The Corporation Code

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The Corporation Code A. Corporation 1. Definition A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence (Sec 2). 2. Attributes of the Corporation A corporation has four (4) attributes: (1) It is an artificial being  Person created by law with personality separate and distinct from its stockholders or members Created by operation of law;  Its existence is dependent on the grant of the State. Thus, mere agreement of the parties is not sufficient to create a Corporation. With right of succession;  Existence is not affected by the death, incapacity or withdrawal of its stockholders or members Has the powers, attributes, and properties as expressly authorized by law or incident to its existence.  As it is a mere creature of law, it can only exercise such powers granted by law.

(2)

(3)

(4)

B. Classes of Corporations a. Under Sec 3 Stock Corporation Non – stock Corporation With capital stock divided into shares and is All other corporations not within the definition of authorized to distribute dividends to such holders a stock corporation. of shares Organized for profit Not organized for profit and no part of its income shall be distributable as dividends. Governing body is Board of Directors Governing body is Board of Trustees

b. Other classes

C. Nationality of Corporations

1. Place of Incorporation Test

2. Control Test

2. Grandfather Rule

D. Corporate Juridical Personality

1. Doctrine of Separate Juridical Personality

a. Liability for Torts and Crimes

b. Recovery of Moral Damages

2. Doctrine of Piercing the Corporate Veil

a. Grounds for Application of Doctrine

b. Test in Determining Applicability

E. Incorporation and Organization

1. Promoter

a. Liability of Promoter

b. Liability of Corporation for Promoter’s Contracts

2. Number and Qualifications of Incorporators

3. Corporate Name—Limitations on Use of Corporate Name

4. Corporate Term

5. Minimum Capital Stock and Subscription Requirements

6. Articles of Incorporation

a. Nature and Function of Articles

b. Contents

c. Amendment

d. Non-Amenable Items

7. Registration and Issuance of Certificate of Incorporation

8. Adoption of By-Laws

a. Nature and Functions of By-Laws

b. Requisites of Valid By-Laws

c. Binding Effects

d. Amendment or Revision

F. Corporate Powers

1. General Powers, Theory of General Capacity

2013 Bar Examination Coverage Mercantile Law 8

2. Specific Powers, Theory of Specific Capacity

a. Power to Extend or Shorten Corporate Term

b. Power to Increase or Decrease Capital Stock or Incur, Create, Increase

Bonded Indebtedness

c. Power to Deny Pre-Emptive Rights

d. Power to Sell or Dispose of Corporate Assets

e. Power to Acquire Own Shares

f. Power to Invest Corporate Funds in Another Corporation or Business

g. Power to Declare Dividends

h. Power to Enter Into Management Contract

i. Ultra Vires Acts

i. Applicability of Ultra Vires Doctrine

ii. Consequences of Ultra Vires Acts

3. How Exercised

a. By the Shareholders

b. By the Board of Directors

c. By the Officers

4. Trust Fund Doctrine

G. Board of Directors and Trustees

1. Doctrine of Centralized Management

2. Business Judgment Rule

3. Tenure, Qualifications and Disqualifications of Directors or Trustees

4. Elections

a. Cumulative Voting/Straight Voting

b. Quorum

5. Removal

6. Filling of Vacancies

7. Compensation

8. Fiduciaries Duties and Liability Rules

9. Responsibility for Crimes

10. Inside Information

12. Contracts

a. By Self-Dealing Directors with the Corporation

b. Between Corporations with Interlocking Directors

2013 Bar Examination Coverage Mercantile Law 9

c. Management Contracts

16. Executive Committee

17. Meetings

a. Regular or Special

i. When and Where

ii. Notice

b. Who Presides

c. Quorum

d. Rule on Abstention

H. Stockholders and Members

1. Rights of a Stockholder and Members

a. Doctrine of Equality of Shares

2. Participation in Management

a. Proxy

b. Voting Trust

c. Cases When Stockholders’ Action is Required

i. By a Majority Vote

ii. By a Two-Thirds Vote

iii. By Cumulative Voting

3. Proprietary Rights

a. Right to Dividends

b. Right of Appraisal

c. Right to Inspect

d. Pre-Emptive Right

e. Right to Vote

f. Right to Dividends

g. Right of First Refusal

4. Remedial Rights

a. Individual Suit

b. Representative Suit

c. Derivative Suit

5. Obligation of a Stockholder

2013 Bar Examination Coverage Mercantile Law 10

6. Meetings

a. Regular or Special

i. When and Where

ii. Notice

b. Who Calls the Meetings

c. Quorum

d. Minutes of the Meetings

I. Capital Structure

1. Subscription Agreements

2. Consideration for Stocks

3. Shares of Stock

a. Nature of Stock

b. Subscription Agreements

c. Consideration for Shares of Stock

d. Watered Stock

i. Definition

ii. Liability of Directors for Watered Stocks

iii. Trust Fund Doctrine for Liability for Watered Stocks

e. Situs of the Shares of Stock

f. Classes of Shares of Stock

4. Payment of Balance of Subscription

a. Call by Board of Directors

b. Notice Requirement

c. Sale of Delinquent Shares

i. Effect of Delinquency

ii. Call by Resolution of the Board of Directors

iii. Notice of Sale

iv. Auction Sale and the Highest Bidder

5. Certificate of Stock

a. Nature of the Certificate

b. Uncertificated Shares

c. Negotiability

i. Requirements for Valid Transfer of Stocks

2013 Bar Examination Coverage Mercantile Law 11

d. Issuance

i. Full Payment

ii. Payment Pro-Rata

e. Lost or Destroyed Certificates

6. Stock and Transfer Book

a. Contents

b. Who May Make Valid Entries

7. Disposition and Encumbrance of Shares

a. Allowable Restrictions on the Sale of Shares

b. Sale of Partially Paid Shares

c. Sale of a Portion of Shares Not Fully Paid

d. Sale of All of Shares Not Fully Paid

e. Sale of Fully Paid Shares

f. Requisites of a Valid Transfer

g. Involuntary Dealings with Shares

J. Dissolution and Liquidation

1. Modes of Dissolution

a. Voluntary i. Where No Creditors Are Affected 1. Vote needed a. Majority vote of BoD or BoT b. Approval of 2/3 SH or members 2. Certification of resolution authorizing the dissolution 3. SEC issues Certificate of Dissolution ii. Where Creditors Are Affected 1. File petition for dissolution with SEC. a. Contents of petition  Claims and demands against the Corporation  Signature of majority of the BoD or BOT  Vote of 2/3 SH or members 2. SEC fixes a date when objections may be filed a. Not less than 30 days and not more than 60 days after entry of order 3. Publication of order

iii. By Shortening of Corporate Term

b. Involuntary

i. By Expiration of Corporate Term

ii. Failure to Organize and Commence Business Within 2 Years from

Incorporation

iii. Legislative Dissolution

iv. Dissolution by the SEC on Grounds under Existing Laws

2. Methods of Liquidation

a. By the Corporation Itself

b. Conveyance to a Trustee within a 3-Year Period

c. By Management Committee or Rehabilitation Receiver

d. Liquidation after Three Years

2013 Bar Examination Coverage Mercantile Law 12

K. Other Corporations

1. Close Corporations

a. Characteristics of a Close Corporation

b. Validity of Restrictions on Transfer of Shares

c. Issuance or Transfer of Stock in Breach of Qualifying Conditions

d. When Board Meeting is Unnecessary or Improperly Held

e. Pre-Emptive Right

f. Amendment of Articles of Incorporation

g. Deadlocks

2. Non-Stock Corporations

a. Definition

b. Purposes

c. Treatment of Profits

d. Distribution of Assets upon Dissolution

3. Religious Corporations - Exclude

4. Foreign Corporations

a. Bases of Authority over Foreign Corporations

i. Consent

ii. Doctrine of “Doing Business” (relate to definition under the Foreign

Investments Act, R.A. No. 7042)

b. Necessity of a License to Do Business

i. Requisites for Issuance of a License

ii. Resident Agent

c. Personality to Sue

d. Suability of Foreign Corporations

e. Instances When Unlicensed Foreign Corporations May Be Allowed to Sue

Isolated Transactions

f. Grounds for Revocation of License

L. Mergers and Consolidations 1. Definition and Concept

Merger In a merger, one of the constituent corporations remains as an existing juridical person whereas the other corporation will cease to exist. The surviving corporation acquires all the assets, rights of actions and assumes all liabilities of the dissolved corporation. Consolidation In a consolidation, both constituent corporations will cease to exist and a new corporate entity will emerge. This new corporate entity is the consolidated corporation and acquires all the assets and assumes the liabilities of both corporations. 2. Constituent vs. Consolidated Corporation Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation. (Sec 76) 3. Plan of Merger or Consolidation The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: 1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; 2. The terms of the merger or consolidation and the mode of carrying the same into effect; 3. A statement of the changes, if any, in the articles of incorporation of the s u r v i v i n g corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and 4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable 4. Articles of Merger or Consolidation After the approval by the stockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation setting forth: 1. The plan of the merger or the plan of consolidation; 2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members; and 3. As to each corporation, the number of shares or members voting for and against such plan,

respectively. (n)

5. Procedure 1. The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve by majority vote a plan of merger or consolidation. 2. Approval by the stockholders or members of each corporation in a separate meeting. The affirmative vote of 2/3 of the outstanding capital stock of each corporation is needed for the plan’s approval. (1) Notice of such meeting must be given 2 weeks prior to the date of meeting and shall include a summary of the plan of merger or consolidation. Dissenting stockholder may exercise his appraisal right in accordance with the Code. Any amendment to the plan must be approved by a. Majority vote of the BoD of all constituent corporation and b. Affirmative vote of 2/3 of the outstanding capital stock or members of each of the constituent corporation. 3. Articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation. 4. Submission of the articles of merger or consolidation to SEC for approval. 6. Effectivity The merger or consolidation shall be effective upon the issuance of the certificate of merger or consolidation by the SEC. 7. Limitations a. Shall not create monopolies b. Shall not eliminate free and healthy competition c. 8. Effects a. Constituent corporations shall become a single corporation. b. Separate existence of constituent corporations shall cease. c. Surviving corporation shall possess all the immunities and powers and shall be subject to all duties and liabilities of a Corporation d. Surviving corporation shall acquire from the constituent corporations the following:

(2) (3)

   

Rights, privileges, immunities and franchises Property Receivables Other choses in action

e. Surviving corporation shall be responsible and liable for:   Liabilities of each constituent corporations Any pending claim, action or proceeding brought by or against any of the constituent corporation

f.

Rights of creditors or liens upon properties shall not be impaired by such merger or consolidation

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