corpo reviewer for finals

8/13/2019 Corpo Reviewer for Finals

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SHARES OF STOCK, SUBSCRIPTION AGREEMENTS, & CERTIFICATESOF STOCK

Nature of Shares of Stock

they constitute personal property of the stockholder and he can contract w/ as w/ anyform of property – such as disposition or pledge

they represent do not represent proprietary rights to the assets of the corporation

Rights of the Corporation w/ Respect to Shares

1. To call for payment of the unpaid subscription w/ interest accrued on the date specified inthe agreement or in the date stated in the call of the Board – subj. to stipulation in theagreement

2. To impose interest on the unpaid subscription from the date of subscription if so requiredby and at the rate of interest fixed in the by-laws

3. To refuse to issue to the subscriber the certificates of stock covering the shares where thesubscription has not been fully paid

4. To refuse to recognize and register the sale or assignment of any share where thesubscription has not been fully paid

5. To refuse to recognize a sale or assignment of shares of stock w/c have not been dulyregistered in the stock transfer book

The Corporation does not have the power to:

1. Demand for he repurchase of its shares unless the same are designated as redeemableshares in the Articles

2. Refuse to pay to stockholders dividends declared on shares w/ have not been declareddelinquent to apply them to the unpaid subscription

3. To bid delinquent shares and thereby obtain for itself profit for a value greater than thebalance due on the unpaid subscription plus interest, costs of advertisement, and expensesof the sale

Subscription Agreements

It is the subscr ipt ion for the shares of stock that creates a legal relation betweenthe stockholder and the corporation and confers ownership (tradit ion) over theshares to the stockholder, not the payment of such subscription

it is the subscription that grants to the stockholder the statutory and common rightsgranted to stockholders, not the payment thereof

thus holders of shares of stock not fully paid for w/c are not delinquent have the rightsof stockholders

neither is registration an essential ingredient as its purpose is to bind third persons

Perfection: A subscription agreement exists at the time of the meeting of theminds between the corporation and the subscriber as to the number and valueof the shares. The shares shall therefore be deemed issued at that point in time.

The Statute of Frauds

There is no requirement in the Corporation Code that the subscription agreement must be inwriting; thus it is perfected upon the meeting of the minds. But are they covered by the Statute ofFrauds?

CLV: No. They are not covered by the Statute of Frauds, and the corporation has a right toenforce and collect and to adduce oral evidence based on the following grounds:

special treatment of subscription agreements under Corporate Law for the purpose of protecting corporate creditors and upholding the trust fund doctrine

By their nature w/c upon consent would make the subscriber a stockholder and ownerof the shares, there is deemed partial execution

Characteristics of Subscription Agreements

There can be a subscription w/ regard to shares of stock w/c have never been issued in thefollowing cases:

the original issuance fro the authorized capital stock at the time of the incorporation

the opening during the life of the corporation of the portion of the original authorizedcapital stock previously issued

increase of authorized capital stock achieved through a formal amendment of thearticles of incorporation and registration thereof w/ the SEC

Any transaction over “issued” shares of stock is not a subscription agreement and iscovered by the Law on Sales on assignment.

The Corporation Code has eliminated the old distinction between subscription contractsfor “un-issued shares” governed by corporate law and ones governed by the law onsales.

Old Distinction between Sale and Subscription

Subscription SaleThe subscriber becomesstockholder even prior topayment of hissubscription

The promise to issueshares and to pay theprice are dependent andconcurrent duties

The unpaid subscription isdeemed a debt of thesubscriber

The purchaser is notdeemed a debtor of thecorporation

Insolvency of thecorporation makes theunpaid subscriptionimmediately due anddemandable

Insolvency of thecorporation will terminateits claim against thepurchaser (reciprocalobligations)

Subject to call for Under old law, calls for


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payment unpaid subscription do notapply to purchase

The corporation is notcapable of releasing tothe subscriber its capitalstock (trust fund doctrine)

Said rule does not applyin case of purchase

New Rule: All agreements for the purchase of unissued stock of a corporation would beconsidered subscription agreements.

Only delinquency duly declared will deprive the stockholder of his rights as such.

Pre-Incorporation Subscriptions

A subscription for shares of stock of a corporation still to be formed shall beirrevocable for a period of 6 months from the date of subscription, except:

o when all other subscribers consent to the revocation (this recognized that asubscription is an agreement between the subscribers)

o the incorporation fails to materialize w/in the said period or w/in a longer period asstipulated in the contract of subscription

No pre-incorporation subscription may be revoked after submission of the Articles w/the SEC

It is beyond the power of the Board to release the subscribers since the consent of allthe subscribers is necessary

Even if the subscribers approve the release, this must still be subject to the trust funddoctrine and no creditors must be prejudiced

Consideration for Issuance of Shares

Sec. 62: stocks shall not be issued for a consideration less than the par or issued value thereof.Consideration therefor may come in any of the following forms:

actual cash paid to the corporation

property (tangible or intangible) for the corporation’s use at fair valuation equal to the

par or issued value of the stock issued

labor or services

previously incurred indebtedness by the corporation

amounts transferred from unrestricted retained earnings to stated capital

outstanding shares exchanged for stocks in the event of reclassification or conversion

Where the consideration is other than cash, the valuation thereof shall be determined bythe incorporators or the Board subject to approval by the SEC.

The same consideration may be used for issuance of bonds of the corporation.

A director or officer who consents to the issuance of watered stocks and who doesnot tender his written objection to the secretary shall be solidarily liable w/ thestockholder to the corporation and its creditors for the difference between the fairvalue received at the time of the issuance of the stock, and the par or issued value ofthe same.

Watered Stocks – stocks issued as fully paid but for a consideration less than its par or issued

value, or for a consideration in any form other than cash, or one valued in excess of its fair value

Cash and Promissory Notes for Subscription

shares of stock shall not be issued in exchange for promissory notes or futureservices

but unpaid subscription constitutes “subscription receivable” in the books ofthe corporation and is allowed

Why the difference? The capital stock of a corporation should be backed up by assets w/ theirown intrinsic value other than a promise to pay in the future. This will also prevent fraud uponcreditors who may be led to believe that the corporation has substantial capital – although thesame are mere promises to pay. Subscription receivable, on the other hand, are not treated ascapital and properly reflected in the balance sheet of the corporation.

Property Consideration

The property must be necessary or proper for the corporation to carry out its business,and must be substantial in nature, not speculative

It must be capable of being applied to debts and of distribution among thestockholders

Receivable may be accepted provided:

1. they are actually received by the corporation

2. they are necessary and convenient for the corporation’s use and lawfu l purpose

3. at fair valuation equal to the par value of the stock issued to be approved by the SEC

This must be subject to verification by the SEC, ad the shares may be held in escrow until thefull payment of the amount due

Debts and Services as Consideration

labor performed or services actually rendered may be valid consideration for theissuance of shares

an agreement to issue stocks for services to be rendered (future services) is voidunder Sec. 62, and the corporation is not estopped thereby; otherwise there would bea tendency to short-change the corporation as their value is unascertained

cancellation of previously incurred debt is valid consideration; they represent truevalue to the corporation and are in fact reflected in the corporate books


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Unrestricted Retained Earnings or Existing Capital as Consideration

this pertains to the issuance of stock dividends where the consideration is theamount of unrestricted retained earnings converted into equity in the corporate booksinstead of being distributed

Unlawful Consideration

shares of stock shall not be issued for promissory notes or future services

but in case shares are indeed issued in consideration therefor, the contract will not berendered void pursuant to the trust fund doctrine

the contract will be valid and binding, only the unlawful provision is deemed void – andthe unpaid amount will be treated as “subscription receivables”

this would also subject the consenting Directors and officers to the liabilities underSec. 65 for watered stocks

Watered Stocks

they are issued as fully paid when in fact the consideration received is known to beless than the par value or issued value

they include bonus shares or discounted shares

Stock watering is prohibited because:

it is injurious to the business of the corporation w/c is deprived of needed capital

shareholders are also injured because their interest in the business is diluted

present and future creditors are injured as the corporation is deprived of the assetsrequired by law to be contributed

it misleads persons dealing w/ the corporation as to its capital standing

3 Theories behind Corporate Officer Liability for Watered Stocks

subscription contract theory – the subscription contract is the source and measure ofthe duty of the subscriber to pay for his shares (unacceptable in our jurisdiction)

fraud theory – liability based on tort misrepresentation, but creditors who had priornotice are not protected

the trust fund doctrine (prevailing in our jurisdiction); fraud is not an element; thevery issuance of the watered stock is sufficient basis to hold the stockholder liable toany corporate creditor

Release from Subscription Obligation

the corporation can release a subscriber from liability only w/ the consent of allthe shareholders and only when there is no prejudice to the corporate creditors

there are certain exceptions to this rule such as: (1) bona fide compromise, (2) set-offof indebtedness, (3) or release w/c must be supported by consideration – w/c iseffectual even against dissenting stockholders

Phil. Trust Co. vs. Rivera

The assignee in insolvency can maintain an action upon any unpaid subscription in order torealize assets for the payment of its debts pursuant to the trust fund doctrine

But subscriptions payable can be cancelled if there is a reduction in capital stock if:

1. it is done w/ the consent of the creditors, or

2. if they will not be prejudiced – in w/c case their consent is not necessary

Note: The Board may declare due and payable to the corporation unpaid subscriptions plusinterest thereon; this power is absolute and cannot be restricted by the subscription agreement

If a date is specified in the subscription contract for the payment of unpaid shares, there is noneed for call, and non-compliance upon the said date can give rise to delinquency

PNB vs. Bitulok Sawmil l

Once the corporation becomes insolvent, the unpaid subscription immediately become due anddemandable – w/o need of call. When one enters into a subscription agreement, he cannot denythe obligation to pay – even if the corporation becomes insolvent.

Payment of balance of Subscription

subscribers are liable for interest thereon from the date of the subscription if sorequired or at the rate of interest fixed in the by-laws

if there is no rate of interest fixed, the legal rate applies

payment is to be made on the date stipulated in the subscription or on the date fixedby the Board

Failure to pay on said date renders the ent ire amount of the subscr ipt ion due anddemandable w/ interest

If w/in 30 days no payment is made, then the said subscription becomes delinquent and subject to sale as provided in the Crop. Code.

Call on Unpaid Subscriptions

A resolution adopted by the Board specifying the portion of the unpaid subscription w/cit desires to call, and the date of payment thereof

When Call is not necessary:

1. when under the perms of the contract the subscription is payable immediately or on aspecified date, or in installments at a specified time

2. if the corporation becomes insolvent, the unpaid subscription becomes immediately dueand demandable


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Edward Keller & Co. vs. COB Group

A stockholder is personally liable for corporate debts to the extent of his unpaid subscriptioneven when the corporation is not insolvent. His liability is direct and he may be sued in his

personal capacity.

Delinquency Sales

The Board may by Resolution order the sale of delinquent stock and shall specify the date andamount due on each subscription plus interest.

The public sale must be not less than 30 days nor more than 60 days from the date the stocks

became delinquent.

Highest Bidder – such bidder who shall offer to pay the full amount of the balance of thesubscription (w/ interests and costs) for the smallest number of shares or fraction of a share.

In case there is no bidder, the corporation may b id for the same, and the shares shall vest in thecorporation as treasury shares.

The remaining shares go to the delinquent stockholder. Sec. 68, after all, is intended to protectthe delinquent stockholder.

No action to recover delinquent stock sold can be sustained due to irregularity or defect in noticeof sale unless:

the action is maintained w/in 6 months from the date of sale

the party maintaining such action pays or tenders to the holder the sum for w/c theshares were sold w/ interest from the date of the sale

The corporation may also maintain an ordinary action for the balance of the unpaidsubscription. The discretion pertains to the Board.

Effects of Delinquency

cannot vote or be voted during the stockholders’ meetings

not entitled to the rights pertaining to stockholders except to receive dividends w/c willbe applied to the unpaid balance

not entitled to notice of meetings, nor considered in determining quorum

stock dividends are withheld until the unpaid balance is settled

Prescriptive Period for Enforcement of Subscription

The prescriptive period is counted from the moment the subscription becomes due anddemandable – such as when the Board declares them due – and not from the date ofsubscription.

THE CERTIFICATE OF STOCK

Shares of stock are personal property and may be transferred by the delivery of the certificateand indorsed by the owner or his representative.

no certificates shall be issued unless the full amount of the subscription (w/ interestsand expenses) are fully paid

but the corporation, at its option, may issue a certificate for the paid shares, thusdividing the subscription; but this is the prerogative of the corporation – further, oncethis alternative is chosen, it must be applied equally to all shareholders similarlysituated

but they may be voted and are entitled to dividends (unless delinquent)

Nature of Shares of Stock

They are quasi-negotiable and may be transferred by indorsement coupled w/ delivery – butsubject to the rights or defenses among prior parties except to the extent that they are barred byestoppel

But the transfers are valid only as between the parties thereto unless and until the said transferis recorded in the books of the corporation.

It is only the paper representative of the stock itself. A person maybe deemed owner of theshares even w/o the certificate – such as if he is the recorded owner in the books of thecorporation.

The certificate is presumed to have been validly issued – but this presumption is rebuttable.It must be signed by the president or VP, countersigned by the secretary or asst. secretary, andunder the corporate seal.

Remedies in case of refusal to issue the certificate:

specific performance

alternative way of damages where specific performance can be granted

mandamus if applicable

rescission

Negotiation

Endorsement and delivery may be for any of the following purposes:

for sale or assignment of shares trust or nominee agreement ledge or encumbrance of shares

Requirements for valid transfer of shares (Bitong Case):

1. delivery

2. endorsement by the owner or his representative

3. recording in the book of the corporation to bind third persons


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Forged and Illegal Transfers

Since certificates are only quasi-negot iable, they do not afford the same protection asnegotiable instruments and the holder takes them subject to the defenses among prior parties(such as lack of consideration) – unless they are barred by estoppel.

Lost or Destroyed Certificates

The procedure in case of lost certificates is found in Sec. 73. The procedure has been opined tobe merely directory and not mandatory (SEC). However, failure to comply therewith will deprivethe corporation of the right to avail of the “free and harmless” clause in the said section.

STOCK & TRANSFER BOOK

A stock corporation is required by law to keep a stock and transfer book in its principal office,open for inspection, and containing:

1. all stocks in the name of stockholders alphabetically arranged

2. installments paid and unpaid and date of payment of installments

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

4. such other entries as the by-laws may provide

Stock transfer agents are required by the SEC to obtain a license therefrom and to pay the

appropriate fees. A stock corporation is not precluded from making a transfer of its owns stocks,in w/c case it is governed by the same rules except for the payment of the license fees.

Torres Jr. vs. Court of Appeals

Only the corporate secretary may make entries in the stock and transfer book; entries made byother officers cannot be given legal effect. If the secretary refuses, a proper suit may e brought,but the entry cannot be made by the stockholder or other officer.

The stock and transfer books must be registered w/ the SEC w/in 30 days from incorporation.

Note: Under NIRC, the corporate secretary cannot effect the transfer w/o requiring certificationfrom the BIR of payment of capital gains tax or other dues.

The stock and transfer book is the best evidence of the corporate acts and proceedings. Butthey are not conclusive and only constitute prima facie evidence. Parol evidence is nonetheless

admissible.

Trust Relations on Shares of Stock

Nominee and trust agreements may be had involving shares of stock, but w/ due compliance w/legal requirements.

Delivery and registration of shares of stock in violation of a trust agreement orrelationship would be void – even if the same were recorded in the books of thecorporation (Neugene Case).

Approval of the beneficial owners of the shares held in trust is necessary for thevalidity of the transfer of the stock certificates.

Want of consideration is a good defense that would render the transfer void.

TRANSFER, SALE, & ASSIGNMENT OF SHARES

One of the fundamental rights of the stockholder is to freely transfer or dispose of his shares;and the corporation cannot restrict the right to transfer or alienate the same. It may only adoptreasonable regulations as to the procedures and formalities.

A corporation may refuse to acknowledge and register a sale or assignment of theshares w/c is not fully paid, and may continue to hold the original subscriber liablethereon. No shares of stock over w/c the corporation has “unpaid claims” shall betransferable in the books of the corporation (Sec. 63)

The word “unpaid claims” pertains to unpaid subscription – but not other debts.

The transfer of unpaid shares binds only the parties thereto, but not the corporationunless the latter gives its consent

A transfer w/c is not recorded in the books of the corporation is valid only asbetween the parties thereto.

Garcia vs. Jomouad

Mere entry in the minutes of the meeting, w/o entry in the corporate books, is not sufficientcompliance.

Reasons for the Rule:

to enable the corporation to know at all times who its actual stockholders are

to afford the corporation an opportunity to object to or refuse its consent to the transferin case of unpaid claims

to avoid fictitious or fraudulent transfers

The rule applies to shares in escrow.

Endorsement and delivery is not the only way by w/c to transfer or assign shares. Othermodes can be used – such as execution of a Deed of assignment. Nonetheless, in orderto bind third persons, the transaction must be registered in the books of the corporation.

Remedies in case of refusal to record:

1. express instructions by the registered owner

2. power of attorney authorizing the transfer

3. mandamus in case of persistent refusal

Mere indorsement is insufficient; there must be a power of attorney to compel the secretary tomake the transfer in the books of the corporation.

Prescription – the prescriptive period to demand registration commences from the demand for

regist rat ion and not from the date of the assignment.

Speculative Damages – these pertain to value of the shares had they been sold in the market.These cannot be recovered.


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INVOLUNTARY DEALINGS

Shares of stock may be pledged, mortgaged, or otherwise encumbered. This right may not berestricted by the corporation.

Reasonable restrictions (according to SEC) may be allowed subject to the following requisites:

1. they must appear in the Articles, by-laws, and the certificates

2. they must not be more onerous than granting the existing stockholders or the corporationan option to purchase w/in a reasonable period and w/ reasonable terms

In order for transfers to bind third persons, the said transfer must be recorded in thebooks of the corporation.

this rule applies only to “transfers,” meaning there is an absolute conveyance of titl eand ownership – and this is true even if the third parties had prior notice

it is not applicable to encumbrances such as pledge or mortgage in order for thesame to bind the world

In case of Chattel Mortgage

recording in the books of the corporation is not needed to bind third parties

instead, the mortgage must be recorded in the Registry of Deeds of the place wherethe principal office of the corporation is located and also in the ROD of the domicile ofthe new owner

failure to comply will deprive the new owner of protection such as against attachingcreditors

what is mortgaged here is not the certificate of stock, but rather the shares or theparticipation in the corporation

CLV: The requirements are not practical. The law should be amended to apply the samerecording requirement to both transfers and encumbrances

The corporate secretary cannot be compelled to make the transfer in the books of thecorporation if the shares are not fully paid for or if no certificate of stock has been issued

therefor. In the absence of a Certificate, the transfer is valid only as between the parties to thetransaction.

Encumbrances that bind the world

the Certificate need only be delivered to and placed in the possession of themortgagee (the same applies in case of chattel mortgage)

in case of chattel mortgage, registry in the ROD is constructive notice to the world – and there need not be a delivery of possession

the contract need not be embodied in a public instrument

Nonetheless, there must be proper foreclosure in case of non-payment of the debt – otherwise, pacto commisorio arises.

Attachments & Levies

Shares may be attached by leaving w/ the president or managing agent a copy of the writ andnotice stating that the stocks are attached pursuant to such writ.

Even if the shares have been alienated, if they stand in the name of the debtor in the books ofthe corporation, they will still be liable to seizure by attachment and execution – even if they arenow in the hands of third parties.

No law requires that attachments be recorded in the books of the corporation for them to bindthird parties. Attachments are not the “transfers” contemplated by law for purposes of

registration.

A purchaser acquires title to the shares but subject to the attachment legally levied thereon evenif the latter is not recorded in the books of the corporation.

Check out summary of rules in Page 448.

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RIGHTS & OBLIGATIONS OF STOCKHOLDERS & MEMBERS

Rights of Stockholders

As a general rule, stockholders are entitled to equal rights

Preferences and restriction, to be valid, must be embodied in the Articles and stated inthe certificates of stock

The Rights are as follows:

1. right to vote2. right to receive dividends3. right to receive distributions upon liquidation4. right to inspect the books of the corporation5. right to transfer or dispose of the shares6. right to file derivative suit

Such rights are inherent and remain even when the shares are sequestered (Cojuanco vs.

Roxas).

Rights of Members

These rights are personal in nature and generally not transferable.

The right to vote in non-stock corporations may be limited, broadened, or deniedunder the Articles or by-laws

the right to vote by proxy may be denied

termination of membership extinguishes all rights


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Pre-emptive Right

All stockholders en joy a p re-emptive right to subscribe to “all issues or disposition” of shares inproportion to their respective shareholdings.

This refers to the common law right of the stockholders to be granted the first option to subscribeto any increase in the authorized capital stock of the corporation.

This is intended to protect the proprietary and voting rights of the stockholders.

In determining the proportionate rights, “subscription deposits” are not included. They are

deposits for additional subscription and have yet to materialize.

Exceptions to the Pre-emptive Right:

1. if denied by the Articles

2. shares issued for the purpose of complying w/ laws requiring stock offerings orminimum ownership by the public

3. shares to e issued in good faith in exchange for property needed for the corporatebusiness w/ the approval of 2/3 of the outstanding capital stock

4. shares issued in payment for previously contracted debt – also w/ 2/3 approval

Pre-emptive rights are common law rights and require no statutory grant for their existence. Any

restriction must be provided in the Articles. It is also a personal right waivable only by thestockholder possessing the same.

Pre-Emptive Right vs. Right of First Refusal

Pre-Emptive Right Right of First Refusal

Common law right Contractual right, may bestatutory in case of closecorporations

Pertains to portion of thecapital stock that has yetto be issued

Pertains to shares alreadyissued

A right claimed againstthe corporation

Claimed against anotherstockholder

The pre-emptive right exists not only for unissued shares in case of increase in capital stock, butalso to already existing unissued shares whenever the Board opens them up for subscription.

SEC: The pre-emptive right also covers treasury shares

Restrictions on Transfer of Shares

a stipulation for prior approval of the Board before any shares can be disposed, or anyabsolute prohibition against disposition is void

similarly, absolute restriction on the right to encumber the shares is void

a right of first refusal in favor of the corporation may be valid if the terms and durationare reasonable

buy-back agreements, where shares are given to officers and employees subject tothe condition that the corporation may buy them back upon their retirement, is validprovided the terms are reasonable

Lambert vs. Fox

A consensual st ipulat ion to suspend the right to dispose of the shares is reasonable and validand offends no public policy. They are valid as between the parties thereto but cannot prejudiceinnocent purchasers. The disposition is valid, except the erring stockholder is liable for damages.

Note: Restrictions upon the right to dispose shares, other than consensual ones, must be

embodied in the Articles, and not only in the by-laws. Besides, by-laws cannot prejudice thirdpersons.

SEC: The restrictions must be laid down in the Certificate so as not to prejudice third persons.

In order not to violate the principle against restraint of trade, any restriction upon the right ofdisposition must pass the test of reasonableness. A reasonable period for the restriction mayrange from 30 to 60 days depending on the circumstances. Once the period expires w/o thepurchase having been made, the stockholder may sell his shares to anyone.

A non-competition clause is a valid condition for being a stockholder if provided in theArticles or by-laws. Even the stockholders have a fiduciary relation w/ the corporation. This isalso justified by the principle of self-preservation.

Right to Vote

No share may be deprived of voting rights except for those classified as “preferred” or“redeemable” shares. But still, holders of such shares may vote in the following matters:

1. Amendment of the Articles (2/3 vote)

2. Sale, lease, exchange of all or substantially all of the business of the corporation

3. Incurring or creating bonded indebtedness (2/3 vote)

4. Increase or decrease in capital stock (2/3 vote)

5. Merger or consolidation (2/3 vote)

6. Investment of corporate funds in another corporation (2/3 vote if pursuant to

secondary purpose)

7. Dissolution

Voting Rights of Members (Non-stock Corp.)

General Rule: One member, one vote.

Exception: The right may be limited, broadened, or denied under the Articles or the by-laws.The right to vote by proxy can also be denied – unlike in stock corporations where it cannot bedenied. They may even provide for voting by mail, or for cumulative voting.

Note: For a proxy agreement to be valid, it must be in writing and signed by thestockholder. The right to appoint a proxy is personal.


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Sequestration of shares does not entitle the government to exercise rights of ownership, such asthe right to vote (Cojuanco vs. Roxas).

Voting in Joint Ownership

If the shares are co-owned, the consent of all the co-owners is needed

they may authorize one or some of them to vote in the others’ behalf

but if the shares are held in an “and/or” capacity, any co-owner may vote for theothers; they may also be transferred upon the indorsement of any of the co-owners

Pledgors, Mortgagors, Administrators

Pledgors and Mortgagors may not vote the shares encumbered to them unlessexpressly given such right in writing and recorded in the books of the corporation

Executors, administrators, or receivers may exercise the right to vote w/o need ofwritten proxy by virtue of Sec. 55

Treasury Shares

They may not be voted while the stock remains in the treasury, otherwise, thedirectors may prolong their stay in office against the wishes of the stockholders

once re-sold or re-issued, they regain their voting and other rights

Agreements Affecting Voting Rights

Stockholders or members may vote by proxy in all meetings.

Proxy is governed by the rules on Agency – hence revocable at will, unless coupled w/ aninterest.

Requisites for valid proxy:

1. It must be in writing2. Signed by the stockholder / member3. Filed before the schedule meeting w/ the corporate secretary

Note: Under Sec. 58, where no deadline for the filing of the proxies is provided in the by- laws,

then the proxies may be filed anytime before the scheduled meeting.

The proxy is valid only for the meeting for w/ it was constituted

No proxy can be valid for a period longer than 5 years at any one time

The right to appoint a proxy is granted by law to stockholders and thus cannot bedenied; but such is not the case for members in non-stock corporations

VOTING TRUST AGREEMENTS

A stockholder parts w/ his voting power but retains the beneficial ownership of the stock – including the right to receive dividends, inspect the books, or to sell his shares.

The trustee becomes legal owner of the shares, and hence is eligible to be elected as director.The trustor becomes the beneficial owner.

Requisites:

Cannot exceed 5 years at any one time, unless made pursuant to a loan agreement

It must be in writing and notarized, specifying the terms thereof

A certified copy must be filed w/ the SEC

The certificates of the trustor are cancelled and new certificates are issued in favor of the trusteestating that they are mare pursuant to the agreement. The trustee will then issue the trustor avoting trust certificate – w/c is transferable in the same manner as shares of stock.

Note: No voting trust agreement may be entered into for the purpose of circumventing the lawsprohibiting monopolies and illegal combinations in restraint of trade.

The agreement shall automatically expire after the period agreed upon.

the trustee may also vote by proxy, unless disallowed by the agreement

Proxy vs. Voting Trust Agreement

Proxy Voting Trust

Creates mere agencyrelationship

Voting rights areseparated from ownership

and creates a contractualtrust relationship

Revocable at will unlesscoupled w/ an interest

Intended to be irrevocablefor a period of time

Mere representation Principal purpose is toacquire control of thecorporation

Can only act in thespecified meeting, unlessstipulated to be continuingin nature

Not limited to any meeting

No right to inspect thecorporate books

Entitled to the right toinspect

Does not have appraisalright

May exercise appraisalright subject to the trustobligations w/ thebeneficial owner

The trustor may set aside the voting trust agreement is his rights are violated by the trustee. Novoting trust shall be entered into for purposes of fraud.

Voting Trust Pursuant to Loan Agreement

may exceed 5 years but shall automatically expire upon full payment of the loan

the voting trust agreement serves as further security to the lender;

CLV: The SC is not ready to adopt the “lender liability” theory where the voting trust pursuant toa loan agreement the lender becomes liable as trustee for the operations and management of


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the corporation to w/c it extended loans by reason of its having allowed itself to engage in themanagement thereof.

Pooling or Voting Agreements

Two or ore stockholders agree that their shares are voted as a unit. They bind themselves tovote in accord w/ the majority in the pool.

These are obligations “to do” and thus cannot be enforced by specific performance; but theyusually stipulate liquidated damages.

Hierarchy of Enforceability

1. Voting Trust – governed by the laws on trust and cannot be arbitrarily terminated

2. Proxy – governed by the laws on agency

3. Pooling – cannot be enforced by specific performance

Meetings

held annually or in the date fixed in the by-laws, or if not fixed on any date of April ofevery year

notice may be waived expressly or impliedly

Must be held in the city of municipality where the principal office is located. This ismandatory; non-compliance will render the meeting null and void – unless allstockholders or members were duly represented.

For non-stock corporation, meetings may be held even outside the Philippinesprovided there is due notice

Who can call?

persons designated in the by-laws

in the absence of such provision, by a director or trustee or officer entrusted w/management

if no person is authorized, or in case of failure or persistent refusal, any stockholder or

member upon showing of good cause may petition the SEC for an order calling themeeting, he shall preside until the majority elects a presiding officer

Quorum

majority of the outstanding capital stock or of the members unless otherwise providedin the by-laws

where the law determines the number of concurring votes necessary, no less than thatnumber will constitute a quorum

Minutes of the Meeting

must bear signature of the corporate secretary, otherwise, it has no probative value

RIGHT TO INSPECT CORPORATE RECORDS

This is part and parcel of the right to participate in the management and allows the stockholderto protect his interests. This is a common law right based upon ownership and self-protection.This right is not affected even if the shares are sequestered.

Nonetheless, the corporation is not bound to show all its records under all circumstances – suchas formulas or trade secrets essential to its functions.

the corporation must w/in 10 days from request o any stockholder its most recentfinancial statement

the financial report of its operations must also be presented during the regularmeetings, certified by a CPA or by the treasurer or authorized officer under oath incase the capital stock does not exceed P 50,000

must also submit annual report of its operations to the SEC, w/ certified financialstatements

Books required to be prepared and kept:

1. Business transactions2. Minutes of the stockholders’ meetings 3. Minutes of the Board meetings4. Stock and transfer book5. Annual financial statements

6. Annual report w/ the SEC7. Report of election of directors, trustees, and officers w/in 30 days after such election

Stockholders may inspect them at reasonable hours during the business days. This right cannotbe unreasonably restricted.

Only shareholders, directors, members, and trustees may exercise the right to inspect, eitherpersonally or through representative. They may also be added by experts or by counsel.

the inspection must be for a lawful purpose and must be germane to the stockholder’sinterest as a stockholder, and must not be for a purpose inimical to the interest of thecorporation

the right may be exercised w/o need of showing mismanagement or fraud

the right is not absolute and may be denied for valid grounds; the mot ive of thestockholder is material

Summary of requisites to exercise right to inspect:

1. Must be exercised at reasonable hours on business days

2. Person requesting must not have improperly used the information secured throughprevious examination

3. Demand must be made in good faith and for a legitimate purpose

The burden of proof to show an illegitimate purpose in upon the corporation if it interposes it as adefense.


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Purpose of Inspection:

To ascertain if the corporation is being mismanaged

To ascertain the financial condition

To ascertain the value of the shares of stock for sale or investment

To obtain a mailing list of shareholders to solicit proxies or influence voting

Grounds for Denial of Right to Inspect:

Purpose is to obtain or reveal business secrets

Purpose is to secure business prospects for investment of advertising lists, where heseeks a shareholders’ list so he could sell it to an advertising agency

Purpose is to bring nuisance or strike suits for purpose of blackmail or extortion

To obtain and publish info that would destroy or injure the corporation

Remedies is Inspection is Denied

1. Mandamus – in case the refusal has no valid ground

2. Damages

3. Criminal Suit – under Sec. 144 of the Corp. Code; if such refusal is pursuant toResolution, all responsible officers are liable

4. Procedures for Intra-Corporate Controversies – through summary proceedings in the

trial court

Who are liable?

1. Officer in custody of the books who unduly refuses inspection

2. If made pursuant to a Resolution, then all the responsible directors or officer are liable

Defenses available to officers:

1. The person demanding has previously misused information obtained

2. Bad faith or illegitimate purpose of the stockholder seeking to inspect

APPRAISAL RIGHT

The right of the stockholder to demand payment of the fair value of his shares aster dissentingfrom a proposed action involving fundamental change in the corporate setting.

He must have voted against the corporate transaction. Mere silence does not suffice.

Instances when right may be exercised:

1. Amendment to the Articles w/c changes or restricts the rights of any stockholder orclass of shares, or authorizing preferences superior to those of the outstanding sharesof any class

2. Extension or shortening of the corporate term

3. Sale, lease, transfer, encumbrance of all or substantially all of the corporate assets

4. Investment of corporate funds in another corporation outside of the primary purpose

5. Merger or consolidation

CLV: Sec. 37 provides appraisal right only in case of extension of the c orporate term, notshortening thereof.

How appraisal right is exercised? It must be exercised w/in 30 days from the date of thetransaction dissented to; otherwise the right is deemed waived.

voting and dividend rights shall be suspended from the time of demand until eitherabandonment of the corporate action or purchase of the said shares by thecorporation

if the dissenting stockholder is not paid w/n 30 days after demand, his rights arerestored

he must submit his certificates w/in 10 days from demand so that they can be markedas dissenting shares – failure to do so terminates the appraisal right

if the shares are in the meantime transferred, then the transferee shall have all therights of a stockholder, and the transferor’s rights shall cease

payment to the dissenting stockholder shall not include appreciation or depreciation

value may be appraised by 3 disinterested persons, one appointed by the stockholder,the other by the corporation, and the third by both chosen; their findings are final andmust be paid w/in 30 days

no payment can be made unless there are unrestricted retained earnings (trust fundrule)

No demand for payment may be withdrawn w/o the consent of the corporation, except:

1. if the proposed corporate action is abandoned or rescinded

2. if the proposed corporate action is disapproved by the SEC where such approval isnecessary

3. the SEC determines that the dissenting stockholder is not entitled to appraisal

In such a case, all the stockholder’s rights shall be restored, and dividends that should haveaccrued to him during the interregnum shall be paid to him.


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The corporation bears the costs of appraisal, unless the value appraised by the disinterestedappraisers is equal to the value proposed by the corporation – in w/c case the stockholder shallbear the costs.

If an action is brought for the matter, the corporation bears the expenses unless the refusal toaccept payment was unjustified.

Appraisal right may be waived indiv idual ly and c onsensual ly . But if the restriction is enteredin the by-laws or Articles, such provision is void for being contrary to public policy.

CLV: The attitude of the law seems to disfavor the exercise of the appraisal right because it

drains or diverts corporate funds. The best remedy on the part of the dissenting stockholder is todispose of his shares.

The availability of the appraisal right is considered in determining whether a suit is a nuisance orharassment suit. The appraisal right in such a case is deemed the main or primary remedyrather that bringing suits to enjoin corporate acts.

DERIVATIVE SUITS

The right to bring a derivative suit is a common law right. It is a suit instituted by ashareholder or member for and in behalf of the corporation for its protection from acts committedby the directors, trustees, officers, and even third persons when the Board refuses to sue.

The stockholder is deemed in this case as a mere nominal party, the real party in interest beingthe corporation.

Requisites:

1. The party bringing the suit should be a shareholder (a) as of the time of the transactioncomplained of and (b) at the time of the filing of the suit, his number of shares beingimmaterial

2. He has tried to exhaust intra-corporate remedies

3. The cause of action devolves upon the corporation and not to the stockholder bringing thesuit

Note: The stockholder suing must have been a stockholder at the time when the transactioncomplained of took place, and also at the time of the institution of the action – unless thetransaction is o a continuous nature and is injurious to such shareholder.

But the derivative suit cannot be brought when:

1. the transferor who had the chance to do so desisted therefrom, in w/c case thetransferee is also estopped

2. the transferor is himself party to the fraud against the corporation

CLV: These doctrines should be reconsidered so as to better protect the interests of thecorporation.

According to the SEC, in order for a derivative suit to p rosper, no appraisal right should havebeen available and it must not be a mere harassment or nuisance suit.

Exhaustion of Intra-Corporate Remedies

This is a prerequisite to bringing a derivative suit and is a substantive rule and not merely aprocedural rule. Of course, is exhaustion would be a futile exercise, then it can be dispensedwith.

Laches – when the corporation has been immobilized due to the inaction of the directors, lachesdoes not begin to attach against the corporation unless and until they cease to be such directors.

Grounds for Derivative Suit

1. Wastage or diversion of corporate funds

2. Violation of laws (or toleration thereof)

The action must be brought for the benefit of the corporation, not for the benefit of thestockholders. Otherwise, it will not prosper.

A receiver can be appointed during the pendency of the derivative suit to take the managementaway for the Board.

Being an intra-corporate dispute, jurisdiction over a derivative suit is lodged w/ the RTC (formerlySEC).

Business Judgment Rule

As a rule, whether to bring a suit lies at the discretion of the Board (business judgment)

The business judgment rule will however not apply if the Board itself is the author ofthe wrong, in w/c case a derivative suit may prosper. Intra-corporate remedies may bedispensed w/ as they are futile

When the cause of action is against third persons, or if there are still enoughdisinterested members of the Board, then intra-corporate remedies must be exhausted

The Board may create an investigative committee to give recommendations whetherto sue or not. It is a valid exercise of business judgment, and in such cases aderivative suit may not yet prosper as intra-corporate remedies must be exhausted

The findings of investigative committee are not binding upon the courts – w/c are the

final arbiters

Nuisance Suits

an essential condition for a derivative suit to prosper is that it is not a nuisance suit

availability of appraisal right can be considered in determining whether the suit is anuisance suit

Case of Close Corporations

a stockholder may compel a close corporation to purchase its shares at their fair value(w/c shall be not less than their par value) when the corporation has sufficient assetsin its books to cover the debts and liabilities exclusive of capital stock


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a shareholder of a close corporation may petition the SEC to compel dissolutionwhenever the acts of the directors or officers are illegal, fraudulent, or oppressive, orprejudicial to the corporation or the stockholders – where the assets are beingdissipated

Right to Proportionate Share of Remaining Assets

No corporation can distribute its assets except upon lawful dissolution and afterpayment of all its debts – includes decrease in capital stock and purchase ofredeemable shares

After dissolution and distribution of its assets, the remaining assets are to bedistributed to the stockholders or members in proportion to their shareholdings

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CAPITAL STRUCTURES OF CORPORATIONS

Equity investments and debt contracts are the 2 primary sources of corporate funding.

Equity Investment Debt Contract

Returns are tied up w/ thesuccess or loss of thecorporation – element of

risk is involved

Creditor puts no stake inthe business operation ofthe corporation

Investor is given a voicein the management, suchas voting rights or electionof members of the Board

No participation in thebusiness operations

Corporation is not boundto pay unless there areprofits and the Boarddeclares the distribution ofdividends

Corporation is bound topay even if it incurslosses, but the creditorcan only demand his fixedreturn even if thecorporation reaps hugeprofits

Generally non-withdrawable so long asthe corporation is not

dissolved; in case ofdissolution, the investorsreceive only from theremaining assets

Enjoy priority in paymentin case of insolvency ordissolution (trust fund

doctrine)

Create ownership interestin the corporation

Creates creditor-debtorrelationship

Corporations have the inherent power to issue or sell stocks. That power is lodged in the Board;no stockholder approval is needed.

But shares cannot be issued for a price less than the par or issued value – except treasuryshares so long as the price is reasonable.

Shares cannot be issued for future services, or promissory notes, but possible for checks.

Capital Stock

Outstanding Capital Stock – total shares of stock issued to subscribers orstockholders, whether or not fully or partially paid, so long as there is a bindingsubscription agreement, except treasury shares.

Authorized Capital Stock – amount fixed in the Articles to be subscribed and paid bythe stockholders.

Paid-up Capital – both subscribed and paid.

Subscription Receivables – portion w/c is still to be paid for in the subscription.

Note: Not all monies paid to the corporation pertain to the capital stock and are deemed paid-upcapital. Any amount received by the corporation in anticipation of future increase in capital stockis not yet deemed capital – unless and until the capital is actually increased and approved by theSEC.

Capital Stock cannot be subject to levy by corporate creditors as to allow them to gaincontrol of the corporation. It represents interest of the stockholders who can be deprived onlyin a manner provided by law.

Policies on Classification of Shares

1. Freedom of the corporation to classify shares – but no shares can be deprived of

voting rights except preferred or redeemable shares (such restriction must appear in

the Articles and Certificates)

2. Presumption of equality of rights and features of shares – unless provided in the

Articles and stated in the Certificates

3. Voting rights for all types of shares in fundamental matters – enumeration underSec. 6.

Common Stock – no special contract rights or preferences

Preferred Shares – holder is entitled to certain privileges, such as preference as to distribution

of assets upon dissolution, or preference as to dividends. Preferences must be embodied in the Articles and appear in the Certificates.

They may be issued only for the stated par value. The type of preference must be expressly

stated, otherwise, no preference is created.

Still, rights of preferred shareholders are subordinate to rights of corporate creditors upondissolution.

Cumulative PreferredShares

Non-CumulativePreferred Shares

Entitled to preference asto back dividends inaddition to currentdividends

Merely entitled topreference as to currentdividends

In the absence of stipulation as to the kind of preferred shares, the shares are deemedcumulative.


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But dividends are payable only when distribution of dividends is decreed by the Board – even ifthe shares are preferred shares,

Participating Preferred Shares – entitle the shareholder to participate w/ the common sharesin the retained earnings after the amount of stipulated dividend is paid to the preferred share

Non-Participating – entitled only to stipulated preferred dividends and no more

Redeemable Shares

May be purchased by the corporation after a fixed period regardless of the existence ofunrestricted retained earnings. Must be provided in the Articles and stated in the Certificate.

It must be proved that the corporation must have sufficient assets in its books to pay off its debtsafter the redemption before it can redeem shares. But if the shares are purchased from surplusprofits, the creditors have no cause to complain.

Founder’s Shares – must be classified as such in the Articles and may be granted certain rights

and privileges. If exclusive right to vote or be voted for is granted, it cannot exceed 5 years fromapproval by the SEC. What determines the nature as founder’s share is not the nomenclaturebut the privilege conferred.

When the period of exclusivity expires, voting rights are restored to common shares, butpreferred shares are not affected.

No Par Value Shares – the capital stock of a corporation issuing no par value shares is not setforth by a stated amount of money but s expressed to be divided into a stated number of sharessuch as 1,000 shares.

Shares of stock issued w/ no par value are deemed fully-paid and non-assessable, and noshareholder shall be liable to the corporation or its creditors in respect thereto.

They may not be issued for less than P 5.00 per share, and the value received shall be treatedas capital.

Treasury Shares – issued and fully paid for but reacquired by the issuing corporation by

purchase, redemption, donation, or other lawful means. Their sale does not increase the numberof issued shares or the amount of the stated capital.

No dividends are paid on treasury shares; neither do they have voting or pre-emptive rights.

Features of Treasury Shares:

they are issued shares, but being in the treasury, they do not have the status ofoutstanding shares

may be issued or sold again

so long as they are in the treasury, there is no participation in dividends, meetings, orvoting

they may be issued as property dividends

They are actually property acquired by the corporation w/c may be re-sold at a price to bedetermined by the Board.

Retirement of treasury shares is done by decrease in capital stock.

Note: See Government vs. Phil. Sugar Estates.

TRUST FUND DOCTRINE

The capital of a corporation as well as all its assets and property are generally held as equity intrust for the payment of corporate debts; and the corporate creditors enjoy preference thereon

above the stockholders. This rule is particularly applicable if the corporation is insolvent.

There can be no distribution of corporate assets until the corporate debts have been settled. Thedoctrine encompasses only the capital stock of the corporation – it does not cover unrestrictedretained earnings.

In case of no par value stock, the legal capital is the total consideration received for the share ofstock.

The capital or capital stock w/c may not be impaired or depleted by dividends is not the entirenet assets but rather the “legal capital” of the corporation.

DIVIDENDS

Dividends are the payments set aside for ratable distribution to the stockholders as a return of

their investment. The Board may declare dividends only out of unrestricted retained earnings.

The Corporation Code makes use of the term “unrestricted retained earnings” to avoid oldcontroversies where the term used was “surplus profit” such that:

all items not included in retained earnings can be declared as dividends unlessrestricted

all other items not falling under retained earnings are included in “capital” and areunavailable for dividend declaration

“Retained” – that portion of the retained earnings not earmarked for specific purposes such asto meet contingencies or for planned expansion programs.

Steinberg vs. Velasco

The existence of “surplus profit” alone does not suffice. The corporation must have actual bonafide surplus, not assets that are practically worthless. Otherwise, the dividends issued would beillegal. In such a case, the directors responsible will be held solidarily liable for having actednegligently or in bad faith.

Unrestricted Retained Earnings

The difference between the total present value of its assets after deducting losses ad liabilitiesand the amount of its capital stock.

FORMULA: REATINED EARNINGS = ASSTES – (LIABILITIES & CAPITAL)

Such retained earnings are said to be unrestricted and free for dividend distribution tostockholders if they have not been reserved or set aside by the Board for some purpose.


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Dividends cannot be declared so long as a deficit exists; it also does not include increase invalue of fixed assets nor borrowed funds.

Treatment of Paid-in Surplus

Where a subscriber pays in excess of the value of the par value shares, a paid in surplus results.Phil. law does not allow paid in surplus to be declared a dividends. Dividends after all, can onlybe paid out of unrestricted retained earnings.

Consideration for No-Par Value Shares

The consideration received by the corporation for the issuance of no-par value shares shall betreated as capital and shall not be available for distribution as dividends.

Board Discretion

Declaration of dividends lies at the discretion of the Board; this is covered by the business judgment of the Board. Stockholders may sue the directors to compel them to declare dividendsbut they assume the burden of proof. Otherwise, even mandamus will not lie.

Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-incapital stock except:

when justified by definite corporate expansion projects approved by the Board

pursuant to a loan agreement where consent of the creditor is required for the

declaration of dividends

where retention is required by special circumstances – such as contingencies

Issuance of stock dividends requires approval of the stockholders representing 2/4 of theoutstanding capital stock. Stock dividends may e issued out of premium surplus, but they cannotbe issued to non-stockholders.

Cash dividends on delinquent stock are first applied to the balance of the subscription plus costsand expenses. Dividends are withheld until full payment of the subscription.

Revocation

Cash dividends are revocable before announcement to the stockholders. Onceannounced, rights to the dividends accrue.

Stock dividends may be revoked prior to actual issuance; the same plies in case ofscrip dividends

Property Dividends may be issued provided:

due notice to the stockholders

the property should no longer be necessary for the operation of the business

it must not result to inequitable distribution of property to the stockholders

the prevailing market price of the dividends shall be considered in determiningequitable distribution of the total dividends

no dividends in the form of land shall be distributed to persons not qualified to ownland

prior approval of the SEC

Illegally Received Dividends

the stockholders who received them shall be liable to refund the same to thecorporation or its stockholders

if the directors acted negligently or in bad faith, then they are liable personally to thecreditors

Dividend Declarations for Gov’t Corporations

All GOCCs shall remit at least 50% of their annual net earnings as cash, stock, or propertydividends to the National Government.

Exempt from the above requirement are GOCCs created to administer properties or funds heldin trust for the use or benefit of the members – such as GSIS, HDMF, ECC, OWWA, etc.

Acquisition of Own Shares

Corporations may acquire its own shares provided it is for a legitimate purpose and there areunrestricted retained earnings to cover the shares acquired. Such legitimate purposes

include:

eliminate fractional shares arising out of stock dividends

collect or compromise indebtedness arising out of subscription in a delinquency sale,and to purchase delinquent shares

to pay dissenting or withdrawing stockholders entitled to payment

Important: Before a corporation can purchase its own shares there must be unrestricted retainedearnings. This is a more stringent formula compared to the Old Corporation Law pursuant to thetrust fund doctrine.

Quasi-Reorganization & Other Special Rules

For the most part, the purpose of reorganization is to place the corporation upon a soundfinancial basis and avoid bankruptcy.

It generally covers 2 methods:

1. use of the appraisal surplus of a corporation’s assets to wipe out the deficit

2. reduction in the corporation’s capital stock through amendment of the Articles, subject tothe rights of the corporate creditors

3. debt to equity arrangements – where creditors agree to be equity holders in the corporationin lieu of payment of corporate debts


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Special Treatment of Shares

Warrants – entitles the holder to subscribe to unissued stock or to purchase issued shares inthe future w/c may be sold separately; it does not apply to option plans for the benefit ofemployees approved by the SEC

Stock Options – a privilege granted to a party to subscribe to certain portion of the unissuedcapital stock of a corporation w/in a specified period under certain terms, and exercisable w/inhe said period

Stock Splits – each of the issued and outstanding shares is broken up into a greater number of

shares each representing a proportionately smaller interest in the corporation; its purpose is tolower the market value of the shares and make them more marketable

Stock Consolidations – new shares are issued in replacement of old shares w/ a higher par or

issued value w/o affecting the total value of the shares; the purpose is to make the shares moreexpensive and bring it w/in a higher end in the market

Stock Reclassification & Exchange – does not bring about substantial alteration in the

subscriber’s proportional interest, but it would affect a shifting of the balance of stock featureslike priority in dividend declaration or absence of voting rights

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CORPORATE ACQUISITIONS, MERGERS, & CONSOLIDATIONS

The 3 Levels of Acquisition / Transfer

1. Assets Only Level

The purchaser is only interested in the raw assets of the enterprise

purchaser is not interested in the entity of the corporate owner, nor the goodwill orother factors relating to the business

The transferee is not liable for the debts and liabilities of the transferor exceptwhere there is fraud or express assumption of liability (express or implied)

There is no privity of contract between the transferee and the creditors of thetransferor

Covered by the Bulk Sales Law; non-compliance makes the transfer null and void

But where a corporation takes over the assets of another corporation that isdissolved, then the transferee is liable for the debts of the dissolved corporation tothe extent of the value of the assets acquired

2. Business Enterprise Level

Purchaser’s interest goes beyond the mere assets or properties, but extends to the“going concern” and the earning capability of the venture, including goodwill, thecustomers, the stock-in-trade, etc.

No interest in purchasing the “juridical entity” itself and in fact purchases the businessor going concern from the said entity

The transferee is responsible for the debts and liabilities of the predecessor, thisis for the purpose of protecting the corporate creditors of the transferor

Fraud is not an essential element for applying the business-enterprise level doctrine inmaking the transferee liable for the transferors debts; its application has been linkedw/ the piercing doctrine

If a partnership (or sole proprietorship) is later incorporated and the corporation merelycontinued the business of the old partnership, then the corporation is prima facie liablefor the predecessor’s debts (Quimson vs. Alaminor Cooperative)

A “free and harmless clause” where the transferor agrees to hold the transfereeharmless from all claims is binding only as between them and cannot prejudicecreditors who were not parties thereto; the creditors may still go after the transferee

3. Equity Level

The purchaser takes control of the business by purchasing the shareholdings of thecorporation

The corporate owner remains the direct owner of the business, and what thepurchasing corporation has actually secured is the ability to elect members of the

Board

The transferee is not liable for the debts and liabilities of the transferor except isthere is express assumption of liability

The purchasing corporation as a stockholder is still protected by the limited liability feature as well as the separate juridical personality

MERGER & CONSOLIDATION

The power to merge or consolidate is not inherent and is merely granted by law (Sec. 76)

Consolidation – Two or more existing corporations unite to form a new corporation called theConsolidate Corporation, composed generally though not necessarily of the stockholders of theold corporations. All the constituent corporations are dissolved and absorbed by the consolidated

corporation.

Merger – One or more existing corporations are absorbed by another corporation w/c survivesand continues the business. All constituent corporations except the surviving corporation aredissolved.

In both cases, there is no liquidation of assets, and the surviving or consolidated corporationbecomes ipso jure liable for the debts of the constituent corporations

Procedure

The Board of Directors or Trustees of each constituent corporation may vote toconsolidate or merge


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Affirmative vote of at least 2/3 of the ou tstanding capital stock or members is neededin a meeting duly called for the purpose

There must be due notice of the meeting to the stockholders or members

In non-stock corporations, although generally allowed, voting by mail is not allowed incase of merger or consolidation

Appraisal Right is available to dissenting members or stockholders; the appraisalright is extinguished if the Board decides to abandon the plan of merger orconsolidation.

Amendments to the plan of merger or consolidation also require majority approval ofthe respective Boards as well as 2/3 vote of stockholders / members.

Articles of Merger and Consolidation are executed by each constituent corporationsigned by the President or VP and certified by the Secretary or Asst. Secretary andsubmitted to the SEC for approval

SEC may issue Certificate of Merger or Consolidation at w/c time themerger/consolidation shall become effective

If SEC has reason to believe that the merger or consolidation is contrary to law, it shallset a hearing and opportunity to be heard will be afforded

Effects of Merger or Consolidation

The constituent corporations shall become a single corporation

Separate existence of the constituent corporations shall cease, except the survivingcorporation in case of merger

Surviving or consolidated corporation shall possess all rights, privileges, immunities,and franchise of each corporation

All properties and interests shall ipso facto be vested in the surviving or consolidatedcorporation

Surviving or consolidated corporation shall be responsible for the debts and liabilitiesof the constituent corporations

Claims (even those pending) against the constituent corporations may be prosecutedagainst the surviving or consolidated corporation

No rights or liens of creditors are impaired

Advantages of Merger or Consolidation

There is a continuous flow in the juridical personalities; the surviving or consolidatedcorporations are not even transferees per se

There are certain statutory prohibitions against transfers w/c are not applicable tomerger or consolidation

There are tax advantages – as transfers are usually covered by gains tax – and notapplicable to mergers or consolidation

De Facto Merger

They are recognized in Philippine Corporate Law.

A de facto merger can be pursued by one corporation acquiring all or substantially all of theproperties of another corporation in exchange of shares of stock of the acquiring corporation.The so-called “target corporation” is left w/ no other assets other than shares of stock of theacquiring corporation.

Separate juridical personality subsists, but liabilities are transmitted under business-enterprisetransfers. The acquiring corporation assumes the liabilities of the target corporation.

De facto merger may be done by the acquiring corporation w/o the required 2/3 stockholdersvote. But for the target corporation, 2/3 ratificatory vote is required and may trigger the exerciseof appraisal right.

SPIN-OFFS

They produce the opposite effect of merger or consolidation. Here, a department or division ofthe corporate business is sold off to a new corporation by the process where it will become asubsidiary of the original corporation in exchange for all the capital stock of the subsidiary.

Spin-offs are not regulated by any specific provision of the Code – the nearest in applicationbeing Sec. 40.

EFFECTS OF TRANSFERS ON EMPLOYEES

Assets Only Transfers

The transferee is not bound to retain the employees of the transferor, even if the resultis the shutting down of the former business

Labor contracts are in personam and binding only as between the parties thereto, andan employer has the right to choose who his employees are going to be

But the transferor and transferee can be held liable in case there is bad faith

Business Enterprise Transfers

As a matter of principle, the transferee should be generally bound to retain theemployees of the acquired business

But the transferee is not liable for violations by the transferor of labor laws, the latterbeing solely liable

Change of management or ownership of a business is not similar to cessation forpurposes of exempting the transferor from payment of separation pay

Jur isprudent ial ly , however, there have been instances w here the assets-onlylevel was applied to a business-enterp rise transfer.

The transferee is not obligated to absorb the employees of the acquired business; anemployees contractual relation is personal and only w/ the original employer

The manner by w/c the transferee can be held liable to the employees of thetransferor is if there are ground to pierce the corporate veil – where there is


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substantial continuity of the same business by the same owners using thecorporate fiction as a shield

Avon Dale Garments vs. NLRC

For a new enterprise to take over the business concerns of another and at the same time not beliable for the labor claims of the predecessor, there must be a formal and sub stant ialterminat ion or break from the operat ions of the predecessor so as to constitute thetransferee as separate entity.

Equity Transfer

The purchaser does not assume personal liability to the employees of the acquiredcorporation under the principle of separate juridical personality

The original corporate employer remains as the party liable to its own employees

In Case of Mergers or Consolidation

By express provision of law (Sec. 80) the surviving or consolidate corporationassumes the liabilities of the constituent corporations – including labor obligations andcollective bargaining agreements

CLV: But the rulings of the SC (once again) run against the natural grain such as in the case ofFilipinas Port v. NLRC, but this case was again overturned by a later case of the same name.

In Case of Spin-Offs

If the spin-off is done for a valid purpose and in good faith, then the employees of thespun-off corporation will no longer form part of the bargaining unit of the originalcorporation and are to be deemed as new bargaining units

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SUSPENSION OF PAYMENTS, REHABILITATION, & INSOLVENCY

SUSPENSION OF PAYMENTS

This may take place where the corporation has sufficient assets to satisfy its debts but foreseesthe impossibility of meeting them when they respectively fall due. The corporation may petitionthat it be declared in the state of suspension of payments by the court.

Procedure:

1. Petition is field in court annexing:

inventoy of corporate assets

schedule of corporate liabilities

proposed agreement requested of the creditors

2. Court shall issue an order (w/ publication):

calling meeting of the creditors

containing absolute injunction (a) forbidding the corporation, during the proceedingsfrom disposing in any manner its property except in ordinary operations, and (b) frommaking payments outside of legitimate expenses

3. As to the unsecured creditors

any execution pending shall not be consolidated w/ the proceedings but shall be

suspended before sale of property is made, provided that the debtor makes a requesttherefor tot the court

they cannot sue or institute suit to collect their claims during the suspension ofpayments proceedings

4. For secured creditors, no such suspension proceedings can be obtained

5. Suspension order shall lapse after 3 months have passed w/o the proposed agreementbeing accepted by the creditors or when it is denied

6. Only creditors included in the annexed schedule shall be cited to appear and take part inthe meeting

7. The presence of creditors representing at least 3/5 of the liabilities of the corporation shall

be necessary for a valid holding of the meeting

8. To obtain majority vote, it is necessary that 2/3 of the creditors voting shall unite upon thesame proposition, and the claims represented by said majority vote total to at least 3/5 ofthe liabilities of the corporation

9. The proposed agreement shall be deemed rejected if the required number of creditors donot attend, or the 2 majorities is not obtained

10. The following are not bound by said agreement unless they join the voting:

persons having claims for personal labor, maintenance, incurred w/in 60 daysimmediately preceding the filing of the petition

persons having legal or contractual mortgages

11. If the decision of the meeting is negative or if no decision is had in default of such numberof majorities, then the proceedings are terminated and all creditors are free to pursue theirrespective claims

12. If the agreement is approved, the court shall issue a directive making the same binding onall creditors included in the schedule and properly summoned – but not upon securedcreditors or those who have employment claims

13. If the corporation fails to comply w/ the agreement, then the rights of the creditors priorthereto shall re-vest to them and the corporation may be subjected to insolvencyproceedings


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Suspension of payment proceedings are under the jurisdiction of the RTC.

The RTC is empowered by law to choose to appoint an management committee or rehabilitationreceiver that will operate bound not by the terms of the Insolvency Law but rather by the boardpowers conferred by PD 902-A.

The provisions of the Insolvency Law, to the extent that they are not repealed by PD 902-A arestill binding.

Suspension underInsolvency Law

Suspension underPD 902-A

Suspensive effect dies notcover secured creditors

Suspension uponappointment of amanagement committee /rehabilitation receiverwould cover all creditors – secured or not

Automatic stay wouldexpire after 3 monthsunless there is anagreement

Automatic stay has notime limit so long as thecorporate debtor is underthe managementcommittee/rehabilitationreceiver, and there is nodirective to liquidate theassets

Final agreement is subject

to the qualifying majorityvotes

Management

committee/rehabilitationreceiver is grantedenough powers to takesuch measures torehabilitate thecorporation, w/o need ofcreditor approval

Note: The Interim Rules on Corporate Rehabilitation do not recognize suspension under PD902-A, and recognize only that under the Insolvency Law.

CORPORATE REHABILITATION

The SEC is granted broad powers to pursue the management or rehabilitation of a private

corporation through appointment of management committee or rehabilitation receiver.

Corporate Rehabilitation – process, continuation of corporate life and activity, to try toconserve and administer the corporate assets in the hope that it may eventually be able to returnto solvency and recover from financial distressSEC must give preference to the interests of creditors and employees in rehabilitationproceedings.

The Interim Rules provide for the following basic steps for rehabilitation:

1. Filing of the verified Petition with the appropriate RTC by:

(a) Corporate debtor w/c foresees the impossibility of meeting debts when they respectivelyfall due; or

(b) Creditors holding at least 25% of the debtor’s total liabilities

2. The following shall be annexed to the Petition:

(a) Audited financial statements at end of its last fiscal year;

(b) Interim financial statements

(c) Schedule of Debts and Liabilities

(d) Inventory of Assets

e) Rehabilitation Plan

(f) Schedule of Payments and disposition of assets effected within 3 months preceding

filing of Petition

(g) Schedule of Cash Flow for the last 3 months

(h) Statement of Possible Claim

(i) Affidavit of General Financial Condition

(j) At least 3 nominees for rehabilitation receiver

(k) Certificate under oath that directors and stockholders have irrevocably approved orconsented to all actions/matters necessary under the rehabilitation plan

3. The Rehabilitation Plan shall include:

(a) Desired business assets or goals and the duration and coverage of rehabilitation

(b) Terms and conditions of rehabilitation, manner of implementation, w/ due regard to the

interest of secured creditors

(c) Material financial commitments to support the rehabilitation plan

(d) Means for execution of rehabilitation plan, which may include debt-to-equityconversion, restructuring of debts, dacion en pago, sale of assets or of controlling interests

(e) Liquidation analysis that estimates the proportion of the claims that the creditors, andshareholders would receive if the debtors’ properties were liquidated

(f) Such other relevant information to enable a reasonable investor to make an informeddecision on the feasibility of the rehabilitation plan.

4. Issuance of the stay order not later than five (5) days from the filing of the Petition which,among others, shall:

(a) Appoint a rehabilitation receiver for the petitioning corporate debtor;

(b) Stay all actions for claims against the debtor, which shall cover both secured andunsecured creditors or claimants

(c) Set an initial hearing for the Petition, and

(d) Direct the creditors and other interested parties to file their verified commend on oropposition to the Petition not later than 10 days before initial hearing and giving them noticethat their failure to do so would bar them from participating in the proceedings

5. Publication of the stay order in a newspaper of general circulation in the Philippines once aweek for 2 consecutive weeks, which makes the proceeding in rem in nature

6. Initial hearing on the Petition not earlier than 45 days but not later than 60 days from filingof the Petition


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7. Referral of rehabilitation plan to rehabilitation receiver who shall submit hisrecommendation thereon to the RTC not later than 90 days from initial hearing

8. Meetings between corporate debtor and/or rehabilitation receiver with the creditors andother interested parties, which should take place before the final revision of the plan prior toits final submission to the RTC for approval

9. Modification or revision by the debtor of the rehabilitation plan in the light of the comments,opposition or discussions with the rehabilitation receiver, creditors and other interestedparties

10. Submission of a final rehabilitation plan to the RTC for approval

11. The Petition shall be dismissed (which results into the automatic lifting of the stay orderunless otherwise ordered by the RTC) if no rehabilitation plan is approved by the RTC after180 days from the date of the initial hearing

12. Approval or disapproval of the rehabilitation plan by the RTC:

(a) If approved, implementation of the plan and modifications in the course thereof ifnecessary to meet the desired business targets or

(b) If not approved, the Petition shall be dismissed

Appointment of Management Committee or Rehabilitation Receiver

RTC is empowered to:

appoint receiver(s) or real or personal property subject to the action

appoint rehabilitation receiver of corporations not supervised or regulated by othergovernment agencies who shall exercise such powers granted under PD 902-A inaddition to his regular powers

appoint a management committee (on petition or motu propio) of corporations notsupervised or regulated by other government agencies where there is imminentdanger of dissipation

Legal Effects of Appointment of Management Committee or Rehabilitation Receiver

all claims against the corporation shall be suspended upon the appointment – otherwise known as the “automatic stay”

automatic stay is effective for the entire period of rehabilitation or until dismissal of thepetition

dismissal of the petition takes place if after 180 days from the initial hearing, no plan isapproved

the purpose of the automatic stay is to give the committee or receiver enoughbreathing space to make the business viable again

the “claims” suspended pertain to any claims whatsoever, whether pecuniary or not

under the new rules, even secured creditors are bound by the automatic stay; thepurpose after all is to hold the assets in equal trust for all the creditors and to allow thecommittee or receiver to work unhampered by several litigations

Rules of Thumb under RCBC vs. IAC

1. All claims of whatever kind are suspended upon the appointment of the managementcommittee or rehabilitation receiver – even employees claims

2. Secured creditors maintain their preference but such preference is suspended uponappointment of the committee or receiver

3. Preferences arise once again in case of dissolution of the corporation whererehabilitation has been rendered impossible or unfeasible

The automatic stay does not work in favor of a non-corporate debtor or one who binds himself w/the corporation.

Powers of Mgt. Committee / Rehab. Receiver

take custody over all assets

evaluate existing assets and liabilities, earnings and operations

determine the best way to salvage and protect the interest of the investors andcreditors

study the feasibility of continuing operations and structure and rehabilitation ifdetermined feasible by the RTC

Report and be responsible to the RTC until dissolution

may overrule or revoke actions of previous management, notwithstanding anyprovision of law, Articles, or by-laws

not subject to any action in connection w/ any act done in good faith in the exercise ofsuch functions

The rehabilitation receiver’s role is basically t

corpo reviewer for finals

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