
against creditors a reduction of the capital stock stockholdings, subject only to the limitations
can take place only in the manner and under the imposed under Sec. 39.
conditions prescribed by law. Moreover, strict
compliance with the statutory regulations is The basis for the grant of this right is the
necessary. preservation, unimpaired and undiluted, of the
old stockholders‟ relative and proportionate
Reduction is not valid because no approval of voting strength and control, that is, the existing
SEC. Even if filed in SEC it will still not be ratio of their proprietary interest and voting
approved because it runs counter with Trust power in the corporation. (In order for them to
Fund Doctrine. maintain their proportionate interest)

Trust Fund Doctrine- Subscriptions to the If there is increase in 10%, stockholders is


capital of a corporation constitute a fund to entitled to subscribe another 10%. In order that
which creditors have a right to look upon for his 10% voting right & dividends will be
satisfaction of their claims and that the assignee maintained.
in insolvency can maintain an action upon any

  46  
 

Absent this right, a controlling stockholder Are there instances when such right can be
may easily strengthen his hold and control of the denied without mentioning in articles? Yes,
corporate affairs. those in exceptions.

GR: All stockholders of a stock corporation Will this exceptions apply to close
shall enjoy pre-emptive right to subscribe to all corporations?
issues or disposition of shares of any class, in
proportion to their respective shareholdings, No, XPN to XPN
unless such right is denied by the articles of
incorporation or an amendment thereto. See section 96, close corporations must
provide it first on its articles of incorporation, that
Exceptions: its articles does not really deny such pre-
emptive rights.
1. Shares to be issued in compliance with
laws requiring stock offerings or ØØ Section 102, will not apply to close
minimum stock ownership by the public; corporations
or
ØØ The right of pre-emptive rights is absolute in
2. Shares to be issued in good faith with close corporations
the approval of the stockholders
representing two- thirds (2/3) of the
outstanding capital stock, in exchange
for property needed for corporate EXAMPLE:
purposes or in payment of a previously
contracted debt. ACS 1M

XPN to XPN: 1. The exceptions do not apply to SUBSCRIBED 1M- 250t


stockholders of a close corporation because of
the express provision in the Code which 750t unissued/unsubscribed
provides that the pre-emptive right of a
stockholder in a close corporation shall extend Board decides to issue remaining
to all stock to be issued, including reissuance usubscribe portion to other person, will the
of treasury shares, whether for money, property existing stockholder have pre-emptive right?
or personal services or in any payment of a Yes, because Benito case is abandoned.
corporate debt, unless the article provide Now new or unsubscribed stocks.
otherwise. (S. 102)

2. S. 96
POWER TO SELL/DISPOSE ASSETS
The right may be lost by waiver, expressly or
impliedly by inability or failure to exercise it after Conditions for the valid exercise of this right
having been notified.
1. Resolution by the majority vote of the
The pre-emptive right covers all issues or board of directors or trustees;
disposition of share of any class. It includes new
share issued pursuant to an increase in capital
2. Authorization from the stockholders
stock, unissued shares which form part of the
representing at least 2/3 of the
original capital stock and treasury shares.
outstanding capital stock or 2/3 of the
members in case of non-stock
Q: Since it is expressly provided by law, May corporations;
this be denied?
3. The ratification must be at a meeting
Yes, Article of corporation or amendment duly called for that purpose;
thereto.
4. Prior written notice of the proposed

  47  
 

action must be made stating the time and it has a plant and sold it to third party, is
place of meeting addressed to each stockholders approval necessary? Yes,
stockholder or member at his place of because such is not in the course of business.
residence, either by mail or personal Selling the plant will render the business
service; incapable of doing business.

5. The sale of the assets shall be GR: Stockholders approval


subject to the provisions of existing laws
on illegal combinations and monopolies; XPN: If proceeds are used for the
and furtherance of business like for more plants.

6. Any dissenting stockholder shall have IDP vs. CA


the option to exercise his appraisal right.
The sale or other disposition of all or
(Note: In non-stock corporations where there are substantially all of the corporate property or
no members with voting rights, the vote of at assets must be voted for by the legitimate
least a majority of the trustees in office will be board and concurred in by the bona fide
sufficient authorization for the corporation to stockholders or members.
enter into such transaction.)
Q: Assuming that they are legitimate
The procedure and requirements members, is their action now valid?
above will not apply if the sale or disposition
does not involve “all or substantially all” of the No, because parcels of land are the
assets of the corporation as to render it only properties of IDP, the act of selling would
incapable of continuing business or render corporation incapable to carry out the
accomplishing the purpose for which it was purpose of its organization.
incorporated. Thus, if the same is necessary
in the usual and regular business, Section 40 Edward Nell vs Pacific Farms
will not apply.
General rule: Where a corporation sells or
For section 40 to apply therefore, otherwise transfers all of its assets to another
the sale or disposition of assets must be corporation, the latter is not liable for the debts
such as to render the corporation incapable and liabilities of the transferor.
to carry out the purpose of its organization,
or that proceeds thereof will not be use for Exceptions:
the conduct of the remaining business.
1. Where the purchaser expressly or
Despite authorization from impliedly agrees to assume such debts;
stockholder, the code allows the board of
directors to abandon the ale or disposition 2. Where the transaction amounts to a
subject only to the rights of third parties under consolidation or merger of the
the contract, w/o further action or approval of the corporations;
stockholders or members.
3. Where the purchasing corporation is
Sale may result to merger or merely a continuation of the selling
consolidation. And a s Rule, the corporation is corporation; and
not liable for the debts and liabilities of the
transferor. 4. Where the transaction is entered into
fraudulently in order to escape liability
Q: X Company is engage in Real property for such debts.
business and has one property, will approval
of stockholders necessary? No, because it is POWER TO ACQUIRE OWN SHARES
in the regular course of business.
A stock corporation shall have the power to
X company has a compound where purchase or acquire its own shares for a

  48  
 

legitimate corporate purpose or purposes, Sectio 4(1-8)


including but not limited to the following cases:
Q: How can there be fractional share? Issue
1. To eliminate fractional shares arising out of amnesty out of stock dividend and pay in cash
stock dividends; the equivalent value.

2.To collect or compromise an indebtedness to Fractional share is no longer allowed in our


the corporation, arising out of unpaid country.
subscription, in a delinquency sale, and to
purchase delinquent shares sold during said Steinberg vs Velasco
sale;
Corporation cannot acquire its own share if
3.To pay dissenting or withdrawing stockholders you have no unrestricted earnings.
entitled to payment for their shares; and
Creditors of a corporation has the right to
4.To redeem redeemable shares. assume that so long as there are outstanding
debts and liabilities, the board od directors will
General rule: the corporation must have not use the assets of the corporation to
“unrestricted retained earnings.” The phrase is purchase its own stock, and that it will not
used in the sense that the corporation cannot declare dividends to stockholders when the
use its capital stock to purchase its own shares, corporation is insolvent.
that is, corporate assets below the legal or
stated capital but only from surplus profits. POWER TO INVEST FUNDS

Exceptions: The right refers to investment in the


form of money, stock, bonds and other liquid
a. Redemption of redeemable assets and does not include real properties or
shares; and (s.8) other fixed assets. (“may invest funds”)

b. Stockholders right to compel a Requirements and procedure:


close corporation to purchase
his shares when the corporation 1. Resolution by the majority vote of the
has sufficient assets to cover its board of directors or trustees;
debts and liabilities. (sec 105 &
sec 104) 2. Ratification by the stockholders
representing at least 2/3 of the
Where a corporation acquires its own outstanding capital stock or 2/3 of the
shares, the shares are not extinguished unless it members in case of non-stock
is acquired by the corporation with the intention, corporations;
and may thereafter reissued. While in the
possession of the corporation, it is considered at 3. The ratification must be at a meeting
treasury share and while they remain so, they duly called for that purpose;
have no voting and dividend right.
4. Prior written notice of the proposed
The acquisition of shares must be made in investment and the time and place of
good faith, free from fraud, actual or meeting shall be made, addressed to
constructive, and that the corporation is not each stockholder or member at his
insolvent or in the process of dissolution and place of residence, either by mail or
that the rights of creditors and other personal service; and
stockholders are in no way injuriously affected.
5. Any dissenting stockholder shall have
Q: May a corporation acquire its own share? the option to exercise his appraisal right.
Yes, for legitimate purposes.
The approval of the stockholders or
Q: What will be the legitimate purposes? members is not required where the investment is

  49  
 

reasonably necessary to accomplish its primary POWER TO DECLARE DIVIDENDS


purpose. “For any purpose other than the
primary purpose” that even if the business is Dividends – are corporate profits set aside,
authorized in the secondary purpose, the declared and ordered by the Board of Directors
provision of section 42 must be complied with to be paid to the stockholders. (Fruit of
before the corporation may pursue the same. investment).

Dela Rama vs Mao-sugar Central This right is not available to Non-stock


corporation because they can’t declare
Investment in Phil Fiber a dividends.
manufacturer of sugar bags is necessary in the
primary purpose of mao-sugar. Test is whether Q: Where does dividends come from?
there exist a logical connection from the primary
purpose. Dividends can only be declared out of
unrestricted retained earnings or surplus profits.
Gokongwei, Jr. vs. SEC (don’t say profits)

There is more logic in the stand that if Unrestricted retained earnings –


the investment is made in a corporation whose undistributed earnings of a corporation which
business is important to the investing have not been allocated for any managerial,
corporation as would aid it in its purpose, to contractual or legal purpose and which are free
require authority of the stockholders would be to for distribution to the stockholders as dividends.
unduly curtail the power of BOD.
A corporation has no power to declare
An unauthorized investment which is dividends if its paid-up capital is not maintained
not illegal or void ab initio or not contrary to law, or is impaired. This capital represents a “trust
morals, public order or public policy, is merely fund” which is kept intact for protection of
voidable and may become binding and creditors.
enforceable when ratified by the stockholders.
Types of dividends:
Q: Corporation’s primary purpose is
construction business while secondary 1. Cash dividend – those that are payable in
purpose is realty . Is stockholders approval lawful money or currency.
necessary ? Yes, law says that the power to
invest corporate funds requires approval of 2. Property dividend – those that are paid in the
stockholders if investment is for another form of property instead of cash.
corporation or for any other purposes other that those that take form of bonds,
primary. notes, evidences of
indebtedness or stock in other
Appraisal right of stockholders to corporations.
withdraw uncertain acts and compel corporation
to pay the FMV of the stocks is not available in 3. Stock dividends – refer to the corporation’s
instances when stockholders may object (Sec shares of stock or certificate
81 & 86) evidencing it.

Q: RCBC building is being leased to third Cash or Property Stock Dividends


parties. Is stockholders ratification Dividends
necessary?
BOD will declare Approval of 2/3 of the
Yes, there is a need for 2/3 vote, or dividends outstanding capital
ratification, or by estoppel. stock

Declaration of cash or Neither would stock


property dividends dividends increase
have the effect of the proportionate

  50  
 

reducing corporate interest of The judgment of the board of directors in the


assets to the extent stockholders of matter of declaring dividends is conclusive
of dividends declared. corporation although except when they act in bad faith, or for a
it will have the effect dishonest purpose or act fraudulently,
of increasing the oppressively, unreasonably or unjustly or abuse
subscribed and paid- of discretion can be shown so as to impair the
up capital. rights of the complaining stockholders to their
just proportion of corporate profits. If the policy
It gives the of the directors is dictated by their personal
stockholders nothing interest rather than the corporate welfare.
in the way of
distribution of assets Accumulated Profits beyond 100%
but merely divides his of PU
existing shares into
smaller units. General rule: Stock corporations are prohibited
from retaining surplus profits in excess of 100%
of their paid-in capital stock.

Rules on dividends due on delinquent Exceptions:


stock:
1. When justified by definite corporate
GR: expansion projects or programs
approved by the board of directors; or
Cash dividend – first applied to the unpaid
balance on subscription costs 2. When the corporation is prohibited
and expenses. under any loan agreement with any
financial institution or creditor, whether
Stock dividend – withheld until subscription is local or foreign, from declaring dividends
fully paid. without its/his consent, and such
consent has not yet been secured; or
XPN:
3. When it can be clearly shown that
S. 72 even if subscribed stocks is not such retention is necessary under
yet paid the stockholders still have certain rights special circumstances obtaining in the
like appraisal. ( Stockholder must be declared corporation, such as when there is need
delinquent) for special reserve for probable
contingencies.
Modes of Collecting
When Dividend Rights Vest
1. If Board make a call
GR: The right of the stockholders to be paid
2. If Board said that the stock delinquent dividends vest as soon as they have been
should be paid in the specific time. lawfully and finally declared by the Board of
Directors.
Authority to Declare Dividends
Lodged with the Board. No revocation of dividend may be had
unless it has not been officially communicated to
General rule: The board of directors exercise the stockholders or is in the form of stock
exclusive authority in declaring dividends. dividends which is revocable at any time prior to
(Reason: they are managers of corporation) distribution. ( to prevent misleading investors
and the probable effect which revocation may
Exception: In declaring stock dividends, the have on the stability of stock transactions)
approval of the stockholders representing at
least 2/3 of the outstanding capital stock is XPN: In stock dividends, it can still be
required. revoked even if dividend is already announced

  51  
 

but not yet paid or issued. (Stock dividend does


not result to the distribution of corporate powers
but merely divides the existing shares of
stockholders into smaller units.

Who is the owner upon declaration of


dividends?

GR: Any dividend already declared when shares


are transferred belongs to the owner of shares
at the time of the declaration. Whoever is the
registered owner on a specified record date is
entitled to dividends.

XPN: If there is a contrary agreement.

As to Transefer…

As against his transferor, however as


transferee of stocks after the declaration but
before the specified date of payment, has
presumably the right to such dividends despite
failure to record the transfer in stock and transfer
book. XPN: Unless the contracting parties have
agreed to the contrary.

Directors can’t declare dividends if there is no


POWER TO ENTER INTO MANAGEMENT
surplus profits. (Steinberg vs. Velasco0 CONTRACTS

Stock dividends cannot be issued to a person Requirements and procedure:


who is not a stockholder. (Neilson & Co., Inc. vs.
Lepanto Consolidated Mining Co.) 1. Resolution by the board of
directors or trustees;
Directors are not liable for declaration of
dividend contrary to law, unless attended with 2. Approval by the stockholders
bad faith, gross negligence or willful and representing a majority of the
knowing assent. (Ladia) outstanding capital stock or majority
of the members in case of non-stock
Q: If BOD acted in due diligence corporations;
in the declaration of dividend, can they
pursue stockholder to bring back 3. The approval must be at a
dividend? An innocent stockholder is not meeting duly called for that purpose;
liable to return it unless corporation is
experiencing Insolvency. 4. The contract shall not be for a
period longer than 5 years for any
one term, except those which relate
to exploration, development or
utilization of natural resources which
may be entered into for such periods
as may be provided by pertinent
laws and regulations.

GR: Majority votes

  52  
 

XPN: Not only majority but approval of the XPN: Unless the public or third parties are
stockholders of the managed corporation thereby prejudiced.
owning at least 2/3 of the outstanding
capital stock or 2/3 of the members in case Consequences of ultra-vires acts:
of non-stock corporations are required:
1. On the corporation itself – the proper
forum may suspend or revoke, after
1. Where a stockholder or proper notice and hearing, the franchise
stockholders representing the same or certificate of registration of the
interest of both the managing and corporation for serious
the managed corporations own or misrepresentation as to what the
control more than 1/3 of the total corporation can do or is doing to the
outstanding capital stock entitled to great damage or prejudice of the
vote of the managing corporation; general public.

2. Where a majority of the members 2. On the rights of the stockholders – a


of the board of directors of the stockholder may either an individual or
derivative suit to enjoin a threatened
managing corporation also constitute
ultra-vires act or contract.
a majority of the members of the
board of directors of the managed 3. On the immediate parties –
corporation; or
(a) if the contract is fully executed on
3. Where the contract would both sides, the contract is effective;
constitute the management or
operation of all or substantially all of (b) if the contract is executory on both
the business of another corporation, sides, neither party can maintain an action
whether such contracts are called for its non-performance; and
service contracts, operating
agreements or otherwise. (c) if the contract is executory on one
side only, and has been fully performed on
the other, the party who has received the
benefits is estopped to set up that the
contract is ultra-vires.
ULTRA-VIRES ACTS
Q: X co. manuf is a caterer. B corporation’s
Ultra-vires acts – are those that can not be President is about to retire. They contracted
executed or performed by a corporation because X co to be the caterer for the farewell party.
they are not within its express, inherent or After the event, B corpo alleged that contract
implied powers as defined by its charter or is ultra vires, is B corp still liable? Yes, B
articles of incorporation. corpo received benefits from the contract and
now is estopped to allege ultra vires act.
Although an Unltra vires act, jurisprudence
tends to hold as within the corporate powers, Republic vs. Acoje Mining
acts which are clearly beneficial to the company
or necessary to promote the interest or welfare Acts which are clearly beneficial to the
of the corporation, its employees and their company or necessary to promote the interest or
families, or in the legitimate furtherance of its welfare of the corporation, its employees and
business. Thus, any transaction which id their families, or in the legitimate furtherance of
incidental to the main business of the its business are within corporate powers.
corporation may be undertaken.
Privano vs. De la Rama Steamship
Ultra vires act is not necessary illegal or void.
GR: It is merely voidable and may be ratified, by Mere ultra-vires acts which are not illegal per
equitable ground or estopped. se may become binding and enforceable either

  53  
 

by ratification, estoppel or on equitable grounds CHAPTER VIII- BY-LAWS


unless the public or third parties are thereby
prejudiced.
By-laws – are rules and ordinances made by a
corporation for its own government; to regulate
Carlos vs. Midoro Sugar Co. the conduct and define the duties of the
stockholders or members towards the
Corporations authorized to acquire the bonds corporation and among themselves.
have the implied power to guarantee them in
order to place them upon the market under
They are rules and regulations or private laws
better, more advantageous conditions, and
enacted by the corporation to regulate, govern
thereby secure the profit derived from their sale.
and control its own actions, affairs and concerns
When a contract is not on its face necessarily
and its stockholders or member and directors
beyond the scope of the power of the
and officers with relation thereto and among
corporation by which it was made, it will, in the
themselves in their relation to it.
absence of proof to the contrary, be presumed
to be valid. Corporations are presumed to
Requirements and procedure for adoption of by-
contract within their powers. The doctrine of ultra
laws:
vires, when invoked for or against a corporation,
should not be allowed to prevail where it would
1. The by laws must not be inconsistent
defeat the ends of justice or work a legal wrong.
with the Code;
Japanese War Notes Claimants Assoc., Inc.
2. If adopted prior to incorporation:
vs. SEC
i. Approved and signed by
Actions which are beyond the powers of the
all the incorporators;
corporation as embodied in its articles of
incorporation and have absolutely no relation to
ii. Submitted together with
the avowed purpose of the corporation are ultra-
the articles of
vires.
incorporation to the
SEC;
Corporation is a non-stock and should not be
engage in a business for profit.
If adopted subsequent to incorporation:
Crisologo-Jose vs. CA
i. Adopted within one (1) month
after receipt of official notice of the
GR: Corporate officers have no power to
issuance of its certificate of incorporation
execute for mere accommodation a negotiable
by the SEC;
instrument of the corporation for their individual
debts or transactions arising from or in relation
ii Affirmative vote of the stockholders
to matters in which the corporation has no
representing at least a majority of the
legitimate concern. Since such accommodation
outstanding capital stock, or of at least a
paper cannot thus be enforced against the
majority of the members in case of non- stock
corporation, especially since it is not involved in
corporations,
any aspect of the corporate business or
operations, the signatories thereof shall be
personally liable therefor, as well as for the iii. Signed by the
consequences arising from their acts in stockholders or
connection therewith. members voting for
them
XPN: If power to execute negotiable
instrument is delegate to agents and officers of iv. Kept in the principal
corporation office of the corporation,
subject to the inspection
of the stockholders or
members during office
hours.

  54  
 

v. A copy thereof, duly office of all officers other than


certified to by a majority directors or trustees;
of the directors or
trustees countersigned h. The penalties for violation of the
by the secretary of the by-laws;
corporation, must be
filed with the SEC which i. In the case of stock
shall be attached to the corporations, the manner of
original articles of issuing stock certificates; and
incorporation.
j. Such other matters as may be
3. Certification of the necessary for the proper or
appropriate government agency convenient transaction of its
concerned to the effect that such by- corporate business and affairs.
laws or amendments are in accordance
with law. (Some provisions like a-c do not need
to be included in by-laws because the Code
4. Issuance by the Securities already provides for it)
and Exchange Commission of a
certification that the by-laws are not By-laws are subordinate to the articles of
inconsistent with this Code. incorporation, the Corporation Code and other
statutes which form part of the corporate charter.
Contents of by-laws:
Q: When is By-laws approved? By-laws shall
a. The time, place and manner of be effective upon the issuance by the SEC of a
calling and conducting regular certification that by-laws are not inconsistent
or special meetings of the with the Code.
directors or trustees;
By law and articles are different. Because in
b. The time and manner of calling by laws approval of SEC is needed while in
and conducting regular or articles Ordinary amendment S.16 will become
special meetings of the valid upon approval or after 60 days SEC did not
stockholders or members; act upon it, the time of effectivety retroacts from
day of filing.
c. The required quorum in
meetings of stockholders or By-laws become effective only upon the
members and the manner of approval of the SEC
voting therein;
Time of filing:
d. The form for proxies of
stockholders and members and Prior to incorporation – must be
the manner of voting them; signed by all the incorporators, must be filed
together with the articles of incorporation
e. The qualifications, duties and
compensation of directors or After incorporation – approval of at
trustees, officers and least a majority of the outstanding capital stock
employees;
Failure to file by-laws may result to
f. The time for holding the annual suspension or revocation of corporate franchise
election of directors of trustees after proper notice and hearing
and the mode or manner of
giving notice thereof; Two modes of amending or repealing by laws or
adopting a new one:
g. The manner of election or
appointment and the term of a. By a majority vote of the

  55  
 

directors or trustees and the interest of a director.


majority vote of the outstanding
capital stock or members, at a Further the law merely states the minimum
regular or special meeting called qualification and disqualification. The by-law
for that purpose; or may provide for additional qualifications and
disqualificationss
b. By the board of directors alone
when delegated by 2/3 of the Elements of a valid by laws:
outstanding capital stock or
members a. It must not be contrary to law, public
policy or morals.
Delegated power to amend, repeal or adopt
by-laws may be revoked b. It must not be inconsistent with the
articles of incorporate.

c. It must be general and uniform in its


LGVHA vs. CA effect or applicable to all alike or those
similarly situated.
Failure to file by-laws does not result in
automatic dissolution. There must be notice and d. It must not impair obligations and
hearing. contracts or vested rights.

PD 902-A Commissioner has authority to e. It must be reasonable.


suspend or revoke certificate or franchise for
failure to file the corporation By-laws.

(If we apply Section 144 we will reach the


same decision if we apply PD 902-A)

Fleisher vs. Botica Nolasco

By-laws are internal rules an cannot bind,


effect or prejudice third persons without
knowledge.

Shares of stock are personal property and


may be transferred by the stockholder to any
one.

The only restraint that may be imposed is the


need for the registration of sale or transfer in the
Books of the corporation.

Govt. vs. El Hogar

Incorporation of an invalid by-law provision is


not a misdemeanor. It does not justify the
dissolution of the corporation.

Gokongwei, Jr. vs. SEC

The by-laws may disqualify a stockholder


from being elected into office if he has a
substantial interest in a competitor corporation to
avoid any possible adverse effects of conflicting

  56  
 

CHAPTER 9: MEETINGS statement are audited.

Meetings – applies to every duly convened 2. Prior notices must be given


assembly either stockholders, members,
directors or trustees, manages, etc. for any legal GR:
purpose, or the transaction of business of a
common interest. Ø Regular SHs Meeting- Written notice
shall be sent to all SHs of record at
Classification of Corporate meetings: least 2 weeks prior to the meeting.
Ø Special SHs Meeting- 1 week prior
1. General written notice is required.

2. Special XPN: Unless the by-laws requires a different


period. The by-laws may extend or shorten
the sending out of notices.

A. STOCKHOLDER’S MEETINGS Q: What will be the effect if no notice is


given? Failure to give notice, give the
GR: Stockholders have no power to agenda or business matters to be taken
act for the corporation except in a corporate would render resolution made VOIDABLE at
meeting called and conduced according to law in the OPTION OF STOCKHOLDER OR
order for the to discuss the issues and vote. MEMBER who was NOT NOTIFIED.

XPN: Ordinary Amendment of Articles However, Notice may be waived, either


of Incorporation where the vote or “written expressly or impliedly, by any SH and the
assent” of the stockholders representing 2/3 of fact that a SH attended the meeting is
the outstanding capital stock or 2/3 of the deemed an implied waiver of the notice
members in case of non-stock. requirement; this is equally true where the
shareholder is represented and participated
Classification of SH meetings: by proxy or by proper authority.

1. Regular meetings of stockholders of 6. Directors vs. Tan


members- are those held annually on a
date fixed in the by-laws, or if not so fixed, The by-laws provided for a 5 day notice rule
on any date in April of every year as the which upheld its validity, nonetheless, it posted 2
BOD or trustees may determine. days prior to the meeting, thus the court held
that the meeting and resolution passed was not
2. Special- Held at any time deemed necessary valid for want of notice.
or as provided for in by-laws.
Failure to give notice in accordance therewith
Requirements to have a valid stockholder’ s would render the resolution made thereunder
meeting: voidable at the option of the SH/members who
was not notified.
1. It must be held on the date fixed in the by-
laws or in accordance with law; If there is no 1. 3. It must be held at the proper
date fixed, it may be held on any date on April place/venue.
as may be fixed by the BOD.
XPN: Where the annual meeting > Stock Corporation- At all times it
cannot be held on the appointed time for some must be held in the city or municipality
valid and meritorious reasons such as force where the principal office of the corporation
majeure or inability to obtain the require is located and, far as practicable, in the
quorum. The same may be postponed to a province or municipality where the principal
reasonable future date. office is located

Q: Why April? – It is the time when financial > Non-Stock Corporation- meetings may

  57  
 

held anywhere in the Philippines provided Otherwise, the remedy is to file


that proper notices shall be sent indicating a petition for mandamus.
the date, time and place of the meeting.

Q: Can the By-laws provide for other Q: What if the person authorized failed or
places to hold a meeting? – In Non-stock neglected to call a meeting? Ponce case
provision only, anywhere in the Philippines would apply only “where there is no person
provided there is a By-law provision. If no authorized to call a meeting”, thus an ex-parte
By-law provision they cannot meet proceeding may e allowed as obviously there
anywhere, s. 87 governing Stock corporation is no person to summon and no person whose
is applicable also to non-stock corporation right to due process will be violated. However,
unless otherwise provided in Title 12. where there is an officer authorized to call the
meeting then the Ponce case will not apply.
Q: Is there a proper place of meeting This is so because the phrase “or when the
if office is located in Makati and meeting officer authorized to do so refuses, or fails, or
was held in PICC? Yes, neglects to call a meeting” in Section 26 of the
old law has been deliberately omitted in Sec
A corporation whose principal office is 50 of the Corporation Code.
located in Makati, Metro Manila may hold its Appropriate remedy is
SHs meeting in any place within Metro Manila Writ of Mandamus.
since the latter is considered as one city or
municipality. v. Quorum and Voting Requirements must be
met
It must be called by the proper person or Ø In order to have a valid stockholders’ or
officer. members’ meeting the Quorum
requirement must be complied
Persons who may call the meeting Ø For a binding resolution the Voting
requirement must likewise be met.
i. The person or persons authorized under the
by-laws; Otherwise any matter taken thereat will not
ii. Absent of any provision in the by-laws, the have any binding force and effect on the
president; corporation and the stockholders or members.
iii. Under Sec. 28 (removal of director), by the
secretary on order of the president or on Quorum Requirement
written demand of the stockholder
representing or holding at least a majority of GR:
the outstanding capital stock or majority of
the members entitled to vote in a non-stock >Stock corporation – quorum shall be majority of
corporation, or the stockholder or member the outstanding capital stock total subscription
making the demand if there is no secretary irrespective of the amount paid by them.
or he refuses to do so; and
iv. On order of the proper forum under Sec. 50. >Non-stock corporation – total number of
S.50 Whenever, for any cause, there is registered voting members.
no person authorized to call a meeting,
the SEC, upon petition of a SH or XPN: Corporations are authorized to prescribe
members, and on the showing of good in their by-laws the number of members or
cause, may issue an order to the outstanding stock capital stock required to be
petitioning SH or memb directing him to present or duly represented in a meeting to
call a meeting of the corporation by constitute a quorum.
giving proper notice required by this However, any provision in the by-laws
Code or by the by-law. The petitioning relative to quorum requirement, will be invalid if
SH shall preside thereat until at least a it is in conflict with the provision of the statute.
majority of the SH present have chosen (You can not stipulate less than the majority)
one of their number as presiding officer.
The basis of determining the presence of a

  58  
 

quorum: A quorum once present is not broken with the meeting is illegal/ Voidable and will not
by the subsequent withdrawal of a part or bind the corporation XPN: 1. When
fraction of the stockholders. subsequently ratified. (Lopez vs. Fontecha)
2. In a close
If the voting requirement is met, any corporation, the act of any one director may bind
resolution passed in the meeting, even if the corporation without a meeting. (S.101)
improperly held or called will be valid if all the
stockholders or members are present or duly XPN to XPN
represented.
1. Notice may be waived, expressly or
In SHs meeting, the voting requirement may impliedly. Presence at a meeting waives
vary depending on the nature of the transaction want of notice or
to be passed upon. Should the Code require a 2. when the absentee signed the checks
specific number of vote necessary for a valid they are now estopped to question the
resolution, the by-laws cannot validly provide for validity.
a lesser number.

- Adoption of by-laws –majority


- Removal of D/T, amendment of Articles, Q: May the directors vote by proxy? No,
Management contract, amendment if By- because they are elected to manage and to be
laws- 2/3 present in the meeting. This is in line with the
fiduciary duty to the corporation where his
Q: Do we include non-voting shares? it personal judgment must be exercised.
depends, if it is one of those included in the
last par. Of Section 6 Q: Members of the Board A, B. C. D are
called for electing successor of those whose
term are about to expire. “A” vote by proxy,
is it allowed? Yes, because A is voting as a SH
in SH meeting not as a Director.
B. DIRECTORS’/ TRUSTEES’
MEETING Q: Is the Director need to be present in the
venue of the meeting so that there will be
2 Kinds quorum? No, Physical presence at the meeting
is not required; teleconferencing and
1. Regular meetings – held monthly, unless videoconferencing is allowed. (RA 8792)
the by-laws provide otherwise
2. Special meetings – held at any time upon Q: Who shall preside the meeting?
the call of the president or person
authorized as provided in the by-laws GR: The President shall preside at all the
meeting of BOD/T
Q: Where is the meeting held? Meetings
may be held anywhere in or outside of the XPN: Unless otherwise determined by the by-
Philippines, unless the by-laws provide laws.
otherwise.
Q: What is the quorum requirement?
Q: What are the notice requirements?
GR: Majority of the number as fixed in the
Notice must be sent at least one (1) day prior Articles. If there are 7 Directors and 2 died, still 7
to the scheduled meeting, unless otherwise will be the basis for quorum.
provided by the by-laws.
XPN: 1. By-laws may provide for a greater
Q: What if notice requirement is not majority
complied with?
3. Election of corporate officers which
GR: If the notice requirement is not complied requires the vote of a majority of all

  59  
 

members of the BOD/T. owner of the shares.

STOCKHOLDERS’ RIGHT TO VOTE Q: Who has right to vote, pledgor or


AND MANNER OF VOTING pledgee?

7. General rule: The right to vote is an inherent In case of pledged or mortgaged shares, the
right and the stockholder may vote any pledgor or mortgagor is entitled to vote in
way he pleases. absence of a written agreement (recorded in the
This right can’t be denied or corporate books) to the contrary. (Sec. 55)
impaired. The court will not deprive a
SH of his right to vote his share. Q: Who is entitled to vote in behalf of
decedent?
Exceptions: If restricted by law, Articles or
by-laws of the Corporation. Executors, administrators, receivers, and
other legal representatives duly appointed by the
1. Non-voting shares are not entitled to court may attend and vote in behalf of the
vote except in those instances provided stockholders or members without need of any
for in the penultimate paragraph of Sec. 6 written proxy. (Sec. 50) (It does not matter
(Only preferred and redeemable shares whether the shares stand on the books of the
may be deprived of the right to vote) corporation in the name of the decedent)
2. Treasury shares while they still remain
in the treasury. This is to prevent or deter “Appointed by the court”- such that absence
the incumbent directors and officers of the of an appointment, no person can represent or
corporation from perpetuating themselves vote the shares of an incapacitated or deceased
a such or prolong their stay in office by stockholder on the ground that nobody is legally
voting on the shares of stock reacquired capable to represent his estate.
by it.
3. Delinquent shares An executor or administrator of a stockholder
4. Unregistered transferee of stock may not be elected unless he owns at least 1
5. Common shares can’t be denied of their share.
right to vote XPN Founder’s share.
What if there is no administrator, who is can
Q: What if shares held in common vote on the shares of the deceased? No one
can Vote.
A- Vote Mar
B- Vote Binay Q: How can joint owners vote?
C- Vote Poe
How will you cast the vote? General Rule: In case of shares jointly owned,
Equally, because they are common the consent of all the co-owners shall be
shares (equal rights). If there are 1M necessary.
shares divide by three. If there are
fraction shares such is no longer Exceptions:
allowed in Corporation Code.
1. Written proxy signed by all the co-
General rule: Stockholders or members may owners
vote personally or through a representative by 2. The shares are owned in an "and/or"
way of proxy, voting trust agreement or by the capacity where any one of the joint
executor, administrator, receiver of other legal owners can vote the shares or appoint a
representative. proxy thereof.

Exception: In non-stock corporations, the right


to vote may be limited, broadened or denied in
the articles of incorporation or in the by-laws. PROXY AND OTHER
REPRESENTATIVE VOTING
The right to vote is vested with the legal

  60  
 

PROXY provision requiring notarization of proxy, the


same will not be required.
Proxy – the authority given by the stockholder
or member to another to vote for him at a > Unless otherwise provided in the proxy, it
stockholders‟ or members‟ meeting. It also shall be valid only for the meeting for which it is
refers to the instrument or paper which is intended.
evidence of the authority of the agent or the
holder thereof to vote for and in behalf of the > No proxy shall be valid and effective for a
stockholder or member. period longer than five (5) years subject to
extension for nmt 5 years for each renewal.
GR: Proxy Voting is a right granted by law to all
SH entitled to vote in stock corporation and can’t
be denied. Any by-law provision or resolution > GR: A proxy is revocable XPN:
prohibiting the use of proxies in stockholders’ unless coupled with an interest and revocation
meeting is void and of no effect. (Matter of right need not be made by formal notice in writing.
under Doctrine of Limited Capacity) Thus, it may be revoked orally.

XPN: However, it may be denied in a non-stock Revocation may be expressed:


corporation (sec 89)
1. To the proxy holder
Two types of proxies:
2. To the election committee
1. General – gives a general discretionary power
of attorney to vote for directors and all 3. By a subsequent proxy to another
ordinary matters that may properly come
before a meeting. It is not an authority, 4. By sale of the shares
however, to vote for fundamental changes in
the corporate charter or for other unusual
transactions, unless specified.
VOTING TRUST
2. Limited – restricts the authority to vote on
specified matters only and may direct the A voting trust is one created by an
manner in which the vote will be cast. agreement between a group of stockholders of a
corporation and a trustee, or a group of identical
Requirements to be a proxy: agreements between individual stockholders
and a common trustee, whereby it is provided
1. In writing that for a term of years, or for a period
contingent upon a certain event, or until the
2. Signed by the stockholder or member or duly agreement is terminated, control over the stock
authorized representative. owned by such stockholders, shall be lodged in
the trustee, either with or without reservation to
3. Filed before the scheduled meeting with the the owners or persons designated by them the
corporate secretary power to direct how such control shall be used.
It is a device of binding stockholders to vote as a
4. However, publicly listed corporations whose unit and thus assuring a desirable stability and
shares are traded in the stock exchange must continuity in management in situations where it
comply with the SEC Memorandum Circular is needed.
relative to proxy and meetings.
Requirements for Voting Trust:
Failure to comply will result to a
fine of 5M or imprisonment of maximum 21 1. It should confer upon the trustee or trustees
years, or both. the right to vote and other rights pertaining to
the shares;
5. By-laws may reasonably regulate the form
and execution of proxies. Thus, absent of by-law 2. It should be for a period not exceeding five (5)

  61  
 

years at any time unless the voting trust is


specifically required as a condition in a loan
agreement, in which case, the voting trust
may be for a period exceeding five (5) years
but shall automatically expire upon full
payment of the loan;
Voting Trust Proxy
3. It must be in writing and notarized, and shall
specify the terms and conditions thereof; The beneficial owner of Legal title remains with
the shares ceases to be the beneficial owner
4. A certified copy thereof must be filed with the a stockholder of record
corporation and with the Securities and of the corporation
Exchange Commission, otherwise, said
agreement is ineffective and unenforceable; The trustee votes as The proxy holder votes
owner of the shares merely as an agent
5. The certificate or certificates of stock covered
by the voting trust agreement shall be
canceled and new ones shall be issued in the
name of the trustee or trustees stating that The beneficial owner of The owner of the shares
they are issued pursuant to said agreement. the shares is may be elected as a
In the books of the corporation, it shall be disqualified to be a director since legal title
noted that the transfer in the name of the
director. VA can be a remains with him.
trustee or trustees is made pursuant to said
Director because legal
voting trust agreement; he has legal title
6. The trustee or trustees shall execute and
deliver to the transferors voting trust
certificates, which shall be transferable in the
The purpose is to Generally used to
same manner and with the same effect as
acquire voting control of secure voting and
certificates of stock.
the corporation quorum requirements or
merely for the purpose
7. It should not be entered into for the purpose
of representing an
of circumventing the law against monopolies
absent stockholder
and illegal combinations in restraint of trade
or used for purposes of fraud.

The Voting trustee, in reality becomes merely


Irrevocable Revocable unless
a “sham owner with a colorable and fictitious
coupled with an interest
tile” for the purpose of voting upon stocks that
he does not actually own.

Test to be a Voting Trust


The trustee can act and A proxy holder can
i. The Voting Rights of the stock are separated vote at any meeting generally act as such
from other attributes of ownership. during the duration of only at a particular
ii. The voting rights granted are intended to be the voting trust meeting
irrevocable for a definite period of time. agreement
iii. That the principal purpose of the grant of
voting rights is to acquire voting control of
the corporation.
The trustee may vote in A proxy holder must
person or by proxy vote in person

  62  
 

The duration may The duration may not


exceed 5 years exceed 5 years

Must be notarized and Need not be notarized


filed with the SEC nor filed with the SEC

Lee vs CA (Ch VI)

The beneficial owner of the shares


ceases to be a stockholder of record of the
corporation. SH has no legal title but only
beneficial owner because legal title is
transferred to trustee.

NIDC vs. Aquino

A corporation is not a party to a voting trust


agreement therefore it is not a real party interest
in a suit to enforce the same.

A voting trust transfers only voting and CHAPTER X


other rights pertaining to the shares subject of
the agreement or control over the stock. It does
STOCKS AND STOCKHOLDERS
not include the assets, operation and
management of the corporation.

Q: Can a corporation interfere with VTA? No,


3 ways in which a person may become a
Corporate entity theory. It is the SH who signs
stockholder:
such VTA.
1. By a contract of subscription with the
corporation;

2. By the purchase of treasury shares from the


corporation; and

3. By purchase or acquisition of shares from


existing stockholders (includes purchase
from the stock exchange).

SUBSCRIPTION CONTRACT

Ø Subscription – the mutual


agreement of the subscribers to take
and pay for the stocks of a
corporation.
Ø Subscription contract – any contract
for the acquisition of unissued stock in
an existing corporation or a

  63  
 

corporation still to be formed, not performance beyond the powers of the


withstanding the fact that the parties corporation or in violation of law or contrary
refer to it as a purchase or some other to public policy.
contract.
Trillana vs Quezon College
Q: Is there a distinction between purchase
and subscription of unissued shares of stock There was a condition in the subscription
corporation? which states “Babayaran kong lahat pagkatapos
na ako ay makapaghuli ng isda”
Distinction between a purchase and
subscription of “unissued stocks” of a General form of subscription must be
corporation has been eliminated. So long as the accepted by the corporation to create a binding
shares to be acquired from the corporation are contract.
“unissued stocks of the latter, the contract will be
deemed a subscription contract. Thus, A condition facultative as to the debtor
subscriber/purchaser becomes of unissued renders the whole obligation void.
stocks is already entitled to all rights of a SH and
subjected to all liabilities upon execution and Q: 10M ACS; 5M SC; 5M PU
affectivity of the contract.
Z acquired the unissued shares and there
A subscription contract is not was a stipulation that Z will not be a SH
required to be written; an oral contract for unless he pay all of the shares. Then there
subscription is valid and enforceable. The was a fire, is Z liable to vote for all shares?
statutes of fraud do not apply to a subscription Yes, for all legal intent.
contract because such subscription does not fall
under the statutory definition of a sale. Q: “A” subscribe for 1M and paid only 500k.
Corporation wants to enforce payment
> Conditional subscription – one made upon a because of failure to pay on the specified
condition precedent, does not make the date, hence, “A” becomes delinquent. There
subscriber a stockholder, or render him to pay will be a Public Auction and if the corporation
the amount of his subscription, until the bought it, it will become treasury shares. If “Z”
performance or fulfillment of the condition. acquire it and there was a fire will Z be liable
to pay the subscription in full? No, because it
> Subscription upon special terms is purchase.
– an absolute subscription, making the
subscriber a stockholder, and rendering him
liable as such, as soon as the subscription is
accepted, the special term being an independent PRE-INCORPORATION SUBSCRIPTIONS
stipulation.
Types of subscriptions as to time of
Whether a subscription is conditional or by execution:
special terms depends on the agreement or
intention of the parties. In case of doubt, a 1. Pre-incorporation subscriptions –
subscription shall be considered one upon subscriptions for shares of stock of
special terms in order to protect the creditors a corporation still to be formed
and other subscribers. (prior); and
2. Post-incorporation subscriptions –
General rule: Conditional subscriptions are those made or executed after the
valid. formation or organization of the
corporation.
Exceptions:
Pre-incorporation gives an immediate
i. The charter or enabling act prohibits the binding effect. It is mandatory as may be culled
same; or form Sec 13 and 14 of the Code which
ii. The conditions are such as to render their mandates that a corporation may be registered

  64  
 

only with 25% of its ACS has been subscribed requiring the corporation to submit
and at least 25% of the subscribed capital has an appraisal report of an
been paid. independent appraiser

General rule: A subscription for shares of stock 3. Labor performed or services actually
of a corporation still to be formed is irrevocable. rendered to the corporation; (As long as
capable of valuation)
Exceptions:
4. Previously incurred indebtedness by
1. They shall be irrevocable for a period of 6 the corporation; (Set-off or satisfaction
months from date of subscription unless of a debt due from the corporation is
lawful and valid consideration for the
a) All the subscribers consent to issuance of the stock)
the revocation; or
b) The incorporation of said
corporation fails to materialize
within 6 months or within a 5. Amounts transferred from unrestricted
longer period as may be retained earnings to stated capital
stipulated in the contract of (declaration and distribution of stock
subscription. dividend where corporate earnings are
capitalized rather that being distributed
Exception to the exceptions: Irrevocable. No as ash dividend); and
pre-incorporation subscription may be
revoked after the submission of the articles
on incorporation to the SEC.
6. Outstanding shares in exchange for
Stocks shall not be issued for a stocks in the event of reclassification or
consideration less than the par or issued price conversion. (refers to stocks
thereof. surrendered to the corporation in
exchange for a new or different type of
Consideration for the issuance of shares. (Ex. conversion of founder‟s
stock may be any or a combination of any two or shares to common shares.)
more of the ff:

1. Actual cash paid to the corporation;


2. Property, tangible or intangible, Stocks shall not be issued in
actually received by the corporation and exchange of promissory notes or future services.
necessary or convenient for its use and Their realization is uncertain.
lawful purposes at a fair valuation equal
to the par or issued value of the stock Issue – the making of a share contract or
issued; contract of subscription, that is, transaction by
which a person becomes the owner of shares
Ø Tangible Properties value is and by which new share contracts are created.
determined either by:
a. appraisal report of an independent The issuance of shares is not
appraiser dependent on the delivery of a certificate of
b. zonal valuation as certified by the BIR stock.
c. market value indicated in the Real
Estate Tax Declaration Par or issue price – indicates the amount which
Ø Intangible Properties, the valuation the original subscribers are supposed to
shall be determined contribute to the corporate capital as the basis of
a. Initially by the incorporators or the the privilege of profit sharing with limited liability.
BOD subject to the approval of the
SEC Two theories in the valuation of property
b. The latter is not precluded from or services:

  65  
 

True value rule – the motives or intent of those transfer of the title.
making the valuation are disregarded and the
sole and decisive factor or question is whether Requisites for the issuance of a certificate of
or not the property or services are in fact worth stock:
the value placed on them.
1. It must be signed by the president or vice-
Good faith rule – the value of the property or president and countersigned by the
services is a matter about which there can be secretary or assistant secretary;
an honest difference of opinion. Therefore, if
the parties have acted in good faith without 2. It must be sealed with the corporate seal; and
fraud or intentional over-valuation, the
transaction cannot be overturned even if the 3. The full amount of subscription together with
later becomes evident that the property or interest and expenses (in case of delinquent
services were in fact worth much less than the shares) if any is due, has been fully paid.
value fixed on them initially.
General rule: Holders of subscribed shares not
The Promissory Notes and future services are fully paid are entitled to all the rights of a
not allowed to be used as consideration for the stockholder but are not entitled to be to the
issuance of shares as their realization are not issuance of a certificate of stock because full
certain payment is required in the latter. (S.72)

National Exchange Co., Inc. vs. Dexter Exceptions:

The stipulation under consideration is illegal 1. The shares have been declared delinquent; or
for this stipulation obligates the subscriber to
pay nothing for the shares except as dividends 2. The stockholder exercises his appraisal right
may accrue upon the stock. In the contingency pursuant to Sec 83.
that no dividends are declared and paid, there is
no liability at all. This discrimination is unlawful. The issuance of a stock certificate is not a
condition sine quanon to consider a subscriber
A corporation has no power to receive a as a stockholder.
subscription upon such terms as will operate as
a fraud upon the other subscribers as A certificate of stock is not a negotiable
stockholders by subjecting the particular instrument but quasi-negotiable.
subscribers to lighter burden, or by giving his
greater rights and privileges, or as fraud upon Negotiable because it may be transferred by
creditors of the corporation by withdrawing or endorsement coupled with delivery.
decreasing capital. Therefore, an agreement
between a corporation and a particular Non-negotiable because the transferee takes
subscriber, by which the subscription is not to be takes it without prejudice to all rights and
payable, or is to be payable in part only, is illegal defenses which the true and lawful owner may
and void. have except Estoppel.

CERTIFICATES OF STOCK AND THEIR Two modes of transferring shares of stock:


TRANSFER
1. When the corporation has already issued
Shares of stock- a profit sharing contract, a stock certificates – transfer is done only
series of units of interest and participation in a through endorsement and delivery of the
corporation in consideration of a proportionate certificate or certificates of stock indorsed
right to participate in dividend and other by the owner or his attorney-in-fact or
distributions. other person legally authorized to make
the transfer.
Certificate of stock – the piece of paper or
document which evidences the ownership of 2. When the corporation has not yet issued
shares and a convenient instrument for the certificates of stock – by a duly notarized

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deed. The corporation looks only through its books for


the purpose of determining who its stockholders
If a certificate of stock has been are.
issued a mere notarized deed will not
suffice. It must be coupled with endorsement Non-registration of a transfer of stock will
and delivery of the stock certificate. not, however, affect the validity thereof at least
in so far as the contracting parties are
Transfer- absolute and unconditional transfer to concerned.
warrant registration in the books of the
corporation in order to bind the later and other Reasons (purpose) for the necessity of the
third persons. registration of transfers of stock:

The right to transfer shares may not 1. To enable the corporation to know who
be unreasonably restricted. But it may be its stockholders are;
“regulated” to give corporation protection against 2. To enable the transferee to exercise his
colorable or fraudulent transfer or to enable it to rights as a stockholder;
know who its SHs are. 3. To afford the corporation an opportunity
to object or refuse registration of the
Restrictions on the right to transfer transfer in cases allowed by law (as
shares would include when it has unpaid claims on the shares
transferred);
1. Section 6 of Corporation Code allows 4. To avoid fictitious and fraudulent
a corporation to classify its shares and transfers; and
grant such “rights, privileges or 5. To protect creditors who have the right
restrictions, as may be indicated in the to look upon stockholders, in case of
Articles, there must be indication of non-payment or watered shares, for the
reasonable terms, conditions or period. satisfaction of their claims.
2. It is not valid, except as between the
parties, until recorded in the books of The duty of the corporate secretary to record
the corporation. a valid transfer of shares of stock is ministerial.
3. Shares of stock against which the Thus, he may be compelled by mandamus.
corporation holds any unpaid claim shall
not be transferable in the books of the General rule: A certificate of stock is not a
corporation, unpaid claims, refer to negotiable instrument. A bona-fide purchaser of
claims arising from unpaid subscription a certificate of stock will acquire no better title to
and not to any indebtedness which a SH the shares than his transferor had and will be
may owe the corporation such as subject to all rights, remedies and defenses
monthly dues. which the true and lawful owner may have.
4. Restrictions required to be indicated
in the articles of incorporation, bylaws Exception: When the general principles of
and stock certificates of a close estoppel apply. Thus, if the legal owner thereof,
corporation. by his act or negligence, is estopped from
5. Restrictions imposed by special law claiming ownership, (as when he clothes
6. Sale to aliens in violation of maximum another with apparent title or authority to
ownership of shares under the dispose of the same) a purchaser in good faith
Nationalization laws and without notice will acquire a better title as
7. Those covered by reasonable against the owner so estopped.
agreement of the parties.
The duty of the corporate secretary to register
No transfer shall be valid, except as between a valid transfer of shares is ministerial.
the parties, until the transfer is recorded in the Therefore, mandamus will lie to compel
books of the corporation. registration in case the corporation or the
corporate secretary refuses registration. (Rural
Until registration is accomplished, the transfer Bank of Salinas vs. CA) However, the
of stock, though valid between the parties, transferee has no such right when his title to
cannot be effective as against the corporation. said shares has no prima facie validity or is

  67  
 

uncertain. (Tay vs. CA) distinct from the certificates which are merely
the evidence of such ownership. The property in
The right to transfer shares of stock may not the shares are deemed to be situated in the
be unreasonably restricted or prohibited. Every province in which the corporation has its
owner of corporate shares has the same principal office or place of business. (Chua
uncontrollable right to alienate them and is Guan vs. Samahang Magsasaka, Inc.)
under no obligation from selling them at his
sacrifice and for the welfare and benefit of the All transfers of shares should be entered in
corporation and other stockholders. (Padgett the books of the corporation. Transfers not so
vs. Bobcock & Templeton; Fleischer vs. entered are invalid as to attaching or execution
Botica Nolasco) creditors of the assignors as well as to the
corporation and to subsequent purchasers in
However, the right to transfer may be good faith, and indeed, as to all persons
“regulated” to give the corporation protection interested, except the parties to such transfer.
against colorable or fraudulent transfer or to (Uson vs. Diosomito)
enable it to know who its stockholders are. Also,
as a matter of policy, the SEC allows the grant A clause contained in the by-laws of a
of “preferential rights” to existing stockholders corporation which provides that the owner of a
and/or the corporation, giving them the first share of stock cannot sell it to another person
option to purchase the shares of a selling except to the defendant corporation is ultra-
stockholder within a reasonable period not vires, violative of the property rights of
exceeding 30 days provided that the same is shareholders, and in restraint of trade.
contained in the articles of incorporation and in (Fleischer vs. Botica Nolasco Co.)
all of the stock certificates to be issued by the
corporation. This is considered “reasonable” Shares of stock being regarded as property,
since it merely suspends the right to transfer the owner of such shares may, as a general
within the period specified. rule, dispose of them as they see fit, unless the
corporation has been dissolved, or unless the
A corporation may classify its shares and right to do so is properly restricted, or the
grant such “rights, privileges or restrictions” owner‟s privilege of disposing of his shares has
provided that such are made in the articles of been hampered by his own action. (Padgett vs.
incorporation and subject to reasonable terms, Babcock & Templeton)
conditions or period. (Go Soc & Sons vs. IAC)
Any restriction on a stockholder‟s right to
Transfer stock to warrant registration dispose of his shares must be construed strictly;
in the books of the corporation in order to bind and any attempt to restrain a transfer of shares
the latter and other third persons. (Monserrat is regarded as being in restraint of trade, in the
vs. Ceron) absence of a valid lien upon its shares, and
except to the extent that valid restrictive
Only the transfer or absolute conveyance of regulations and agreements exist and are
the ownership of the title to a share need be applicable. Subject only to such restrictions, a
entered and noted upon the books of the stockholder cannot be controlled in or restrained
corporation in order that such transfer may be from exercising his right to transfer by the
valid, therefore, inasmuch as a chattel mortgage corporation or its officers or by other
of the aforesaid title is not a complete and stockholders, even though the sale is to a
absolute alienation of the dominion and competitor or the company, or to an insolvent
ownership thereof, its entry and notation upon person, or even though a controlling interest is
the books of the corporation is not a necessary sold to one purchaser. Therefore, restrictions
requisite to its validity. (Monserrat vs. Ceron) consisting in the word “non-transferable” is
illegal. (Padgett vs. Babcock & Templeton)
Chattel mortgages over shares of stock
should be registered both at the owner‟s The suspension of the power to sell shares of
domicile and in the province where the stock which has a beneficial purpose, results in
corporation has its principal office or place of the protection of the corporation as well as of the
business in order to bind third persons. The individual parties to the contract, and is
ownership of shares in a corporation is property reasonable as to the length of time of

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suspension is valid. (Lambert vs. Fox) stockholder, cannot vote nor be voted for, and
will not be entitled to dividends, insofar as the
An indorsee of an undelivered certificate of assigned shares are concerned. (Rural Bank of
stock has no power to effectively transfer the Lipa City, Inc. vs. CA)
shares to other persons or his nominees. For an
effective transfer of shares of stock the mode Delivery is not essential where it appears that
and manner of transfer prescribed by law must the person sought to be held as stockholders
be followed. (Embassy Farms, Inc. vs. CA) are officers of the corporation, and have custody
of the stock books. (Tan vs. SEC)
Indorsement of the certificate of stock is a
mandatory requirement of law for an effective After a valid transfer of share, the right to
transfer of a certificate of stock. (Razon vs. IAC) have such registered commences to exist.
However, it would not follow that said right
The right of a transferee/assignee to have should be exercised immediately or within a
stocks transferred to his name is an inherent definite period. (Won vs. Wack Wack Golf &
right flowing from his ownership of the stocks. Country Club, Inc.)
The corporation‟s obligation to register is
ministerial. (Rural Bank of Salinas vs. CA) Certificates of stock are not negotiable
instruments. Consequently, a transferee under a
The pledge of shares of stock does not vest forged assignment acquires no title which can
ownership of such shares to the pledgee. The be asserted against the true owner, unless his
pledgor remains the owner during the pendency own negligence has been such as to create an
of the pledge and prior to foreclosure and sale. estoppel against him. If the owner of the
Therefore, the pledgee has no right to demand certificate has endorsed it in blank, and it is
the registration of the pledged shares in his stolen from him, no title is acquired by an
name. In order that a writ of mandamus may innocent purchaser for value. (De Los Santos
issue, it is essential that the person petitioning vs. Republic)
for the same has a clear legal right to the thing
demanded and that is it the imperative duty of Note: Review Cases
the respondent to perform the act required. (Tay
vs. CA)

Without a stock certificate, which is the FORGED AND UNAUTHORIZED


evidence of ownership of corporate stock, the TRANSFERS
assignment of corporate shares is effective only
between the parties to the transaction. (Nava
Forged and Unauthorized
vs. Peers Marketing)
unauthorized issuance of stock
transfer certificate
For a valid transfer of stocks, there must be
strict compliance with the mode of transfer
prescribed by law. What is forged or The act of the
unauthorized is the corporation in
transfer of the issuing a certificate,
1. There must be delivery of the stock
certificate from the either fraudulently
certificate;
true and lawful or by mistake.
2. The certificate must be endorsed by the
owner to another
owner or his attorney-in-fact or other
person.
persons legally authorized to make the
transfer; and
3. To be valid against third parties, the
transfer must be recorded in the books
of the corporation.

An assignment, without endorsement and General rule: In forged or unauthorized


delivery, while valid as among the parties, does transfer of stock the purchaser acquires no title
not necessarily make the transfer effective. The no matter how innocent they ma have been as
assignees cannot enjoy the status of a against the lawful owner and will have no right or

  69  
 

remedy against the corporation because he took price


the shares not by virtue of misrepresentation
made by the corporation but on faith of a forged Q: How about non par value shares? S. 62
endorsement or unauthorized transfer. (non- last par
negotiability of stock certificates).
Q: What about no par value shares issued
Exception: If after such forged or below the required issued price?
unauthorized transfer, the corporation issues a
new certificate and such certificate passes into
the hands of subsequent bona fide purchaser,
the latter may rightfully acquire title thereto since WATERED STOCK
the corporation will be estopped to deny the
validity thereof. The subsequent purchaser in Watered stock – one which is issued
good faith took the shares by virtue of the by the corporation as fully paid-up shares when
genuiness of the certificates issued by the in fact the whole amount of the value thereof has
corporation or of the representation made by the not been paid. “Watered or Fictitiously paid-up”
corporation that the same is valid and subsisting
and that the person named therein is a Q: What is the extent of liability of Directors
stockholder of the corporation. He may or Officers consenting and have knowledge?
therefore, compel the corporation to recognize Sec. 62 Directors or officers shall be solidarily
him as a stockholder or claim reimbursement liable with the stockholder concerned to the
and damages against the latter. corporation and its creditors for the difference
between the fair value received at the time of
issuance of the stock and the par or issued
value of the same for the following acts:

1. Consenting to the issuance of watered stocks;


or

ISSUANCE OF STOCK CERTIFICATES 2. Having knowledge thereof, failing to forthwith


express his objection in writing and file the same
Q: When is stock certificate issued? with the corporate secretary.

Subscriptions to shares of stock are All creditors, whether prior or


indivisible. Thus, no certificate of stock shall be subsequent to the issuance of watered stock
issued to a subscriber until the full amount of his may enforce payment of such water.
subscription together with interest and expenses
(in case of delinquent shares), if any is due, has Q: What if “no par value” is issued below the
been paid. par?...

Once a subscriber has paid his


subscription in full, he becomes entitled to be
issued a stock certificate. Ways in which watered stocks may be
issued:
The duty of the corporate officers to
issue stock certificates to those entitled is a 1. For a monetary consideration
ministerial duty enforceable by mandamus. less than its par or issued value;
2. For a consideration in
A stockholder whose subscription is property, tangible or intangible, valued in
not fully paid may not be issued a stock excess of its fair market value;
certificate for that portion already paid. (Fua Cun 3. Gratuitously or under an
vs. Summers and China Banking Corporation) agreement that nothing shall be paid at
all; or
Q: How much is the consideration for the 4. In the guise of stock
issuance of stocks? Nlt the par value or issued dividends when there are no surplus

  70  
 

profits of the corporation. the payment of the “water” in the stock


solidarily against the responsible and
Evil effects of stock watering: consenting directors and officers inclusive of
the holder of the watered stock.
1. The corporation is deprived of its capital
thereby hurting its business prospects, 5. As to creditors – they may enforce
financial capability and responsibility; payment of the difference in the price, or the
2. Stockholders who paid their subscriptions in water in the stock, solidary against the
full, or promised to pay the same, are injured responsible directors/officers and the
and prejudiced by the reduction of their stockholders concerned.
proportionate interest in the corporation; and 6. As against transferees of the
3. Present and future creditors are deprived of watered stock – his right is the same as
corporate assets for the protection of their that of his transferor. If however, a certificate
interest. of stock has been issued and duly indorsed
to a bona fide purchaser, without
Two theories advanced as the basis for the knowledge, actual or constructive, the latter
liability on water stocks: cannot be held liable, at least as against the
corporation, since he took the shares on
1. Trust fund doctrine – treating the capital of reliance of the misrepresentation made by
the corporation, inclusive of the unpaid the corporation that the stock certificate is
portion of subscriptions to said capital, as a valid and subsisting. This is because a
“trust fund” which the creditors have a right corporation is prohibited from issuing
to look up to for the satisfaction of their certificates of stock until the full value of the
claims. subscriptions have been paid and could not,
therefore, deny the validity of the stock
2. Fraud or misrepresentation theory – liability certificate it issued as against a purchaser in
is based on the false representation made good faith.
by the corporation and the stockholder
concerned to the creditors that the true par Subscribers for stock shall pay (in full) to the
value or issued price of the shared has corporation interest on all unpaid subscriptions
been paid or promised to be paid full. from the date of subscription, if so required by,
and at the rate of interest fixed in the by-laws. If
Effects of issuance of watered stock: no rate of interest is fixed in the by-laws, such
rate shall be deemed to be the legal rate.
1. As to the corporation – when a corporation
is guilty of ultra-vires acts which constitute Q: Are subscribers liable to pay interest?
an injury to or fraud upon the public, or Yes,
which will tend to injure or defraud the
public, the State may institute a quo- What if unpaid subscription? Generally not
warranto proceeding to forfeit its charter for liable until the by-laws requires or contract of
the misuse or abuse of its franchise. subscription provides otherwise.

2. As between the corporation and the Q: Capital structure of 10M shares divided
subscriber – the subscription is void; the into 5M common shares with 10 par value
subscriber is liable to pay the full par or and 10M no par value shares
issued value thereof, to render it valid and
effective. They’ve decided that issue price is
20/share. Assuming that there is
3. As to the consenting stockholders – they unsubscribed shared and “A” wants to
are estopped from raising any objection subscribe 1M shares.
thereto.
Corporation agreed that “A” to subscribe
4. As to dissenting stockholder – in 10M shares at 8/share and 1M no par value
view of the dilution of their proportionate share with a consideration of 18/share.
interest in the corporation, they may compel

  71  
 

Is this watered stock? collect the unpaid portion thereof (Trust


fund doctrine).
Yes, it is watered stocks because it is issued
less than 20/share. BOARD ACTION

What is he liability of D/O? Solidary liable Procedure for the enforcement of payment
with A for both issuances. through board action:

What about A, what is the extent of his 1. The board of directors, by a formal
liability? P.57 resolution, declares the whole or any
percentage of unpaid subscriptions to
Par value- SH is solidary liable be due and payable on a specific date.
However, if the contract of subscription
provides the date or dates when
No par value- SH is not liable for watered
payment is due, no “call” declaration of
stocks because limitation on corpo to issue no
the board is necessary;
par value share. No par value share are deemed
2. The stockholders concerned are
fully paid and non assessable.
given notice of the board resolution by
the corporation either personally or by
Q: Assume there is 10 shares valued at registered mail. Publication of the notice
of call is not required unless the by-laws
provide otherwise. Notice is not likewise
necessary if the contract of the
subscription stipulates a specific date
when any unpaid portion is due and
ENFORCEMENT OF PAYMENT OF payable;
SUBSCRIPTIONS 3. Payment shall be made in the date
specified in the call or on the date
Unpaid subscription or any percentage provided for in the contract of
thereof, together with interest if required, by subscription;
the By-laws or the contract shall be paid 4. Failure to pay on the date required in
either: (When is unpaid subscription the call or as specified in the contract of
becomes due and demandable?) subscription will render the entire
balance due and payable and making
i. On the date or dates fixed in the the stockholder liable for the interest;
contract of subscription; or 5. If within 30 days from the date stated
ii. On the date or dates that may be in the call or as may be provided in the
specified by the board of directors pursuant contract of subscription no payment is
to a “call” declaring any or all unpaid portion made, all the stock covered by the
thereof to be so payable. subscription shall become delinquent
and shall be subject to a delinquency
Two possible remedies available to the sale;
corporation to enforce payment of unpaid 6. The board, by resolution, orders the
subscription: sale of the delinquent stock stating the
amount due and the date, time and
1. By board action (delinquency place of the sale;
sale); s.67 to 69 7. The sale shall be made not less than
2. By a collection case in court. 30 days nor more than 60 days from the
Sec. 70 date the stocks became delinquent;
8. Notice of the sale, with the copy of the
6. Failure or refusal of the board resolution should be sent to every
corporation, through its board of delinquent stockholder either personally
directors to enforce or collect payment or by registered mail;
of unpaid subscription will not prevent 9. Publication of the notice of sale must
the creditors or the receiver of the be made once a week for two
corporation to institute a court action to consecutive weeks in the newspaper of

  72  
 

general circulation in the province or city interest, cost of advertisement and expenses of
where the principal officer is located; sale.
10. Sale at public auction if no payment is
made by the delinquent stockholder in “B”- 70 shares for 5k
favor of the bidder who offered to pay
the full amount of the balance in the “Z”-75 shares for 5k
subscription, inclusive of interest, cost of
advertisement and expenses for the B will be the winner and th2 30 shares
smallest number of shares; remaining will inure to the benefit of the
11. Registration or transfer of the shares delinquent stockholder.
of stock in the name of the bidder and
corresponding issuance of the stock Grounds to question the delinquency sale:
certificate covering the shares
successfully bidded; 1. Irregularity or defect in the notice of
12. If there be any remaining shares, the sale; or
same shall be credited in favor of the 2. Irregularity or defect in the sale itself.
delinquent stockholder who shall be
entitled to the issuance of a certificate of Two conditions before an action to recover
stock covering such shares; delinquent stocks irregularly sold may be
13. If there is no bidder at the public allowed:
auction who offers to pay the total
amount due plus interest, cost and 1. The party seeking to maintain such
expenses, the corporation may, subject action first pays or tenders to the party
to the provisions of the Code, bid for the holding the stock the sum for which the
same and the total amount due shall be same was sold, with interest from the
credited or paid in full in the corporate date of the sale at the legal rate; and
books; and 2. The action shall be commenced by the
filing of a complaint within six months
Q: What is the meaning of “subject to the from the date of the sale.
provisions of this Code” – GR: it must have
unrestricted retained earnings

What is the recourse of the COURT ACTION


corporation? 2 Remedies to enforce payment
A “call” is a condition precedent before the
i. Board Action right of action to institute a recovery suit
ii. Direct Collection Case in court by accrues. A demand is required before a debtor
Specific Performance may incur a delay in the performance of his
obligation.
14. The shares so purchased by the
corporation shall be vested in the latter Instances when a “call” is not necessary:
as treasury shares.
1. The contract of subscription provides for
Q: Who will win the bid? a date or dates when payment is due; or
2. The corporation has become insolvent.
Highest bidder – is such bidder who shall offer
to pay the full amount of the balance on the
subscription together with accrued interest, cost Velasco vs. Poizat
of advertisement and expenses of sale, for the
smallest number of shares or fraction of a share. A subscription for shares of stock does not
require an express promise to pay the amount
“A” Subscribed for 100 shares at P100/share subscribed, as the law implies a promise to pay
and paid only 50% and has an unpaid balance on the part of the subscriber. The subscriber is
of 5k as much bound to pay the amount of the share
subscribed by him as he would be to pay any
Bidders are B and Z paid together with accrued

  73  
 

other debt, and the right of the company to PNB vs. Bitulok Sawmill, Inc.
demand payment is no less incontestable.
The President of the Philippines is devoid of
De Silva vs. Aboitiz & Co. the prerogative of suspending the operation of
any stature or any of its items. Thus the
Notwithstanding the fact that the by-laws of President cannot condone the payment of stock
the corporation provides for a method for the subscriptions in the event that the counterpart
collection of the unpaid portion of stock fund to be invested by the government would not
subscriptions, the corporation may still make use be available.
of the methods provided by the Code.
Edward Keller & Co., Ltd. vs. Cob Group
Marketing, Inc.

General rule: A valid and binding subscription A stockholder is personally liable for the
for stock of a corporation cannot be cancelled so financial obligations of a corporation to the
as to release the subscriber from liability extent of his unpaid subscription.
thereon.
Garcia vs. Suarez
Exception: Consent of all the stockholders is
given. The subscription to capital stock of the
corporation, unless otherwise stipulated, is not
Exceptions to the exception: payable at the moment of the subscriptions but
on a subsequent date which may be fixed by the
1. Bona fide compromise; corporation.

2. Set-off of a debt due from the corporation; or Shares of stock become delinquent when no
payment is made on the balance of all or any
3. Release supported by consideration portion of the subscription on the date or dates
fixed in the contract of subscription without need
(Set off is premature unless there is a stipulation of call, or on the date specified by the board of
in contract or by-laws. It can’t be due and directors pursuant to a call made by it.
demandable unless there is a call.
Q: What will be the rights of a delinquent
(Lingayen Gulf vs. Baltazar) SH?

Apocada vs. NLRC General rule: Delinquent stock shall not be


entitled to:
The NLRC has no jurisdiction to determine
intra-corporate disputes between the 1. Be voted for or to vote;
stockholder and the corporation as in the matter 2. Representation at any stockholder's
of unpaid subscriptions. meeting; or
3. Any of the rights of a stockholder.
Unpaid subscriptions are not due and
payable until a call is made by the corporation Exception: Delinquent stocks are entitled to the
for payment. right to dividends. What will be the extent of
their dividend right? any cash dividends due
Lumanlan vs. Cura on delinquent stockholders shall first be applied
to the unpaid balance on his subscription plus
Subscription to the capital of a corporation cost and expenses, while stock dividends shall
constitutes a fund to which the creditors have a be withheld until his unpaid subscription is paid
right to look for satisfaction of their claims and in full.
that the assignee in insolvency can maintain an
action upon any unpaid stock subscription in General rule: Holders of subscribed shares not
order to realize assets for the payment of its fully paid which are not delinquent shall have all
debt. the rights of a stockholder.

  74  
 

Exception: Shares of stock not fully paid are not may be issued even before the
entitled to be issued a certificate of stock. expiration of the one 1 year period.
9. If a contest has been presented to
“A” a SH and a director. His hares are said corporation or if an action is
delinquent. Can he exercise his rights as a pending in court regarding the
director? The shares still stands in his name in ownership of said certificate of stock,
the book pending the result of the bid. He is still the issuance of the new certificate of
the owner. Even if there is winning bidder stock shall be suspended until the final
already and entirety of subscription is not sold, decision by the court regarding the
he can still be a director because the remaining ownership of said certificate of stock.
shares will still be under his name. 10. Except in case of fraud, bad faith, or
negligence on the part of the corporation
Q: What shall be done if certificate of share and its officers, no action may be
is lost or destroyed? brought against any corporation which
shall have issued certificate of stock in
Requirements and procedure for issuance of lieu of those lost, stolen or destroyed
new certificates of stock in lieu of those lost, pursuant to the procedure above-
stolen or destroyed: described.

1. The registered owner of a certificate Rationale for the law is to avoid


of stock in a corporation or his legal duplication of certificates of stock and to avoid
representative shall file with the duplication of certificates of stocks and the
corporation an affidavit in triplicate avoidance of fictitious and fraudulent transfers. It
setting forth: is likewise intended for the protection of the
2. The circumstances as to how the corporation against damage from whatever
certificate was lost, stolen or destroyed; source arising from issuance of the duplicate
3. The number of shares represented by certificate based on the duplicate.
such certificate;
4. The serial number of the certificate; Thus, the BOD has the authority to
and decide the amount and the kind of surety bond
5. The name of the corporation which that may be required for the issuance of a
issued the same. certificate of stock, in lieu of the lost or
6. He shall also submit such other destroyed one, if the same is to be issued prior
information and evidence which he may to the expiration of the one year period provided
deem necessary. by Sec 73.
7. Publication of a notice in a newspaper
of general circulation published in the Q: How much is surety bond? BOD has the
place where the corporation has its authority to decide the amount and kind of
principal office, once a week for 3 surety bond.
consecutive weeks at the expense of
the registered owner of such certificate Q: Certificate of stock is lost and destroyed,
of stock. may the SH transfer his shares pending the
8. If no contest has been presented said period? No, notarized deed is not
within 1 year from the date of the last sufficient. You can’t transfer it by notarized deed
publication, the right to make such it must be coupled by endorsement and delivery
contest shall be barred and said of certificate. (Rural Bank case)
corporation shall cancel in its books the
certificate of stock which has been lost, XPN: 1. Tan vs Sec- Person sought
stolen or destroyed and issue in lieu to be is officer of corporation
thereof new certificate of stock.
However, the registered owner may file 2. in cases of shares of stock acquired through
a bond or other security, effective for a stock exchange. You course it through the
period of 1 year, for such amount and in Broker. Broker will the forward to subtransfer
such form and with such sureties as agent an record it (Scriptless endorsement)
may be satisfactory to the board of
directors, in which case a new certificate Q: May a corporate officer be liable for

  75  
 

unauthorized issued of new certificate of 19. In the case of a close corporation, to


stock? GR: No, XPN in cases of Fraud or withdraw therefrom, for any reason, and
negligence. to compel the purchase of his shares.

Certain obligations and liabilities of


stockholders:
RIGHTS AND LIABILITIES OF
STOCKHOLDERS i. To pay the corporation the balance of his
unpaid subscriptions;
Certain basic rights for the protection of ii. To pay interest on his unpaid subscription if
stockholders: required by the by-laws or by the contract of
subscription;
1. Participation in the management of the iii. To answer to creditors for the unpaid portion
corporate affairs by exercising their right of their subscription;
to vote and be voted upon either iv. To answer the “water” in their stocks;
personally or by proxy; v. To be liable, as general partners, for all debts,
2. To enter into a voting trust agreement; liabilities and damages of ostensible
3. To receive dividends and to compel their corporations; and
declaration if warranted; vi. In case of a close corporation, to be
personally liable for corporate torts when
7. To transfer shares of stock subject only to they actively participate in the management
reasonable restrictions inclusive of the of the corporation.
right of the transferee to compel the
registration of the transfer in the books
of the corporation;

8. To be issued a certificate of stock for fully


paid-up shares; CHAPTER XI
9. To exercise pre-emptive rights; CORPORATE BOOKS AND
10. To exercise their appraisal right;
RECORDS

11. To institute and file a derivative suit;

12. To recover shares of stock unlawfully Q: What are the books and records that
sold for delinquency; corporation must keep?

13. To inspect the books of the corporation; Records to be kept and maintained by the
corporation:
14. To be furnished the most recent
financial statements of the corporation; 1. Records of all business transactions – which
include, among others, journals, ledgers,
15. To be issued a new stock certificate in contracts, vouchers and receipts, financial
lieu of the lost or destroyed one; statements and other books of accounts, income
tax returns, and voting trust agreement which
16. To have the corporation dissolved; must be kept and carefully preserved at its
principal office.
17. To participate in the distribution of the
assets of the corporation upon 2. Minutes of all meetings of stockholders or
dissolution; members and of the directors or trustees -
setting forth in detail the time and place of
18. In the case of a close corporation, to holding the meeting, how authorized, the notice
petition the SEC to arbitrate a deadlock; given, whether the meeting was regular or
and special, if special its object, those present and
absent, and every act done or ordered done

  76  
 

thereat which must likewise be kept at the GR: Yes


principal office of the corporation.
XPN: It may be exercised by SH or proper
3. Stock and transfer book – showing the names representative or attorney-in-fact with or without
of the stockholders, the amount paid or unpaid presence of SH.
on all stock for which subscription has been
made, a statement of every alienation, sale or General rule: The right of stockholders to
transfer of stock made, the date thereof, and by examine corporate books extends to a wholly
and to whom made which must be kept either in owned subsidiary which is completely under the
the principal office of the corporation or in the control and management of the parent company
office of its stock transfer agent. –instead of where he is such a stockholder. (Gokongwei
corporation monitoring the stock, they assign an agent to vs. SEC)
monitor and transfer the stocks.

Exception: But if the two entities, the subsidiary


Q: Where should this be kept? Principal office
and the parent, are legally being operated as
or in the office of stock transfer agent.
separate and distinct entities, there is no such
right of inspection on the part of the SH of parent
4. Financial Statements as certified- (sec. 75) company.
These corporate books and records, inclusive The right to inspect corporate books, although
of all business transactions and minutes of personal, may be exercised through an agent or
meetings, are subject to inspection by any representative since it may be unavailing in
director, trustee, stockholder or member of the many instances. (W.G. Philpotts vs. Philippine
corporation at reasonable hours on business Manufacturing Co.)
days and a copy of excerpts of said records may
be demanded.
Q: What does wholly owned mean? All shares
are in the name of corporation
And for an effective exercise of his right, a SH
can make copies, abstracts and memoranda of
Ayala land- Globe Can “A” inspect Globe? No,
documents, books ad papers as incident thereto.
because Ayala do not wholly/ Subsidiary Globe.
Q: Can they copy the Books and Record?
The corporation, or its responsible directors
Yes, at the expense of SH.
and officers cannot unduly restrict the right of
inspection and may not arbitrarily set a few days
Q: What is the basis of the Right to Inspect? of the year within which the stockholder may
To protect the interest of the SH. Business make the inspection. (Pardo vs. Hercules
prudence demands that the investor keep a Lumber, Co.)
watchful eye on the management and the
condition of business. Those in charge of the
Directors or Trustees of a corporation have
company may be guilty of gross incompetence
the absolute and unqualified right to inspect the
or dishonesty for years and escape liability if the
books and records of the corporation at all
shareholders cannot inspect the records and
reasonable hours. This is because a director
obtain information.
supervises, directs, and manages corporate
business and its necessary that he be equipped
Q: What is stock and transfer book? with all the information and data with regard to
the affairs of the company.

However, there is no absolute right to secure


Q: Is there a distinction between right of certified copies of the minutes of the corporation
director and Sh to inspect? Yes until these minutes have been written up and
approved by the directors. (Vegaruth vs.
Director- Absolute and unqualified Isabela Sugar Co., Inc.)

Stockholder- Reasonable business hours. It is a required condition for the inspection of


corporate books that the one requesting it must
Q: Is the right personal in nature?

  77  
 

not have been guilty of using improperly any


information secured through a prior examination
and that the person asking for such examination Any Corporation under this Code must
must be acting in good faith and for a legitimate submit 2 documents
purpose in making his demand. (Gonzales vs.
PNB) ** 1. General Information- submitted in the SEC
within 30 days from date of annual meeting.
The corporation, or its responsible directors 2. Audited Financial Statement stamped by
and officers cannot unduly restrict this right of the BIR within 120 days from end of fiscal
inspection and may not arbitrarily set few days year of corporation.
of the year within which to inspect. Should a SH
be unjustifiably refused the right to inspect the Right to Financial Statements
corporate books, he is not left without remedy.
Within ten (10) days from receipt of a written
Remedies of a stockholder who is denied request of any stockholder or member, the
inspection of corporate books: corporation shall furnish to him its most recent
financial statement, which shall include a
1. Mandamus; In such event, the corporate balance sheet as of the end of the last taxable
secretary shall be included as a party year and a profit or loss statement for said
respondent since he is customarily charged taxable year, showing in reasonable detail its
with the custody of all documents or records assets and liabilities and the result of its
of the corporation and against whom operations.
personal order of the court would be made.
At the regular meeting of stockholders or
2. Damages either against the corporate or the members, the board of directors or trustees shall
responsible officer who refused inspection; present to such stockholders or members a
or financial report of the operations of the
corporation for the preceding year, which shall
3. Criminal complaint based on Sec. 144 of the include financial statements, duly signed and
Code. If the refusal is pursuant to a certified by an independent certified public
resolution or order of the board, the liability accountant. However, if the paid-up capital of
shall be imposed upon the directors or the corporation is less than P50,000.00, the
trustees who voted for such refusal. Any financial statements may be certified under oath
penal sanction? Sec. 144 by the treasurer or any responsible officer of the
corporation.
General rule: Any officer or agent of the
corporation who refuses to allow the inspection
of corporate books and records, or any director
or trustee who through a resolution by the board
votes for such refusal shall be liable for
damages and shall be guilty of an offense which
shall be punishable under Sec. 144.
CHAPTER XII
Exception. It shall be a defense that the
person demanding inspection
MERGER AND CONSOLIDATION
1. Has improperly used any information
Section 36, par. 8 of Corporation Code of the
secured through any prior examination
Philippines expressly empowers a corporation to
of the records or minutes of such
merge or consolidate with another corporation.
corporation or of any other corporation;
or
2. Was not acting in good faith or for a Merger and consolidation are the two most
legitimate purpose in making his common types of corporate reorganizations or
demand. combination parlance.
3. His right is limited or restricted by
special law or the law of its creation. Corporate Reorganization- signifies the

  78  
 

various proceedings and transactions by which a c. A statement of changes, if any, in the


succession of corporations is brought about, articles of incorporation; and
involving as it does the carrying out, by proper d. Other provisions deemed necessary and
agreements and legal proceedings of business desirable.
plan or scheme for winding up the affairs of or
foreclosing a mortgages upon the property of 2. Approval of the plan by the
insolvent corporation. stockholders representing 2/3 of the
outstanding capital stock or 2/3 of the
“usually” this is sought due to financial losses, members in a non-stock corporations of
however, it can also be used if there will be an each constituent corporation at separate
expansion. corporate meetings called for the
purpose;
However, corporation cannot merge or 3. Prior notice of such meeting, with a
consolidate if it will result to Monopoly. RPC copy or summary of the plan of merger
imposes a penalty of imprisonment and or fine or consolidation shall be given to all
on any person who enters into a contract or stockholders or members at least 2
conspiracy to create monopolies and weeks prior to the scheduled meeting,
combinations in restraint of trade. either personally or by registered mail
stating the purpose thereof;
Limitations of Merger and Consolidation 4. Execution of the articles of merger or
consolidation by each constituent
1. Act. 3518 – monopoly corporation to be signed by the
2. Sec. 20 president or vice-president and certified
3. RPC Art. 186 by the corporate secretary or assistant
secretary setting forth the following:
Merger – a union effected by absorbing one or a. The plan of the merger or
more existing corporations by another which consolidation;
survives and continues the combined business; b. As to stock corporations, the
the uniting of two or more corporations by the number of shares outstanding,
transfer of property to one of them which or in the case of non-stock
continues in existence, the other or others being corporations, the number of
dissolved and merged therein. members; and
c. As to each corporation, the
Consolidation – the uniting or amalgamation of number of shares or members
two or more existing corporations to form a new voting for and against such plan,
corporation and the termination of existence of respectively.
the old ones.
5. Submission of the articles of merger
Constituent Corporation or consolidation in quadruplicate to the
SEC subject to the requirement of that if
Consolidated Corporation it involves corporations under the direct
supervision of any other government
Requirements and procedure for merger or agency or governed by special laws the
consolidation: favorable recommendation of the
government agency concerned shall first
be secured; and
1. The board of directors or trustees of
6. Issuance of the certificate of merger
each constituent corporation shall
or consolidation by the SEC at which
approve a plan of merger or
time the merger or consolidation shall
consolidation setting forth the following:
be effective. If the plan, however, is
(Sec 76)
believed to be contrary to law, the SEC
a. The names of the constituent
corporations; shall set a hearing to give the
b. The terms of the merger or corporations concerned an opportunity
consolidation and the mode of carrying to be heard upon proper notice and
thereafter, the SEC shall proceed as
the same into effect;
provided in the Code.

  79  
 

Any amendment to the plan of merger any of such constituent corporations


or consolidation must be approved by shall not be impaired by such merger or
majority vote of the respective boards of consolidation.
directors or trustees of all the constituent
corporations and ratified by the affirmative Merger or consolidation does not
vote of stockholders representing at least become effective upon the mere agreement of
2/3 of the outstanding capital stock or of 2/3 the constituent corporations. It shall be effective
of the members of each of the constituent only upon the issuance of a certificate of merger.
corporations. (Associated Bank vs. CA)

Mergers and consolidations may not be BPI case WON the ee’s of absorbed corporation
entered into for the purpose of circumventing the will also be absorbed by absorbing/surviving
law against monopolies and illegal combinations corporation?
in restraint of trade or for purposes of fraud.
First, No, ee’s are not chattel, franchises or
***Effects of merger or consolidation: liabilities.

1. There will only be a single …There was Motion for Reconsideration


corporation. In case of merger, the filed.
surviving corporation, or in case of
consolidation, the consolidated Second, SC now said that Yes, because of
corporation; social justice and State policy according to full
2. Termination of the corporate protection of Labor, contracts are automatically
existence of the constituent assumed (here there is contract) there is no
corporations, except that of the surviving impairment of right of er to terminate ees for
or the consolidated corporation; lawful reason or for ee to resign subject to
3. The surviving or the consolidated contractual obligation.
corporation will possess all the rights,
privileges, immunities and powers and
shall be subject to all the duties and
liabilities of a corporation organized
under the Code;
4. The surviving or the consolidated
corporation shall possess all the rights,
privileges, immunities and franchises of
the constituent corporations; and all CHAPTER XIII
property and all receivables due on
whatever account, including TITLE X- APPRAISAL RIGHT
subscriptions to shares and other
choses in action, and all and every other Appraisal right – the method of paying a
interest of, or belonging to, or due to shareholder for the taking of his property; the
each constituent corporation, shall be statutory means whereby a stockholder can
deemed transferred to and vested in avoid the conversion of his property into another
such surviving or consolidated property not of his own choosing. The purpose
corporation without further act or deed; of the right is to protect the property rights of
and dissenting stockholders from actions by the
5. The surviving or consolidated majority shareholders which alters the nature
corporation shall be responsible and and character of their investment. It is a right
liable for all the liabilities and obligations granted to dissenting stockholders on certain
of each of the constituent corporations; corporate or business decisions to demand
and any pending claim, action or payment of the fair market value of their shares.
proceeding brought by or against any of
such constituent corporations may be Q: When may appraisal right be exercised?
prosecuted by or against the surviving
or consolidated corporation. The rights Instances when a stockholder may have the
of creditors or liens upon the property of right to dissent and demand payment of the fair

  80  
 

value of his shares: Q: What if He is out voted, can he be paid


of his stocks?
1. In case any amendment to the articles
of incorporation has the effect of:
a. Changing or restricting the rights
of any stockholder or class of B. Q: Change in purpose from
shares; construction to real estate? Not one
b. Authorizing preferences in any of the instances in Sec. 81 but under
respect superior to those of sec. 42 it allows SH to dissent for any
outstanding shares of any class; investment other than the primary
or purpose.
c. Extending or shortening the term
of corporate existence. Demands to pay for his SH, but
(It is no available if amendment consist of corporation has no funds to pay the
instance, of changing the corporate name shares, 1 yr later corporation sold
or of increasing or decreasing the number
of the members of the board of directors.)
some of his property and has a profit
of 50M, may a corporation now pay
2. In case of sale, lease, exchange, transfer, his shares? This can be done because
mortgage, pledge or other disposition of he already exercised his appraisal right,
all or substantially all of the corporate true he may withdraw his rights but must
property and assets as provided in the have consent of corporation S.84.
Code; and
What if 4 other SH wants to pay “A”
his appraisal right in order that only
3. In case of merger or consolidation.
the 4 will divide the cash dividend?
Same as above s. 84
Enumeration is not exclusive!!
C. Q: SH objected SCTEX extension
because it will traverse property of a
Other instances provided for in the Code:
person he knows. “A” now demand
for payment of his shares but all the
1. Investment of corporate funds in another
capital issued for payment of other
corporation or business or for any other property? He can’t be paid because he
purpose; has no unrestricted retained earnings.
2. In a close corporation, a stockholder has
the right to compel the corporation “for
In the meantime, the 30 day period has not
any reason” to purchase his shares at
yet elapsed. What will happen? S. 83
their fair value which shall not be less
than the par or issued value when the
What will be the right of Sh? His right before
corporation has sufficient assets to
the 30d period is suspended Voting and
cover it debts and liabilities, exclusive of
dividend right is suspended.
capital stock.
A. Q: Articles of incorporation is
After 30D period “A” was not paid, what
amended changing corporate office from
happens to his rights as SH? His rights will be
QC to Manila . Can “A” exercise
restored.
Appraisal Right? No
Requirements and procedure for the exercise
Q: What if “A” is disabled and can no
of the appraisal right:
longer attend meetings because of the
change in office. Will it restrict the rights
of an SH? If this is his only reason, he can’t i. The stockholder must have voted
nd
exercise appraisal right sec. 51 2 par that if against the proposed corporate action in any
it is located within metro manila of the instances allowed by law for the
exercise of the appraisal right;
ii. A written demand for payment must
What if in Davao? He may because
be made by the dissenting stockholder
wording of law is any SH
within 30 days after the date on which the
vote was taken. Failure to make the demand

  81  
 

within the said period shall be deemed a i. The stockholder withdraws his
waiver of the appraisal right; demand for payment with the consent of the
iii. Surrender of the certificate of stock by corporation;
the dissenting stockholder for notation in the ii. The proposed corporate action is
corporate books and payment by the abandoned or rescinded by the corporation;
corporation of the fair market value of said iii. The proposed corporate action is
shares as of the day prior to the date on disapproved by the SEC where such
which the vote was taken, excluding any approval is necessary;
appreciation or depreciation in anticipation iv. The SEC determines that such
of such corporate action. If the stockholder stockholder is not entitled to the appraisal
and the corporation cannot agree on the fair right;
market value thereof, the same shall be v. The stockholder fails within 10 days
determined by appraisers; after demanding payment for his shares to
Q: How is fair value determined? The day submit the certificates of stock representing
prior to the date on which the vote was his shares to the corporation for notation
taken, excluding any appreciation or and the corporation, at its option, terminates
depreciation in anticipation of such the right.
corporate action. vi. The shares represented by the
iv. The corporation must have certificates bearing such notation are
unrestricted retained earnings in it books to transferred and the certificates subsequently
cover the payment of the fair value of the cancelled.
shares of the dissenting stockholder;
v. Upon payment of the shares by the Q: What if they do not agree on the fair
corporation, the dissenting stockholder shall value? The appraisal, if not agreed upon by the
transfer his shares to the corporation. corporation and the dissenting Sh, shall be
determined by three disinterested persons and
Effects of demand for payment of the fair the cost thereof shall be borne either by the
value of a stockholder’s shares: corporation or by the SH depending on the
circumstances provided for under the Code.
> From the time of demand for payment – all
rights accruing to such shares, including Q: Who will pay the cost and expenses?
voting and dividend rights, are suspended,
except the right to receive payment. General rule: The costs and expenses of
appraisal shall be borne by the corporation.
> After either the right ceases or the purchase of
the said shares by the corporation – all rights Exception: The fair value ascertained by the
accruing to such shares are restored and all appraisers is approximately the same as the
dividend distributions which would have price which the corporation offered to pay the
accrued on the shares shall be paid to the stockholder.
holder thereof.
General rule: In an action to recover the fair
If the dissenting stockholder is not paid the value of stocks, all costs and expenses shall be
value of his shares within 30 days after the assessed against the corporation.
award, his voting and dividend rights shall
immediately be restored. Exception: The refusal of the stockholder to
receive payment is unjustified.
No demand for payment may be withdrawn
unless the corporation consents thereto. A dissenting stockholder is required within
10 days after demanding payment for his shares
A dissenting SH will not be paid the fair value to submit the stock certificates representing his
of his shares so s to restore his rights as such shares to the corporation for notation. His failure
SH, and all dividend distribution which would to do so shall, at the option of the corporation,
have accrued on his shares shall be paid to him terminate his rights.
in those instances provided for in Sec. 84.
The dissenting stockholder is not prohibited
Instances when the right to payment ceases: from selling, transferring or assigning his shares.

  82  
 

If such be the case, once the certificates are CHAPTER XIV


subsequently canceled, the rights of the
transferor as a dissenting stockholder shall
cease and the transferee shall have all the rights
NON-STOCK CORPORATIONS
of a regular stockholder; and all dividend
distributions which would have accrued on such Q: What provisions govern non-stock
shares shall be paid to the transferee. corporation? S. 87 to 95 and subject to
provisions relating to stock corporations
A director who exercises his appraisal right
remain to be a director until his shares are no Non-stock corporation - one where no part of
longer registered in his name. its income is distributable as dividends to its
members, trustees, or officers, subject to the
A stockholder whose subscription is not fully provisions of the Code on dissolution.
paid is still entitled to exercise his appraisal
right. Even if a corporation has capital stock divided
into shares it is considered as non-stock so long
Notation, in the books of the corporation, to as it does not distribute dividends to its
the effect that certain share are dissenting is members and officers. (CIR vs. Club Filipino
necessary to give notice and guide the de Cebu) Club shares represent capital whose
corporation to determine the respective rights of income is not distributed by way of dividends.
Sh. Dissenting SH who demands payment for
the fair value of his shares are thus required by However, as may be allowed and specified in
law, to submit his certificate in order that his its articles of incorporation or as incident to the
rights, accruing to said shares may be effectively objects and purposes indicated therein, it may
suspended. engage in certain money-making ventures or
economic activities provided that any profits
Notation is not Mandatory! “at the option of derived therefrom shall be used for the
the corporation” Sec. 86 furtherance of the purpose.

Right of SH to Right of SH to Non-stock corporations may be organized or


formed for any purposes allowed or indicated in
dividends if exercise appraisal
Section 88. The enumeration is not
delinquent Sh right
exclusive…Charitable, religious, educational,
professional, cultural, fraternal, literary,
Right is not Suspends right
scientific, social, civic service, or similar
suspended under only.
purposes, like trade, industry, agricultural and
s.71
like chambers, or any combination thereof (non-
exclusive).

MEMBERSHIP AND VOTING RIGHTS


Q: May a SH who’s share is not fully paid-up
exercise his appraisal right even if it is
Stock Corporation Non-Stock
required in Sec. 86 to surrender certificate
Corporation
since a certificate is not yet issued to such
SH? S. 86 is not mandatory because how can
you make a notation if there is no certificate Cumulative voting GR: Cumulative
is a matter of right Voting is not
issued yet.
allowed

XPN: If allowed in
Articles or By-laws

Proxy voting is right GR: Entitled to vote


granted by law to all by proxy in the
SH absence of Article
or By-laws

  83  
 

XPN:Proxy Voting adopt rules prescribing the mode and manner in


may be denied which membership thereat can be obtained or
maintained. In other words, membership in non-
GR: The vote must Voting by mail or stock corporations may be acquired by
be cast at a duly other similar means complying with the provisions of its rules
constituted may also be prescribed in the by-laws. In absence of
meeting. authorized and restrictions, a non-stock corporation may act
allowed by the by- arbitrarily and exclude any persons it may see
XPN: General laws fit, and the courts have no power to interfere. It
amendment of is free to fix qualifications for membership and to
Articles where the provide for termination of membership.
written assent of
SH may be General rule: The board of trustees of a non-
sufficient. stock corporation shall have the authority to
admit members. Since it is the body that
Corporate officers Allows the Articles exercises all corporate powers.
are elected by the or by-laws to
BOD rather than by provide that officers Exception: The by-laws provide otherwise. In
SH thereof shall be certain cases, the law itself may provide certain
directly elected by limitations or even perhaps proscription on
the members transfer of membership.

Mandated to Membership RA 4726 Condominium Act requires that


conduct the meeting may be membership therein shall not be transferred
meeting within the held anywhere in separately from the condominium unit of which it
city of municipality the Philippines is appurtenant and that when a member ceases
where the principal to own a unit, he shall automatically cease to be
office is located, Note: Even if the a member.
and as far as meeting is
practicable, within improperly held or Membership shall be terminated in the
the principal office called, it shall, manner and for the causes provided in the
of the corporation. nevertheless be articles of incorporation or the by-laws.
valid if all SH or
members were General rule: Termination of membership shall
present or duly have the effect of extinguishing all rights of a
represented member in the corporation or in its property.
thereat,
8. Exception: The articles of incorporation or
The voting rights of the members in no-stock the by-laws provide otherwise.
corporations may be “limited, broadened, or be
denied” by specific provisions in the Articles or In terminating membership, strict compliance
By-laws. Thus, they may provide for a with the manner and procedure laid down in the
classification of members with voting or non- by- laws must be observed, otherwise it may
voting rights. render the expulsion ineffective and invalid.
(Carmoan vs, PED)

In absence of any provision in the articles of


General rule: Membership in a non-stock incorporation or by-laws relative to the manner
corporation and all rights arising therefrom are and causes of termination, the power is
personal and non-transferable. nonetheless inherent in the following situations:

Exception: The articles of incorporation or the 1. When an offense is committed which,


by-laws provide otherwise. although it has no immediate relation to
a members duty as such, it is so
Non-stock corporations have the right to infamous as to render him unfit for

  84  
 

society of honest men, and which is designate their governing boards by any name
indictable at common law; through their articles of incorporation or their by-
2. When the offense is a violation of his laws.
duty as a member of the corporation;
and General rule: The number of trustees in a
3. When the offense is of a mixed nature, non-stock corporation may exceed 15.
being both against his duty as a
member of the corporation, and also 1. Exception: The articles of incorporation or
indictable at common law. the by-laws provide otherwise.

As to whether or not a member should be 2. GR: A term in excess of 5 years is not


expelled or maintained is the established right of allowed as it would unduly deprive other
the corporation to determine and the courts are members to take an active part in the
without authority to strip a member of his corporate management.
membership without cause.
3. XPN: If the articles or by-laws otherwise
Courts cannot strip a member of a non-stock provided.
corporation of his membership therein without
cause. Otherwise, that would be an unwarranted ( Valle verde case – GR: 1 year
and undue interference with the well established
right of a corporation to determine its Xpn: 1. Non-stock
membership. (Chinese YMCA vs. Ching)
2. Educational institution
Q: Assuming that shares is transferable for
instance Club shares. What is being 3…
transferred is proprietary certificate of stock.
Owner transfers it to “A” may “A compel General rule: The term of office of the board
Wack-wack to transfer the certificate under of trustees may be staggered. They shall
his name? He can, provisions of stock classify themselves in order that 1/3 of their
corporation is also applicable (Rural Bank number shall expire every year and subsequent
Case). Because it is required for them to record elections of trustees comprising 1/3 shall be held
any transfer otherwise, they can be compelled annually.
by Mandamus.
4. Exception: The articles of incorporation or
If now it is transferred under his name, is the by-laws provide otherwise.
he now considered as a member of Wack-
wack? Being a shareholder and member is not 9. Qualifications of trustees: (Qualif and
the same in Non-stock corporation because Disqualif in Stock Corporation is also
member may be required to comply with rules of applicable)
non-stock corporation.
10. 1. He is a member of the corporation;
Golfer in Wack-wack transferred the
proprietary certificate to his driver and ask to 11. 2. Majority thereof must be residents of
transfer or record in corporate book. the Philippines; and
Corporation recorded it but they can’t compel
corporation to acknowledge him as a member, 12. 3. Other qualifications as may be
one of the qualification is financial capacity. provided for in the by-laws.
Cebu Country Club case- although a 13. General rule: officers of a non-stock
corporation can provide in by-laws on how they corporation may be directly elected by
can accept members, such can’t be exercised the members.
arbitrarily.
14. Exception: The articles of incorporation
TRUSTEES AND OFFICERS or the by-laws provide otherwise.
Non-stock or special corporations may

  85  
 

Trustees elected to fill vacancies occurring meeting; and


before the expiration of a particular term hold
office only for the unexpired period. 2. The place of meeting must be within the
Philippines.
General rule: The courts will not interfere on
matters involving the internal affairs of an
unincorporated association such as elections,
the manner by which it was conducted and the General rule: All proceedings and business
results thereof. (Lions Club International vs. CA) transactions at a meeting improperly held or
called are invalid.
15. Exceptions:
Exception: All of the members are present or
16. 1. There is fraud, oppression or bad duly represented at the meeting.
faith;
DISTRIBUTION OF ASSETS UPON
17. The action complained of is capricious, DISSOLUTION
arbitrary or unjustly discriminatory;
All liabilities and obligations of the
18. 3. Property and civil rights are invaded; corporation shall be paid, satisfied and
discharged, or adequate provision shall be made
4. The proceedings are violative of the laws of therefore;
society, or the law of the land, as by
depriving a person of due process of Assets held by the corporation upon a
law; condition requiring return, transfer or
5. There is lack of jurisdiction on the part conveyance, and which condition occurs by
of the tribunal conducting the proceedings; reason of the dissolution, shall be returned,
6. The organization exceeds its powers; transferred or conveyed in accordance with such
7. The proceedings are illegal; or requirements;
8. An incorporated association or its
members avail of the remedy of instituting an Assets received and held by the
intra- corporate dispute case. corporation subject to limitations permitting their
use only for charitable, religious, benevolent,
Q: Can the held the meeting anywhere in educational or similar purposes, but not held
the Philippines? No, Qualify upon a condition requiring return, transfer or
conveyance by reason of the dissolution, shall
General rule: Regular or special meetings of be transferred or conveyed to one or more
members of a non-stock corporation shall be corporations, societies or organizations engaged
held in the city or municipality where the in activities in the Philippines substantially
principal office is located, and if practicable in similar to those of the dissolving corporation
the principal office of the corporation. according to a plan of distribution;

Exceptions: Assets other than those mentioned in


the preceding paragraphs, if any, shall be
a. The by-laws of the corporation provide distributed in accordance with the provisions of
otherwise; and the articles of incorporation or the by-laws, to the
extent that the articles of incorporation or the by-
b. Metro Manila is considered a city or laws, determine the distributive rights of
municipality. members, or any class or classes of members,
or provide for distribution; and
Requirements for meetings held outside the
location of the principal office as provided for by In any other case, assets may be
the by-laws: distributed to such persons, societies,
organizations or corporations, whether or not
1. Proper notice is sent to all members indicating organized for profit, as may be specified in a
the date, time and place of the plan of distribution.

  86  
 

Procedure and requirements for a plan of 20;


distribution of assets: ii. All the issued stock of all classes shall
be subject to one or more specified
1. Majority vote of the board of trustees restrictions on transfer permitted by Title XV
adopting a plan of distribution; of the Code; and
2. Approval of such plan by at least 2/3 of iii. The corporation shall not list in any
the members having voting rights stock exchange or make any public offering
present or represented by proxy at a of any of its stock of any class.
regular or special meeting for that
purpose; and Absent any of the three requisites, a
3. Prior written notice setting forth the corporation cannot be considered a close
proposed plan of distribution or a corporation and would thus be governed by the
summary thereof and the date, time and general provisions on ordinary corporations.
place of such meeting shall be given to
each member entitled to vote, within the Purpose: Close corporation is inserted in the
time and in the manner provided in the law to provide a type of business organization
Code for the giving of notice of meetings especially designed for business belonging to a
to members. small, closely-knit group, like the family.

Q: May there be a distribution it the members A corporation does not become a close
of assets? If there is no distributive rights corporation just because a husband and wife
granted to members such then can’t be owns 99.86% of the capital stock. (San Juan
distributed to them, such can be transferred in Structural Steel vs. CA)
accordance with section 94… if there is
distributive right but no distributive plan that is A corporation shall not be deemed a close
when Section 95 will set in. corporation when at least 2/3 of its voting stock
or voting rights is owned or controlled by another
(check book) corporation which is not a close corporation.
Culled from this is that even if another
corporation owns or controls 2/3 of the voting
stocks of a close corporation, the latter may still
be considered as such close corporations if the
TITLE XV corporation owning or controlling the shares is
also a close corporation.
CLOSE CORPORATIONS
Close Corporation - Partnership
(Check page 447 for comparison with Family
The ultimate effect is to furnish another form
Corporation)
of business organization- a “de facto corporation
with a corporate shell”.
Q: What law will govern Close Corporation?
The provisions of Title XII of the Code shall
It is referred to sometimes as hybrid of both
primarily govern close corporations. However, in
the corporate and partnership forms an
the absence of special law the general law
incorporated partnership or a corporation de jure
governing ordinary corporations apply to the
but a de facto partnership.
former.
This is because a close corporation may
Q: What is a Close Corporation? partake the nature of a partnership in that SHs
thereof take an active role in the management of
Close corporation - one whose articles of the corporate affairs either as directors, officers,
incorporation provide that: or even perhaps as partners in management.

i. All the corporation's issued stock of Q: What is the most distinct characteristic of
all classes, exclusive of treasury shares, close corporation? In ordinary stock
shall be held of record by not more than a corporation the SHs have hardly a voice in
specified number of persons, not exceeding

  87  
 

management except to elect the directors. or more classes, each of whom may be
Identity of SHs and active participation of SH voted for and elected solely by a
which the old code failed to mention. particular class of stock; (check book for
example)
Se. 97 allows the Articles of a Close 3. For a greater quorum or voting
Corporation to do away wit a Board of Directors requirements in meetings of
vesting management of the corporate affairs to stockholders or directors;
SHs. Despite this, and unlike partnership the Although the articles or by-laws of
SHs who are active in management, still enjoy other stock corporations may provide for
greater quorum and voting requirements in
“Limited liability” to the extent of subscription.
Director’s meeting (Sec. 25), those for Sh’s
meeting, unlike in close corporation, may not
It will be noted, however, under no. 5 of be altered or increased. This provision,
Section 100 of the Code, they are made increases the veto power of minority SHs-
personally liable for corporate torts unless they Investment in another purpose. For ordinary
have obtained a reasonably adequate insurance corporation 2/3 but in non-stock corporation
liability. it can include in its by-laws that vote must be
¾.
General rule: Any corporation may be
incorporated as a close corporation. 4. The Articles of Incorporation of a
Close Corporation may provide that
Exceptions: the business of the corporation shall
be managed by the stockholders of
the corporation rather than by a
1. Mining or oil companies;
2. Stock exchanges; board of directors. So long as this
3. Banks; provision continues in effect:
4. Insurance companies; a. No meeting of stockholders need be
5. Public utilities; called to elect directors;
6. Educational institutions; and b. Unless the context clearly requires
7. Corporations declared to be vested with otherwise, the stockholders of the
public interest. corporation shall be deemed to be
directors; and
c. The stockholders of the corporation
Sec. 140 authorizes the NEDA to
shall be subject to all liabilities of
recommend to the legislature the setting of
directors.
maximum limits to family or group ownership of
stock in corporation vested with public interest,
As to their Liability-
and the determination of whether or not it should
Close Corporation Ordinary
be vested with public interest is within its corporation
domain.
Their liability will be Directors are liable
The articles of incorporation of a close more extensive in for corporate torts
corporation may provide: that they are only if they have
personally liable for been negligent or
1. For a classification of shares or rights corporate torts acted fraudulently
and the qualifications for owning or unless, again, the
holding the same and restrictions on corporation has
obtained a
their transfers as may be stated therein; reasonably adequate
A close corporation may thus liability insurance.-
classify its shares into different classes to be depends on the facts
held of record only by specified persons. For
example it may provide that it shall gave 3
classes of shares, A, B, C. Class A to be
held by incorporators, B by relatives within
rd
3 civil degree, and C by close business 5. That all officers or employees or that
associates. specified officers or employees shall be
elected or appointed by the
2. For a classification of directors into one stockholders, instead of by the board of

  88  
 

directors. certificate
In ordinary corporation, the officers are conspicuously
appointed or elected by the board. states such
number; and
In order to bind purchasers in good faith,
restrictions on the right to transfer shares 3. The issuance or
must appear in: transfer of stock
causes the stock to
1. The articles of incorporation; be held by more
2. The by-laws; and than such number
3. The certificate of stock. of persons.

Restrictions on the right to transfer


shares shall not be more onerous than
granting the existing stockholders or the 1. The stock The transferee is
corporation the option to purchase the certificate conclusively
shares of the transferring stockholder within conspicuously presumed to have
reasonable terms, conditions or period. If shows a restriction notice of this fact.
upon the expiration of said period, the on transfer of stock;
existing stockholders or the corporation fails
to exercise the option to purchase, the 2. The transfer
transferring stockholder may sell his shares violates the
to any third person. restriction.
Effects of issuance or transfer of stock in
breach of qualifying conditions:

Conditions Effects
General rule: A close corporation may refuse to
1. The stock is The transferee is
register the transfer of stock in the name of the
issued or conclusively
transferee who has or is conclusively presumed
transferred to a presumed to have
to have notice that:
person not entitled notice of his
under the articles of ineligibility to be a
1. He is not eligible to be a holder of stock
incorporation; and stockholder.
of the corporation;
2. Transfer of stock to him causes the
2. The stock
stock of the corporation to be held by
certificate
more than the number of persons
conspicuously
permitted by its articles of incorporation
shows the
to hold stock of the corporation; or
qualifications of the
3. The transfer of stock is in violation of a
persons entitled.
restriction on transfer of stock.

Exceptions:
1. The articles of The transferee is
1. The transfer of stock has been
incorporation states conclusively
consented to by all the stockholders; or
the number of presumed to have
2. The close corporation has amended its
persons, not notice of this fact.
articles of incorporation.
exceeding 20, who
are entitled to be
Options granted to the transferee/ Recourse
holders of record of
of Transferee:
its stock
1. Compel the Close corporation to
2. The stock
purchase his shares at the fair value for

  89  
 

any reason subject only to the any phase of the corporate affairs, shall
conditioned laid down in Section 105. be invalidated as between the parties on
2. Rescind the transfer; or the ground that its effect is to make
3. Recover under any applicable warranty, them partners among themselves.
express or implied.
4. A written agreement among some or all
The term "transfer" is not limited to a of the stockholders in a close
transfer for value. corporation shall not be invalidated on
the ground that it so relates to the
Agreements by and among Stockholders conduct of the business and affairs of
the corporation as to restrict or interfere
1. Agreements by and among stockholders with the discretion or powers of the
executed before the formation and board of directors: Provided, That such
organization of a close corporation, agreement shall impose on the
signed by all stockholders, shall survive stockholders who are parties thereto the
the incorporation of such corporation liabilities for managerial acts imposed by
and shall continue to be valid and this Code on directors.
binding between and among such Par 3 and 4 refers to conduct of
stockholders, if such be their intent, to corporate affairs which renders any written
agreement of the SHs to be effective and
the extent that such agreements are not
binding despite the fact that it may make
inconsistent with the articles of them partners among themselves.
incorporation, irrespective of where the Agreements may also be entered
provisions of such agreements are into by and between the Shs of a close
contained, except those required by this corporation which relates to the
Title to be embodied in said articles of management of the corporate affairs which
incorporation. would not otherwise be valid and binding in
other corporations. This is because Sh/s
Ordinary stock Close Corporation agreement in the latter cannot limit or restrict
corporation the discretion and powers of the BOD to
manage the corporate affairs.
5. To the extent that the stockholders are
Do not ordinarily In close corporations,
survive the it will survive and actively engaged in the management or
corporation in continue to be valid, if operation of the business and affairs of
ordinary stock such be the intent of a close corporation, the stockholders
corporation unless it the SHs, provided that shall be held to strict fiduciary duties to
has been ratified or agreement is not each other and among themselves. Said
adopted by the inconsistent with the stockholders shall be personally liable
corporation after articles. for corporate torts unless the
incorporation. corporation has obtained reasonably
adequate liability insurance.

General rule: Any action by the directors of a


close corporation without a meeting is invalid.
2. An agreement between two or more
stockholders, if in writing and signed by
Exceptions: When board meeting is
the parties thereto, may provide that in
unnecessary or improperly held. - Unless the by-
exercising any voting rights, the shares
laws provide otherwise, any action by the
held by them shall be voted as therein
directors of a close corporation without a
provided, or as they may agree, or as
meeting shall nevertheless be deemed valid if:
determined in accordance with a
procedure agreed upon by them. (SHs in
a. Written consent is signed by all the
a close corporation may this agree to vote
for a specific person or group or to maintain directors;
a certain Sh as their president or chairman.
b. All the stockholders have actual or
3. No provision in any written agreement implied knowledge of the action and
signed by the stockholders, relating to make no prompt objection thereto in

  90  
 

writing; a. Delete or remove any provision required


by Title XV of the Code to be contained
c. The directors are accustomed to take in the articles of incorporation, or
informal action with the express or b. Reduce a quorum or voting requirement
implied acquiescence of all the stated in said articles of incorporation,
stockholders; or must be approved by the affirmative
vote of at least 2/3 of the outstanding
d. All the directors have express or capital stock, whether with or without
implied knowledge of the action in voting rights, or of such greater
question and none of them makes proportion of shares as may be
prompt objection thereto in writing. specifically provided in the articles of
incorporation for amending, deleting or
(If a director's meeting is held without removing any of the aforesaid
proper call or notice, an action taken therein provisions, at a meeting duly called for
within the corporate powers is deemed ratified the purpose.
by a director who failed to attend, unless he
promptly files his written objection with the Main distinctions of ordinary stock and close
secretary of the corporation after having corporations are:
knowledge thereof.)
1. No public offer in close corporation
Exception to the exceptions: The by-laws 2. As to their pre-emptive right
provide otherwise. 3. Any SH may compel the corporation to
buy its shares provided, corporation has
As to Pre-emptive Right capacity

Ordinary Stock Close Corporation ** Deadlock - the directors or stockholders are


Corporation so divided respecting the management of the
corporation's business and affairs that the votes
Pre-emptive right be Pre-emptive right is required for any corporate action cannot be
denied if the shares absolute because obtained, with the consequence that the
are to be issued in there is no public business and affairs of the corporation can no
compliance with laws offering in close longer be conducted to the advantage of the
requiring stock corporation.
stockholders generally.
offering or minimum
stock ownership y the Pre-emptive right is
public, in exchange broadened to include
Ex. 2/3 votes for ordinary stock; ¾ for close
for properly needed all issued without corporation as provided in Articles. 2/3 votes can
for corporate exceptions unless, of be obtained but ¾ votes not. If this is the case
purposes; or, in course, denied or there will be deadlock.
payment of previous limited by the Articles.
debts. (S.39) - Provision violated the business
judgment rule.
Q: Are treasury - Powers of the SEC involving
shares included?
intracorporate disputes is transferred to
the special commercial law.
- Provisional director appointed by the
court.
General rule: The pre-emptive right of - It may prohibit corporation to act even in
stockholders in close corporations shall extend case of death of the corporation,
to all stock to be issued, including reissuance of - It gives the SEC a very wide discretion
treasury shares, whether for money, property or in respect to management of a close
personal services, or in payment of corporate corporation in the event of deadlock. It
debts. may:
Exception: The articles of incorporation In case of a deadlock and upon written
provide otherwise. Any amendment to the petition by any stockholder, the SEC has the
articles of incorporation which seeks to: power to arbitrate the dispute and the authority

  91  
 

to: between the provisional director and the


corporation.
1. Cancel or alter any provision contained in
the articles of incorporation, by-laws, or any Any stockholder of a close corporation may,
stockholder's agreement; for any reason, compel the said corporation to
purchase his shares at their fair value, which
2. Cancel, alter or enjoin any resolution or act of shall not be less than their par or issued value,
the corporation or its board of directors, when the corporation has sufficient assets in its
stockholders, or officers; books to cover its debts and liabilities exclusive
of capital stock. This can be done by stock
3. Direct or prohibit any act of the corporation or corporation only upon the exercise of his
its board of directors, stockholders, officers, or appraisal right in those instances allowed in Sec.
other persons party to the action; 81.

4. Require the purchase at their fair value of Dissolution…


shares of any stockholder, either by the
corporation regardless of the availability of Any stockholder of a close corporation may,
unrestricted retained earnings in its books, or by by written petition to the SEC, compel the
the other stockholders; dissolution of such corporation whenever:

5. Appoint a provisional director; Any of acts of the directors, officers or those


6. Dissolve the corporation; or in control of the corporation is illegal, or
7.Grant such other relief as the circumstances fraudulent, or dishonest, or oppressive or
may warrant. unfairly prejudicial to the corporation or any
stockholder; or Corporate assets are being
In the event that SEC opt to appoint a misapplied or wasted.
provisional director, the second par of Sec. 104
will apply. The provisional director may break Dishonesty is a ground for dissolution of a
the deadlock by casting the deciding vote. close corporation

Provisional director: When there is a relief available, dissolution


would not be available in an ordinary
a. A provisional director shall be an corporation.
impartial person who is neither a
stockholder nor a creditor of the Ex:
corporation or of any subsidiary or
affiliate of the corporation, and whose Wastage of corporate assets because
further qualifications, if any, may be investment in business outside the purpose
determined by the SEC. clause. Corporation did not approve and they
b. A provisional director is not a receiver of ask for dissolution
the corporation and does not have the
title and powers of a custodian or Land transportation to Mining- SC did not ruled
receiver. in favor of dissolution because this may only be
c. A provisional director shall have all the warranted if no other remedy. First, go
rights and powers of a duly elected personally to officer involved but in close
director of the corporation, including the corporation court perhaps may have granted
right to notice of and to vote at meetings dissolution because one of the grounds is any
of directors, until such time as he shall other acts prejudicial to the business.
be removed by order of the SEC or by
all the stockholders. Close Corporation Ordinary Stock
Corporation
His compensation shall be
determined by agreement between him and the The number of No limitation as to
corporation subject to approval of the SEC, stockholders cannot number of
which may fix his compensation in the absence
of agreement or in the event of disagreement

  92  
 

exceed 20. shareholders. particular class of


stock, cumulative
The number of Maximum number of voting may, in effect,
directors can directors is 15 be restricted.
effectively be more
than 15. The articles of Officers are elected
incorporation may by the Board of
Shares of stock are Generally no provide that all Directors.
subject to specified restriction on transfer officers shall be
restrictions. of shares. elected or appointed
by the stockholders.
Shares of stock are No prohibition.
prohibited from it may provide for Although the articles
being listed in the greater quorum and of incorporation or
stock exchange or voting requirements by-laws may provide
offered for sale to in meetings of for greater quorum
the public. stockholders and and voting
directors. requirements in
Stockholders may Management is directors‟ meetings
take an active part in lodged in the board under Sec. 25, those
corporate of directors. for stockholders‟
management by meetings cannot
vesting generally be altered.
management to
them rather than the Restrictions on Valid and binding if
a board of directors. transfer of shares indicated in the
should be indicated articles of
Those active in Directors are liable in the articles of incorporation and
management are for torts only if they incorporation, by- stock certificates.
personally liable for have acted laws and stock
corporate torts negligently or certificates.
unless the fraudulently.
corporation has Pre-emptive rights of Pre-emptive rights
obtained an stockholders is may be denied as
adequate liability broader as it provided for in Sec.
insurance. includes all issues 39.
without exception.
Directors can validly Directors must, as a
act even without a rule, act as a body at
meeting a duly constituted A stockholder may Unless he sells his
meeting. withdraw and shares, a
compel the stockholder cannot
Agreements Not valid and binding corporation to get back his
between since stockholders‟ purchase his shares investment nor
stockholders agreement cannot for any reason with compel the
regarding the limit the discretion of the limitation only corporation to buy
operations of the the Board to manage that the corporation his shares except in
business can validly corporate affairs. has sufficient assets the exercise of his
be made. to cover its liabilities appraisal right.
exclusive of capital
To the extent that Ordinarily, no such stock.
directors may be classification and no
classified into one or restrictions on The proper forum Courts cannot
more classes and to cumulative voting. may interfere in the interfere in the
be voted solely by a management of a business judgment of

  93  
 

close corporation in the duty imposed by law. Article 283 of the Labor
case of deadlocks directors/stockholder Code mandates the employer to grant
under Sec. 104, s. separation pay to employees in case of closure
even if the or cessation of operations of establishment or
directors/stockholder undertaking not due to serious business losses
s are acting in good or financial reverses. CFTI failed to comply with
faith. this law-imposed duty or obligation.
Consequently, its stockholder who was actively
Any stockholder Dissolution may be engaged in the management or operation of the
may petition the Sec had only on the business should be held personally liable.
for corporate grounds provided by (Naguiat vs. NLRC)
dissolution on the provisions of the
grounds among Code on dissolution Atty. Ladia: 2 Corporations in both cases are
others, provided for and PD 902-A, as not close corporation because there must be
in Sec. 105., amended. compliance with sec. 96 but still SC said that
they are close corporation. He said that the SC
Additional will still arrive at the same ruling without
misapplying the law if:
As to appraisal right
Dulay case- Estoppel because Vice president
sigened

Nugait cause- In labor cases, if in Bad faith are


personally liable.
Business judgment rule
is not applicable in IMPORTANT!! Notes in page 465
case of deadlocks

Transferees has no
same right to compel
the corporation record
the transfer in books to
be a Sh

In a close corporation, a corporate action


taken at a board meeting without proper call or
notice is deemed ratified by the absent director
unless the latter promptly files his written
objection with the secretary of the corporation
after having knowledge of the meeting. (Manuel
Dulay Enterprises vs. CA)

Structure steel corporation holding 98%


od outstanding stock does not make it a close
corporation because qualifying condition in Sec.
96 must be present.

Stockholders who actively engage in the


management or operation of the business and
affairs of a close corporation shall be personally
liable for corporate torts unless the corporation
has obtained reasonably adequate liability
insurance. Essentially a tort consists in the
violation of a right given or the omission of a

  94  
 

Trustees of non-stock educational


corporations shall not be less than 5 nor more
than fifteen 15, in multiples of 5.

Q: May the governing board be less than 13?


Yes, in stock corporation, because provisions in
stock corporation must apply. In non-stock
CHAPTER XVI corporation, No, it must be in multiples of 5.

SPECIAL CORPORATION Q: What is their term of office?

GR: 5 years

2 Tyeps XPN:

1. Educational Corporation Unless otherwise provided in the


Private & Public articles of incorporation on the by-laws (it may
be less than 1 year), the board of trustees of
2. Religious Corporation incorporated schools, colleges, or other
Corporation sole & Religious institutions of learning shall, as soon as
societes organized, so classify themselves that the term
of office of 1/5 of their number shall expire every
year. Trustees thereafter elected to fill
vacancies, occurring before the expiration of a
EDUCATIONAL CORPORATIONS particular term, shall hold office only for the
unexpired period. Trustees elected thereafter to
Educational corporations – those which fill vacancies caused by expiration of term shall
provide facilities for teaching or instruction. hold office for 5 years. A majority of the trustees
shall constitute a quorum for the transaction of
business. The powers and authority of trustees
Educational corporations are governed
shall be defined in the by- laws.
primarily by special laws and secondarily by the
Code.
For institutions organized as stock
corporations, the number and term of directors
Public schools are those created by
shall be governed by the provisions on stock
government and subject to the law of its
corporations.
creation.
Q: May foreigners be Board of Director in an
Private school includes any private
educational corporation?
institutions for teaching, managed by private
individual or corporations.
General rule: Educational institutions shall be
owned solely by citizens of the Philippines or
Educational institutions are required
corporations or associations at least 60% of the
to incorporate within 90 days after their
capital of which is owned by such citizens. The
recognition as such. However, failure to comply
control and administration of educational
will not immune the educational institution from
institutions shall be vested in citizens of the
suit as a corporation.
Philippines. (While foreigners may own a max. of
40% of capital stock of an educational institution not
A favorable recommendation of the one of them may sit as a BOD. Neither may they act
Secretary of Education, Culture and Sports is as a officer with the power of control and
required before the SEC accepts or approves administration. Their ownership is limited to “non
the articles of incorporation or by-laws of any controlling interest”)
educational institution.
Exception: Educational institutions established
Q: How are the BOD/T of be constituted in by religious groups and mission boards. ( Art.
educational corporations? XIV, Par. 2 Sec. 4)

  95  
 

General rule: No educational institution shall be Requirements and procedure of


established exclusively for aliens and no group incorporation:
of aliens shall comprise more than 1/3 of the
enrollment in any school. The chief archbishop, bishop, priest, minister,
rabbi or other presiding elder of such religious
Exception: The rule shall not apply to schools denomination, sect or church must file the
established for foreign diplomatic personnel and articles of incorporation with the SEC which
their dependents and, unless otherwise provided must contain the following:
by law, for other foreign temporary residents.
1. That he is the chief archbishop,
Ex. St. Louis University- created by religious bishop, priest, minister, rabbi or
order by Belgian presiding elder of his religious
denomination, sect or church and that
UST- Jesuits he desires to become a corporation
sole;
Grace Christian School- President is 2. That the rules, regulations and
naturalized foreigner. discipline of his religious denomination,
sect or church are not inconsistent with
his becoming a corporation sole and do
not forbid it;
RELIGIOUS CORPORATIONS 3. That as such chief archbishop,
bishop, priest, minister, rabbi or
Religious corporation – one composed entirely presiding elder, he is charged with the
of spiritual persons which is created for the administration of the temporalities and
furtherance of religion or perpetuating the rights the management of the affairs, estate
of the church or for the administration of church and properties of his religious
or religious work or property. denomination, sect or church within his
territorial jurisdiction, describing such
Classes of religious corporations: territorial jurisdiction;
4. The manner in which any vacancy
i. Corporations sole; and occurring in the office of chief
ii. Religious societies. archbishop, bishop, priest, minister,
rabbi of presiding elder is required to be
Religious corporations are governed filled, according to the rules, regulations
by the appropriate chapter of the Code and the or discipline of the religious
general provisions on non-stock corporations. denomination, sect or church to which
he belongs; and
Corporation Sole 5. The place where the principal office of
the corporation sole is to be established
and located, which place must be within
Corporation sole – consists of one person only
the Philippines.
and his successor in some particular station,
who are incorporated by law in order to give
them some legal capacities and advantages, The articles of incorporation may
particularly that of perpetuity, which in their include any other provision not contrary to law
natural persons they could not have had. for the regulation of the affairs of the
corporation.
Purpose – Administration and management, as
trustee, of the affairs, properties and The articles of incorporation must be:
temporalities of any religious denomination, sect Verified by affidavit or affirmation of
or church. the chief archbishop, bishop, priest, minister,
rabbi or presiding elder, as the case may be;
Accompanied by a copy of the commission,
Who – Chief archbishop, bishop, priest,
certificate of election or letter of appointment of
minister, rabbi or other presiding elder of such
such chief archbishop, bishop, priest, minister,
religious denomination, sect or church. (not just
rabbi or presiding elder; and Duly certified to be
any person)
correct by any notary public.

  96  
 

From and after the filing of the Exception: Court intervention is not necessary
aforementioned documents with the SEC, such when the rules, regulations and discipline of the
chief archbishop, bishop, priest, minister, rabbi religious denomination, sect or church, religious
or presiding elder shall become a corporation society or order concerned represented by such
sole. corporation sole regulate the method of
acquiring, holding, selling and mortgaging real
All temporalities, estate and properties of the estate and personal property.
religious denomination, sect or church
administered or managed by the corporation T or F- Does the sole corporation has the
sole shall be held in trust for the use, purpose, same rights with ordinary corporation with
behalf and sole benefit of the religious regards to acquisition and alienation?
denomination, sect or church, including FALSE, in alienation and selling court order is
hospitals, schools, colleges, orphan asylums, required unless otherwise provided in the
parsonages and cemeteries thereof. Articles.

A provision relative to its term of existence is Q: Can the Sole corporation register
not required since a corporation sole is property? Yes
supposed to exist in perpetuity. It may however
be dissolved in accordance with Sec. 115 Will it vest ownership to the head? No, the
head merely acts as trustee of guardian.
Q: When does it become a judicial
personality? Registration of real property in the name of
the corporation sole does not vest ownership
General rule: A corporation acquires juridical unto the head thereof.
personality only upon the issuance of a
certificate of incorporation by the SEC. The constitutional requirement that 60% of
the capital of a corporation must be owned by
Exception: A corporation sole becomes Filipino citizens before it may register land in its
endowed with corporate personality after filing of own name does not apply to a corporation sole.
the verified articles of incorporation together with A corporation sole has no nationality and the
other required documents. framers of the constitution did not have in mind
the corporation sole when it provided for such
Q: Can a corporation sole acquire, own, sell requirement. (Roman Catholic Apostolic Adm.
and alienate properties? of Davao, Inc. vs. LRC)

A corporation sole may purchase and hold Whether or not a corporation sole, or any
real estate and personal property for its church, private corporation for that matter, can acquire
charitable, benevolent or educational purposes, alienable land of the public domain depends
and may receive bequests or gifts for such upon the character of the land at the time of the
purposes. institution of the registration proceeding. If it still
forms part of the public domain, no. If it is
General rule: A court order is required before a private, yes. (Republic vs. INC)
corporation sole may sell or mortgage real
property held by it. Before such an order is Under the Public Land Act, alienable public
granted, a verified petition must be made by the land may be subject to registration by a
chief archbishop, bishop, priest, minister, rabbi possessor if he, personally or through his
or presiding elder acting as corporation sole and predecessor-in-interest, had openly,
it must be shown that notice of the application continuously, exclusively and notoriously
has been given as directed by the court and that possessed the same for 30 years. The law
it is to the interest of the corporation that the creates the legal fiction whereby the land, upon
petition be granted. However, such application completion of the requisite period ipso jure and
may be opposed by any member of the religious without the need of judicial or other sanction,
denomination, sect or church represented by the ceases to be public land and becomes private
corporation sole. property. (Director of Lands vs. CA)

Q: Who fill up the vacancy?

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In case of vacancy in the office of the “head” or for the management of its affairs, properties
of the corporation, the person authorized by the and estate
rules, regulations or discipline of the
denomination shall exercise all the powers and Who – any religious society or religious order, or
authority of the corporation sole during such any diocese, synod, or district organization of
vacancy and until such vacancy has been filled- any religious denomination, sect or church.
up. It is required that the successor filling-u the
vacancy must file with the SEC a copy of his Requirements and procedure for incorporation:
commission, certificate of election, or letter of
appointment, duly certified by a notary public. 1. Filing of the articles of incorporation
with the SEC;
The successors in office shall become the 2. The articles of incorporation must set
corporation sole and shall be permitted to forth the following:
transact business as such only upon the filing a. That the religious society or
with the SEC of a copy of their commission, religious order, or diocese,
certificate of election, or letters of appointment, synod, or district organization is
duly certified by a notary public. a religious organization of a
religious denomination, sect or
Q: May a Corporation Sole be dissolved? church;
Yes, by submission of a verified declaration of b. That at least 2/3 of its
dissolution. membership have given their
written consent or have voted to
Q: May it be dissolved involuntary incorporate, at a duly convened
(judicially)? GR: No, because of separation of meeting of the body;
Church and State 3. That the incorporation of the
religious society or religious order, or
XPN: By Police Power, in the event that diocese, synod, or district organization
corporation did not use it according to purpose. desiring to incorporate is not forbidden
For illegal or immoral acts. by competent authority or by the
constitution, rules, regulations or
Requirements for the voluntary dissolution of discipline of the religious denomination,
corporations sole: 1. Filing with the SEC of a sect, or church of which it forms a part;
verified declaration of dissolution which must set 4. That the religious society or
forth the following: religious order, or diocese, synod, or
district organization desires to
a. The name of the corporation; incorporate for the administration of its
b. The reason for dissolution and affairs, properties and estate;
winding up; 5. The place where the principal
c. The authorization for the dissolution office of the corporation is to be
of the corporation by the particular established and located, which place
religious denomination, sect or church; must be within the Philippines; and
and 6. The names, nationalities, and
d. The names and addresses of the residences of the trustees elected by the
persons who are to supervise the religious society or religious order, or
winding up of the affairs of the the diocese, synod, or district
corporation. organization to serve for the first year or
e. Approval of the SEC. such other period as may be prescribed
by the laws of the religious society or
Religious Societies religious order, or of the diocese, synod,
or district organization, the board of
Religious society – a body of person trustees to be not less than 5 nor more
associated together for the purpose of than 15.
maintaining religious worship.

Purpose – the administration of its temporalities


The articles of incorporation

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must be verified by the affidavit of the Three modes of dissolution:


presiding elder, secretary, or clerk or other
member of such religious society or religious 1. By expiration of the corporate term;
order, or diocese, synod, or district
organization of the religious denomination, 2. By voluntary surrender of its primary franchise
sect or church. (voluntary dissolution); or

Q: When does they acquire juridical 3. By the revocation of its corporate franchise
personality? Issuance of the SEC of the (involuntary dissolution).
certificate of incorporation.
EXPIRATION OF CORPORATE TERM
The articles of incorporation of a religious
society need not indicate a term since it is General rule: A corporation registered under
supposed to exist in perpetuity. the Corporation Code is required to indicate its
term of existence in the articles of incorporation.
Religious society is not mandated by law to
register as a corporation but it may do so to Exceptions:
acquire juridical personality and for the purpose
of administration of its temporalities and 1. Corporations sole; and
properties and even to acquire properties of its
own. Thus, it has been held that an 2. Religious societies.
unincorporated religious association cannot
acquire private agricultural land in the A corporation ceases to exist and is
Philippines. automatically dissolved (ipso facto) upon the
expiration of the term indicated in its articles of
Q: May it be dissolved thru judicial act? Yes incorporation without the need of formal
proceeding. There is no need to for the
May the rules governing dissolution be institution of a proceeding for quo warranto to
applied in religious societies? Yes determine the time and date of the dissolution of
a corporation because the period of corporate
existence is provided in the articles of
incorporation. (PNB vs. CFI)

SURRENDER OF FRANCHISE (VOLUNTARY


DISSOLUTION)
CHAPTER XVII
Three modes of voluntary dissolution:
DISSOLUTION
i. Voluntary dissolution where no creditors are
affected;
ii. Voluntary dissolution where creditors are
Dissolution – the extinguishment of the affected; and
corporate franchise and the termination of iii. Shortening of corporate term.
corporate existence.
Voluntary dissolution where no creditors are
General rule: When a corporation is dissolved, affected;
it ceases to be a juridical entity and can no
longer pursue the business for which it is Formal and procedural requirements for
incorporated. voluntary dissolution where no creditors are
affected:
Exception: The corporation will continue as a
body corporate for another period of 3 years a. Majority vote of the board of directors
from the time it is dissolved for the purpose of or trustees;
winding up its affairs and the liquidation of its b. Sending of notice to each stockholder
assets. or member either by registered mail or

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personal delivery at least 30 days prior the president or secretary or one of its
to the meeting (scheduled by the board directors or trustees, setting forth all
for the purpose of submitting the board claims and demands against it;
action to dissolve the corporation for c. Issuance of an order by the SEC
approval of the stockholders or reciting the purpose of the petition and
members); fixing the date on or before which
c. Publication of the notice of time, place objections thereto may be filed by any
and subject of the meeting for 3 person, which date shall not be less
consecutive weeks in a newspaper than 30 days nor more than 60 days
published in the place where the after entry of the order;
principal office of said corporation is d. Before such date, a copy of the order
located or in a newspaper of general must be published once a week for 3
circulation in the Philippines; consecutive weeks in a newspaper of
d. Resolution adopted by the affirmative general circulation published in the city
vote of the stockholders owning at least or municipality where the principal office
2/3 of the outstanding capital stock or is situated or in a newspaper of general
2/3 of the members at the meeting duly circulation in the Philippines;
called for the purpose; e. Posting of the same order for 3
e. A copy of the resolution authorizing consecutive weeks in 3 public places in
the dissolution must be certified by a such city or municipality;
majority of the board of directors or f. Upon 5 days notice, given after the
trustees and countersigned by the date on which the right to file objects
corporate secretary; and has expired, the SEC shall hear the
f. Issuance of a certificate of dissolution petition and try any issue made by the
by the SEC. objections filed; and
g. Judgment dissolving the corporation
The requirements and formalities provided by and directing disposition of its assets as
law for the dissolution of corporations are justice requires and the appointment of
mandatory such that failure to comply therewith a receiver (if necessary in the court‟s
will have no effect on the legal existence of the discretion) to collect such assets and
corporation. A corporation being a creation of pay the debts of the corporation.
law may only terminate its existence in the
manner prescribed by law. While the foregoing is a mandatory
requirements, the appointment of a receiver is
A mere resolution by the stockholders or the only permissive. SC: The law is intended to let
board of directors of a corporation to dissolve the stockholders have control of the assets of
the same does not affect the dissolution of a the corporation upon dissolution and winding up
corporation. (Daguhoy Enterprises vs. Ponce) of its affairs.

Voluntary dissolution where creditors are Dissolution by shortening the corporate term
affected
A Corporation may exist for a period of
Formal and procedural requirements for 50 years but there is no law which prevents the
voluntary dissolution where creditors are shareholders thereof to shorten that period and
affected: effect a dissolution of the corporation.

a. Affirmative vote of the stockholder


representing at least 2/3 of the
outstanding capital stock or at least 2/3 19. Procedure to shorten the corporate
of the members at a meeting duly called term:
for that purpose;
b. Petition for the dissolution shall be 20. a. Approval by a majority vote of the
filled with the SEC signed by the board or directors or trustees.
majority of its board of directors or
trustees or other officers having the 21. b. Written notice of the proposed action
management of its affairs, verified by and the time and place of meeting shall

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be served to each stockholder or Sec. 6, PD 902-A:


member either by mail or by personal
service. 1. Fraud in procuring the certificate of
registration;
22. c. Ratification by the stockholders
representing at least 2/3 of the 2. Serious misrepresentation as to
outstanding capital stock or 2/3 of the what the corporation can do or is doing to
members in case of non-stock the great prejudice of or damage to the
corporations. general public;

23. d. Submission of the amended articles 3. Refusal to comply or defiance of


of incorporation to the SEC. any lawful order of the Commission
restraining commission of acts which would
24. e. Approval of the SEC. amount to a grave violation of its franchise;

In case of a corporation sole, an authorization 4. Continuous inoperation for a period


for the dissolution by the particular religious of at least 5 years;
denomination, sect or church is necessary.
5. Failure to file by-laws within the
A vote must cast at a duly constituted required period; and
meeting. Written assent is insufficient.
6. Failure to file required reports in
It is only upon the approval of the SEC that appropriate forms as determined by the
the corporation is deemed dissolved. Likewise, Commission within the prescribed period.
section 16 provides that amendment of articles
is deemed approved if not acted upon by SEC Other grounds provided for the in Corporation
within 6 months does not apply in shortening of Code:
corporate term.
1. Violation of any provision of the
Code (Sec. 144);

INVOLUNTARY DISSOLUTION 2. In case of deadlock in a close


corporation (Sec. 105);
Requirements for involuntary dissolution
by the SEC: 3. In a close corporation, any acts of
directors, officers or those in control of the
1. Filing of a verified complaint; and corporation which is illegal or fraudulent or
dishonest or oppressive or unfairly
2. Proper notice and hearing on the prejudicial to the corporation or any
grounds provided by laws, rules and stockholder or whenever corporate assets
regulations. are being misapplied or wasted (Sec. 105).

Notwithstanding the fact that RA 8799 Other grounds can be found in special laws,
transferred the jurisdiction of the SEC under e.g. the Securities Regulation Code and the
Sec. 5 of PD 902-A to the Special Commercial General Banking Act.
Courts, the same law granted the SEC
concurrent jurisdiction over revocation Involuntary dissolution is a harsh
proceedings. Sec. 5 (m) of RA 8799 provides remedy akin to a capital punishment. Thus,
that the SEC shall have the power to suspend or Courts proceed with extreme caution in the
revoke, after proper notice and hearing, the proceeding which have for their object the
franchise or certificate of registration of forfeiture of corporate franchises, and a
corporations, partnerships or associations, upon forfeiture will not be allowed, except under
any ground provided by law. express limitation, or for a plain abuse of power
by which the corporation fails to fulfill the design
Grounds for involuntary dissolution under and purpose of its organization. But when such

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abuses and violations constitute or threaten a partnership or association of which they are
substantial injury to the public or such as to stockholders, members or associates,
amount to a violation of the fundamental respectively; and between such corporation,
conditions of the contract (charter) by which the partnership or association and the State insofar
franchise were granted and thus defeat the as it concerns their individual franchise or right
purpose of the grant, then dissolution will be to exist as such entity. (PD 902-A)
granted. (Government vs. Philippine Sugar
Estates Co.) The SEC has concurrent jurisdiction to
suspend, revoke, after proper notice and
Likewise, it has been held that relief of hearing, the franchise or certificate of
dissolution will be awarded only where no other registration of corporations, partnership or
adequate remedy is available and it will not be associations upon any of the grounds provided
allowed where the rights of the SHs can be, or by law. (Sec. 5(m) RA 8799)
are, protected in some other way.
The existence of a de jure corporation may
The court has a discretion with respect to the be determined in a private suit for its dissolution
infliction of capital punishment upon between stockholders, without intervention of
corporations and there are certain the State. (Hall vs. Piccio)
misdemeanors and misusers of franchises which
should not be recognized as requiring their In a close corporation, a petition for the
dissolution. (Government vs. El Hogar) dissolution of the corporation may be instituted
by any shareholder on the ground of mere
That the corporation is guilty of willful and dishonesty.
repeated violation of the law and that its
continuance inflicts substantial injury to the EFFECTS OF DISSOLUTION
public warrants its dissolution. (Republic vs.
Security Credit) No right or remedy in favor of or against any
corporation, its stockholders, members,
Q: What if the corporation in this case is a directors, trustees, or officers, nor any liability
close corporation, will the court decide incurred by any such corporation, stockholders,
otherwise? Sec. 105 provides for the grounds members, directors, trustees, or officers, shall
for dissolution of close corporation. It may even be removed or impaired by the subsequent
be by mere dishonesty. dissolution of said corporation.

Relief by dissolution will be awarded only GR: Dissolution terminates not only a
where no other adequate remedy is available, corporations primary franchise but also prevents
and is not available where the rights of the it from further exercising other or secondary
stockholders can be, or are, protected in some franchises which have been conferred to it.
other way. The several acts of misuse and
misapplication of the funds and/or assets of the XPN: Debts due to or by the corporation are
corporation were committed more particularly by not extinguished. Rights and liabilities of the
the corporation‟s president, for the commission corporation is not extinguished by its
of which they may be held personally liable. dissolution.
(Republic vs. Bisaya Land Transportation
Co., Inc.) Dissolution terminates the corporations
power to enter into contracts or to continue the
Under the present state of law, any business as a going concern. (Hall vs. Piccio)
stockholder or member of a corporation can
institute a dissolution proceeding against his General rule: In a lease to a corporation, the
own corporation before the proper forum. rights and obligations thereunder are not
extinguished by the corporations dissolution
The Special Commercial Courts, shall hear since leases affect property rights and survives
and decide cases involving intra-corporate the death of parties. The stockholders succeed
dispute or partnership relations between and to the rights and liabilities of the dissolved
among stockholders, members or associates; corporation in an unexpired leasehold state
between any or all of them and the corporation,

  102  
 

which may be enforced by or against the but not for the purpose of continuing the
receiver or liquidating trustee. business for which it was established.

Exception: The lease, by its terms, terminates At any time during said three (3) years, the
when the corporation ceases to exist. corporation is authorized and empowered to
convey all of its property to trustees for the
Contracts for personal services are deemed benefit of stockholders, members, creditors, and
terminated by the dissolution of the corporation. other persons in interest. From and after any
There is an implied condition that the contract such conveyance by the corporation of its
shall terminate in such event. (Gelano vs. CA) property in trust for the benefit of its
stockholders, members, creditors and others in
A dissolved corporation has no juridical interest, all interest which the corporation had in
personality; it ceases to exist as a corporation the property terminates, the legal interest vests
and cannot apply for a new certificate or a in the trustees, and the beneficial interest in the
secondary franchise. (Buenaflor vs. Camarines stockholders, members, creditors or other
Sur Industry Corp.) persons in interest.

The 3-year period allowed by the law is only Upon the winding up of the corporate affairs,
for the purpose of liquidation or winding up of any asset distributable to any creditor or
corporate affairs. No act can be done for the stockholder or member who is unknown or
purpose of continuing the business for which it cannot be found shall be escheated to the city or
was established. Neither can it enforce a municipality where such assets are located.
contract executed prior to its dissolution. (Cebu
Port Labor Union vs. State Marine Co.) General rule: No corporation shall distribute any
of its assets or property except upon lawful
The termination of the life of a juridical entity dissolution and after payment of all its debts and
does not, by itself, imply the diminution or liabilities.
extinction of rights demandable against such
juridical entity. Debts due to or against the 25. Exceptions:
corporation will not be extinguished. Otherwise,
it will amount to an impairment of contracts or a 1. By decrease of capital stock; or
denial of due process. (Gonzales vs. Sugar 2. As otherwise allowed the Code.
Regulatory Administration)
26. ***Three methods of
**LIQUIDATION AND WINDING UP liquidation:

- The most important steps in connection with 1. By the corporation itself though
dissolution. the Board of Directors

Liquidation and winding up – the collection of Usual method or procedure of


all corporate assets, the payments of all its liquidating a corporation and although there
debts and settlement of its obligations and the is no law authorizing it, neither is there
ultimate distribution of the corporate assets, if anything that prohibits the BOD from
any of it remains, to all stockholders in undertaking the same.
accordance with their proportionate The power of the board to manage
stockholdings in the corporation or in the corporate affairs is broad enough to
accordance with their respective contracts of cover situation where the corporate affairs
subscription (e.g. preferred stocks). are to be liquidated.
If this method is resorted t, the board
A dissolved corporation continues as a body will only have a period of 3 years to finish its
corporate for a period of 3 years from the time of task of liquidation. Claims for or against the
dissolution for the purpose of prosecuting and corporation not filed within the period will
defending suits by or against it and enabling it to become unenforceable as there exist no
settle and close its affairs, to dispose of and corporate entity against which they can be
convey its property and to distribute its assets, enforced.
Actions pending for or against the

  103  
 

corporation when the 3 year period expires, trustees to whom the corporate assets have
are abated since after the period, the been conveyed may sue or be sued as such in
corporation ceases for all intents and all matters connected with the liquidation. The
purposes and is no longer capable of suing effect of conveyance is to make the trustees the
or being sued. legal owners of the property conveyed, subject
to the beneficial interest therein of creditors and
stockholders. (National Abaca Other Fibers
2. By a Trustee appointed by the Co. vs. Pore)
corporation.
If the corporation carries out the liquidation of
its assets through its own officers and continues
The 3 year period limitation will not and defends the actions brought by or against it,
apply provided the designation of the trustee is its existence shall terminate at the end of three
made within that period. Should the corporation years from the time of dissolution; but if a
finds it difficult to finish its liquidation, it may, at receiver or assignee is appointed, as has been
any time during the 3 year period, convey all its done in the present case, with or without a
assets and receivables to a trustee to prosecute transfer of its properties within three years, the
and defend suits by or against the corporation legal interest passes to the assignee, the
begun before the expiration of said period. beneficial interest remaining in the members,
In effect, the corporation, as stockholders, creditors and other interested
represented by trustee. Can sue and be sued persons; and said assignee may bring an action,
even beyond the 3 year period fixed by law. prosecute that which has already been
“Trustee” –counsel to whom the case commenced for the benefit of the corporation, or
is entrusted. defend the latter against any other action
already instituted or which may be instituted
even outside of the period of three years fixed
3. By appointment of a receiver. for the offices of the corporation. (Sumera vs.
Valencia)
A receiver may be appointed by the
proper forum or motu proprio upon the (Board of Liquidators vs. Kalaw)
dissolution of the corporation. The appointment
of receiver is permissive and the law tends to The counsel who prosecuted and defended
recognize that in cases of voluntary dissolution the interest of the corporation and who appeared
there is no occasion for the appointment of a in behalf of the corporation may be considered a
receiver except under special circumstances trustee of the corporation at least with respect to
and upon proper showing. the matter in litigation only. The word “trustee”
If a receiver is appointed, the three must be understood in its general concept.
year period fixed by law within which to (Gelano vs. CA)
complete the task of liquidation will not likewise
apply because the dissolved corporation is A claim established against the corporation
substituted by the receiver who may sue or be may be prosecuted against the liquidator of such
sued even after that period. corporation even after the three years from its
Thus, when a corporation is dissolved dissolution. (Republic vs. Marsman
and the liquidation of the assets is placed in the Development Company)
hands of receiver or assignee, the period of 3
years prescribed by law of the corparation even Upon dissolution of the corporation its assets
after the expiration of three years. are held for the benefit of its stockholder after
payment of its debts and will be so distributed to
the said stockholder in accordance with their
Mere appointment of a receiver without proportionate interest in the corporation or their
anything more does not imply the dissolution of contracts of subscription.
a corporation.
Holders of preferred shares may be granted
Pending actions by or against a corporation certain rights or privileges upon dissolution.
are abated upon expiration of the period allowed
by law for the liquidation of its affairs; but General rule: The board of directors of a

  104  
 

dissolved corporation is not permitted to own country or state).


undertake any activity outside of the usual
liquidation of the corporation. The phrase “whose laws allow Filipino citizens
and corporations to do business in its own
Exception: The stockholders of a dissolved country or state” is a mere condition precedent
corporation may convey their respective to the grand of a license of a foreign corporation
shareholdings toward the creation of a new to do business in the Philippines.
corporation to continue the business of the old.
Winding up is the sole activity of a dissolved General rule: The “incorporation test” is
corporation that does not intend to incorporate a applied in determining whether a corporation is
new. (Chung Ka Bio vs. IAC) domestic or foreign. If it is incorporated in
another state, it is a foreign corporation, while if
If the three year period of liquidation has it is registered under Philippine laws, it is
elapsed and no effort to finally settle or close the deemed a Filipino or domestic corporation
corporate affairs was undertaken, those having irrespective of the nationality of its stockholders.
pecuniary interest in the corporate assets, ( a corporation registered under Foreign Investment
including not only the stockholders but likewise Act or Trade Liberalization law with 100% equity is
the creditors, acting for and its behalf, may make considered a Domestic foreign corporation)
proper representations with the SEC for working
out a final settlement of the corporate concern. Exception: In times of war, the “control test”
(Clemente vs. CA) would apply in determining the corporate
nationality, i.e., the citizenship of the controlling
*** Note: The above decision is an aberrant stockholders determines the nationality of the
ruling. Once the three year period for liquidation corporation.
and winding up has elapsed without any trustee
or receiver being appointed, the assets of the General rule: A corporation can have no legal
corporation will be escheated in favor of the existence outside the boundaries of the
Government thus barring the claims of sovereign by which it is created.
stockholders and creditors. (Review book!!!)
Exception: By virtue of state comity, a
corporation created by laws of one state is
usually allowed to transact business in other
states and to sue in the courts of the forum,
subject to restrictions and certain requirements
imposed therein.
CHAPTER XVIII
Q: What are the requisites in order that FC
FOREIGN CORPORATIONS can do business in Phil.?

Foreign Domestic Sec. 123 Requisites for a foreign corporation to


Corporation Corporation transact business in the Philippines:

Any corporation A corporation 1. A license or permit to do so in


which owes its created by the laws accordance with laws of the country;
existence to the of the state or and
laws of another country. 2. A certificate of authority from the
state, government appropriate government agency.
or country BSP- banking institutions
Office of the Insurance Commission-
insurance companies
A certificate from Board on Investment is no
longer required it is necessary only for
Foreign corporation – one formed, organized purpose of availing of the incentives allowed
under Omnibus Investment Code.
or existing under any laws other than those of
the Philippines (and whose laws allow Filipino
citizens and corporations to do business in its Q: What will be the implication if FC does

  105  
 

business in Philippines without license? corporation in good standing. If such


They can’t sue, liable officers will be held with certificate is in a foreign language, a
penal sanctions under sec.144 translation thereof in English under oath
of the translator shall be attached
It is not the lack of license required but doing thereto.
business without required license that will bar
FC from bringing sit in Phil. Courts. XPN ? 4. The application for a license to
transact business in the Philippines shall
Q: How to apply for a license? likewise be accompanied by a statement
under oath of the president or any other
Procedure for application of a license: person authorized by the corporation,
showing to the satisfaction of the
1. Submission to the SEC of its articles Securities and Exchange Commission
of incorporation and by-laws, certified in and other governmental agency in the
accordance with law, and their proper cases that the applicant is
translation to an official language of the solvent and in sound financial condition,
Philippines, if necessary. and setting forth the assets and
2. The application shall be under oath liabilities of the corporation as of the
and, unless already stated in its articles date not exceeding one (1) year
of incorporation, shall specifically set immediately prior to the filing of the
forth the following: application.
a. The date and term of
incorporation; 5. Foreign banking, financial and
b. The principal office of the insurance corporations shall, in addition
corporation in the country or to the above requirements, comply with
state of incorporation; the provisions of existing laws
c. The resident agent; applicable to them. In the case of all
d. The place in the Philippines other foreign corporations, no
where the corporation application for license to transact
intends to operate; business in the Philippines shall be
e. The purpose or purposes of the accepted by the Securities and
corporation; Exchange Commission without previous
f. The directors and officers of the authority from the appropriate
corporation; government agency, whenever required
g. Its authorized capital stock; by law.
h. Its outstanding capital stock;
i. The amount actually paid in; Foreign corporations already issued a license
and to transact business in the Philippines prior to
j. Such additional information as the effectivity of the Code continue to have such
may be necessary or authority under the terms and conditions of its
appropriate in order to license, subject to the provisions of the Code
enable the SEC to determine and other special laws.
whether such corporation is
entitled to a license to Upon compliance with the provisions of Sec.
transact business in the 125, other special laws and the rules and
Philippines, and to determine regulations implementing them, the SEC shall
and assess the fees payable. thereafter issue the license.
3. Attached to the application for license
shall be a duly executed certificate Upon issuance of the license, such foreign
under oath by the authorized official or corporation may commence to transact business
officials of the jurisdiction of its in the Philippines and continue to do so for as
incorporation, attesting to the fact that long as it retains its authority to act as a
the laws of the country or state of the corporation under the laws of the country or
applicant allow Filipino citizens and state of its incorporation, unless such license is
corporations to do business therein, and sooner surrendered, revoked, suspended or
that the applicant is an existing annulled in accordance with this Code or other

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special laws. therein. The corporation thus formed


becomes as the local subsidiary of the
Within 60 days after the issuance of the investing FC which becomes legally
license, a foreign corporation, except those independent unit governed by the laws
engaged in foreign banking or insurance, shall of Phil. It is called “Domestication” in the
deposit with the SEC, for the benefit of creditors, sense that FC is granted the right to
securities consisting of bonds or other evidence obtain a character or organize itself into
of indebtedness of the Philippine government or a domestic corporation under the
its political subdivisions or instrumentalities, or of general laws of the other state.
government owned or controlled corporations
and entities, shares of stock in “registered 4. Regional or area headquarters- It is
enterprises,” shares of stock in domestic an office whose purpose is to act as an
insurance companies and banks, or any administrative branch of a multinational
combination thereof, with an actual market value company engaged in international trade
of P100,000.00. Additional securities may be which principally serves as a
required by the SEC if the actual market value of supervision, communications and
the securities on deposit has decreased by at coordinating center for its subsidiaries,
least 10%. branches or affiliates in Asia-Pacific
Region and other foreign markets and
The objective of the law requiring the which does not earn or derive income in
license is not to prevent the foreign corporation the Philippines. It cannot in any manner,
from performing isolated or single acts, but to participate in the management of any
prevent it from acquiring a domicile for the subsidiary or branch office in the
purpose of pursuing its business without taking Philippines nor shall it market goods and
steps to render it amendable to suit in the local services in behalf of its mother
courts. (Marshall-Wells Co. vs. H. W. Elser & company, branches or affiliates.
Co.)

MODES OF ENTRY OF FOREIGN 5. Regional operating headquarters- It is


CORPORATIONS a FC entity which is allowed to derive
income in the Philippines by performing
FC may step into Philippines territory qualifying services exclusively to its
and do certain acts, engage in activities or affiliates, subsidiaries or branches in the
transact business in various mode. Among them Philippines, in the foreign markets. They
are: are granted certain tax incentives such
as exemption from all kinds of local
1. Branch office – on which carries out taxes fees or charges imposed by local
business activities of the foreign government units except real property
corporation itself and derives income tax, land improvements, tax and duty-
from the Philippines. As such, the free importation of training materials and
juridical entity involved is one and the importation of motor vehicles.
same. 6. Regional warehouse- One whose
activities are limited to serving as supply
2. Representative or liaison office- One depot of Regional or Area headquarters
which deals directly with the clients of or regional operating headquarters in
the parent company but does not derive the Philippines, after securing a license
income from the host country and is fully therefor in PEZA or concerned ecozone.
subsidized by its head office. It It shall only be used for the storage,
undertakes activities such as but not deposit and safekeeping but shall not
limited to information dissemination and directly engage in trade or disposition of
promotion of company’s products. goods in the Philippines except those for
delivery to an authorized distributor in
3. Local subsidiary- A FC may form or the country.
organize a separate corporation under
the Foreign Investment Act by making at 7. Joint venture- Is a one-time grouping
least a majority of the investment of two or more persons, natural or

  107  
 

juridical, for carrying out a specified neglected to designate such a person or an


undertaking. No license to do business agent.
is required on the part of the FC
entering into such kind of business It was held that “where such FC
venture since mere investment does not actually doing business here has not applied for
constitute doing business as per IRR a license to do and has not designated and
unless, the FC actively participates in agent to receive summons, then service of
the management. summons on it will be made pursuant to the
ROC…If such FC has a license to do business,
RESIDENT AGENT then summons to it will be served on the agent
designated by it for purpose, or otherwise in
The appointment of a resident agent is a accordance with the Corporation law.
condition precedent to the issuance of a license
to transact business in the Philippines by a DOING BUSINESS WITHOUT A LICENSE
foreign corporation.
General rule: No foreign corporation
The following may be appointed as a resident transacting business in the Philippines without a
agent: license, or its successors or assigns, shall be
permitted to maintain or intervene in any action,
a. An individual residing in the suit or proceeding in any court or administrative
Philippines, of good moral character and agency of the Philippines
of sound financial standing; or
b. A domestic corporation lawfully Exception: Such corporation may be sued or
transacting business in the Philippines proceeded against before Philippine courts or
(includes partnerships such as law firms administrative tribunals on any valid cause of
and accounting firms). action recognized under Philippine laws.

Q: Is it required that FC will have resident A foreign corporation cannot transact


agents? Yes, in order that summons may be business in the Philippines without the requisite
served. license. If it does so, the responsible officers
may be subjected to the penal provisions of Sec.
The necessity of the appointment of a 144.
resident agent is only for the purpose of
receiving summons and other legal processes in General rules regarding whether or not a
any legal action or proceeding against the foreign corporation may sue or be sued in
foreign corporation. the Philippines:

Modes of service of summons upon a foreign A. As to whether or not it can sue.


corporation:
1. A foreign corporation transacting or doing
a. Service upon the resident agent – service business in the Philippines with a license
upon the resident agent is mandatory if the can sue before Philippine Courts.
foreign corporation is license to do business in 2. Subject to certain exceptions, a foreign
the Philippines; corporation doing business in the country
without a license can not sue in Philippine
b. Service upon the SEC – if the licensed foreign Courts.
corporation has ceased to transact business in 3. If it is not transacting business in the
the Philippines or has no resident agent in the Philippines, even without a license, it can
Philippines; or sue before the Philippine Courts.

c. Service upon any of its officers or agents B. As to whether it can be sued or not.
within the Philippines.
1. A foreign corporation transacting business
The latter 2 modes may become in the Philippines with the requisite
effective only if the foreign corporation failed or license can be sued in the Philippines.
2. A foreign corporation transacting business

  108  
 

in the Philippines without a license can substantially retired from it and turned it over to
be sued in Philippine courts. another. The term implies a continuity of
3. If it is doing business in the Philippines, it commercial dealings and arrangements, and
cannot be sued in Philippine courts for contemplates, to that extent, the performance of
lack of jurisdiction. acts or works or the exercise of some of the
functions normally incident to, and in
It is not the lack of required license but doing progressive prosecution of, the purpose and
business without a license which bars a foreign object of its organization. (Mentholatum Co.,
corporation from access to our courts. Inc. vs. Mangaliman) examples page 537
(Universal Shipping vs. IAC)
The object of the statute was to subject the
**** General rule: A foreign corporation must foreign corporation doing business in the
have the requisite license to sue before the Philippines to the jurisdiction of its courts. The
Philippine courts. object of the statute was not to prevent the
foreign corporation from performing single acts,
Exceptions: but to prevent is from acquiring domicile for the
purpose of business without taking the steps
a. The act or transaction involved is an necessary to render it amenable to suit in the
“isolated transaction;” local courts. The law simply means that no
foreign corporation shall be permitted “to
b. The foreign corporation is not seeking transact business in the Philippine Islands”
to enforce any legal or contractual unless it shall have the license required by law,
rights arising from, or growing out of and until it complies with the law, shall not be
any business which it has transacted in permitted to maintain any suit in the local courts.
the Philippines; (Marshall-Wells Co. vs. Henry W. Elser & Co.)

c. The purpose of the suit is to protect A foreign corporation not engaged in


its trademark, tradename, corporate business in the Philippines may not be denied
name, reputation or goodwill; the right to file an action in Philippine courts for
isolated transactions. (Bulakhidas vs. Navarro)
d. The suit is based on a violation of the
Revised Penal Code; If A foreign corporation not engaged in
business in the Philippines has the right to sue
e. The foreign corporation is merely on an isolated transaction, more so may it sue
defending a suit filed against it; based on a mistake. (Swedish East Asia Co.,
Ltd. vs. Manila Port Service)
f. The party is estopped to challenge
the personality of the corporation by There was only one agreement between
entering into a contract with it. petitioners and the respondent. The three
seemingly different transactions were entered
f. § Exception to an into by the parties only in an effort to fulfill the
exception: Where a single act or basic agreement and in no way indicate an
transaction however, is not merely intent on the part of the respondent to engage in
incidental or casual but indicates the a continuity of transactions with petitioners
foreign corporation‟s intention to do which will categorize it as a foreign corporation
other business in the Philippines, said doing business in the Philippines. The
single act or transaction constitutes respondent, being a foreign corporation not
„doing‟ or „engaging in‟ or „transacting‟ doing business in the Philippines, does not need
business in the Philippines. to obtain a license to do business in order to
have the capacity to sue. (Atnam
The true test regarding “doing” or “engaging Consolidated, Inc. vs. CA)
in” or “transacting” business is whether the
foreign corporation is continuing the body or Under the rules of the BOI, the phrase “doing
substance of the business or enterprise for business‟ has been exemplified with
which it was organized or whether it has illustrations, among them being as follows:

  109  
 

a. Soliciting orders, purchase (sales) or service (Communication Materials and Design, Inc.
contracts. Concrete and specific vs. CA)
solicitations by a foreign firm, not acting
independently of the foreign firm A foreign corporation doing business in the
amounting to negotiation or fixing of the Philippines may sue in Philippine courts
terms and conditions of sales or service although no authorized to do business here
contract, regardless of whether the against a Philippine citizen or entity who had
contracts are actually reduced to writing, contracted with and benefited by said
shall constitute doing business even in corporation. To put it another way, a party is
the enterprise has no office or fixed place estopped to challenge the personality of a
of business in the Philippines. corporation after having acknowledged the same
by entering into a contract with it. An the
b. Appointing a representative or distributor doctrine of estoppel to deny corporate existence
who is domiciled in the Philippines unless applies to a foreign as well as to domestic
said representative or distributor has an corporations. One who has dealt with a
independent status, i.e., it transacts corporation of foreign origin as a corporate entity
business in its name and for its own is estopped to deny its corporate existence and
account, and not in the name or for the capacity. The principle will be applied to prevent
account of the pricipal. a person contracting with a foreign corporation
from later taking advantage of its noncompliance
c. Opening offices, whether called „liaison‟ with the statutes chiefly in cases where such
offices, agencies or branches, unless person has received the benefits of the contract.
provided otherwise. (Communication Materials and Design, Inc.
vs. CA)
d.Any other act or acts that imply a continuity
of commercial dealings or arrangements, The right of a corporation to use its corporate
and contemplate to that extent the and trade name is a property right, a right in
performance of acts or works, or the rem, which it may assert and protect against all
exercise of some of the functions the world, in any of the courts of the world –
normally incident to, or in the progressive even in jurisdictions where it does not transact
prosecution of, commercial gain or of the business – just the same as it may protect its
purpose and objective of the business tangible property, real or personal, against
organization. (Facilities Management trespass, or conversion. Since it is the trade and
Corp. vs. De La Rosa) not the make that is to be protected, a trademark
acknowledges no territorial boundaries or
A single act may bring the corporation within municipalities or states or nations, but extends
the purview of the statute where it is an act of to every market where the traders goods have
the ordinary business of the corporation. In such become known and identified by the use of the
a case, the single act of transaction is not mark. (Western Equipment and Supply Co.
merely incidental or casual, but is of such vs. Reyes)
character as distinctly to indicate a purpose on
the part of the operations for the conduct of a A foreign corporation which has never
part of the corporation‟s ordinary business. (Far done business in the Philippine Islands and
East Int‟l Import vs. Nankai) which is unlicensed and unregistered to do
business here, but is widely and favorably
ITEC‟s arrangement with its various known in the Islands through the use therein of
business contacts in the country indicate its its products bearing its corporate and trade
purpose to bring about the situation among its name has a legal right to maintain an action in
customers and the general public that they are the Islands. Parenthetically the Trademark Law
dealing directly with ITEC and that ITEC is allows a foreign corporation or juristic person to
actively engage in business in the country. In bring an action in Philippine courts for
determining whether a corporation does infringement of a mark or trade-name, for unfair
business in the Philippines or not, aside from competition, or false designation of origin and
their activities within the forum, reference may false description, whether or not it has been
be made to the contractual agreements entered licensed to do business in the Philippines.
into by it with other entities in the country. (General Garments Corporation vs. Director

  110  
 

of Patents) defense of the defendant. Technical rules should


not be accorded undue importance to frustrate
and defeat a plainly valid claim. (Olympia
Article 8 of the Paris Convention to which the Business Machines Co. vs. Razon, Inc.)
Philippines became a party provides that a trade
name shall be protected in all the countries of Since petitioner is not maintaining any suit
the Union without the obligation of filing or but is merely defending one against itself (it did
registration, whether or not it forms part of the not file any complaint but only a corollary
trademark. (Puma vs. IAC) defensive petition to prohibit the lower court from
further proceeding with a suit that it had no
A foreign corporation not doing business not jurisdiction to entertain), its failure to aver its
doing business in the Philippines needs no legal capacity to institute the present petition is
license to sue before Philippine courts for not fatal. (Time, Inc. vs. Reyes)
infringement of trademark and unfair
competition. (Le Chemise Lacoste vs.
Fernandez)
LAWS GOVERNING FOREIGN
In a suit involving the violation of the Revised CORPORATIONS
Penal Code the complainant foreign
corporation‟s capacity to sue is not significant. General rule: Any foreign corporation lawfully
(Le Chemise Lacoste vs. Fernandez) doing business in the Philippines shall be bound
by all laws, rules and regulations applicable to
domestic corporations of the same class. They
are placed in a similar situation as any other
CAPACITY TO SUE domestic corporation.

General rule: A foreign corporation must Exceptions:


affirmatively plead its capacity to sue in order
that it may proceed and effectively institute a a. Laws which provide for the creation,
case in Philippine courts. formation, organization or dissolution of
corporations; or
Exceptions:
b. Laws which fix the relations,
a. The action involves a complaint for violation liabilities, responsibilities, or duties of
of the Revised Penal Code. stockholders, members or officers of a
corporation to each other or to the corporation.
b. The foreign corporation is not suing or
maintaining a suit but is merely In effect, Intra-corporate or internal matters not
defending itself from one filed against it. affecting creditors or the public in general are
governed not by Philippine laws but the law
The qualifying circumstance of whether or not under which the foreign corporation was formed
a foreign corporation has engaged in business or organized.
in the Philippines is an essential part of the
element of a foreign corporations capacity to Special laws may provide or grant certain
sue and must be affirmatively pleaded. restrictions, limitations, privileges or incentives
(Atlantic Mutual Insurance Co. vs. Cebu to a foreign corporation not otherwise applicable
Stevedoring Co., Inc.) or granted to domestic corporations (e.g. import
duties and tax incentives under the Omnibus
If the dismissal of the case, based on failure Investments Code).
of the foreign corporation to aver its capacity to
sue, would not, however, bar the institution of A foreign corporation authorized to transact
the same action, dismissal should not be business in the Philippines which amends its
allowed, especially so if it would be an idle, articles of incorporation or by-laws must file a
circuitous ceremony considering the absence of copy of such amended articles of incorporation
any meritorious substantial defense of the or by-laws with the SEC or the appropriate

  111  
 

government agency within 60 days from the penalties, if any, lawfully due to the
effectivity of such amendment. Philippine Government or any of its
agencies or political subdivisions
Instances when a foreign corporation authorized have been paid;
to transact business in the Philippines must
obtain an amended license: d. Publication of the petition for
withdrawal once a week for 3
a. The foreign corporation changes its corporate consecutive weeks in a newspaper
name; or of general circulation in the
Philippines; and
b. The foreign corporation desires to pursue
other or additional purposes in the e. Issuance of the certificate of
Philippines. withdrawal by the SEC.

Requirements in a merger or consolidation of Grounds for the revocation or suspension of


a foreign corporation licensed in the Philippines: license:

Ø With a domestic corporation: Such a. Failure to file its annual report or pay
must be permitted under Philippines any fees as required by the Code;
laws and by the law of its incorporation;
and The requirements on merger or b. Failure to appoint and maintain a
consolidation provided by the Code resident agent in the Philippines;
must be followed. If it merges or
consolidates in the place of its c. Failure, after change of its resident
incorporation, necessarily the laws of agent or of his address, to submit to
that state shall be made to apply. It shall the SEC a statement of such
file with the SEC and the appropriate change;
government agency concerned, a duly
authenticated copy of the Articles of d. Failure to submit to the SEC an
merger and consolidation. authenticated copy of any
amendment to its articles of
Ø With a foreign corporation: Such must incorporation or by-laws or of any
be permitted by the law of its articles of merger or consolidation
incorporation; A duly authenticated within the time prescribed by the
articles of merger or consolidation Code;
must be filed with the SEC or the
appropriate government agency within e. Misrepresentation of any material
60 days from the effectivity of the matter in any application, report,
merger or consolidation; and If the affidavit or other document
absorbed corporation is the foreign submitted;
corporation doing business in the
Philippines, a petition for withdrawal of f. Failure to pay any and all taxes,
its license must also be filed. imposts, assessments or penalties,
if any, lawfully due to the Philippine
Requirements and procedure for the withdrawal Government or any of its agencies
of foreign corporations: or political subdivisions;

a. Filing of a petition for withdrawal of g. Transacting business in the


license; Philippines outside of the purpose or
purposes for which such corporation
b. All claims which have accrued in the is authorized under its license;
Philippines have been paid,
compromised or settled; h. Transacting business in the
Philippines as agent of or acting for
c. All taxes, imposts, assessments and and in behalf of any foreign

  112  
 

corporation or entity not duly agencies like the CB and the Insurance
licensed to do business in the Commission may also issue an order effectively
Philippines; or suspending or revoking the license of a FC.

i. Any other ground as would render it


unfit to transact business in the
Philippines.

Last ground is all encompassing, giving the CHAPTER XIX


SEC a wide discretion in revoking or suspending
the license of a FC. Depending on the
seriousness of the acts objectionable done by MISCELLANEOUS PROVISIONS
FC, the SEC can either mete out the penalty of
suspension or revocation.

Revocation is not generally granted if it Outstanding capital stock – the total shares
does not cause a substantial injury to the public of stock issued under binding subscription
and there are other legal remedies available. agreements to subscribers or stockholders,
whether or not fully or partially paid, except
Other grounds for revocation of license treasury shares.
under special laws:
Non-stock or special corporations may,
1. General Banking Act – imminent danger of through their articles of incorporation or their by-
insolvency; laws, designate their governing boards by any
name other than as board of trustees.
2. Insurance Code – unsound condition, failure
to comply with the provisions of law or The NEDA shall, from time to time, make a
regulation obligatory upon it, a condition determination of whether the corporate vehicle
or method of business hazardous to the has been used by any corporation or by
public or its policy holders, impairment business or industry to frustrate the provisions
of its security deposit, or deficiency in thereof or of applicable laws, and shall submit to
the margin of solvency. Congress, whenever deemed necessary, a
report of its findings, including recommendations
3. Omnibus Investments Code – willful for their prevention or correction.
violation of the provisions of existing
laws and implementing guidelines or Maximum limits may be set by Congress for
violation of the terms and conditions of stockholdings in corporations declared by it to
its license. be vested with a public interest pursuant to the
provisions of this section, belonging to
In case the revocation is warranted the SEC individuals or groups of individuals related to
shall: each other by consanguinity or affinity or by
close business interests, or whenever it is
a. Issue a certificate of revocation; necessary to achieve national objectives,
prevent illegal monopolies or combinations in
b. Furnish a copy thereof to the appropriate restraint or trade, or to implement national
government agency; and economic policies declared in laws, rules and
regulations designed to promote the general
c. Mail a notice of such revocation accompanied welfare and foster economic development. In
by a copy of the certificate of revocation recommending to Congress corporations,
to the corporation at its registered office business or industries to be declared vested with
in the Philippines. a public interest and in formulating proposals for
limitations on stock ownership, the NEDA shall
SEC does not have the sole authority to consider the type and nature of the industry, the
suspend or revoke the license of a FC doing size of the enterprise, the economies of scale,
business in Phil since other government the geographic location, the extent of Filipino
ownership, the labor intensity of the activity, the

  113  
 

export potential, as well as other factors which Code.


are germane to the realization and promotion of
business and industry. No right or remedy in favor of or against any
corporation, its stockholders, members,
Every corporation, domestic or foreign, directors, trustees, or officers, nor any liability
lawfully doing business in the Philippines shall incurred by any such corporation, stockholders,
submit to the SEC an annual report of its members, directors, trustees, or officers, shall
operations, together with a financial statement of be removed or impaired either by the
its assets and liabilities, certified by any subsequent dissolution of said corporation or by
independent certified public accountant in any subsequent amendment or repeal of this
appropriate cases, covering the preceding fiscal Code or of any part thereof.
year and such other requirements as the SEC
may require. Such report shall be submitted All corporations lawfully existing and doing
within such period as may be prescribed by the business in the Philippines on the date of the
SEC. effectivity of this Code and heretofore
authorized, licensed or registered by the
All interrogatories propounded by the SEC Securities and Exchange Commission, shall be
and the answers thereto, as well as the results deemed to have been authorized, licensed or
of any examination made by the Commission or registered under the provisions of this Code,
by any other official authorized by law to make subject to the terms and conditions of its license,
an examination of the operations, books and and shall be governed by the provisions hereof:
records of any corporation, shall be kept strictly Provided, That if any such corporation is
confidential, except insofar as the law may affected by the new requirements of this Code,
require the same to be made public or where said corporation shall, unless otherwise herein
such interrogatories, answers or results are provided, be given a period of not more than two
necessary to be presented as evidence before (2) years from the effectivity of this Code within
any court. which to comply with the same than thirty (30)

The SEC shall have the power and authority PD 902-A, AS AMENDED
to implement the provisions of this Code, and to
promulgate rules and regulations reasonably
The SECs quasi-judicial functions
necessary to enable it to perform its duties
under Sec. 5 of PD 902-A, as amended were
hereunder, particularly in the prevention of fraud
transferred to the Special Commercial Courts by
and abuses on the part of the controlling
RA 8799. This would include intracorporate
stockholders, members, directors, trustees or
controversies; devices; or schemes amounting
officers.
to fraud and misrepresentation detrimental to the
public and/or stockholders; controversies in the
Violations of any of the provisions of this election or appointment of directors, trustees,
Code or its amendments not otherwise officers or managers, and petitions for
specifically penalized therein shall be punished suspension of payments.
by a fine of not less than one thousand
(P1,000.00) pesos but not more than ten
Old Law New Law
thousand (P10,000.00) pesos or by
imprisonment for not less days but not more
Fraudulent and
than five (5) years, or both, in the discretion of
the court. If the violation is committed by a manipulative devices
corporation, the same may, after notice and relative to securities
hearing, be dissolved in appropriate proceedings are clearly spelled
before the Securities and Exchange out and defined
Commission: Provided, That such dissolution
shall not preclude the institution of appropriate Administrative and
action against the director, trustee or officer of Penal sanctions are
the corporation responsible for said violation: more stringent
Provided, further, That nothing in this section
shall be construed to repeal the other causes for - Adminis -Administrative
dissolution of a corporation provided in this trative sanctions sanction- penalty of

  114  
 

suspension or 10k but nmt 1M plus hear and decide cases involving devices or
revocation of 2k for each day of schemes employed by or any acts of the board
certificate of continuing violation. of directors, business associates, its officers or
registration or partners, amounting to fraud and
permit to sell -Penal Fine of min misrepresentation which may be detrimental to
securities, fine of 50k but nmt 5M the interest of the public and/or of the
nlt 200 nmt 50k while retaining the 7 stockholder, partners, members of associations
plus 500 for to 21 years or organizations registered with the SEC.
each day of imprisonment.
continuing Exception: The complaint is based on the
violation , or violation of the Revised Penal Code (Ex.
disqualification Syndicated Estafa)
from being an
officer, director Even if the action is for recovery of
or principal SH sums of money paid or given to the corporation
of a n issuer through devices and schemes amounting to
corporation. fraud or misrepresentation detrimental to the
investing public, the same must be filed, heard
- Penal Sanction and tried by the Special Commercial Courts.
Fine nlt 5k or
imprisonment of nlt Examples of acts amount to fraud or
7 years nor more misrepresentation within the original and
than 21 years, or exclusive jurisdiction of the Special Commercial
both. Courts:

a. Fraud committed by a corporation in failing


to pay individual money market
General rule: The Special placements. (Orosa, Jr. vs. CA) I
Commercial Courts shall have exclusively and b. Corporations act of duping persons into
originally jurisdiction over cases falling under investing money when such
Sec. 5 of PD 902-A. corporations authority to issue
commercial papers has already
Exception: The SEC shall retain expired. There is no averment in the
jurisdiction over cases involving suspension of complaint of any fraud or
payments and corporate rehabilitation filed on or misrepresentation. The cause of action,
before June 30, 2000. therefore, were nothing more than
money claims. (Mangalad vs. Premier
§ Distribution of Special Corporation)
Commercial Courts: c. Corporate officer‟s act of diverting
corporate funds and assets for his
i. Two in Makati City; personal use. Fraud committed is
detrimental to the corporation and
ii. Two in Quezon City; members (Alleje vs. CA)
d. Pyramiding schemes.
iii. One in each in other cities in
Metro Manila; and The allegation of fraud must be stated with
particularity to place the case with the
iv. One per region. jurisdiction of the Special Commercial Courts.
It must state ultimate facts and not Conclusion
DEVICES OR SCHEMES AMOUNTING TO of laws. That averments in the complaints
FRAUD AND MISREPRESENTATION (Sec. 5 determines the nature of the action and
[a]) consequently, the jurisdiction of the courts.

General rule: The Special Commercial Courts INTRA-CORPORATE CONTROVERSIES (Sec.


shall have original and exclusive jurisdiction to 5 [b])

  115  
 

Intra-corporate controversies include those of stockholders to another group of stockholders is


corporations, partnerships and associations. intra-corporate. (Saavedra vs. SEC)

Elements of intra-corporate controversies: Where the conflict involves the enforcement


of rights and obligations under the Corporation
An intra-corporate relationship: Code or the inter and intra-corporate affairs of
the corporation, jurisdiction would fall with the
i. Between and among the Special Commercial Courts. But if it requires a
stockholders, members, associates of a mere determination of the contractual rights of
corporation, partnership or association; the parties under an ordinary agreement, the
ii. Between them and the corporation, ordinary/regular courts can acquire jurisdiction
partnership or association; or thereto.
iii. Between the corporation, partnership
or association and the State. The factor which decides whether the action
is within the jurisdiction of the Special
The controversy must arise out of Commercial Courts is that the controversy arose
said relationship. out of an intra-corporate relation between and
among the parties. (SEC vs. CA)
The dispute among the parties must be
intrinsically connected with the regulation of the The filing of the civil/intra-corporate case
corporation. If the nature of the controversy before the SEC does not preclude the
involves matters that are purely civil in character simultaneous and concomitant filing of a criminal
necessarily the case does not involve an intra- action before the regular courts; such that, a
corporate controversy. (Speed Distributing fraudulent act may give rise to liability for
Corp. vs. CA) violation of the rules and regulations of the SEC
cognizable by the SEC itself, as well as criminal
` The fact that shares of stock were issued to be liability for violation of the Revised Penal Code
used as part payment for lease rentals does not cognizable by the regular courts, both charges
convert it into a intra-corporate controversy. to be filed and proceeded independently, and
(DMRC Enterprises vs. Este del Sol Mountain may be simultaneously, with the other. (Fabia
Reserve, Inc.) vs. CA)

` Recovery of the control and management of a CONTROVERSIES IN THE APPOINTMENT,


corporation in the guise of a complaint for ELECTION AND REMOVAL OF DIRECTORS
rescission of a memorandum of agreement AND OFFICERS (Sec. 5 [c])
which vested such control and management is
an intra-corporate controversy. (DPB vs. Ilustre, The Special Commercial Courts have original
Jr.) and exclusive jurisdiction to hear and decide
cases involving controversies in the election or
If all of the requirements for a valid transfer appointment of directors, trustees, officers or
have been complied the dispute is intra- managers of corporations, partnerships or
corporate and is within the jurisdiction of the associations.
Special Commercial Court. (Abejo vs. de la
Cruz; Rural Bank of Salinas, Inc. vs. CA) General rule: A corporate officers election,
appointment or termination by the board of
`If the petitioner does not have a “prima facie” directors is always a corporate act, and the fact
title to the share sought to be recorded in his that the officer asks for back wages, other
name the dispute is not intra-corporate and the benefits as well as damages does not alter the
ordinary or regular court can assume jurisdiction picture. The original and exclusive jurisdiction
over the case. (Rivera vs. Florendo; Tay vs. rests with the Special Commercial Courts. (In
CA) this case a close examination reveals that they
are actually part of the pre-requisite od his
A dispute regarding the automatic rescission elective position, hence, ultimately linked with
clause of a Memorandum of Agreement his relations with the corporation.)
regarding the sale of shares of a group of
Exception: The main cause of action is for the

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recovery of unpaid wages and separation pay. 28. 1. Simple suspension of payments –
(Midland Construction Co., Inc. vs. Movilla) mere deferment of payment of debts
and it refers to a petition which is filed
The main aspect to be considered is whether by a corporation which possesses
the corporate officer asserts his rights as such sufficient assets to cover its liabilities but
officer or questions his removal or ouster. If so, foresees the possibility of meeting them
the case would fall within the ambit of the when they respectively fall due owing to
jurisdiction of the Special Commercial Courts temporary liquidity problems.
and not the NLRC.
29. 2. Suspension of payments with the
Examples appointment of a receiver with or without
a rehabilitation plan. The rehabilitation
1. Tan was a SH, director and VP of plan is a plan under which the
PSBA. The Board declared all corporate corporation will reschedule the payment
positions vacant and they elected new of its debts and liabilities. Either the
officers. Tan was not re-elected and he petitioner corporation will propose the
filed an illegal dismissal case. SC: The plan or ask for the appointment of a
controversy is intracorporate it revolves receiver who will study and make the
around the election of directors, officers plan.
or managers of PSABA, the relation
between and among its Shs, and 30. 3. Suspension of payments where the
between them and the corporation. corporation has no sufficient assets to
2. Determination of the rights from alleged cover its debts and liabilities with or
illegal convening of the meeting of the without the appointment of a
Board and subsequent ouster from management committee with or without
corporate office as a result of the voting a rehabilitation plan.
for the reorganization of management
are obviously intracorporate EFFECTS OF SUSPENSION OF PAYMENTS
controversies subject to the jurisdiction
of the SEC. The proper court may issue an order
3. PAL case, dismissal of VP although not suspending payments of claims due from a
a SH is considered as intracorporate distress corporation.
controversy. A corporate officer’s
dismissal is always a corporate act Upon the appointment of a management
and/or an intracorporate controversy committee, rehabilitation receiver, board or body
and that nature is not altered by the all actions for claims against the corporation,
reason or wisdom which the BOD may partnership or association under management or
have in taking such action. receivership pending before any court, tribunal,
board or body shall be suspended accordingly.
RECEIVERSHIP AND SUSPENSION (Sec. 5
[d] and 6[c, d]) The reason for suspension of payments for
claims against a distressed corporation is to
Petitions for suspension of payments of enable the management committee to effectively
corporations, partnerships or associations, and exercise its powers free from judicial or
appointment of receivership, management extrajudicial interference that might unduly
committee, board or body are lodged within the hinder or prevent the „rescue‟ of the debtor
jurisdiction of the Special Commercial Courts. company. (PAL vs. Sps. Sadic and Kurangking)

A corporation, partnership or association, The suspension of all actions for claims


whether or not insolvent, can file a petition for against a corporation embraces all phases of the
suspension of payments provided it is placed suit, be it before the trial court or any tribunal or
under a rehabilitation receiver or management before this Court. No other action may be taken,
committee or rehabilitation receiver. including the rendition of judgment during the
state of suspension. It must be stressed that
27. Three types of suspension of payments: what are automatically stayed or suspended are
the proceedings of a suit and not just the

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payment of claims during the execution stage entertain petitions for suspension of payments
after the case had become final and executory. filed by parties other than corporations,
Once the process of rehabilitation, however, is partnerships or associations. (Union Bank vs.
completed, this Court will proceed to complete CA)
the proceedings on the suspended actions.
Furthermore, the actions that are suspended Equality is Equity – during suspension the
cover all claims against the corporation whether assets are held in trust for the equal benefit of all
for damages founded on a breach of contract of creditors to preclude one from obtaining an
carriage, labor cases, collection suits or any advantage or preference over another by the
other claims of a pecuniary nature. No exception expediency of an attachment, execution or
in favor of labor claims is mentioned in the law. otherwise. The creditors should stand on equal
(PAL vs. Zamora) footing. Not anyone of them should be given any
preference by paying one of them ahead of the
Claims – refers to debts or demands of others. (Alemars Sibal and Son, Inc. vs.
pecuniary nature; the assertion of right to have Elibenas)
money paid.
The issue of whether or not preferred
Suspended proceedings include extra judicial creditors of distressed corporations stand on
foreclosures. You cannot even consolidate. All equal footing with all other creditors gains
proceedings at whatever stage are suspended. relevance and materiality only upon the
appointment of a management committee,
Even if the suspension order is issued after a rehabilitation receiver, board or body.
creditor‟s action in court has already become Suspension of claims against the corporation
final but pending execution, the execution of the under rehabilitation is counted or figured up only
decision is likewise suspended. (Filinvest vs. upon the appointment of a management
Ejercito) committee or a rehabilitation receiver. (RCBC
vs. IAC)
Note the words “against the corporation.”
******
If a corporation secures a loan, and one of its
key officers uses his private properties to 1. All claims against corporations,
guarantee the loan, corporation files for partnerships or associations that are
suspension, the bank want to foreclose on the pending before any court, tribunal or
prop, may the bank foreclose? Yes. It is not an board, without distinction as to whether
action for ac claim against the corporation. or not a creditor is secured or
Union bank case. unsecured, shall be suspended
effective upon the appointment of a
Properties of an individual stockholder, management committee, rehabilitation
director or officer, as surety of corporate receiver, board or body in accordance
liabilities, are not, and will not be covered by the with the provisions of PD 902-A.
suspension of payments order issued by the
court pursuant to PD 902-A. 2. Secured creditors retain their preference
over unsecured creditors, but
Same with regard to criminal proceedings, enforcement of such preferences is
personal to corporate officer concerned. equally suspended upon the
appointment of a management
Despite the appointment of a receiver for a committee, rehabilitation receiver,
corporation under PD 902-A, an action against a board or body. In the event that the
corporation seeking the nullification of corporate assets of the corporation, partnership or
documents cannot be suspended by reason association are finally liquidated,
thereof, since the civil action does not present a however, secured or preferred credits
monetary claim against the corporation. (Finasia under the applicable provisions of the
Investment and Finance Corporation vs. CA) Civil Code will definitely have
preference over unsecured ones.
The SEC does not have jurisdiction to
If the rehabilitation of the corporation

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is not feasible, the court muto propio or the corporation and paralysis of its business
management committee may petition the lifting operations, the mere apprehension of future
and the preferences will be there again. misconduct based upon prior mismanagement
will not authorize the appointment of a
management committee/receiver. (Sy Chim vs.
Sy Siy Ho & Sons, Inc.)
APPOINTMENT OF MANAGEMENT
COMMITTEE, BOARD OR BODY (Sec. 6 [d]) Mere disagreement among stockholder as to
the fairness of the corporation would not in itself
Special Commercial Courts may create or suffice as a ground for the appointment of a
appoint a management committee, board or management committee. However, where the
body upon petition or muto propio to undertake dissention among the stockholders is such that
the management of corporations, partnerships the corporation cannot successfully carry on its
or association not supervised or regulated by corporate functions, the appointment of a
other government agencies in appropriate cases management committee becomes imperative.
where there is imminent danger of dissipation, (Jacinto vs. First Women‟s Credit
loss or wastage or destruction of assets or other Corporation)
properties or paralyzation of business operations
of such corporation or entities which may be A management committee shall have the
prejudicial to the interest of minority power to take custody of and control all assets
stockholders, parties-litigant or the general and properties owned and possessed by the
public. entity under management. It shall take the place
of the management and board of directors of the
It may also create or appoint a management entity under management, assume their rights
committee, board or body to undertake the and responsibilities, and preserve the entity‟s
management of corporations, partnerships or assets and properties in its possession.
other associations supervised or regulated by
other government agencies such as banks and The rehabilitation receiver shall not take over
insurance companies, upon the request of the the management and control of the debtor but
government agency concerned. shall closely oversee and monitor the operations
of the debtor during the pendency of the
Requisites before a management committee, proceedings. He shall be primarily tasked to
board or body may be appointed or created: study the best way to rehabilitate the debtor and
to ensure that the value of the debtor‟s property
1. Dissipation, loss, wastage or destruction is reasonably maintained pending the
of assets or other properties; and determination of whether or not the debtor
2. Paralyzation of its business operations should be rehabilitated, as well as implement the
which may be prejudicial to the interest rehabilitation plan after its approval.
of the minority stockholders, parties-
litigants or the general public. (Sy Chim Venue of actions in intra-corporate
vs. Sy Siy Ho & Sons, Inc.) controversies – Special Commercial Court
which has jurisdiction over the principal office of
Danger – a general term, including peril, the corporation, partnership or association.
jeopardy, hazard and risk; refers to exposure or
liability to injury. Nature of proceedings is in rem. Jurisdiction
acquired upon publication of the proceeding.
Imminent – something which is threatening to
happen at once, something close at hand, Creditors have the personality (at least 25% of
something to happen upon the instant, close the total outstanding liablitities) may file, ex.
although not yet happening, and on the verge of Bayantel.
happening.
Their compensation is subject to agreement
In the absence of a strong showing of an of the parties.
imminent danger of dissipation, loss, wastage or
destruction of assets or other properties of a Actuations of the board, body, committee
subject to....

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Service of pleadings . Sec. 6 rule 1. may be determine technical and intricate matters of fact.
by fax or email. When authorized by the court.
§ A criminal charge for violation of the
Service of summons. Sec. 5 rule 2. made SRC is a specialized dispute. Hence, it
upon any of the statutory or corporate officers or must first be referred to an
their respective secretaries. vs. Eb Villarosa administrative agency of special
case. (Rule of Court) competence, i.e., the SEC... The SRC is
a special law. Its enforcement is
31. SECURITIES particularly vested in the SEC. Hence,
all complaints for any violation of the
REGULATION CODE (SRC) Code and its implementing rules and
R.A 8799 regulations should be filed with the SEC.
Where the complaint is criminal in
nature, the SEC shall indorse the
32. - Passed and Enacted by the House of complaint to the DOJ for preliminary
Representatives and the Senate on July investigation and prosecution as
17 and 28, 2000. provided in Section 53.1. (Baviera vs.
Paglinawan)
33. - Approved by the President on July 19,
2000. Securities

34. - Effectivity date on August 8, 2000. 20. § Securities – are


shares, participation or interests in a
corporation or in a commercial
35. - It replaced the Revised Securities Act enterprise or profit-making venture and
(Batas Pambansa Blg. 178) evidenced by a certificate, contract,
instrument, whether written or electronic
36. - AIM – Establish a free securities in character. It includes:
market that regulates itself, encourage
widest participation of ownership in Shares of stock, bonds, debentures, notes,
enterprises, enhance the evidences of indebtedness,
democratization of wealth, promote the asset-backed securities;
development of the capital market,
protect investors and minimize Investment contracts, certificates of interest or
fraudulent and other market participation in a profit sharing
manipulations which creates distortions agreement, certificates of
in the free market. deposit for a future subscription;

The law adopts the view that the State should Fractional undivided interests in oil, gas or other
not interfere in the business judgment of mineral rights;
investors.
Derivatives like option and warrants;
The SEC is tasked merely to ensure the Full
disclosure rule – as long as there is full andfair Certificates of assignments, certificates of
disclosure relative to the issuance of securities participation, trust certificates,
the investing public should determine for voting trust certificates or similar
themselves whether or not to invest. There is a instruments;
departure to the “Merit Regulation”
Proprietary or non proprietary membership
Doctrine of primary jurisdiction – courts will certificates incorporations; and
not determine a controversy involving a question
within the jurisdiction of the administrative Other instruments as may in the future be
tribunal, where the question demands the determined by the Commission.
exercise of sound administrative discretion
requiring the specialized knowledge and 21. § The definition of
expertise of said administrative tribunal to

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securities is extra-ordinarily broad. It is a management of others without goods or services


catch all phrase meant to include all is an investment contract and thus a security.
novel devices which are of the same “Pyrammiding scheme” (Justee vs. SEC)
nature. Investment contracts and golf
club shares are included in the definition Pyramiding schemes partakes of a nature of
of securities. an investing contract which cannot be sold to
more than 19 persons without prior approval of
General rule: Securities cannot be sold or the SEC.
offered for sale or distribution to more than 19
persons without a Registration Statement duly When an investor is relatively uninformed
filed and approved by the SEC. Once the and turns over his money to others, essentially
securities are sold or offered to more than 19 depending upon their representations and their
persons, it becomes a public offering requiring honesty and skill in managing it, the transaction
prior registration with the SEC. Violation thereof generally is considered as an investment
renders the person administratively, civilly and contract. The touchstone is the presence of an
criminally liable. investment in a common venture premised on a
reasonable expectation of profits to be derived
Exception: Registration and Licensing is note from the entrepreneurial or managerial efforts of
required if the securities involved are covered by others. (People vs. Petralba)
Sec. 9 (exempt securities) and Sec. 10 (exempt
transactions). Exempt Securities (Sec. 9):

Persons engaging in the business of buying i. Any security issued or guaranteed by


or selling securities in the Philippines as a the Government of the Philippines, or by any
broker or dealer, or acting as a salesman for political subdivision or agency thereof, or by
such entities must be registered and authorized any person controlled or supervised by, and
as such by the SEC. acting as an instrumentality of said
Government.
Broker- is a person engaged in the buying and
selling of securities for the account of others ii. Any security issued or guaranteed by
the government of any country with which
Dealer- Is a person who buys and sells the Philippines maintains diplomatic
securities for his own account in the ordinary relations, or by any state, province or
course of business. political subdivision thereof on the basis of
reciprocity: Provided, That the Commission
Salesman- Is a natural person employed as may require compliance with the form and
such or as an agent, by a dealer, issuer or content of disclosures the Commission may
broker to buy and dell securities. prescribe.

Any violation of the laws may result to iii. Certificates issued by a receiver or by
imposition of administrative sanction (Sec. 54) a trustee in bankruptcy duly approved by the
and penal sanctions (Sec. 73). This is without proper adjudicatory body.
prejudice to civil liabilities provided for under
section 56. iv. Any security or its derivatives the sale or
transfer of which, by law, is under the
supervision and regulation of the Office of
the Insurance Commission, HLURB, or BIR.
Investment contract – a contract or scheme
whereby a person invests his money in a v. Any security issued by a bank except its own
common venture premised on a reasonable shares of stock.
expectation of profits to be derived from the
entrepreneurial or managerial efforts of others. Exempt Transactions (Sec. 10):

Issuance of certificates of participation in a 1. Any judicial sale, or sale by an executor,


multi-level marketing scheme, solely on the administrator, guardian or receiver or
trustee in insolvency or bankruptcy.

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delivered in exchange, if sold at the


2. By or for the account of a pledge holder, conversion price, would at the time of
or mortgagee or any other similar lien such conversion fall within the class of
holder selling or offering for sale or securities entitled to registration under
delivery in the ordinary course of the SRC. Upon such conversion the par
business and not for the purpose of value of the security surrendered in
avoiding the provisions the SRC, to such exchange shall be deemed the
liquidate a bona fide debt, a security price at which the securities issued and
pledged in good faith as security for delivered in such exchange are sold.
such debt.

3. An isolated transaction in which any


security is sold, offered for sale, 8. Broker‟s transactions, executed upon
subscription or delivery by the owner customer‟s orders, on any registered
thereof, or by his representative for the Exchange or other trading market.
owner’s account, such sale or offer for
sale, subscription or delivery not being 9. Subscriptions for shares of the capital
made in the course of repeated and stock of a corporation prior to the
successive transactions of a like incorporation thereof or in pursuance of
character by such owner, or on his an increase in its authorized capital
account by such representative and stock under the Corporation Code, when
such owner or representative not being no expense is incurred, or no
the underwriter of such security. commission, compensation or
remuneration is paid or given in
4. The distribution by a corporation, connection with the sale or disposition of
actively engaged in the business such securities, and only when the
authorized by its articles of purpose for soliciting, giving or taking of
incorporation, of securities to its such subscriptions is to comply with the
stockholders or other security holders as requirements of such law as to the
a stock dividend or other distribution out percentage of the capital stock of a
of surplus. corporation which should be subscribed
before it can be registered and duly
5. The sale of capital stock of a corporation incorporated, or its authorized capital
to its own stockholders exclusively, increased.
where no commission or other
remuneration is paid or given directly or 10. The exchange of securities by the issuer
indirectly in connection with the sale of with its existing security holders
such capital stock. exclusively, where no commission or
other remuneration is paid or given
6. The issuance of bonds or notes secured directly or indirectly for soliciting such
by mortgage upon real estate or tangible exchange.
personal property, where the entire
mortgage together with all the bonds or 11. The sale of securities by an issuer to
notes secured thereby are sold to a fewer than 20 persons in the Philippines
single purchaser at a single sale. during any twelve-month period.

7. The issue and delivery of any security in 12. The sale of securities to any number of
exchange for any other security of the the following qualified buyers:
same issuer pursuant to a right of
conversion entitling the holder of the a. Bank
security surrendered in exchange to b. Registered investment house;
make such conversion: Provided, That c. Insurance company;
the security so surrendered has been d. Pension fund or retirement plan
registered under the SRC or was, when maintained by the Government of
sold, exempt from the provisions of the the Philippines or any political
SRC, and that the security issued and subdivision thereof or managed by a

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bank or other persons authorized by 6. No proxy shall be valid and


the Bangko Sentral to engage in effective for a period longer than 5 years
trust functions; at one time.
e. Investment company; or
f. Such other person as the No broker or dealer shall give any proxy,
Commission may by rule determine consent or authorization, in respect of any
as qualified buyers, on the basis of security carried for the account of a customer, to
such factors as financial a person other than the customer, without the
sophistication, net worth, express written authorization of such customer.
knowledge, and experience in
financial and business matters, or A broker or dealer who holds or acquires the
amount of assets under proxy for at least 10% or such percentage as the
management. Commission may prescribe of the outstanding
share of the issuer, shall submit a report
TENDER identifying the beneficial owner within 10 days
after such acquisition, for its own account or
Tender Offers – a publicly announced intention customer, to the issuer of the security, to the
by the purchaser to acquire a certain block of Exchange where the security is traded and to
equities of a company through open market the Commission.
purchases or private negotiations.
INDEPENDENT DIRECTOR
A tender offer is required of any person or
group of persons acting in concert who intend to Any corporation with a class of equity
acquire: securities listed for trading on an Exchange or
with assets in excess of P50M and having 200
1. At least 15% of any class of any equity or more holders, at least of 200 of which are
security of a listed corporation or of any holding at least 100 shares of a class of its
class of any equity security of a equity securities or which has sold a class of
corporation with assets of at least P50M equity securities to the public pursuant to an
and having 200 or more stockholders with effective registration statement shall have at
at least 100 shares each; or least 2 independent directors or such
2. At least 30% of such equity over a independent directors shall constitute at least
period of 12 months. 20% of the members of such board, whichever
is the lesser.
PROXIES
Independent director – a person other than
Proxies must be issued and proxy solicitation an officer or employee of the corporation, its
must be made in accordance with rules and parent or subsidiaries, or any other individual
regulations to be issued by the Commission. having a relationship with the corporation, which
would interfere with the exercise of independent
5. Requisites for proxies: judgment in carrying out the responsibilities of a
director.
In writing;
The SEC may exempt corporations from the
Signed by the stockholder or his duly required independent directors as it did in the
authorized representative; and rehabilitation of Victorias Milling Co. Inc..

Filed before the scheduled meeting Insider Trading


with the corporate secretary.
Insider:
General rule: A proxy shall be valid only for the
meeting for which it is intended. a. The issuer;
b. A director or officer (or person
Exception: It is otherwise provided in the performing similar functions) of,
proxy. or a person controlling the

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issuer; Trading by persons who have material non-


c. A person whose relationship or public information about a tender offer is
former relationship to the issuer prohibited.
gives or gave him access to
material information about the Registration of Brokers, Dealers, Salesmen
issuer or the security that is not and Associated Persons
generally available to the public;
d. A government employee, or Persons engaging in the business of buying
director, or officer of an or selling securities in the Philippines as a
exchange, clearing agency broker or dealer, or acting as a salesman for
and/or self-regulatory such entities must be registered and authorized
organization who has access to as such by the SEC.
material information about an
issuer or a security that is not A stockbrokerage firm can have no other
generally available to the public; business than that.
or
e. A person who learns such Purchase of shares should be coursed
information by a communication through a broker. However a private transaction
from any of the foregoing can be made.
insiders.
Fraudulent Transactions and Other Market
General rule: An insider may not sell or buy a Manipulations
security of the issuer while in possession of
material information with respect to the issuer or Fraudulent and manipulative devices:
the security that is not generally available to the
public. 1. Wash sale – any transaction in a
security which involves no change in the
Exceptions: beneficial ownership thereof.

f. The insider proves that the 2. Matched order – an order or orders for
information was not gained from the purchase or sale of security with the
such relationship; or knowledge that a simultaneous order or
orders of substantially the same size,
g. The insider disclosed the information time and price for the sale or purchase
to a party reasonably believed of such security has, or will be entered
by the insider to possess the by or for the same or different parties.
information.
3. Marking the close – place of purchase
Material non-public information – has not been or sale order, at or near the close of the
generally disclosed to the public and: trading period.

1. would likely affect the market price of


the security after being disseminated to
the public and the lapse of a reasonable
time for the market to absorb the 4. Painting the tape – the activity is made
information; or during normal trading hours. It involves
2. would be considered by a reasonable buying activity among nominee
person important under the circumstances accounts at increasingly higher or lower
in determining his course of action prices or causing fictitious reports to
whether to buy, sell or hold a security. appear on the “ticker tape.”

An insider may not communicate material 5. Squeezing the float – the part or portion
non-public information to any person who will of the issue/security which is
likely buy or sell a security of the issuer while in outstanding but intentionally held by
possession of such information. dealers or other persons with a view of

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reselling them later for profit. thereof (illegal)

6. Hype and dump – the act employed by a 11. Short sale – sale of securities which the
person or group of persons of vendor does not own (illegal unless
purchasing the outstanding capital stock done in accordance with the rules and
of a dormant public shell company for a regulations of the SEC) (T3 rule).
nominal amount and merge it with their
privately held company. They would 12. Insider trading – the act of an insider of
then gain control of the majority of the buying or selling securities of the issuer
stocks of the merged entity. The shares while in possession of material
of the Shell Company are often reverse- information with respect thereto that is
split four to one or more to reduce the not generally available to the public
number of shares. Stock certificates are (illegal unless exempted).
often re-issued in the name of the
merged entity to relatives and Wash sale and matched order is illegal when
associates who act as nominees of the used as a means to create a false or misleading
person or group of persons employing appearance of active trading in the security
the device. They would then look for a concerned.
broker- dealer who would be willing to
make a market relative to the stocks of Marking the close, painting the tape,
the newly merged company; then hire a squeezing the float, hype and dump, and boiler
promoter who would “hype” the virtues room operations are illegal when they are
of the company, its products and stocks. effected to:
The broker-dealer then generates
volume and advance bid price. When a. Raise the price or induce the
the market reaches a high price, they purchase of a security or of a
would “dump” their shareholdings and controlling, controlled or
bail out. commonly controlled company by
others;
7. Boiler room operations – involves an b. Depress their price to induce the
intensive selling campaign through sale of a security, whether of the
numerous salesmen by telephone or same or of a different class, of the
through direct mail offerings for same issuer or of a controlling,
securities of either a certain type or from controlled company, or common
a specific issuer. Investors are induced controlled company of others; and
to purchase through hard-sell c. Creates active trading to induce
techniques based on unfounded such purchase or sale through
predictions and mailing of misleading said devices or schemes.
market letters.
Other fraudulent transactions:
8. Circulating or dissemination information
that the price of any security listed in the 1. Employing any device, scheme, or
Exchange will or is like to rise or fall artifice to defraud;
(illegal) 2. Obtaining money or property by means
of any untrue statement of a material
9. Making false or misleading statements fact of any omission to state a material
with respect to any material fact, which fact necessary in order to make the
he knew or had reasonable ground to statements made, in the light of the
believe was so false or misleading for circumstances under which they were
the purpose of inducing the purchase or made, not misleading; or
sale of any security (illegal). 3. Engaging in any act, transaction,
practice or course of business which
10. Pegging or fixing or stabilizing the price operates or would operate as a fraud or
of security effected either alone or with deceit upon any person.
others through any series of
transactions for the purchase or sale Fraud – akin to bad faith which implies a

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conscious and intentional design to do a


wrongful act for a dishonest purpose or moral
obliquity.

Settlement Offer

At any time, during an investigation or


proceeding under this Code, parties being
investigated and/or charged may propose in
writing an offer of settlement with the
Commission.

Upon receipt of such offer of settlement, the


Commission may consider the offer based on
timing, the nature of the investigation or
proceeding, and the public interest.

The Commission may only agree to a  


settlement offer based on its findings that such
settlement is in the public interest. Any
agreement to settle shall have no legal effect
until publicly disclosed. Such decision may be
made without a determination of guilt on the part
of the person making the offer.

Limitation of Actions

SEC. 62. Limitation of Actions. - 62.1. No


action shall be maintained to enforce any liability
created under Section 56 or 57 of this Code
unless brought within two (2) years after the
discovery of the untrue statement or the
omission, or, if the action is to enforce a liability
created under Subsection 57.1(a), unless
brought within two (2) years after the violation
upon which it is based. In no event shall any
such action be brought to enforce a liability
created under Section 56 or Subsection 57.1 (a)
more than five (5) years after the security was
bona fide offered to the public, or under
Subsection 57.1 (b) more than five (5) years
after the sale.

62.2. No action shall be maintained to


enforce any liability created under any other
provision of this Code unless brought within two
(2) years after the discovery of the facts
constituting the cause of action and within five
(5) years after such cause of action accrued.
Fasle registration statement - liable civily - sec.
56 Ceiling as to amount of damages - triple of
the amount involved limitation of actions - not
later than 5 years after the cause of action
accrues

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