Commercial Law Review - Zara Notes Corporation Law

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro CORPORATION CODE (BP BLG 68) *Corporati *Corpor ation on Code Code is the general general law on Private Private Corporation regarding to its creation, formation and powers.

Section Secti on 2 of th the e Corp Corpor orat ation ion Code Code::  “A corporation is an artificial being created by oper perati tio on of law law, hav having the ri righ ghtt of succession and the powers, attributes and properti prop erties es exp expres ressly sly authori authorized zed by law or incident to its existence.” B. Attr Attribut ibutes es of a C Corp orporat oration ion

INTROD NTRODUCTI UCTION: ON: A. Hi Hist stori orica call Backg Backgrou round nd

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Effectivity: May Effectivity:  May 1, 1980 Article XII Section 16 of the 1987 Constitution: Const itution: “The The Cong Congres ress s sh shall all not, not, ex exce cept pt by ge gene nera rall law, law, prov provid ide e for for the the form fo rmat atio ion, n, organ organiza izatio tion, n, or regul regulati ation on of private corporations. Government-owned or control con trolled led cor corpora poration tions s may be created created or established by special charters in the interest of the common good and subject to the test of economic viability.” *Cong ngrress ha has s lim limite ited powers ers in the form format atio ion, n, cr crea eati tion on an and d regu regula lati tion on of a private corporation. Purposes: 1. Unifo iformit rmity y

*GOCC is a private corporation with regard to fu func nctio tion n and and in the the mean meantim time e a publ public ic corporation with regard to ownership. Twin Cond Twin Condit itio ions ns must must be pr pres esen entt in forming a GOCC: 1. Int Intere erest st in in the the comm common on g good ood 2. Subject Subject to to the test test of of econom economic ic viabil viability ity - Means can survive alone in the market; can generate income which they they can can us use e for for thei theirr op oper erat atin ing g expenses

A. Statuto Statutory ry defini definition tion of of a Corpora Corporation tion

It exist by fiction of law only, hence it is subj subjec ectt to li limi mita tati tion ons s that that are are inherent because of its nature

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A co corpo rpora ratio tion n is a ju jurid ridic ical al per perso son n  which exists exists by process process of legal fiction Doctrine of Corporate Enti En titty/D y/Doctrin trine e of Separate Personality Personality  - A corporation is a legal or juridical person with a personality separate and apart from its individual stockhol stoc kholder ders s or mem members bers and from from any othe otherr legal legal ent entiti ities es to wh which ich it may be connected

OF

of

1. It is ent entit itle led d to own own prop proper erti ties es in its own name and its properties are are not not the the pro propert pertie ies s of it its s stoc st ockh khol old ders, ers, dire direct cto ors and and officers.

General Rule: Congress Rule: Congress is prohibited to enact a law directly forming a private corporation. Exception: GOCC Exception:  GOCC may be created by special charter.

ATTRIBUTES

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Conseq Cons eque uenc nces es/Im /Impli plica catio tions ns Separate Personality: Personality:

2. To av avoi oid d cor corru rupt ptio ion n

CONCEPT AND CORPORATION:

Artificial Being

A

Cases: Magsays Cases: Magsaysay-L ay-Labr abrado adorr v CA; Sulo ng Bayan v Araneta  *The interest of the stockholders over the properties of the corporation is merely inchoate. *Merely inchoat *Merely inchoate e bec becaus ause e the there re are are stil stilll cond condit itio ion n prec preced eden ents ts before the shareholders get their sh share are,, vi viz, z, in As Asse set, t, the there re are are disso dis solut lutio ion n and and sa sati tisf sfac acti tion on of claims; in profit-sharing, there are unres unrestri trict cted ed reta retaine ined d ear earnin nings gs and declaration by the Board of Directors. 2. It can inc incur ur obl oblig igat atio ions ns and its obligations are not the obligations 1

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro of its stockholders, directors and officers. Case: Francisco v CA 3. The

rights

belonging

to

the

corpora corporation cannot by the stockh stotion ckholde olders, rs, be directo direinvoked ctors rs and officers and vice versa. 4. Corporations are entitled to certain constitutional constitutional rights, i.e., righ ight agains inst unr nre easonable searches an and d seiz izu ure, due process clause. *It is not en enttitl itled to cer erttain cons consti titu tuti tion onal al righ right, t, i.e. i.e.,, righ rightt against self-incrimination particularly production of corporate documents. *Right against self-incrimination is applicable only to natural persons. Genera Gene rall Rule Rule::  Constitutional gu guar aran ante tees es are are ap appl plic icab able le to corporations. Exceptions: 1. Right against incrimination

self-

2. Fr Free eedo dom m to trav travel el Case: Bataan Shipyard v PCGG 5. It is lia liable ble for for to tort rt.. It is li liab able le when when th the e ac actt was was comm commit itte ted d by the the of offic ficer er or agent agent under under ex expr pres ess s dir direc ectio tion n or auth authori ority ty from from the the stockholders stock holders or members members acting as a body or generally from the directors as the governing body. 6. Genera rall lly y, the corp rpo ora rattio ion n is co cons nsid ider ered ed a nati nation onal al of the the country where it was incorporated (Place of incorporation test) *Exceptions: 1. In times of war, the nationality of a corporation is determined by the nationality of the contro controllin lling g stockh stockholde olders; rs; 2.

Under the Foreign Investment Act of 1991 7. Co Corp rpor orat atio ions ns are are in inc capab apable le of intent, hence, they cannot commit felo feloni nies es that hat are are pun punis isha habl ble e unde underr the the RP RPC. C. They They cann cannot ot commit crimes that are punis punisha hable ble under under sp spec ecial ial laws laws becaus bec ause e crim crimes es are persona personall in nature requiring personal perf perfor orma manc nce e of over overtt acts acts.. In addition, the penalty of imprisonment cannot be imposed. *C *Crim rimin inal al lia liabil bility ity falls falls upon upon to responsible officers. *R *Res espo pons nsib ible le offi office cers rs cann cannot ot invoke invo ke the doc doctrin trine e of sep separat arate e personality. *Corporations incarcerated.

cannot

be

8. Moral damages cannot be awarded in favor of corporations because they do not have feelings and mental state. *Corporations can claim damages such suc h as actual, actual, com compen pensat satory ory,, exemplar ary y, loss of ear arn ning ing capacity. Genera Gene rall Rule: ule:   Corporation cannot claim moral damages. Exception: If the corporation has Exception: If a good ood repu reputa tati tion on and and su such ch reputation was destroyed. Case: Coastal Pacific Trading v Southern Rolling Mills, Co. *In Fil iliipi pin nas Bro roa adcasting Network Inc. v. Ago Medical and Educational Center, the SC ruled that that a co corp rpora oratio tion n ca can n reco recove verr mora mo rall dama damage ges s unde underr Arti Articl cle e 2219 2219(7 (7)) if it was the the vi vict ctim im of defamation. Doctrine of Piercing the Veil of Corporate Entity – The doctrine that a corporation is a legal entity 2

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro distinct from the persons distinct persons composing it. It is a theory introduced for the purposes of convenience and to serv serve e th the e en ends ds of just justic ice. e. But But when when the the veil veil of corporate fiction is used as a shield to perpetuate fraud, to defeat public convenience, justify wrong, or defend crime, this fiction shall be disregarded and th the e in indi divi vidu dual als s co comp mpos osin ing g it wil illl be trea treate ted d identically. Case Ca ses: s: Ti Time mes s Tr Tran ansp spor orta tati tion on Co. Co. v Sant Santos os Sotelo; Concept Builders v NLRC *The doctrine of piercing the veil of corporate entity is the exception to the doctrine of corporate entity. *The users of this doctrine are: 1. Stockholder; 2. Group of stockholders; 3. Another corporation. Effects:: 1. Stockho Effects Stockholde lders, rs, officer officers s and corpora corporation tion are are in ef effe fec ct jo join intl tly y li liab able le;; 2. In ca cas se of two two corpora cor poratio tions, ns, they they will will be trea treated ted as one whe wherein rein they the y will be both both solidar solidarily ily liable. liable. (Ins (Instru trumen mentali tality ty rule) *Ther There e is no ef effe fect ct on the the exis existtence ence of eac each

1. Identical shareholders; 2. Same set of officers, directors, or trustees; 3. Use of same premises, properties, tools and equipments; 4. Engage practically in the same business; 5. The sa sam me manne annerr of ke keep epin ing g book books s and and records. *T *The he prob probat ativ ive e fact factor ors s of iden identi tity ty are are not not co conc nclus lusiv ive e but may may be co cons nside idered red as stro strong ng evidence. Creature of Law Arti Articl cle e XII XII Sect Sectio ion n 16 of the the 19 1987 87 Constitution: “The “The Congress shall not, except exc ept by general general law, provide provide for the formation, organization, or regulation of private corporations. Government-owned or contr ontrol olle led d co corp rpor orat atio ions ns may be cr crea eate ted d or esta establ blis ishe hed d by sp spec ecia iall charters in the interest of the common good and subject to the test of economic

corporation as long as their separate entity is used for legitimate purposes.

viability.” Concession Theory – Theory – It is a principle in the creation of corporat corporations, ions, under which a co corpo rpora ratio tion n is an artif artific icial ial cr crea eatur ture e  without any existence existence until it has receiv rec eived ed the impr imprim imat atur ur of the St Stat ate e ac actin ting g ac acco cord rdin ing g to law law,, throu through gh the the SEC. SE C. The The li life fe of the the corp corpor orat atio ion n is a concession made by the State.

Instrumentality Rule – When one corporation is so Instrumentality orga organi nize zed d and and co cont ntro roll lled ed and and its its affa affair irs s are are conducted so that it is in fact a mere instrumentality or adjunct of the other, the fiction of the corporate entity to the instrumentality may be disregarded. *The user is another corporation. Keyword: CONTROL Requisites:   1. Cont Requisites: Contro rol, l, not not me mere re ma major jority ity or complete stock control, but complete dominion, not only of finances but of policy and business in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; 2. Such control must have been used by th the e de defe fend ndan antt to com commit mit frau fraud d or wron wrong g in contrav con travent ention ion of plaintif plaintiff’s f’s legal legal rights; rights; 3. The afor afores esai aid d cont contro roll an and d brea breach ch of du duty ty must must proxim pro ximat ately ely caus cause e th the e in inju jury ry or un unjus justt los loss s complained of. Three cases of piercing the veil:  veil:   1. Fraud Cases – Cases – when a corporation is used as a cloak to cover fraud, or to do wrong; 2. Alter Ego Cases – Cases – when the corporate entity is merely a farce since the corporation is an alter ego, business business conduit conduit or inst instrum rumenta entality lity of a person or another corporation; 3. 3. Equity  Equity cases – cases – when piercing the corporate fiction is necessary to achieve justice or equity. Probative Factors of Identity:  Identity: 

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Right of Succession -

Capacit ity y to have continu inuit ity y of existence despite the changes on the persons who compose it. Thus, the perso per sonal nalit ity y co cont ntinu inues es despi despite te the the change chan ge of sto stockh ckholde olders, rs, members members,, board members or officers; death or disability.

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Also known as Principle of Perpetual Succession

Reason: To make the corporation more Reason: To stable •

Cre rea ature of enumerated attributes and properties

power ers s,

Doctrine Doctrin e of Limited Limited Cap Capacit acity y  – No corporation under the Corporation Code, shall possess or exercise any corporate powers, except those conferred by law, its Articles of Incorporation, those implied 3

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro from express powers and those as are necessary or incidental to the exercise of the powers so conferred. The corporation’s capacity is limited to such express, implied and incidental powers. *C *Corp orpor orat ation ion may may be rest restrai raine ned d from from enga engagi ging ng a part partic icul ular ar tran transa sact ctio ion n because it is beyond their powers. *General Capacity – Capacity – a corporation can perform any act for as long as it is lawful, moral and not contrary to public policy or order. Ultra Vires Doctrine – Doctrine – Even if the act is lawful, moral and not contrary to public order or policy but such act is not within the the ex expr pres ess, s, im impl plie ied d an and d inci incide dent ntal al powers of the corporation such act shall be void for being ultra vires. *These doctrines are based on Section 2 and Section 45 of the Corporation Code.

C. Cla Classi ssific ficatio ation n of Private Private Corpor Corporatio ations: ns: 1. As to to exis existe tenc nce e of Sto Stock cks: s: Stock Corporatio Corporation n  – Cor Corpora poration tions s which which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus sur plus profits profits on the basis of the shares shares held. (Sec. 3) Non-stock Corporation Non-stock Corporation   – A co corp rpora oratio tion n  where no part of of its income income is distributable distributable as as divi divide dend nds s to its its memb member ers, s, trus truste tees es,, or of offic ficer ers, s, subje subject ct to the the provis provision ions s of this this Code on dissolution. (Sec. 87) Q:  Q:  Is it corr correc ectt to say say that that a No Nonn-st stoc ock k corporation corpora tion cannot generate income on their own? A: NO 2. As to fun funct ctio ion/o n/orga rgani nize zers rs:: Public Corporation – Corporation – for public purpose and organized by the State. Private Corporatio Corporation n  – for for prof profit it ma maki king ng functions and organized by private persons alone or with the State

3. As to la laws ws of Inco Incorp rpor orat atio ion n (P (Pla lace ce of Incorporation) : Domest Dome stic ic Corp Corpor orati ation on   – corp corpor orat atio ion n form formed, ed, orga organiz nized ed or ex exist isting ing unde underr the the Philippine Laws. Foreign Corporation – Corporation – corporation formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. (Sec. 123) *L *Lice icens nse e is nece necess ssary ary for; for; 1. Re Regu gulat latio ion n purposes and 2. Access to local courts. 4. As to legal status: De Jure Corporation – Corporation – corporation created in strict or substantial compliance with the mandat man datory ory requirem requirement ents s for incorpor incorporatio ation n and the right of which to exist as a corporation cannot be successfully attacked or questioned by any party even in a direct proceeding for that purpose by the state. De Facto acto Corp orporati ration on   – the due incorporation of any corporation claiming in good goo d fait faith h to be a co corpo rpora ratio tion n under under the the Corporation Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such co corpo rporat ratio ion n ma may y be a par party ty.. Suc Such h inquir inquiry y may be made by Solicitor General in a quo  warranto  warrant o proceeding. proceeding. (Sec. 2 20) 0) -

organized with a colourable compliance with the requirements of a valid law and its existence cannot be inquired collaterally.

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There is an irregularity or defect in the constitution or organization.

Can be compared to a voidable contract, i.e., valid until annulled. *Can be challenged by the State later on. Cases: Hall v Piccio; Seventh Advent Adv entist ist v Northe Northeaste astern rn Min Mindan danao ao Mission *The filing of the Articles of Incorporation Incorporation and and the is issu suanc ance e of the the ce cert rtif ifica icate te of registra regi stratio tion n are the ess essenti ential al requis requisites ites 4

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro for the existence of a de facto corporation. Requisites:   Requisites: 1. The existence of a valid law under  which it may be incorporated; incorporated; 2. An attempt in good faith to incorporate; 3. Use of corporate powers; 4. Filing of the Articles of Incorporation; 5. Subs Subseq eque uent nt comp compli lian ance ce with with the the requirement of law. *In both corporations, there must be a certificate of registration issued.

directors can be elected either directly or indirectly by such other corporation. It is always controlled. Open Corporatio Corporation n  – one one wh whic ich h is open open to any person who may wish to become a stockholder or member thereto. Close Corporation – Corporation – those whose shares of stock are held by limited number of persons like the family or other closely knit group. (Sec. 96) FORMATION ION AND ORGANIZA IZATIO ION N PRIVATE CORPORATION:

OF

A

Doctrin Doctr ine e of Corp Corpor orati ation on by Esto Estopp ppel el – All persons pers ons who assume assume to act as a corpora corporation tion knowing it to be without authority to do so shall be liab liable le as ge gene nera rall pa part rtne ners rs for for all all de debt bts, s, liabilities and damages incurred or arising as an result thereof: Provided, however, that when any such such oste ostens nsibl ible e corpo corporat ration ion is su sued ed on any any

A. Subm Submis issi sion on of Ar Arti ticl cles es of Inco Incorp rpor orat atio ion; n; contractual significance

transaction intoby byititas assuch, a corporation or on any tort entered committed it shall not be allo allow wed to us use e as a de defe fens nse e its its lack lack or corporate personality. (Sec. 21) - Group of persons which holds itself out as a corporation and enters into a contract with a third person on the strength of such appearance cannot be permitted to deny its existence in an action under said contract. Case: Lim Tong Lim v CA *Lim is stopped stopped because because he benefit benefited ed from the transaction. Remedy:   To ran Remedy: ran after after those those perso persons ns responsible for the representations Essence:   They Essence: They are are prec preclu lude ded d from from denying their existence by their previous act or conduct Holdin Hol ding g Corpor Corporatio ation n – it is on one e whic which h cont contro rols ls an anot othe herr as a subs subsid idia iary ry by the the po powe werr to elec electt management. It is one that holds stocks in other companies for purposes of control rather than for mere investment.

Article of Incorporation – Incorporation – is the charter of the corp rpo ora rattion ion, and the cont ontrac acttual relat relation ionsh ships ips betw betwee een n the the St State ate and and the the corporation, the stockholder and the State, and between een the corpor porati tio on and and its stockholders.

*The life of a corporation commences from the issuance of the Certificate of Registration by the the SE SEC C upon upon fil filin ing g of the Articl Articles es of Incorporation and other documents.

Contractual Significance:  Significance:  1. The issuance of a certificate of in inco corp rpor orat atio ion n sig igna nals ls the the birt birth h of the the corporation’s juridical personality; 2. It is an esse essent ntia iall requ requir irem emen entt for for the the existence of a corporation, even a de facto one.

B. Contents and Form of the Articles of Incorporation (Secs. 14 and 15) Contents of Articles of Incorporation: Incorporation: 1. Corporate Name;

Affiliate  – one related to another by owning or being Affiliate – owned by common management or by a long-term lease of its properties or other control control device. It may be the controlled controlled or controlling controlling corporation, corporation, or under common control.

2. Purpose Clause;

Subsidiary Corporation Corporation –  – one which is so related to an anot othe herr corp corpor orat atio ion n th that at the the ma majo jori rity ty of its its

5. Incorporators;

3. Principal office; 4. Term of existence;

6. Directors or trustees; 5

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Reason: public domain; can be used by Reason: public anyone; public use.

7. Capitalization; 8. Shares of stock;

Exception:  Do Exception:  Doctr ctrin ine e of Seco Second ndary ary Meaning   – a word or phrase originally Meaning incapable of exclusive appropriation with

 9. Treasurer’s Affidavit.

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refer ref erenc ence e to an art articl icle e on the the ma mark rket et,, beca becaus use e geog geograp raphic hicall ally y or othe otherw rwis ise e desc descrip ripti tive ve,, mi migh ghtt neve neverth rthele eless ss have have been used so long and so exclusively by one producer with reference to his article that in that trade and to that branch of the purchasi purc hasing ng publ public, ic, the wor word d or phra phrase se has come to mean that the article was his product.

Corporate Name Purpose: Identification Purpose:  Identification *Corporation can not adopt any name or group of words at its pleasure because of statutory statuto ry limitation, limitation, viz., Sec. 18 of the Corporation Code  Code  which provides that: “No corporate name may be allowed by the SEC if the proposed name is identical  or  or deceptively or confusingly similar to that of any existing co corp rpor orat atio ion n or to an any y ot othe herr name name already protected by law  or   or is patentl is patently y

Requisites:   Requisites: 1. Period of use; 2. The use must be exclusive.

deceptive, decepti ve, confus confusing ing or contra contrary ry to existing existin g laws. laws. When When a chan change ge in the the corp rpo ora ratte name is approved, the Comm Co mmis issio sion n shall shall is issu sue e an amen amende ded d certi certific ficat ate e of in inco corp rpora oratio tion n under under the the amended name.

Case: Lyceum of the Philippines *The The ex excl clus usiv ivity ity requi requirem rement ent was was not not satisfied by Lyceum of the Philippines. *In case of change of name, the corporation is not dissolve nor create a new corp rpo ora rattion ion; it als lso o does oes not not extinguish the corporate liability.

SEC Guid SEC Guidel elin ine e ”x x x b. In order to pr prev even entt conf confus usio ion n an and d diff diffic icul ulti ties es of administration, supervision and control, if the the pr prop opos osed ed na name me cont contai ains ns a word word already use as a part of the firm name or style of a registered entity, the proposed na name me must must cont contai ain n tw two o othe otherr word words s different and distinct from the name of th the e co comp mpan any y al alre read ady y regi regist ster ered ed or protected by law. x x x” Case: Ang Mga Kaanib Ni Jesu esus Cristo

*Chang ange of nam ame e can be done by amending the Articles of Incorporation. Procedure:   Procedure: 1. Ob Obta tain in appro approva vall of major majorit ity y of the the Board and 2/3 stockholders; 2. Submission to the SEC for approval. •

Purpose Clause *O *Only nly one one prima primary ry purpos purpose. e. Pri Prima mary ry purpose defines the business activities of the corporation. It is the ordinary course of business of the corporation.

*The *The ph phra rase se “Ang “Ang Mga Mga Ka Kaan anib ib”” are are  words merely descriptive descriptive of membership membership  while the phrase “Sa Bansang Pilipinas” are merely descriptive of the place.

*Secondar ary y Pur Purpose is for fut future expa expans nsio ion. n. Th Ther ere e is no li limi mitt on the the secondary purpose.

*Both parties are religious institutions *Both use the acronym H.S.K.

*In case the primary purpose is not viable then secondary purpose may be used.

As a rule, rule, generic name or descriptive  word may may be used as a corporate corporate name. name. •

Principal Office 6

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro back to the date of the passage of the resolution of the stockholders to extend the life of the corporation. However, the doctrine of relations applies if the failure to file the application for existence within the the term term of the the corp corpor orat atio ion n is due due to negl neglec ectt of the the offi office cerr with with wh whom om the the ce cert rtifi ifica cate te is requir required ed to be fil filed ed or to  wrongful  wrongf ul refus refusal al on is is part to rec receive eive it.

*T *The he pr princ incipa ipall place place of busin busines ess s may may de dete term rmin ine e th the e venu venue e of cour courtt case cases s invo involv lvin ing g corp corpor orat atio ions ns.. It ma may y also also determ det ermin ine e if servi service ce of su summ mmon ons s and and notic not ices es was was prope properly rly made made.. It is al also so im impo porrtan antt fo forr tax tax purp rpo oses (loc (loca al taxation). *The SEC requires the exact address to be indicated in the Articles of Incorporation.

*The delay in submitting the application for extension is justifiable.

*It is the residence of the corporation. It is where where the corpora corporation tion mainta maintains ins its books and records and where normally the bulk of its business is being conducted or undertaken. *For *For per perso sona nall residence. •

acti action on,,

Keywords:   Keywords: 1. Excusable delay; 2. Beyond the control of the corporation (insuperable intervening causes)

venue enue is the the •

*Once an incorpor ora ator alway lways s an incorp inc orpora orator tor.. (Fait Fait ac acco comp mpli li   – an acco accomp mpli lish shed ed fact fact wh whic ich h cann cannot ot be altered)

Term of Existence *A corporation has a maximum term of 50 years. It may be extended for a period not exce exceed eding ing 50 ye years ars in any any single single instance.

*They are the signatories to the Articles of Incorporation.

As a rule, rule, no extension can be made earlier than 5 years prior to the expiration of the term.

*They are corporation

*No *No limi limita tati tion ons s rega regard rdin ing g nu numb mber er of extension can apply.

originally

forming

the

Q: What is the reason behind the phrase that that an inco incorp rpor orat ator or is not not alwa always ys a corporator?

Reason: To compel the stockholders to Reason: meet the corporation’s term.

A: A:    To be toanown inc incaorshare por ora atorunlike it isasnot necessary a corporator.

Exception: If for Exception: for co comp mpel ellin ling g reas reason ons, s, earlier extension will be allowed.

*Number is limited to 5 to 15.

*During the three year winding up period, the corporation still has personality but activities are limited to the liquidation of the corporation affairs and not to transact further business.

*They must have a contractual capacity. *Juridical person cannot create another  juridical person.

As a rule, rule, after the term has expired, no more extensions be allowed or entertained by the SEC.

*Th Ther ere e is no ci citi tize zen n requ requir irem emen entt but but special laws may require otherwise. *Maj ajor orit ity y must must be a resi reside dent nt of the the Philippines.

Reason:: No more period to extend. Reason Exception: Doctrine of Relation – Exception: Relation – The fil filing ing and recor recordin ding g of a ce certi rtifi fica cate te of extensi exte nsion on after after the term term cannot cannot relate relate

Incorporators

•

Directors and trustees

7

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *The Board of Directors is the governing body in a stock corporation while Board of Trustees is the governing body in a non-stock corporation.

Subscribed Capital – Capital – that portion of the authorized capital stock that is covered by subscription agreements whether fully paid or not.

*They

Paid-Up Paid-U p Capital  Capital  – the the port portio ion n of the

exerc rcis ise e

the

powers

of

the

authorized capital stock which has been subscribed and actually paid.

corporation. Qualifications:   Qualifications:

Outstanding Capital Stock  Stock  – the total shares of stock issued to subscribers or stoc stockh khold olders ers,, whet whether her or not not fully fully or partially paid except treasury shares so long as there is a binding subscription agreement.

1. Every director must own at least one (1) share of the capital stock; 2. Majorit Majority y of the directors directors or truste trustees es must be residents of the Philippines. *An Any y dire direct ctor or who who ceas ceases es to be the the owner of at least one share of the capital stock of the corporation of which he is a dire direct ctor or shal shalll ther thereb eby y ceas cease e to be a director. *Trustees of non-stock corporations must be members thereof. *Initial directors/trustees shall hold office for one year until until the their ir suc succes cessor sors s are elected and qualified. •

Capitalization Section 14(8) states 14(8) states that: “If it be a stock corporation, the amount of its authorized capi capita tall st stoc ock k in lawf lawful ul mone money y of the the Philippi Phil ippines nes,, the number number of sha shares res into  which it is divided, and in case the share are par value shares, the par value of ea each ch,, the the na name mes, s, na nati tion onal alit itie ies s an and d residen resi dences ces of the orig original inal subs subscrib cribers ers,, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated.” *It is required that at least 25% of the subscribed capital must be paid and in no case may be paid-up capital be less than P5,000. Authorized Capital Stock – Stock – the amount fixed in the articles of incorporation incorporation to be subscribed and paid by the stockholders of the corporation. *Shows the total number of shares

•

Shares of stock Q: Why shares of stock? A: A:   Beca Becaus use e ther there e is a shar share e on the the capitalization. Economic Value: 1. expectancy on the share in the profits 2. expectancy on the share of assets in case of dissolution/liquidation. Political Value: 1. vote 2. cont contro roll in the the mana manage geme ment nt of the the corporation. Doct Do ctri rine ne of Equa Equali lity ty of Shar Shares es   – “Except “Exce pt as other otherwi wise se prov provide ided d in the the articles of incorporation incorporation and stated in the certificate of stock, each share shall be equa equall in all all resp respec ects ts to ever every y othe otherr share.” - Prov Provid ides es that that wh wher ere e the the Arti Articl cle e of Inco Incorp rpor orat atio ion n do not not prov provid ide e for for any any distin dis tinct ction ion of the the sh share ares s of stoc stock, k, all sh shar ares es iss issued ued by the the co corpo rpora ratio tion n are pres presum umed ed to be equa equall and and enjo enjoy y the the same rights and privileges and are also subject to the same liabilities. Classes of Shares: 1. Par Value Share Share –  – shares that have a nominal value in the certificate of stock. 8

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Contractu Contra ctual al Significa Significance nce::  The minimum price at which the shares are to be issued.

General Rule:  Rule:  Shareholder Shareholder owning non-v non -voti oting ng sh share ares s has has no rig right ht to vote.

*The price is fixed. It is stated in the Articles of Incorporation.

Exceptions:   Exceptions:

2. No Par Value Share – Share – those shares  which do not have nominal nominal value. Howe Ho weve ver, r, th they ey have have issue issued d va value lue stated in the certificate or articles of incorporation. *There is flexibility in the price. *Th The e pric price e is deter etermi mine ned d by the the Board.

1. Amendm endmen entt of the the arti articl cles es of incorporation; 2. Adoption and amendment of bylaws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or subs substa tant ntia iall lly y all all of the the co corp rpor orat ate e property;

Limitations:: Limitations

4. Inc Incurri urring, ng, creatin creating g or incr increas easing ing bonded indebtedness;

1. No par value shares cannot have an issued price of less than P5.00;

5. Incre Increas ase e or decr decreas ease e of ca capi pital tal stock; 6. Merger or consolidation of

2. The The entir entire e co cons nsid idera erati tion on for for its its issuanc iss uance e constitu constitutes tes cap capital ital so that that no part of it should be distributed as dividends; 3. They cannot be used as preferred stocks; 4. They cannot be issued by banks, trust companies, insurance co com mpani panie es, publ public ic util utilit itie ies s and and build ilding ing and loa loan associat iation ion (Reason: Reason:   imbued with public interest); 5. The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares; 6. Once Once is issu sued, ed, they they are deem deemed ed fully paid and non-assessable. 3. Voting Voting Shares Shares   – shar shares es wi with th the the right to vote. They have the right to participate in the management of the corporat corp oration ion through through the exercis exercise e of such right. 4. Non-voting Shares – Shares – shares without the right to vote. *Has only a limited right to vote.

the corporation with another corporation or other corporations; 7. Investment of corporate funds in another anot her corp corpora oration tion or bus busine iness ss in ac acco corda rdanc nce e wi with th the the Corp Corpora oratio tion n Code; 8. Dissolution of the corporation. *The exc excepti eptions ons are exc exclusi lusive; ve; the list is a closed list Statutory Constraint: Sec. Constraint: Sec. 6 of the Corporation Code *The corporation cannot provide for shares with no voting right General Rule: Only Rule: Only redeemable and pref prefer erre red d shar shares es are are depr depriv ived ed of voting right. Exception: Common shares may be deni denied ed of it its s votin oting g ri righ ghtt in the the following instances: 1. Delinquent in paying payi ng the subs subscrip criptio tion; n; 2. If ther there e  was a founde founder’s r’s share where it was given the right to vote exclusively for 5 years (Sec. 7). 5. Comm Common on Shar Shares es   – the most common type of shares which enjoy no preference. 9

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *The basic class of stock ordinarily and usually issued without extraor ext raordin dinary ary rights rights and privileg privileges, es, and the owners thereof are entitled to a pro rata share in the profits of the corpo corporat ratio ion n and in its as asse sets ts up upon on diss dissol olut utio ion n an and, d, like likewi wise se,, in the the mana ma nage geme ment nt of its affa affairs irs wi with thou outt preference or advantage whatsoever. 6. Prefe ferrred Shares- sh shar ares es which which enjoy preference as to dividends or assets upon dissolution as stated in the Articles of Incorporation. Reason: To Reason:  To attract investors. *Preference does not give them a lien up upon on the prop propert erty y nor make make them them creditors of the corporation. *Ch Char arac acte teri rize zed d shares.

as

once it is declared, the shareholder is entitled to the said arrears; 6. NonNo n-cu cumu mulat lative ive prefe preferr rred ed shares – shares  – not entitled to arrears only to present dividends. 7. Rede Redeem emab able le Shar Shares es – are thos those e  which permit the issuing corporation corporation to redeem eem or pur purchase it its s own shares. Limitations:   Limitations: 1. Redeemable share res s may be issued only when expressly provided for in the Articles of Incorporation; 2. The terms and conditions affecting said shares must be stated both in the cer certif tificat icate e of sto stock ck represe representi nting ng such share;

re red deema eemabl ble e

Kinds:   Kinds: 1. Preferred shares as to assets  assets   – share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation; 2. Preferred shares as to dividends – sh shar are e whic which h gi giv ves the the hold holde er thereof preference in the distribution of the dividends to the extent agreed upon before any dividends at all are paid paid to th the e hold holder ers s of co comm mmon on shares; 3. Participating preferred shares  shares  – the holders thereof are still given the right to participate with the common stoc stockh khold olders ers in di divid vidend ends s beyo beyond nd their stated preference; 4. Non-p No n-parti articip cipatin ating g prefer preferred red shares   – wher shares where e ther there e is no such such participation; 5. Cumul Cumulative ative preferred preferred shares shares  – the shareholder is entitled to recover dividends in arrears. While dividend declara dec laratio tion n may not be com compell pelled, ed,

3. Redeemable share res s may be depr depriv ived ed of vo voti ting ng ri righ ghts ts in the the Arti Articl cles es of Inco Incorp rpor orat atio ion, n, unle unless ss otherwise provided in the Corporation Code; 4. Th The e corp corpor orat atio ion n is requ requir ired ed to maintain a sinking fund to answer for redemption price if the corporation is required to redeem; 5. The redeem eemable share res s are deeme dee med d retir retired ed upon upon rede redemp mptio tion n unle unless ss othe otherw rwis ise e prov provid ided ed in the the Articles of Incorporation; 6. Unre Unrestr stricte icted d reta retained ined earnings earnings is not necessary before shares can be redeemed but there must be sufficient assets to pay the creditors and to answer for operations. 8. Trea Treasu sury ry Shar Shares es –  shares shares which have been earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, dona donati tion on,, rede redemp mpti tion on or thro throug ugh h some lawful means. -  Shares which are previously issued by the corporation but subsequently reacquired by the corporation. 10

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *Retired thus can no longer be reissued.

General Rule: 25% General Rule: 25% must be subscribed and 25% must be paid.

*They are not entitled to dividends.

Exception: If the law provides otherwise, Exception: If i.e., special laws.

*They are not entitled to voting rights. Rationale: to prevent abuse by the Rationale: management. *These shares may again be dispose disp osed d of for a rea reason sonable able price fixed by the Board of Directors. 9. Foun Founde ders rs’’ Shar Shares es – clas classifi sified ed as such suc h in the arti articles cles of incorpor incorporati ation on may ma y be give given n cert certai ain n righ rights ts an and d privileges not enjoyed by the owners of other stocks, provided that where th the e excl exclus usive ive right to vo vote te an and d be voted for in the election of directors is grant gra nted, ed, it must must be for for the the limite limited d period not to exceed 5 years subject to the approval of the SEC. The 5 year period shall commence from the date of the approval by the SEC. •

Treasurer’s affidavit *The SEC shall not accept the Articles of Incorpor Inco rporati ation on of any stock stock corpora corporation tion unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least 25% of th the e auth autho ori riz zed ca capi pita tall stoc stock k of the the corporation has been subscribed, and at least 25% of the total subscription has be been en fu full lly y pa paid id to him him in ac actu tual al cash cash and/or in prop and/or property erty the fair valuation valuation of  which is equal equal to at least 25% of the the said subscription, such paid up capital being not less than P5,000. *If the Treasurer’s affidavit is false such act is tantamount to fraud. (PD 902-A) *Fraud on the part of the corporat corporation ion is a ground for revocation or suspension of license depending upon the extent of the violation committed. *If there’s there’s no Treasu Treasurer’ rer’s s Affida Affidavit, vit, the first ground shall nonc noncom ompl plia ianc nce e with ith requirement.

apply, i. e., the the mi mini nim mum

C. Gr Grou ound nds s for for reje reject ctio ion n of the the Ar Arti ticl cles es of Incorporation 1. The art rtiicles of inc incorp rpo ora rattion ion or any amendment thereto is not substantially in ac acco cord rdanc ance e wi with th the the form form presc prescri ribed bed herein; 2. The purpose or purposes of the corporation corpora tion are patently patently unconstitution unconstitutional, al, illegal, immoral, or contrary to government rules and regulations; 3. The The Tr Trea easu surer rer’s ’s Af Affid fidav avit it concern concerning ing the amount amou nt of capi capita tall and/or paid is false;

st stoc ock k

subs subscr crib ibed ed

4. The perc rce entage age of owner ers ship of the capital stock to be owned by citizens of the Phil Philippi ippines nes has not bee been n com complie plied d  with as required by existin existing g laws or the Constitution. Dual Franchise  Franchise Requirement Requirement:: No articles of incorpor inco rporatio ation n or ame amendm ndment ent to article articles s of incorporation of banks, banking and quasibank bankin ing g inst instit itut utio ions ns,, buil buildi ding ng and and lo loan an as asso socia ciati tion ons, s, tr trus ustt co comp mpani anies es and other other fina inanc ncia iall int intermedia ediarries ies, ins insura ran nce co comp mpan anie ies, s, publi public c utili utilitie ties, s, educ educati ationa onall institutions, and other corporations governed by speci pecial al la laws ws sh shal alll be acc ccep epte ted d or appr approv oved ed by the the Com omm mis issi sion on unle unless ss accompanied by a favourable re rec commendati tio on of the appr pro opri ria ate government agency to the effect that such articles or amendment is in accordance with law. D. Com Commen mencem cement ent of Corporat Corporate e Existenc Existence e Sec. 19 of the Corpo Corporat ration ion Code Code   states that that “ A priv privat ate e corpo orpora rati tion on form formed ed or organize orga nized d und under er this Code Code com commen mences ces to have have corp corpor orat ate e exis existe tenc nce e and and ju juri ridi dica call personality and is deemed incorporated from the the date date the the SE SEC C is issu sues es a cert certif ific icat ate e of 11

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro incorpora incorp oratio tion n under under its its off offic icial ial se seal; al; and and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under under th the e name name stat stated ed in the the arti article cles s of inc ncor orp por ora atio tion for the perio riod of time ime menti me ntione oned d th there erein, in, unles unless s sa said id perio period d is ex exte tend nded ed or th the e corp corpor orat atio ion n is soon sooner er dissolved in accordance with law.” *For For pur purpos poses es of de deter termi mini ning ng wheth whether er a corporation enjoys the status of a de facto corp corpor orat atio ion, n, it must must ha have ve be been en at leas leastt issued a certificate of registration.

E. Amendm Amendment ent of the the Article Articles s of Incorpo Incorporati ration on

commenced the transaction of its business but su subs bseq eque uent ntly ly beco become mes s co cont ntinu inuou ously sly inoperative for a period of at least 5 years, the same shall be a ground for the suspen sus pensio sion n or revo revocat cation ion of its corpora corporate te franchise or certificate of incorporation. This provis pro vision ion sh shall all not not apply apply if the the failu failure re to organize orga nize,, com commen mence ce the tran transac sactio tion n of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the SEC.” *Th The e peri period od mu must st be coun counte ted d fr from om the the issuance of the Certificate of Incorporation. *Auto Automat matic ic dissolut dissolution ion is not con contem templat plated ed under Section 22. (SEC Opinion).

Sec. 16 of the Corporati Sec. Corporation on Code Code   states that: tha t: “Unless “Unless otherw otherwise ise prescr prescribed ibed by this

*Section 22 must be read in conjunction with Sec 6(1) of PD 902-A which requires that the

Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least 2/3 of the outstanding outsta nding capital stock, stock, without without prejudice to the appraisal right of dissenting stockholde lders in accordance with ith the provisions of this Code, or the vote or written assent of at least 2/3 of the members if it be a non-stock corporation.”

corporation must be given the opportunity to be heard in compliance with the requirement of due process before the revocation of its license.

CONTROL AND CORPORATION:

MANAGEMENT

1. By Stockholders/Shareholders; 2. By Corporate Officers;

*There may be an amendment by inaction. Amendment by Inaction – Inaction – Upon filing with the SEC of the amendment and the Comm Co mmis issi sion on fa fail iled ed to ac actt on it wi with thin in 6 months from the date of filing for a cause not attributable to the corporation.

3. By Directors/Trustees

Sec. 22 of the Corporati Sec. Corporation on Code Code   states that th at:: “If a corpo corporat ration ion does does not forma formally lly organize and commence the transaction of its business or the construction of its work  within 2 ion, years from the date its incorpo inc orporat ration, its corpora cor porate te powers pow ers of cease cease and and th the e corpo orpora rati tion on shall hall be dee deemed med dissolv dis solved. ed. However However,, if the corpor corporatio ation n has

A

A. Lev Levels els of Cor Corpora porate te Con Contro troll

*It is effective upon the approval of the SEC.

F. Effect Effects s of Non-U Non-Use se of Corpo Corporat rate e Charter Charter

OF

B. Boar Board d of of D Direc irectors tors/Tr /Trust ustees ees •

General Powers of the Board Sec. 23 of the Corporation Code states Code states that: “Unless otherwise provided in this Code, ode, the the corpo orpora rate te powe powers rs of al alll co corp rpora orati tions ons form formed ed unde underr this this Co Code de shall be exercised, all business cond conduc ucte ted d and and all all prop proper erty ty of such such corporations controlled and held by the boar board d of dire direct ctor ors s or tr trus uste tees es to be elec electe ted d fr from om amon among g the hold holder ers s of stocks, or where there is no stock, from among the members of the corporation, 12

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro ca caus use e lo loss sses es to the the corpo orpora rati tion on or decrease the profits of a department.

 who shall hold office for one year until the their successors are elected and qualified.”

*Great *Gre at resp respec ectt is acco accord rded ed to the the decisions of the Board of Directors/Trustees.

Powers of the Board of Directors:  Directors:  1. Corporate Powers;

*The *The di dire rec ctors tors are are not not li liab able le to the the stockholders in performing such acts.

2. Manage the Corporation; and 3. Control over and hold the properties of the Corporation. *Bo Boar ard d of Dire Direct ctor ors/ s/Tr Trus uste tees es is statutory representative of corporation.

the the the

General Rule: General Rule:  Al Alll co corpo rporat rate e powe powers rs emanate from the Board of Directors/Trustees. Exception: Unless otherwise provided in this Code. (Limiting (Limiting Clause) The limiting clause  clause  mea means ns that there there are certain corporate matters that cannot be done by the Board by reason that such matters fall upon the shareholders; or corp corpor orat ate e matt matter ers s that that cann cannot ot be resolved by the Board alone, i.e., it must be done with ith the approval of the the shareholders. •

•

Qualifications of the Board Members Sec. 23 of the Corporation Code states Code states that: “Every director must have at least one one shar share e of the the capi capita tall st stoc ock k of the the co corp rpora orati tion on of wh which ich he is a dir direc ecto tor, r,  which share shall stand in his name on the books of the corporation. Any director  who ceases to be the owner of at least one one shar share e of the the capi capita tall st stoc ock k of the the corporation corpora tion of which he is a director director shall thereby cease to be a director. Trustees of nonnon-st stoc ock k corpo orpora rati tion ons s must ust be memb me mber ers s ther thereo eof. f. A ma majo jori rity ty of the the directors or trustees of all corporations orga organi nize zed d unde underr this this Co Code de mu must st be residents of the Philippines.”

Business Judgment Rule

*In order to be eligible as director, what is mate ma teri rial al is the the lega legall ti titl tle e to and and not not beneficial benefic ial title or ownership of the stocks appearing on the books of the corporation.

Business Judgment Business Judgment Rule  Rule  – questions of policy or management are left solely to

*The directors/trustees directors/trustees must be natural persons.

the the ho hone nest st de deci cisi sion on of offi office cers rs an and d directors of a corporation and the courts are withou withoutt authori authority ty to substit substitute ute their their  judgmentt for the  judgmen the judgment judgment of the boa board rd of dire direct ctor ors; s; th the e bo boar ard d is the the bu busi sine ness ss manager of the corporation and so long as it acts in good faith its orders are not reviewable by the courts or the SEC. - A re reso solut lution ion or trans transac actio tion n pursu pursued ed  within the corporate corporate powers and business busines s operations operations of the corpora corporation, tion, and passed in good faith by the board of directo dire ctors/ rs/trus trustee, tee, is valid valid and binding binding,, an and d gen ene erally lly the courts hav ave e no au autthori rity ty to rev evie iew w the same and subs substit titut ute e th their eir own own judgm judgmen ent, t, ev even en  when the exercise exercise of such power may

*They must also be of legal age. *He must possess other qualifications as may be prescribed in the by-laws of the corporation. *Under Se Sec. c. 27 of the the Co Corp rpor orat atio ion n Code:: “N Code “No o pers person on conv convic icte ted d by fi fina nall  judgmentt of an offense punisha  judgmen punishable ble by impriso imp risonme nment nt for a per period iod exceed exceeding ing 6 years, or a violati ation of this Code committed within 5 years prior to the date of his his elec electi tion on or appo appoin intm tmen ent, t, shal shalll qualify as a director, trustee or officer of any corporation.” Reason: The position is based on trust Reason: The and confidence. 13

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *No citizenship requirement. *The By-Laws *The By-Laws may provide provide additio additional nal qualifications/disqualifications. •

Election of the Board Members Sec. 24 of th Sec. the e Corp Corpor orat atio ion n Cod Code provides that: “At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of th the e memb members ers entit entitled led to vo vote te.. The The election must be by ballot if requested by any votin voting g stoc stockh khold older er or memb member er.. In stock stoc k corpora corporation tions, s, every every stockh stockhold older er entitl ent itled ed to vote vote sh shal alll have have the righ rightt to vote in person or by proxy the number of share shares s of stoc stock k stand standing ing,, at the the time time fixed in the by-laws, in his own name on the stoc stock k bo book oks s of the the co corp rpora oratio tion, n, or  where the by-laws by-laws are silent at the time of the election; and said stockholder may vote such number of shares for as many pe pers rson ons s as th ther ere e are are dire direct ctor ors s to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute distribute them on the the same same pr prin inci cipl ple e amon among g as many many candidates as he shall see fit: Provided, that the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole num number ber of di dire rect ctor ors s to be el elec ecte ted: d: Provided Prov ided,, howeve however, r, that that no delinqu delinquent ent stock stoc k shall shall be voted. voted. Unless Unless otherw otherwise ise provided in the articles of incorporation or in the by-laws, members of the corporations corporat ions which have no capital capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason,

no election is held, or if there not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capit apital al stoc tock, a major ajorit ity y of the member entitled to vote.” *It is the stockholders or corporators who elect members of the Board of Directors. *T *The he only only proc procedu edure re requ require ired d by the the Code is through Election Election.. There can be no other modes. *The elec ecti tio on must be by bal allo lott if requ reques este ted d by any any voti voting ng me memb mber er or stockholder. *A stockholder stockholder cannot be deprive deprived d in the articles of incorporation or in the by-laws of his statutory right to use any of the method meth ods s of voti voting ng in the the elec electi tion on of directors. *No delinquent stock shall be voted. *I *Itt is not not requ require ired d that that th the e ca cand ndida idate te received the majority vote, what the law provides is only plurality of votes. *Majority number is required only for the existence of a quorum. Not incl include uded d in outstan outstandin ding g cap capital ital stocks: 1. stocks:  1. Unissued stocks; 2. Non-voting stocks; 3. Treasury Shares. Methods of Voting:  Voting:  1. Straight Voting  Voting  – every stockholder may vote such number of shares for as many persons as there are directors to be elected. 2. Cumulativ tive Votin ting for One Candidate – Candidate  – a stockholder is allowed to conc concen entr trat ate e his his vote votes s and and give give one one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. *Example: X has 10 shares in his name; there are 5 numbers of directors to be 14

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *The one year period does not apply to directors initially elected for purposes of incorporation.

elected. X has 50 votes (10x5) available to him. X may opt to concentrate all his 50 votes to a particular candidate. 3. Cumulative Voting by Distribution – Distribution – a stockholder may cumulate his shares

•

Sec. 25 of the Corporation Code states Code states that: “Unless the articles of incorporation or the the by-l by-law aws s prov provid ide e for for a grea greate terr major ma jorit ity, y, a major majorit ity y of the the numb number er of dire direct ctor ors s or tr trus uste tees es as fi fixe xed d in the the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majo ma jori rity ty of the the dire direct ctor ors s or tr trus uste tees es present at a meeting at which there is a quorum shall be valid as a corpor corporate ate act, except for the election of officers which shall require the vote of a majority of all the members of the board.”

by multi multiply plying ing also also the the numb number er of hi his s shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit. *Example: X has 10 shares in his name; there are 5 numbers of directors to be elected. X has 50 votes available to him. X may opt to distribute the votes to as many candidates as there are provided that the total number of votes does not exceed 50. Purpose of cumulative voting: To protect Purpose of the minority stockholders.

Q: Is the director allowed to let a proxy atte attend nd a boar board d me meet etin ing g in beha behalf lf for for himself?

*The elected officer must act as a body. *In a stock corporation, cumulative voting is a stat statut utory ory right right where whereas as in a nonnonstock stoc k corpor corporatio ation, n, cumulat cumulative ive voting voting is applicable applicabl e if it is provided in the Article of Incorporation.

•

Quorum Requirement in Board Meetings

A: A:  NO. NO. Proxy  Proxy prohibition. Reason:  Beca Reason:  Becaus use e qualifications.

of thei theirr

pers person onal al

Sec. 26 of th Sec. the e Corp Corpor orat atio ion n Cod Code provides that: Within 30 days after the election elec tion of the dire directo ctors, rs, trus trustee tees s and officers of the corporation, the secretary, or any other office officerr of the corporatio corporation, n, shall shall subm submit it to the SE SEC, C, the the name names, s,

*Quorum requirement should always be computed based on the number specified in the Articles of Incorporation regardless of ensuing vacancies.

na nati tion onal alit itie ies s an and d resi reside denc nces es of the the directors,, trustees directors trustees and officers elected. elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secre secreta tary ry,, or any othe otherr offic officer er of the the corporat corp oration ion,, or the direct director, or, truste trustee e or officer himself, shall immediately immediately report such fact to the SEC.”

specified in the Articles of Incorporation. *The corporation can modify the number by providing a different provision in the articles arti cles of inc incorpo orporat ration, ion, howeve however, r, the law provides that the modification must be for a num number ber grea greate terr than than tha that provided in the law. It cannot provide for a number less than the general requirement of the code.

*The

Term of Office *T *The he di dire rect ctors ors or trus truste tees es sh shall all hold hold offi office ce fo forr on one e (1) (1) year year subj subjec ectt to the the “hold over” principle, principle, i.e., they continue in office until their successors are elected and qualified.

basis

is

alwa lways

the

number

*For For vo votin ting g purpo purpose ses, s, majo majorit rity y of the member present constituting a quorum. Except: election of directors. •

Removal of Board Members Sec. 28 of the Corporation Code states Code states that: “Any di dire rec ctor or tru rus stee of a 15

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 3. The removal must be by a vote of the stockholders representing 2/3 outs outsta tand ndin ing g ca capi pita tall stock tock or 2/3 2/3 of members;

corporation may be removed from office by a vote of the stockholders holding or representing at least 2/3 of the outs outsta tand ndin ing g ca capi pita tall stock tock,, or if the corporation be a non-stock corporation, by a vote of at least 2/3 of the members en enti titl tled ed to vote vote:: Prov Provid ided ed,, that that such such re remo mova vall shal shalll take take plac place e eith either er at a regular meeting meeting of the corporation corporation or at a special meeting called for the purpose, and in either case, after previous notice to sto toc ckh khol olde ders rs or mem embe bers rs of the corporat corp oration ion of the inte intentio ntion n to propose propose such removal at the meeting. A special meeting of the stockholders or members of a co corp rpor orat atio ion n for for the the purp purpos ose e of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or ho hold ldin ing g at leas leastt a majo majori rity ty of the the outstanding capital stock, or, if it be a non-s non -stoc tock k corpo corporat ration ion,, on the the wr writt itten en deman dem and d of a major majority ity of the the memb members ers entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, secretary, the call fo forr th the e meeti eeting ng may be addr addres esse sed d directly to the stockholders or members by any any stoc stockh khold older er or me memb mber er of the the corporation signing the demand. Notice of the time and place of such meeting, as  well as of the intention intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provid Pro vided ed,, th that at remo remova vall wi with thout out ca caus use e may ma y not not be us used ed to depri deprive ve mino minorit rity y stockholders or members of the right of repres rep resen enta tatio tion n to which which they they may may be entitled under Sec. 24 of this Code.” Requisites: 1. It must take place either at a regular meet me etin ing g or sp spec ecia iall meet meetin ing g of the the stockholders or members called for the purpose; 2. There must be previous notice to the stockholders or member of the intention to remove;

4. The director may be removed with or  without cause unless he was elected by the minority, in which case, it is required that there is cause for removal. Reason:  The functions of directors are Reason:  fiduciary in nature. Requisites for the removal of minority directors are:  are:  1. Justifiable cause; 2. Satisfaction of requ equir ire ements, i.e., 2/3 members.

the voting of OCS or

*I *Itt is the the se secr creta etary ry of the the co corp rpor orati ation on upon order of the president or in case ther there e is no se secr cret etar ary y, stoc stockh khol olde derr representing majority of the outstanding ca capit pital al stoc stocks ks or memb member er signin signing g the demand who may call a meeting for the purpose of removal. •

Vacancies in the Board Sec. 29 of the Sec. the Corpo rporati ratio on Cod ode e provides that: “Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if sti stillll constit constituti uting ng a quo quorum rum;; oth otherw erwise, ise, said said vaca vacanc ncie ies s mu must st be fi fill lled ed by the the stoc stockh khol olde ders rs in a regu regula larr or spec specia iall meeti eeting ng cal alle led d for for that that purp purpos ose. e. A dir direc ecto torr or tr trus ustee tee so elect elected ed to fil filll a va vaca canc ncy y sh shall all be ele elect cted ed only only or the the unex unexpir pired ed term term of hi his s prede predece cess ssor or in office. A directorship or trusteeship to be fil filled led by reas reason on of an inc incre reas ase e in the number of directors or trustees shall be filled only by an election at a regular or at a sp spec ecial ial meet meeting ing of stoc stockh khold older ers s or members duly called for the purpose, or in the the sa same me meet meeting ing aut autho horiz rizing ing the the

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Reason: In order to avoid temptation on Reason: In the part of directors to abuse powers by appropr app ropriat iating ing com compen pensat sation ion pac packag kages es si sinc nce e they they are are in co cont ntrol rol of co corp rpor orate ate assets.

increase increa se of di direc recto tors rs or trust trustees ees if so stated in the notice of the meeting.” General Rule: Rule: Power to elect directors is vested in the stockholders Exception: Va Exception: Vaca canc ncy y oc occu curr rrin ing g in the the board of directors or trustees other than by re rem moval oval by the st stoc ockh khol olde ders rs or members or by expiration of term may be filled by the vote of at least a majority of the remaining directors or trustees if still constituting a quorum. •

C. Corpo Corpora rate te Offic Officer ers s •

*Corporate powers reside on the Board of Dire Direct ctor ors; s; deci decisi sion on/p /pol olic icym ymak akin ing g resi reside des s on them them.. Im Impl plem emen enta tati tion on of rules/policy lies on the corporate officers

Compensation of Board Members Sec. 30 of th Sec. the e Corp Corpor orat atio ion n Cod Code provid pro vides es th that at:: “In the the absenc absence e of an any y pr prov ovis isio ion n in the the by by-l -law aws s fixi fixing ng thei theirr comp compen ensa sati tion, on, the the di direc recto tors rs sh shal alll not not re rece ceiv ive e an any y comp compen ensa sati tion on,, as such such dire direct ctor ors, s, ex exce cept pt for for reas reason onab able le pe perr diems: Provided, however, however, that any such compensation other than per diems may be granted to directors by the vote of the stoc stockh khold older ers s re repr pres esent enting ing at least least a majority of the outstanding capital stock at a re regu gula larr or spec specia iall st stoc ockh khol olde ders rs’’ meeting. In no case shall the total yearly comp compen ensa sati tion on of dire direct ctor ors, s, as such such directors, exceed 10% of the net income before bef ore in inco come me tax tax of the the co corpo rpora ratio tion n during the preceding year.”

Concept of Corporate Officers

Categories:   Categories: 1. Statuto Statutory ry Corporate Corporate Officers Officers  – Pres Presid iden entt (m (mus ustt be a st stoc ockh khol olde der) r);; Secretary (must be a resident and citizen of the Philippines); Treasurer (must be a resident and citizen of the Philippines). 2. As provided by the By-Laws  By-Laws   – mustt be cle mus clearly arly stated stated in the By-Laws By-Laws that such office is a corporate office. 3. Those designated by the Board of Dir Direc ector tors s prov provide ided d th the e Bo Boar ard d of Directors is authorized to do so by the By-Laws. •

General Rule: Directors Rule: Directors are not entitled to receive compensation

Validit Valid ity y and and Bin Bindin ding g Ef Effec fectt of Ac Acts ts of Corporate Officers General Rule:  Rule:  No one, even corporate officer officers s can bind the corporatio corporation. n. It is only the Board of Directors who has the authority to bind the corporation.

Exceptions:   Exceptions: 1. When their compensation is fixed in the by-laws;

Exceptions: 2. If compensation compensation is granted to directors by the vote of the stockholders represe repr esenti nting ng at least least a majorit majority y of the outstanding capital stock at a regular or special stockholders’ meeting. Limitation:   In no case Limitation:  case shall shall the the tota totall yearly compensation of directors exceed 10% of the net income before income tax of the corporation during the preceding year.

1. If the By-Laws provides that such act is part of the function of such office; 2. If authorized by the Board of Directors •

Doctrine of Apparent Authority Doctrine of Apparent Authority/Doc Autho rity/Doctrine trine of Estop Estoppel pel   –If –If a corporation, knowingly permits one of its officers, or any other agent, to act within the the sc scop ope e of an appar apparen entt auth authori ority ty,, it 17

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be stopped from denying the agent’s authority.

Case: Carag v NLRC 2. Gu Guilt ilty y of gros gross s neglig negligen ence ce or b bad ad faith in directing the affairs of the corporation (Sec. 31). Case Ca se:: Da Davi vid d v Con Constru struct ctio ion n Industry

Cases: People’s Aircargo; Aircargo; Inter-Asia; Inter-Asia; Lapu-Lapu

3. Acquire any personal or pecunia pec uniary ry interes interestt in con conflic flictt of their duty (Sec.31).

*Requires good faith on the part of third person.

4. Consent to the issuance of  watered stocks stocks or having kn know owled ledge ge the thereo reof, f, fails fails to fil file e obje object ctio ions ns with with the the secr secret etar ary y (Sec. 65).

D. Liability of Directors Directors,, Trustees Trustees and Officers Officers •

Instances when Offic Off icers ers/D /Dire irect ctor ors s are are Liable

Corporate held held Solid Solidari arily ly

Sec. 31 of th Sec. the e Corp Corpor orat atio ion n Cod Code provides that: “Directors or trustees who  wilfully and knowingly knowingly vote for or assent to patently unlawful acts of the corpo corporat ratio ion n or who who are guilty guilty of gross gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict  with their duty as such directors directors or tr trus uste tees es shall hall be li liab able le jo join intl tly y and and seve severa rall lly y for for all all da dama mage ges s resu result ltin ing g therefrom therefro m suffered by the corporation, its stoc stockh khol olde ders rs or me memb mber ers s an and d othe otherr perso per sons ns.. Wh When en a dir direc ecto tor, r, trus truste tee e or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the the corp corpor orat atio ion n in resp respec ectt of an any y matter which has been reposed in him in confidence, as to which equity imposes a disab dis abili ility ty upon upon him to deal deal in hi his s ow own n behalf, he shall be liable as a trustee for the corporation and must account for the pr prof ofit its s whic which h othe otherw rwis ise e wo woul uld d ha have ve accrued to the corporation.” General Rule: Dire Direct ctor ors/ s/Tr Trus uste tees es/O /Off ffic icer ers s are are no nott solidarily liable with the corporation. Exceptions:: Exceptions 1. Wil ilfu full lly y and and know nowin ingl gly y vote ote for for and assent assent to patentl patently y unlawfu unlawfull acts of the corporation (Sec. 31).

5. Ag Agree ree o orr stipu stipulat late e in a con contra tract ct to hold himself personally liable with the corporation. 6. By v virtu irtue e of a sp specif ecific ic provi provision sion of law such as BP 22; Trust receipts Law; Law; RA 7832 7832 (A (Anti nti-E -Elec lectr trici icity ty Pilferage Act of 1997); Securities Regulation Code   *In Carag v NLRC, NLRC, the Supreme Court held that not any violative of law, the Code means that violation must have a corresponding penalty. Patently unlawful act means that a law declares an act unlawful and that such law provides penalty for that unlawful act. •

Self-Dealing Directors/Officers Sec. 32 of the Corporation Code states Code states that: “A contract of the corporation with one or more of its directors or trustee trustees s or officers is voidable, at the option of such corpora cor poration tion,, unle unless ss all of the foll followi owing ng cond condit itio ions ns are are pres presen ent: t: 1. That That the the presence of such director or trustee in the board meeting in which the contract  was approved was not necess necessary ary to constitute a quorum for such meeting; 2. That the vote of such director or trustee  was not not necessary necessary fo forr the approval approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in case of an officer, the contract has been pre previo viously usly authorize authorized d by the 18

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 4. In case of an officer, the contract has been previously authorized by the board of directors.

board of directors. Where any of the first two conditions set forth in the preceding paragr par agraph aph is abse absent, nt, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least 2/3 of the outs outstan tandin ding g ca capit pital al stoc stock k or of at least 2/3 of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such suc h meeting meeting:: Provid Provided, ed, howeve however, r, that that the contract is fair and reasonable under the circumstances.”

Reas aso on: A’ A’s s pres presen ence ce in the the boar board d meeting mee ting might affect affect the sta status tus of the contract.

Self-Dealin Self-De aling g Directo Directors/O rs/Offic fficers ers   – directors/offi directo rs/officers cers who transac transactt busines business s  with their their own own corp corporation. oration. - This is not prohibited by law. Interlocking Directo Interlocking Directors rs   – thos those e wh who o have been elected as directors in 2 or more different corporations.

Example: In XYZ Corporation, A is a director. The corporat corp oration ion acts acts throug through h the Board Board of Dire Direct ctor ors. s. XYZ XYZ Corpo orpora rati tion on and and A entered into a lease contract. A as the lessor and XYZ Corporation as lessee. The contract was approved by the Board of Directors. Q: What is the status of the contract? General Rule: The Rule: The contract is voidable. Exception: If the requisites provided in Exception: If Sec. 32 are present. Exception to the Exception: If requirement number 1 or 2 is absent, in the case of a contract with a director or trustee, such contract may be considered valid by the ratification of at least 2/3 of the outstanding capital stock or 2/3 of the members. Requisites: 1. The The pr pres esen ence ce of such such dire direct ctor or or trustee in the board meeting in which the contract was approved was not neces nec essa sary ry to co cons nstit titut ute e a quoru quorum m for such meeting; 2. The vote of such director or trustee  was not necessary necessary for the the approval approval of the the contract; 3. The The cont contrac ractt is fair fair and and rea reaso sonab nable le under the circumstances;

- May be proh prohib ibit ited ed by the the By-L By-Law aws s (Gokongwei case). -Not prohibited prohibited by law however there are consequences. •

Contr ntracts Directors

inv involv lvin ing g

Inter ter-l -loc ock king ing

Sec. 33 of the Sec. the Corpo rporati ratio on Cod ode e provides that: “Except in cases of fraud, and and pro provi vided ded the co contr ntrac actt is fair fair and and reasonable reasona ble under the circumstances, circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other co corp rpora orati tion on or co corpo rpora ratio tions ns is merel merely y nom nomin inal al,, he sh shal alll be su subj bjec ectt to the the prov provis isio ions ns of the the prec preced edin ing g sect sectio ion n in ins sofar ofar as the the la latt tter er co corp rpor orat atio ion n or corporations are concerned. St Stoc ockh khold olding ings s ex exce ceedi eding ng 20% of the the outs outsta tand ndin ing g ca cap pit ital al stock tock shall hall be conside con sidered red sub substa stantia ntiall for pur purpose poses s of interlocking directors.” Example:  A is a director of two corporation, ABC Corporation and XYZ Corporation. XYZ Corpo orpora rattio ion n and and ABC ABC Corpo orpora rati tio on entered into a lease contract where ABC 19

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Corpor Corp orat atio ion n is the the le less ssor or and and XYZ XYZ Corporation is the lessee. Q:  Q:  Can this contra contract ct be inva invalida lidated ted on the ground that there is an interlocking director? A: NO. Q: What Q: What is the status of the contract? A: General Rule: Contracts Rule: Contracts between two or more corporations having interlocking directors are valid. Exceptions: 1.

Contr ntracts are are void if if c co ontra rac cts a arre fraudulent or if contracts are unfair and unreasonable.

2.

If

the

By-Laws

prohibits

interlocking director. Case:  Gokongwei, Jr. v SEC Case: *The interest is nominal if his interest is 20% or less less of the outstandi outstanding ng capital capital stock. stoc k. The interest interest is substa substantia ntiall if his interest is more than 20% of the outstanding capital stock. *If the int inter erlo loc cking dire irector has a substant subs tantial ial interes interestt in one corpora corporation tion and has a nominal interest in the other corporat corp oration ion,, the directo directorr must must comply comply  with the requisites requisites provided provided in Sec. 32 32 on self-dealing directors. Reason: The case is analogous to that Reason: The of trans transac actio tions ns invol involvin ving g se selflf-de deali aling ng directo dire ctors rs becaus because e such such directo directorr holds holds su subs bsta tant ntia iall in inte tere rest st with ith the the othe otherr company. •

Doctrine of Corporate Opportunity Sec. 34 of the Corporation Code states Code states that: “Where a director, by virtue of his office, offi ce, acquire acquires s for him himsel selff a bus busines iness s opportunity which should belong to the corporation, corporat ion, thereby obtaining obtaining profits to the pr preju ejudic dice e of su such ch co corpo rporat ration ion,, he must mu st acco accoun untt to the the latte latterr for all su such ch profits by refunding the same, unless his act has been ratified by a vote of the

stockhold stockh olders ers owning owning or repr represe esenti nting ng at least 2/3 of the outstanding capital stock. This his prov provis isio ion n sh shal alll be appl applic icab able le notwithstanding the fact that the director risked his own funds in the venture.” General Rule: A Rule: A director shall refund to the corporation all the profits he realizes on a business opportunity which: 1. the corpor ora ation is fina inanciall ially y able to undertake; 2. from its nature, is in line  with corporations corporations business business and is of prac practi tica call adva advant ntag age e to it it;; and and 3. the the corporation has an interest or a reasonable expectancy. Exception: His act has been ratified by a vo vote te of the the stoc stockh khol old ders ers ow owni ning ng or representing at least 2/3 of the outstanding capital stock. *A busi busine ness ss opport opportun unit ity y ce ceas ases es to be corporate opportunity and transforms to personal opportunity where the co corp rpora orati tion on ref refus uses es or is defin definit itely ely no longer able to avail itself of the opportunity.

E. Ex Exec ecut utive ive Comm Commit itte tee e Sec. 35 of the Corpo Corporat ration ion Code Code   states that: that: “Th “The e by by-la -laws ws of a co corp rpora oratio tion n ma may y create an execut executive ive committee composed of not less than 3 members of the board to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action act ion for whic which h sharehol shareholder ders’ s’ approva approvall is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amen amenda dabl ble e or repe repeal alab able le;; and and (5) (5) a dis isttribu ibution ion of cash di div vide idends to the shareholders.” Keyword: BY-LAWS

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *It must be stated in the By-Laws. *Board Resolution is not sufficient if there is no provision in the By-Laws. *The decision of the executive committee is considered a Board Resolution. *The decision of the executive committee is not subject to appeal to the board. However, However, if the resolution of the Executive Committee is invalid it may be ratified by the Board. *The decisi decision on of the executi executive ve commit committee tee needs no confirmation from the Board. Case: Filipinas Port, Inc. *The corporation committees.

may

create

other

Distinction: In Distinction:  In executive committee, there is a statutory restriction on members whereas in other committee tee there is no such restriction. Generall Rule: Genera Rule:   The execut executive ive committ committee ee may ma y ac actt on spec specif ific ic matt matter ers s wi with thin in the the competen tence of the board as may be delegated to it in the by-laws or on a majority vote of the board. Exceptions: 1. Approval of any action for which shareholders’ approval is also required;

possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of powers so conferred.” Ultra Vires Acts – Acts – an act committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law. Effects of Ultra Vires Acts: 1. Executed Contract – Contract – courts will not set aside or interfere with such contracts. 2. Executory Executory Contract Contract   – no enforc enforceme ement nt even at the suit of either party. 3. Partly executed and Partly executory contract   – prin contract princi cipl ple e agai agains nstt unju unjust st enrichment shall apply.

B. Clas Classes ses of Cor Corpora porate te Pow Powers ers 1. Express 2. Implied 3. Incide idental •

2. The filing filing of of vacan vacancie cies s in the board; board; 3. The The amend amendme ment nt or repea repeall of by-law by-laws s or the adoption of new by-laws; 4. The amendment or repeal of any re reso solu luti tion on of the the bo boar ard d whic which h by its its express terms is not so amendable or repealable; 5. A dist distri ribu buti tion on of cash cash divid dividen ends ds to the the shareholders. CORPORATE POWERS: A. Do Doct ctri rine ne of Limi Limite ted d Capa Capaci city ty;; Conc Concep eptt of Ultra Vires Act

•

•

Express – those expressly authorized by the Corpora Corporatio tion n Cod Code e and oth other er laws laws,, and and it its s Art rtic icle les s of Incor ncorpo pora rati tion on or Charter. Implied – those that can be inferred from Implied – or nece necess ssar ary y for for the the exer exerci cise se of the the express powers. Incidental – those that are incidental to Incidental – the existence of the corporation.

Doctrine of Necessary Implication – Implication – those which can be reasonably inferred from the express powers given since they are necessary for the corporation to perform a particular act are deemed part of such powers. C. St Statu atuto tory ry Pow Power ers s of a Co Corpo rporat ratio ion n and and the the Limitations on their Exercise

Sec. 45 of the Corporati Sec. Corporation on Code Code   states that: “No corporation under this Code shall

Sec. 36 of the Corpo Corporat ration ion Code Code   states that: “Every corporation incorporated under 21

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succes suc cessio sion n by its corpora corporate te name name for the peri period od of ti time me stat stated ed in the the arti articl cles es of inc ncor orp por ora atio tion and the certific ifica ate of in inc corpo orpora rati tion on;; 3. To adop adoptt and and use use a corporate seal; 4. To amend its articles of in inc corpo orpora rati tion on in acc accorda ordanc nce e with ith the the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or re rep peal the same in acco accord rdanc ance e wi with th th this is Code Code;; 6. In ca case se of stock corporations, to issue or sell stocks to subscr sub scribe ibers rs and to sell treasury treasury stocks stocks in accordance accord ance with the provisions provisions of this Code; and to admit members members to the corporation corporation if it be a non-stock corporation; 7. To purchase, receive rec eive,, take take or grant, grant, hold hold,, con convey vey,, sell, sell, lease, pledge, mortgage and otherwise deal  with such real and personal personal property, property,

outs outsta tand ndin ing g ca capi pita tall stoc tock, wi with tho out prej prejud udic ice e to the the appr apprai aisa sall ri righ ghtt of dissent dis senting ing sto stockh ckholde olders rs in accord accordanc ance e  with the provisio provisions ns of this Code, or the vote or written assent of at least 2/3 of the members if it be a non-s -sttoc ock k corporation.”

incl includ udin ing g secu securi riti ties es an and d bo bond nds s of othe otherr corporations, corpora tions, as the transaction transaction of the lawful business of the corporation may reasonably an and d ne nece cess ssar aril ily y requ requir ire, e, subj subjec ectt to the the li lim mit itat atio ions ns pres prescr crib ibed ed by la law w and and the the Cons Co nstit titut ution ion;; 8. To enter enter int into o merge mergerr or cons consoli olida datio tion n wi with th other other co corp rpora oratio tions ns as provided in this Code; 9. To make reasonable donations, including those for the publi public c we welfa lfare re or for for hosp hospita ital, l, ch chari arita table ble,, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, fore ign, shall give donations donations in aid of any politicall party or candidate politica candidate or for purposes purposes of

Q:  Q:  How to get get the the appr approv oval al of the the stockholders?

Four cha Four change nges s in Article Articles s of Inc Incorp orpora oratio tion n tha thatt require the approval of the stockholders.  stockholders. 

partisan partisa n poli politic tical al activit activity; y; 10. To establi establish sh pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation.”

1. 2. Extension Shorteningofofcorporate corporateterm; term; 3. Increase or Decrease of Capital Stock; 4. Increase or Decrease of Bonded indebtedness. *Approv *Ap proval al of Stoc Stockhol kholder ders s is necess necessary ary in the these se chan change ges s beca becaus use e they they are are nece necess ssar ary y for for the the corporation’s existence.

•

Amendment of Articles of Incorporation

*The following are excluded in counting the outstanding capital stock: 1. Treasury stock; 2. Unissued shares. *Aside from the votes of majority of the board and assent of the 2/3 of the OCS, the approval of the SEC is necessary for the amendment of the AOI. *There is an implied approval of the SEC, i.e., failure to act on the application filed by the corporation within 6 mos.

A: A:   1. Call for a meeting; 2. Obtain the  written assent of the stockh stockholders. olders. *In Tan v Sycip, the Supreme Court held that in case of a non-stock corporation, membership is per ers sonal nal and non nontransferrable unless the by-laws provides otherwise. The deceased member is not entitled to vote.

•

Extension/Shortening of Corporate Term

Sec. 16 of the Corporation Code states Code states that: “Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articl articles es of incorp incorporat oration ion may be

Sec. 37 of the Corporation Code states Code states that: “A private corporation may extend or short horten en it its s term term as stat stated ed in the the articles of incorporation when approved by a majori ritty vote of the boar oard of

amended by a majority vote of the board of directors or trustees and the vote or  written assent assent of the stockholders stockholders representing at least 2/3 of the

dir direc ecto tors rs or tr trus ustee tees s and and rat ratifi ified ed at a meeting by the stockholders representing at leas leastt 2/3 2/3 of the the outs outsta tand nding ing ca capit pital al stock or by at least 2/3 of the members in 22

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro case of non-st case non-stock ock corpora corporatio tion. n. Written Written notice of the proposed action and of the time and place of the meeting shall be addr addres esse sed d to each each stoc stockh khol old der or memb me mber er at his place place of resi residen dence ce as shown on the books of the corporation and deposited to the addressee in the po post st offi office ce with with po post stag age e prep prepai aid, d, or served personally: Provided, That in case of ex exte tens nsio ion n of corp corpor orat ate e term term,, an any y dissenting stockholder may exercise his ap appr prai aisa sall ri righ ghtt un unde derr the the cond condit itio ions ns provided in this code.” •

Increase Increas e or Decreas Decrease e of Capital Capital Stoc Stock/ k/ Incu Incurr rren ence ce,, Crea Creati tion on or Incr Increa ease se of Bonded Indebtedness Sec. 38 of the Corporation Code states Code states that:: “No corpora that corporation tion shall shall increas increase e or decrease its capital stock or incur, create or increas increase e any bonded bonded indebted indebtednes ness s unless approved by a majority vote of the board of directors and, at a stockholders’ meeting duly called for the purpose, 2/3 of th the e ou outs tsta tandi nding ng ca capit pital al stoc stock k sh shall all favorr the increase favo increase or diminut diminution ion of the capital stock, or the incurring, incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonde bon ded d indeb indebted tedne ness ss and and of the the time time and place of the stockholders’ meeting at  which the proposed increase increase or dimin dim inuti ution on of th the e ca capit pital al stoc stock k or the the incurr inc urring ing or increa increasi sing ng of any bond bonded ed indebtedness is to be considered , must be addressed to each stockholder at his plac place e of re resi side denc nce e as show shown n on the the books of the corporation and deposited to the addressee in the post office with postage post age prepaid prepaid,, or serv served ed persona personally. lly. xxx.” Q:  Q:  When When the corporati corporation on increas increases es its capit capital al stoc stock, k, is the the 25% requ require ireme ment nt necessary? How can it be computed? A:  A:  YES YES.. The SEC ruled that the 25% applies to the increase amount.

*The corporation is required to maintain a sinking fund. Q: Wh What at does does bonde bonded d indeb indebte tedn dnes ess s mean? A: A:   Requ Require ires s lon longer ger ti time me of paym paymen ent; t; sp spec ecia iall burd burden en on the the corpo orpora rati tion on;; invo involv lves es the the im impo port rtan antt asse assets ts of the the corporation. •

Denial of Pre-emptive Right Sec. 39 of the Corporation Code states that: “A “All ll stoc tockholde lders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proport proportion ion to their respec res pectiv tive e sha shareho reholdin ldings, gs, unle unless ss such such right is denied by the articles of incorporation or an amendment thereto: Provided,, That Provided That suc such h prepre-emp emptive tive right right shall not extend to shares to be issued in co comp mplia lianc nce e wi with th laws laws requir requiring ing stoc stock k offerings or minimum stock ownership by the public; or to shares to be issued in good good fait faith h wi with th the the appro pprova vall of the stoc stockh khold olders ers repre represe sent nting ing 2/3 2/3 of the the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.” *Coming from the increased authorized capital stock. * Similar to Right of First Refusal *I *Itt is not not a ma matt tter er of rig right ht.. It can be denied by the corporation through denial of such right in the articles of incorporation. Purposes: 1. In order that the stockholder may be able to maintain their relative proportional voting trend and control in the corporation; 2. To avoid dilution of their proporti prop ortiona onate te vot voting ing and con control trol in the corporation. Genera Gene rall Ru Rule: le:   PrePre-em empt ptiv ive e available to stockholders.

ri righ ghtt

is

23

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Exception: if it is denied in the Articles of Exception: if Incorporation or through amendment. Exception Exc ion to th the e Exc xce eptio tion: emptive right shall not extend to:  to:  

Pre-

1. Shar Shares es to be is issu sued ed in co comp mplia lianc nce e  with laws requiring stock offerings offerings or minimum stock ownership by the public; 2. Shares to be issued in good faith with the the ap app proval of the stockholde lders re repr pres esen enti ting ng 2/3 2/3 of the the ou outs tsta tand ndin ing g capital capi tal sto stock, ck, in exchan exchange ge for propert property y needed for corporate purposes; and 3. In payment of a previously contracted debt. *Pre-emptive right is satisfied as long as the corporation gives the stockh stockholder older the opportunity to buy the shares. *The *The offe offerr must must firs firstt be ma made de to the the stockholders. •

Sale or Disposition of Assets Sec. 40 of the Corporation Code states Code states th that at:: “ Subj Subjec ectt to the the prov provis isio ions ns of existing laws on illegal combinations combinations and mono mo nopol polie ies, s, a co corpo rpora ratio tion n may, may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such te term rms s and and co cond ndit itio ions ns and and for for su such ch cons conside idera ratio tion, n, whic which h may may be mone money, y, stocks, stoc ks, bonds bonds or other other inst instrum rument ents s for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least 2/3 of the outstanding capital stock, or in case of non-stock corporation by the vote of at least 2/3 of the members, in a stockholders’ or members’ meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to ea each ch stoc stockh khold older er or memb member er at his plac place e of re resi side denc nce e as show shown n on the the

books of the corporation and deposited to the addressee in the post office with postag pos tage e prep prepaid, aid, or serv served ed pers persona onally: lly: Provided, That any dissenting stockh sto ckhold older er may exercise exercise his apprais appraisal al right under the conditions provided in this Code. A sale or other disposition shall be deem deemed ed to co cove verr su subs bsta tanti ntiall ally y all all the the corporate property and assets if thereby the the co corp rpor orat atio ion n wo woul uld d be rend render ere ed incapable of continuing the business or accomp acc omplish lishing ing the pur purpos pose e for which which it  was incorpora incorporated. ted. xxx.” xxx.” Q: What makes the disposition peculiar? A: A:   The disposition is of all or subs substa tant ntia iall lly y all all of the the co corp rpor orat atio ion’ n’s s properties and assets. Q: What Q: What kind of disposition involve? A: A:   1. Se Sell; ll; 2. Lea Lease se;; 3. Ex Exch chang ange; e; 4. Mortgage; 5. Pledge. Requirements: 1. Ma Major jority ity vo vote te of of th the e Bo Board ard.. 2. Vote of the Stockholders representing 2/3 of the OCS. 3. Th The e sa sale le do does es not not brin bring g abou aboutt the the illegal combinations and monopolies. *No need for the approval of the SEC. Tests: 1. Quantitative Test – Test – no statutory test; pert pertai ains ns to the the disp dispos osit itio ion n of all all assets 2. Qu Quali alita tativ tive e Test Test   – there is a statu atutory test; pertain tains s to the disposit disp osition ion of sub substa stantia ntially lly all of its assets. *The provision is so strict because the law wants the corporation will reach its expiration term. Q: With Q: With the sale of all the assets of the corpora cor poration tion,, wil willl the same result result to its dissolution? A: A:   NO. NO.   Poss Posses essi sion on or cont contin inue ued d possession posses sion of corpora corporate te properties is not a condit nditiion for the the exis isttence of a corp corpor orat atio ion. n. Co Corp rpor orat atio ion n stil stilll exis exists ts

24

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro during said sale; and 3. To pay dissent dis senting ing or with withdra drawin wing g stockh stockholde olders rs entitled to payment for their shares under the provisions of this Code.”

despite the disposition of all its properties and assets. Q: Will the buying corporation be made answerable for the liabilities of the selling corporation?

Requisites: 1. Unre Unrestr strict icted ed Ret Retaine ained d Earn Earnings ings

A: NO. NO. The two corporat corporation ions s are two separ separate ate pers person onali alitie ties s thus thus they they are are separ separate ate and and disti distinc nctt from from each each othe otherr hence the buying corporation cannot be held liable to the obligations of the selling corporation.

2. The a acqu cquisit isition ion must must be fo forr leg legitim itimate ate purpose Q:  Q:  What What is an unres unrestr tric icte ted d retai retained ned earnings? A: Earnings not allocated for any other purpose. Q: What Q: What happens to reacquired shares? A: A:   Genera Generall Rule: They are automatically deemed retired. Exception: The Exception:  The AOI provides otherwise.

General Gener al Rule: Rule:   The sale of all or subs substa tant ntia iall lly y all all of the the asse assets ts of the the corpo corporat ratio ion n does does not ma make ke the buye buyerr answe ans werab rable le for the oblig obligat atio ions ns of the the seller. Exceptions:

Trust Fund Doctrine – Doctrine – The capital stock, property

1. If the buyer expressly ag agrrees to assume the obligations of the seller.

and other assets of the corporation are regarded as equit equity y in tr trus ustt for for the the paym paymen entt of the the co corpo rpora rate te cr cred edit itor ors. s. The The subs subscr crib ibed ed capi capita tall st stoc ock k of the the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits. Corporation may not not dis dissi sipa pate te this this and and the the cr cred edit itor ors s may su sue e stockholders directly for the unpaid subscription.

2. If sale amounts consolidation.

to

merger

or

3. If and when when appli applica cati tion on of pier pierci cing ng the veil of corporate entity doctrine is  warranted.  warrant ed.

•

4. If the purchaser becomes continuation of the seller.

a

5. Sale was done in viola violation tion of the the B Bulk ulk Sales Law. •

Investment of Corporate Funds

Case: PNB v Andrada  Acquisition of Corporate Shares Sec. 41 of the Corporation Code states Code states that: “A stock corporation shall have the power pow er to purc purchas hase e or ac acqu quire ire its own own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corpo corporat ratio ion n has has unres unrestri trict cted ed retai retained ned earnings in its books to cover the shares to be pur purch chas ased ed or acqu acquir ired ed:: 1. To eliminate fractional shares arising out of stoc ock k divid ivide ends; 2. To collec lect or comp compro rom mise ise an inde indebt bted edne ness ss to the the co corp rpor orat atio ion, n, aris arisin ing g out of unpa unpaid id subscription, in a delinquency sale, and to pu purc rcha hase se de deli linq nque uent nt shar shares es sold sold

Sec. 42 of the Corporation Code states Code states that: tha t: “Sub “Subjec jectt to the provis provisions ions of this Code, a private corporation may invest it its s fund funds s in any any othe otherr corp corpor orat atio ion n or business or for any purpose other than the the prima primary ry purpo purpose se for for wh whic ich h it was was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at leas leastt 2/3 2/3 of the the outs outsta tand nding ing ca capit pital al stock, or by at least 2/3 of the members in the case of non-stock corporations, at a stoc stockh khold olders ers’’ or me memb mber ers’ s’ meet meeting ing duly duly call called ed for for the the purp purpos ose. e. Writ Writte ten n notice not ice of the pro propos posed ed inve investm stment ent and the time and place of the meeting shall be addre address ssed ed to eac each h stoc stockh khold older er or memb me mber er at hi his s pl plac ace e of resid residen ence ce as shown on the books of the corporation and deposited to the addressee in the post post offi office ce with with post postag age e prep prepai aid, d, or served ser ved persona personally lly:: Provide Provided, d, Tha Thatt any 25

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro di diss ssen enti ting ng stoc stockh khol olde derr sh shal alll have have appraisal right as provided in this Code: Prov Provid ided ed,, ho howe weve ver, r, Th That at wh wher ere e the the inv investment by the corpo porration ion is reasonably necessary to accomplish its primary purpose as stated in the articles of incorp incorpor orati ation, on, the the appro approva vall of the stockhol stoc kholder ders s or mem members bers shall not be necessary.” Requisites: 1. Majo Majorit rity y vot vote e of the the B Boa oard rd 2. Vote of the the stoc stockho kholder lders s repres represent enting ing 2/3 OCS. •

corporation, such as when there is need for special reserve for probable contingencies.” *This his se sec cti tion on is excl exclus usiv ive e corporations.

to sto stock

Dividends  – repr Dividends  repres esen entts part part of the the earni earning ngs s of the co corp rpora oratio tion n whic which h the the board has decided to distribute among the stockholders. *The fact that the corporation has surplus earning does not mean that it is mandated to declare dividends; it is still upon the sound discretion of the board of directors.

Declaration of Dividends Reason: Trust Reason:  Trust Fund Doctrine Sec. 43 of the Corporation Code states Code states that: “The board of directors of a stock corporation corporat ion may declare dividends dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of ou outs tsta tand ndin ing g stoc stock k he held ld by them them:: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus plu s cost costs s and ex expe pens nses es,, while while stoc stock k divide div idends nds shall shall be wi with thhel held d from from the the delinque deli nquent nt stockhol stockholder der unti untill his unpaid unpaid subs subscr crip ipti tion on is full fully y pa paid id:: Prov Provid ided ed,, further, That no stock dividend shall be issued without the approval of stockholders representing not less than 2/3 of the outstanding capital stock at a regular or special meeting duly called for the purpo purpose se.. St Stoc ock k co corp rpora oratio tions ns are are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stoc stock, k, ex exce cept pt:: 1. When When just justif ifie ied d by definite corporate expansion projects or pr prog ogra rams ms ap appr prov oved ed by the the bo boar ard d of directors; or 2. When the corporation is prohib pro hibite ited d under under an any y lo loan an agree agreeme ment nt  with any financial financial institution institution or creditor, creditor,  whether local or foreign, from declarin declaring g dividen divi dends ds withou withoutt its/his its/his consen consent, t, and such consent has not yet been secured; or 3. When it can be clearly shown that su such ch re rete tent ntio ion n is nec necessa essary ry unde underr special spec ial circums circumstan tances ces obtaini obtaining ng in the

*There must be a unrestricted retained earn earnin ings gs befo before re divi divide dend nds s may be declared. *The board may opt to re res stri ric ct its earn earnin ings gs,, as the the earn earnin ings gs may be allocated to legitimate business purpose.

CASH ASH DIV DIVID IDEN ENDS DS does not require stockholders’ approval The stockholders receive cash

ST STOC OCK K DIVIDENDS Requires stockholders’ approval The stockholders receive stocks

Creditor-debtor relationship

No creditor-debtor relationship

Requisites for declaration cash/property dividends:

of

1. Bo Boar ard da app ppro rova vall 2. Unre Unrestr strict icted ed Ret Retaine ained d Earn Earnings ings Requis Requ isite ites s fo forr decla declara ratio tion n of stoc stock k dividends: 1. Unrestricted Retained Earnings; 2. Board approval; 3. Ratification by the stockholders. Q:  Q:  Why Why stoc stockh khold olders ers’’ rati ratific ficat ation ion is nece necess ssar ary y in the the decla declarat ratio ion n of stoc stock k dividends? 26

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro A:  A:  Because Because the earnings earnings are capitalized. capitalized. It is considered to be a corporate assets. Q: May th the e board oard be co comp mpel elle led d to declare dividends? A:  A: General Rule: NO. Exception:   Stoc Exception: Stock k corp corpor orat atio ions ns are are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock. Exceptions to the Exception: 1. Corp Corpor orat ate e expan expansi sion on 2. Pursu Pursuan antt to loa loan n agre agreem ement ent 3. Spec Specia iall ci circ rcum umst stan ance ces/ s/co cont ntin inge gent nt liabilities Q: Are Q: Are the stock dividends considered as  watered stocks because because the stock stockholder holder conc ncer ern ned doe oes s not pay an any ything ing therefor? A:  A:  NO NO.. The unre unrest stri rict cted ed reta retain ine ed earnings are considered to be a considerati consider ation on thus thus dividen dividends ds received received through stocks are not watered stocks. *The source of payment is the unrestricted retained earnings. Q: Are delinquent stockholders entitled to receive dividends? A:  A:  YES YES.. But only in terms of cash dividends. Q: Who Q: Who are entitled to receive dividends? A: Stockholders A: Stockholders *In Nie Nielson lson case case, the SC he helld that di divi vide dend nds s ca cann nno ot be gi give ven n to nonnonstockholders. *If there is date of record – Dividends may be received by those persons who are are hold holder ers s of stoc tocks as of date date of record. *If there is no date of record – dividends may be received by those persons who are holders of stocks as of the declaration. Q: When Q: When the corporation declares stock divide div idends nds,, woul would d it lik likew ewis ise e cr crea eate te a creditor-debtor creditordebtor relationship between between the corporation and the stockholder? A: NO NO.. St Stoc ock k divide dividend nds s wi will ll not not bring bring about abo ut a cr credi editor tor-de -debt btor or relati relations onship hip.. When it comes to shareholdings, the one hold holdin ing g th the e sh shar ares es are are co cons nsid ider ered ed investors; risk-takers. Q:  Q:  Will Will legal legal compens compensatio ation n possib possible le to occur?

•

A: A:   NO NO.. The The part parties ies are are not not mu mutu tuall ally y cr cred edit itor or-d -deb ebto torr of each each oth other. er. The requisites under the Civil Code on legal compensation are not present. Management Contract Sec. 44 of the Corporation Code states Code states that: tha t: “No corpora corporation tion sha shallll conclud conclude e a mana ma nage geme ment nt cont contra ract ct with with anot anothe herr corpora cor poration tion unless unless such such cont contrac ractt sha shallll have have been been appro approve ved d by the the board board of directors and by stockholders owning at least lea st the major majority ity of the outs outsta tandi nding ng capital stock, or by at least a majority of the members in the case of a non-stock corpora cor poration tion,, of bot both h the man managin aging g and the managed corporation, at a meeting duly called for the purpose purpose:: Pro Provid vided, ed, That 1. Where a stockholder or stoc stockh khold olders ers repre represe sent nting ing the the sa same me interes inte restt of both the ma managi naging ng and the manag ma naged ed co corpo rporat ration ions s own own or co cont ntrol rol more mor e than than 1/3 of the total outsta outstandin nding g capi capita tall st stoc ock k enti entitl tled ed to vote vote of the the manag ma naging ing co corpo rporat ration ion;; or 2. Wh Where ere a majority of the members of the board of directo dire ctors rs of the man managin aging g cor corpor poratio ation n also constitute a majority of the members of the board of directors of the managed corp corpor orat atio ion, n, then then the the ma mana nage geme ment nt co cont ntra ract ct must ust be appr approv oved ed by the the stockholders of the managed corporation owning at least 2/3 of the total outstanding outsta nding capital stock entitled entitled to vote, or by at least 2/3 of the members in the case case of a nonnon-st stoc ock k corp corpor orat atio ion. n. No management managem ent con contrac tractt sha shallll be ent entered ered into for a period longer than 5 years for any one term. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or su subs bsta tant ntia iall lly y all all of the busi busine ness ss of anot anothe herr corp corpor orat atio ion, n, wh whet ethe herr such such contrac con tracts ts are called called servic service e contra contracts cts,, oper operat atin ing g agre agreem emen ents ts or othe otherw rwis ise: e: Provided Prov ided,, howeve however, r, Tha Thatt suc such h ser service vice contracts or operating agreements which relate rela te to the exp explora loration tion,, deve develop lopmen ment, t, expl ex ploi oita tati tion onmay or beutil utentered iliz izat atio ion n into of fornatu nasuch tura rall resources peri period ods s as may be prov provid ided ed by the the pertinent laws or regulations.” 27

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Requisite:

existence of corporation

the

status of the exis existe tenc nce e but but has has impact on the existen exis tence; ce; fail failure ure to submit is a ground for disenfranchisement

Joint b oarddecision of athe nd stockholders

Gene Ge nera rall Rule Rule::  joint decision Exception: Delegates the power to amend the ByLaws to the Board

General Rule: Majority vote of the OCS Exception: 2/3 Exception:  2/3 of the OCS *SEC’s approval is not necessary *Wh When en th the e corp corpor orat atio ion n en ente ters rs into into a management contract, appraisal right is NOT AVAILAB AVAILABLE LE   to any di diss ssen entin ting g stockholder. Reason: Sound business policy dictates Reason: Sound that it would be better for the corporation, at the inception of its operation, to be managed by a company who has been expe experi rien enc ced in a part partic icul ular ar ki kind nd of busin bus ines ess s if th the e mana managed ged co corpo rporat ration ion needs nee ds th the e te tech chnic nical al ex expe perti rtise se,, sk skill ills, s, exper experien ience ces, s, back backgr grou ound nd of anoth another er entity. CORPORATE BY-LAWS: A. Concep Concept, t, Use Use and and Nature Nature of of By-Law By-Laws s By-Laws   – re By-Laws rela lati tive vely ly perm perman anen entt and and continu con tinuing ing rules rules of action action adopted adopted by the corporation for its own government and that of the individ individuals uals compo composin sing g it and those ha havi ving ng th the e dire direct ctio ion, n, ma mana nage geme ment nt an and d control of its affairs, in whole or in part, in the management and control of its affairs and activities. Nature:   Regu Nature: Regulat lates es int inter ernal nal affa affairs irs of the the corporation.

B. By-Laws in Incorporation

relation

to

Articles

of

Distinction between By-Laws and Articles of Incorporation: By-Laws –is By-Laws  –is a condition subsequent. Articles of Incorporation  Incorporation  – is a condition precedent. Essential for corporate existence.

ARTICLES OF INCORPORATION External af affairs Affect Aff ects s the the stat status us of of

BY-LAWS Internal Af Affairs Does Does not affe affect ct the

C. Adopt Adoption ion of By By-La -Laws ws;; Eff Effec ectt of NonNon-Fil Filing ing  within the the pres prescribed cribed period Sec. 46 of the Corpo Corporat ration ion Code Code   states that:: “Ev that “Every ery corpora corporation tion form formed ed unde underr this Code must, within 1 month after receipt of official notice of the issuance of its certificate of incorporation incorporation by the SEC, adopt a code of By-Laws for its government not inconsistent  with this Code. For the adoption of By-Law By-Laws s by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of nonstock corporations, shall be necessary. The By-Laws shall be signed by the stockholders or memb member ers s vo votin ting g for for them them and and sh shall all be kept in the principa principall office of the corporation, corporation, subject to the inspection of the stockholders or memb members ers during during offic office e hours hours.. A co copy py thereof, duly certified to by a majority of the directo dire ctors rs or truste trustees es cou counte ntersig rsigned ned by the secreta sec retary ry of the cor corpora poration tion,, shall shall be file filed d  with the SEC which shall be attach attached ed to the original articles of incorporation. Notw No twit iths hsta tand ndin ing g the the prov provis isio ions ns of the the prec preced edin ing g para paragr grap aph, h, By-L By-Law aws s ma may y be adopted and filed prior to incorporation; in such case, such By-Laws shall be approved and si signe gned d by al alll the the in inco corp rpora orato tors rs and and su subm bmit itte ted d to the the SE SEC, C, toge togethe therr wi with th the article arti cles s of incorpor incorporatio ation. n. In all cases, cases, ByLaw Laws shall hall be effec ffecti tive ve only only upon upon the the issuance by the SEC of a certification that the ByBy-Law Laws s are not inc incons onsist istent ent wit with h this Code. The SEC shall not accept for filing the By-Laws or any amendment thereto of any bank, banking institution, building and loan asso associ ciat atio ion, n, tr trus ustt comp compan any, y, insu insura ranc nce e comp compan anie ies, s, publ public ic util utilit ity, y, educ educat atio iona nall 28

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro instituti instit ution on or other other sp spec ecial ial co corp rpora oratio tions ns governed by special laws, unless accompanied ied by a certific ificat ate e of the appropriate appropri ate government agency to the effect thatt such tha such By-Laws By-Laws or amendm amendment ents s are in accordance with law.” *Submission of By-Law is not a requirement for for ac acqu quis isit itio ion n of corp corpor orat ate e ex exis iste tenc nce, e, however, for the corporation to be able to co cont ntin inue ue it its s co corp rpor orat ate e exis existe tenc nce, e, the the co corp rpor orat atio ion n is requ requir ired ed to su subm bmit it the the corporate By-Law. *Non-submission of the By-Laws within the prescribed period allowed by law is a ground for the dissolution of the corporation. *In Lo Loyo yola la Gran Grandv dvilla illas s Home Homeow owne ners rs Association v CA, CA, the SC held that failure to ado dop pt a set of By-L By-La aws with ithin the prescribed period, notwithstanding the word used in the Code, the same would not result to automatic dissolution of the corporation. The failure to file by-laws would not, by itself, amount amo unt to dissolut dissolution ion or ext extingu inguishm ishment ent of the corporate existence. *Section 46 of the Corporation Code must be read rea d in conju conjunc nctio tion n wi with th PD 902-A 902-A which which outlines the procedure to be followed before the franchise/license franchise/license of a private private corporation corporation may be suspended or revoked. *Observance of Due Process is necessary. *In Sa Sawa wadja djaan an v CA, CA, the the SC held held that hat meanw me anwhi hile le when when the the By By-La -Laws ws is not ye yett submitted, the corporation, at that time, and the very least, may be considered as a De Facto Corporation and therefore, its right to exis existt as such such canno cannott be inquir inquired ed in into to or cannot be collaterally attacked in a private suit. It is for the State to initiate a proceeding proceeding questioning the existence, on the ground of its non non-su -submi bmissi ssion on of By-L By-Laws aws,, within within the prescribed period.

D. Conte Content nts s of By-Law By-Laws; s; Requis Requisite ites s of a Valid Valid By-Law Provision Sec. 47 of the Corporati Sec. Corporation on Code Code   states th that at:: “Sub “Subje jec ct to the the prov provis isio ions ns of the the

Constitution, this Code, other special laws, and the arti articles cles of incorpo incorporati ration, on, a priv private ate corporation may provide in its By-Laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The requi quire red d quoru rum m in meet eeting ings of stockholders or members and the manner of vo votin ting g there therein; in; 4. The The for form m for proxi proxies es of stockholders and members and the manner of voting them; 5. The qualifications, duties and com compen pensat sation ion of dire directo ctors rs or trustee trustees, s, offic officers ers and and em emplo ploye yees es;; 6. The The tim time e for for holding hold ing the ann annual ual election election of directo directors rs or trustees and the mode or manner of giving notice thereof; 7. The manner of election or appoin app ointm tment ent and and the the term term of offi office ce of all officers offi cers other than than dire directo ctors rs or trustee trustees; s; 8. The penalties for violation of the By-Laws; 9. In the case of stock corporations, the manner of iss issuing uing stock certific certificate ates; s; and 10. Suc Such h other matters as may be necessary for the prop proper er or conv conven enie ient nt tr tran ansa sact ctio ion n of it its s corporate business and affairs.” Requisites: 1. It must ust be cons consis iste tent nt with with Corp Corpor orat atio ion n Code, other pertinent laws and regulations. 2. It mu must st be consi consist stent ent with with th the e Arti Articl cles es of Incorporation. 3. It m must ust be reaso reasonabl nable e and not a arbi rbitrar trary y or oppressive. 4. It mu must st not dist distur urb b vested vested rights rights,, impair impair contract or property rights of stoc stockh khol olde ders rs or mem members bers or cr crea eate te obligations unknown to law.

E. Amen Amendm dmen entt to By By-L -Law aws s Sec. 48 of the Corporation Code  Code   provides that: “The board of directors or trustees, by a majority vote thereof, and the owners of at leastt a maj leas majorit ority y of the out outsta standin nding g capi capital tal stock, or at least a majority of the members of a non-stock corporation, at a regular or 29

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro special meeting duly called for the purpose, may amend or repeal any By-Laws or adopt ne new w By-L By-Law aws. s. The The owne owners rs of 2/3 2/3 of the the ou outs tsta tand ndin ing g capi capita tall st stoc ock k or 2/3 2/3 of the the member mem bers s in a non-st non-stock ock corpora corporatio tion n may may delegate to the board of directors directors or trustees trustees the power to amend or repeal any By-Laws or adopt new By-Laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any By-Laws or adopt new By-Laws shall be considered as revoke rev oked d whenev whenever er sto stockh ckholde olders rs owning owning or represe repr esentin nting g a majori majority ty of the outsta outstandi nding ng capital stock or a majority majority of the members in non-sto non -stock ck corpora corporation tions, s, sha shallll so vote vote at a regular regu lar or special special meeting meeting.. Whenev Whenever er any amendm ame ndment ent or new By-Law By-Laws s are adopte adopted, d, such amendment or new By-Laws shall be attached attach ed to the original By-Laws in the office of the corporation, and a copy thereof, duly ce cert rtif ifie ied d unde underr oath oath by the the corpo orpora rate te secretary and a majority of the directors or trus tr ustee tees, s, shall shall be filed filed wi with th the the SEC the same to be attached to the original articles of incorp inc orpora oratio tion n and and origi original nal By By-La -Laws ws.. The The amen am ende ded d or ne new w By-L By-Law aws s shal shalll on only ly be effective upon the issuance by the SEC of a certification that the same are not inconsistent with this Code.”

F. By-Law By-Laws s in relation relation to Third Third Par Parties ties *In China Banking Corporation v CA, CA , the SC held that in the absence of evidence evidence that China Bank is aware of the provisions of the By-L By -Law aws, s, Chin China a Bank Bank is not not boun bound d to ob obse serv rve e th the e pr prov ovis isio ions ns of the the By-L By-Law aws. s. Henc He nce, e, Chin China a Bank Bank must must be allo allowe wed d to register the shares in its name. General Rule: Third parties are not affected by the By-Laws. Exception:  If th Exception:  the e thir third d pa part rty y ha has s ac actu tual al knowledge of the provisions of the By-Laws. CORPORATE MEETINGS: A. Kinds Kinds of of Corpo Corporate rate Meeting Meetings s Sec. 49 of the Corporation Code  Code   provides that that:: “Mee “Meeti ting ngs s of dire direct ctor ors, s, trus truste tees es,,

stockholders, or members may be regular or stockholders, special.”  Kinds: a. St Stoc ockh khold olders ers/M /Mem embe bers rs:: 1. Re Regu gula larr me meet etin ing g 2. Sp Spec ecia iall me meet etin ing g b. Di Direc rector tors/ s/Tru Trust stee ees: s: 1. Re Regu gula larr me meet etin ing g 2. Sp Spec ecia iall me meet etin ing g Sec. 50 of the Corporation Code  Code   provides that:: “Reg that “Regula ularr meeting meetings s of sto stockh ckholde olders rs or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least 2 weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed neces nec essa sary ry or as provi provided ded in the by by-la -laws ws:: Provi Pro vided ded,, howe howeve ver, r, That That at lea least st 1 we week ek  written notice shall be sent to all stockholders or members, unless otherwise prov provid ided ed in the the by-l by-law aws. s. Noti Notice ce of any any meeti eeting ng may be wa waiv ived ed,, expr expres ess sly or implied imp liedly, ly, by any sto stockh ckholde olderr or mem member. ber. Whenever, Whenev er, for any cause, there is no person authorized to call a meeting, the SEC, upon petit pet ition ion of a stoc stockh khold older er or memb member er on a showing of good cause therefor, may issue an order order to the the pet petit ition ioning ing stoc stockh khold older er or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-law laws. The petit pet ition ioning ing stoc stockh khold older er or memb member er sh shal alll preside thereat thereat until at least a majority of the stockholders or members present have been ch chos osen en one of their their numb number er as pres presid iding ing officer.” *Regularr meeting *Regula meeting of stockh stockholders/ olders/membe members rs shall be held annually on a date fixed in the by-laws or if not so fixed, on any date in April of ever every y year year.. Wr Writ itte ten n noti notice ce of regu regula larr meetings shall be sent 2 weeks prior to the

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro meeting unless a different period is required by the by-laws. ** Special meeting of stockholders/members shall be held at any time deemed necessary or as provided in the by-laws. Written notice shall be sent to all stockholders or members at leas leastt on one e week week or un unle less ss othe otherw rwis ise e provided in the by-laws. Sec. 53 of the Corporation Code  Code   provides that that:: “Reg “Regul ular ar meet meetin ings gs of the the bo boar ard d of directo dire ctors rs or trustee trustees s of every every corpora corporation tion shallll be held monthly, sha monthly, unless unless the by-laws by-laws provide otherwise. Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as prov provid ided ed in th the e by-l by-law aws. s. Meet Meetin ings gs of directors or trustees of corporations may be held anywhere in or outside of the Phili Ph ilipp ppine ines, s, unles unless s the the by by-la -laws ws prov provid ide e othe otherw rwis ise. e. Noti Notice ce of regu regula larr or spec specia iall

5. Ther There em mus ustt be be a quo quorum rum.. Sec. 51 of the Corporation Code  Code   provides that: “Stockholders’ “Stockholders’ or members’ members’ meetings, meetings,  whetherr regular or special,  whethe special, shall be held in the city or municipality where the principal office offi ce of the corp corpora oration tion is located, located, and if prac practi tica cabl ble e in the the prin princi cipa pall offi office ce of the the corporat corp oration ion:: Pro Provide vided, d, Tha Thatt Metro Metro Man Manila ila sh shal all, l, for for purp purpos oses es of this this se sect ctio ion, n, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein. All proceedings had and and any any bus busine iness ss tr trans ansac acted ted at any meeting of the stockholders or members, if  within the powers or authority of the co corp rpor orat atio ion, n, sh shal alll be val alid id even even if the the meeti eeting ng be im impr prop oper erly ly held held or ca call lled ed,, provided all the stockholders or members of the corporation are present or duly represented at the meeting.”

meetings stating the date, time and place of the meeting must be sent to every director or trustee at least 1 day prior to the scheduled meeting mee ting,, unless unless otherwis otherwise e provide provided d by the by-laws. A director or trustee may waive waive this requirement, either expressly or impliedly.” *Regular meetings of directors/trus directors/trustees tees shall be held monthly unless the by-laws provide otherwise. *Special meetings of directors/trustees may be held at any time upon the call of the president or as provided in the by-laws. *Mee Meeting tings s of directo directors rs or trus trustee tees s may be held anywhere in or outside of the

*Ap Appl plie ies s to both both stoc stock k and and nonnon-s stock tock corporations. General Rule: The meeting must be held in the city or municipality where the principal office is located. Exception: Sec. 93 on non-stock co corpo rporat ratio ions ns,, the the By By-L -Law aws s may may prov provid ide e different venue for  for their meeting. *A casual reading of section 51 would say that a corporation cannot provide any other place for the meeting of stockholders. But in case of a non-stock corporation, Section 93 of the Corporation provides that the by-laws could provide any place for the meeting of its

Phil Ph ilip ippi pine nes s un unle less ss the the by by-l -law aws s prov provid ide e otherwise. *Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least 1 day prior to the scheduled meeting unless otherwise provided by the by-laws.

membe embers rs prov provid ided ed that that it is wi with thin in the the Phil Ph ilip ippi pine nes s and and prop proper er noti notice ce has has been been given. Q: Is Q: Is there a conflict between Section 51 and Section 93? A: A:  YES YES.. There is conflict but this conflict may be reconciled. As a rule, the by-laws may provide a different place of meeting provided that it is within the Philippines and notice has been given. As an exception, if the by-laws is silent of the place of the meeting, section 51 applies. Sec. 52 of the Corporation Code  Code   provides that: “Unless otherwise provided for in this Code Co de or in the the by-l by-law aws, s, a quor quorum um shal shalll consist con sist of the sto stockh ckholde olders rs represe representin nting g a majority of the outstanding capital stock or a

B. Requi Require reme ment nts s of a Meet Meeting ing 1. It must must be held held at at the the prope properr place place.. 2. It must must be be held held at the the st state ated d date date and and at the appo appoint inted ed time time or at a reaso reasona nable ble time thereafter. 3. It must must be calle called d by the prope properr person person.. 4. There There must must be a pre previou vious s notic notice. e.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro majority of the members in the case of nonstock corporations.” General Rule le:: Majo jori rity ty of the the OC OCS S or Majority of the members Exception:   Unless Exception: Unless otherwi otherwise se provide provided d by the Code or by the By-Laws. *In Tan v Sycip, deceased member is not entitled to vote Sec. 54 of the Corporation Code  Code   provides that that:: “The “The pr pres esid iden entt shal shalll pres presid ide e at all all meetings of the directors or trustees as well as of the stockholders or members, unless the by-laws provide otherwise.” C. Rig Right ht tto o Vote Vote of Stoc Stockho kholder lders s •

Instances when voting right not available Sec. 6 of the Corporatio Sec ion n Code provides that: “Except as provided in the immedia imm ediately tely precedi preceding ng par paragra agraph, ph, the vote necessary necessary to appr approve ove a particul particular ar corporate act as provided in this Code shall be deemed to refer only to stocks  with voting voting rights.” rights.” Instance Instan ces s when when vo votin ting g right right is no nott available: 1. Deli Delinq nque uent nt shar shares es 2. Trea Treas sury ury shar shares es 3. Fr Frac acti tion onal al shar shares es 4. Escr Escrow ow share hares s

•

*Delinquency arises upon default in payment of subscription. Q: Are they included for quorum and voting purposes? A: A:  NO. Q: Even Q: Even if there are proxies? A: YES. Q: Shares not yet fully paid but not yet delinquent, delinquent, are they entit entitled led to vote? A: A:  YES. *Deli Delinque nquent nt sto stock ck is not ent entitle itled d to vote and his presence would not be taken for purposes of quorum. *The only right remain is the right to rece receiv ive e divi divide dend nds s subj subjec ectt to the the provision of Section 43. 2. Es Escr crow ow Sh Shar ares es *Escrow *Escro w sh shar ares es are are not not entit entitled led to vote vote befo before re the the fulf fulfil illm lmen entt of the the condition imposed thereon. 3. Un Unpa paid id Sh Shar ares es Sec. 72 of the Corpo Corporat ration ion Code provides that: “Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of

Rules on:

a stockholder.”

1. Deli Delinq nque uent nt Shar Shares es

General Rule: The Rule: The holder of unpaid shares can exercise the right to vote.

Sec. 71 of the Corporati Corporation on Code provides prov ides that: that: “No deli delinque nquent nt stock stock shall be voted for or be entitled to vote vote or to repr repres esen enta tati tion on at an any y stockholders’ stockh olders’ meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and and th the e costs osts and and expe expens nses es of advertisement, if any.”

Exceptio Excep tion: n: If it is prov provid ided ed in the the subscription contract that such right cannot be exercised until the subscription is fully paid. 4. Se Sequ ques este tere red d Sh Shar ares es Q:  Q:  What is the reason sequestration process?

for

A: A:   For invest investigat igative ive purpose purposes; s; To avoid wastage dissipation of assets. Q:  Q:  Is PCGG authorized to vote for the sequestered shares? 32

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro A: General Rule: No. Rule: No. PCGG cannot vote vote for for th the e sequ seques este tere red d shar shares es because being a conserv con servato ator/ad r/admin minist istrato rator, r, it sho should uld only perform perform acts of adminis administra tration tion and not acts of ownership. Excep Exce pti tion on:: If there is a strong evidence that indeed the shares have been been purc purcha hase sed d thro throug ugh h publ public ic funds.

and other legal representatives duly appointe appo inted d by the cou court rt may atten attend d and vote in behalf of the stockholders or me memb mber ers s with withou outt need need of any any  written proxy. proxy.”” Q:  Q:  Ca Can n the the pled pledge gee/ e/mo mort rtga gage gee e exercise the right to vote?

Requisites:

A: General General Rule Rule:: No. The right to vote remains to the owner thus, it is the the pl pled edg gor/m or/mor ortg tgag ago or that that ca can n exercise it.

1. St Stro rong ng evid eviden ence ce or prim prima a fac facie evidence that the shares are illgotten.

Exception: If there is an agreement Exception: If that that the the pled pledge gee/ e/mo mort rtga gage gee e can can exercise the right to vote.

2. Ther There e is an imm immine inent nt dange dangerr that that the shares will be dissipated.

Case:  Calapatia  Case:

Case: Transmiddle East v CA Q:  Q:  During the pendency of se sequ ques estr trat atio ion n proc proces ess s, are are the the sequ seques este tere red d shar shares es incl includ uded ed for for quorum purposes? A:  A: General Rule:  Rule: YES. Q: Who can vote them? A:  A:  Ge Gene nera rall Rule Rule:: record.

Stockholder Stockh older of

*In Rep Republ ublic ic of the Philippi Philippines nes v COCOFED,, the SC held that there is COCOFED a pri rima ma fa faci cie e evid eviden enc ce that that the the shares are purchased with the use of public funds. 5. Pledg Pledgor, or, Mor Mortg tgago agorr or Admini Administ stra rator tor of Shares Sec. 55 of the Corporati Corporation on Code provides that: “In case of pledged or mortgaged shares in stock corporations, the pledgor or mort mo rtga gago gorr shal shalll ha have ve the the righ rightt to at atte tend nd and and vo vote te at meeti eeting ngs s of stockholders, unless the pledgee or mortgagee is expressly given by the pledgo ple dgorr or mo mort rtgag gagor or su such ch right right in  writing which is recorded recorded on the appr pro opr pria iatte corporate ate books. Executors, Execut ors, administrators administrators,, receivers, receivers,

  *Adminis Administrator/ trator/executo executor/heirs r/heirs have the right to vote even without prior proxy. But the SEC requires them to subm submit it lett letter ers s of appo appoin intm tmen entt or documents showing that he has been duly instituted as ex exec ecut uto or/adminis inisttrato ator of the deceased. 6. Sha Shares res Jo Joint intly ly Owne Owned d Sec. 56 of the Corpo Corporat ration ion Code provides that: “In case of shares of stock owned jointly by two or more persons, in order to vote the same, the consent of all the co-owners shall be nece necess ssar ary, y, unle unless ss ther there e is a  written proxy, signed by all the coowners, authorizing one or some of them the m or any any other other perso person n to vo vote te such share or shares: shares: Provided, That  when the shares are owned in an “and “and/o /or” r” capa capaci city ty by the the hold holder ers s thereof, any one of the joint owners ca can n vo vote te sa said id sh share ares s or appoin appointt a proxy therefor.”

D. Concept of Agreement

Proxy

and

Voting

Trust

Proxy is a written authorization given by one Proxy is person to another so that the second person can act for the first. 33

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *Proxy is a representative.

PROXY

*Relationship: Principal-Agent. *Pr Prox oxy y is aut utho hori rize zed d to vo vote te and and al also so authorized to be present in a meeting. Functions: For quorum purposes; for voting purposes. *In Board meeting, proxy is not allowed (Sec. 25 of the Corporation Code). Sec. 58 of the Corporation Code  Code   provides that: “Stockholders and members may vote in pe pers rson on or by prox proxy y in all all meet meetin ings gs of stockholders or members. Proxies shall be in  writing, signed by the the stockholder stockholder or member member and filed before the scheduled meeting with the corpora corporate te secreta secretary. ry. Unle Unless ss otherw otherwise ise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shal shalll be vali valid d an and d effe effect ctiv ive e for for a pe peri riod od longer than 5 years at any one time.” Requisites: 1. Must Must be in writ writin ing g 2. File Filed d befo before re th the e sc sche hedu dule led d meet eetin ing; g; under the SEC rule, 10 days before the scheduled meeting *Proxy ensures presence of a quorum and also approval of corporate acts. General Rule: Proxy Rule: Proxy is revocable. Exception: If Exception:  If proxy is coupled with interest.  Ways to revoke proxy: 1. By executio execution n of of s subse ubsequen quentt proxy proxy.. 2. If the stockholde lder con onc cerned appear in the scheduled meeting.

would

Voting Trust Agreement  Agreement  is an agreement  whereby one or more stockholders stockholders transfer transfer thei theirr shar shares es of st stoc ocks ks to a trus truste tee, e, wh who o there th ereby by acqu acquire ires s fo forr a perio period d of time time the the voting rights (and/or any other rights) over such shares; and in return, trust certificates are gi give ven n to th the e stoc stockh khold older ers, s, whic which h are transferab transfe rable le like stock stock certifi certificat cates, es, subject subject however, to the trust agreement.

The stoc ock khol old der remains the stockholder of record Revocable

VOTING TRUST AGREEMENT The stockholder ceases to be a stockholder of record Irrevocable General Rule: 5 years Exception: If Exception:  If coupled  with interest interest

*The transfer includes the transfer of legal title. Sec. 59 of the Corporation Code  Code   provides that: “One or more stockholders of a stock corporation may create a voting trust for the purpo pur pose se of co conf nferr erring ing upon upon a tru trust stee ee or trustee trus tees s the right to vote vote and other rights perta per taini ining ng to the the sh shar ares es for for a perio period d not not exceed exc eeding ing 5 years years at any time: time: Provided Provided,, That in the case of a voting trust specifically required as a condition in a loan agreement, said voti oting tru rus st may be for a per erio iod d exceed exc eeding ing 5 yea years rs but sha shallll automa automatica tically lly expire upon full payment of the loan. A voting tr trus ustt agre agreem emen entt mu must st be in writ writin ing g and and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement agreeme nt shall be filed with the corpora corporation tion and with the SEC; otherwise, said agreement is in inef effe fect ctiv ive e and and unen unenfo forc rcea eabl ble. e. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees that they issued pursuant to saidstating agreement. In are the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agree agr eeme ment nt.. The The tr trus ustee tee or tr trus uste tees es sh shall all execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as ce certi rtifi fica cates tes of stoc stock. k. The The vo voti ting ng tru trust st agreement agreeme nt filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any otherr cor othe corpora porate te boo book k or reco record: rd: Pro Provid vided, ed, That both the transferor and the trustee or trustees may exercise the right of inspection of all all corpo orpora rate te book books s and and reco record rds s in accordance accorda nce with the provisions of this Code. 34

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Any othe Any otherr st stoc ockh khol olde derr ma may y tran transf sfer er his his shares to the same trustee or trustees upon the terms and conditions conditions stated in the voting trus tr ustt agre agreem ement ent,, and and there thereup upon on sh shall all be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumv circ umvent enting ing the law against against monopo monopolies lies and illegal combinations in restraint of trade or use sed d fo forr pur purpose poses s of fra fraud. ud. Unl nles ess s expres exp ressly sly renewed renewed,, all rights rights granted granted in a voting vot ing trust trust agreeme agreement nt shall shall automa automatic tically ally expire at the end of the agreed period, and the voting trust certif certificat icates es as well well as the cert certif ific icat ates es of st stoc ock k in the the na name me of the the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. The voting trustee or trustees may vote by prox proxy y unle unless ss th the e agre agreem emen entt prov provid ides es otherwise.” Consequence:   The stockh Consequence: stockhold older er ente entering ring into a voting trust agreement ceases to be a stockholder of record. *In case of Lee v CA, CA, the SC held that the stockholder stockh older concerned loses his legal title to the shares so that if the stockholder is, at the same same time, time, a di direc recto torr of the the co corpo rporat ration ion,, automa aut omatic tically ally he is disqual disqualifie ified d to con continu tinue e performing the duties of a director because the law requires each and every director to have legal, not beneficial title to at least one share. E. Derivat Derivative ive Suit; Suit; Conce Concept pt and Requi Requisite sites s Derivative Derivat ive Suit  Suit  is a suit suit brou brough ghtt by any stockholder, usually a minority shareholder, to redress a wrong committed against the corp corpor orat atio ion n when whenev ever er the the resp respon onsi sibl ble e officers refuse to take any action thereon or are the very person to be sued. *Th This is pr prer erog ogat ativ ive e  jurisprudence.  jurisprud ence.

is de deve velo lope ped d

thro throug ugh h

*This is expressly mandated by Sec. 31 of the Corporation Code.

Q: Who brings the suit? A: Any stockholder/member usually minority stockholder. Q: Whose Q: Whose cause of action? A: A: It  It is the corporation’s cause of action. Q: Are Q: Are we in violation of the Code? A: A: No.  No. Because the power to sue lies on the board thus when the board refuses to take ac actio tion n in order order to prot protec ectt the the co corp rpora oratio tion n derivative suit may be allowed. Compelling Reason: Inaction Reason: Inaction of the officers. Failure Fail ure to dis dischar charge ge thei theirr respons responsibili ibilities ties.. Requisites: 1. The s stock tockhold holder er bring bringing ing the the suit suit must must be one of record as of the time the cause of action accrues as well as of the time the ac actio tion n is broug brought ht unl unles ess s the the ca caus use e of action is a continuing offer. *The stockholder must implead the real party in interest, i.e. the corporation. *In Chua v CA, CA, the SC held that the corporation must be impleaded since it is the real party in interest. 2. The ac acti tion on must must be nam amed ed unde underr the the corporation’s name 3. Genera Generall Rul Rule: e: The stockholder bringing the the suit suit mu must st have have exha exhaus uste ted d intr intraacorporate remedies within the corporation. Exception: If the very person to be sued is the responsible officers themselves. **This is a condition precedent. 4. Th The e suit suit is not not inte intend nded ed to har haras ass s the the defendant, not a nuisance or harassment suit. 5. Ap Appra prais isal al right right must must no nott be an availab available le remedy.

Q: Why Q: Why derivative? A: A:   From the word derive. The one bringing the suit derives the cause of action from the corporation.

Ind In divi ividual s uit is his a spersonal uit filed right by has the stockholder because been been vi viol olat ated ed.. The ca caus use e of acti action on is 35

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro pe pers rson onal al to th the e stoc stockh khol olde der. r. The The pa part rty y injured is the stockholder himself. Representative suit is suit is a suit filed by a group of stockholders that suffered common injury.

1. Subscription corporation.

a

*Contracts between the subscribers. 2 Fold Characteristics:

SUBSCRIPTION CONTRACT: A. Ways to become Corporation

in inc corpo orpora rati tion on su subs bscr crip ipti tion on may be revo revoke ked d afte afterr the the subm submis issi sion on of the the articles of incorporation to the SEC.”

Stockholder

contract

with

of

a

the

2. Purc Purcha hase se or ac acqu quis isit itio ion n of shar shares es fro from m existing stockholders. 3. Purchas Purchase e of treasury treasury shares shares from from the corporation. *All of them involve shareholdings. *Subscription is unique because it involves unissued shares. B. Concep Conceptt of Subs Subscrip criptio tion n Contra Contract ct Subscription Contract is, Contract is, under Sec. 60 of the Corporation Code, Code, “any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shallll be deemed sha deemed a subscr subscripti iption on within within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract.” *This is strictly regulated by the Corporation Code.

C. Kinds Kinds of of Subs Subscr cript iption ion 1. Pre-incorpor Pre-incorporation ation subscription subscription   – one entered into before incorporation. Sec. 61 of th Sec. the e Corp Corpor orat atio ion n Cod Code provides that: “A subscription for shares of stock of a corporation still to be formed shall shall be ir irrev revoc ocab able le for for a perio period d of at least 6 months from the date of su subs bscr crip ipttio ion, n, unle unless ss al alll of the the oth other subscribers subscri bers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subs subscri cript ption ion:: Provid Provided ed,, That That no prepre-

a. It is a contra contract ct betw between een s subs ubscri cribers bers.. b. Ma May y be regar regarded ded a as s con conti tinui nuing ng offer offer on the part of the subscriber concerned which the corporation may accept acc ept upon upon acq acquisi uisitio tion n of juri juridic dical al personality. Reason: The corporation is not yet in Reason: The existence. 2. Post incorporation subscription – subscription – one entered ent ered into afte afterr the inc incorpo orporati ration on for the acquisition of unissued stock. *Contracts between the subscribers and the corporation. *Creates a creditor-debtor relationship.

D. Con Conside siderat ration ion for th the e Issuanc Issuance e of Shares Shares Sec. 62 of the Corporation Code  Code   provides that that:: “S “Sto tock cks s sh shal alll not not be is iss sued ued for for a co cons nside idera ratio tion n less less than than the par par or iss issue ued d price thereof. Consideration Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or inta intang ngib ible le,, actu actual ally ly rece receiv ived ed by the the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actu actual ally ly rend render ered ed to the the corp corpor orat atio ion; n; 4. Previ Pre vious ously ly incu incurre rred d in indeb debte tedn dnes ess s of the corporat corp oration ion;; 5. Amo Amount unts s tran transfer sferred red from unres unr estri trict cted ed retain retained ed earnin earnings gs to state stated d capital; and 6. Outstanding shares exch exchan ange ged d for for stoc stocks ks in the the even eventt of reclass recl assific ificatio ation n of con convers version. ion. Where Where the consideration is other than actual cash, or cons consis ists ts of in inta tang ngib ible le prop proper erty ty such such as patents of copyrights, the valuation thereof shall initially be determined by the 36

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro inco incorp rpor orat ator ors s or the the bo boar ard d of dire direct ctor ors, s, subject to the approval by the SEC. Shares of stock shall not be issued in exchange for promi pro miss ssor ory y notes notes or futur future e se serv rvic ice. e. The The same same cons conside iderat ration ions s prov provide ided d for for in this this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorpo inc orporat ration ion or by the board of direct directors ors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absenc absence e thereof, thereof, by the sto stockh ckholde olders rs repr repres esen enti ting ng at leas leastt a majo majori rity ty of the the outstanding capital stock at a meeting duly called for the purpose.” Valid considerations for the subscription agreements: 1. Cash 2. Property 3. La Labo borr or serv servic ices es ac actu tual ally ly rend render ered ed to the corporation 4. Prior Prior cor corpor porat ate e oblig obligat ation ions s 5. Amou Amount nts s tr tran ansf sfer erre red d from from un unre rest stri rict cted ed retained earnings to stated capital 6. Outs Outsta tand ndin ing g sh shar ares es in exch exchan ange ge for for stocks in the event of reclassification or conversion.

2. By judi judici cial al acti action on.. 3. Co Coll llec ecti tion on fr from om cash cash divi divide dend nds s and and  withholding  withhold ing of s stock tock dividends. dividends. •

 When shares are considered delinquent Sec. 67 of the Sec. the Corpo rporati ratio on Cod ode e provides that: “Subject to the provisions of the contract of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corp corpora oration tion unpaid unpaid subscri subscripti ptions ons to the the ca capit pital al stoc stock k and and ma may y co colle llect ct the sa same me or su such ch per perce cent ntag age e there thereof, of, in either case with accrued interest, if any, as it may deem necessary. Payment of any unpaid subscription or any perc percent entag age e the there reof of,, toget togethe herr wi with th the the interest accrued, if any, shall be made on the the date date spec specif ifie ied d in the the cont contra ract ct of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due due and and paya payable ble and sh shall all make make the the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, co com mpute puted d fr from om su such ch date date unti untill full full payment. If within 30 days from the said date date no paym payment ent is ma made de,, al alll stoc stocks ks co cove vere red d by sa said id subsc ubscri ript ptio ion n sh shal alll thereupon become delinquent and shall be subjec ject to sale as her hereinaf nafter provided prov ided,, unle unless ss the boa board rd of dire directo ctors rs orders otherwise.”

E. Paym Payment ent of of Subsc Subscrip ripti tion on Q ： Whe When n paymen paymentt of the sub subscr scripti iption on is made? A: A:   Look into the subscription agreement. If subscription agreement is silent as to when the amount of subscription to be paid, the board of directors may call on all the unpaid subscribers to pay the remaining balance of their subscription. •

Remed ediies to subscription

enfor orc ce

1. By Extra-judicial auction.

payment

sale

at

*If there was no date as to payment of subscr sub script iption ion stated stated in the subs subscrip cription tion agreement, the board may call on all the unpaid subscribers to pay the remaining balance of their subscription. Failure to pay within 30 days from the said date, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale unless the board of directors orders otherwise.

of

public

F. Ce Cert rtifi ifica cate te of St Stoc ock k

37

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro P10 per share; payment made is P6000 covering 1000 shares. The P6000 shall be allocated equally to all shares. P6 per share has been paid. P4 per share is the liability.

Certificate of Stock is Stock is a written evidence of the shares of stock but it is not the share itself. *Does not represent credit. Q: How Q: How important is a stock certificate? A: A: It  It is an evidence of ownership of stocks. Q: Who issue stock certificate?

•

Certificate of Stock, quasi-negotiable Q: can Q: can the stock certificate be treated as negotiable instrument under NIL?

A: A: Stock  Stock certificates must be signed by the president or vice-president, countersigned by the secretary or assistant secretary.

A: No. The requisites are not complied  with. There is no engagem engagement ent to pay in sum certain in money.

Q: When Q: When certificate of stock may be issued?

*Negotiable instrument represents credit. Creditor-debtor relationship arises.

A: Sec. 64 of the Corporation Code states Code states that: “No certificate of stock shall be issued to a subscriber until the full amount of his subs subscr crip ipti tion on to toge geth ther er wi with th inte intere rest st an and d expenses (in case of delinquent shares), if any is due, has been paid.” •

Doctrine Doctrin e of Indivis Indivisibil ibility ity of Subscr Subscripti iption on Contract Doctrine of Indivisibility of Subscr Sub scripti iption on Contra Contract: ct: Fai Failure lure to pay any any of th the e in inst stal allm lmen ents ts due due would ould necessarily affect all the other installments because the subscription is to be tr trea eate ted d as on one, e, whol whole, e, en enti tire re,, indi indivi visi sibl ble e cont contra ract ct.. Up Upon on de defa faul ultt of payment on any of the installment results to entire subscription due and

Q: Are certificates of stock negotiable? A: A: They  They are negotiable in certain extent. That is why they are quasi-negotiable. *The title over the share can be assigne ass igned, d, tran transfe sferred rred by indorse indorsemen mentt and delivery. *Due course holding is not applicable.   G. Tr Trans ansfer fer of Shar Shares es If represented by a certific ifica ate, the following must be strictly complied with:  with:  1. Delivery of the certificate;

demandable.

2. Indorsement by the owner or his agent;

*The *The Cert Certif ific icat ate e of Stoc Stock k cann cannot ot be divided into portions.

3. To be valid to third parties, the transfer must ust be reco record rded ed in the book books s of the the corporation.

*No certificate of stock shall be issued until the full payment of the subscription. *The corporation has an automatic lien over the shares. Q:  Q:  What What wi will ll happ happen en to the the paym paymen entt already made by the subscriber? A: The A: The payment partially made shall be applied proportionately to all the shares covered by the subscription. Example:

*I *Iff not not repre represe sent nted ed by the the ce certi rtifi fica cate, te, the shares may be transferred by means of a deed deed of ass ssig ignm nmen entt and and su such ch is duly duly recorded in the books of the corporation. *To make the tra ran nsfer bind inding ing to the corporat corp oration ion and third third person, person, the transf transfer er must be recorded in the stock and transfer book of the corporation. Q: Who Q: Who is the owner of the share? A: A: The  The stockholder of record. 38

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

H. Los Lostt and Destro Destroyed yed Certif Certificat icate e of Stock Stock Sec. 73 of the Corporation Code  Code   provides that that:: “The “The fo foll llow owin ing g proc proced edur ure e shal shalll be followed for the issuance by a corporation of new new certi certific ficat ates es of stoc stock k in lie lieu u of thos those e  which have have been lost, stolen stolen or destroyed: destroyed: 1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in trip tripli lica cate te sett settin ing g fort forth, h, if po poss ssib ible le,, the the circumstances as to how the certificate was lost, los t, stole stolen n or dest destroy royed ed,, the the numb number er of shares represented by such certificate, the serial number of the certificate and the name of the corporation which issued the same. He shall also submit such other information and evidence which he may deem necessary; 2. Af Afte terr ve veri rify fyin ing g evidence th the e affi affida davi vitt the and anbooks d othe other information and with ofr the the corp corpor orat atio ion, n, said said corp corpor orat atio ion n shal shalll publish a notice in a newspaper of general circulation published in the place where the corpora cor poration tion has its princip principal al office, office, once a  week for 3 consecutive consecutive weeks at the ex expe pens nse e of th the e re regi gist ster ered ed owne ownerr of the the cert certifi ifica cate te of stoc stock k which which has has bee been n lost, lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner and the serial number of said certificate, and the number of shares repre rep rese sent nted ed by such such ce cert rtifi ifica cate te,, and and that that after the expiration expiration of 1 year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate of stock, the right to make such contest shall be barred and said corporation shallll cancel sha cancel in its books the certifi certificat cate e of stock which ich has bee een n los lost, stolen len or dest destroy royed ed and and is issu sue e in lie lieu u thereo thereoff new certifi cer tificat cate e of stock, stock, unless unless the regist registered ered owner files a bond or other security in lieu thereof as may be required, effective for a perio period d of 1 year year,, for for su such ch amou amount nt and and in such form and with such sureties as may be satis satisfac facto tory ry to the board board of dir direc ecto tors rs,, in  which case a new certificate may be issued even even befo before re th the e ex expir pirati ation on of the the 1 ye year ar period provided herein: Provided, That if a contest has been presente nted to said corporation corpora tion or if an action is pending pending in court

regarding the ownership ownership of said certificate of stock whi hic ch has has been los lost, stol ole en or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the the ow owne ners rship hip of sa said id ce cert rtifi ifica cate te of stoc stock k  which has been lost, stolen or destroyed. destroyed. Exce Ex cept pt in ca case se of fr fra aud, ud, bad bad fait faith, h, or negligence on the part of the corporation and its officers, no action may be brought against any co corpo rporat ration ion wh whic ich h sh shall all have have is issu sued ed certificate of stock in lieu of those lost, stolen or dest destro roye yed d pur pursu suan antt to the the pro proce cedu dure re above-described.” CORPORATE BOOKS AND RECORDS: A. Book Books s require required d to be kept kept by a C Corpo orporati ration on Sec. 74 of the Corporation Code  Code   provides that that:: “E “Eve very ry corp corpor orat atio ion n shal shalll keep keep and and ca caref refull ully y prese preserv rve e at its princ principa ipall offi office ce a reco record rd of all all busi busine ness ss tr tran ansa sact ctio ions ns and and minutes of all meetings of stockholders or memb me mbers ers,, or of the the board board of dir direc ecto tors rs or trustees, in which shall be set forth in detail the time and place of holding the meeting, how auth authoriz orized, ed, the not notice ice given, given, whe whether ther the meeting was regular or special, if special its object, those present present and absent, absent, and ever every y act act done done or ord ordered ered done done at the the meeting. Upon the demand of any director, trust tru stee ee,, stoc stockh khold older er or memb member, er, the tim time e  when any directo director, r, trustee, trustee, stock stockholder holder or member entered or left the meeting must be note noted d in the the minut inutes es;; and and on a si simi mila larr demand, the yeas and nays must be taken on any motion or proposition, and a record thereof ther eof car careful efully ly made. made. The protes protestt of any director, trustee, stockholder or member on any any acti action on or prop propos osed ed acti action on must must be recorded in full on his demand. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, tr trus uste tee, e, st stoc ockh khol olde derr or memb member er of the the corporation at reasonable hours on business days and he may demand, writing, for a copy of excerpts from said records or minutes, at his expens expense. e. Any Any offic officer er or agen agentt of the the corporation corporat ion who shall refuse refuse to allo allow w any director, trustee, stockholder or member of the the co corp rpor orat atio ion n to exam examin ine e and and co copy py 39

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro exce excerp rpts ts from from its record records s or minu minute tes, s, in accordance accord ance with the provisions provisions of this Code, shal shalll be liab liable le to such such dire direct ctor or,, trus truste tee, e, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this sect section ion fo forr such such ac acti tion on sh shall all be impo impose sed d upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this se sect ctio ion n th that at th the e pers person on dem demandi anding ng to exam examin ine e and and co copy py exce excerp rpts ts from from the the corp corpor orat atio ion’ n’s s re reco cord rds s an and d minut inutes es ha has s imprope imp roperly rly used used any informa information tion secure secured d through any prior examination of the records or mi minu nute tes s of such such co corpo rporat ration ion or of any any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book ook to be kn know own n as the the “s “sto tock ck and and tran transf sfer er bo book ok,” ,” in whic which h must must be kept kept a reco record rd of all all st stoc ocks ks in the the na name mes s of the the stockh sto ckhold olders ers alphabet alphabetical ically ly arrange arranged; d; the installments paid and unpaid on all stock for  which subscription has been made, and the date date of pay payment ment of any in ins stall tallme ment nt;; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by by-l -law aws s may may pr pres escr crib ibe. e. Th The e stoc stock k an and d transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the the corp corpor orat atio ion n at reas reason onab able le ho hour urs s on business days. No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in th the e Phil Philip ippi pine nes s un unle less ss he secu secure res s a license from the SEC and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation corpora tion is not precluded from perform performing ing or making transfer of its own stocks, in which case all the rulesagents, and regulations on stock transfer except the imposed payment of a lic licen ense se fee herei herein n provi provided ded,, sh shal alll be applicable.”

*Keeping of mandatory.

books

and

records

are

Books required to be kept: 1. Bo Book ok of min minut utes es – refle reflect cts s the decis decision ions s and actions of the Directors/Stockholders.

Board

of

2. Rec Record ord of all all bu busine siness ss trans transact action ions s 3. Stoc Stock k and and Tr Tran ansf sfer er Book Book/M /Mem embe bers rshi hip p Book 4. Bo Book oks s of Pro Proce ceed edin ings gs

B. Righ Rightt to Ins Inspec pectt Corpor Corporate ate Book Books s •

Basis and Inspection

Extent

of

the

Right

of

Q:  Q:  Is the keeping ing of thes hese book ooks mandatory? A: YES. YES. Section 144 of the Corporation Code provides penalty for any violation of the provision of the Code. Rationale: Right of inspection would be Rationale: Right futile. Right of inspection would not be exercised. •

Limitations on the Right of Inspection 1. The The boo books ks an and d record records s shall shall be open open to inspection at reasonable hours on business days. 2. Th The e books books an and d recor records ds shal shalll not be im impr prop oper erly ly used used any any in info form rmat atio ion n secured through any prior examination of the books or records.

•

3. The stockh stockholde older’s r’s demand demand mus mustt be in good faith or for a legitimate purpose. *Inspe *In specti ction on can be done person personally ally or through agent. Remedies to Enforce Right of Inspection *In case of refusal to exercise the right of inspect ins pection ion,, the sto stockh ckholde olderr concer concerned ned may file an action for mandamus before the RTC. *Can also claim damages. 40

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro MERGER AND CONSOLIDATION: A. Concep Conceptt of Merge Mergerr and Cons Consolid olidatio ation n Merger is one where a corporation absorbs Merger is the other and remains in existence while the others are dissolved. *Th Ther ere e is a cont contin inuo uous us flow flow of juri juridi dica call personality. Examples: A+B=B A+B+C=C A+B+C=A A+B+C=B Consolidation  is one where a new Consolidation  corpora cor poration tion is create created, d, and consol consolidat idating ing corporations are extinguished.

3. The plan of merge merger/c r/cons onsolid olidatio ation n shall shall be approved by the majority vote of the 2/3 of the sha shareho reholder lders s of the outs outstan tanding ding capital stock or members in case of a non-stock corporation. 4. Arti Articles cles of Merger Merger/Co /Consol nsolidat idation ion shall shall b be e exec execut uted ed by each each of the the cons consti titu tuen entt corporators, signed by the President or Vi Vice ce-P -Pre resi side dent nt and and cert certif ifie ied d by the the secretary or assistant secretary. 5. Four Four co copie pies s of the Arti Articl cles es of Merg Merger er or Consol Con solidat idation ion togeth together er wit with h fav favora orable ble recommendation of a pertinent government agency in certain cases shall be submitted to the SEC for approval. 6. The SEC shal alll is iss sue a certif ific ica ate or merger if it is satisfied that the merger or co cons nsol olid idat atio ion n of the the corpo orpora rati tion ons s concer con cerned ned is not inco inconsi nsiste stent nt wit with h the provisions of this Code and existing laws.

Examples: A+B=C C. Effe Effects cts o off Merger Merger or Cons Consolid olidati ation on A+B+C=D A + B + C = ABC A + B + C = XYZ

1. Al Alll prop proper erty ty,, real real or pers person onal al,, and and al alll receivables due to, and all other interest of each constituent corporation, shall be deem deemed ed tra trans nsfe ferre rred d to and and ve vest sted ed in such surviving or consolidated corporation without further act or deed.

B. Requis Requisites ites of of and Proce Procedur dure e for Merger Merger and and Consolidation

2. The s survi urviving ving or or consoli consolidat dated ed co corpor rporatio ation n

1. Approval Approval by major majority ity vote vote of the the Board Board of Directors of each corporation.

shall be responsible for all the liabilities and obligations of each of the constituent corporations.

2. Appr Approv oval al of th the e stoc stockh khol olde ders rs of each each corp corpor orat atio ion n re repr pres esen enti ting ng 2/3 2/3 of the the outstanding capital stock. 3. Appr Approv oval al of SEC SEC Cases: Cas es: Associate Associated d Bank Bank v CA; CA; Polyan Polyan v CA Procedure: 1. The Board Board of each each corp corporat oration ion shall shall draw up a plan of merger/consolidation. 2. The plan of merge mergerr or cons consolid olidatio ation n shall shall be appro approve ved d by major majority ity vo vote te of each each board of the concerned corporations at separate meetings.

3. An Any y clai claim, m, actio action n or pro proce ceed eding ing pe pend ndin ing g by or agai agains nstt any any of the the cons consti titu tuen entt corpora cor poration tions s may be pro prosec secute uted d by or again against st the the su surv rvivi iving ng or co cons nsoli olida date ted d corporations. 4. Th The e ri righ ghts ts of the the cr cred edit itor ors s or li lien en upon upon the property of any of each constituent corporation shall not be impaired by such merger or consolidation. 5. Di Diss ssol olut ution ion of other other cor corpo porat ration ion leavin leaving g the surviving or consolidated corporation exists. 41

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Remedy of the dissent Remedy dissenting ing stockh stockhold older: er: The dissenting stockholder stockholder may exercise his appraisal right. RIGHT OF APPRAISAL: A. Conc Concept ept of of Apprai Appraisa sall Right Right Appraisal Right is Right is the right to withdraw from the corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in corporate structure. *De Dema mand ndin ing g fo forr th the e rea reaso sona nable ble retu return rn of investment. *Sto Stockh ckhold olders ers cannot cannot exercis exercise e this right right at his pleasure. Requisites: 1. The The Stock Stockho holde lderr has dis disse sent nted ed 2. Corp rpo orate ate chang nge e must approved by the SEC. *Any changes stockholders’ right.

that

*Any changes that corporation’s existence.

have

bee een n

affect

the

concern

the

*Corporate changes that appraisal right can be availed of. 3. There There must must have have an unre unrestri stricte cted d retaine retained d earnings, *It is not a matter of right. Reason: If it is a matter of right it shall lead Reason: If to the diminution or depletion of corporate assets which is violative of the Trust Fund Doctrine.

B. Instan Instances ces of Apprais Appraisal al Right Right Sec. 81 of the Corporation Code  Code   provides that: “Any stockholder of a corporation shall have have th the e ri righ ghtt to di diss ssen entt and dema demand nd payment payme nt of the fair value of his shares in the following instances: 1. In case any amendm ame ndment ent to the arti articles cles of incorpor incorporatio ation n has the effect of changing or restricting the

rights of any stockholder or class of shares, or of 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. In case of sale, sale leas exchan hange, ge, tran transfer sfer, mortga mortgage, p led led,gelease, oe, r exc other dis isp po siti tio on , of all ge, or substantially all of the corporate property and assets as provided in the Code; and 3. In case of merger or consolidation.”

C. Requir ire ements for Appraisal Right

a

Vali lid d

Ex Exer erc cise

of

Sec. 82 of the Corporation Code  Code   provides that: “The appraisal right may be exercised by any any stoc stockh khold older er wh who o sh shall all have have vo vote ted d against agai nst the prop propose osed d cor corpora porate te act action, ion, by making a written demand on the corporation  within 30 days after the date on which the vote was taken for payment of the fair value of his shares shares:: Provided, That failure to make the the dema demand nd with within in such such peri period od shal shalll be deemed a waiver of the appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to such stockholder, upon surrender of the certificate or ce certi rtific ficate ates s of stoc stock k repre represe sent nting ing his shares, the fair value thereof as of the day prio priorr to the the date date on whic which h the the vote vote wa was s take taken, n, excl exclud udin ing g any any appr apprec ecia iati tion on or depreciation in anticipation of such corporate action. If within a period of 60 days from the date the corporate action was approved by the stockholders, the withdrawing stoc stockh khold older er and and the the co corpo rporat ration ion ca cann nnot ot agree on the fair value of the shares, it shall be determined and appraised by 3 disinterested persons, one of whom shall be named nam ed by the sto stockh ckholde older, r, another another by the corporation, and the third by the two thus chosen. The findings of the majority of the appraise appr aisers rs shall shall be fina final, l, and their award award shall be paid by the corporation within 30 days day s afte afterr such such awa award rd is made: made: Pro Provide vided, d, That Th at no paym paymen entt shal shalll be ma made de to any any dissenting stockholder unless the corporation has unres unrestr trict icted ed reta retaine ined d earni earning ngs s in its books to cover such payment: and Provided, further, That upon payment by the corporation of the agreed or awarded price, 42

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro the stockh stockholde olderr shall shall fort forthwi hwith th transf transfer er his shares to the corporation.” Requisites: 1. Any Any of the the in inst stan ance ces s se sett fort forth h by la law w must be present. 2. Disse Dissenti nting ng stockh stockhold older er must have have vo vote ted d against the proposed action. *Abstaining stockholder cannot claim or exercise his appraisal right. 3. Deman and d for paymen entt must be made  within 30 days from the date vote is taken thereon. Failure to make demand shall be deemed a waiver. 4. Price Price mus mustt be base based d on fair fair valu value e as of da day y pr prio iorr to da date te on wh whic ich h vote vote wa was s taken 5. Submi Submiss ssio ion n by wi with thdr draw awing ing stockh stockhold older er of his his shar shares es to the the corp corpor orat atio ion n for for notation of being a dissenting stockholder within 10 days from written demand. 6. Paym Paymen entt must must be made made on only ly when when the the corpo corporat ratio ion n has has unres unrestri trict cted ed retai retained ned earnings in its books. 7. Stock Stockhol holde derr must must trans transfe ferr his share shares s to the corpo corporat ration ion upon upon paym payment ent by the the corporation.

D. Eff Effect ects s of Exercis Exercising ing Apprai Appraisal sal Right Right Sec. 83 of the Corporation Code  Code   provides that: “From the time of demand for payment of the fair value of a stockholder’s shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, corporation, all rights accruing accruing to such shares, including voting and dividend rights, righ ts, shall shall be suspend suspended ed in acc accord ordanc ance e  with the provisions provisions of this Code, except the right of such stockholder stockholder to receive payment payment of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his votin ting and div iviide den nd righ rightts sha hall ll immediately be restored.”

Effects: 1. Al Alll ri righ ghts ts accru accruin ing g to such such shar shares es sha shall ll be suspended from the time of demand for for paym paymen entt of the the fai airr val alue ue of the the shares sha res unt untilil either either the aban abandon donmen mentt of the corporate action. 2. The dissenti nting stoc ock khol holder der shall be entit entitled led to rec receiv eive e payme payment nt of the fair fair valu value e of his his shar shares es as agre agreed ed upon upon between him and the corporation or as determined by the appraisers chosen by them. *Sec. 86. The dissenting stock can be sold during the pendency of its payment. Remedy in case appraisal right cannot be exercised: Dispose exercised:  Dispose the shareholdings. NON-STOCK CORPORATIONS: A. Defi Defini niti tion on and and Pu Purp rpo ose ses s of a No Nonn-St Stoc ock k Corporation Sec. 87 of the Corpo Corporat ration ion Code Code   states that: “For the purposes of this Code, a nonstock is one where no part of its income is distribu dist ributab table le as divi dividen dends ds to its members members,, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall,  whenever  whenev er neces necessary sary or proper, be used for the furtherance of the purpose or purposes for for whic which h the co corpo rpora ratio tion n wa was s orga organiz nized ed,, subject to the provisions of this Title. The provis pro vision ions s gove governi rning ng stoc stock k co corpo rpora ratio tions ns,,  when pertinen pertinent, t, shall be applicable applicable to nonstoc st ock k co corp rpor orat atio ions ns,, exc xcep eptt as may be covered by specific provisions of this Title.” *Se Sec. c. 87 sh shoul ould d be rea read d in harm harmon ony y wi with th Sec. 94. *A Non Non-st -stock ock corpora corporation tion is not pre preclud cluded ed from engaging in profit-business related. Sec. 88 of the Corporation Code provides that: “Non-stock corporations may be formed or orga organi nize zed d for for ch char arit itab able le,, reli religi giou ous, s, educational, professional, cultural, fraternal, literary,, scient literary scientific ific,, social, social, civic civic servic service, e, or si sim mil ilar ar purpo urpose ses, s, li like ke tr trad ade, e, in indu dus str try, y, agri agricu cult ltur ural al and and li like ke cham chambe bers rs,, or any any 43

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro combination combina tion thereof thereof,, subj subject ect to the spe specia ciall provisio prov isions ns of this Title Title governi governing ng partic particular ular classes of non-stock corporations.” *The purpose of a non-stock corporation is related to public welfare.

B. Disting Distinguis uished hed from from Stock Stock Corpo Corporati ration on Non- stock Stock Corporation Corporation Public welfare For profit Board of Trustees Board of directors Gene Ge neral rally, ly, th the e term term 1 year subjec ject to of office of trustees is hold-over principle 3 years City ty or munic municipa ipalit lity y By-laws By-l aws can provid provide e Ci principall for a different venue  where the principa as long as it is within office is located the Philippines Member may be deprived deprive d of their right to designa designate te proxies proxies by provi provisi sion ons s in th the e articles of incorpo inc orporati ration on or bylaws Reason: To Reason:  To promote camaraderie, toget tog ether hernes ness, s, un unity ity and familiarity. Generally, General ly, members members coul could d di direc rectly tly elect elect officers. Except unless unle ss AOI provide provides s otherwise.

Proxy is allowed

El Elec ecti tion on is vest vested ed upon Board of Directors

C. Mem Member bershi ship p in a Non-Sto Non-Stock ck Corpora Corporation tion Sec. 89 of the Corporation Code  Code   provides that: tha t: “The right of the membersh membership ip of any clas class s or clas classe ses s to vo vote te may may be lim limit ited, ed, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unles Un less s so limit limited, ed, broad broaden ened ed or den denied ied,, each member, regardless of class, shall be en enti titl tled ed to on one e vote vote.. Unle Unless ss othe otherw rwis ise e provided in the articles of incorporation of the by-la by-laws ws,, a memb member er may may vo vote te by proxy proxy in accordance accord ance with the provisions provisions of this Code. Voting Votin g by mail mail or othe otherr si simi milar lar means means by members of non-stock corporations may be au auth thor oriz ized ed by th the e by by-l -law aws s of no nonn-st stoc ock k corporations with the approval of, and under

such conditions which may be prescribed by, the SEC.” General Rule: Sec. 58 Exception:   Sec. Exception: Sec. 89. This provision provision allows denial of proxy. Reason: Reason:    Tunity o promfamiliarity. ote camaraderi rie e, togetherness, and *A member is entitled to 1 vote. However, su such ch rig right ht may may be lim limite ited, d, broad broadene ened d or denied in the Articles of Incorporation or ByLaws. Law s. Thus Thus,, the By By-la -laws ws of a non-s non-sto tock ck co corpo rporat ratio ion n may may prov provid ide e for for the the desi desired red voti voting ng ri righ ghts ts of me memb mber ers s incl includ udin ing g the the number of votes. Sec. 90 of the Corporation Code  Code   provides that: “Membership in a non-stock corporation and all rights arising therefrom are personal and non-transferable, unless the articles of inco incorp rpor orat atio ion n or the the by-l by-law aws s othe otherw rwis ise e provide.” Gene Ge nera rall Rule Rule::  Membership is nontransferable. Exception: If Exception:  If the Articles of Incorporation or the By-laws provide otherwise. Sec. 91 of the Corporation Code  Code   provides that: “Membership shall be terminated in the manner and for the causes provided in the artic art icles les of incor incorpor porat atio ion n or the the by by-la -laws ws.. Termina Term ination tion of mem members bership hip shall shall have have the effect of extinguishing extinguishing all rights of a member member in the corporation or in its property, unless other herwise pro rov vide ided in the art rtiicles of incorporation or the by-laws.” Rules on Place of Meeting: General Rule: Sec. 51 Exception: Sec. Exception:  Sec. 93 D. Rule on Distr Distribut ibution ion of of Asset Assets s Sec. 94 of the Corporation Code  Code   provides that: that: “In ca case se dis disso solu lutio tion n of a non-s non-sto tock ck corporation in accordance with the provisions of this Code, its assets shall be applied and distribu dist ributed ted as foll follows ows:: 1. All liabilit liabilities ies and obligations of the corporation shall be paid, sati satisf sfie ied d and and disc discha harg rged ed,, or adeq adequa uate te provision shall be made therefor; 2. Assets held hel d by the the co corp rpora oratio tion n upon upon a co condi nditio tion n requiring return, transfer or conveyance, and  which condition condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements; 3. Assets received and held by 44

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro th the e corpo orpora rati tion on subje ubject ct to li lim mitat itatio ions ns pe perm rmit itti ting ng th thei eirr us use e on only ly for for char charit itab able le,, religious, benevolent, educational or similar purpo purpose ses, s, but not not held held upo upon n a co cond nditi ition on requiring return, transfer or conveyance by

directing the submission thereof to a vote at a regul regular ar or sp spec ecial ial meet meeting ing of memb members ers having hav ing vot voting ing righ rights. ts. Written Written not notice ice setting setting forth the proposed plan of distribution or a su summ mmar ary y there thereof of and the date, date, tim time e and and

reason of the shalle be transferred or convey conveyed ed dissolution, to one or more mor corpora corp oration tions, s, so soci ciet etie ies s or orga organi niza zati tion ons s enga engage ged d in activ activiti ities es in the Phili Philippi ppines nes su subs bstan tantia tially lly similar to those of the dissolving corporation according to a plan of distribution adopted purs pursuan uantt to th this is Chap Chapter ter;; 4. As Asse sets ts othe otherr than than th thos ose e ment mentio ione ned d in the the prec preced edin ing g paragrap para graphs, hs, if any, shall be distrib distribute uted d in accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the bylaws, law s, deter determi mine ne th the e di dist strib ribut utive ive right rights s of members, or any clas ass s or classes of members, or provide for distribution; and 5. In any other case, assets may be distributed to such persons, societies, organizations or corpora cor poration tions, s, whethe whetherr or not org organiz anized ed for prof profit it,, as may may be spec specif ifie ied d in a plan plan of di dis str trib ibut utio ion n adop adopte ted d pursu ursuan antt to this this Chapter.”

place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in this Code for the giving giv ing of notic notice e of me meeti etings ngs to me memb mber ers. s. Such Suc h plan of distrib distributio ution n sha shallll be adop adopted ted upon approval of at least 2/3 of the members having voting rights present or represented by proxy at such meeting.” Q: Wo Would uld it be poss possibl ible e for a non non-s -sto tock ck co corpo rporat ratio ion n to be co conv nvert erted ed int into o a stoc stock k corp corpor orat atio ion n by mere mere amen amendm dmen entt of the the Articles of Incorporation? A: NO. Because NO. Because it would violate Section 87 of the the Co Corpo rporat ratio ion n Co Code de whic which h prohi prohibi bits ts dist distri ribu buti tion on of in inco com me as divi divide dend nds s to members.

Order of distribution: 1. All its its cred credito itors rs sha shall ll be paid paid;; 2. Assets held subject to return on dissolut diss olution ion,, shall shall be deliver delivered ed bac back k to their givers; 3. Asse Assets ts held held for for ch char arit itab able le,, re reli lig gio ious us purpose purp oses, s, etc., etc., withou withoutt a con condit dition ion for thei theirr re retu turn rn on diss dissol olut utio ion, n, shal shalll be conveyed to one or more organizations engaged in similar activities activities as dissolved corporation; and 4. All All othe otherr as asse sets ts shall shall be dist distri ribu bute ted d to members, as provided for in the Articles or By-Laws.

Reason: Fraudulent Reason:  Fraudulent to donors Q: Can Q: Can a stock corporation be converted to a non-stock corporation by mere amendment of the Articles of Incorporation? A: YES. Requirements: 1. Ap Appro prova vall of 2 2/3 /3 of of th the e me memb mbers ers 2. Ap Appr prov oval al of the the S SEC EC Q: What Q: What was relinquished? A: Proprietary rights. *Appraisal right is available. CLOSE CORPORATIONS: A. Concept; Distinguished Corporations

from

Open

Sec. 95 of the Corporation Code  Code   provides that: “A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by a non-stock

Sec. 96 of the Corpo Corporat ration ion Code Code   states that: “A corporation, within the meaning of this Code, is one whose articles of in inco corp rpor orat atio ion n provi rovide de that that:: (1) (1) All the the co corpo rporat ratio ion’s n’s is issu sued ed stoc stock k of all class classes es,, exclusive exclusi ve of treasury share shares, s, shall be held of record by not more than a specified number

corporation in the process of dissolution in the following manner: The board of trustees shall, sha ll, by majorit majority y vote, vote, adopt adopt a resolut resolution ion recom rec omme mend nding ing a plan plan of di dist strib ribut ution ion and and

of pers person ons, s, not not ex exce ceed eding ing 20; 20; (2) all the the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The 45

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro co corp rpor orat atio ion n sh sha all not not li list st in any any stoc stock k exchange exchan ge or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least 2/3 of its votin vo ting g led stoc stock k or votin voher ting g corpora right rigporation hts s tion is owne ow ned d or control con trolled by anot another cor which whi ch is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining min ing or oil compan companies ies,, stoc stock k exchang exchanges, es, banks, insurance companies, public utilities, educ educat ation ional al insti institut tutio ions ns and co corp rpora oratio tions ns declared to be vested with public interest in accordance accord ance with the provisions provisions of this Code. The provisions provisions of this Title shall shall primaril primarily y govern gov ern close close corporat corporations ions:: Pro Provide vided, d, Tha Thatt the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.” *Whether open or close corporation depends on its charter. Case: San Juan Structural The fo foll llow owin ing g must be state tated d in th the e Articles of Incorporation: 1. Memb Members ership hip is lim limit ited ed tto o 20 2. Tra ran nsfer or dis ispo pos sition of share res s is subject to specified restrictions 3. Prohib Prohibiti ition on agains againstt offe offerin ring g to the the publ public ic of th the e sh shar ares es or li list stin ing g in the the stock tock exchange. General Rule le:: An Any y co corpo rporat ration ion may may be incorporated as close corporation. Exceptions: 1. Minin Mining g or or oil oil comp compan anie ies s 2. Stoc Stock k ex exch chan ange ges s 3. Banks 4. Insu Insura ranc nce e compa compani nies es 5. Publ Public ic util utilit itie ies s 6. Educa Educatio tiona nall inst institu ituti tions ons 7. Corpo Corporat ration ions s declar declared ed to be ve vest sted ed with with public interest

Distinctions from Open Corporations: Open pen Cor Corp porati ration on Close lose Corp orporat oratio ion n articles must Its articles of Its cont ntain ain the the sp spec ecial ial incor inc orpor porat ation ion need need co matt tters ers presc prescri ribed bed only contain the ma by Section 97 aside from the general matt ma tter ers s in Sect Sectio ion n 14. Failure to do so precl pre clud udes es a de ju jure re cl clo ose co corp rpor orat atiion status Its status as an 2/3 of its voting stock ordinary stock or voting rights must co corrpora porati tion on is not not be owned or affected by the controlled by another corpora poration tion whic which h is ownership of its cor a close voting stock or voting not corporation rights Its Its arti articl cles es cann cannot ot Its articles may classify its directors classify its directors

general matters enumerated in Section ion 14 of the Corporation Code

B urpora sioratio nestion sn o f y tbe he co corp may ma managed by the stoc stockh khol olde ders rs if the the articl art icles es so pro provi vide, de, but they are liable as directors articles may The corporate Its officers and provide that any or all the corporate employees are of elected by a majority officers or employees may y be elec electe ted d or vote of all the ma appoint inted by the members of the app stockholders board of directors The pre-emptive right The pre-emptive right is subject to the is subject to no except ptio ions ns unle unless ss except exc eptions ions found found in exce Section ion 39 of the denied in the articles Corporation Code The app appra rais isal al ri right ght The The appra apprais isal al ri righ ghtt The may y be exer exerci cis sed may be exercised by ma and com ompe pell lled ed a stockholder only in and the the cases provided in against by a Sect Se ction ions s 81 and 42 corporation stockh khol older der for for any any of the the Co Corp rpor orat atio ion n stoc reason Code case of an Exce Except pt as rega regard rds s In of an redeem red eemable able sha shares res,, arbitration the purchase by the intracorporate by the corporation of its own deadlock stock must always be SEC, the corporation may y be orde ordere red d to made from the ma purchas ase e its own unrestricted unrest ricted retained retained pur B nreastsion of thie courspio s managed by the board of directors

earnings

shares from stockholders re reg gardles less of availability

the the of 46

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro unrestricted retained unrestricted retained earnings of Arbitration of Arbitration intracorporate intracorporate deadlock by the SEC deadlock by the SEC an available is not not a rem remedy edy in is case the directors or stockh sto ckholde olders rs are so divi divide ded d re resp spec ecti ting ng the managem management ent of the corporation.

reme remedy dy in ca case se the directors or stockh sto ckholde olders rs are so divi divide ded d resp respec ecti ting ng the the mana managem gemen entt of the corporation.

*In San Juan Structural Steel Fabricators v CA, CA, the SC held that the circumstance that around 99.86% of the total share holding of petitioner belongs to respondent would not  justify classificatio classification n of the corporation corporation as close. B. Perm Permis issi sive ve Pr Prov ovis isio ion ns in the the Ar Arttic icle les s of Incorporation Sec. 97 of the Corporation Code  Code   provides that: “The articles of incorporation of a close corporation may provide: 1. For a clas classif sific icat ation ion of shar shares es or right rights s and and the the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of  whom may be voted for and elected elected solely by a pa part rtic icul ular ar clas class s of st stoc ock; k; an and d 3. For For a greater grea ter quorum quorum or voting voting require requiremen ments ts in meeting mee tings s of stockh stockhold olders ers or dire directo ctors rs than than those provided in this Code. The articles of incorp inc orpora oratio tion n of a close close co corp rpora orati tion on may may provide that the business of the corporation may prov provid ide e th that at the the busi busine ness ss of the the co corp rpor orat atio ion n sh sha all be mana manage ged d by the the stockholders of the corporation rather than by a bo boar ard d of dire direct ctor ors. s. So long long as this this provision continues in effect: 1. No meeting of stoc stockh khol olde ders rs ne need ed be call called ed to elec electt dire direct ctor ors; s; 2. Unle Unless ss the the cont contex extt cl clea earl rly y requires otherwise, otherwise, the stockholde stockholders rs of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and 3. The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may like ikewise prov oviide that all offic ice ers or

employ empl oyee ees s or that that spec specif ifie ied d offi office cers rs or employees shall be elected or appointed by the stockholders, instead of by the board of directors.”   C. Res Restric trictio tions ns on Tran Transfe sferr of Shares Shares Sec. 98 of the Corporation Code  Code   provides that:: “Res that “Restric triction tions s on the righ rightt to tran transfe sferr sh shar ares es must ust appe appear ar in the the arti articl cles es of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more mo re oner onerou ous s than than gran grantin ting g the the ex exis istin ting g stockholders or the corporation the option to purc purcha hase se the the shar shares es of the the tr tran ansf sfer erri ring ng stoc stockh khold older er wi with th su such ch reaso reasona nable ble term terms, s, conditions or period stated therein. If upon the the ex expir pirat ation ion of sa said id perio period, d, the the ex exist isting ing stoc stockh khol olde ders rs or the the corp corpor orat atio ion n fail fails s to exerc rciise the option ion to purc rcha has se, the transferring stockholder may sell his shares to any third person.” Option Optio n Re Rest stric rictio tion n  – this this res restr tric icti tion on provides that no disposition of shares will be made unless the shares are offered first to the corporation or the stockholders. *Pre-emptive right is exercisable or available. *This restriction is valid and allowed. Reason: it Reason:  it is the one contemplated by law. *Restriction derogates private rights. Consentt Restric Consen Restriction tion   – this this rest restri rict ctio ion n provides that no disposition of shares will be made without the consent of directors. *This restriction is not valid. Reason:  It Reason:  burdensome.

is

more

onerous

and

CORPORATE DISSOLUTION/LIQUIDATION: A. Met Method hods s of Volunt Voluntary ary Cor Corpor porate ate Dissolu Dissolution tion and the Requirements therefor

47

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro of the board of directors or trustees and counte cou ntersig rsigned ned by the secret secretary ary of the corpora cor poration tion.. The SEC shall shall thereup thereupon on issue the certificate of dissolution.”

Dissolution  refers to the extinguishment of Dissolution  fr fran anch chis ise e or te term rmin inat atio ion n of co corp rpor orat ate e existence. Modes of Dissolution: Dissolution:

Requisites: 1. Volunt Voluntary ary disso dissolut lution ion 1. A me meeti eting ng mus mustt be held held o on n the c call all of of the directors or trustees;

2. Invol Involunt untar ary y dis disso solut lution ion Methods of Voluntary Dissolution: Dissolution: 1. Volunt Voluntary ary disso dissolut lution ion where where no cr credi editor tors s are affected

2. Notic ice e of the meeting shoul ould be given to the stockholders by personal delivery or registered mail at least 30 days prior to the meeting;

2. Volunta Voluntary ry disso dissoluti lution on where where credi creditors tors are affected 3. Sho Shorten tening ing of the corpora ratte term by amending the articles of incorporation

3. The The not notic ice e of meet meeting ing s sho hould uld a als lso o be published for 3 consecutive weeks in a newspaper published in the place;

*Dissolution takes effect upon the coming of the shortened term.

4. Th The e reso resolu luti tion on to diss dissol olve ve must must be appr approv oved ed by the the majo ajori rity ty of the the directors/ directo rs/trus trustees tees and appr approve oved d by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of members;

4. Ex Expir pirat atio ion n of corpo corpora rate te term term

•

Voluntary dissolution where no creditors are affected

5. A copy of the the re res solut lution ion shal alll be cert rtif ifie ied d by the maj ajo ori ritty of the directors or trustees and countersigned by the secretary;

Sec. 11 Sec. 118 8 of the the Corp Corpor orat atio ion n Code Code pr pro ovide ides that: at: “If “If dis iss solutio tion of a corporation does not prejudice the rights of any creditor having a claim against it, th the e di dis sso solu luti tion on may may be effe effect cted ed by majority vote of the board of directors or tr trus uste tees es,, and and by a re reso solu luti tion on duly duly adopt ado pted ed by th the e affir affirma mativ tive e vo vote te of the the stockholders owning at least 2/3 of the outstan outs tanding ding capital capital stock stock or of at leas leastt 2/3 of the members of a meeting to be held upon call of the directors or trustees aft after er pub public licat atio ion n of the the notic notice e of time time,, place pla ce an and d ob objec jectt of the the meet meeting ing for 3 cons consec ecut utiv ive e week weeks s in a ne news wspa pape perr publ publis ishe hed d in the the pl pla ace wher where e the the princ principa ipall of offic fice e of sa said id co corpo rporat ration ion is located; and if no newspaper is published in such place, then in a newspaper of genera gen erall circ circula ulatio tion n in the the Philip Philippin pines es,, af afte terr se send ndin ing g such uch noti notice ce to each each stoc ock khold older or member either by registered mail or by personal registered personal delivery at least 30 days prior to said meeting. A copy copy of th the e resolu resolutio tion n autho authoriz rizin ing g the the dissolution shall be certified by a majority

6. The The sign signed ed and coun counte ters rsign igned ed copy copy  will be filed with the SEC and the latt latter er will will is issu sue e the the cert certif ific icat ate e of dissolution

•

Voluntary dissolution Voluntary dissolution where creditors creditors are affected Sec. 11 Sec. 119 9 of the the Co Corp rpor orat atio ion n Co Code de provides that: “Where the dissolution of a corpora cor poration tion may prejudic prejudice e the righ rights ts of any credito creditor, r, the petitio petition n for dissolu dissolution tion sh shall all be fi file led d wi with th the the Secu Securit rities ies and and Exchange Commission. The petition shall be signed by a majority of its board of dir direc ecto tors rs or trust trustee ees s or other other offic officers ers havin having g the the ma manag nagem emen entt of its affai affairs rs,, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon upon by the the aff affir irma mati tiv ve vo vote te of the stockh sto ckhold olders ers represe representi nting ng at leas leastt twotwothird thirds s (2/3) (2/3) of the outs outsta tandi nding ng ca capit pital al 48

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro stock or by at least two-thirds (2/3) of the members at a meeting of its stockholders or members called for that purpose. If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition,

consecutive weeks in 3 public places consecutive is sufficient; 5. Obj Objec ectio tions ns must must be fi filed led n no o les less s than than 30 days nor more than 60 days after the entry of the order; 6. Aft After er th the e exp expira irati tion on of the the tim time e to file file

fix a date on or before which objections ther theret eto o may may be file filed d by an any y pe pers rson on,,  which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such da datte, a copy of the ord rde er shall all be published at least once a week for three (3) consecutive consecutive weeks in a newspaper of ge gene nera rall circ circul ulat atio ion n pu publ blis ishe hed d in the the municip mun icipalit ality y or cit city y where where the pri princip ncipal al office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or city. Upon five (5) day's notice, given after the date on which the right right to fi file le objec objecti tion ons s as fix fixed ed in the the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the materia mat eriall allegati allegations ons of the petitio petition n are true, it shall render judgment dissolving th the e co corp rpor orat atio ion n and and direc irecti ting ng su suc ch di disp spos osit itio ion n of its its ass assets ets as ju just stic ice e requires, and may appoint a receiver to collect such assets and pay the debts of the corporation.” Requisites: 1. Approval of the stockholders re repr pres esen enttin ing g at le leas astt 2/3 2/3 of the the

obje objec cti tio ons, a hear arin ing g shall be conducted upon prior 5 day notice to hear the objections; 7. Judgment shall be rendered diss dissol olvi ving ng the the co corp rpor orat atio ion n and and directing the disposition of assets; the  judgmentt may include  judgmen include appointme appointment nt of a receiver.

ou outs tstan tandi ding ng ca capit pital al stoc stock k or 2/3 of members in a meeting called for that purpose; 2. Filin ling of a Petit tition ion with ith the SEC signe sig ned d by major majority ity of dir direc ector tors s or trustees or other officers having the management of its affairs verified by Presiden Pres identt or Sec Secreta retary ry or Dir Direct ector. or. Claims and demands must be stated in the petition; 3. If peti petiti tion on is suffi uffici cien entt in form form and substa sub stance nce,, the SEC shall issue issue an Or Orde derr fi fixi xing ng a hear hearin ing g date date for for objections; 4. A copy of the Order shall be published at least once a week for 3 consecutive weeks inora ifnewspaper of general circulation there is no newspaper in the municipality or city of the principal office, posting for 3

•

Shortening of term of existence Sec. 12 Sec. 120 0 of the the Co Corp rpor orat atio ion n Co Code de provides prov ides that: that: “A volunt voluntary ary dissolu dissolution tion may be effected by amending the articles of incorporation to shorten the corporate term pursuant pursuant to the provis provisions ions of this Code. A copy of the amended articles of incorpo inc orporat ration ion shall shall be sub submit mitted ted to the Securities and Exchange Commission in accordanc ance wit ith h thi this Code. Upon appr approv oval al of the the amen amende ded d arti articl cles es of incorp inc orpora oratio tion n of the the ex expir pirati ation on of the the shortened term, as the case may be, the corpora cor poration tion sha shallll be dee deemed med dis dissol solved ved  without any further proceed proceedings, ings, subject to the provis isiions ons of this Code on liquidation.”

B. Conc Concep eptt of Invo Involun lunta tary ry Diss Dissolu oluti tion on and the the Grounds therefor Sec. 121 of the Corporation Code provides Code provides that: “A corporation may be dissolved by the Securities and Exchange Commission upon filing of a verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulations.” *This This mu must st be done done wi with th su subs bsta tanti ntive ve and and procedural due process. Grounds: 1. Fai ailu lure re to submit by-l -law aws s within the prescribed period 2. Fra Fraud ud in tthe he procu procurem rement ent of of Ce Certif rtifica icate te of Registration 49

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 3. Misrepr Misreprese esentat ntation ion as to the acti activit vities ies that that the corporation will undertake 4. Treas Treasur urer er’s ’s affid affidav avit it is false false 5. Continu Continued ed inoperat inoperation ion for 5 year years s 6. Failure to commence business transactions within 2 years from issuance of certificate of registration 7. To some ome cases ases,, perf perfor orm mance ance of ul ultr tra a vire vires s ac actt sinc since e it is a vi viol olat atio ion n to the the franchise but depending on the seriousness or gravity of the offense 8. Is Issu suanc ance e of wat watere ered d stoc stocks ks 9. De fa fac cto st stat atus us 10 10.. Fail Failur ure e to keep keep corp corpor orat ate e bo book oks s an and d re reco cord rds s de depe pend ndin ing g on the the grav gravit ity y or seriousness of the offense

trustee trust ees s for the the ben benef efit it of stoc stockh khol older ders, s, members mem bers,, credito creditors, rs, and othe otherr persons persons in interest. From and after any such conveyance by the corporation of its property in trus trustt for the bene benefit fit of its stock stockhold holders, ers, members, creditors and others in interest, all int intere erest st whic which h the the co corpo rpora rati tion on had had in the the property terminates, the legal interest vests in the trustees, and the beneficial interest in the the stoc stockh khold olders ers,, memb member ers, s, cr cred edito itors rs or other persons in interest. Upon the winding up of the the co corp rpo orate rate affai ffairs rs,, any any ass asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated escheated to the city or municipality municipality  where such assets are located. located. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.”

11. Violation of its charter charter D. Met Method hods s of Liq Liquida uidatio tion n or Win Windin ding g Up C. Corpo Corporat rate e Liquida Liquidatio tion n Liquidation  is a process by which all the Liquidation  assets of the corporation are converted into liquid assets in order to facilitate the payment of obligations to creditors, and the remaining balan balance ce if any is to be distri distribu bute ted d to the the stockholders.

1. By B Boa oard rd of of Dir Direc ecto tors rs 2. Thr Through ough a tru truste stee e to whom whom the p prope ropertie rties s are conveyed 3. By management committee rehabilitation receiver Q: Can Q: Can the 3 year period be extended? A: NO. NO.

or

*Liquidation takes place after dissolution. Sec. 122 of the Corporation Code provides that that:: “Eve “Every ry corp corpor orat atio ion n whos whose e char charte terr expires by its own limitation or is annulled by forfeitu forf eiture re or otherw otherwise ise,, or who whose se corporat corporate e existence for other purposes is terminated in any any other other mann manner, er, sh shall all nevert neverthe heles less s be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and and defen defendin ding g suit suits s by or again against st it and and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose

Reason: Beyond the 3 year period, there is Reason: Beyond no co corpo rpora rate te ex exist isten ence ce for al alll purpos purposes es subject to doctrine of relation. Remedy: Before Remedy:  Before the expiration of the 3 year period, appoint a trustee/receiver. Q: Durin uring g the the 3 ye year ar peri period od,, does does the the corporation enjoy corporate existence? A: YES. YES. But  But for limited purpose only, i.e., for liquidation purposes only. (Limited existence) Q: May such corporation sue during the 3 year period? A: YES. YES. But  But only when the subject matter is related to liquidation and winding up of its remaining affairs.

of continuing the business for which it was established. At any time during said three (3) year years, s, th the e corpo corporat ratio ion n is auth authori orize zed d and and empowered to convey all of its property to

*In case trustee/receiver is appointed, he is not bound by the 3 year period. *In Gelano v CA, CA, the SC held that the lawyer of the the co corpo rporat ration ion ca can n be co cons nside idered red as 50

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro trustee. The term trustee must be considered in its generic sense. Anyone who has been designated by the corporation to act on its behalf beh alf could could be consider considered ed as trustee trustee for purpo purpose ses s of purs pursuin uing g a claim claim for for and and on

otherwise whether enforcement is by court or not,, until not until reh rehabi abilit litat ation ion proc procee eedin dings gs are terminated. Cases:: PA Cases PAL L v Garc Garcia ia;; So Sobr brej ejua uani nite te;; Lingkod Manggagawa ng Rubberworld v

behal behalff of th the e corpo corporat ration ion.. A lawye lawyerr falls falls  within the ambit ambit of the word word “trustee.” “trustee.” *Appoint Appointment ment of trustee trustee can be inferred from the conduc conductt of the corporat corporation. ion. This This is by Implication. *If the corporation is the creditor appoint a trus truste tee. e. If th the e corp corpor orat atio ion n is the the de debt btor or appoint a receiver. Q:  Q:  What What if the corporate corporate properties properties have alr lre ead ady y been dis isttribu ibuted among the shareholders without trustee/receiver? A: A:   Remedy Remedy:: Run after the erring directors and officers.

Rubberworld Philippines; RCBC v IAC *In PA PAL L v Garci Garcia  a , the SC held that stay order suspends all enforcement in all stages of the proceedings. *In Lingkod Manggagawa sa Rubberworld v Rubberwor Rubberworld ld Philippines Philippines,, the the SC hel held d that labor claims are likewise affected by the Stop order. *In RCBC v IAC, IAC, the SC held that whether creditors are secured or not, stay order will still affect them. The preference preference still remains remains it is just the enforcement that is suspended.

E. Conc ncep eptt

of

Rehabili ilitation ion;

Effec ects ts

of

Appointment of Management Committee or Receiver Rehabilitation   conn Rehabilitation  connot otes es a reop reopen enin ing g or reorganization. reorgani zation. Contemplates Contemplates a continuance continuance of corporate existence in an effort to restore the th e corpo corporat ration ion to its its form former er su succ cces essf sful ul operation. *This is a remedy expressly allowed under Section 6 of PD 902-A. Purpose: To make financially viable again.

the

FOREIGN CORPORATIONS:

corporation

Substantive Grounds: 1. When there is imminent danger of diss dissip ipat atio ion n or wast wastag age e of corp corpor orat ate e assets 2. Seriou Serious s paraly paralyza zatio tion n of busine business ss which which  would work to the prejudice prejudice of the stoc st ockh khol olde ders rs and and cred reditor itors s of the the corporation *Mer *M ere e misc miscon ondu duct ct of an offi office cerr is no nott a ground for corporate rehabilitation. *A corpo corpora ratio tion n cann cannot ot as ask k for for co corp rpor orate ate reh eha abilit ilitat atiion and at the same time dissolution. *With the passage of RA8799, the remedy could now be instituted with the proper RTC. Effect: Stay Order Order - stops or suspends the en enfo forc rcem emen entt of all all cl clai aims ms for for mo mone ney y or

A. Con Concep ceptt of For Foreign eign Corpora Corporation tion Foreign Corpor Foreign Corporatio ation n  is a co corp rpor orat atio ion n formed, organized or existing under any law other other than than thos those e of the the Ph Phili ilippi ppines nes,, and and  whose laws allow Filipino citizens citizens and corp corpor orat atio ions ns to do busi busine ness ss in it its s own own country or state. Sec. 123 of the Corporation Code provides Code provides that that:: “F “For or the the purp purpos oses es of this this Co Code de,, a foreign corporation corporation is one formed formed,, organized organized or existing under any laws other than those of the the Ph Phili ilippi ppines nes and and wh whos ose e laws laws all allow ow Fi Fili lipi pino no ci citi tize zens ns and and corp corpor orat atio ions ns to do business in its own country or state. It shall have hav e the rig right ht to tra trans nsac actt busin busines ess s in the the Phili Ph ilippi ppine nes s after after it sh shall all have have obta obtaine ined d a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency.” Reciprocity Clause provides Clause provides that the foreign laws allow Filipino citizens and corporations to do business in its own country or state.

B. Tests to Determine Corporation

Nationality

of

a

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 1. Incor Incorpo pora ratio tion n Test Test   – when the corporat corp oration ion is incorpo incorporate rated, d, orga organiz nized ed under the law of other country. 2. Cont Contro roll Test Test   – for purposes of investment; the citizenship of a particular corporation is to be determined by the citizenship of the controlling stockholders.

C. Conc ncep eptt of “D “Doi oin ng Business” License Requirement therefor

and

the the

Substance Test  Substance Test  prov provide ides s that that:: a fore foreign ign corporation is doing business in the country if it is continuing the body or substance of the en ente terp rpri rise se of bu busi sine ness ss for for whic which h it was was organized. Cont Co ntin inuit uity y Test Test   prov provid ides es that that:: do doin ing g business implies a continuity of commercial dealings and arrangements, and contemplates to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and object of its organization. *For Foreign eign Corpor Corporatio ation n is require required d to obtain obtain license from the SEC to enable them to do business in the Philippines. *The The fo forei reign gn corpo corporat ration ion must must appoi appoint nt a reside res ident nt agent agent so that that co court urt ma may y ac acqui quire re  jurisdiction  jurisdic tion over over the foreign corpor corporation ation *License is essential if there is an intention to maintain main or substance of the business in the Philippines or to continue the same.

Rule: they Rule: they have have no acce access ss in Phil Philip ippi pine ne Courts Exceptions: 1. Isola Isolate ted d tr trans ansac actio tions ns 2. Infri Infringe ngeme ment nt of of trad tradem emark ark *I *Int nter erna nati tion onal al offe offens nse e can can be sued sued anywhere. Cases: Cas es: Exp Expert ert Travel Tours v CA; Home Insurance v Eastern Shipping Lines *In Expert Travel Tours v CA, CA, the SC held that resident agent is not with authority to execut exe cute e a cert certific ificati ation on of Foru Forum m shopping shopping following Sec. 23 of the Corporation Code. *In Home Insurance v Eastern Shipping Lines,, the SC held that if at the time the suit Lines  was brought, the suing foreign entity already have license to do business in the Philippines, the suit will be allowed although at the time the transactio transaction n was made it does not have the requisite of a license to do so, the remedial defect is cured. Cases: Japan Airlines v CA *In Japan Airlines v CA, CA, the SC held that the the sell sellin ing g of ti tick cket ets s thou though gh ther there e is no aircraft landing in the Philippines constitute doing business in the Philippines. *In Ericks v CA, CA, the SC held that license is necess nec essary ary in ord order er the fore foreign ign cor corpora poration tion may sue. In this case, the court considered the continuity test, they found out that the foreign corporation has the intent to continue business in the Philippines. *Cre *Credi ditt is obta obtain ined ed to maint aintai ain n transactions.

lo long nger er

D. Effe Effects cts o off Being Being Issue Issued d a License License

*Lack of license does not affect the validity of the transaction.

1. The They y are are placed placed under under the juri jurisdi sdicti ction on of the Philippine courts

*License is for regulatory purposes.

2. The They y are are placed placed under under the sam same e footin footing g as domestic corporations

*Lic *Licen ense se re requ quir irem emen entt do does es no nott prev preven entt performance of acts that are isolated from the th e main main busin busines ess s of the co corp rpora oratio tion n and there is no intent to continue the same in the Philippines. *If the foreign corporation is not licensed to do busin usines ess s in th the e Phil Philip ippi pine nes s, General

3. The pub public lic iis s protec protected ted in de dealin aling g with with foreign corporations.

E. Rev Revoca ocatio tion n and W With ithdraw drawal al of Licen License se Grounds for Revocation: 52

 

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 1. Failure Failure to to file file its annual annual repor reportt or pay pay any any fees as required by the Corporation Code 2. Failure to appoint and maintain a re resi side dent nt ag agen entt in the the Phil Philip ippi pine nes s as required by the Corporation Code 3. Failure Failure,, after after chang change e of its resident resident agent agent or his address, to submit to the SEC a statement of such change as required by the Corporation Code 4. Failure to submit to the SEC an authenticated copy of any amendment to its articles of incorporation or by-laws or of any articles articles of merger or consolidation consolidation  within the time prescribed prescribed by the Corporation Code 5. A mis isre repr pres esen enta tati tion on of any any mate materi rial al matter in any application, report affidavit or ot othe herr docu docume ment nt su subm bmitt itted ed by su such ch corporation pursuant to the provisions of the Corporation Code 6. Failure Failure to to pay any any and and all taxes, taxes, impo imposts sts,, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivision 7. Trans Transac acti ting ng busi busine ness ss in the the Phili Philipp ppine ines s outside of the purpose or purposes for  which such corporation corporation is authorized authorized under its license 8. Trans Transac acti ting ng busi busine ness ss in the the Phili Philipp ppine ines s as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines 9. Any other other ground ground as as would would rende renderr it unfi unfitt to transact business in the Philippines.

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