Corporation Law

An Outline
By: Atty. Alfred Gaccion
 Historical Background
• Ethnological Theory – manifestation of the
gregarious instinct in man, existing inchoate from
earliest times and before law itself became an
effective social Force.

• Imitative Theory – Imitative theory of Jural

Development.
- Laws Fathered by the Hellenic jurist permitted the
formation of private corporation for certain
purposes, upon condition that they do not operate in
violation of the laws of the state.
Philippine Corporation Laws
• Sociedad en comandita - Limited partnership
• Sociedad regular colectiva – General Partnership

- Governed by Art. 116 to 150 and 160 to 174 of the code

of commerce
• Sociedad anonima – present day concept of
corporate entity
- Governed by Art. 151 to 159 of the Code of Commerce
• Act No. 1459 – The Old Corporation Law
• B.P. 68 – The Corporation Code of the Philippines
 Corporation Definitions
Corporation – An artificial being created by
operation of law, having the right of succession and the
powers, attributes and properties espressly authorized
by law or incident to its existence. (Sec. 2 Corporation
Code) (applies only to private corporations)

- A corporation is an artificial being created by

operation of law, having the right of succession and the
powers, attributes, and properties expressly authorized
by law or incident to its existence. It is an artificial being
invested by law with a personality separate and distinct
from those of the persons composing it as well as from
that of any other legal entity to which it may be related.
It was evolved to make possible the aggregation and
assembling of huge amounts of capital upon which big
business depends. It also has the advantage of non-
dependence on the lives of those who compose it even
as it enjoys certain rights and conducts activities of
 Attributes of a Corporation

• Artificial Being
• Created by Operation of Law
• Right of Succession
• Powers, Attributes and Properties
expressly authorized by law or
incident to its existence.
 As an Artificial Being
• Juridical Person – possess personality separate
and distinct from its individual stockholders or
members.
- possess a corporate veil as against its stockholders
and members.
• Liability for Acts and contracts – May be
liable for obligations incurred by the corporation
through its authorized agents.’
- Any suit against a Stockholder, Director, or officer
cannot be a suit against the corporation without
impleading the corporation itself
• Right to Bring Actions - May incur obligations
and bring civil and criminal actions in the
Limitations of bringing Actions:

• A suit for and in behalf of of its stockholders or members for purposes of

recovering its property which belong to the said stockholder (Sulo ng Bayan
vs. G. Araneta, Inc. 72 SCRA 347)

• Actions for moral damages arising from wounded feelings, serious anxiety,
moral shock, mental anguish, sleepless nights (Rural Bank of Makati Inc. Vs.
Municipality of Makati, 433 SCRA 362)

Exception: Moral Damages resulting from besmirched reputation.

(Mambulao Lumber Co. Vs. Philippine National Bank, 22 SCRA 359)

• Venue – The place of business of the suing Corporation is considered as its

place of residence
• Right to Acquire Properties Possesses
-
and owns properties as separate and distinct from
its stockholders, officers or members.

• Rights Guaranteed Under the

Constitution – a corporation is entitled to the
rights provided for by the constitution being
recognized as a juridical person

Exceptions:
Right of Liberty
Right against Self Incrimination
(Bataan Shipyard and Engineering Co., vs. PCGG
150 SCRA 181)

• Citizenship – as may be defined in the

Doctrine of Piercing the Veil
- The legal fiction of a corporation being a judicial entity with a distinct
and separate personality was envisaged for convenience and to serve
justice. Therefore, it should not be used as a subterfuge to commit
injustice and circumvent the law. (Tomas Lao Construction Vs. NLRC)

- When the fiction is urged as a means of perpetrating a fraud or an

illegal act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of a monopoly
or generally the perpetration of knavery or crime, the veil with which
the law covers and isolates the corporation from the members or
stockholders who compose it will be lifted to allow for its consideration
merely as an aggregation of individuals. (Reynoso Vs. CA)

- Court has pierced the veil of corporate fiction in numerous cases

where it was used, among others, to avoid a judgment credit; to avoid
inclusion of corporate assets as part of the estate of a decedent; to
avoid liability arising from debt; when made use of as a shield to
perpetrate fraud and/or confuse legitimate issues; or to promote unfair
objectives or otherwise to shield them.
 Grounds
Corporate Veil is used to:
- Defeat Public Convenience – when the corporate fiction
is used a vehicle for the evasion of existing obligation.
- Fraud Cases – when corporate entity is used to justify
wrong, protect fraud or defend crime
- Alter Ego – corporation is so organized and controlled
and its affairs are so conducted as to make it merely an
instrumentality, agency conduit or andjuct of another
person or corporation.
Elements
A. Control - complete dominion
B. Used to Commit Fraud or wrong
C. Proximate cause of the loss complained of
Effects:
- Corporation may be
treated as an association of
individuals.
- In cases of two
Corporation, it may be
merged into one.
- Legitimate purpose of
the corporation may still be
allowed.
Cases
 As Creation of Law
• Modes of creating a Corporation
A. Special Law or charter – Direct act
of Legislature.
B. General Corporation law – BP 68
Right of succession
- independent from its members
- not more than 50 years
 Powers Attribute and
Properties
• Those that may be granted by law of its
creation
• Implied powers
• Incidental or essential to the corporate’s
existence.
Test: Whether the act is in direct and
immediate furtherance of its Business,
fairly incidental to the express powers
and reasonably necessarry.
Distinction as of partnership
from corporation
Partnership Corporation
1. Created by agreement of parties 1. Created by operation of law
2. May be Organized by only 2 2. Minimum of 5 except
persons. corporation sole.
3. Juridical personality commences 3. Juridical personality
upon the execution of the commences upon issuance of
contract. certificate by SEC
4. May exercise powers authorized 4. Power is defined by the
by partners as long as not Corporation Code
contrary to law, morals, etc. 5. Established for a period not in
5. May be established for a period excess of 50 years extendible
of time stipulated by the for another period of 50 yrs in
partners. one instance.
6. May be dissolve by the will of 6. May only be dissolve upon
the partners. consent of the state
Corporation as Partner:

General Rule – Cannot ordinarily enter into a contract of

partnership.

Reason:
- The identity of the corporation will be lost or merged.
- Against public policy. Corporation will be bound by the
act of persons not its authorized agents.
- Permit corporate assets be subjected to risk

Exceptions:
a. Joint Ventures in line with the business provided by its charters
b. Other Partnerships provided the ff conditions presents:
1. All Corporation Partners must be managing partners
and must be solidarily liable
2. The respective charters or articles of incorporation
expressly allow the corporation to enter into partnership agreement and the
nature of the busniess venture is in line with the business authorized by law
or its articles.
3. When one partner is a foreign corporation it must obtain
a license to transact business in the country.
Can a Corporation be a Partner?

General Rule:

A Corporation cannot ordinarily enter into partnership

Reason:

A. A Corporation can only act through its authorized officers and will not
be bound by the act of anyone else, while in partnership each act of the partner
binds the other partner.
B. Contrary to Public Policy
C. Subjects Corporate assets to risk and liabilities not contemplated by
stock holders.

Exception:

A.General Professional Partnership

B.Joint Venture where the nature of the venture is in line with the business
authorized by its charter.
C.Partnership agreement wherein all partners will manage the partnership
Conditions under the exceptions:

A.All partners must be managing partners and all partners must be solidarily liable
B.Articles or charters must allow partnership and nature of business must be
inline with the business authorized in the articles or charters
C.For Foreign Corporations, it must have a license to transact business in
accordance with existing law (Corporation Code and Foreign Investment Act)

WHAT ARE THE ADVANTAGES OF A CORPORATION?

1.Has a legal capacity to act and contract as a distinct unit in its own name.
2.Continuity of existence
3.Strengthened credit by such continuity of existence
4.Centralized management
5.Creation, organization, management and dissolution are standardized
6.Shareholders have limited liability

WHAT ARE THE DISADVANTAGES OF A CORPORATION

1.Relatively complicated in formation

2.Governmental control
3.Stockholders have little voice in the conduct of business
SEC 3. Classes of Corporation

What is a stock Corporation?

Corporations which have capital stock divided into shares and are
authorized to distribute to the holders of such shares dividends or allotments of
the surplus profits on the basis of the shares held are stock corporations.

Distinguish Stock Corporation From Non-stock Corporation:

Stock Corporation Non-Stock Corporation

1. Created and operated for profit 1. Created not for profit but
2. Must have capital stock divided for public good and
into shares welfare
3. Authorized to distribute shares 2. Do not have capital stock
or allotments out of the surplus divided into shares
profits 3. Does not distribute
dividends or allotments
Trust Fund Doctrine – The Capital stock of a corporation is trust fund
to be kept intact during the life of the corporation for the benifit of the
creditors of the Corporation. Hence dividends or allotments may only be
declared upon the presence of unrestricted retained earnings.
Other Classifications of corporations

1.Corporation aggregate – composed more than one incorporator

2.Corporation sole – consist of one member or corporator only and his
successor
3.Ecclesiastical corporation – organized for religious purposes
4.Lay corporation – organized for purposes other than religion
5.Eleemosynary – organized charitable purposes
6.Civil Corporation – established for business or profit
7.Domestic Corporation – incorporated under the laws of the philippines
8.Foreign Corporation – existing under any laws other than Philippines
9.De Jure Corporation – a corporation existing in fact and in law.
10.De facto – a corporation existing in fact but not in law.
11.Close Corporation - one which is limited to selected person or members
of the family
12.Open Corporation – membership is open to all person
13.Parent Corporation – possess the power to elect directly or indirectly
majority of the directors of another corporation
14.Subsidiary Corporation – majority of its directors can be elected by other
corporation
15.Affiliated Corporation – related to another corporation by owning or being
owned by common management or long term lease of its properties or other
control device
Public Corporation Vs. Private Corporation

Public Corporation – Organized for the government of a portion of the State

for the general good and welfare

Private Corporation – Formed for some private purpose benefit or end. May
either be government owned or controlled corporation.

Test: If creation done by the State as its own agency or instrumentality for
political or public purpose connected with administration of the government.

Can a corporation exist without formal Legislative grant?

Quasi- Corporations
Corporation by prescription
Corporation by estoppel
SEC 4. Corporations Created by Special Laws or Charter
Modes where a corporation is created:
1. General Incorporation
2. Special Act of the Legislature
- must be owned or controlled by the government
- Governed by Civil Service Law not labor code
- Sec has no jurisdiction except as it may determined the status
of the corporation
Q. Can the Government organize a corporation under the Corporation Code?

Sec. 5 Corporators and incorporators, stockholders and Members

Corporators – Those who Compose the corporation.

Incorporators – Corporators mentioned in the Articles of Incorporation as originally
forming and composing the corporation. Must be a natural Person.
Stockholders – owners of shares of stock in a stock corporation
Members – Corporators of a corporation with no capital stocks.

Promoters – a person who undertake the formation of a corporation without their

being incorporators.
Subscriber – person who have agreed to take and pay for original, unissued
shares of a corporation formed or to be formed
Underwriter - a person who (a) has agreed to buy at stated terms an entire issue
of securities or substantial part thereof (b) has guaranteed the sale of an issue
Sec. 6 Classifications of share
A corporation may classify shares of stock which may have rights, privileges or
restrictions as provided in the articles of incorporation and subject to the provision
or limitations under section Sec. 6
Limitations:
1.No shares May be Deprived of a voting rights except those preferred and
redeemable shares.
2.There Shall always be a clas or series with complete voting rights.
3.Banks, Trust Companies, insurance companies, public utilities, and Building and
loan association shall not issue a no par value share.
4.Preferred shares of stocks may be issued only with a stated par value.
5.Shares without par value shall not be issued for a consideration less than 5
pesos per share and considerations receive thereof by the corporation shall be
treated as the capital and shall not be available for distribution as dividend.
6.Each share shall be equal in all respects to every other share except as
provided in the articles and stated in the certificate of stock (doctrine of Equality of
shares)
7.Non-voting shares may nevertheless be allowed to vote for:
A. Amendment of the articles of incorporation
B. Adoption and amendment of by laws;
C. Sale, Lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the properties
D. Incurring, creating or increasing bonded indebtedness
E. Increase or decrease of capital stock
 F. Merger or consolidation with other corporation
G. Investment of corporate funds in another corporation or business in
accordance with this code
H. Dissolution of the corporation
I. Classification must not be restricted by the articles or by law.

A Corporation may issue only one class of share “common share”.

Who may cause the classification of shares?

1.Incorporators
2.Board of Directors and stockholders by amending the articles Subject to Sec.
16 and Section 81.

Purpose of classifying shares:

1.Compliance with constitutional requirement
2.Reason of expediency primarily for monitoring purposes.

May the Board of Directors Classify shares?

Doctrine of equality of Shares – in the absence of any provision in the articles

and certificate of stock, all stock are presumto enjoy same rights and privileges
and subject to same liabilities.
Capital Stock – amount fixed in the articles of incorporation to be subscribed
and paid in or agreed to be paid in by the stockholders of a corporation, in
money, property, services or other means at the organization of the
corporation.
Authorized Capital Stock – refers to the amount of capital stock as specified
in the articles of incorporation.
Subscribed Capital Stock – the amount of capital stock subscribed whether
fully paid or not.
Outstanding Capital Stock – portion of the capital stock which is issued and
held by persons other than the corporation itself whether or not fully or
partially paid.
Paid up Capital stock – is that portion of the subscribed or outstanding
capital stock that is actually paid.
Unissued Capital Stock – portion that is not issued or subscribed.
Legal Capital - amount equal to or aggregate par value and/or issued value
of the outstanding capital stock.
Capital – broadly used the entire property or assets of the corporation
Stock or Share of stock – one of the units into which the capital stock is
divided. It represents the interest or right of the owner to the corporation.
Owned by a stockholder or person in contrast with the capital which is owned
by the corporation itself.
Corporation X
Authorized Capital Stock = P1,000,000.00
Shares = 10,000
Par value = P100.00/share
Subscribed = P250,000.00
Distinguish Capital Stock from Capital
1.Capital is the actual corporate property. It is therefore a concrete thing.
While Capital stock is an amount therefore something abstract
2.Capital may fluctuate or vary depending upon losses or profit of the
business of the corporation while Capital Stock is Constant
3.Capital belongs to the corporation while Capital stocks when issued
Belongs to the stockholder.

Situs for shares of Stocks

1.For Purposes of execution, attachment, and garnishment – Domicile or

residence of the corporation which is the place where the principal office of
the corporation is located ( Chua Guan vs. Samahang Magsasaka Inc. 62
Phil 472)
2.For Purposes of registration of Chattel Mortgage – Province or city which
the corporation has its principal office or placce of business
3.For Property Taxation – At the domicile or residence of the owner.
Exception:
A. Inconsistent with the express provision of the
statute
B. NIRC – Estate of decedent includes all
intagible wherever situated
Types of Shares :

Par Value Shares – one with a specific money value fixed in the articles and
on the certificate of stock
No Par Value – without any stated value appearing on the face of the
certificate of stock. But must have an issued value.
Voting Share – with right to vote
Non Voting Share – without a right to vote
Common Share – one which entitles the holder thereof to a pro rata division
of the profits if any and in its assets upon dissolution.
Preferred Share – with stated par value which entitles the holderto certain
preferences over the holders of common stock. cummulative, noncumulative,
participating, nonparticipating, cummulative-paticipating
Promotion share – those that are issued to promoters for incorporating the
company or for services rendered in launching or promoting the company.
Share in escrow – share in deposited by the grantor or his agent with a third
person to be kept by the depository until performance of a certain condition.
Subject of suspensive condition. Ownership is not transferred untill fulfillment
of the condition
Convertible share – Share convertible from one class to another class. Not
automatic, the articles must be amended to formally convert the share.
Par Value = Book Value = Market Value
Ref. CE = CS/Issued S = Supply and demand
Sec. 7 Founder’s Share – Founder’s share chassified as such in the articles of
incorporation maybe given certain rights and privileges not enjoyed by owners of
other stocks, provided that where the exclusive right to vote and be voted for in
the election of director is granted, it must be for a limited period not to exceed 5
years subject to the approval of SEC. Period shall commence from the date of the
aforesaid approval by the SEC.

Sec. 8 Redeemable Share –Redeemable shares may be issued by the

corporation when expressly so provided in the articles of incorporation. They may
purchased or taken up by the corporation upon the expiration of a fixed period,
regardless of the existence of unrestricted retained earnings in the books of the
corporation, and upon such other terms and conditions stated in the articles of
incorporation, which terms and conditions must also be stated in the certificate of
stock representing the said shares.

Sec. 9 Treasury Shares – Treasury shares are shares of stock which have been
issued and fully paid for but subsequently reacquired by the issuing corporation by
purchase, redemption, donation or through some other lawful means. Such
shares may again be disposed of for a reasonable price fixed by the board of
directors.
Sec. 10 Number and Qualification of incoporators-

Who May Form a corporation? May foreigners form a corporation under the laws
of the philippines? May a corporation be a stockholder? May a corporation be an
incorporator?
Natural Persons not less than 5 but not more thatn 15 and majority of
whom are residents of the philippines may form a corporation for legitimate
purpose or purposes.

-Incorporation under the jurisdiction of the philippines is not a matter of natural or

civil right but a priveledge conferred upon group of person. It becomes a matter
of right only after it is in accordance with the code.

-Corporations Vs. Association

Courts will not interfere with the internal affairs of an unincorporated
associations.
Corporation as a Concept of Franchise

Any special privilege or right affected with public interest, conferred by

the state on corporations or persons and which does not belong to the citizens of
the country generally as a matter of right.
The Right to exist as a corporation is a franchise.
- inviduals may not exercise by their own will and pleasure
- must be under conditions set forth by government
Two Kinds of Franchise in relation to corporation

1.Primary franchise – right or privelege granted to individuals by the state to be

and act as corporationafter its incorporation.
General Franchise – vests in the individuals and not to the
corporation
-inalienable and cannot be transferred it may be conveyed
except upon express legislative consent

2. Secondary Franchice – Exercise powers and privileges of the corporation to

the business for which it was created., including those conferred for purposes of
public benefit such as the power of eminent domain and other powers and
privileges enjoyed by public utilities
- Conferred upon the corporation after its incorporation
- May be alienated except with charged with public use

Steps in Forming Corporation:

Promotion:
Business operation by which a compoany is generally brought into
existence

May a Corporation Formed without promoters?

Who is a promoter?
- one who, alone or with others takes upon himself to organize a
corporation: To procure the necessary legislation, subscribers to the articles of
incorporation, and other necessarry requirements.

- Not necessarily an agent of the corporation except after formation and

with assent of the corporation

- quasi trust relation with the corporation after the corporation is formed
hence imposed upon the duty to act in good faith in all dealings of the
corporation.

- May be an agent to the subscribers or corporators provided there is an

agreement to the effect.

- In the absence of character or statutory provision, a corporation is not

liable to its promoters in respect to any payment of services rendered, unless
after incorporation it expressly agreess to make such payments
May a Corporation be held Liable for Contracts entered into by promoters for its
behalf?
What are the liability of the promoters in cases of failure to organize a
corporation?
1.To Subscribers – obligation to return except contrary agreement
2.To Each other – general laws but if business is carried on laws of partnership

Incorporation

- Substantial Compliance with the requirements and conditions imposed

by the Corporation code SEC may not refuse registration of a Corporation.

- A corporation may become a stockholder of another corporation by

subscribing to or purchasing the latter’s stock.

- Incorporators must have capacity to enter into contracts.

- Residents of incorporators must be referred to as domicile. A place of

habitual residence of a corporation, where one has his true, fixed, permanent
home and to which whenever he is absent has the intention of returning.

- Requirement regarding the minimum number of incorporators is

mandatory which however may reduce after incorporation.
Sec. 11 – Corporate Term

A corporation shall exist for a period not exceeding 50 years from date of
incorporation unless dissolved, revoked, or extend.
Exception: Condominium Corporation which may be up to 200 yrs.

Extension Of Corporate Term:

May a corporation provide in the articles of incorporation for an

automatic extension clause?
Can a Usufruct be constitute in favor of a corporation for more than 50
yrs?
What is the Doctrine of Relation?

Limitation of extension:
1. Term shall not exceed 50 yrs. In one instance
2. The amendment is effective before the expiration of the corporate
term but not earlier than 5 years prior to the expiration.

Doctrine of relation-
Delay in effecting the amendment is due to the neglect of the officer
with whom the application is required to be filed, or wrong his wrongful refusal
to receive it the same shall be treated as having been filed before the expiry
date.
-Upon the Expiration of the term the corporation ceases to exist and is
dissolve ipso facto.

Sec 12 – Minimum Capital Stock required of a stock corporation

Sec 13 – Amount of Capital Stock to be subscribed and paid for purposes of

incorporation

-There is no minimum capital stock required for the creation of the

corporation except as that required under section 13 or that may be
required under special laws such as educational corporations, Banking
corporations, Financing Companies

Minimum Paid up Capital

- 25 % of the subscribe capital stock but not less than 5,000
pesos.
- 25 % must be based on the aggregate subscribe capital stock
and not on the individual stock subscribed by the stockholder.
Sec. 14 – Contents of articles of Incorporation
Sec. 15 – Form of Articles of Incorporation

Articles of Incorporation
- the document prepared by the persons establishing a corporation
and filed with the SEC containing the matters required by the code

Rule on Joint Venture

- Need not be registered expect when a separate personality is
desired.

Can the SEC be compelled through mandamus to accept the articles of

incorporation?

Name of the Corporation

- essential to its existence and identity
- in the nature of a trademark, a property right, right in rem
- must include the word Corporation or incorporated or abbreviation.

Purpose or Purposes of the Corporation

- must state its primary and secondary purposes
- Purpose or purposes must be lawful- not contrary to law or morals
 - Corporations may not be formed for purposes of exercising
professions. Exceptions: Hospitals Optimetry – Acebido optical vs. CA
- Purpose or Purposes must be stated with sufficient clarity and in
broad terms but not indefinitely stated.
- Purposes must be Capable of being lawfully combined.

Reasons for stating the purpose:

1. Investors
2. Directors
3. Third Persons
- A corporation engaged in secondary purposes should be in the
nature in relation to its secondary purpose

Place where Principal office is Located

- it should be the main office in cases where corporation has
different brances.
- Change of address which results in change of municipality or city
must be effected through amending the articles of incorporation.
Can summons be served to the branch of a corporation?

Incorporating Directors or Trustess

- Not less than 5 not more than 15 except non stock corporation
who may have more than 15 trustees.
Sec. 16 – Amendment of Articles of Incorporation

Charter – instrument or authority from sovereign power bestowing the right or

privilege to be and act as a corporation

Charter of a private corporation Consist of :

1. The general incorporation Law
2. Articles of incorporation
3. By Laws
4. Provisions of the constitution and the general laws of the state
For Corporation created by special laws:
1. The Special Law creating the Corporation
2. EO of the president
3. Rules and regulations applicable to such corporations
4. all laws applicable thereto.

Nature of a Corporate Charter

1. Contract between the Corporation and the State
2. Contract between the Corporation and the Stockholders
3. Contract among stockholders themselves
Nature of a Corporate Charter:

Three fold Contract:

1.State-Corporation
Consent = The application made by the corporation
Object = Power to exist as Corporation
Consideration = To abide by the rules and regulations

Government cannot dissolve a corporation without case as it may result

to impairment of contract. Except to Franchise holder where the only requirement
in when the common Good Requires”

2. Corporation-Stockholders
3. Stockholders-Stockholders

Amendments
Sec. 16
Se. 37 – Shortening or extending the corporate term
Sec. 38 – Increasing or decreasing the capital stock
Matters not Subject to amendment
1. Name of Incorporators and name of first set of directors
2. Names of the subscribers, treasurers of the corporation elected by
the subscribers and witnesses except to correct mistakes.

Is a meeting for the stockholders necessary to effect amendment under section

6?
- only writtten assent is required hence meeting is not necessary

Limitations
- must not be contrary to any provisions or requirement prescribed by
the code
- not change any provisions in the articles stating an accomplished
fact
- must be for legitimate purpose
- must be approved by the required vote of the board of directors and
stockholders
- both articles must contain all provisions required by law to be set out
in the articles of incorporation
- Amended articles must indicate the changes made
- take effect only after approval by the SEC or 6 mos after filing without
action of the SEC and no attributable cause against the corporation
- Favorable recomendations if needed
Sec 17 – Grounds when articles of incorporation or amendment may be rejected
or disapproved.

- Decisions of the commission in recting or disapproving the articles of

incorporation may be appealed by a petition for review.

Grounds for rejection under PD 902-A as superseded by the SRC

1.Fraud in procuring its certificate of incorporation

2.Serious misrepresentation causing prejudice or damage to the general public
3.Refusal to comply with lawful orders of the Commission
4.Continous operation for 5 yrs.
5.Failure to file By-laws within the required period.
6.Failure to file required reports in appropriate forms.

Effects of Revocation,Suspension,Disapproval

A.Immediately effective
B.May sue only for purposes of liquidation
Sec. 18 – Corporate name

Does a Corporation need to register with the DTI if it intended to use another
business name?

Part name:
-Every Corporate name must contain the word Corporation or incorporated or
its abb.

Corporate Name must :

1.Not be identical or deciptively or confusingly similar with existing corp.
2.Not be patently Deceptive, confusing or contrary to existing law.

Test of Infringement:
“priority of adoption”
- whether the similarity is such as to mislead a person using ordinary
care and discrimination. Proof of actual confusion need not be shown.

Requisites for infringement: (Philips BV vs Ca)

1.The Complainant Corporation acquired prior right over the use of such
corporate name
2.The proposed name is either, identical, or deceptively or confusingly similar,
patently deceptive,confusing or contra to existing law
Generic,Geographical, and descriptive terms and names

-Rule : Incapable of exclusive appropriation

Exception: Doctrine of Secondary Meaning
- where such word have acquired a secondary
meaning or have become distinctive so as to distinguish not only the product of a
particular service and its quality but also the name of the producer of the service.
- The word or phrase which may be incapable of exclusive
appropriation might nevertheless have been used so long and so exclusively by
one producer with reference to his article that, in that trade and to that branch of
purchasing public, the word or phrase has come to mean that the article was his
product.

 = can it be registered?

Remedy of an infringed corp

1.Injunction
2.De-registration

Change of Corp. Name

-Amendment of the Articles
-Effectivity upon approval of the commission
Use of Changed or abandoned names
1.Former name of same corporation – cannot be appropriated for a certain time
2.Names of Merged or consolidated corporation – may not be used by another
corporation without consent of the merged/consolidated corp.
3.Names of Dissolved Corporation or whose registration has been revoked – it
shall not bee used 3 years from approval of dissolution or 6 years from
revocation
4.Dissolve Corporation through expiration of the term – may be appropriated by
other corporation.

Sec. 19 – Commencement of Corporate existence

When does a corporation commences to have a corporate existence?

It is the certificate of incorporation that not only gives juridical
personality to a corporation but places it under the jurisdiction of the
Commission.

In relation to Sec. 22
The corporation must formally organize and commence transaction of
its business or construction of its works within 2 yrs. Otherwise its corporate
powers shall cease.
Sec. 20 – Defacto Corporation

Distinguish De jure Corporation from a defacto Corporation.

A de Jure Corporation is one created in strict or substantial conformity

with the mandatory statutory requirements for incorporationand the right of which
to exist as a corporation cannot be succesfully attcked or questioned by any party
even in direct proceeding for that purpose by the State. While a De facto
Corporation, is one which actually exist for all practical purposes as a corporation
but which has no legal right to corporate existence as against a state.

Requisites of a de facto corporation:

1.Valid Law under which a corporation with powers assumed might be incorporated
2.A bona fide attempt to organize a corporation under such law; colorable
compliance
3.Actual user or exercise in good faith of corporate powers.

Effect on stockholders of a de facto corporation?

- enjoy the exemption from personal liability

Absence off Articles of Incorporation = no defacto

Minor defect in requirements = produces de facto corporation
Colorable Compliance = De facto Corporation
Substantial Compliance = De jure Corporation
Non Compliance = No corporation at all except upon application of estoppel

-The corporation must act in good faith in claiming to be a corporation and

exercising corporate powers. There must be a showing that the corporation will
correct any defect, otherwise it will cease to enjoy the privilege of a defacto
corporation.

Basis of De facto Corporation:

Protection to third person

Who may attack the status of a defacto corporation?

Only the state in a direct proceeding
Rationale:
Individual right is not invaded; it is the state’s right and
authority which are invaded and usurped.

Test of the status of a corporation

Whether what has been done toward incorporation and organization is
sufficient to constitute a corporation de jure or de facto.
Sec. 21 – Corporation by estoppel

Basis:
Principle of equity and is designed to prevent injustice and unfairness.
applies to third party only to third party when he tries to escape liability
on a contract from which he has benefited on the irrelevant ground of defective
corporation.

-A corporation by estoppel has no real existence in law. It is neither a de jure

nor a defacto corporation, but a mere fiction exiting for the particular case, and
vanishing where the element of estoppel is absent.

-- A corporation which continues its business instead of liwuidating its affairs

after the expiration of its corporate term, is a corporation by estoppel for the
purpose of being sued on its contracts, not a corporation de facto because it no
longer exists in fact and in law as a body corporate, except pnly for purposes of
liquidating its affairs

-- in order for one to be estopped to deny the corporate existence of an

organization, he must have contracted or dealt with it as a corporation. Except
upon the attendance of fraud
-- third party receiving benefits cannot later on deny the existence of a
corporation
Sec. 22 Effects of Non use of corporate charter and continuous inoperation

Condition subsequent

-Effects
1.Automatic cessation of corporate powers
2.May be collaterally attacked
Sec. 23 The Board of Directors or trustees

Tri- Level Structure of a corporation:

Stockholders – pass upon other corporate actions

Elects the Board of Directors.
Earns Profit

Directors – Policy making Body

Exercises Corporate Powers
Management

Officers – Execute Policies formulated by the Board of Directors.

-Corporation may only act through the Board of Directors

General Rule: In the absence of authority or a valid delegation from the
board of Directors or Trustees, no person, not even its officers can validly bind the
corporation.

Exception: Doctrine of Apparent Authority

- Extent of Judicial Review – court will not interfere with the regular, honest acts or
contracts entered by the directors or contracts intra-vires. “Business Judgment rule
-The only remedy for internal dissensions is only through Corporate Election.

-The Powers of the Board of directors or trustees are original and undelegated.
The stockholders of members don not confer, nor can they revoke, those powers.
Derivative only in the sense of being received from the state in the act of
incorporation.

-A director is presumed to serve without compensation and in the absence of

express agreement or resolution, the same cannot be asserted.

Genral Rule:
Directors or trustees can bind the corporation only by actions taken at a
board meeting:

Reason:
1. For Purposes of Discussion and an interchange of views
2. As Agents of tthe corporation manging its affairs, directors or trustees
have no power to act other than as a board

Exception:
Extra Ordinary Situation or conditions to justify the act
Illustration:
- Contract entered by a director where he is the sole stockholder

-Contract entered into by a corporate officer authorized by the board (Board of

liquidators vs. Heirs of Maximo Kalaw)

-Subsequent ratification by the board

-Apparent Authority

Delegation of Directors/trustees authority

General rule - May be delegated expressly or impliedly subject to
qualification as provided by ABS CBN Case. (1) Specific Purpose except for
Executive committee (2) subject to the rules on agency

Exceptions – Discretionary powers (e.g. Power to Declare Dividends)

Entire Supervision and Control of the Corporation
Special Powers especially conferred upon it by a
resolution.
Term of Office
- As Fixed in the by-laws ; or one year and until the successors are elected and
qualified

Hold over – arises when no successor is elected due to valid and justifiable
reason.

Number of Directors:

Stock = Not less than 5 nor more than 15

Non Stock = Not less than 5 may be more than 15

Qualifications of a director or trustee:

Stock Corporation – Must own at least one share of the capital stock
Must be registered in his name in the books
Must continuously own the share during his term
Majority must be a resident of the Philippines

Non Stock – Must be a resident of the philippines

-Only Natural persons can be elected as director
Exception: Corporation who owns a shares of stock of another
corporation may designate its officer or representative to sit in the latter’s board.

-The by laws may however additional qualification for a director provided the
same would not be in conflict with the requirements prescribed by the
corporation code.

-Acts of a director or other officers are therefore valid so far as third persons
are concerned, although he may not ppossess the qualifications prescribed, if
he has been elected or appointed by the corporation and permitted to act for it.

Sec. 24 Election of Directors or Trustees

Requirements:
1.Must be made in a meeting of stockholders called for the purpose
2.Stockholder must be present or by representative authorized to act by written
proxy
3.Majority of the outstanding capital stock
4.Must be by ballot if requested by a voting stockholder or member
5.May vote in the manner appropriate for him (straight,cumulative for one,
cumulative by distribution)
6. Deliquent stock cannot be voted. A deliquent stock is not entitled to voteor be
represented for any corporate purpose
7. The candidate receiving the highest votes shall be declared elected. Plurality
and not majority.
8. Meeting may be adjourn from day to day
9. Notice must be given to a stockholder.

-Deliquent stocks are not included in computing the quorum.

-Directors cannot change the date of election for purposes of extending there
term except for justifiable reasons;

Sec 25 – Corporate Officers- Quorum

Corporate Officers – those as given that character either by the code or in the by
laws
- Conflict arising thereon are in the nature of Intra-corporate disputes.

Employees – other officers of the corporation that are not mentioned in the code
or in the by laws.

- Conflict arising thereon are in the nature of a Labor Dispute

-Only the by-laws can enumerate the officers of the corporation and the board
cannot create new offices without amending the by-laws except as it may be
empowered under the by- laws or merely appointive officers which are the
corporate officers.

Election of Officers:
- Majority of all members of the board

Corporate acts:
- Majority of the members present

President – Must be a director hence must own a shares of stock in his own
name
- Acts may bind the corporation for contracts entered in the ordinary
course of business, provided the same is reasonable under the circumstances.
Exception : Acts which are beyond his power as may be
granted only to the directors.

- Corporation must prove that the said act is beyond the power of the
officer and that it is free from any ratification.

Vice president – may not be a director except when the by laws provides that
the VP shall take place as president during his absence.
Secretary – May or may not be a director unless required in the by laws
- May not also own a share of stock
- Must be a resident or citizen of the Philippines
- ministerial officer who cannot bind the corporation unless expressly
authorized to do so

Treasurer – May or may not be a director

- May not also own a share of stock
- Good Corporate practice requires that Treasurer must be a resident
(sec opinion)

Apparent Authority
Not only through corporate practice but its existence may be
ascertained through:

1.The genral manner in which the corporation holds out its officer or agent
2.The acquiscence in his act of a particular nature, with actual or constructive
knowledge thereof
Inside Directors – Directors who are also officers

Sources of Powers of corporate officers:

1.Statute
2.Articles of Incorporation
3.By law
4.Resolution of the board

-Officers of a corporation who acted for and in behalf of the corporationwithin the
scope of their authority and in good faith do not become liable with the corporation.
Exception : Doctrine of Piercing the veil
Alter ego doctrine

-Corporations are not bound by the act of its unauthorized officers

Exception : Doctrine of Apparent authority against third person (may be
prove by previous acts or conduct of the corporation;
Authority by estoppel (a Corporation which by its
voluntary act, places an officer or agent in such a position or situation that a
person of ordinary prudence are justified in assuming that he has authority
to perfor the act)
Subsequent ratification by the corporate board
Requisites for the Validity of a corporate act

1.Board Meeting
2.Presence of the required Quorom
3.Decision of the majority of those presence or members as may be required
4.Place and time of meeting

-Proxy voting is not allowed in the Board of directors/trustees manner of voting

-A Director should cast his vote as he is elected as such purposely to participate
the management of the corporation hence s by laws which procides that the
chairman of the board may only vote in case of tie is invalid.

Sec. 26 Report of Election of directors, trustees and officers

-Reportorial requirements to the SEC upon election of directors

names
nationalities
residences

- Vacancy by reason of death, resignation or any other manner ceased to hold

office.
Sec. 26 Disqualification of directors

-Purpose is to avoid election or appointment of unworthy officers in view of the

fiduciary character of their positions.

2 grounds of disqualification

1.Conviction by final judgment of an offense punishable by imprisonment for a

period exceeding six (6) years.
2.Violation of the code, committed within five (5) years prior to date of election
or appointment.

-Produces a de facto officer

Right to possess office and salary

General rule: while de facto officers have the same powers of a dejure
officers, they do not enjoy same rights as they may be ousted from office and
not entitled to salary
Exception: De facto officers in good faith are legally entitled to
compensation (Cojuanco Vs. Roxas 195 Scra 797)
Sec. 27 Removal of Directors

-The Removal of Directors rests upon the prerogative of the stockholders.

Requisites for Removal of Directors:

1.Removal must be done at a regular meeting or special meeting called for the
purpose.
2.Previous notice to stockholders or members of the corporation of the intention
to propose such removal at the meeting.
3.Removal must be by a vote of stockholders representing 2/3 of the outstanding
capital stock or 2/3 of members entitled to vote
4.May be with or without cause but if without cause, it must not be done to deprive
minority stockholders

As a rule Directors elected to represent the minority stockholders through

cumulative voting may not be removed without cause.
Exception: if removal is initiated by the minority stockholders

Initiation
- Upon call of the president
- upon written demand of the stockholders representing or holding at
least majority of the outstanding capital stock.
-Removal of a hold over director is considered as expiration of the term .

-Courts have no power to remove a director except when a receiver is

appointed by the court. In which case the court may thereafter removed such
appointee.

Filling of Vacancy as effect of removal:

-May be replaced by election in the same meeting without need of further notice
-At any regular of special meeting called for the purpose

Sec 29 Vacancies in the office of director or trustees

-Applies only in cases other than removal or expiration of the term

-Instance where a board of directors may elect a director provided the
remaining director still constitute a quorum.

-Section applies to resignation, death, abandonment, or disqualification

-The person elected to fill the vacancy holds office for the unexpired term of the
predecessor.
Filling of Vacancies
1.By Stockholders
A. Vacancy results from removal or expiration of the term
B. Other than removal or expiration and directors remaining
does not constitute a quorum.
C. Referral by the Board
D. Vacancy created by reason of an increase in the number of
directors

2. By the members of the Board

A. If still constituting a quorum, majority of members may fill in
vacancies that arose other than removal or expiration of the term.

Sec. 30 Compensation of Directors

-General Rule:
In the absence of any provisions the directors shall not
receive any compensation except for reasonable per diems.
The compensation is granted by the stockholders
representing majority of the outstanding capital stock in a regular or special
stockholder’s meeting.

-Limitation
Sec. 31 Liability of Directors, Trustees or Officers

General Rule:
Directors and Officers are not liable for their official acts unless they
exceeded their authority.

Exceptions: under Sec. 31

1. He willfully and knowingly votes or assents to patently unlawful acts
of the corporation.
2. He is guilty of Gross negligence or bad faith in directing the affairs of
the corporation
3. he acquires any personal or pecuniary interest in conflict with his
duties

Other exceptions:
4. He Consents to the issuance of watered stocks or who having
knowledge thereof, does not forthwith file with the corporate secretary his written
objection thereto.
5. Agrees to hold himself personally liable with the corporation
6. he is made by specific provisions of law, to personally answer for his
corporate action.
Sec. 32 Dealing of Directors, trustees or officers with the corporation

-Refers to Self Dealing Directors

General Rule:
Contract is Voidable
Exception:
1.That the presence of such directors in the board meeting in which the
contract was approved is not necessary to constitute a quorum.
2.The vote of such director was not necessarry for the approval of the contract.
3.The contract is fair and reasonable under the contract
4.In case for officer, the contract with officer has been previously authorized by
the board of directors.
5.In the absence of the first two conditions, in case a contract with director or
trustee, may ratified by the stockholder by the vote of 2/3 or the outstanding
capital stock in a meeting called for the purpose. Provided that fyll disclosure of
the adverse interest be made and contract is fair and reasonable.

Sec. 33 Contracts between corporations with interlocking directors

Interlocking director – one who is a director of a corporation and at the same

time a director of another corporation.
Nominal interest – Stockholding not exceeding 20 % of the outstanding capital
stock

Rule:
Valid except as may be prescribed under Sec. 33 and Sec. 32.
(Absence of Fraud, Fair and reasonable, and both interest are the same)

Sec. 34 Disloyalty of a Director

Doctrine of Corporate Oppurtunity – When a director, trustee or officer attempts

to acquire or acquires in violaiton of his duties any interest adverse to the
corporation in respect of any matter which has been reposed in him in
confinence, as to which equity imposes a liability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation.

-Exception to the liabilty of the director/officer

When ratified by majority vote of the stockholder representing the
outstanding capital stock

Non- applicability of the Doctrine

1.The director acts in goodfaith
2. The director does not exploit opportunity by employment of company’s
resources, or not directly in competition with the corporation
3. When corporation is no longer able to avail itself of the opportunity arising
from financial difficulties or legal restrictions or from any other factor.

Sec. 35. Executive committee

-The by laws and not the directors may create executive committee,
composed of not less than 3 members of the board to be appointed by the
board.
-The Committee have no powers to act on matters:
1.Approval of actions for which shareholder’s approval is also required
2.Filling of vacancies of the board
3.Amendment or repeal of any resolution of the board
4.Distribution of cash dividends.
5.
Title III Required Vote Approval

Stockholders Written Fixing

representing demand for directors
majority of removal of a Compensation
the OCS director (Sec. other than per
28) Diem (Sec. 30)
Stockholders Removal of a Ratification for Ratification for
representing 2/3 Director (Sec. contracts of self contracts/acts of
of the OCS 28) dealing a disloyal
directors (Sec. director (sec.
32) 34)
Majority of the Corporate
quorum by BOD Acts/Resolutions
(Sec. 25)
Majority of Election of Filling of
Members of Officers (Sec. Vacancies
BOD 25) caused other
than removal or
expiration (Sec.
29)
Sec. 36 Corporate Powers and Capacity

Doctrine of Limited Capacity – a corporation has only such powers as are

expressly granted and those that are necessarily implied from those expressly
granted or those which are incidental to its existence

Ultra vires- Acts or contracts of a corporation outside the scope of its express,
implied, and incidental powers

Express powers – powers expressly conferred upon the corporation law.

-An enumerates the express powers given to corporations created under the
general incorporation law.

Implied powers – powers which reasonably necessary to execute the express

powers and to accomplish or carry out the purposes for which the corporation
was formed.

Distinguish implied powers from express powers.

Express powers has to do with main business object and purpose of the
corporation while implied relates to the means and methods of attaining those
object.
Test – whether express powers is mention in the charter while in implied
whether they are fairly incidental.
Incidental powers mention in Sec. 36:
-Power of sucession
-To sue and be sued
-To have a corporate name
-To purchase and hold real and personal property
-To adopt and use corporate seal
-To adopt by laws

Power to sue and be Sued

Dissolved corporation – may sue and be sued, after the expiration 3 yrs winding up,
it ceases to be a de facto.
Unregistered Corporation – No legal capacity to sue
Foreign corporation – No capacity when did not obtain license

Real Party in interest – Corporation itself.

There must be a specific authorization to sign the verification and
certification in behalf of the corporation

Service of Summons – may be made to an agent or representative of the

corporation so integrated to the corporation as to make it a priori supposable that
he will realize his responsibilities and know what he should do with any legal
papers served on him.
Power to adopt and use corporate seal
-Incidental power of the corporation
-A corporation may however exist even without a corporate seal.

Power to acquire and convey property, including shares or securities.

-Incidental power of the corporation
- must be necessary or incidental to the operation of business or must be its
primary purpose
-A corporation has no power to purchase stock in another corporation unless it
is one of the activities permitted by its articles of incorporation.

Power to contribute to charity

-Based on the view that business corporations are not organized solely as
profit making enterprise but also as economic and social institution with
corresponding public responsibility to aid in the betterment of economic and
social conditions in the community in which such corporations are doing
business.
- Subject to limitation that the amount must be reasonable, and must not be to
aid any political party\
- it may be paid out of capital

Power to establish pension plans

Power to act as guarantor
Sec. 37 Power to extend or shorten corporate term
Procedure:
- Amendments of the articles of incorporation
- Approved by majority vote of directors and ratified by 2/3 of
stockholders of the outstanding capital stock
- Appraisal right is given to a dissenting stockholder in case only of
extending the term under sec. 37. hower should be applicable also in cases of
shortening the period under sec. 81

Appraisal right – right of the stockholder in cases provided by law to demand

payment of the fair value of their shares.

Sec. 38 Power to increase or decrease capital stock, incur, create or increase

bonded indebtedness.

Power to increase or decrease capital stock

-May be done despite that its authorized capital stock may not have been fully
subscribed yet
-A corporation cannot issue stock in excess of the amount limited by its articles
of incorporation
Requisites:
1.Approve by the Majority of the board of directors
2.Favored by 2/3 of the outstanding capital stock in a meeting duly called for
the purpose.
3.Written notice of the proposal must be given to the stockholders.
4.A Certificate Duplicate must be filed in the SEC stating matters mentionedd
under sec. 38
5.The increased capital stock, 25 % thereof must be subscribed and 25%
thereof must be paid in form of cash or property and stated through a
treasurer’s affidavit.
6.No decrease is allowed if its effect will prejudice the rights of the corporate
creditors.
7.In non stock corporation it may create, incur, increase bonded indebtedness
by a majority vote of the trustees and approved by 2/3 of the members.

-The capital stock of a corporation stands increased or decreased only from

and after approval and the issuance by the Sec of its certificate of filing.

Over issue stock/spurious stocks – an issue of stock by a corporation in

excess of the amount prescribed or limited by its articles of incorporation
Ways of Increasing (decreasing) Authorized Capital stock
1.By increasing the number of shares without increasing the par value
2.By increasing the par value without increasing the number of shares
3.By increasing both

Person entitled to question the increase or decrease

-Corporation
-Dissenting Stockholders
-Creditors

Sec 39. Power to deny Pre- emptive right

Pre emptive right

- Whenever the capital stock is increased and new shares of stock are
issued, the new issue must be offered first to the stockholders who are such at
the time the increase was made in proportion to their existing shareholdings and
on equal terms with other holders before subscription are received from the
general public.
- It may also stand to unissued shares.

Exceptions under Sec. 39:

1.Share issued in compliance with existing law
2.Issued in exhange for property needed for corporate purposes or in payment
of debt with approval of stockholders representing 2/3 of OCS
Sec. 40 Sale or Other Disposition of Assets

- Sale of substantially all properties of the Corporation – must be made with

approval by the stockholder representing 2/3 of toutstanding capital stock

-A dissenting stockholder may enforce his appraisal right

-Sale as part of its primary purpose, no approval is required

liability of the purchasing corporation

General Rule:
No Liability
Exception:
(1) Express or implied agreement
(2) When transaction amounts to consolidation
(3) where purchasing corp. Is merely a continuation of selling corp.
(4) Fraudulent transaction

Sec. 41 Power to Acquire own shares

Purposes:
1.To eliminate fractional shares arising out of stock dividends
2.To collect or compromise an indebtedness to the corporation
3. To pay dissenting or withdrawing stockholders entitled to payment of their
shares

Requisites:
1. The corporation must have an unrestricted retained earnings.
2. For a legitimate and proper corporate purpose
3. The corporation acts in good faith and without prejudice to its creditors
4. That the conditions of corporate affairs warrant its.

Appraisal rights under Title IV.

1.Extension of the corporate term ( Section 37)
2.Sale or disposition of corporate assets (Section 40)
3.Power to invest corporate funds in another corporation (Sec. 42)

Redeemable Shares however may be reacquired by the corporation even the non
existence of unrestricted retained earnings.

Trust Fund Doctrine

“ The assets of the corporation as represented by its capital stock are
trust fund to be maintained unimpaired and to be used to pay corporate creditors
in the sense that there can be no distribution of such assets among the
stockholders without provisions being made for the payment of corporate debts.
Sec. 42 Power to Invest corporate Funds in another corporation or business of for
any other purpose

-Right to invest to other corporation for any other purpose other than the primary
purpose

Requisites:
1. Approved by majority of the Board
2. Ratified by a vote of 2/3 of the stockholders representing the
outstanding capital stock.
3. Dissenting stockholders are given appraisal rights.

-The other purpose however must be stated in the articles of incorporation

otherwise the corporation is not allowed to engaged in such business.

A Corporate funds may be loaned to a stock holder provided that:

1.The Funds are not presently used by the corporation and the loaning is not on a
regular basis.
2.Will make the funds productive instead of remaining idle.
3.No restrictions in the Articles of Incorporation
4.There must be a collateral
5.The lending in not used to defraud creditors
6.Sec. 42 is complied with
Sec. 43 Power to Declare Dividends

Requisites:
1. Unrestricted Retained earnings
2. Approval of the stockholders 2/3 vote (for stock dividends)

-Power to declare dividends rest upon the Board of directors

Forms of dividends:
1.Cash
2.Stocks
3.Property

Retained Earning = Assets – Liabilities and legal capital

Sec. Memo. Circ. No 11, December 5, 2008

The surplus profits or income must be
(1)Bonafide income founded upon actual earnings or profits.
(2)Actual earnings or profits shall mean net income for the year based on the
audited financial statement, adjusted for unrealized items enumerated below,
which are not available for dividend declaration:
(a) Share/equity in net income of the associate or joint venture
accounted for under equity method, as the same is not yet actually realized or
(b) Unrealized foreign exchange gains, except those attributable to cash and
cash equivalents.
(C) Unrealized acturial gains which results when the company opts to recognize
actuarial gain
Etc.

(3) Additional paid in capital shall neither be declared as dividends

-Unrestrected earnings from which dividends may be declared are not limited to
the accumulated earned surplus of the corporation but may also include other
gains not arising from its business.

- proceeds from shares issued above par does not form part of the capital.

Action to enforce declaration of dividends:

General Rule
Director may not be compelled by mandamus to declare dividends
Exception
Sufficient net profits have been earned to obligate the corporation

- A director may be held liable to the improper declaration of dividends.

Delinquent stocks:
Stock – witheld until unpaid subscription be fully paid
Cash – application to unpaid subscription first

The stock however must be declared to be delinquent.

Sec. 44 Power to enter into management contract

Sec. 46 Adoption of By Laws
By Laws – rules of action adopted by a corporation for its internal government
and for the government of its stockholders or members and those having the
direction, management and control of its affairs in their relation to the corp.
-Inherent power of the corporation

Two Ways of Filing By Laws

1.One after receipt of official notice of the issuance of the certificate of
incorporation.
- Must be approve by stockholders representing at least
majority of the outstanding capital stock or members
- Must be signed by the approving members/stockholders
- Kept in the principal office of the corporation

2. Filed Prior to incorporation

- Must be signed by all incorporators
- Submitted together with the articles of incorporation

-By laws is effective only upon issuance of SEC of a certification that it is not
inconsistent with the code

- Additional requirements of certificate may be required for banking and

financial corporation or other corporations stated under sec. 46
Effect of failure to File By-laws
- renders the corporation liable to the revocation of its registration.

Construction of by-laws;
-Govern by the general rules on construction of contracts
-Stricly construed if provides for disenfranchisement of members
-Prospective in application
-Effective only upon issuance of a certificate from a corporation

Elements of a valid by-laws

1.They must not be contrary to law and inconsistent with the code.
2.Must not be contrary to morals
3.Must not impair obligations and contracts
4.Must be general and uniform in their operation and not directed against a
particular individual
5.They must be consistent with the charters of articles of incorporation
6.They must be reasonable

-Stockholders are presumed to know the provisions of the corporation’s by laws

-Third person are not bound by the by laws of the corporation
Sec. 47 Contents of by-laws

By laws must contain:

-The time place and manner of calling and conducting regular and special
meetings of the directors or trustees.
-The time and manner of calling and conducting meetings of the stockholders
-The required quorom in meetings of stockholders or members and the manner of
voting therein
-The form of proxies of stockholders and members and the manner of voting them
-The qualifications, duties and compensation of directors or trustees, officers and
employees
-The time for holding the annual election of directors or trustees and the mode or
manner of giving notice thereof
-The manner of election or appointment and the term of office of all officers other
than deirectors
-Penalties
-The manner of issuing certificates
-Such other matters
Sec. 48 Amendments to by laws

-Power to amend emanates from the power to create by laws

Requisites
1.Majority of the Board of directors or trustees
2. Stockholders representing majority of the outstanding capital stock

Power to delegate amendments

-Stockholders representing the owners of 2/3 of the outstanding capital stock may
delegate the power to amend which may however be revoked by a vote of majority
of the stockholders representing the outstanding capital stock.

In case of conflict, by laws prevails over the resolutions

Sec. 49 – Kinds of Meetings
Two Kinds of Meetings
1. Regular
2. Special

Sec. 50 – Regular and special meetings of stockholders or members

Reequisites of a valid meeting

1.It must be held at the proper place

2.It must be held at the stated date and at the appointed time or at a reasonable
time thereafter
3.It must be called by the proper person
4.There must be a previous notice
(2 weeks for regular, 1 week for special)
5. There must be a quorum

Sec. 51 Place and time of meetings of stockholders or members

-Must be at the city or municipality where the pricipal office is situtated

-Irregular meetings may be valid provided all stockholders or members are
present during the meeting
Who may call a meeting
- thru the secretary
1. The person designated in the by laws
2. director or trustee or by an officer entrusted with the
management of the corporation unless otherwise provided by law
3. the petitioning stockholder or member

Sec. 52 Quorum in meetings

- stockholders representing a majority of the outstanding capital stock or

that may be provided by the bylaws.

Sec. 53 – Regular or Special meetings of Director

Regular – Monthly
Special – upon call of the president or as may be provided in the by laws

Notice- at least a day prior to the meeting

May be held anywhere in or outside of the philippines

Sec. 54 Who presides in a meeting

Sec. 55 Right to vote of pledgors, mortgagors. And administrators

Sec. 56 Voting in case of joint ownership

-Consent of all co-owners is required in order to vote of such stock except:

a. When there is a written proxy
b. When shares are owned in an and/or capacity

-For married individuals it shall be governed by the property relations entered into
during the marriage.

Sec. 57 – Voting Rights for treasury shares

-No voting rights if the stock remains in the treasury

Sec. 58 Proxies

Proxy – designates the formal witten authority given by the owner of holder of the
stock who has a right to vote it, or by a member, as principal, to another person
as an agent, to exercise the voting rights of the former.

- A form of agency
-Purposes
A. Presence of Quorum Meetings
B. Exercise the right to vote despite absence
C. Voting and management control

-Voting by proxy however is not allowed in board meetings under Section 25

-A corporation cannot restrict the right of the stockholder to appoint any person
he sees fit to represent him nor can a corporation deprived a stockholder to
vote by proxy it being a personal right of the stockholder, except in non-stock
corporation

-The agent may only act through in so far as the right is available of his
principal.

Limitations:
1.Proxies must be in writing and signed by the stockholder or member and filed
before the scheduled meeting.
2.As a general rule a proxy is valid only for the meeting it was intended.
3.A continuing proxy must not exceed 5 years at any one time.
Types of proxies
1.General proxies – confers a general discretionary power of attorney to attend
and vote at an annual meeting to vote for directors and all ordinary matters that
may properly come before a regular meeting.
2.Limited Proxies – limits the power conferred. It may restrict the authority to
vote to specified matters only and may direct the manner in which the vote shall
be cast.
3.Continuing proxies – confers a continuing proxy but not exceeding 5 years
4.Limited and specific proxies – used only for a specific meeting

-Proxies may be revoked expressly or impliedly.

Sec. 59 Voting Trust –

-Results in the separation of the voting rights of a stockholder from his other
right. The transferring stockholder departs his voting power but retains the
equitable or the beneficial ownershipt of the stock.

Rights of the voting trustee:

1.The right to vote
2.May vote in person or by proxy
3.May exercise right to inspect corporate books and record
4.Qualified to be a director
6. A proxy need not be notarized
7. A proxy does not have the right to inspect corporate books or records.

Sec. 60 Subscription Contract – contract for acquisition of unissued stock in an

existing corporation or a still to be formed.

-The law does not require that subscription contract be in writing although it is
usual and convenient for it to be in writing

Kinds of Subscription
1.Pre- incorporation
2.Post incorporation subscription
3.Conditional subscription
4.Absolute subscription
5.Subscription with a special term

Stock option – a privilege granted to a party to subcribe to a certain portion of

the unissued capital stock of the corporation with a certain period and under the
terms and conditions of the grant

Before a corporation shall grant stock option it must first secure the
approval from SEC (SEC RULE BED No. 902-1-3 Sec. 1 and sec. 2.)
Sec. 61 Pre Incorporation subscription

-A pre incorporation subscription is irrevocable for a period of six (6) months

exception:
- unless all other subscribers consent to the revocation
- when the incorporation of the subscription fails to materialize within
the said period.
exception to the exception
- after the submission of the articles of incorporation to the SEC

Reason for the rule :

to prevent speculating on the stocks of a proposed corporation

Sec. 62 Consideration for stock

Equity securities – stock issued by the corporation to persons who wants to

invest capital in it, for money property or services

Equity capital – capital contributed by stockholders in exchange for shares of

stock

Power to issue stock rest upon the board of directors except for increase or
decrease of stocks
For considerations other than cash, its value must be worth the value of the stocks
issued. (true value rule)

Good faith rule – the value is a matter about which men may honestly differ and in
which further questions of intention, good faith and fraud are submitted to the
court. No other devices is allowed but margin is considered for the difference in
valuation

Property in payment of stock

-Must be of a kind which the corporation may lawfully acquire and hold in carrying
out the purposes of its incorporation and which is necessary or proper for it to own
in carrying on its business

-Services in payment of stock – only to labor performed provided the transaction is

in good faith and no fraud is perpetrated upon the stockholders or creditors.

-An agreement to issue stock for sevices before the same is rendered is void

Sec. 63 Certificate of stock and transfer of shares

Certificate of Stock – written instrument signed by the proper officer of a

corporation stating or acknowleging that the person named therein is the owner of
Restriction on transfer of stock
The corporation has only the power to regulate but not the power to prohibit in
so far as the trasfer of stocks is concern.

Right of First Refusal – valid

Validity of transfer
As between parties – upon delivery and endorsement of the certificate

As between corporation and creditors – Registration in the book

Reason for requiring registration

1.To enable the corporation to know at all times who its actual stockholders
2.To afford the corporation an oppurtunity to object to the transfer in case it has
claims against the stock
3.Avoid fictitious or fraudulent transfers.

Remedy against refusal for registration

General rule: mandamus is not allowed/ adminitrative mandamus
Exception: when the following are present:
1. Due application has been made
2. application was denied
3. no unpaid claims against the stock
Sec. 64 Issuance of Stock Certificate

-Only paid shares are entitled to the issuance of stock certificates

-In case of partial payments, it shall be applied to all stocks subscribed

proportionately.
-Sec Opinion
-May be applied first to feww stock and a certificate be issued.
-But once said option is execised by the corporation it shall apply to all
stockholders
Relation of Stockholder to the corporation
- Contractual relation and not creditor-debtor but for unpaid subscription
stockholder is the debtor of the corporation.

Rights and remedies of the heirs of a stockholder

Rule of Majority is applied in corporation

Rights of Dissenting Minority

1.Appraisal Right
2.Actions at law
Actions by Stockholders or Members
1.Derivative actions
2.Individual actions
3.Representative actions

Derivative Suits – Brought by one or more stockholders or members in the name

and on behalf of the corporation to redress wrongs committed against it or to
protect or vidicate corporate rights, whenever the officials of the corporation
refuse to sue or are the ones being sued.

- a remedy for minority stockholders grounded upon equity

- The corporation is the real party in interest hence it must be

impleaded.

- Nature is representative action

Requisites for bringing the action

1.There must be an existing cause of action in favor of the corporation.
2.Exhaustion of the intra-corporate remedies
3.The stock holder or member must have been such at the time of the
objectionable acts or transaction.
4.The action must be brought by the stockholder or member in the name of the
Individual Suit – an action brought by a stockholder against the corporation for
direct violation of his contractual rights as such individual stockholder. Such as
the right to vote, the right to share in declared dividends.

Distinguish from Derivative suit

Representative suit – an action brought by a stockholder in behalf of himself and

all other stockholders similarly situated.

-A form of class action

- common cause of action
- parties are so numerous

-Distinguish derivative suit from representative suit

Jurisdiction ove intracorporate controversies

1.Regular Courts – prior to pd 902-A
2.SEC – PD 902-A
3.Special Commercial Courts - SRC
Sec. 65 Libility of directors for watered stocks

Watered Stocks – stock issued not in exchange for its equivalent either in cash,
property, share, stock dividends or services.

- Issued without consideration

- Issued fully paid when corporation has received a lesser sum than its
par value or issued value
- issued for consideration other than cash and is valuated less than its
par or issued
- stock dividends issued with no sufficient retained earnings

-Liabilities
A.Directors – Solidary
B.Subscriber – Direct and Solidary
C.Subsequent Transferee – same with his transferror

-Prohibition on issuance of stocks less than its par value or issued value applies
only to the original issue.

Suit by the state

Quo warranto
Injunction
Sec. 66 Interest on unpaid subscription

-Fixes the rates of interest

1. as may be provided in the by laws
2. Legal Rate

Interest shall be counted from the date of subscription.

If no interest is mentioned in the by-laws then interest shall only be paid from the
time of declaration of a deliquent stock

Sec. 67 Payment of Balance of Subscription

-Payment shall be due upon specified date of the subscription contract or on the
date stated in the call or assessment made by the board.

-If within 30 days and no payment is made, stocks shall become delingquent and
shall be subject to sale.

Call – a declaration officially made by a corporation usually expressed in the form

of resolution of the board of director rewuiring the payment of all or a certain
prescribed poriton of a subcriber’s stock subscription
Assessment – applied both to paid subscription
Requisites for a valid call
1.Made in the manner prescribed by law
2.Made by the board of directors.
3.Operate uniformlu upon all shareholders

Sec. 68 Deliquency sale

-Made not less than 30 days nor later than 60 days from the date the stock
become delinquent
-Notices shall be observe
-Sold at public auction including all expenses
-Remaining shares shall be credited back to the stockholder and shall be
considered as having fully paid
-Corporation may participate in bidding if there are no qualified bidders
-Corporation cannot forfeit the delinquent stock

Sec. 69 – When Sale may be uestioned

Gounds for questioning the delinquent sale:

1. Irregularity of the notice of sale
2. defect in the sale itsel
- The party seeking the action must pay first or tenders to the sum which it was
sold
Secc. 70 Court action to recover unpaid subscription

-Call is still required prior to the action

Sec. 71 Effects of Delinquency

1.Deprived the right to be voted or be entitled to vote

2.Not included in determining the existence of quorum
3.Quo warranto may be instituted against directors elected by deliquent
stockholders
4.Not entitled to any of the rights of a stockholder but shall entitled to dividends in
accordance with the code
5.Shall be subject to delinquent sale

Sec. 72 Rights of Unpaid shares

-Shares not fully paid which are not deliquent shall have all the rights of a
stockholder

Sec. 73 Lost or destroyed certificates

Sec. 74 Books to be Kept

Required Books to be Kept:

1.A record of All Business Transactions:
2.Minutes of all meetings of stockholders or members;
3.Minutes of all meetings of directors or trustees
4.Stocks and Transfer Books , in case of stock corporation

The records and all business transaction shall be open to the inspection of any
director, trustee, stockholder or member of the corporation at reasonable hours on
business days.

Exception;
1. improper use of information
2. was not acting in good faith or for a legitimate purpose in making his
demand
Remedy for refusal:
1.Mandamus
2.Damages

Libilities:
1.Secretary
2.Directors who voted for the denial
Sec. 75 Rights to Financial Statements

Right of the Stockholder to demand financial statements

Merger and Consolidation

Sec. 76 Plan of Merger or Consolidation

Matters that should be set forth by the Board of directors or trustees of each
corporation:

1.Names of the corporations;

2.Terms of the merger or consolidation and the mode of carrying into effect
3.Statement of changes in the articles of incorporation
4.Other necessary provisions

Merger – Two or more corporations unite, one corporation which retains its
corporate existence absorbing or merging in itself the other which disappears as a
separate corporation.
- Transfer of all assets and the assumption of debts and libilities

Consolidation – Two or more Corporation unite, giving rise to a new corporate

body and dissolving the constituent corporation which cease to exist
Sec. 77. Stockholders or members approval

Requisites: (including amendment)

> Approved by majority vote of the directors of each constituent
corporation
> Approval of the stockholders representing at least 2/3 of the
outstanding capital stock

-May give rise to am appraisal right by a dissenting stockholder

>however, may extinguished upon abandonment of the plan

Sec. 78 Articles of Merger or consolidation

Sec. 79 SEC’’s approval and effectivity of merger and consolidation

Merger or Consolidation shall be approve only upon the issuance of the SEC
Certificate of merger or consolidation.

Articles of Merger or consolidation shall also be furnished to the SEC stating the
matters mentioned in Sec. 78
Forms of Corporate Combinations
1.Sale of Assets – All or substantially all of the assets of the corporation. May be
made during dissolution. Governed under Sec. 40. does not however effect
automatic dissolution of the corporation.
2.Lease of Assets – a corporation without being dissolved, leases its property to
another corporation for which the lessor merely receives rental paid by the lesee.
Corporation is not dissolved.
3.Sale of stock – The purpose of the holding company is to acquire sufficient
amount of stock of another corporation for the purpose of acquiring control.
Parent or holding company – acquiring corporation
Subsidiary corporation – company whose stocks are acquired
4. Merger
5. Consolidation

Sec. 80 Effects of Merger and consolidation

Effects of Merger and consolidation

1.The consitutent corporations shall become a single corporation
2.The separate existence of the constituent corporations shall cease, except that
of the surviving or the consolidated corporation
3.Surviving or consolidated corporation shall possess all rights etc of a corp.
4.Surviving or consolidated corporation shall posses all rights of both corp.
5.Surviving or consolidated corp. Assumes the liabilities.
Merger and Consolidation Distinguish from sale of assets
1.In Merger or Consolidation, the sale of assets is necessarily included while in
sale it is does not necessarily result in merger or consolidation.
2.In merger or Consolidation, there is automatic assumption of liabilities
3.Continuance of enterprise while in Sale comtemplates Liquidation
4.Trasfer of assets = by virtue of law while in sale, by reason of contract
5.Corporation is automatically dissove while in sale does not result in automatic
dissolution

Appraisal Right

Sec. 81 Instances of Appraisal Right.

Appraisal right – Right of the stockholder to demand payment of the fair value
of his shares, after dissenting from a proposed corporate action involving a
fundamental change in the corporation in cases provided by law.

- Any fundamental change in the corporate charter would require the consent of
all the stockholders, in as much as it would impair the obligation of the contract
between the corporation and its stockholders
Instances when appraisal right available
1.In case of amendment of the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or opf
authorizing preferences in any respect, superior to those of outstanding shares
of any class, or of extending or shortening the term of corporate existence
2.Conveyance of all or substantially all of corporate property
3.In case of merger or consolidation
4.In case the corporation decides to invest its funds in another corporation or
business for any purpose other than its primary purpose (Sec. 42)
5.Close Corporation, any stock holder may compel the corporation to purchase
his share for any reason at their fair value when the corporation has sufficient
assets in its books to cover its debts and liabilities exclusive of capital stock.

Limitations on the exercise of the right

1.Only in intances provided by law
2.Must vote against the proposed corporate action
3.Written demand to the corporation 30 days after the date of the vote
4.Price must be based on the fair value of the share
5.Payment must be made out of the unrestricted retained earnings
6.Transfer of shares
Sec. 82 How right is exercised
Sec. 83. Effect of demand and termination of right

Effects:
1.Rights accruing to such shares including voting and dividend rights shall be
suspended
2.Only entitled to receive payment of the fair value of his shares.
3.If not paid after 30 days from the award, he shall be restored with his rights.

Sec. 84 When right to payment ceases

Extinguishment of the right to payment

1.Withdrawal of demand with consent of the corporation
2.Proposed action is abandoned or rescinded
3.Disapproved by the SEC
4.Commission rule that the stockholder is not entitled for the right

Sec. 85 Who bears cost of appraisal

Section 86 Notations on the certificate
Non Stock Corporation
-Organized for an eleemosynary purpose and where no part of its income is
distributable to its members, trustees, or officers subject to the provisions on
dissolution, provided that any profit which a non stock corporation may obtain as
an incident to its operation shall whenver necessary or proper be used for the
furtherance ot the purpose or purposes for which the corporation was organized.

Eleemosynary purpose – Formed or organized for charitable, religious,

educational, professional, cultural, recreational, fraternal, literary, scientifica,
social civic service, or similar purposes,

Right to vote
- Limited, broadened or denied as specified in the articles or in the by laws.
Unless limited or broadened each members shall be entitled to one vote.
- May vote by proxy except when specifically denied in the articles

-Membership in non stock corporation in non-transferrable unless the articles and

by laws provide. Personal and non-transferrable right.

Election and Terms of trustees

Unless specified in the by laws, the board of trustees of non-stock corporations,
which may be more than 15 in number shall classify themselves that the term of
office of 1/3 of their number shall expire every year; and subsequent election
Of trustees shall held anually with a term of 3 years

Vacancies – shall hold office only for the unexpired term

Qualification – must be a member of the corporation

Place of meetings – anywhere within the philippines outside of the principal

office provided notices must be given.

Rules in Distribution of assets:

1.All debts must be paid
2.Assets held under condition of being return must be returned
3.Other assets held subject to specific use (charitable education etc.) must be
transferred to other corporation societies having the same purpose
4.All oher assets not included above shall be distributed in accordance with the
stipulation in the articles or by laws

CLOSE CORPORATION
Contents of the Artices:
1.Number of stockholders must not exceed 20
2.Restriction: right of first refusal in favor of the stockholder or corporation
3.Stocks cannot be listed in he stock exchange nor publicly offered
Special Rule in Stock ownership – a corpotaion is not deemed close whenever
2/3 of the voting stocks or voting rights is owned or controlled by another
corporation which is not a close corporation

Certain business ventures may not be allowed to be operated by a close

corporation

Restriction on transfers must appear:

1.Articles of incorporation
2.By laws
3.Stock certificate

-Premptive right may be against all kinds of shares including treasury shares
-The articles may provide, that Management may be excercised by the
stockholders and the latter shal be deemed directors.
DISSOLUTION
Sec. 117 Methods of dissolution
Dissolution – signifies the extinguishnment of a corporation’s franchise and the
termination of its corporate existence

-A condition of law and fact which ends the capacity of the body corporate to act
as such and necessitates a liquidation and extinguishment of all legal relations
existing in respect of corporate enterprise
- A corporation may come to end and its life extinguished only by the act or with
approval of the sovereign power vy which it was establish.

Two legal steps in corporate dissolution

1.Termination of corporate existence

2.Winding up of affairs

Methods in dissoving a corporation

1.Voluntarily
2.Involuntarily
3.Expiration of the term of the corporation
4.Shortening the corporate termFailure to organize and commence business
5.Legislative dissolution
Voluntary Dissolution
1. By a vote of the board of directors/trustees and
stockholders/members where no creditors are affected
2. Judgment by SEC after hearing a petition for voluntary dissolution
where creditors are affected
3. by amending the articles of incorporation
4. In corporation sole, by submitting to the SEC verified declaration

Involuntary dissolution
1. By expiration of terms
2. by legislative enactment
3. failure to organize within two years
4. by order of the SEC

Sec. 118 Voluntary dissolution where no creditors are affected

Corporation is deemed dissolved upon:

1.Issuance of certificate of dissolution – under sec. 118
2.Judgment rendered – under sec. 119
3.Approval of the articles – under sec 120
4.Approval of the verified declaration of dissolution – sec. 115
Sec. 119 Voluntary dissolution where creditors are affected

-By filing a petition duly signed by majority of the board or officers having
management of its affairs and verified by its president or secretary or one of the
directors. Setting forth the demands or claims against it and the fact that it was
approved by a vote of the stockholder representing 2/3 of the outstanding capital
stock.

Sec. 120 Dissolution by shortening corporate term

Effective only upon approval by SEC

-Publication is also required

Death of Stockholders does not necessarily results in corporate dissolution

Sec. 121 Involuntary Dissolution

-Upon filing of a verified complaint and after proper notice and hearing on
grounds provided by existing laws
Grounds:
Violation of Sec. 144
Close corporation – deadlock and mismanagement
Sec. 122 Corporate Liquidation

Liquidation – the winding up of affairs of the corporation by reducing its assets in

money, settling with creditors and debtors, and apportioning the amount of profit
and loss. “ Distribution of Assets”

Methods of Corporate Liquidation

1.Liquidation by the corporation itself
2.Liquidation by duly appointed receiver
3.Liquidation by a trustee whom the corporation had conveyeed the corporate
assets

-After the 3 yeear period expires for the liquidation, any claims by and against the
corporation not presented and settled within that period becomes un eforceable.
-3 yr. Period is not extendible except that a trustee may be appointed during the
liquidation and thereafter such trustee may be sued or dcontinue the case even
after the 3 yr period
-Sec approval is not required in liquidation
-Stay of all claims upon liquidation by receiver or when the corporation is unde
management or receivership (pd 902-A)
-The appointment of a receiver for a going corporation is a last resort remedy and
should not be employed when another remedy is available.
Distrubution of corporate assets

Assets of the corporation may only be distributed upon lawful dissolution and after
payment of all its debts and liabilities. The trust fund doctrine is the underlying
principe.

The ct of stockholders distributing assets of the corporation among themselves is

valid so ling as all corporate creditors are paid and no one is prejudiced

-Assets distibutable to a creditor or stockholder where the same cannot be found

shall be escheated in favor of the city or municipality where such assets are
located.
-Preference of payments
Creditors
Stockholder Creditors
Preferred Stockholder
Common stockholder
Foreign Corporation

Consent doctrine – a corporation may do business with another state only upon
consent of the latter

Determination of Nationality
Incorporation Test – the nationality of the corporation is determined by the state
of which it was incorporated regardless the nationality of its stockholders

Control Test – depends upon the nationalities of the controlling stockholders

Grand father rule – method of determining the nationality of a corporation which

is owned in part by another corporation by breaking down the equity structure of
the shareholder corporation

Foreign Corporations – a corporation that is organized other than under the laws
of the Philippines

Suability of the Corporation

Doing Business in the Philippines with license – may sue and be sued
Doing business withoput license – cannot sue but may be sued
Not doing business in the Philippines - may sue
Definition in doing Busines
1.Soliciting Orders
2.Service Contracts
3.Opening Offices whether called liason offices
4.Appointing representative or distributors in the philippines or who in any calendar
year stay in the country for a period or periods totalling 180 calendar days or more;
5.Participating in the management, supervision or control of any domestic
business, firm, entity or corporation of the philippines
6.Any other acts that imply a continuity of commercial dealings or arrangements,
and contemplate to that extent, performance normally incident to, and in
progressive prosecution or, commercial gain or of the purpose and object of the
business organization
Provided: that it does not include
1. mere investment as a shareholder by a foreign entity in
domestic corporation duly registered to do business and/or the exercise of rights
as such investor
2. Having a nominee director or officer to represents its interests in such
corporation
3. appointing representative or distributor domiciled in the philippines
which transacts business in its own name and for its own account.
SECURITIES REGULATION CODE

“Blue Sky Law”

Purpose: to protect the public from unscruplous promotors who stake business or
venture claims which have no really basis and sell shares or interest therein to
investors, who are then left certificates representing nothing more than a claim to a
square of a blue sky

Peculiar declaration of state policy

-Protect investors and ensure full and fair disclosure about securities
-Minimize if not totally eliminate insider trading and other fraudulent or
manipulative devices and practices which creates distortions in the free market

Objectives sought to be achieved to protect the public from fraudulent and

worthless securities in three ways

-Requirement of registration
-Limiting margin and borrowing requirements to prevent undue speculations
-Punishing those who manipulate the market and from misrepresentations,
manipulations and fraudulent practises covering securities.
SEC

Collegial Body Composed of the Chairman and Four Commissioners

Appointed by the president for a terms of Seven years

Natural Born fiLIPINO Citizens, majority of whom, including chairperson must be

lawyers

Shall meet at least weekly

SEC Powers and Functions (Sec. 5)

-Shall have jurisdiction and supervision over all corporation, partnerships or

associations who are grantees of primary franchise
-Formulate policies and recommendations on securities market, advise congress
and other government agencies on all aspects of securities market and propose
legislation and amendments thereto;
-Approve, reject, suspend, revoke, or require amendments to, registration
statements, and registration and licensing applications;
-Regulate, investigate or supervise activities of persons to ensure compliance;
-Supervise, monitor suspend or take over activities of exchanges, clearing
agencies and SRO’s
-Impose sanctions for violation of laws and rules, regulations and orders;
-Prepare, approve, amend or repeal rules and regulations and orders, and issue
opinions and provide guidance on and supervise compliance therewith;
-Enlist aid and support and/or deputize any and all enforcement agencies of
Government as well as private institution, corporation, firm or association or person
in the implementation of its powers and function;
-Issue cease and desist orders to prevent fraud or injury to investing public;
-Punish for both direct and indirect contempt;
-Compel corporate officers to call meetings of stockholders or members thereof
under its supervision
-Issue Subpoena duces tecum and summons witnesses, and order the examination,
search and seizure of all documents, paper, files and records, tax returns, and
books of accounts of any entity or person under investigation;
-Suspend or revoke, after proper notice and hearing, franchise or certificate or
registration of corporations partnerships or associations; EXCEPTION:
Cooperatives, Homeowners assn, labor unions.. SEC VS. Ca 246 S 738
-Exercise such other powers as may be provided by law, implied from or which are
necessary or incidental to the carrying out of the express powers;

Transfer of Jurisdiction under PD 902-A

- All cases enumerated under PD 902-A Sec. 5 (Fraud schemes cases, intra-
corporate disputes, election cases, petitions for suspension of payments and/or
rehabilitation proceedings) has been transferred to RTC
Registration of Securities

Security – shares, participation or interest in a corporation or in a commercial

enterprise of profit-making venture and evidence by a certificate, contract ,
instruments, whether written or electronic in character

Genral Rule:
Securities shall not be sold or offered for sale or distribution within the
philippines
- Without registration statement duly filed with and approved by the SEC
- and Prior to such sale, information on the securities, in such form and
with such substance as SEC may prescribe, shall be made available to each
prospective purchaser

Principle of Full material Disclosure

- A Fact is deemed material if it tends to induce or otherwise effect the
sale or purchase of its securities

Exception:
Exempt Securities: (Sec. 9)
Those issued or guaranteed by the government or by any political subdivision,
agency or by any person controlled or supervised by, and acting as instrumentality
of the government
Those issued or guaranteed by the government of any country with which the
Philippines has diplomatic relations , or by any state, province or political
subdivisions thereof on the basis of reciprocity, althoug SEC may require
compliance with the form and content of disclosures
Certificates issued by receiver or by trustees in a bankcruptcy duly approved by
proper adjudicatory body
Any security or derivatives the sale or transfer of which by law, is under the
supervision and regulation of OIC, HLURB or BIR
Any securities issued by a bank ecept its own shares

Exempt Transactions:
Anny Judicial Sale, or by an executor, administrator, guardian, receiver or trustee
in insolvency or bankcruptcy
Those sold by a pledgee, mortgageee, or any other similar lienholder, to liquidate
a bona fide debt, a security pledge in good faith as security for such debt.
 Those sold or offered for sale in isolated trasaction, subscription or delivery by
owner or for his account, such transaction not being made in the course of
repeated and succesive transactions and such owner not being underwriter.
 Distribution by a corporation, actively engaged in business authorized by its
articles of incorporation, of securitis to its stockholders or other security holders as
stock dividend or other distribution out of surplus.
Sale of Capital stock of a corporation to its own stockholders exclusively, where
no commission or other renumeration is paid or given directly or indirectly
Issuance of secured bonds or notes where entire mortgage together with all
bonds or notes secured thereby are sold to single purchaser at single sale;
Issue and delivery of security in exchange for any other security of the same
issuer pursuant to right of conversion provided that security so surrendered has
been registered or was when sold exempt from registration;
Broker’s trasaction, executed upon customer’s order but not those made upon
broker’s solicitation thereof;
Share subscription prior to incorporation or in pursuance of an increase in its
increase in its authorized capital stock, when no expense is incurred, or no
commission, compensation, or remuneration is paid or given in connection with the
sale or disposition of such securities
Exchange of securities by issuer with its existing security holders exclusively,
where no commisions or other renumeration is paid
Sale by the issuer to fewer that 20 persons in the Philippines during the 12-
month period
Sale to any number of qualified buyers:
- Banks
- Investment house
-Insurance companies
- pension fund or retairment plan
-INVESTMENT COMPANY
SUCH OTHER PERSON AS sec MAY BY RULE DETERMINE
Sec. 12 refers to procedure in the registration of securities

Sec. 13 Grounds for rejection revocation

Sec may order supension the offer and sale of securities pending any
investigation, any sale made in void

Pre need plans corporation has special rules under sec. 16

- due to the nature of the business

Remedies available to purchaser of Registered securities containing false

registration Statement:

1.May sue in court

- Every person who signed the registration statement
- Directors
-Every professionals who gives authority to a statement
- underwriter with respect to the security

Rules on Tender Offers

Every person or group of persons acting in concert who intends to:

1. Acquire at least 15 % OF or
2. Acquire at least 30 % over a period of 12 mos. Of
> Any class of equity security of a listed corporation
> Any class of equity security of a corporation with assets of 50M and
having 200 or more stockholders with at least 100 shares each

Shall:
a. Make a tender offer to stockholders by filing with SEC a declaration to
that effect; and furnish the issuer a statement containing such of the information
required of issuers as SEC may prescrib, including subsequentor additional
materials

b. Publish all request or invitations for tender or materials making a tender

offer or requesting or inviting of such a security

c. Pay at time of filing of statement with SEC a filing fee

FOR THE PROTECTION OF THE SHAREHOLDERS INTEREST

Important Terms
Manipulation of Security Prices

Wash Sales – For the purpose of creating a false or misleading appearance of

active trading in any listed security in an exchange or any other trading market
To effect any transaction which invloves no change in the beneficial ownership
thereof
To enter order or orders with knowledge that a simulteneous order or orders
of the same size, thime and price has or will be entered by different parties
Perform similar acts where there is no change in the benefecial ownership

Markingthe close – Buying and selling securities at close of market in an effort

to alter the closing price of the security
Painting the Tape – engaging in a series of transactions that are reported series
of transaction that are reported publicly to give impression of activity or price
movement in a securoty
Squezzing the Float – taking advantage of a shortage of securities in the
market by controlling demeand side and exploiting market congestion during
such such shortages in a way as to create artificial prices
Hype and dump – engaging in buying activity at increasingly higher prices and
then selling securities in market at higher prices
Improper matched orders – engaging in transactions where both the buy and
sell orders are entered at the same time with the same prices and quantity by
different but colluding parties
Boiler Room operations – a well-organized operation where in a room there
would be well-trained salesmen operating over several phones and using high-
pressures sales talk to get investors to invest in securities offered
Scalping – where a person, like an investment advisor, purchases securities for his
own account before recommending that security and then sells the share at a profit
upon the rise in the market price following the recommendation
Daisy chain – a pattern of fictitious trading activity by a group of persons who lures
innocent people into the scheme
Flipping – operated where on office buys a particular stock for customers while
another office simultaneously recommends that its customers sell the stock, with the
stock being shifted from one office to another and the firm makes a profit and the
brokers earn there commissions

PD 902-A Sec. 5
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original
and exclusive jurisdiction to hear and decide cases involving.
(a)Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partnership, amounting to
fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder, partners, members of
associations or organizations registered with the Commission;
(b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates;
between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or
right to exist as such entity; and
(c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or
associations
Rules on Corporate rehabilitation

Grounds and Who may initiate Petition

Rule 4, 5, 6

1.Debtor (Corporation) – who foresess the impossibility of meeting its debts when
they respectively fall due. Group of companies when one of its constituent
corporations foresee the imposibility of meeting debts when they respectively fall
due, and the financial distress would likely adversely affect the financial condition
and/or operations of the other member companies of the group and/ or the
participation of the other group is essential under the terms and conditions of the
proposed rehabilitation plan
2.Creditor – Holding at least 20% of t debtor’s total liabilities may file a petition
3.Pre-negotiated plan – both creditor and debtor
requisites
a. Compliance with sec. 2 of rule 4
b. Affidavit showing the written approval or
endorsement of
creditor holding at least 2/3 of the total liabilities of
debtor
including secured creditors holding more than 50% of
the total
Jurisdiction/venue/ Nature of Proceeding

Rule 3

Nature – In rem, summarry and non adversarial in nature

Venue – RTC which has jurisdiction over the principal office of the corporation
if Manila it must be filed in the city or municipality where te pricipal office is
situated
for joint petition – RTC which has jurisdiction over the principal office of
the parent company

Important effects of the petition:

Sec. 7 Stay order

After 5 working days from filing, the court shal order:

A.Appointing a rehabilitation receiver and fixing his bond

B.Statying enforcement of all claims except: claims against letters of credit and
similar security arrangements issued by third party to secure payments of debtors
obligation, Foreclosure of a creditor of a property not belonging to a debtor but if
the owner is a gurantor he shall be entitled to the benefits of the stay
C. Prohibiting the debtor from selling , encumbering, transferring or disposing any
of its properties except in the ordinary course of business
D. Prohibiting the debtor from payments of his liabilities excepot under (e) (f) (g) or
as may be ordered by the court under Sec. 10
E. Prohibiting debtor’s suppliers og good or services from witholding supply in the
ordinary course of business
F. Directing the payment in full administrative expenses
G. Directing the payment of New Loans with court’s approval
H. Fixing the date of initial hearing not earlier than 45 days but not exceeding 60
days
I.Directing the petitioner for publication
J. Direct the furnishing of the orders to the creditors and Govt. Agencies (Sec.)
K. Direct the furnishing of the order to the foreign creditors
L. Direct all creditors to file their comment or opposition not later than 15 days
before the date of the initial hearing
M. Directing creditors and interested parties to secure from the court copies of the
petition and its annexes within such time as to enable them to file their comments
or oppositions and participate in the initial hearings.

Effectivity of the stay order:

Date of issuance until approval of the rehabilitaion plan or the dismissal of the
petition
Sec. 11 – Qualification of a receiver
Power of the Rehabilitation receiver – shall oversee and monitor only the
operations of the debtor during the pendency of the proceedings
> Considered as an officer of the court

Grounds for dismissal of Rehab Receiver

a.Fails without just cause to perform any of his powers and function
b.Any gorunds for removing a trustee under general principle of trust

Neccesity of submitting rehabilitaiton plan Sec. 18

The rehabilitation plan shall include

(a) the desired business targets or goals and the duration and coverage of
the rehabilitation; (b) the terms and conditions of such rehabilitation which
shall include the manner of its implementation, giving due regard to the
interests of secured creditors such as, but not limited, to the nonimpairment
of their security liens or interests; (c) the material financial
commitments to support the rehabilitation plan; (d) the means for the
execution of the rehabilitation plan, which may include debt to equity
conversion, restructuring of the debts, dacion en pago or sale or exchange
or any disposition of assets or of the interest of shareholders, partners or
members; (e) a liquidation analysis setting out for each creditor that the
present value of payments it would receive under the plan is more than that
which it would receive if the assets of the debtor were sold by a liquidator
within a six-month period from the estimated date of filing of the petition;
and (f) such other relevant information to enable a reasonable investor to
make an informed decision on the feasibility of the rehabilitation plan.
Effects of Rehabilitation plan Sec. 20

(a) The plan and its provisions shall be binding upon the debtor and
all persons who may be affected thereby, including the creditors,
whether or not such persons have participated in the proceedings
or opposed the plan or whether or not their claims have been
scheduled;
(b) The debtor shall comply with the provisions of the plan and shall
take all actions necessary to carry out the plan;
(c) Payments shall be made to the creditors in accordance with the
provisions of the plan;
(d) Contracts and other arrangements between the debtor and its
creditors shall be interpreted as continuing to apply to the extent
that they do not conflict with the provisions of the plan; and
(e) Any compromises on amounts or rescheduling of timing of
payments by the debtor shall be binding on creditors regardless
of whether or not the plan is successfully implemented.