CORPORATIONS

The code is known as the corporation code of the Philippines.Its scope is:

a. It provides for the incorporation,organizationand regulation or private corporations, both stock and non-stock, including educational and religiouscorporations;b. It defines their powers and provides for their dissolution;c. If fixed the duties and liabilities of director or trustees and otherofficersthereof;d. It declares the rights and liabilities of stockholders or members;e. It prescribes theconditionsunderwhich corporations including foreign corporations may transact business;f. It provides penalties for violations of the Code andg. It repeals all laws and parts of laws in conflict and inconsistent with the Code

Corporation code - General Provisions

A corporation is anartificial being created by operation of law, having the right of succession and the powers, attributes and properties expresslyauthorizedby law or incident to its existence.

Attributes:a. It is an artificial being;b. It is created by operation of law;c. It has the right of succession, andd. It has only the powers, attributes and properties expresslyauthorizedby law or incident to its existence

The corporation is an artificial being

A corporation is a legal orjuridicalperson with apersonalityseparate and apart from its individual members or stockholders who, as naturalpersons, are merged in the corporate body. It is not, in fact, and in reality, a person but the law treats it as though it is a person. The stockholders or members compose the corporation but they are not the corporation.

Consequences:

a. Corporation is not liable for the debts of stockholders and viceversa. Rule isstockholdercan lose only up to theextentof their investment.

b. Corporations can ownpropertyseparate from the stockholders

c. Contract validity entered into on behalf or in the name of the corporation creates rights and liabilities only for the corporation;

d. A corporation cannot bring a suit onbehalfof a stockholder. The opposite though is not always the case such as in derivative suits

e. The corporation is not changed by the change in identities of its stockholders.

The Doctrine of Piercing the Corporate Veil

Being a mere creature of the law, a corporation may beallowedto exist solely for lawful purposes but where thefictionor corporation entity is being used as a cloak or cover for fraud of illegality, this fiction will be disregarded and the individuals composing it will be treated as identical. The corporate veil can bepiercedif it a) defeats public convenience, b) justifies a wrong, protects a fraud or defends a crime or c) it is a mere alter ego.

Note that the creditors of financially troubled corporations benefit when they succeed in piercing the corporate veil for they can go after the assets of individual stockholders.

A. A corporation is a Mere Alter Ego if1. The parent company owns all or most of the capital stock2. They have common directors or officers3. The parent finances the subsidiary4. The Parentsubscribes to all the capital stock or incorporates thesame5. The subsidiary has grossly inadequate capital6. The subsidiary has substantially no business except with the parent or no assets except those conveyed to or by the parent7. The subsidiary isdescribedby the parent as a department or division or its business orfinancialresponsibilitiesare described to be that of the parent's8. The parent uses the property of the subsidiary9. The directors and executives of the subsidiary do not act independently in the interest of the subsidiary but take orders from the parent10. The formal legal requirements of the subsidiary are not observed.

Corporations as Created by operation of law

This means that corporations cannot come into existence by mere agreement of theparties as in the case of business partnerships.

Right of Succession of the Corporation

A corporation has a capacity ofcontinuousexistenceirrespective of the death, withdrawal,insolvency, or incapacity of the individual members or stockholders and regardless of the transfer of theirinterestor shares of stock

Classes of corporation:

Stock corporations: the ordinary business corporation created and operated for the purpose of making aprofitwhich may be distributed in the form of dividends tostockholdersonthe basis of their invested capital.

Non-stock corporations do not issue stock and are created not for profit but for the public good welfare.

Public versus Private Corporations

Corporations created by special laws: These shall be governed primarily by the provisions of the special law or charted creating them or applicable to them, supplemented by the provisions oftheCode insofar as they are practicable.

Note that the enactment of a special act creating a private corporation is subject to the constitutionallimitationthat such corporation shall be owned or controlled by thegovernmentof andsubdivisionor instrumentally thereof.

Classes of persons composing a corporation:

A. Corporations or thosewho compose the corporation, whether stockholders or members. Includes incorporators, stockholders or members.

B. Incorporators or those corporators mentioned in the articles of incorporation asoriginally forming and composing the corporation. They are there to incorporate the corporation and the enable it to became a body politically and corporate under the law.

C. Stockholders or owners of shares of stock in a stockcorporation. They may be natural or juridical persons but only natural persons can be incorporators.

D. Members or corporators of the corporation, which has no capital stock

Share may be divided andclassified,anyof which class may have such rights,privilegesor restrictions as may be stated in the articles of incorporation.

Stocks or shares ofstockare one of the units into which the capitalstock is divided. It represents the interest or right that the owner has in the management, in the share in earnings (dividends) or upon dissolution and winding up.

Shares represent a distinct undivided share or interest in the common property of the corporation. They do not constitute an indebtedness of the corporation to the stockholder and are, therefore, not credits.

Classes of Note:a. Par vs. no parb. Voting vs. non votingc. Commond. Preferred as to assets in case of liquidatione. Preferred as to dividends, whether cumulative, non cumulative, participating or non participatingf. Convertible (from one class to another)g. Foundersh.Redeemablei. Treasury

No share may be deprived of voting rights except those classified as Preferred and Redeemable shares unless otherwise provided under the code. There must be at least a class of shares that have complete voting rights.

Can common shares be given restricted voting rights? If approved by the SEC in Articles of Incorporation, even common shares can be given restricted voting rights.

In relation to preferred shares there are four legal limitations:

a. Preferred shares deprived of voting rights shall still be entitled to vote onmattersenumerated in section 6 ( par.6)

1. Amendment of the Articles of Incorporation2. Adoption and amendment of the By-laws3. Sales, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property4. Incurring, creating or increasing bonded indebtedness5. Increase or decrease of capital stock6. Merger or consolidation of the corporation with another corporation's7. Investment of corporate funds in another corporation or business in accordance with this code8. Dissolution of the corporation

b. Preferred share of stock issued by a corporation may be given preferences in the distribution of thecorporateassetsor dividends or such other preferences as may be stated in thearticlesof incorporation but theymust not be violative of this code. (ex. violation of the Trust funddoctrine)

c. Preferred shares may be issued only with a stated par value

d. Theboardcan determine the terms andconditionsof the preferred shares if so allowed in thearticles, and such will be effective only upon filing or a certificate with the SEC.

Cumulative Preferred Shares entitles the holder not only to the payment of current dividends but also to dividends in arrears.

S owns 10 preferred shares with par value of P100 with guaranteed 5% cumulative dividends. Dividends declared only after 4 years. In this case, S will get P250.00 for his 10 shares as follows:

P 50.00 for each year for the first 4 years (dividends in arrears) and P 50.00 for the current year. These have to be paid to S before dividends is paid to common shareholders.

Non-cumulative preferred shares entitled to the holder thereof to the payment of current dividends only in preference to the common shareholders. If dividends are not declared in a given year, the right to the dividends for that particular year is extinguished.

In the previous example, S would only get the P 50.00 for the current year.

Participating preferred shares gives the holder not only the rights to receive the stipulated dividends at the preferred rate but also to participate with the common shareholders in the remaining profits pro rata after the common shareholders have been paid the amount of the stipulated dividend as the preferred rate/

Non-participating preferred shares entitle the holder to receive the stipulated preferred dividends only. the balance is given entirely to the common shareholders.

X corp has 1000 shares with P 100,000 with par of P100. 300 are preferred at a rate of 10% and 700 are common.

P 5100 was declared as dividends. The preferred shareholders get P 3000, while the balance is distributed to the common at P 3.00 each (P 2,100/700)

If P 11,400 was declared and the preferred shareholders are participating then the preferred shareholders get P 3000. The common get P 7000. Of the remaining P 1,400 the same is divided amongst the shareholders equally or P 1.40 additional per share.

Cumulative participating preferred share is a combination of cumulative and participating. The holder is entitled to dividends in arrears and participation with the common shareholders in the remaining profits.

Redeemable share are shares which a redeemable at a fixed date or at the option of either the issuing corporation or the stockholder both at a certain redemption price. They must be redeemed regardless of the existence of unrestricted retained earnings provided that the corporation has after such redemption sufficient assets to cover debts and liabilities inclusive of capital stock. These may be denied voting rights.

Treasury shares are shares, which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, and donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board. Only surplus earning can be used to purchase treasury shares.

They do not have the same status as outstanding shares and they are not part of outstanding capital stock.

They cannot be distributed as cash or stock dividends but may be distributed as property dividends. They cannot vote and are not entitled to dividends themselves.

Corporation code - Incorporation and organization

Any number of natural persons not less than 5 but not more than 15, all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation.

Three steps in formation of a corporation:1. Promotion (not a legal requirement)2. Incorporation3. Formal organization and commencement of business operationSteps in incorporation:

a. Drafting and execution of the articles of incorporation. The treasurer must execute a treasurer's affidavitb. Filing with the SEC of the articles, the treasurers affidavit, endorsement from the proper government agency (if covered by special law) and such other documents as required by the SECc. Payment upon registration and other feesd. Upon verification and the examination, the SEC issues the Certificate of Registration. Only at this time will the corporation be deemed to be a juridical person.

Stock corporations are not required not have a minimum authorized capital stock unless otherwise provided by law. But in no case shall be paid up capital be less than P 5,000

In terms of composition, depending on the industry where the corporation is classified. The shareholding may be fully or partially restricted to Filipinos.

100% industries: Mass media, retail trade (unless exempted under the retail trade law)

70:30 industries: advertising, pawnshops

60:40 industries

exploration, development and utilization of natural resourcespublic service corporationseducational corporationsbanking corporationscoast wide shippingbusiness engaged in domestic trade under the FIA unless paid in capital more than $200,000

Refer to Omnibus Investment Code and the Priority List

In the case of Gamboa versus Teves (2011) the SC ruled in relation to foreign ownership that, "Considering that common shares have voting rights which translate to control, as opposed to preferred shares which usually have no voting rights, the term "capital" in section 11, Article XII of the Constitution refers only to common shares. However, if the preferred shares also have the right to vote in the election of directors, then the term "capital" shall include such preferred shares because the right to participate in the control or management of the corporation is exercised through the right to vote in the election of directors. In short, the term "capital" in Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the election of directors."

In setting up the corporation, there must be:

a. Compliance with the 25% - 25% rule. At least 25% of the authorized capital stock must be subscribed. At least 25% of the subscribed must be paid up. In no case shall the paid up be less than 25%

b. No confusion as to the name. Not confusingly similar to existing corporations or names protected under the trademark

c. a legal purpose

d. Compliance with Nationality Requirements

De Jure Corporation: One created in strict or substantial compliance with the mandatory statutory requirements f or the incorporation and whose right to exist as a corporation cannot be successfully questioned by any party.

Da Facto Corporation: One which actually exists for all practical purposes but which has no legal right to corporate existence because it did not comply with all the requirements necessary to be a de jury corporation but has complied sufficiently to be accorded status as against their parties but not against the state. The state can question the existence of a corporation through the Solicitor General filing a quo warrant proceeding.

Requisites of a De facto Corporation:

a. A valid law under which a corporation might be incorporatedb. A bond fide attempt to organic under the lawc. Actual used or exercise in good faith or corporate powers conferred upon it by law

Stockholders of de facto corporations enjoy exemption from personal of liability for corporate obligations, as do stockholders of de jury corporations.

A De facto corporation, as opposed to a de jure corporation, is formed due to the following:

a. The name being closely similar to a pre-existing corporationb. The majority of the incorporators are not residentsc. The acknowledgements is insufficient or defective

Corporation by Estoppel:

Persons who participated in holding out a pretended corporation as a validly organised corporation are generally estopped of precluded from denying the existence of such corporation against creditors to prevent them from escaping liability for corporate debts or liabilities.

One who assumes an obligation to and ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation

Corporations have certain inherent powers as stated in Section 36:

4. To sure and be sued in its corporate name5. Succession by its corporate name6. To adopt or use a corporate seal7. To amend its articles of incorporation8. to adopt, amend or repeal by-laws not contrary to law, morals or public policy9. To issue or sell stocks to subscribers and to sell treasury stocks;10. To exercise acts of ownership over its assets11. To enter in mergers or consolidations. Merger is when the companies unite where one survives. In consolidation two companies unite and form a new corporation.12. To make reasonable donations except to any political party or candidate13. To establish pension plans, retirement, and other plans for the benefit of directors, trustees, officers and employees and14. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes.

POWERS OF A CORPORATION:

Classification of powers:

1. Those essentially granted or authorized by law2. Those that are necessary to the exercise of the express or incidental powers (acts in the usual course of business, to protect debts owed to the corporation, embarking on a different business, acts in part or wholly to protect or aid employees, and acts to increase business)3. Those inherent to its existence (those under Section 36)

Power to extend or shorten corporate term:

a. requires majority of the board and 2/3 of the stockholders to approve.b. Corporate dissolution can be effected this wayc. subject to appraisal rights

maximum corporate term: 50 years

Power to increase or decrease capital stock and incur, create of increase bonded indebtedness:

a. Requires majority of the board and 2/3 of the stockholders to approveb. There must be compliance with the 25% 25% rulec. No decrease of capital stock can be affected if it will prejudice the rights of corporate creditors. It is disallowed if it will relieve existing subscribers from their obligation.d. Increase or decrease of capital stock is subject to SEC approval; Bonds shall be registered with the SEC prior to issuance. Shares cannot be issued in excess of the capital stock.

Power to deny pre-emptive rights:

Pre-emptive right: Whenever the corporation issues or disposes of new shares of stock of any class, the new issue must first be offered to the stockholders in proportion to their existing shareholdings. This is to safeguard the right of a stockholder to preserve his proportionate influence and interest in the corporation and the relative value of his holdings. This is protection against impairment of dilution. Dilution would have adverse effects on the right to vote, the right to dividends and the right to net corporate assets after liquidation.

Pre-emptive rights do not apply to the following:

a. shares to be issued in compliance with laws requiring stock offering or minimum stock ownership by the public.b. Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock in exchange for property needed for corporate purposes;c. Shares to be issued in good faith with the approval of 2/3 of the stockholders in payment of previously contracted debt.

If a stockholder does not avail of his pre-emptive rights, the rights he did not pick up may be sold to third parties and need not be subjected to further pre-emptive rights in favor of the ones who availed of their respective shares.

Pre-emptive rights to extend even to treasury shares.

If shares offered for subscription were not taken up and then later they were offered there is not right to pre-emption.

Difference of Pre-emptive rights from Rights of First Refusal:

a. Pre-emptive rights deal with newly issued shares, while the right of first refusal applies to shares to be sold by other shareholders from their existing shareholdings;b. Pre-emptive rights are inherent to shareholders while the other is not. For the right of First Refusal to exist it must be explicitly stated in the articles of incorporation.c. Pre-emptive rights aims to prevent dilution and maintain percentage ownership in the corporation. Right of first refusal aims to maintain ownership of shares amongst the existing shareholders and keep off third parties.

Subject to laws on illegal combinations and monopolies, a corporation may, by majority of the board and 2/3 of the stockholders, sell, lease, exchange mortgage pledge or otherwise dispose of all substantially all of its property and assets including goodwill. This is subject to appraisal rights.

A sale involves all of substantially all of the assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. this does not apply though if such actions are done in the ordinary course of business or it the proceeds will be appropriated for the conduct of its remaining businesses.

Power to acquire own shares:

a. This must be a legitimate corporate purpose and done on good faith and conditions of corporate affairs warrant itc. The corporation must have sufficient unrestricted retained earning and capital is not impaired.c. Shares purchased shall be booked as treasury shares.

Valid purposes:a. Eliminate fractional shares;b. collect of compromised a debt from unpaid subscriptions and to purchase delinquent sharesc. Pay dissenting or withdrawing stockholders.

Trust Fund Doctrine: The assets of the corporation as represented by its capital stock are "trust funds" to be maintained unimpaired and to be used to pay corporate creditors on the sense that there can be no distribution of such assets among stockholders without provision being first made for the payment of corporate debts and that any such disposition of it is a fraud on the creditors of the corporation and therefrom void. The purchase amounts to repayment to the stockholder of his proportionate share from the corporate assets and hence, an impairment of capital available for the benefit and protection of creditors who are preferred over the stockholders in the distribution of corporate assets.

Power to invest corporate funds in another corporation or business or of any other purpose:

a. Requires majority of the board and 2/3 of the stockholders.b. Investment may be in any other corporation, business or for any purpose other than its primary purposec. Notice and meeting requirements must be metd. This is the subject to appraisal rightse. Where the investment is reasonably necessary to accomplish its primary purpose as stated in the articles the approval of the stockholders or members shall not be necessary.

Power to declare dividends:

Dividends: that part or portion of profits or a corporation set aside declared and ordered by the directors to be paid ratably to the stockholders on demand or at a fixed time.

Limitations on declaration of dividends:a. There mist be unrestricted retained earningsb. Cash dividends need only board approval but stock dividends news approval of 2/3 of the stockholdersc. Property dividends needs SEC approval

Unrestricted Retained earnings:

a. Retained Earning = Assets - (liabilities and capital)b. Unrestricted means they have not been reserved or set aside by the board of directors for some corporate purpose nor are required by law to be earmarked for some other purpose specified by law.

There is no obligation on the part of the board to distribute all the retained earnings as dividends. However, stock corporations cannot retain surplus profits in excess of 100% of their paid-in capital except:

a. When justified by definite corporation expansion projects or programs approved by the board.b. 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; orc. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies.

If stocks are delinquent, cash dividends shall be applied to repayment of the delinquency. If stock dividends are declared, delinquent stockholders do not get their shares until they pay off their delinquency.

Basis for share in dividends is total subscription not total paid up.

Power to enter into management contracts:

a. Must be approved by majority of both board and stockholdersb. If there are significant (more than 1/3) inter stockholders or inter directors (more than majority) approval needed is 2/3 of the stockholdersc. Management contracts cannot exceed 5 yearsd. Under a management contract, a corporation undertakes to manage or operate all or substantially all of the business of another corporation.

Ultra Vires Acts:

No corporation shall possess or exercise any corporate powers except those conferred by this code or by its articles of incorporation and except as are necessary or incidental to the exercise of the powers so conferred.

Ultra Vires acts are not necessarily illegal acts. If a contract is illegal it cannot be ratified. If the contract is not illegal but beyond the powers of a corporation the same is merely voidable.

Effects of Ultra Vires acts, which are not illegal:

a. If still executory on both sides then it cannot be enforced.b. If fully performed on both sides, neither party can lawfully set it aside or to recover what has been given.c. When performed only on one side, recovery is permitted in most courts.

When a contract is not on its face necessarily beyond the scope of the power of the corporation by which it is made, it will, in the absence of proof to the contrary be presumed to be valid. An act is presumed valid unless clearly shown to be otherwise.

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