notes in corporation

7/25/2019 Notes in Corporation

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CORPORATION LAW NOTESZarah Villanueva-Castro

CORPORATION CODE (BP BLG 68)

*Corporation Code is the general law on Private Corporation

regarding to its creation, formation and powers.

INTRODUCTION:

A. Historical Background

Effectivity:May 1, 1980

Article XII Section 16 of the 1987 Constitution: The Congress

shall not, except by general law, provide for the formation,

organization, or regulation of private corporations. Government-

owned or controlled corporations may be created or established

by special charters in the interest of the common good and

subject to the test of economic viability.

*Congress has limited powers in the formation, creation andregulation of a private corporation.

Purposes:

1. Uniformity

2. To avoid corruption

General Rule:Congress is prohibited to enact a law directly

forming a private corporation.

Exception:GOCC may be created by special charter.

*GOCC is a private corporation with regard to function and in

the meantime a public corporation with regard to ownership.

Twin Conditions must be present in forming a GOCC:

1. Interest in the common good

2. Subject to the test of economic viability- Means can survive alone in the market; can generate

income which they can use for their operating expenses

CONCEPT AND ATTRIBUTES OF A CORPORATION:

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A. Statutory definition of a Corporation

Section 2 of the Corporation Code: A corporation is an

artificial being created by operation of law, having the right of

succession and the powers, attributes and properties expressly

authorized by law or incident to its existence.

B. Attributes of a Corporation

Artificial Being

- It exist by fiction of law only, hence it is subject to

limitations that are inherent because of its nature

-

A corporation is a juridical person which exists by processof legal fiction

Doctrine of Corporate Entity/Doctrine of Separate

Personality - A corporation is a legal or juridical person

with a personality separate and apart from its individual

stockholders or members and from any other legal entities

to which it may be connected

Consequences/Implications of Separate Personality:

1. It is entitled to own properties in its own name and its

properties are not the properties of its stockholders,

directors and officers.

Cases: Magsaysay-Labrador v CA; Sulo ng Bayan v

Araneta

*The interest of the stockholders over the properties of

the corporation is merely inchoate.

*Merely inchoate because there are still condition

precedents before the shareholders get their share, viz, in

Asset, there are dissolution and satisfaction of claims; in

profit-sharing, there are unrestricted retained earnings

and declaration by the Board of Directors.

2. It can incur obligations and its obligations are not the

obligations of its stockholders, directors and officers.

Case: Francisco v CA

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3. The rights belonging to the corporation cannot be

invoked by the stockholders, directors and officers and

vice versa.

4. Corporations are entitled to certain constitutional rights,i.e., right against unreasonable searches and seizure, due

process clause.

*It is not entitled to certain constitutional right, i.e., right

against self-incrimination particularly production of

corporate documents.

*Right against self-incrimination is applicable only tonatural persons.

General Rule: Constitutional guarantees are applicable

to corporations.

Exceptions:

1. Right against self-incrimination

2. Freedom to travel

Case: Bataan Shipyard v PCGG

5. It is liable for tort. It is liable when the act was

committed by the officer or agent under express

direction or authority from the stockholders or members

acting as a body or generally from the directors as the

governing body.

6. Generally, the corporation is considered a national of the

country where it was incorporated (Place of

incorporation test)

*Exceptions: 1. In times of war, the nationality of a

corporation is determined by the nationality of the

controlling stockholders; 2. Under the Foreign

Investment Act of 1991

7. Corporations are incapable of intent, hence, they cannot

commit felonies that are punishable under the RPC.

They cannot commit crimes that are punishable under

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special laws because crimes are personal in nature

requiring personal performance of overt acts. In

addition, the penalty of imprisonment cannot be

imposed.

*Criminal liability falls upon to responsible officers.

*Responsible officers cannot invoke the doctrine of

separate personality.

*Corporations cannot be incarcerated.

8. Moral damages cannot be awarded in favor of

corporations because they do not have feelings andmental state.

*Corporations can claim damages such as actual,

compensatory, exemplary, loss of earning capacity.

General Rule: Corporation cannot claim moral

damages.

Exception:If the corporation has a good reputation andsuch reputation was destroyed.

Case: Coastal Pacific Trading v Southern Rolling Mills,

Co.

*In Filipinas Broadcasting Network Inc. v. Ago Medical

and Educational Center, the SC ruled that a corporation

can recover moral damages under Article 2219(7) if itwas the victim of defamation.

Doctrine of Piercing the Veil of Corporate Entity The doctrine that

a corporation is a legal entity distinct from the persons composing it.

It is a theory introduced for the purposes of convenience and to serve

the ends of justice. But when the veil of corporate fiction is used as a

shield to perpetuate fraud, to defeat public convenience, justify

wrong, or defend crime, this fiction shall be disregarded and theindividuals composing it will be treated identically.

Cases: Times Transportation Co. v Santos Sotelo; Concept Builders

v NLRC

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*The doctrine of piercing the veil of corporate entity is the exception to

the doctrine of corporate entity.

*The users of this doctrine are: 1. Stockholder; 2. Group of

stockholders; 3. Another corporation.

Effects: 1. Stockholders, officers and corporation are in effect jointly

liable; 2. In case of two corporations, they will be treated as one

wherein they will be both solidarily liable. (Instrumentality rule)

*There is no effect on the existence of each corporation as long as their

separate entity is used for legitimate purposes.

Instrumentality Rule When one corporation is so organized and

controlled and its affairs are conducted so that it is in fact a mereinstrumentality or adjunct of the other, the fiction of the corporate

entity to the instrumentality may be disregarded.

*The user is another corporation.

Keyword: CONTROL

Requisites:1. Control, not mere majority or complete stock control,

but complete dominion, not only of finances but of policy and

business in respect to the transaction attacked so that the corporate

entity as to this transaction had at the time no separate mind, will

or existence of its own; 2. Such control must have been used by the

defendant to commit fraud or wrong in contravention of plaintiffs

legal rights; 3. The aforesaid control and breach of duty must

proximately cause the injury or unjust loss complained of.

Three cases of piercing the veil:

1. Fraud Cases when a corporation is used as a cloak to cover

fraud, or to do wrong;2. Alter Ego Cases when the corporate entity is merely a farce

since the corporation is an alter ego, business conduit or

instrumentality of a person or another corporation;

3.Equity cases when piercing the corporate fiction is necessary to

achieve justice or equity.

Probative Factors of Identity:

1. Identical shareholders;

2. Same set of officers, directors, or trustees;

3. Use of same premises, properties, tools and equipments;

4. Engage practically in the same business; 5. The same manner of

keeping books and records.

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*The probative factors of identity are not conclusive but may be

considered as strong evidence.

Creature of Law

Article XII Section 16 of the 1987 Constitution: The

Congress shall not, except by general law, provide for the

formation, organization, or regulation of private corporations.

Government-owned or controlled corporations may be

created or established by special charters in the interest of the

common good and subject to the test of economic viability.

Concession Theory It is a principle in the creation of

corporations, under which a corporation is an artificial

creature without any existence until it has received theimprimatur of the State acting according to law, through the

SEC. The life of the corporation is a concession made by the

State. Right of Succession

- Capacity to have continuity of existence despite the

changes on the persons who compose it. Thus, the

personality continues despite the change of stockholders,

members, board members or officers; death or disability.

- Also known as Principle of Perpetual Succession

Reason:To make the corporation more stable

Creature of enumerated powers, attributes and properties

Doctrine of Limited Capacity No corporation under theCorporation Code, shall possess or exercise any corporate

powers, except those conferred by law, its Articles of

Incorporation, those implied from express powers and those

as are necessary or incidental to the exercise of the powers so

conferred. The corporations capacity is limited to such

express, implied and incidental powers.

*Corporation may be restrained from engaging a particulartransaction because it is beyond their powers.

*General Capacity a corporation can perform any act for as

long as it is lawful, moral and not contrary to public policy or

order.

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Ultra Vires Doctrine Even if the act is lawful, moral and not

contrary to public order or policy but such act is not within

the express, implied and incidental powers of the corporation

such act shall be void for being ultra vires.

*These doctrines are based on Section 2 and Section 45 of the

Corporation Code.

C. Classification of Private Corporations:

1. As to existence of Stocks:

Stock Corporation Corporations which have capital stockdivided into shares and are authorized to distribute to the

holders of such shares dividends or allotments of the surplus

profits on the basis of the shares held. (Sec. 3)

Non-stock Corporation A corporation where no part of its

income is distributable as dividends to its members, trustees, or

officers, subject to the provisions of this Code on dissolution.

(Sec. 87)Q: Is it correct to say that a Non-stock corporation cannot

generate income on their own?

A: NO

2. As to function/organizers:

Public Corporation for public purpose and organized by the

State.

Private Corporation for profit making functions and organized

by private persons alone or with the State

3. As to laws of Incorporation (Place of Incorporation) :

Domestic Corporation corporation formed, organized or

existing under the Philippine Laws.

Foreign Corporation corporation formed, organized or

existing under any laws other than those of the Philippines and

whose laws allow Filipino citizens and corporations to do

business in its own country or state. (Sec. 123)

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*License is necessary for; 1. Regulation purposes and 2. Access to

local courts.

4. As to legal status:

De Jure Corporation corporation created in strict or substantial

compliance with the mandatory requirements for incorporation

and the right of which to exist as a corporation cannot be

successfully attacked or questioned by any party even in a direct

proceeding for that purpose by the state.

De Facto Corporation the due incorporation of any

corporation claiming in good faith to be a corporation under theCorporation Code, and its right to exercise corporate powers,

shall not be inquired into collaterally in any private suit to which

such corporation may be a party. Such inquiry may be made by

Solicitor General in a quo warranto proceeding. (Sec. 20)

- organized with a colourable compliance with the

requirements of a valid law and its existence cannot be

inquired collaterally.- There is an irregularity or defect in the constitution or

organization.

Can be compared to a voidable contract, i.e., valid until

annulled.

*Can be challenged by the State later on.

Cases: Hall v Piccio; Seventh Adventist v Northeastern

Mindanao Mission

*The filing of the Articles of Incorporation and the issuance of

the certificate of registration are the essential requisites for the

existence of a de facto corporation.

Requisites:

1. The existence of a valid law under which it may be

incorporated;

2. An attempt in good faith to incorporate; 3. Use of corporatepowers;

4. Filing of the Articles of Incorporation;

5. Subsequent compliance with the requirement of law.

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*In both corporations, there must be a certificate of

registration issued.

Doctrine of Corporation by Estoppel All persons who assume to

act as a corporation knowing it to be without authority to do soshall be liable as general partners for all debts, liabilities and

damages incurred or arising as an result thereof: Provided,

however, that when any such ostensible corporation is sued on any

transaction entered into by it as a corporation or on any tort

committed by it as such, it shall not be allowed to use as a defense

its lack or corporate personality. (Sec. 21)

-

Group of persons which holds itself out as a corporationand enters into a contract with a third person on the

strength of such appearance cannot be permitted to deny

its existence in an action under said contract.

Case: Lim Tong Lim v CA

*Lim is stopped because he benefited from the transaction.

Remedy: To ran after those persons responsible for the

representations

Essence:They are precluded from denying their existence by

their previous act or conduct

Holding Corporation it is one which controls another as a

subsidiary by the power to elect management. It is one that holds

stocks in other companies for purposes of control rather than for mere

investment.

Affiliate one related to another by owning or being owned by

common management or by a long-term lease of its properties or

other control device. It may be the controlled or controlling

corporation, or under common control.

Subsidiary Corporation one which is so related to another

corporation that the majority of its directors can be elected either

directly or indirectly by such other corporation. It is always

controlled.

Open Corporation one which is open to any person who may wish

to become a stockholder or member thereto.

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Close Corporation those whose shares of stock are held by limited

number of persons like the family or other closely knit group. (Sec. 96)

FORMATION AND ORGANIZATION OF A PRIVATE

CORPORATION:

A. Submission of Articles of Incorporation; contractual significance

*The life of a corporation commences from the issuance of the

Certificate of Registration by the SEC upon filing of the Articles

of Incorporation and other documents.

Article of Incorporation is the charter of the corporation, and

the contractual relationships between the State and thecorporation, the stockholder and the State, and between the

corporation and its stockholders.

Contractual Significance:

1. The issuance of a certificate of incorporation signals the birth

of the corporations juridical personality;

2. It is an essential requirement for the existence of a corporation,even a de facto one.

B. Contents and Form of the Articles of Incorporation (Secs. 14 and

15)

Contents of Articles of Incorporation:

1. Corporate Name;

2. Purpose Clause;

3. Principal office;

4. Term of existence;

5. Incorporators;

6. Directors or trustees;

7. Capitalization;

8. Shares of stock;

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9. Treasurers Affidavit.

Corporate Name

Purpose:Identification

*Corporation can not adopt any name or group of words at its

pleasure because of statutory limitation, viz., Sec. 18 of the

Corporation Codewhich provides that: No corporate name

may be allowed by the SEC if the proposed name is identical

or deceptively or confusingly similar to that of any existing

corporation or to any other name already protected by laworis patently deceptive, confusing or contrary to existing laws.

When a change in the corporate name is approved, the

Commission shall issue an amended certificate of

incorporation under the amended name.

SEC Guideline x x x b. In order to prevent confusion and

difficulties of administration, supervision and control, if the

proposed name contains a word already use as a part of thefirm name or style of a registered entity, the proposed name

must contain two other words different and distinct from the

name of the company already registered or protected by law. x

x x

Case: Ang Mga Kaanib Ni Jesus Cristo

*The phrase Ang Mga Kaanib are words merely descriptiveof membership while the phrase Sa Bansang Pilipinas are

merely descriptive of the place.

*Both parties are religious institutions

*Both use the acronym H.S.K.

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

corporate name.

Reason:public domain; can be used by anyone; public use.

Exception: Doctrine of Secondary Meaning a word or

phrase originally incapable of exclusive appropriation with

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reference to an article on the market, because geographically

or otherwise descriptive, might nevertheless have been used

so long and so exclusively by one producer with reference to

his article that in that trade and to that branch of the

purchasing public, the word or phrase has come to mean that

the article was his product.

Requisites:

1. Period of use;

2. The use must be exclusive.

Case: Lyceum of the Philippines

*The exclusivity requirement was not satisfied by Lyceum of

the Philippines.

*In case of change of name, the corporation is not dissolve nor

create a new corporation; it also does not extinguish the

corporate liability.

*Change of name can be done by amending the Articles ofIncorporation.

Procedure:

1. Obtain approval of majority of the Board and 2/3

stockholders;

2. Submission to the SEC for approval.

Purpose Clause

*Only one primary purpose. Primary purpose defines the

business activities of the corporation. It is the ordinary course

of business of the corporation.

*Secondary Purpose is for future expansion. There is no limit

on the secondary purpose.

*In case the primary purpose is not viable then secondary

purpose may be used.

Principal Office

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*The principal place of business may determine the venue of

court cases involving corporations. It may also determine if

service of summons and notices was properly made. It is also

important for tax purposes (local taxation).

*The SEC requires the exact address to be indicated in the

Articles of Incorporation.

*It is the residence of the corporation. It is where the

corporation maintains its books and records and where

normally the bulk of its business is being conducted or

undertaken.

*For personal action, venue is the residence.

Term of Existence

*A corporation has a maximum term of 50 years. It may be

extended for a period not exceeding 50 years in any single

instance.

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

*No limitations regarding number of extension can apply.

Reason: To compel the stockholders to meet the corporations

term.

Exception: If for compelling reasons, earlier extension will be

allowed.*During the three year winding up period, the corporation

still has personality but activities are limited to the liquidation

of the corporation affairs and not to transact further business.

As a rule, after the term has expired, no more extensions be

allowed or entertained by the SEC.

Reason: No more period to extend.

Exception: Doctrine of Relation The filing and recording of

a certificate of extension after the term cannot relate back to

the date of the passage of the resolution of the stockholders to

extend the life of the corporation. However, the doctrine of

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relations applies if the failure to file the application for

existence within the term of the corporation is due to neglect

of the officer with whom the certificate is required to be filed

or to wrongful refusal on is part to receive it.

*The delay in submitting the application for extension is

justifiable.

Keywords:

1. Excusable delay;

2. Beyond the control of the corporation (insuperable

intervening causes)

Incorporators

*Once an incorporator always an incorporator. (Fait accompli

an accomplished fact which cannot be altered)

*They are the signatories to the Articles of Incorporation.

*They are originally forming the corporationQ: What is the reason behind the phrase that an incorporator

is not always a corporator?

A: To be an incorporator it is not necessary to own a share

unlike as a corporator.

*Number is limited to 5 to 15.

*They must have a contractual capacity.

*Juridical person cannot create another juridical person.

*There is no citizen requirement but special laws may require

otherwise.

*Majority must be a resident of the Philippines.

Directors and trustees

*The Board of Directors is the governing body in a stock

corporation while Board of Trustees is the governing body in

a non-stock corporation.

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*They exercise the powers of the corporation.

Qualifications:

1. Every director must own at least one (1) share of the capital

stock;

2. Majority of the directors or trustees must be residents of the

Philippines.

*Any director who ceases to be the owner of at least one share

of the capital stock of the corporation of which he is a director

shall thereby cease to be a director.

*Trustees of non-stock corporations must be members thereof.

*Initial directors/trustees shall hold office for one year until

their successors are elected and qualified.

Capitalization

Section 14(8) states that: If it be a stock corporation, the

amount of its authorized capital stock in lawful money of thePhilippines, the number of shares into which it is divided, and

in case the share are par value shares, the par value of each,

the names, nationalities and residences of the original

subscribers, and the amount subscribed and paid by each on

his subscription, and if some or all of the shares are without

par value, such fact must be stated.

*It is required that at least 25% of the subscribed capital mustbe paid and in no case may be paid-up capital be less than

P5,000.

Authorized Capital Stock the amount fixed in the articles of

incorporation to be subscribed and paid by the stockholders

of the corporation.

*Shows the total number of shares

Subscribed Capital that portion of the authorized capital

stock that is covered by subscription agreements whether

fully paid or not.

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Paid-Up Capital the portion of the authorized capital stock

which has been subscribed and actually paid.

Outstanding Capital Stock the total shares of stock issued

to subscribers or stockholders, whether or not fully orpartially paid except treasury shares so long as there is a

binding subscription agreement.

Shares of stock

Q: Why shares of stock?

A:Because there is a share on the capitalization.

Economic Value:

1. expectancy on the share in the profits

2. expectancy on the share of assets in case of dissolution/

liquidation.

Political Value:

1. vote

2. control in the management of the corporation.

Doctrine of Equality of Shares Except as otherwise

provided in the articles of incorporation and stated in the

certificate of stock, each share shall be equal in all respects to

every other share.

- Provides that where the Article of Incorporation do notprovide for any distinction of the shares of stock, all shares

issued by the corporation are presumed to be equal and enjoy

the same rights and privileges and are also subject to the same

liabilities.

Classes of Shares:

1. Par Value Share shares that have a nominal value in thecertificate of stock.

Contractual Significance:The minimum price at which the

shares are to be issued.

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

Incorporation.

2. No Par Value Share those shares which do not have

nominal value. However, they have issued value stated inthe certificate or articles of incorporation.

*There is flexibility in the price.

*The price is determined by the Board.

Limitations:

1. No par value shares cannot have an issued price of less

than P5.00;

2. The entire consideration for its issuance constitutes

capital so that no part of it should be distributed as

dividends;

3. They cannot be used as preferred stocks;

4. They cannot be issued by banks, trust companies,insurance companies, public utilities and building and loan

association (Reason:imbued with public interest);

5. The articles of incorporation must state the fact that it

issued no par value shares as well as the number of said

shares;

6. Once issued, they are deemed fully paid and non-

assessable.

3. Voting Shares shares with the right to vote. They have

the right to participate in the management of the

corporation through the exercise of such right.

4. Non-voting Shares shares without the right to vote.

*Has only a limited right to vote.

General Rule: Shareholder owning non-voting shares has

no right to vote.

Exceptions:

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1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other

disposition of all or substantially all of the corporate

property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock; 6. Merger or

consolidation of the corporation with another corporation

or other corporations;

7. Investment of corporate funds in another corporation or

business in accordance with the Corporation Code; 8.

Dissolution of the corporation.

*The exceptions are exclusive; the list is a closed list

Statutory Constraint:Sec. 6 of the Corporation Code

*The corporation cannot provide for shares with no votingright

General Rule: Only redeemable and preferred shares are

deprived of voting right.

Exception: Common shares may be denied of its voting

right in the following instances: 1. Delinquent in paying the

subscription; 2. If there was a founders share where it was

given the right to vote exclusively for 5 years (Sec. 7).

5. Common Shares the most common type of shares which

enjoy no preference.

*The basic class of stock ordinarily and usually issued

without extraordinary rights and privileges, and the

owners thereof are entitled to a pro rata share in the profits

of the corporation and in its assets upon dissolution and,likewise, in the management of its affairs without

preference or advantage whatsoever.

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6. Preferred Shares- shares which enjoy preference as to

dividends or assets upon dissolution as stated in the

Articles of Incorporation.

Reason:To attract investors.

*Preference does not give them a lien upon the property

nor make them creditors of the corporation.

*Characterized as redeemable shares.

Kinds:

1. Preferred shares as to assets share which gives the

holder thereof preference in the distribution of the assets of

the corporation in case of liquidation;

2. Preferred shares as to dividends share which gives the

holder thereof preference in the distribution of the

dividends to the extent agreed upon before any dividends

at all are paid to the holders of common shares;

3. Participating preferred shares the holders thereof arestill given the right to participate with the common

stockholders in dividends beyond their stated preference;

4. Non-participating preferred shares where there is no

such participation;

5. Cumulative preferred shares the shareholder is

entitled to recover dividends in arrears. While dividenddeclaration may not be compelled, once it is declared, the

shareholder is entitled to the said arrears;

6. Non-cumulative preferred shares not entitled to

arrears only to present dividends.

7. Redeemable Shares are those which permit the issuing

corporation to redeem or purchase its own shares.

Limitations:

1. Redeemable shares may be issued only when expressly

provided for in the Articles of Incorporation;

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2. The terms and conditions affecting said shares must be

stated both in the certificate of stock representing such

share;

3. Redeemable shares may be deprived of voting rights inthe Articles of Incorporation, unless otherwise provided in

the Corporation Code;

4. The corporation is required to maintain a sinking fund to

answer for redemption price if the corporation is required

to redeem;

5. The redeemable shares are deemed retired uponredemption unless otherwise provided in the Articles of

Incorporation;

6. Unrestricted retained earnings is not necessary before

shares can be redeemed but there must be sufficient assets

to pay the creditors and to answer for operations.

8. Treasury Shares shares which have been earlier issued as

fully paid and have thereafter been acquired by thecorporation by purchase, donation, redemption or through

some lawful means.

-Shares which are previously issued by the corporation but

subsequently reacquired by the corporation.

*Retired thus can no longer be re-issued.

*They are not entitled to dividends.

*They are not entitled to voting rights. Rationale: to

prevent abuse by the management.

*These shares may again be disposed of for a reasonable

price fixed by the Board of Directors.

9. Founders Shares classified as such in the articles of

incorporation may be given certain rights and privileges

not enjoyed by the owners of other stocks, provided that

where the exclusive right to vote and be voted for in the

election of directors is granted, it must be for the limited

period not to exceed 5 years subject to the approval of the

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SEC. The 5 year period shall commence from the date of

the approval by the SEC.

Treasurers affidavit

*The SEC shall not accept the Articles of Incorporation of any

stock corporation unless accompanied by a sworn statement

of the Treasurer elected by the subscribers showing that at

least 25% of the authorized capital stock of the corporation

has been subscribed, and at least 25% of the total subscription

has been fully paid to him in actual cash and/or in property

the fair valuation of which is equal to at least 25% of the said

subscription, such paid up capital being not less than P5,000.

*If the Treasurers affidavit is false such act is tantamount to

fraud. (PD 902-A)

*Fraud on the part of the corporation is a ground for

revocation or suspension of license depending upon the

extent of the violation committed.

*If theres no Treasurers Affidavit, the first ground shallapply, i. e., noncompliance with the minimum requirement.

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

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

C. Grounds for rejection of the Articles of Incorporation

1. The articles of incorporation or any amendment thereto is not

substantially in accordance with the form prescribed herein;

2. The purpose or purposes of the corporation are patently

unconstitutional, illegal, immoral, or contrary to government

rules and regulations;

3. The Treasurers Affidavit concerning the amount of capitalstock subscribed and/or paid is false;

4. The percentage of ownership of the capital stock to be owned

by citizens of the Philippines has not been complied with as

required by existing laws or the Constitution.

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Dual Franchise Requirement: No articles of incorporation or

amendment to articles of incorporation of banks, banking and

quasi-banking institutions, building and loan associations, trust

companies and other financial intermediaries, insurance

companies, public utilities, educational institutions, and other

corporations governed by special laws shall be accepted or

approved by the Commission unless accompanied by a

favourable recommendation of the appropriate government

agency to the effect that such articles or amendment is in

accordance with law.

D. Commencement of Corporate ExistenceSec. 19 of the Corporation Code states that A private

corporation formed or organized under this Code commences to

have corporate existence and juridical personality and is deemed

incorporated from the date the SEC issues a certificate of

incorporation under its official seal; and thereupon the

incorporators, stockholders/members and their successors shall

constitute a body politic and corporate under the name stated inthe articles of incorporation for the period of time mentioned

therein, unless said period is extended or the corporation is

sooner dissolved in accordance with law.

*For purposes of determining whether a corporation enjoys the

status of a de facto corporation, it must have been at least issued

a certificate of registration.

E. Amendment of the Articles of Incorporation

Sec. 16 of the Corporation Code states that: Unless otherwise

prescribed by this Code or by special law, and for legitimate

purposes, any provision or matter stated in the articles of

incorporation may be amended by a majority vote of the board

of directors or trustees and the vote or written assent of thestockholders representing at least 2/3 of the outstanding capital

stock, without prejudice to the appraisal right of dissenting

stockholders in accordance with the provisions of this Code, or

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the vote or written assent of at least 2/3 of the members if it be a

non-stock corporation.

*It is effective upon the approval of the SEC.

*There may be an amendment by inaction. Amendment by

Inaction Upon filing with the SEC of the amendment and the

Commission failed to act on it within 6 months from the date of

filing for a cause not attributable to the corporation.

F. Effects of Non-Use of Corporate Charter

Sec. 22 of the Corporation Code states that: If a corporation

does not formally organize and commence the transaction of its

business or the construction of its work within 2 years from the

date of its incorporation, its corporate powers cease and the

corporation shall be deemed dissolved. However, if the

corporation has commenced the transaction of its business but

subsequently becomes continuously inoperative for a period of

at least 5 years, the same shall be a ground for the suspension orrevocation of its corporate franchise or certificate of

incorporation. This provision shall not apply if the failure to

organize, commence the transaction of its businesses or the

construction of its works, or to continuously operate is due to

causes beyond the control of the corporation as may be

determined by the SEC.

*The period must be counted from the issuance of the Certificate

of Incorporation.

*Automatic dissolution is not contemplated under Section 22.

(SEC Opinion).

*Section 22 must be read in conjunction with Sec 6(1) of PD 902-

A which requires that the corporation must be given the

opportunity to be heard in compliance with the requirement ofdue process before the revocation of its license.

CONTROL AND MANAGEMENT OF A CORPORATION:

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A. Levels of Corporate Control

1. By Stockholders/Shareholders;

2. By Corporate Officers;

3. By Directors/Trustees

B. Board of Directors/Trustees

General Powers of the Board

Sec. 23 of the Corporation Code states that: Unless

otherwise provided in this Code, the corporate powers of all

corporations formed under this Code shall be exercised, all

business conducted and all property of such corporations

controlled and held by the board of directors or trustees to be

elected from among the holders of stocks, or where there is no

stock, from among the members of the corporation, who shall

hold office for one year until their successors are elected and

qualified.

Powers of the Board of Directors:

1. Corporate Powers;

2. Manage the Corporation; and

3. Control over and hold the properties of the Corporation.

*Board of Directors/Trustees is the statutory representative ofthe corporation.

General Rule:All corporate powers emanate from the Board

of Directors/Trustees.

Exception: Unless otherwise provided in this Code. (Limiting

Clause)

The limiting clause means that there are certain corporate

matters that cannot be done by the Board by reason that such

matters fall upon the shareholders; or corporate matters that

cannot be resolved by the Board alone, i.e., it must be done

with the approval of the shareholders.

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Business Judgment Rule

Business Judgment Rule questions of policy or

management are left solely to the honest decision of officers

and directors of a corporation and the courts are withoutauthority to substitute their judgment for the judgment of the

board of directors; the board is the business manager of the

corporation and so long as it acts in good faith its orders are

not reviewable by the courts or the SEC.

- A resolution or transaction pursued within the corporate

powers and business operations of the corporation, and

passed in good faith by the board of directors/trustee, is validand binding, and generally the courts have no authority to

review the same and substitute their own judgment, even

when the exercise of such power may cause losses to the

corporation or decrease the profits of a department.

*Great respect is accorded to the decisions of the Board of

Directors/Trustees.

*The directors are not liable to the stockholders in performing

such acts.

Qualifications of the Board Members

Sec. 23 of the Corporation Code states that: Every director

must have at least one share of the capital stock of the

corporation of which he is a director, which share shall stand

in his name on the books of the corporation. Any director who

ceases to be the owner of at least one share of the capital stock

of the corporation of which he is a director shall thereby cease

to be a director. Trustees of non-stock corporations must be

members thereof. A majority of the directors or trustees of all

corporations organized under this Code must be residents of

the Philippines.

*In order to be eligible as director, what is material is the legal

title to and not beneficial title or ownership of the stocks

appearing on the books of the corporation.

*The directors/trustees must be natural persons.

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*They must also be of legal age.

*He must possess other qualifications as may be prescribed in

the by-laws of the corporation.

*Under Sec. 27 of the Corporation Code: No person

convicted by final judgment of an offense punishable by

imprisonment for a period exceeding 6 years, or a violation of

this Code committed within 5 years prior to the date of his

election or appointment, shall qualify as a director, trustee or

officer of any corporation.

Reason:The position is based on trust and confidence.*No citizenship requirement.

*The By-Laws may provide additional qualifications/

disqualifications.

Election of the Board Members

Sec. 24 of the Corporation Code provides that: At all

elections of directors or trustees, there must be present, eitherin person or by representative authorized to act by written

proxy, the owners of a majority of the outstanding capital

stock, or if there be no capital stock, a majority of the

members entitled to vote. The election must be by ballot if

requested by any voting stockholder or member. In stock

corporations, every stockholder entitled to vote shall have the

right to vote in person or by proxy the number of shares ofstock standing, at the time fixed in the by-laws, in his own

name on the stock books of the corporation, or where the by-

laws are silent at the time of the election; and said stockholder

may vote such number of shares for as many persons as there

are directors to be elected or he may cumulate said shares and

give one candidate as many votes as the number of directors

to be elected multiplied by the number of his shares shall

equal, or he may distribute them on the same principle among

as many candidates as he shall see fit: Provided, that the total

number of votes cast by him shall not exceed the number of

shares owned by him as shown in the books of the

corporation multiplied by the whole number of directors to be

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elected: Provided, however, that no delinquent stock shall be

voted. Unless otherwise provided in the articles of

incorporation or in the by-laws, members of the corporations

which have no capital stock may cast as many votes as there

are trustees to be elected but may not cast more than one vote

for one candidate. Candidates receiving the highest number of

votes shall be declared elected. Any meeting of the

stockholders or members called for an election may adjourn

from day to day or from time to time but not sine die or

indefinitely if, for any reason, no election is held, or if there

not present or represented by proxy, at the meeting, the

owners of a majority of the outstanding capital stock, or ifthere be no capital stock, a majority of the member entitled to

vote.

*It is the stockholders or corporators who elect members of

the Board of Directors.

*The only procedure required by the Code is through

Election. There can be no other modes.*The election must be by ballot if requested by any voting

member or stockholder.

*A stockholder cannot be deprived in the articles of

incorporation or in the by-laws of his statutory right to use

any of the methods of voting in the election of directors.

*No delinquent stock shall be voted.

*It is not required that the candidate received the majority

vote, what the law provides is only plurality of votes.

*Majority number is required only for the existence of a

quorum.

Not included in outstanding capital stocks: 1. Unissued

stocks;

2. Non-voting stocks;

3. Treasury Shares.

Methods of Voting:

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1. Straight Voting every stockholder may vote such number

of shares for as many persons as there are directors to be

elected.

2. Cumulative Voting for One Candidate a stockholder isallowed to concentrate his votes and give one candidate as

many votes as the number of directors to be elected

multiplied by the number of his shares shall equal.

*Example: X has 10 shares in his name; there are 5 numbers of

directors to be elected. X has 50 votes (10x5) available to him.

X may opt to concentrate all his 50 votes to a particular

candidate.

3. Cumulative Voting by Distribution a stockholder may

cumulate his shares by multiplying also the number of his

shares by the number of directors to be elected and distribute

the same among as many candidates as he shall see fit.

*Example: X has 10 shares in his name; there are 5 numbers of

directors to be elected. X has 50 votes available to him. X mayopt to distribute the votes to as many candidates as there are

provided that the total number of votes does not exceed 50.

Purpose of cumulative voting: To protect the minority

stockholders.

*The elected officer must act as a body.

*In a stock corporation, cumulative voting is a statutory rightwhereas in a non-stock corporation, cumulative voting is

applicable if it is provided in the Article of Incorporation.

Sec. 26 of the Corporation Code provides that: Within 30

days after the election of the directors, trustees and officers of

the corporation, the secretary, or any other officer of the

corporation, shall submit to the SEC, the names, nationalities

and residences of the directors, trustees and officers elected.Should a director, trustee or officer die, resign or in any

manner cease to hold office, his heirs in case of his death, the

secretary, or any other officer of the corporation, or the

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director, trustee or officer himself, shall immediately report

such fact to the SEC.

Term of Office

*The directors or trustees shall hold office for one (1) year

subject to the hold over principle, i.e., they continue in

office until their successors are elected and qualified.

*The one year period does not apply to directors initially

elected for purposes of incorporation.

Quorum Requirement in Board Meetings

Sec. 25 of the Corporation Code states that: Unless the

articles of incorporation or the by-laws provide for a greater

majority, a majority of the number of directors or trustees as

fixed in the articles of incorporation shall constitute a quorum

for the transaction of corporate business, and every decision

of at least a majority of the directors or trustees present at a

meeting at which there is a quorum shall be valid as a

corporate act, except for the election of officers which shallrequire the vote of a majority of all the members of the

board.

Q: Is the director allowed to let a proxy attend a board

meeting in behalf for himself?

A:NO.Proxy prohibition.

Reason:Because of their personal qualifications.

*Quorum requirement should always be computed based on

the number specified in the Articles of Incorporation

regardless of ensuing vacancies.

*The basis is always the number specified in the Articles of

Incorporation.

*The corporation can modify the number by providing a

different provision in the articles of incorporation, however,

the law provides that the modification must be for a number

greater than that provided in the law. It cannot provide for a

number less than the general requirement of the code.

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*For voting purposes, majority of the member present

constituting a quorum. Except: election of directors.

Removal of Board Members

Sec. 28 of the Corporation Codestates that: Any director or

trustee of a corporation may be removed from office by a vote

of the stockholders holding or representing at least 2/3 of the

outstanding capital stock, or if the corporation be a non-stock

corporation, by a vote of at least 2/3 of the members entitled

to vote: Provided, that such removal shall take place either at

a regular meeting of the corporation or at a special meeting

called for the purpose, and in either case, after previous noticeto stockholders or members of the corporation of the intention

to propose such removal at the meeting. A special meeting of

the stockholders or members of a corporation for the purpose

of removal of directors or trustees, or any of them, must be

called by the secretary on order of the president or on the

written demand of the stockholders representing or holding at

least a majority of the outstanding capital stock, or, if it be anon-stock corporation, on the written demand of a majority of

the members entitled to vote. Should the secretary fail or

refuse to call the special meeting upon such demand or fail or

refuse to give the notice, or if there is no secretary, the call for

the meeting may be addressed directly to the stockholders or

members by any stockholder or member of the corporation

signing the demand. Notice of the time and place of such

meeting, as well as of the intention to propose such removal,

must be given by publication or by written notice prescribed

in this Code. Removal may be with or without cause:

Provided, that removal without cause may not be used to

deprive minority stockholders or members of the right of

representation to which they may be entitled under Sec. 24 of

this Code.

Requisites:

1. It must take place either at a regular meeting or special

meeting of the stockholders or members called for the

purpose;

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2. There must be previous notice to the stockholders or

member of the intention to remove;

3. The removal must be by a vote of the stockholders

representing 2/3 outstanding capital stock or 2/3 of members;

4. The director may be removed with or without cause unless

he was elected by the minority, in which case, it is required

that there is cause for removal.

Reason:The functions of directors are fiduciary in nature.

Requisites for the removal of minority directors are:

1. Justifiable cause;

2. Satisfaction of the voting requirements, i.e., 2/3 of OCS or

members.

*It is the secretary of the corporation upon order of the

president or in case there is no secretary, stockholder

representing majority of the outstanding capital stocks or

member signing the demand who may call a meeting for thepurpose of removal.

Vacancies in the Board

Sec. 29 of the Corporation Codeprovides that: Any vacancy

occurring in the board of directors or trustees other than by

removal by the stockholders or members or by expiration of

term, may be filled by the vote of at least a majority of theremaining directors or trustees, if still constituting a quorum;

otherwise, said vacancies must be filled by the stockholders in

a regular or special meeting called for that purpose. A director

or trustee so elected to fill a vacancy shall be elected only or

the unexpired term of his predecessor in office. A directorship

or trusteeship to be filled by reason of an increase in the

number of directors or trustees shall be filled only by an

election at a regular or at a special meeting of stockholders or

members duly called for the purpose, or in the same meeting

authorizing the increase of directors or trustees if so stated in

the notice of the meeting.

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General Rule: Power to elect directors is vested in the

stockholders

Exception: Vacancy occurring in the board of directors or

trustees other than by removal by the stockholders ormembers or by expiration of term may be filled by the vote of

at least a majority of the remaining directors or trustees if still

constituting a quorum.

Compensation of Board Members

Sec. 30 of the Corporation Code provides that: In the

absence of any provision in the by-laws fixing theircompensation, the directors shall not receive any

compensation, as such directors, except for reasonable per

diems: Provided, however, that any such compensation other

than per diems may be granted to directors by the vote of the

stockholders representing at least a majority of the

outstanding capital stock at a regular or special stockholders

meeting. In no case shall the total yearly compensation of

directors, as such directors, exceed 10% of the net incomebefore income tax of the corporation during the preceding

year.

General Rule: Directors are not entitled to receive

compensation

Exceptions:

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

2. If compensation is granted to directors by the vote of the

stockholders representing at least a majority of the

outstanding capital stock at a regular or special stockholders

meeting.

Limitation: In no case shall the total yearly compensation of

directors exceed 10% of the net income before income tax ofthe corporation during the preceding year.

Reason:In order to avoid temptation on the part of directors

to abuse powers by appropriating compensation packages

since they are in control of corporate assets.

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C. Corporate Officers

Concept of Corporate Officers

*Corporate powers reside on the Board of Directors; decision/

policymaking resides on them. Implementation of rules/

policy lies on the corporate officers

Categories:

1. Statutory Corporate Officers President (must be a

stockholder); Secretary (must be a resident and citizen of the

Philippines); Treasurer (must be a resident and citizen of the

Philippines).

2. As provided by the By-Laws must be clearly stated in

the By-Laws that such office is a corporate office.

3. Those designated by the Board of Directors provided

the Board of Directors is authorized to do so by the By-

Laws.

Validity and Binding Effect of Acts of Corporate Officers

General Rule: No one, even corporate officers can bind the

corporation. It is only the Board of Directors who has the

authority to bind the corporation.

Exceptions:

1. If the By-Laws provides that such act is part of the function

of such office;

2. If authorized by the Board of Directors

Doctrine of Apparent Authority

Doctrine of Apparent Authority/Doctrine of Estoppel If a

corporation, knowingly permits one of its officers, or anyother agent, to act within the scope of an apparent authority, it

holds him out to the public as possessing the power to do

those acts; and thus, the corporation will, as against anyone

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who has in good faith dealt with it through such agent, be

stopped from denying the agents authority.

Cases: Peoples Aircargo; Inter-Asia; Lapu-Lapu

*Requires good faith on the part of third person.

D. Liability of Directors, Trustees and Officers

Instances when Corporate Officers/Directors are held

Solidarily Liable

Sec. 31 of the Corporation Codeprovides that: Directors ortrustees who wilfully and knowingly vote for or assent to

patently unlawful acts of the corporation or who are guilty of

gross negligence or bad faith in directing the affairs of the

corporation or acquire any personal or pecuniary interest in

conflict with their duty as such directors or trustees shall be

liable jointly and severally for all damages resulting therefrom

suffered by the corporation, its stockholders or members andother persons. When a director, trustee or officer attempts to

acquire or acquires, in violation of his duty, any interest

adverse to the corporation in respect of any matter which has

been reposed in him in confidence, as to which equity

imposes a disability upon him to deal in his own behalf, he

shall be liable as a trustee for the corporation and must

account for the profits which otherwise would have accrued

to the corporation.

General Rule: Directors/Trustees/Officers are not solidarily

liable with the corporation.

Exceptions:

1. Wilfully and knowingly vote for and assent to patently

unlawful acts of the corporation (Sec. 31).

Case: Carag v NLRC

2. Guilty of gross negligence or bad faith in directing the

affairs of the corporation (Sec. 31).

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Case: David v Construction Industry

3. Acquire any personal or pecuniary interest in conflict of

their duty (Sec.31).

4. Consent to the issuance of watered stocks or having

knowledge thereof, fails to file objections with the

secretary (Sec. 65).

5. Agree or stipulate in a contract to hold himself

personally liable with the corporation.

6. By virtue of a specific provision of law such as BP 22;

Trust receipts Law; RA 7832 (Anti-Electricity PilferageAct of 1997); Securities Regulation Code

*In Carag v NLRC, the Supreme Court held that not any

violative of law, the Code means that violation must have a

corresponding penalty. Patently unlawful act means that a law

declares an act unlawful and that such law provides penalty for

that unlawful act.

Self-Dealing Directors/Officers

Sec. 32 of the Corporation Codestates that: A contract of the

corporation with one or more of its directors or trustees or

officers is voidable, at the option of such corporation, unless

all of the following conditions are present: 1. That the

presence of such director or trustee in the board meeting in

which the contract was approved was not necessary toconstitute a quorum for such meeting; 2. That the vote of such

director or trustee was not necessary for the approval of the

contract; 3. That the contract is fair and reasonable under the

circumstances; and 4. That in case of an officer, the contract

has been previously authorized by the board of directors.

Where any of the first two conditions set forth in the

preceding paragraph is absent, in the case of a contract with a

director or trustee, such contract may be ratified by the vote of

the stockholders representing at least 2/3 of the outstanding

capital stock or of at least 2/3 of the members in a meeting

called for the purpose: Provided, That full disclosure of the

adverse interest of the directors or trustees involved is made

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at such meeting: Provided, however, that the contract is fair

and reasonable under the circumstances.

Example:

In XYZ Corporation, A is a director. The corporation acts

through the Board of Directors. XYZ Corporation and A

entered into a lease contract. A as the lessor and XYZ

Corporation as lessee. The contract was approved by the

Board of Directors.

Q: What is the status of the contract?

General Rule:The contract is voidable.

Exception:If the requisites provided in Sec. 32 are present.

Exception to the Exception: If requirement number 1 or 2 is

absent, in the case of a contract with a director or trustee, such

contract may be considered valid by the ratification of at least

2/3 of the outstanding capital stock or 2/3 of the members.

Requisites:

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

meeting in which the contract was approved was not

necessary to constitute a quorum for such meeting;

2. The vote of such director or trustee was not necessary for

the approval of the contract;

3. The contract is fair and reasonable under the circumstances;

4. In case of an officer, the contract has been previously

authorized by the board of directors.

Reason: As presence in the board meeting might affect the

status of the contract.

Self-Dealing Directors/Officers directors/officers who

transact business with their own corporation.

- This is not prohibited by law.

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Interlocking Directors those who have been elected as

directors in 2 or more different corporations.

- May be prohibited by the By-Laws (Gokongwei case).

-Not prohibited by law however there are consequences.

Contracts involving Inter-locking Directors

Sec. 33 of the Corporation Code provides that: Except in

cases of fraud, and provided the contract is fair and

reasonable under the circumstances, a contract between two

or more corporations having interlocking directors shall not

be invalidated on that ground alone: Provided, That if theinterest of the interlocking director in one corporation is

substantial and his interest in the other corporation or

corporations is merely nominal, he shall be subject to the

provisions of the preceding section insofar as the latter

corporation or corporations are concerned. Stockholdings

exceeding 20% of the outstanding capital stock shall be

considered substantial for purposes of interlocking directors.Example:

A is a director of two corporation, ABC Corporation and XYZ

Corporation. XYZ Corporation and ABC Corporation entered

into a lease contract where ABC Corporation is the lessor and

XYZ Corporation is the lessee.

Q:Can this contract be invalidated on the ground that there isan interlocking director?

A: NO.

Q:What is the status of the contract?

A: General Rule: Contracts between two or more

corporations having interlocking directors are valid.

Exceptions:

1. Contracts are void if contracts are fraudulent or if contracts

are unfair and unreasonable.

2. If the By-Laws prohibits interlocking director.

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Case:Gokongwei, Jr. v SEC

*The interest is nominal if his interest is 20% or less of the

outstanding capital stock. The interest is substantial if his

interest is more than 20% of the outstanding capital stock.

*If the interlocking director has a substantial interest in one

corporation and has a nominal interest in the other

corporation, the director must comply with the requisites

provided in Sec. 32 on self-dealing directors.

Reason: The case is analogous to that of transactions

involving self-dealing directors because such director holdssubstantial interest with the other company.

Doctrine of Corporate Opportunity

Sec. 34 of the Corporation Code states that: Where a

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

opportunity which should belong to the corporation, thereby

obtaining profits to the prejudice of such corporation, he must

account to the latter for all such profits by refunding the same,unless his act has been ratified by a vote of the stockholders

owning or representing at least 2/3 of the outstanding capital

stock. This provision shall be applicable notwithstanding the

fact that the director risked his own funds in the venture.

General Rule: A director shall refund to the corporation all

the profits he realizes on a business opportunity which: 1. the

corporation is financially able to undertake; 2. from its nature,

is in line with corporations business and is of practical

advantage to it; and 3. the corporation has an interest or a

reasonable expectancy.

Exception: His act has been ratified by a vote of the

stockholders owning or representing at least 2/3 of the

outstanding capital stock.

*A business opportunity ceases to be corporate opportunity

and transforms to personal opportunity where the

corporation refuses or is definitely no longer able to avail

itself of the opportunity.

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E. Executive Committee

Sec. 35 of the Corporation Code states that: The by-laws of a

corporation may create an executive committee composed of not

less than 3 members of the board to be appointed by the board.

Said committee may act, by majority vote of all its members, on

such specific matters within the competence of the board, as may

be delegated to it in the by-laws or on a majority vote of the

board, except with respect to: (1) approval of any action for

which shareholders approval is also required; (2) the filing of

vacancies in the board; (3) the amendment or repeal of by-lawsor the adoption of new by-laws; (4) the amendment or repeal of

any resolution of the board which by its express terms is not so

amendable or repealable; and (5) a distribution of cash dividends

to the shareholders.

Keyword: BY-LAWS

*It must be stated in the By-Laws.*Board Resolution is not sufficient if there is no provision in the

By-Laws.

*The decision of the executive committee is considered a Board

Resolution.

*The decision of the executive committee is not subject to appeal

to the board. However, if the resolution of the ExecutiveCommittee is invalid it may be ratified by the Board.

*The decision of the executive committee needs no confirmation

from the Board.

Case: Filipinas Port, Inc.

*The corporation may create other committees.

Distinction: In executive committee, there is a statutory

restriction on members whereas in other committee there is no

such restriction.

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General Rule: The executive committee may act on specific

matters within the competence of the board as may be delegated

to it in the by-laws or on a majority vote of the board.

Exceptions:

1. Approval of any action for which shareholders approval is

also required;

2. The filing of vacancies in the board;

3. The amendment or repeal of by-laws or the adoption of new

by-laws;

4. The amendment or repeal of any resolution of the board

which by its express terms is not so amendable or repealable;

5. A distribution of cash dividends to the shareholders.

CORPORATE POWERS:

A. Doctrine of Limited Capacity; Concept of Ultra Vires Act

Sec. 45 of the Corporation Code states that: No corporationunder this Code shall possess or exercise any corporate powers

except those conferred by this Code or by its articles of

incorporation and except such as are necessary or incidental to

the exercise of powers so conferred.

Ultra Vires Acts an act committed outside the object for which

a corporation is created as defined by the law of its organization

and therefore beyond the power conferred upon it by law.

Effects of Ultra Vires Acts:

1. Executed Contract courts will not set aside or interfere with

such contracts.

2. Executory Contract no enforcement even at the suit of either

party.

3. Partly executed and Partly executory contract principle

against unjust enrichment shall apply.

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*In Tan v Sycip, the Supreme Court held that in case of a non-

stock corporation, membership is personal and non-

transferrable unless the by-laws provides otherwise. The

deceased member is not entitled to vote.

Four changes in Articles of Incorporation that require the approval

of the stockholders.

1. Extension of corporate term;

2. Shortening of corporate term;

3. Increase or Decrease of Capital Stock;

4. Increase or Decrease of Bonded indebtedness.

*Approval of Stockholders is necessary in these changes because theyare necessary for the corporations existence.

Extension/Shortening of Corporate Term

Sec. 37 of the Corporation Code states that: A private

corporation may extend or shorten its term as stated in the

articles of incorporation when approved by a majority vote of

the board of directors or trustees and ratified at a meeting by

the stockholders representing at least 2/3 of the outstandingcapital stock or by at least 2/3 of the members in case of non-

stock corporation. Written notice of the proposed action and

of the time and place of the meeting shall be addressed to

each stockholder or member at his place of residence as

shown on the books of the corporation and deposited to the

addressee in the post office with postage prepaid, or served

personally: Provided, That in case of extension of corporateterm, any dissenting stockholder may exercise his appraisal

right under the conditions provided in this code.

Increase or Decrease of Capital Stock/ Incurrence, Creation or

Increase of Bonded Indebtedness

Sec. 38 of the Corporation Codestates that: No corporation

shall increase or decrease its capital stock or incur, create or

increase any bonded indebtedness unless approved by a

majority vote of the board of directors and, at a stockholders

meeting duly called for the purpose, 2/3 of the outstanding

capital stock shall favor the increase or diminution of the

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capital stock, or the incurring, creating or increasing of any

bonded indebtedness. Written notice of the proposed increase

or diminution of the capital stock or of the incurring, creating,

or increasing of any bonded indebtedness and of the time and

place of the stockholders meeting at which the proposed

increase or diminution of the capital stock or the incurring or

increasing of any bonded indebtedness is to be considered ,

must be addressed to each stockholder at his place of

residence as shown on the books of the corporation and

deposited to the addressee in the post office with postage

prepaid, or served personally. xxx.

Q:When the corporation increases its capital stock, is the 25%

requirement necessary? How can it be computed?

A: YES. The SEC ruled that the 25% applies to the increase

amount.

*The corporation is required to maintain a sinking fund.

Q: What does bonded indebtedness mean?A: Requires longer time of payment; special burden on the

corporation; involves the important assets of the corporation.

Denial of Pre-emptive Right

Sec. 39 of the Corporation Code states that: All stockholders

of a stock corporation shall enjoy pre-emptive right to

subscribe to all issues or disposition of shares of any class, inproportion to their respective shareholdings, unless such right

is denied by the articles of incorporation or an amendment

thereto: Provided, That such pre-emptive right shall not

extend to shares to be issued in compliance with laws

requiring stock offerings or minimum stock ownership by the

public; or to 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 or in payment of a previously contracted

debt.

*Coming from the increased authorized capital stock.

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* Similar to Right of First Refusal

*It is not a matter of right. It can be denied by the corporation

through denial of such right in the articles of incorporation.

Purposes:

1. In order that the stockholder may be able to maintain their

relative proportional voting trend and control in the

corporation; 2. To avoid dilution of their proportionate voting

and control in the corporation.

General Rule:Pre-emptive right is available to stockholders.

Exception: if it is denied in the Articles of Incorporation or

through amendment.

Exception to the Exception: Pre-emptive right shall not

extend to:

1. Shares to be issued in compliance with laws requiring stock

offerings or minimum stock ownership by the public;

2. Shares to be issued in good faith with the approval of the

stockholders representing 2/3 of the outstanding capital

stock, in exchange for property needed for corporate

purposes; and

3. In payment of a previously contracted debt.

*Pre-emptive right is satisfied as long as the corporation gives

the stockholder the opportunity to buy the shares.

*The offer must first be made to the stockholders.

Sale or Disposition of Assets

Sec. 40 of the Corporation Code states that: Subject to the

provisions of existing laws on illegal combinations and

monopolies, a corporation may, by a majority vote of its board

of directors or trustees, sell, lease, exchange, mortgage, pledge

or otherwise dispose of all or substantially all of its property

and assets, including its goodwill, upon such terms and

conditions and for such consideration, which may be money,

stocks, bonds or other instruments for the payment of money

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or other property or consideration, as its board of directors or

trustees may deem expedient, when authorized by the vote of

the stockholders representing at least 2/3 of the outstanding

capital stock, or in case of non-stock corporation by the vote of

at least 2/3 of the members, in a stockholders or members

meeting duly called for the purpose. Written notice of the

proposed action and of the time and place of the meeting shall

be addressed to each stockholder or member at his place of

residence as shown on the books of the corporation and

deposited to the addressee in the post office with postage

prepaid, or served personally: Provided, That any dissenting

stockholder may exercise his appraisal right under theconditions provided in this Code. A sale or other disposition

shall be deemed to cover substantially all the corporate

property and assets if thereby the corporation would be

rendered incapable of continuing the business or

accomplishing the purpose for which it was incorporated.

xxx.

Q: What makes the disposition peculiar?

A: The disposition is of all or substantially all of the

corporations properties and assets.

Q:What kind of disposition involve?

A:1. Sell; 2. Lease; 3. Exchange; 4. Mortgage; 5. Pledge.

Requirements:

1. Majority vote of the Board.

2. Vote of the Stockholders representing 2/3 of the OCS.

3. The sale does not bring about the illegal combinations and

monopolies.

*No need for the approval of the SEC.

Tests:1. Quantitative Test no statutory test; pertains to the

disposition of all assets

2. Qualitative Test there is a statutory test; pertains to the

disposition of substantially all of its assets.

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*The provision is so strict because the law wants the

corporation will reach its expiration term.

Q: With the sale of all the assets of the corporation, will the

same result to its dissolution?

A: NO. Possession or continued possession of corporate

properties is not a condition for the existence of a corporation.

Corporation still exists despite the disposition of all its

properties and assets.

Q: Will the buying corporation be made answerable for the

liabilities of the selling corporation?

A: NO. The two corporations are two separate personalitiesthus they are separate and distinct from each other hence the

buying corporation cannot be held liable to the obligations of

the selling corporation.

General Rule:The sale of all or substantially all of the assets

of the corporation does not make the buyer answerable for the

obligations of the seller.

Exceptions:

1. If the buyer expressly agrees to assume the obligations of

the seller.

2. If sale amounts to merger or consolidation.

3. If and when application of piercing the veil of corporate

entity doctrine is warranted.

4. If the purchaser becomes a continuation of the seller.

5. Sale was done in violation of the Bulk Sales Law.

Case: PNB v Andrada

Acquisition of Corporate Shares

Sec. 41 of the Corporation Code states that: A stock

corporation shall have the power to purchase or acquire itsown shares for a legitimate corporate purpose or purposes,

including but not limited to the following cases: Provided,

That the corporation has unrestricted retained earnings in its

books to cover the shares to be purchased or acquired: 1. To

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eliminate fractional shares arising out of stock dividends; 2. To

collect or compromise an indebtedness to the corporation,

arising out of unpaid subscription, in a delinquency sale, and

to purchase delinquent shares sold during said sale; and 3. To

pay dissenting or withdrawing stockholders entitled to

payment for their shares under the provisions of this Code.

Requisites:

1. Unrestricted Retained Earnings

2. The acquisition must be for legitimate purpose

Q:What is an unrestricted retained earnings?A: Earnings not allocated for any other purpose.

Q:What happens to reacquired shares?

A:General Rule: They are automatically deemed retired.

Exception:The AOI provides otherwise.

Trust Fund Doctrine The capital stock, property and other assets of

the corporation are regarded as equity in trust for the payment of the

corporate creditors. The subscribed capital stock of the corporation isa trust fund for the payment of debts of the corporation which the

creditors have the right to look up to satisfy their credits. Corporation

may not dissipate this and the creditors may sue stockholders directly

for the unpaid subscription.

Investment of Corporate Funds

Sec. 42 of the Corporation Code states that: Subject to the

provisions of this Code, a private corporation may invest its

funds in any other corporation or business or for any purpose

other than the primary purpose for which it was organized

when approved by a majority of the board of directors or

trustees and ratified by the stockholders representing at least

2/3 of the outstanding capital stock, or by at least 2/3 of the

members in the case of non-stock corporations, at a

stockholders or members meeting duly called for thepurpose. Written notice of the proposed investment and the

time and place of the meeting shall be addressed to each

stockholder or member at his place of residence as shown on

the books of the corporation and deposited to the addressee in

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the post office with postage prepaid, or served personally:

Provided, That any dissenting stockholder shall have

appraisal right as provided in this Code: Provided, however,

That where the investment by the corporation is reasonably

necessary to accomplish its primary purpose as stated in the

articles of incorporation, the approval of the stockholders or

members shall not be necessary.

Requisites:

1. Majority vote of the Board

2. Vote of the stockholders representing 2/3 OCS. Declaration of Dividends

Sec. 43 of the Corporation Code states that: The board of

directors of a stock corporation may declare dividends out of

the unrestricted retained earnings which shall be payable in

cash, in property, or in stock to all stockholders on the basis of

outstanding stock held by them: Provided, That any cash

dividends due on delinquent stock shall first be applied to theunpaid balance on the subscription plus costs and expenses,

while stock dividends shall be withheld from the delinquent

stockholder until his unpaid subscription is fully paid:

Provided, further, That no stock dividend shall be issued

without the approval of stockholders representing not less

than 2/3 of the outstanding capital stock at a regular or

special meeting duly called for the purpose. Stockcorporations are prohibited from retaining surplus profits in

excess of 100% of their paid-in capital stock, except: 1. When

justified by definite corporate expansion projects or programs

approved by the board of directors; or 2. When the

corporation is prohibited under any loan agreement with any

financial institution or creditor, whether local or foreign, from

declaring dividends without its/his consent, and such consent

has not yet been secured; or 3. When it can be clearly shown

that such retention is necessary under special circumstances

obtaining in the corporation, such as when there is need for

special reserve for probable contingencies.

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*This section is exclusive to stock corporations.

Dividends represents part of the earnings of the corporation

which the board has decided to distribute among the

stockholders.

*The fact that the corporation has surplus earning does not

mean that it is mandated to declare dividends; it is still upon

the sound discretion of the board of directors.

Reason:Trust Fund Doctrine

*There must be a unrestricted retained earnings before

dividends may be declared.

*The board may opt to restrict its earnings, as the earnings

may be allocated to legitimate business purpose.

Requisites for declaration of cash/property dividends:

1. Board approval

2. Unrestricted Retained Earnings

Requisites for declaration of stock dividends:

1. Unrestricted Retained Earnings;

2. Board approval;

3. Ratification by the stockholders.

C A S HDIVIDENDS

S T O C KDIVIDENDS

does not requirestockholdersapproval

Requiresstockholdersapproval

The stockholdersreceive cash

The stockholdersreceive stocks

Creditor-debtorrelationship

No creditor-debtor

relationship

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Q: Why stockholders ratification is necessary in the

declaration of stock dividends?

A:Because the earnings are capitalized. It is considered to be a

corporate assets.

Q: May the board be compelled to declare dividends?

A:General Rule: NO.

Exception: Stock corporations are prohibited from retaining

surplus profits in excess of 100% of their paid-in capital stock.

Exceptions to the Exception:

1. Corporate expansion

2. Pursuant to loan agreement

3. Special circumstances/contingent liabilitiesQ: Are the stock dividends considered as watered stocks

because the stockholder concerned does not pay anything

therefor?

A: NO. The unrestricted retained earnings are considered to

be a consideration thus dividends received through stocks are

not watered stocks.

*The source of payment is the unrestricted retained earnings.Q: Are delinquent stockholders entitled to receive dividends?

A:YES. But only in terms of cash dividends.

Q:Who are entitled to receive dividends?

A:Stockholders

*In Nielson case, the SC held that dividends cannot be given

to non-stockholders.

*If there is date of record Dividends may be received by

those persons who are holders of stocks as of date of record.

*If there is no date of record dividends may be received by

those persons who are holders of stocks as of the declaration.

Q: When the corporation declares stock dividends, would it

likewise create a creditor-debtor relationship between the

corporation and the stockholder?

A: NO. Stock dividends will not bring about a creditor-debtor

relationship. When it comes to shareholdings, the one holdingthe shares are considered investors; risk-takers.

Q:Will legal compensation possible to occur?

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A: NO. The parties are not mutually creditor-debtor of each

other. The requisites under the Civil Code on legal

compensation are not present.

notes in corporation

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