commercial law review swu sy2010 11 corporation law 2

7/29/2019 Commercial Law Review SWU SY2010 11 Corporation Law 2

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CORPORATION CODE

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Corporation Code

Corporation defined an artificial being created by

operation of law having the right of succession, and the

powers, attributes and properties expressly authorized bylaw and incident to its existence (Sec. 2)

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Corporation Code

Similarities between corporation and partnership:

1. Like a corporation, a partnership has a juridical

personality separate and distinct from that of each of

the partners

2. Like a corporation (aggregate), a partnership iscomposed of two or more persons, i.e., a group of

persons

3. Like a corporation, a partnership can act only through

agents

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Corporation Code

Corporation Partnership

Created by operation of law Created by agreement of the parties

Requires at least 5 incorporators (exceptcorporation sole)

Requires only 2 partners

Can exercise only the powers expressly granted

and those that are incident to its existence

May do anything agreed by the parties except

those contrary to law, morals, good customs,

public order & public policy

Must do business through its BOD Every partner is an agent of the partnership,hence, can act for the PH

Liability of members/stockholders limited to

the extent of their contribution

Liability of partners, except limited partners,

extend to all their property

Has right of perpetual succession (survives the

death /withdrawal of stockholders/members)

No right of succession (death, insolvency,

withdrawal, civil interdiction dissolves PH

A stockholder has a right to transfer shares

without the consent of the other stockholders

A partner cannot transfer his interest so as to

make the transferee a partner without other

partners consent

Life of a corporation is limited to 50 years Partnership may be created for an indefinite

period

Cannot be dissolved by mere agreement of themembers/stockholders

Partners may dissolve their partnership anytimethey see fit 4


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Corporation Code Classification of corporations

Stock corporation - a corporation which has capital stockdivided into shares, and is authorized to distribute profits on the

basis of the shares thus held

Non-stock corporation - a corporation where no part of its

income is distributable as dividends to its members, trustees, orofficers, subject to the provisions of the Corporation Code on

dissolution

Public corporation - one formed or organized for the

government of a portion of the State; its purpose is for thegeneral good and welfare.

Private corporation - one formed for some private purpose,

benefit, aim or end

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Corporation Code - Classification of corporations

De jure corporation - a corporation formed with all the

requirements of law

De facto corporation - a corporation defectively formed from

a bona fide attempt to incorporate under existing laws, andwhich exercises corporate powers

Requisites:

1. organized under a valid law

2. bona fide compliance with formalities of law3. user of corporate powers

4. issuance of certificate of incorporation

Example:

A corporation that fails to submit its by-laws on time.6


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Corporation by estoppel - a group of persons which holds

itself out as a corporation and enters into a contract with third

persons on the strength of such appearance

Corporation sole - a special form of corporation which maybe formed by the chief archbishop, bishop, priest, minister,

rabbi or other presiding elder of such religious denomination,

sect or church for the purpose of administering and managing, as

trustee, the affairs, property and temporalities of such

denomination, sect or church

Corporation aggregate - one with incorporators not less than

five (5) nor more than fifteen (15), in stock corporations, or up

to more than 15 in non-stock corporations

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Eleemosynary corporation - one organized for charitable

purpose

Domestic corporation - a corporation formed, organized or

existing under the laws of the Philippines

Foreign corporation - a 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 country or state

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Corporation Code Nationality of corporations

Domiciliary test - the country where the corporation was

incorporated determines the nationality of a corporation

Control test - if the controlling stock of a corporation is

owned by citizens of a particular country, then that corporation,

although organized in the Philippines, is a foreign corporation

Applied to Philippine setting: Shares belonging to

corporations or partnerships at least 60% of the capital of

which is owned by Filipino citizens shall be considered as

of Philippine nationality.

Grandfather rule - The method by which the percentage of

Filipino equity in a corporation engaged in nationalized and/or

partly nationalized areas of activities, provided for under the

Constitution and other nationalization laws, is computed, in

cases where there are corporate shareholders. 9


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Corporation Code Doctrine of separate juridical personality

A corporation is a juridical person separate and distinct from its

members or stockholders.

Application of doctrine:

1. Since a corporation is clothed with a personality separate and

distinct from that of the persons composing it, it may notgenerally be held liable for the personal indebtedness of its

stockholders or those of the entities connected with it.

2. Being an officer or stockholder of a corporation does not byitself make ones property also that of the corporation, and

vice versa, for they are separate entities, and that the

shareholders are in no legal sense the owners of corporate

property which is owned by the corporation as a distinct legal

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Corporation Code - Doctrine of separate juridical personality

3. Mere ownership by a single stockholder, or by another

corporation, of all or nearly all of the capital stock of acorporation is not of itself sufficient ground for disregarding the

separate corporate personality.

4. If used to perform legitimate functions, a subsidiarysseparate existence must be respected, and the liability of the

parent corporation as well as the subsidiary will be confined to

those arising in their respective business.

5. The property of the corporation is not the property of its

stockholders or members and may not be sold by the

stockholders or members without express authorization from the

corporations board of directors.

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6. Tax privileges enjoyed by a corporation do not extend to itsstockholders.

7. A corporate defendant against whom a writ of possession

has been issued, cannot use its controlling equities in thecorporate plaintiff to suspend enforcement of the writ, because

of their separate juridical personality, thus their separate

business and proprietary interests.

8. Even when the foreclosure of the assets of the corporationwas wrongful and done in bad faith, its stockholders have no

standing to recover for themselves moral damages

proportionate to their equity holdings.

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9. The President cannot be held solidarily liable with the

corporation for the accident caused by its truck driver and

cannot be held solidarily liable for the judgment obligation

arising from quasi-delict, since the fact alone of being

President is not sufficient to hold him solidarily liable for theliabiliteis adjudged against the corporation and its employee.

10. The Treasurer, although he has official custody of the

finances of the company, cannot be held personally liable for

the judgment rendered against the corporation.

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Liability for torts:

A corporation can be held liable for torts committed by its

officers for corporate purpose.

Liability for crimes:

Since a corporation is a mere legal fiction, it cannot be

held liable for a crime committed by its officers, since it does

not have the essential element of malice; in such case theresponsible officers would be criminally liable.

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Recovery of moral damages:

General rule:A corporation, being an artificial person which has no

feelings, emotions or senses, and which cannot experience

physical suffering or mental anguish is not entitled to moral

damages.

Exception:

When the corporation has a good reputation that is debased,

resulting in its humiliation in the business realm.

Also, a corporation may recover damages under item 7 of

Art. 2219 of the Civil Code which expressly authorizes the

recovery of moral damages in cases of libel, slander or any other

form of defamation. 15


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Corporation Code Doctrine of piercing the corporate veil

Concept:Piercing the veil of corporate fiction means looking through

the corporate form to the individual stockholders composing it.

It also means disregarding the corporations separate

personality where the business affairs of a subsidiary are socontrolled by the mother corporation to the extent that it

becomes an instrument or agent of its parent.0

Rationale:

The rationale behind piercing a corporations identity is toremove the barrier between the corporation from the persons

comprising it to thwart the fraudulent and illegal schemes of

those who use the corporate personality as a shield for

undertaking certain activities. 16


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Grounds for application of doctrine:

When the notion of separate juridical personality is used in

the following instances:

1. To defeat public convenience, as when the corporation is

used as vehicle for the evasion of existing obligation

2. In fraud cases, as when the corporate entity is used to

justify wrong, protect fraud, or defend a crime

3. In alter ego cases, where the corporation is so organizedand controlled and its affairs are so conducted as to

make it merely an instrumentality, agency, conduit or

adjunct of another corporation

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Instrumentality or alter-ego doctrine (in relation to piercing theveil of corporate fiction:

When the corporation is the mere alter ego or business

conduit of a person, the separate personality of the corporation

may be disregarded. This is commonly referred to as the

instrumentality rule or the alter ego doctrine, which the

courts have applied in disregarding the separate juridical

personality of a corporation.

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Requisites:

1. control, not merely majority or complete stock control,resulting in complete domination not only of finances but of

policy and business practice in respect to a transaction 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 the defendant to

commit fraud or wrong, to perpetuate the violation of a

statutory or other positive legal duty, or dishonest acts in

contravention of plaintiffs legal rights; and3. the aforesaid control and breach of duty must proximately

cause the injury or unjust loss complained of.

Note: The absence of any one of these elements preventspiercing the corporate veil. 19


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Corporation Code Incorporators, Corporators, Stockholders, Members

Incorporators - those mentioned in the articles of

incorporation as originally forming and composing the

corporation and who are the signatories thereof

Corporators - those who compose the corporation, whether asstockholders or members

Stockholders/shareholders - owners of shares in a corporation

which has capital stock

Members - corporators of a corporation which has no capital

stock

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Corporation Code Capital structure

Capital refers to the value of the property or assets of the

corporation

Capital stock (or authorized capital stock) - the amount fixed in

the articles of incorporation to be subscribed and paid by the

stockholders of the corporation

Subscribed capital stock that portion of the capital stock

subscribed whether fully paid or not

Paid up capital- that percentage of the subscribed capital stock

that is paidOutstanding capital stock - total shares of stock issued to

subscribers or stockholders, whether or not fully or partially

paid, as long as there is a binding subscription agreement,

except treasury shares 21


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Corporation Code Capital structure

Minimum capital stock:At the organization of a stock corporation

- at least 25% of the authorized capital stock must be

subscribed, and

- at least 25% of the subscription must be paid up

Minimum paid-up capital:

Not less than Php5,000.00 unless specifically provided

by special law

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Corporation Code Shares of stock

Shares of stock in a corporation may be divided into classes or

series of shares, or both, any of which classes or series ofshares may have such rights, privileges or restrictions as may

be stated in the articles of incorporation.

Rules:

- No share may be deprived of voting rights except those

classified as preferred or redeemable shares

- There shall always be a class or series of shares which have

complete voting rights

- Any or all of the shares or series of shares may have a parvalue or have no par value as maybe provided for in the

articles of incorporation, except that banks, trust companies,

insurance companies, public utilities, and building and loan

associations shall not be permitted to issue no par value

shares of stock 23


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Corporation Code Shares of stock

Kinds:

1. Founders shares

2. Common shares

3. Preferred shares

4. Redeemable shares

5. Voting shares

6. Non-voting shares

7. Par value shares

8. No-par value shares

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Corporation Code Incorporation and organization

Charter vs. Franchise:

Charter is an instrument or authority from the sovereign

power bestowing the right or privilege to be and act as a

corporation; while franchise is the right or privilege to be and

act as a corporation.

Primary franchise vs. secondary franchise:

Primary franchise is the license to do business in the

Philippines, while secondary franchise is the authority granted to

engage in particular business activities.

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Articles of incorporation vs. By-laws:The articles of incorporation is the document that defines

the charter of the corporation. It is the contract between

the State and the corporation; between the stockholders

and the State; and between the corporation and thestockholders.

By-laws govern the internal affairs of the corporation.

They are rules of action adopted by a corporation for its

internal government and for the regulation of conduct andprescribe the rights and duties of its stockholders or

members towards itself and among themselves in reference

to the management of its affairs.

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Contents of the articles of incorporation:

1. Corporate name

2. Purpose or purposes

3. Term of existence

4. Principal office

5. Names, citizenship and residences of incorporators

6. Number, names, citizenship and residences of directors7. Amount of authorized capital stock, number of shares,

and in case of par value stock corporations, the par value

of each share

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Corporation Code - Incorporation and organization

8. Names, residences, number of shares and amount

of subscription of, and amounts paid by

stockholders

9. Name of treasurer elected by the subscribers10. If the corporation engages in a nationalized

industry, a statement that no transfer of shares

will be allowed if it will reduce the stock ownership

of Filipinos to a percentage below the required

legal minimum

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Non-amendable provisions of the articles of incorporation:

1. Names of incorporators

2. Names of incorporating directors

3. Names of original subscribers, amounts subscribed and

paid-up

4. Name of treasurer

5. Date and place of adoption

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Commencement of corporate existence:A corporation commences its corporate existence from the

date the SEC issues its certificate of incorporation.

Effect of non-user of corporate charter:

When the corporation does not formally organize and

commence the transaction of its business or the construction

of its works within two years, its corporate powers cease and

the corporation shall be deemed dissolved

Adoption of by-laws:

Within 30 days from incorporation, the corporation must

organize and adopt its by-laws.

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By-laws signify the rules and regulations or private lawsenacted by the corporation to regulate, govern and control its

own actions, affairs and concerns and its stockholders or

members and directors and officers with relation thereto and

among themselves in their relation to it.

Purpose of by-laws:

To regulate the conduct and define the duties of the

members towards the corporation and among themselves.

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How by-laws adopted:

If filed together with the articles of incorporation:

- must be approved and signed by all incorporators; and

- must be filed with the SEC together with the articles of

incorporation

If adopted after incorporation:

- must be adopted within 30 days from incorporation

- must be adopted by stockholders representing majority ofoutstanding capital stock, or majority of the members of

a non-stock corporation

- must be signed by stockholders or members voting for

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Contents of by-laws:

1. Time place and manner of calling and conducting regular or special

meetings of the directors or trustees2. time and manner of calling and conducting regular or special

meetings of the stockholders or members

3. Required quorum in meetings of stockholders or members and the

manner of voting therein

4. form for proxies of stockholders and members and the manner ofvoting them

5. qualifications, duties and compensation of directors or trustees,

officers and employees

6. time for holding the annual election of directors of trustees and the

mode or manner of giving notice thereof7. manner of election or appointment and the term of office of all

officers other than directors or trustees

8. penalties for violation of the by-laws

9. manner of issuing stock certificates

10. other matters as may be necessary for the proper or convenient

transaction of its corporate business and affairs 33


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Binding effect of by-laws upon third persons:

- In order that by-law provisions can be binding upon

third parties, such third-parties must have acquired

knowledge of the pertinent by-laws at the time thetransaction or agreement between said third party and

the shareholders was entered.

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How by-laws may be amended, repealed or new by-laws

adopted:

With stockholders or members approval:

a. Majority vote of members of the board

b. Majority of outstanding capital stock or majority of

members

By Board of Directors/Trustees:

a. 2/3 of outstanding capital stock, or

b. 2/3 of members

Note: delegated power may be revoked by majority of

outstanding capital stock or majority of members35


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Corporation Code Powers of the corporation

Express powers - those that are granted by the words of the

corporate charter or the applicable laws. Thus, where a

corporation is created under a general law, the express

powers are found in the general incorporation law

(Corporation Code), and in the articles of incorporation.

Incidental powers - those that are incident to its existence

and inherent to it as a legal entity

Implied powers - those that can be inferred or are implicit inthe wordings or conferred by necessary or fair implication of

the enabling act; those that may be essential or necessary to

carry out its purpose or purposes as stated in the articles of

incorporation36


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Power to extend or shorten corporate term

Requisites:

1. majority vote of the BOD

2. Ratification in a meeting by 2/3 of the outstanding

capital stock or 2/3 of members

(Note: this is an exception to the general requisiteof vote or written assent for amendment of the A/I)

Right of dissenting stockholder:

- A dissenting stockholder may exercise his right ofappraisal.

(Note: Sec. 37 provides for exercise of the right in case of

extension of corporate term; while Sec. 81 provides for

exercise of the right in both extension and shortening of

corporate term.) 37


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Power to increase or decrease capital stock; incur, createor increase bonded indebtedness (Sec. 38)

Requisites:

1) Majority vote of the board directors

2) Vote of 2/3 of outstanding capital stock

3) Certificate of increase of capital stock

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Power to deny pre-emptive right

Concept: Pre-emptive right is the shareholders right to

subscribe to all issues or dispositions of shares of any class in

proportion to his shareholding, unless such right is denied in

the A/I or in an amendment thereto

Exceptions:

1) shares to be issued in compliance with laws requiring

stock offerings or minimum stock ownership by the

public

2) shares to be issued in good faith in exchange forproperty needed for corporate purposes

3) shares to be issued in good faith in payment of a

previously contracted debt

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Power to deny pre-emptive right (cont.)Vs. restriction in transfer of shares:

The articles of incorporation may provide for a

restriction in the transfer of shares, such as, for the

selling stockholder to first offer the shares to thecorporation and/or the other stockholders before the

shares are offered to third persons.

However, a provision which absolutely restricts the

sale of shares except to the corporation is invalid.

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Power to sell or dispose of all or substantially all assets (Sec. 40)

Requisites:

1) Vote of majority of the board of directors2) Vote of 2/3 of the outstanding capital stock, or 2/3 of the

members

Test:

If the corporation would be rendered incapable of continuing

the business or accomplishing the purpose for which it was

incorporated.

Failure to comply with requisites:The sale or disposition is void.

Right of dissenting stock holder:

A dissenting stockholder may exercise his right of appraisal.

(Sec. 81) 41


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Power to acquire own shares (Sec. 41)

Instances:

1. To eliminate fractional shares arising out of stock

dividends;

2. To collect an indebtedness to the corporation, and topurchase delinquent shares; and

3. To pay dissenting stockholders exercising their

appraisal right

Requisite:

Unrestricted retained earnings to cover the shares to

be purchased or acquired.

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Trust fund doctrine:

The Trust Fund doctrine considers the subscribed capital as a

trust fund for the payment of the debts of the corporation, to which

the creditors may look for satisfaction. Until the liquidation of the

corporation, no part of the subscribed capital may be returned or

released to the stockholder (except in the redemption of redeemable

shares) without violating this principle. Thus, dividends must neverimpair the subscribed capital; subscription commitments cannot be

condoned or remitted; nor can the corporation buy its own shares

using the subscribed capital as the consideration therefor.

3 instances when distribution is allowed:1. amendment of the Articles of Incorporation to reduce the

authorized capital stock

2. purchase of redeemable shares by the corporation, regardless

of the existence of unrestricted retained earnings

3. dissolution and eventual liquidation of the corporation 43

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Power to invest in another corporation or business (secondary

purpose) (Sec. 42)

Requisites:

1) Vote of majority of the board of directors or trustees

2) Vote of 2/3 of the outstanding capital stock, or 2/3

of the members

Note: Where the investment is reasonably necessary to

accomplish the primary purpose, a board resolution is

sufficient.

Right of dissenting stock holder:

A dissenting stockholder may exercise his right of

appraisal. (Sec. 42)44


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Power to declare dividends (Sec. 43)

Kinds of dividends:

1) Cash

2) Property

3) Stock - declared by the board plus approval of 2/3 ofthe outstanding capital stock

Rule:

Dividends can be declared only out of the unrestricted

retained earnings.

Exception:

Stock dividend may be issued out of premium surplus

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Corporation Code Powers of a corporation

Rule on accumulation of surplus:

Stock corporations are prohibited from retaining surplusprofits in excess of one hundred (100%) percent of their paid-in

capital stock, except:

1) when justified by definite corporate expansion projects or

programs approved by the board of directors; or

2) when the corporation is prohibited under any loan agreement

with any financial institution or creditor, whether local or

foreign, from declaring dividends without its/his consent,

and such consent has not yet been secured; or

3) when it can be clearly shown that such retention is necessary

under special circumstances obtaining in the corporation,

such as when there is need for special reserve for probable

contingencies. 46


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Power to enter into management contract (Sec. 44)

Requisites:

1) Vote of majority of the board of directors

2) Vote of majority of the outstanding capital stock

But, vote of 2/3 of the OCS of the managed corporation is

required ifi) a stockholder or stockholders representing the same

interest of both the managing and the managed

corporations own or control more than one-third (1/3) of

the total outstanding capital stock entitled to vote of themanaging corporation; or

ii) a majority of the members of the board of directors of

the managing corporation also constitute a majority of

the members of the board of directors of the managed

corporation 47



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Ultra vires act

- an act which is not within the corporate powersconferred by the Corporation Code or articles of

incorporation, or not necessary or incidental in the exercise

of the powers so conferred

- one committed outside the object for which acorporation is created as defined by the law of its

organization and therefore beyond the power conferred

upon it by law

- an act outside or beyond the corporate powers,including those that may ostensibly be within such powers

but are, by general or special laws, prohibited or declared

illegal

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Ultra vires act (cont.)Three types of ultra-vires acts:

1. those which are outside of the express, implied or

incidental powers of the corporation

2. those which are effected by corporate representatives

who act without authority, even though the contract is

within the express/implied/incidental powers of the

corporation

3. those which are contrary to laws or public policy

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Ultra vires act (cont.)

Vs. illegal act

- Generally, ultra vires acts are merely voidable, i.e.,may be enforced by performance, ratification or

estoppel; while illegal acts are void and cannot be

ratified

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Rules on effects of ultra vires acts:

1. A wholly executory contract/act cannot be enforced

2. A wholly executed ultra vires contract/act on both sides

will not be set aside nor interfered with by the courts

3. Contract executed by one party but executory on the

other allows recovery by the former

4. Title of a corporation to property cannot be questionedon the ground that it was acquired through an ultra-vires

contract

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Doctrine of ratification:

- Ratification means that the principal (corporation)

voluntarily adopts, confirms and gives sanction to

some unauthorized act of its agent on its behalf.

- The substance of the doctrine is confirmation after

conduct, amounting to a substitute for a prior

authority

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Doctrine of estoppel (acceptance of benefits):

- Even when the contract entered into in behalf of a

corporation is outside the usual powers of a corporate

officer, the corporations acceptance of benefits arising

therefrom has made such contract binding upon the

corporation.

Example:

A corporations posting of a surety bond in order that a post

office branch would be opened within the company

compound.

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Doctrine of apparent authority:- If a corporation knowingly permits one of its officers,

or any other agent, to act within the scope of an apparent

authority, it holds him out to the public as possessing the

power so to do those acts; and thus, the corporation will,as against anyone who has in good faith dealt with or

through such agent, be estopped from denying the agents

authority.

- Under the doctrine of apparent authority, theprincipal (corporation) is liable only as to third persons

who have been led reasonably to believe by the conduct

of the principal that such actual authority exists, although

none has been given.54


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Corporation Code Rights of stockholders

Rights of stockholders:

1. Participation in management

2. Proprietary rights

3. Remedial rights

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Participation in management

How done through their votes for (or written assent to)

certain corporate acts; election of directors

Manner of voting:

a. in personb. by proxy

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Voting by proxy:

Form in writing, signed by the stockholder or

member and filed before the scheduled meeting with

the secretary

Validity- valid only for the meeting of which it is

intended

Note: No proxy shall be valid for more than 5 years

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Voting in case of joint ownership of stock:

Consent of all owners is necessary unless there is a written

proxy signed by all co-owners, authorizing or some of

them or any person to vote such shares

Note: If shares are owned in an and/or capacity, anyone of the joint owners can vote said shares or appoint a

proxy therefor

Voting right for treasury shares:

Treasury shares shall have no voting right as long as such

stock remains in the treasury.

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Voting trust:

Concept - a contract entered into by a group of stockholders and

a trustee wherein the stockholders, for a specified period notexceeding 5 years, transfer their stocks to a trustee and vest in

him voting and other specified rights, in return for the issue by

the trustee of voting trust certificates to the involved

stockholdersLimitations:

1. No voting trust agreement shall be entered into (1) for the

purpose of circumventing the law against monopolies and

illegal combinations in restraint of trade; or (2) for purposesof fraud.

2. No voting trust agreement shall be for more than 5 years

unless the trust is required as a condition in a loan

agreement but the trust shall automatically expire upon

payment of the loan. 59


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Form of voting trusts:

1. Must be in writing and notarized, and shall specify theterms and conditions thereof

2. Certified copy of the agreement shall be filed with the

SEC, otherwise said agreement shall be ineffective and

unenforceable3. Covered stock certificates shall be cancelled and new ones

issued in the trustees name, indicating that they are

issued pursuant to the said agreement

4. Notation in the corporate books of the transfer in trustees

name5. Trustee shall execute and deliver to transferors voting

trust certificates, which shall be transferable in the same

manner and with the same effect as certificates of stock

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Instances when stockholders action are required:

A. With majority vote

B. With 2/3 vote

C. By cumulative voting

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Right to receive dividends:

Rule:

All shares of stock, whether paid or unpaid, are entitled to

dividends

Exceptions:a. Cash dividend due to delinquent stock shall be applied to

the unpaid balance on the subscription plus cost and

expenses

b. Issuance of stock dividend due to delinquent stock shallbe withheld until the delinquent stockholder fully pays

his subscription

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Pre-emptive right:

Concept - the shareholders right to subscribe to all issues or

dispositions of shares of any class in proportion to his

shareholding, unless such right is denied in the A/I or in an

amendment thereto

Transactions covered:

1. Increase in authorized capital stock

2. Issuance of the unissued portion of the authorizedcapital stock

3. Disposition of treasury shares

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When pre-emptive right is not available:

1. shares to be issued in compliance with laws requiring

stock offerings or minimum stock ownership by the public

2. shares to be issued in good faith in exchange for property

needed for corporate purposes

3. shares to be issued in good faith in payment of a

previously contracted debt

Vs. restriction against transfer of shares:

The articles of incorporation may provide for a restriction in

the transfer of shares, such as, for the selling stockholder tofirst offer the shares to the corporation and/or the other

stockholders before the shares are offered to third persons.

However, a provision which absolutely restricts the sale of

shares except to the corporation is invalid. 64


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Right to inspect and copy corporate books:

Books to be kept in the principal office:

1. Record of all business transactions

2. Minutes of all meetings of stockholders or members

3. Minutes of all meetings of BOD or trustees4. Stock and transfer book

Conditions for exercise of the right:

1. Must be done during business hours on business days

2. For a good purpose, such asa. to investigate acts of management

b. to investigate financial conditions

c. to fix value of shares

d. to obtain information for litigation 65



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Right to inspect and copy corporate books (cont.):

Right to obtain copies

1. upon written demand

2. at stockholders expense

Right to financial statements

- within 10 days from receipt of request

- FS shall include balance sheet and the income

statement

66

C i C d Ri h f kh ld


67/128


Right to inspect and copy corporate books (cont.):

Liability for refusal to allow inspection-

- damages and criminal liability under Sec. 144 of the

Corporation Code

Defenses

a. Improper use of the information obtained in the past

b. Bad faithc. Use of information for an illegitimate purpose

67

C ti C d Ri ht f t kh ld


68/128


Appraisal right:

Concept - the right of a stockholder to demand the payment of

the fair value of his shares in the following cases:

a) Amendment of the A/I to extend or shorten corporate

term

b) Amendment of A/I changing, restricting or enlargingstockholders rights

c) Sale or other disposition of all or substantially all of the

corporate assets

d) Merger and consolidatione) Investment of corporate funds in another corporation or

business

Remedy of dissenting stockholder if no appraisal right

transfer his shares under Sec. 63 68



69/128

Appraisal right (cont.):

Procedure:

1. Written demand within 30 days from date when the vote wastaken

2. Submission of stock certificates (for notation) within 10 days

from demand

3. Within 60 days when vote was taken, the corporation anddissenting stockholder shall agree on the fair value of the

shares, otherwise the value shall be determined by 3

disinterested persons (appointed by the corporation, by the

stockholder, and by the 2 appointees)

4. Payment within 30 days from determination of fair value

Provided: There are unrestricted retained earnings.

Provided further: If dissenting stockholder is not paid within 30

days, he is automatically restored to all his rights as a

stockholder 69

C ti C d Ri ht f t kh ld


70/128



Instances when right is lost:

1. Failure to make demand within 30 days

2. Failure to submit stock certificate within 10 days from

demand

3. Non-existence of unrestricted retained earnings4. Subsequent transfer of shares which have been annotated

5. When the corporation consents to the withdrawal by the

dissenting stockholder

6. Abandonment of corporate act7. Disapproval of corporate act by SEC

70



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Who bears cost of appraisal:1. The corporation, where the value as determined by the

appraisers is higher than what was offered by the

corporation to the dissenting stockholder

2. The dissenting stock holder, if the value determined bythe appraisers is approximately the same as the price

offered by the corporation

3. The corporation, if action is filed to recover the fair value

of the shares and the stockholders refusal to receive

payment is justified

4. The dissenting stockholder, where an action to recover is

filed and the refusal of such stockholder to receive

payment is unjustified

71



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Derivative suit:

Concept:

- It is a suit by a shareholder to enforce a corporate cause

of action.

- It is a suit brought by a stockholder, for an in behalf ofthe corporation and against any person be he also a

stockholder, director, officer, or third person.

Purpose:- The whole purpose of the law authorizing derivative suit

is to allow the stockholders/members to enforce rights

which are derivative (secondary) in nature, i.e., to

enforce a corporate cause of action72



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Derivative suit (cont.):

Requisites:a) The party bringing the suit was a stockholder or member

at the time the acts or transactions subject of the action

occurred and at the time the action was filed;

b) He exerted all reasonable efforts, and alleges the samewith particularity in the complaint, to exhaust all

remedies available under the A/I, B/L, laws or rules

governing the corporation or partnership to obtain the

relief he desires;

c) No appraisal rights are available for the act or actscomplained of; and

d) The suit is not a mere nuisance or harassment suit.

(Rule 8, Sec. 1, Interim Rules of Procedure for Intra-

Corporate Controversies) 73



74/128

Derivative suit (cont.)

Example:

Where the majority of the board of directors wastes ordissipates the funds of the corporation or fraudulently

disposes of its properties, or performs ultra vires acts, the

court, in the exercise of its equity jurisdiction, and upon

showing that intracorporate remedy is unavailing, willentertain a suit filed by the minority members of the board

of directors, for and in behalf of the corporation, to prevent

waste and dissipation and the commission of illegal acts and

otherwise redress the injuries of the minority stockholders

against the wrongdoing of the majority. The action in such a

case is said to be brought derivatively in behalf of the

corporation to protect the rights of the minority stockholders

thereof

74



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Derivative suit (cont.):

Individual suit, representative suit and derivative suitdifferentiated:

Individual suit suit brought for a wrong done to a stockholder

personally

e.g., denial of right of inspection

Representative suit suit brought for the protection of all

stockholders belonging to the same group

Derivative suit suit brought by a stockholder on behalf of the

corporation

75



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p g

Right to attend stockholders meetings

2 kinds of stockholders meetings:1. Regular meetings - annually as fixed in the by-laws; if not

fixed, any day in April as determined by the board of

directors or trustees

Requirement written notice sent at least 2 weeks, unlessa different period is provided in the by-laws

2. Special meetings - any time deemed necessary or as

provided in the by-laws

Requirement written notice at least 1 week, unless

otherwise provided in the by-laws

Note: Notice of any meeting may be waived, express or

impliedly, by any stockholder or member 76

Corporation Code Rights of stockholers


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Corporation Code Rights of stockholers

Right to attend stockholders meetings (cont.):

Place of meeting in the city or municipality where theprincipal office is located, preferably in the principal office

itself.

Any provision in the by-laws changing such place is illegal

Who may call meetings officer as authorized in the by-laws;

if no person authorized, SEC may issue an order to

petitioning stockholder to call a meeting

Quorum - majority of the outstanding capital stock or ofmembers except in cases where greater vote for an act is

required, e.g., amendment of the articles of incorporation

Who presides the president unless otherwise provided in the

by-laws 77



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Right to attend stockholders meetings (cont.):

Minutes of meetings

- The minutes of all meetings shall set forth in detail

the time and place of holding the meeting, how

authorized, the notice given, whether the meeting was

regular or special, if special its object, those present and

absent, and every act done or ordered done at the

meeting

- Upon demand, the time when any stockholder or

member entered or left the meeting

- The protest of any stockholder or member on any

action or proposed action must be recorded in full on his

demand78

Corporation Code Board of Directors/Trustees


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Seat of corporate powers:

Unless otherwise provided in the Corporation Code, (1)

all powers of all corporations under the Code shall be

exercised, (2) all business conducted and (3) all property

of such corporations controlled and held by a board ofdirectors or trustees to be elected from among the holders

of stocks, or where there is no stock, from among the

members of the corporation, who shall hold office for one

(1) years until their successors are elected and qualified.

(Sec. 23)

79



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Thus:

- In the absence of authority from the Board of

Directors, no person, not even its officers, can validly

bind the corporation.

- Where a corporate contract has been effected with

the approval of the Board of Directors, a resolution

adopted by the stockholders refusing to recognize the

contract or repudiating it is without legal effect.

80



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Minimum qualification of directors:

1. must own at least one (1) share of stock in a stock

corporation; trustees must be subsisting members in a non-stock corporation

2. majority of the directors must be residents of the Philippines

3. must not have been convicted by final judgment of an

offense carrying an imprisonment exceeding 6 years, or an

offense constituting a violation of the Corporation Code,

within 5 years prior to his election

Additional qualifications:A corporation may provide in its by-laws (or amend its by-

laws to provide) additional qualifications for its directors,

e.g., the disqualification of a directors of a competitor

corporation from being elected as a director.81



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Election:

Quorum for election:

Stock - majority of the outstanding capital stock

Non-stock - majority of the members entitled to vote

Manner of election:

a) in any form; or

b) by ballot when requested by any voting stockholder

or member

82



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Election (cont.):

Cumulative voting:

- A stockholder shall have as many votes as he has

number of shares times the number of thedirectors that are to be elected.

- Cumulative voting of directors is mandatory and

cannot be dispensed with in a stock corporation;

no cumulative voting unless provided in the by-laws in a non-stock corporation.

83



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Election (cont.):

Removal:

- With or without cause by vote of 2/3 of the

outstanding capital stock or 2/3 of the members

entitled to vote.

Filling of vacancies:

a) if still constituting a quorum majority vote of

remaining directors

b) if no quorum regular or special election called for

the purpose

84



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Compensation:

1. If not provided in the by-laws, not entitled, except for

reasonable per diems

2. If not provided in the by-laws, compensation may be

granted by vote of majority of the outstanding capital

stock

Limit:

Total yearly compensation shall not exceed 10% of thecorporations net income before tax for the preceding

year.

85



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Three-fold duties of directors:

1. Obedience - directors are bound to observe the limits

of their authority

2. Diligence - directors are expected to manage the

corporation with knowledge, skill, care and prudence3. Loyalty - directors must exercise not only care and

diligence, but utmost good faith in the management of

corporate affairs

- It covers situations involving self-dealingdirector, the interlocking director, the bad faith of

directors and conflict of interest situations.

86



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Liability for violation of the three-fold duties:

Directors or trustees are held jointly and severally liable forall damages suffered by the corporation, its stockholders and

other persons resulting from:

1) Directors or trustees willfully and knowingly voting or

assenting to patently unlawful acts of the corporation(violation of duty of obedience);

2) Their gross negligence or bad faith in directing the

affairs of the corporation (violation of the duty of

diligence);3) Their acquiring any personal or pecuniary interest in

conflict with their duty as such directors or trustees or

interests adverse to the corporation (violation of duty

of loyalty). 87



88/128

Self-dealing directors/officers

A contract of the corporation with one or more of itsdirectors or trustees or officers is voidable, at the option of such

corporation, unless:

1) The presence of such director or trustee in the board

meeting in which the contract was approved was notnecessary to constitute a quorum for such meeting;

2) That the vote of such director or trustee was not

necessary for the approval of the contract;

3) That the contract is fair and reasonable under thecircumstances;

4) That in case of an officer, the contract with the officer

has been previously authorized by the board of directors.

(Sec. 32) 88



89/128


Doctrine of corporate opportunity:

Concept:

The doctrine of corporate opportunity is a rule expressly

provided for in the Corporation Code making a director

account to his corporation, gains and profits from anytransaction entered into by him or another competing

corporation or entity where he has a substantial interest,

which should have been a transaction undertaken by his

corporation.

89



90/128

Thus:

Where a director, by virtue of his office, acquires for himself

a business opportunity which should belong to the corporation,thereby obtaining profits which should belong to the

corporation, he must account to the latter for all such profits by

refunding the same, unless his act has been ratified by a vote of

stockholders owning or representing 2/3 of the outstanding

capital stock.

Also:

When a director, trustee or officer attempts to acquire or

acquires, in violation of his duty, any interest adverse to the

corporation in respect of any matter which has been reposed tohim in confidence, as to which equity imposes a liability upon

him to deal on his own behalf, he shall be liable as a trustee for

the corporation and must account for the profits which

otherwise would have accrued to the corporation 90



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Underlying philosophy:

- The doctrine rests on the unfairness occasioned by the

director taking personal advantage of a business opportunitywhich properly belongs to the corporation, in breach of the

fiduciary posture he is supposed to observe in relation to his

corporation and its stockholders.

Liability of director:

Unless his act is ratified, a director shall refund to the

corporation all the profits he realized on a business opportunity

which:

1) the corporation is financially able to undertake;2) from its nature, is in line with the corporations business

and is of practical advantage to it; and

3) the corporation has an interest or a reasonable

expectancy. 91



92/128

Interlocking directorship:

General rule:

Contract between corporations with interlocking

directors is valid so long as there is no fraud and thecontract is fair and reasonable under the existing facts.

92



93/128

Exception:

Ifa directors interest is substantial (at least 20%) in one

corporation and nominal (less than 20%) in the othercorporation, then the following must concur (in the corporation

where he has nominal interest):

1) The presence of such director or trustee in the board

meeting in which the contract was approved was notnecessary to constitute a quorum for such meeting;

2) That the vote of such director or trustee was not

necessary for the approval of the contract;

3) That the contract is fair and reasonable under thecircumstances

Otherwise the contract is voidable at the election of the

corporation (where the interlocking director has nominal equity)

unless ratified by 2/3 of the outstanding capital stock. 93



94/128

Executive Committee

The by-laws may provided for the creation of an ExecutiveCommittee composed of not less than 3 members of the board

to be appointed by the Board, to act on specific matters

within the powers of the board, or as may be delegated to it

by the board, or on majority vote of the board, except:a) approval of any action for which stockholders approval

is also required;

b) filling of vacancies in the board;

c) amendment or repeal of any resolution of the board

which by its terms is not so amendable or repealable

d) distribution of cash dividends.

94



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Board Meetings

Quorum - majority of the number of directors/trustees as

fixed in the articles of incorporation

Venue - any place, even outside the Philippines, unless

prohibited in the by-laws

Vote to approve resolutions - majority of the quorum

Vote to elect officers majority vote of all members of the

board

Meeting by teleconferencing allowed provided the

guidelines set by SEC in SEC Memorandum Circular No. 15

on Nov. 30, 2001 are complied

95

Corporation Code - Officers


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Election of officers by directors immediately after their

election

Limitations:

1. No one shall act as president and secretary or as

president and treasurer at the same time.

2. President must be a member of the board of directors

3. Secretary must be a citizen and resident of the

Philippines

Liability of officers:

They are liable, like directors, under Secs. 31 (violation ofcorporate opportunity doctrine) and 32 (self-dealing).

Removal - the general right of removal of officers in a

corporation is vested on the members of the Board96

Corporation Code Capital affairs


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Certificate of stockConcept:

- tangible evidence of ownership of stock; however, it

is not the share itself

- evidence of the holders interest and status in the

corporation, his ownership of the share represented

thereby

- expresses the contract between the stockholder andthe corporation; but it is not essential to the

existence of a share

97



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Certificate of stock

Nature - considered quasi-negotiable becauseendorsement and delivery are sufficient to effect transfer

Requisites for valid transfer of shares stock:

1. Endorsement of the certificate by the owner or

attorney-in-fact

2. Delivery of certificate

3. Recording of the transfer in the books of thecorporation (to bind third persons)

Note: No transfer shall be recorded for shares against

which the corporation holds unpaid claim

98



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Rule on issuance of certificate:

- No certificate of stock shall be issued to a

subscriber until the full amount of his subscription

is paid.

Remedy for refusal to issue:

- Mandamus

99



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Stock and transfer book book which records

1. the names and addresses of all stockholders

arranged alphabetically,

2. the installments paid and unpaid on all stock forwhich subscription has been made, and the date

of payment thereof,

3. every alienation, sale or transfer of stock, the

date thereof, and by whom and to whom made

4. other entries as may be prescribed by law

Responsible officer Corporate Secretary

100



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Procedure for issuance of new certificate in case of loss, theft

or destruction:

1) Filing with the corporation of affidavit stating:a) circumstances of loss or destruction

b) number of shares and serial number of certificate

c) name of issuing corporation

d) other information and evidence2) Publication of notice of loss once a week for 3 consecutive

weeks in the province or city where the principal office is

located

3) If no contest is presented within 1 year from last

publication, a new certificate is issuedNote: A new certificate may be issued before the lapse of 1

year if registered owner files a bond

4) If contest is presented or an action is pending in court,

certificate is issued after finality of court decision 101



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Watered stocks - stocks issued for less than its par or issued

value or for a consideration in any form other than cash,

valued in excess of its fair value

Who is liable:

Any director/officer who:

a) consented to the issuance, orb) has knowledge of issuance but failed to express his

written objection and file the same with the Corp.

Sec.

Nature and extent of liability:

Guilty director or officer is solidarily liable with the

stockholder concerned for the difference between the fair

value received at the time of issuance of the stock and the

par or issued value 102


Unpaid subscription


103/128

Unpaid subscription

Liability for interest:

- only if provided in the by-laws

- rate of interest as fixed in the by-laws, otherwise,

legal interest

- interest reckoned from date of subscription

Payment of balance of subscription:- upon call by the BOD, subject to provisions in the

subscription contract

Effect of failure to pay:- Entire unpaid subscription becomes due and payable

- defaulting stockholder becomes liable for interest at

the legal rate, computed from date when payment was

supposed to be made103



104/128

Unpaid subscription

Effect of non-payment within 30 days:

- all stocks covered by subscription become delinquent

Effect of delinquency (Sec. 71):

- delinquent stock cannot vote or be voted

- holder is not entitled to any of the rights of astockholder,

Except the right to dividends

- delinquent stock may be sold in a delinquency sale

Note: the corporation may opt to bring an action for

collection of unpaid subscription (Sec. 70)

104


Delinquency sale


105/128

Delinquency sale

Procedure:

1) Call, by resolution of the BOD

2) Notice of call to each stockholder (personally or by registered

mail)

3) Notice of delinquency (personally or by registered mail)

4) Notice of delinquency sale

- to delinquent subscriber- publication

5) Public auction - not less than 30 days nor more than 60 days

when stocks become delinquent

- highest bidder

- remaining shares- if no bidders, the corporation may bid

Effect:

i) title to all shares shall be vested in the corporation

ii) shares become treasury shares

105



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Alienation of shares

1. Restriction on transfer

- must be stated in the AI/BL and stock certificate

- not more onerous than granting the existing

stockholders or the corporation the option to purchase

- if stockholders or the corporation fails to exerciseoption, selling stockholder may sell to any third person

2. Sale of partially paid shares

3. Sale of portion of shares not fully paid

4. Requisites of valid transfer

106

Corporation Code Dissolution and liquidation


107/128

Modes of dissolution

1. Voluntary

a. where no creditors are affected

b. where creditors are affected

c. by shortening corporate term2. Involuntary

107


V l t di l ti h dit ff t d


108/128

Voluntary dissolution where no creditors are affected

i) Majority vote of board of directors or trustees

ii) Publication of notice of meeting once a week for 3

consecutive weeks

iii) Notice of meeting to each stockholder at least 30 days

prior to date of meetingiv) Affirmative vote of 2/3 of outstanding capital stock or 2/3

of members

v) Filing with SEC with copy of resolution certified by

majority of directors/trustees and countersigned by thesecretary

vi) Issuance of certificate of dissolution

108


Voluntary dissolution where creditors are affected


109/128

Voluntary dissolution where creditors are affected

i) Filing of petition for dissolution with SEC

1) Signed by majority of directors/ trustees, verified by

president, secretary, or one director/ trustee

2) Setting forth all claims and demands against the corporation

3) Setting forth the fact that dissolution was approved by 2/3 of

outstanding capital stock or members

ii) If petition is sufficient in form and substance, SEC issues andorder

1) reciting purpose of the petition

2) fixing the period when objections may be filed (not less than

30 days nor more than 60 days when order was entered)

iii) Publication of order once a week for 3 consecutive weeks in anewspaper published in the municipality/city where principal

office is located

iv) Hearing of petition after 5 days notice

v) Judgment of dissolution109



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Voluntary dissolution by shortening corporate term

- Amending the AI

Note: comply with requisites for amendment of

the AI

110



111/128

Involuntary dissolution

a) By SEC upon filing of verified petition, and after

proper notice and hearing

Grounds:

1) Fraud or misrepresentation

2) Ultra-vires (mala prohibita)

3) Continuous inactivity for more than 5 years

4) Refusal to adopt or approve by-laws

111



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Effect of dissolution

- The corporation continues to exist to as body corporate,but only for purposes of prosecuting and defending suit by

or against it and enabling it to settle and close its affairs,

to dispose of and convey its property and to distribute its

assets, but not for purposes of continuing the business forwhich it was established. (Sec. 122)

- Dissolution or even the expiration of the three-year

liquidation period should not be a bar to a corporationsenforcement of its rights as a corporation. (Paramount

Insurance Corp. vs. A.C. Ordoez Corporation, GR 175109,

August 8, 2008)

112


d


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Liquidation:

- Winding up or settling with creditors

- Winding up of a corporation so that assets aredistributed to those entitled to receive them.

- The process of reducing assets to cash, discharging

liabilities and dividing surplus or loss

Effects of liquidation:

- The corporation cannot extend its corporate term during

the 3-year liquidation period

- At any time during said three (3) years, the corporation

is authorized and empowered to convey all of itsproperty to trustees for the benefit of stockholders,

members, creditors, and other persons in interest. (Sec.

122)

113


Li id i ( )


114/128

Liquidation (cont.)

Who may be constituted as trustee?

- The counsel who prosecuted and defended the interest of

the corporation in the instant case and who in fact

appeared in behalf of the corporation may be considered

a trustee of the corporation at least with respect to the

matter in litigation only

- The board of directors may be permitted to complete the

corporate liquidation by continuing as trustees by legal

implication

114



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Liquidation (cont.)

Effect on suits commenced before or during liquidation period:

- The trustee may commence a suit which can proceed to

final judgment even beyond the three-year period.

- No reason can be conceived why a suit already

commenced by the corporation itself during its

existence, not by a mere trustee who, by fiction, merely

continues the legal personality of the dissolved

corporation should not be accorded similar treatment

allowed to proceed to final judgment and execution

thereof.

115

Corporation Code Other corporations

Close corporation


116/128

Close corporation

Requisites : The articles of incorporation must provide that:

1. Number of stockholders must not exceed 202. Restriction in transfer of shares

Notes:

a) Restriction cannot be more onerous than granting

right of first refusal in favor the corporation or the

stockholders

b) The restriction must be stated not only in the

articles of incorporation but also in the by-laws and

the certificates of stock

3. Stocks cannot be listed in the stock exchange or bepublicly offered

When a corporation not deemed a close corporation

116


Cl ti ( t)


117/128

Close corporation (cont)

Cannot be close corporations:

1. mining companies

2. oil companies

3. stock exchanges

4. banks

5. insurance companies6. public utilities

7. educational institutions

8. other corporations vested with public interest

Management:

The articles of incorporation may provide that the business of

the corporation shall be managed by the stockholders

117


Non stock corporation


118/128

Non-stock corporation

Concept - One where no part of its income is distributable as

dividends to its members, trustees, or officers

Test:

Distribution of dividends to members

Number of trustees:Trustees may be more than 15.

Voting:

No cumulative voting unless provided in the by-laws.

Place of meetings:

Members meeting may be held at any place if so provided in

the by-laws.118



119/128

Foreign corporation

Concept:

A foreign corporation is one 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

Right to do business:

A foreign corporation has a right to do business only after

obtaining a license to transact business from the SEC.

119



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Foreign corporation (cont.)

Doing business includes:1. Soliciting orders

2. Entering into service contracts

3. Opening offices

4. Appointing representatives5. Participating in the management, supervision or control

of any domestic business, firm, entity or corporation in

the Philippines

6. Any act or acts that imply a continuity of commercial

dealings or arrangements

120



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Not doing business includes:

1. Mere investment as shareholder by a foreign entity in a

domestic corporation;

2. Having a nominee director to represent its interests in

such corporation

3. Appointing a representative or distributor domiciled in

the Philippines which transacts business in its own name

and for its own account

121



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Recent rulings:

- An essential condition to be considered as doing business inthe Philippines is the actual performance of specific

commercial acts within the territory of the Philippines for

the plain reason that the Philippines has no jurisdiction over

commercial acts performed in foreign territories.

- To be doing or transacting business in the Philippines for

purposes of Section 133 of the Corporation Code, the foreign

corporation must actually transact business in the

Philippines, that is, perform specific business transactions

within the Philippine territory on a continuing basis in its own

name and for its own account.

122


F i i ( )


123/128


Effect of doing business without license:- Foreign corporation shall not be permitted to maintain or

intervene in any action, suit or proceeding in any court or

administrative agency of the Philippines.

- It may be sued or proceeded against before Philippine

courts under Philippine laws. (Sec. 133)

- The failure to obtain a license does not affect the validity

of contracts entered into by a foreign corporation; itmerely removes its legal standing to sue in local tribunals.

123



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Right to sue of unlicensed foreign corporation not doing

business in the Phil.:

An unlicensed foreign corporation not doing business in

the Philippines can sue before Philippine courts.But:

The fact a foreign corporation is not doing business

in the Philippines must be disclosed if it desires to

sue in the Philippine courts under the isolatedtransactions rule.

124

Corporation Code Merger and consolidation


125/128

Merger a union whereby one or more existing corporations

are absorbed by another corporation which survives andcontinues the combined business

Effect of merger:One of the constituent corporations remains as an

existing juridical person, whereas the other corporation

shall cease to exist.

125


Consolidation the union of two or more existing corporations to


126/128

Consolidation - the union of two or more existing corporations to

form a new corporation called the consolidated corporation. It

is a combination by agreement between two or morecorporations by which their rights, franchises, and property are

united and become those of a single, new corporation,

composed generally, although not necessarily, of the

stockholders of the original corporations.

Effect of consolidation:

Consolidation is the union of two or more existing

corporations to form a new corporation called the

consolidated corporation. It is a combination by agreementbetween two or more corporations by which their rights,

franchises, and property are united and become those of a

single, new corporation, composed generally, although not

necessarily, of the stockholders of the original corporations.126



127/128

Common effect of both merger and consolidation:

There is no liquidation of the assets of the dissolved

corporations, and the surviving or consolidated

corporation acquires all their properties, rights and

franchises and their stockholders usually become its

stockholders.

127


Procedure:

1 Plan of merger or consolidation drawn by the BOD setting forth:


128/128

1. Plan of merger or consolidation drawn by the BOD, setting forth:

a) names of constituent corporations

b) terms of the merger or consolidationc) statement of changes, if any, in the A/I of the surviving corporation;

for consolidation, all statements required to be set forth in the A/I

d) other provisions

2. Approval by majority vote of each BOD concerned

3. Approval by 2/3 of outstanding capital (or 2/3 of members) of constituent

corporations after a 2-week notice4. Exercise of appraisal right by dissenting stockholders

5. Execution of Articles of Merger (or Consolidation), setting forth:

a) plan of merger or consolidation;

b) number of shares outstanding, or number of members

c) no of shares (or number of members) voting for and against the plan6. Filing of Articles of Merger (or Consolidation) with SEC

7. Issuance of Certificate of Merger or Certificate of Incorporation (OR SEC

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