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INTRODUCTION
Definition and attributes of a corporation
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.
A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a creature without any
existence until it has received the imprimatur of the state acting according to law." A corporation will have no rights and privileges of a higher
priority than that of its creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet Corporation)
A corporation has four (4) attributes:
(1)
(2)
(3)
(4)
It is an artificial being;
Created by operation of law;
With right of succession;
Has the powers, attributes, and properties as expressly authorized by law or incident to its existence.
Stock
Definition
Non-Stock
All other private corporations (3)
Purpose
Distribution of Profits
Composition
Stockholders
Members
Voting by proxy
Voting by mail
Not possible.
Governing Board
Election of officers
Place of meetings
Transferability of interest
or membership
Transferable.
Term of
trustees
directors
or
INCORPORATORS
REQUIREMENTS
COMMENTS
Definition
Characteristic
natural persons
Number
residence
a
requirement;
citizenship requirement only in
certain areas such as public
utilities, retail trade banks,
investment houses, savings and
loan associations, schools
Age
of legal age
Residence
12345-
STEPS
a. Promotional Stage (See SEC. 2.
Definitions)
COMMENTS
Promoter
Process:
a) SEC shall examine them in order to determine
whether they are in conformity w/ law.
b) If not, the SEC must give the incorporators a
reasonable time w/in w/c to correct or modify the
objectionable portions.
Grounds for rejection or disapproval of AOI:
a) AOI /amendment not substantially in accordance
w/ the form prescribed
b) purpose/s are patently unconstitutional, illegal,
immoral, or contrary to government rules & regulations;
c) Treasurers Affidavit is false;
d) required percentage of ownership has not been
complied with (Sec. 17)
e) corp.s establishment, organization or operation
will not be consistent w/ the declared national economic
policies (to be determined by the SEC, after consultation
w/ BOI, NEDA or any appropriate government agency -PD 902-A as amended by PD 1758, Sec. 6 (k))
e. Issuance of certificate of
incorporation.
COMMENTS
(2)
Principal Office
Term of Existence
Purpose Clause
Capital Stock
Other matters
b) stock exchanges;
c) banks;
d) insurance companies;
e) public utilities;
f) educational institutions; &
g) corporations declared to be vested w/ public interest
Was there colorable compliance enough to give the supposed corporation at least the status of a de facto corporation?
No. Neither the hope, the belief, nor the statement by parties that they are incorporated, nor the signing of the articles of
incorporation which are not filed, where filing is requisite to create the corporation, nor the use of the pretended franchise of the
nonexistent corporation, will constitute such a corporation de facto as will exempt those who actively and knowingly use s name to
incur legal obligations from their individual liability to pay them. There could be no incorporation or color of it under the law until the
articles were filed (requisites for valid incorporation).
HALL v. PICCIO (29 SCRA 533; 1969)
In the case of Hall v. Piccio, where the supposed corporation transacted business as a corporation pending action by the SEC
on its articles of incorporation, the Court held that there was no de facto corporation on the ground that the corporation cannot claim
to be in good faith to be a corporation when it has not yet obtained its certificate of incorporation.
NOTE: The validity of incorporation cannot be inquired into collaterally in any private suit
to which such corporation may be a party. Such inquiry must be through a quo warranto proceeding made by the Solicitor
General. (Sec. 20)
CORPORATION BY ESTOPPEL
(Sec. 21)
Distinguish a de facto corporation from a corporation by estoppel.
The de facto doctrine differs from the estoppel doctrine in that where all the requisites of a de facto corporation are
present, then the defectively organized corporation will have the status of a de jure corporation in all cases brought by and
against it, except only as to the State in a direct proceeding. On the other hand, if any of the requisites are absent, then the
estoppel doctrine can apply only if under the circumstances of the particular case then before the court, either the defendant
association is estopped from defending on the ground of lack of capacity to be sued, or the defendant third party had dealt with
the plaintiff as a corporation and is deemed to have admitted its existence.
(De facto has status of de jure corpo, except separate personality against State, provided all requisites are present)
The defendant is estopped from denying its own corporate existence. It is also estopped from denying the others corporate
existence. The general rule is that in the absence of fraud, a person who has contracted or otherwise dealt with an association is such a
way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped from denying its corporate
existence.
CRANSON VS IBM (234 MD. 477, 200 A. 2D 33 ; 1964)
IBM sued Cranson in his personal capacity regarding a typewriter bought by him as President of a defectively organized
company whose Articles were not yet filed when the obligation was contracted.
IBM, having dealt with the defectively organized company as if it were properly organized and having relied on its credit
instead of Cransons, is estopped from asserting that it was not incorporated. It cannot sue Cranson personally.
SALVATIERRA VS GARLITOS (103 Phil. 757; 1958)
Salvatierra leased his land to the corporation. He filed a suit for accounting, rescission and damages against the corporation
and its president for his share of the produce. Judgment against both was obtained. President complains for being held personally
liable.
He is liable. An agent who acts for a non-existent principal is himself the principal. In acting on behalf of a corporation which
he knew to be unregistered, he assumed the risk arising from the transaction.
ALBERT VS UNIVERSITY PUBLISHING CO., INC. (Jan. 30, 1965)
Mariano Albert entered into a contract with University Publishing Co., Inc. through Jose M. Aruego, its President, whereby
University would pay plaintiff for the exclusive right to publish his revised Commentaries on the Revised Penal Code. The contract
stipulated that failure to pay one installment would render the rest of the payments due. When University failed to pay the second
installment, Albert sued for collection and won. However, upon execution, it was found that University was not registered with the
SEC. Albert petitioned for a writ of execution against Jose M. Aruego as the real defendant. University opposed, on the ground that
Aruego was not a party to the case.
The Supreme Court found that Aruego represented a non-existent entity and induced not only Albert but the court to believe in
such representation. Aruego, acting as representative of such non-existent principal, was the real party to the contract sued upon, and
thus assumed such privileges and obligations and became personally liable for the contract entered into or for other acts performed as
such agent.
The Supreme Court likewise held that the doctrine of corporation by estoppel cannot be set up against Albert since it was
Aruego who had induced him to act upon his (Aruego's) willful representation that University had been duly organized and was
existing under the law.
When adopted:
(a) No later than one (1) month after receipt from SEC of official
of incorporation.
Requirement:
Contents of By-laws - Subject to the provisions of the Constitution, this Code, other
special laws, and the articles of incorporation, a private corporation may provide in its by-laws for:
1)
the time, place and manner of calling and conducting regular or special meetings of the directors or trustees;
2)
the time and manner of calling and conducting regular and special meetings of the stockholders or members;
3)
the required quorum in meetings of stockholders or members and the manner of voting herein;
4)
the form for proxies of stockholders and members and the manner of voting them;
5)
the qualifications, duties and compensation of directors or trustees, officers and employees;
6)
the time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof;
7)
the manner of election or appointment and the term of office of all officers other than directors or trustees;
8)
9)
10) such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.
Where the SEC grants a license to a foreign corporation, it is deemed to have approved its
foreign-enacted by-laws. Sec. 46 of the Corporation Code which states that by-laws are not valid without SEC approval
applies only to domestic corporations.
A board resolution appointing an attorney-in-fact to represent the corporation during pre-trial is not necessary where the bylaws authorize an officer of the corporation to make such appointment.
RULING:
No. Failure to file by-laws does not result in the automatic dissolution of the corporation. It only constitutes a ground
for such dissolution. (Cf. Chung Ka Bio v. IAC, 163 SCRA 534) Incorporators must be given the chance to explain their
neglect or omission and remedy the same.
Since corporate property is owned by the corporation as a juridical person, the stockholders have no claim on it as owners, but
have merely an expectancy or inchoate right to the same should any of it remain upon the dissolution of the corporation after all
corporate creditors have been paid. Conversely, a corporation has no interest in the individual property of its stockholders, unless
transferred to the corporation. Remember that the liability of the stockholders is limited to the amount of shares.
In this case, the sale of a piece of land belonging to Motorich Corporation by the corporation treasurer (Gruenberg) was held to
be invalid in the absence of evidence that said corporate treasurer was authorized to enter into the contract of sale, or that the said
contract was ratified by Motorich. Even though Gruenberg and her husband owned 99.866% of Motorich, her act could not bind the
corporation since she was not the sole controlling stockholder.
STOCKHOLDERS OF F. GUANZON V. REGISTER OF DEEDS (6 SCRA 373)
Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While
shares of stock constitute personal property, they do not represent property of the corporation. A share of stock only typifies an aliquot
part of the corporation's property or the right to share in its proceeds to that extent when distributed according to law and equity, but its
holder is not the owner of any part of the capital of the corporation. Nor is he entitled to the possession of any definite portion of its
property or assets.
The act of liquidation made by the stockholders of the corp of the latters assets is not and cannot be considered a partition of
community property, but rather a transfer or conveyance of the title of its assets to the individual stockholders. Since the purpose of
the liquidation, as well as the distribution of the assets, is to transfer their title from the corporation to the stockholders in proportion to
their shareholdings, that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the
stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance.
CARAM V. CA (151 SCRA 373; 1987)
The case of the unpaid compensation for the preparation of the project study.
The petitioners were not involved in the initial stages of the organization of the airline. They were merely among the
financiers whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in the
proposed airline.
There was no showing that the Airline was a fictitious corp and did not have a separate juridical personality to justify making
the petitioners, as principal stockholders thereof, responsible for its obligations. As a bona fide corp, the Airline should alone be liable
for its corporate acts as duly authorized by its officers and directors. Granting that the petitioners benefited from the services
rendered, such is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the corporation,
including those who came in late, and regardless of the amount of their shareholdings, would be equally and personally liable also
with the petitioner for the claims of the private respondent.
shows that other shareholders may be considered dummies of Castro. Hence, corporate veil may be pierced.
Sycip held jointly and severally liable with AFC. AFC's corporate veil was pierced because it was used as Sycip's alter ego,
corpo used merely as an instrumentality, agency or conduit of another to evade liability.
JACINTO V. CA (198 SCRA 211)
Jacinto, president/GM and owner of 52% of corpo, owes MetroBank sum of money, signs trust receipts therefor. Jacinto
absconds. Jacinto ordered to jointly and severally pay MetroBank. Corpo veil pierced because it was used as a shield to perpetuate
fraud and/or confuse legitimate issues. There was no clear cut delimitation between the personality of Jacinto and the corporation.
employees of Indophil are the same persons manning and providing for auxiliary services to the other company, and that physical
plants, officers and facilities are situated in the same compound - not sufficient to apply doctrine.
NAFLU V. OPLE (143 SCRA 125; 1986)
Libra/Dolphin Garments was but an alter ego of Lawman Industrial, therefore, the former must bear the consequences of the
latter's unfair acts. It cannot deny reinstatement of petitioners simply because of cessation of Lawman's operations, since it was in fact
an illegal lock-out, the company having maintained a run-away shop and transferred its machines and assets there.
Here, the veil of corporate fiction was pierced in order to safeguard the right to self-organization and certain vested rights
which had accrued in favor of the union. Second corporation sought the protective shield of corporate fiction to achieve an illegal
purpose.
ASIONICS PHILS. v. NLRC (290 SCRA 164)
A corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from
that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.
Where there is nothing on record to indicate the President and majority stockholder of a corporation had acted in bad faith or
with malice in carrying out the retrenchment program of the company, hecannot be held solidarily and personally liable with the
corporation.
"shall not, for a period of 10 years from the date of the sale, apply for any TPU service identical or competing with the buyer
(Pantranco)."
Barely 3 months after the sale, a corporation called Villa Rey Transit, Inc. was organized, with the wife of Jose M. Villarama as
one of the incorporators and who was subsequently elected as treasurer of the Corporation. Barely a month after its registration with
the SEC, the corporation bought 5 CPCs and 49 buses from one Valentin Fernando, and applied with the Public Service Commission
(PSC) for approval of the sale. Before the PSC could take final action on the said application, however, 2 of the 5 CPCs were levied
upon pursuant to a writ of execution issued by the CFI in favor of Eusebio Ferrer, judgment creditor, against Valentin Fernando,
judgment debtor. During the public sale conducted, Ferrer was the highest bidder, and a certificate of sale was issued in his name.
Shortly thereafter, he sold the said CPCs to Pantranco, and they jointly submitted their contract of sale to the PSC for approval.
The PSC issued an order that pending resolution of the applications, Pantranco shall have the authority to provisionally operate
the service under the 2 CPCS that were the subject of the contract between Ferrer and Pantranco. Villa Rey Transit took issue with
this, and filed a complaint for annulment of the sheriff's sale of the CPCs and prayed that all the orders of the PSC relative to the
dispute over the CPCs in question be annulled. Pantranco filed a third-party complaint against Jose M. Villarama, alleging that
Villarama and Villa Rey Transit are one and the same, and that Villarama and/or the Corporation is qualified from operating the CPCs
by virtue of the agreement entered into between Villarama and Pantranco.
Given the evidence, the Court found that the finances of Villa-Rey, Inc. were managed as if they were the private funds of
Villarama and in such a way and extent that Villarama appeared to be the actual owner of the business without regard to the rights of
the stockholders. Villarama even admitted that he mingled the corporate funds with his own money. These circumstances negate
Villarama's claim that he was only a part-time General Manager, and show beyond doubt that the corporation is his alter ego. Thus,
the restrictive clause with Pantranco applies. A seller may not make use of a corporate entity as a means of evading the obligation
of his covenant. Where the Corporation is substantially the alter ego of one of the parties to the covenant or the restrictive
agreement, it can be enjoined from competing with the covenantee.
Close Corporations
CEASE V. CA (93 SCRA 483; 1979)
The Cease plantation was solely composed of the assets and properties of the defunct Tiaong plantation whose license to
operate already expired. The legal fiction of separate corporate personality was attempted to be used to delay and deprive the
respondents of their succession rights to the estate of their deceased father.
While originally, there were other incorporators of Tiaong, it has developed into a closed family corporation (Cease). The head
of the corporation, Cease, used the Tiaong plantation as his instrumentality. It was his business conduit and an extension of his
personality. There is not even a showing that his children were subscribers or purchasers of the stocks they own.
DELPHER TRADES V. CA (157 SCRA 349; 1988)
The Delpher Trades Corp. is a business conduit of the Pachecos. What they really did was to invest their properties and change
the nature of their ownership from unincorporated to incorporated form by organizing Delpher and placing the control of their
properties under the corporation. This saved them inheritance taxes.
This is the reverse of Cease; however, it does not modify the other cases. It stands on its own because of the facts.
Parent-Subsidiary Relationship
Q:
Q: What are the criteria by which the subsidiary can be considered a mere
instrumentality of the parent company?
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
the parent corp. owns all or most of the capital stock of the subsidiary.
the parent and subsidiary have common directors and officers
the parent finances the subsidiary
the parent subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation
the subsidiary has grossly inadequate capital
the parent pays the salaries and other expenses or losses of the subsidiary
the subsidiary has substantially no business except with the parent corp. or no assets except those conveyed to or by the
parent corp.
in the papers of the parent corp. or in the statements of its officers, the subsidiary is described as a department or division
of the parent corp. or its business or financial responsibility is referred as the parents own
the parent uses the property of the subsidiary as its own
the directors or the executives of the subsidiary do not act independently in the interest of the subsidiary but take their
orders from the parent corp. in the latters interest
the formal legal requirements of the subsidiary are not observed
GARRETT VS. SOUTHERN RAILWAY (173 F. Supp. 915, E.D. Tenn. 1959)
This case involved a Workers Compensation claim by a wheel moulder employed by Lenoir Car Works. The plaintiff sought to
claim from Southern Railway Company, which acquired the entire capital stock of Lenoir Car Works. Plaintiff contended that
Southern so completely dominated Lenoir that the latter was a mere adjunct or instrumentality of Southern.
The general rule is that stock ownership alone by one corporation of the stock of another does not thereby render the dominant
corporation liable for the torts of the subsidiary, unless the separate corporate existence of the subsidiary is a mere sham, or unless the
control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation.
In the case, it was found that there were two distinct operations. There was no evidence that Southern dictated the
management of Lenoir. In fact, evidence shows that Marius, the manager of the subsidiary, was in full control of the operation. He
established prices, handled negotiations in CBAs, etc. Lenoir paid local taxes, had local counsel and maintain a Workmens
Compensation Fund. There was also no evidence that Lenoir was run solely for the benefit of Southern. In fact, a substantial part of
its requirements in the field of operation of Lenoir was bought elsewhere. Lenoir sold substantial quantities to other companies.
Policy decisions remained in the hands of Marius. Hence, the complaint against Southern Railway was dismissed.
KOPPEL VS. YATCO (77 Phil. 496; 1946)
This case involved a complaint for the recovery of merchant sales tax paid by Koppel (Philippines), Inc. under protest to the
Collector of Internal Revenue. Although the Court of First Instance did not deny legal personality to Koppel (Philippines), Inc. for
any and all purposes, it dismissed the complaint saying that in the transactions involved in the case, the public interest and
convenience would be defeated and would amount to a perpetration of tax evasion unless resort was had to the doctrine of "disregard
of the corporate fiction."
The facts show that 99.5% of the shares of stocks of K-Phil were owned by K-USA. K-Phil. acted as a representative of KUSA and not as an agent. K-Phil. also bore alone its own incidental expenses (e.g. Cable expenses) and also those of its principal.
Moreover, K-Phils share in the profits was left in the hands of K-USA. Clearly, K-Phil was a mere branch or dummy of K-USA, and
was therefore liable for merchant sales tax. To allow otherwise would be to sanction a circumvention of our tax laws and permit a tax
evasion of no mean proportion and the consequent commission of a grave injustice to the Government. Moreover, it would allow the
taxpayer to do by indirection what the tax laws prohibit to be done directly.
LIDDELL & CO. VS. CIR (2 SCRA 632; 1961)
Liddel Motors Inc. was an alter ego of Liddel & Co. At the time of its incorporation, 98% of the Liddel Inc.s stock belonged
to Frank Liddel. As to Liddel Motors, Frank supplied the original capital funds. The bulk of the business of Liddel Inc. was
channeled through Liddel Motors. Also, Liddel Motors pursued no other activities except to secure cars, trucks and spare parts from
Liddel Inc. and then sell them to the general public.
To allow the taxpayer to deny tax liability on the ground that the sales were made through another and distinct corporation
when it is proved that the latter is virtually owned by the former or that they were practically one and the same is to sanction the
circumvention of tax laws.
While a corporation could not have been a party to a promoter's contract since it did yet exist at the time the
contract was entered into and thus could not possibly have had an agent who could legally bind it, the corporation may
make the contracts its own and become bound thereon if, after incorporation, it:
(1)
(2)
It must be noted, however, that the contract must be adopted in its entirety; the corporation cannot adopt only the part that
is beneficial to it and discard that which is burdensome. Moreover, the contract must be one which is within the powers of
the corporation to enter, and one which the usual agents of the company have express or implied authority to enter.
McARTHUR V. TIMES PRINTING CO. (48 Minn. 319, 51 N.W. 216; 1892)
It is not a requisite that a corporation's adoption or acceptance of a promoter's contract be expressed, but it may be inferred
from acts or acquiescence on the part of the corporation, or its authorized agents, as any similar original contract might be shown.
The right of agents to adopt an agreement originally made by promoters depends upon the purposes of the corporation and the
nature of the agreement. The agreement must be one which the corporation itself could make and one which the usual agents of the
company have express or implied authority to enter into.
CLIFTON v. TOMB (21 F. 2d 893; 1921)
Whatever may be the proper legal theory by which a corporation may be bound by the contract (ratification, adoption,
novation, a continuing offer to be accepted or rejected by the corporation), it is necessary in all cases that the corporation should have
full knowledge of the facts, or at least should be put upon such notice as would lead, upon reasonable inquiry, to the knowledge of the
facts.
CAGAYAN FISHING DEV. CO. v. SANDIKO (65 Phil. 223; 1937)
A promoter could not have acted as agent for a corporation that had no legal existence. A corporation, until organized, has no
life therefore no faculties. The corporation had no juridical personality to enter into a contract.
Also see Caram v. CA
Should the other contracting party fail to perform its part of the bargain, the corporation which has adopted or ratified
the contract may either sue for:
(1)
Specific performance; or
(2)
The fact of bringing an action on the contract has been held to constitute sufficient adoption or ratification to give the
corporation a cause of action.
BUILDERS DUNTILE CO. v. DUNN (229 Ky. 569, 17 S.W. 2d 715; 1929)
When the corporation was formed, the incorporators took upon themselves the whole thing, and ratified all that had been done
on its behalf. Though there was no formal assignment of the contract to the corporation, the acts of the incorporators were an adoption
of the contract. Therefore the corporation has the right to sue for damages for the breach of contract.
RIZAL LIGHT V. PSC (25 SCRA 285; 1968)
The incorporation of (Morong) and its acceptance of the franchise as shown by this action in prosecuting the application filed
with the Commission for approval of said franchise, not only perfected a contract between the municipality and Morong but also cured
the deficiency pointed out by the petition. The fact that Morong did not have a corporate existence on the day the franchise was
granted does not render the franchise invalid, as Morong later obtained its certificate of incorporation and accepted the franchise.
GENERAL RULE:
EXCEPTION:
WELLS VS. FAY & EGAN CO. (143 Ga. 732, 85 S.E. 873; 1915)
Individual promoters cannot escape liability where they buy machinery, receive them in their possession and authorize one
member to issue a note, in contemplation of organizing a corporation which was not formed. (see Campos' notes p. 258-259). The
agent is personally liable for contracts if there is no principal. The making of partial payments by the corporation, when later formed,
does not release the promoters here from liability because the corporation acted as a mere stranger paying the debt of another, the
acceptance of which by the creditor does not release the debtors from liability over the balance. Hence, there is no adoption or
ratification.
HOW & ASSOCIATES INC. VS. BOSS (222 F. Supp. 936; 1963)
The rule is that if the contract is partly to be performed before incorporation, the promoters solely are liable. Even if the
promoter signed "on behalf of corporation to be formed, who will be obligor," there was here an intention of the parties to have a
present obligor, because three-fourths of the payment are to be made at the time the drawings or plans in the architectural contract are
completed, with or without incorporation. A purported adoption by the corporation of the contract must be expressed in a novation or
agreement to that effect. The promoter is liable unless the contract is to be construed to mean: 1) that the creditor agreed to look solely
to the new corporation for payment; or 2) that the promoter did not have any duty toward the creditor to form the corporation and give
the corporation the opportunity to assume and pay the liability.
QUAKER HILL VS. PARR (148 Colo. 45, 364 P. 2d 1056; 1961)
The promoters here are not liable because the contract imposed no obligation on them to form a corporation and they were not
named there as obligors/promissors. The creditor-plaintiff was aware of the inexistence of the corporation but insisted on naming it as
obligor because the planting season was fast approaching and he needed to dispose of the seedlings. There was no intent here by
plaintiff-creditor to look to the promoters for the performance of the obligation. This is an exception to the general rule that promoters
are personally liable on their contracts, though made on behalf of a corporation to be formed.
OLD DOMINION VS. BIGELOW (203 Mass. 159, 89 N.E. 193; 1909)
A promoter, notwithstanding his fiduciary duties to the corporation, may still sell properties to it, but he must pursue one of
four courses to make the contract binding. These are: 1) provide an independent board of officers in no respect directly or indirectly
under his control, and make full disclosure to the corporation through them; 2) make full disclosure of all material facts to each
original subscriber of shares in the corporation; 3) procure a ratification of the contract after disclosing its circumstances by vote of the
stockholders of the completely established corporation; or 4) be himself the real subscriber of all the shares of the capital stock
contemplated as a part of the promotion scheme. The promoter is liable, even if owning all the stock of the corporation at the time of
the transaction, if further original subscription to capital stock contemplated as an essential part of the scheme of promotion came in
after such transaction.
CORPORATE POWERS
General Powers of Corporation (Sec. 36)
Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of
incorporation;
To amend its articles of incorporation in accordance with the provisions of this Code;
To adopt by-laws not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code;
In case of stock corporations, to issue of sell stocks to subscribers and to sell treasury stocks in accordance with the
provisions of this Code; and to admit members to the corporation if it be a non-stock corporation;
To purchase, receive, take, grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal
property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution;
(NOTE: There are two (2) general restrictions on the power of the corp. to acquire and hold properties:
To make reasonable donations, including those for the public welfare of for hospital, charitable, cultural, scientific, civic, or
similar purposes:
Provided that:
To establish pension, retirement and other plans for the benefit of its directors, trustees, officers and employees; and
To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles
of incorporation.
A sale is deemed to substantially cover all the corporate property and assets if such sale renders the corporation
incapable of continuing the business or accomplishing the purpose for which it was incorporated.
Implied Powers
Under Sec. 36, a corporation is given such powers as are essential or necessary to carry out its purpose or purposes as stated in the
articles of incorporation. This phrase gives rise to such a wide range of implied powers, that it would not be at all difficult to defend a corporate act
versus an allegation that it is ultra vires.
A corporation is presumed to act within its powers and when a contract is not its face necessarily beyond its authority; it will, in the
absence of proof to the contrary, be presumed valid.
Parties to the ultra vires contract will be left as they are, if the contract has been fully executed on both sides. Neither party
can ask for specific performance, if the contract is executory on both sides. The contract, provided that it is not illegal, will be
enforced, where one party has performed his part, and the other has not with the latter having benefited from the formers
performance.
Ultra vires acts may become binding by the ratification of all the stockholders, unless third parties are prejudiced thereby, or
unless the acts are illegal.
Held: The act of guaranty by PTC was well within its corporate powers. Furthermore, having received money or property by virtue of
the contract which is not illegal, it is estopped from denying liability. Even if the then prevailing law (Corp. Law) prohibited PTC
from guaranteeing bonds with a total value in excess of its capital, with all the MSC properties transferred to PTC based on the deed
of trust, sufficient assets were made available to secure the payment of the corresponding liabilities brought about by the bonds.
GOVT v. EL HOGAR (50 Phil 399; 1932)
(This case is an example of how the implied powers concept may be used to justify certain acts of a corporation.)
A quo warranto proceeding instituted by the Gov't against El Hogar, a building and loan ass'n to deprive it of its corp. franchise.
1. El Hogar held title to real property for a period in excess of 5 years in good faith, hence this cause will not prosper.
2. El Hogar owned a lot and bldg. at a business district in Manila allegedly in excess of its reasonable requirements, held valid bec, it
was found to be necessary and legally acquired and developed.
3. El Hogar leased some office space in its bldg.; it administered and managed properties belonging to delinquent SHs; and managed
properties of its SHs even if such were not mortgaged to them.
Held: first two valid, but the third is ultra vires bec. the administration of property in that manner is more befitting of the business
of a real estate agent or trust company and not of a building and loan ass'n.
4. Compensation to the promoter and organizer allegedly excessive and unconscionable.
Held: Court cannot dwell on the issue since the promoter is not a party in the proceeding and it is the corp. or its SHs who may
bring a complaint on such.
5. Issuance of special shares did not affect El Hogar's character as a building and loan ass'n nor make its loans usurious.
6. Corporate policy of using a depreciation rate of 10 % per annum is not excessive, bec. accdg. to the SC, the by-laws expressly
authorizes the BOD to determine each year the amount to be written down upon the expenses of installation and the property of the
corp.
7. The Corp. Law does not expressly grant the power of maintaining reserve funds but such power is implied. All business enterprises
encounter periods of gains and losses, and its officers would usually provide for the creation of a reserve to act as a buffer for such
circumstances.
8. That loans issued to member borrowers are being used for purposes other than the bldg. of homes not invalid bec. there is no statute
which expressly declares that loans may be made by these ass'ns solely for the purpose of bldg. homes.
9. Sec. 173 of the Corp. Law provides that "any person" may become a SH on a bldg. and loan ass'n. The word "person" is used on a
broad sense including not only natural persons but also artificial persons.
BISSEL v. MICHIGAN SOUTHERN ( 22 NY 258; 1860)
Two railroad corporations contend that they transcended their own powers and violated their own organic laws. Hence, they
should not be held liable for the injury of the plaintiff who was a passenger in one of their trains.
Held: The contract between the two corporations was an ultra vires act. However, it is not one tainted with illegality, therefore, the
accompanying rights and obligations based on the contract of carriage between them and the plaintiff cannot be avoided by raising
such a defense.
PIROVANO v. DELA RAMA STEAMSHIP (96 Phil 335 , 1954)
This case involved the issue of whether or not the defendant corporation performed an ultra vires act by donating the life
insurance proceeds to the minor children of Pirovano, the deceased president of the defendant company under whose management the
company grew and progressed to become a multi-million peso corporation.
Held:
NO.
(2) to aid in any other manner any person, association or corporation of which any obligation or in which any interest is
held by this corporation or in the affairs of prosperity of which this corporation has a lawful interest.
From this, it is obvious that the corporation properly exercised within its chartered powers the act of availing of insurance
proceeds to the heirs of the insured and deceased officer.
HARDEN v. BENGUET CONSOLIDATED (58 Phil 141)
A contract between Benguet and Balatoc provided that Benguet will bring in capital, eqpt. and technical expertise in exchange
for capital shares in Balatoc. Harden was a SH of Balatoc and he contends that this contract violated the Corp.Law which restricts the
acquisition of interest by a
mining corp. in another mining corp.
Held: Harden has no standing bec. if any violation has been committed, the same can be enforced only in a criminal prosecution by an
action of quo warranto which may be maintained only by the Attorney-General.
(c)
(i)
(ii)
(iii)
Nationality
(iv)
+1
By a vote of the SHs holding or representing at least 2/3 of the outstanding capital stock, or by a vote of at least 2/3 of the members
entitled to vote, provided that such removal takes place at either a regular meeting of the corporation or at a special meeting called for the
purpose. In both cases, there must be previous notice to the SHs / members of the intention to propose such removal at the meeting.
Removal may be with or without cause. However, removal without cause may not be used to deprive minority SHs or members of the
right of representation to which they may be entitled under Sec. 24 of the Code.
(e) How vacancy filled (Sec. 29)
If vacancy due to removal
or expiration of term:
Note:
(f)
in
the
same
or
Directors or trustees so elected to fill vacancies shall be elected only for the unexpired
term of their predecessors in office.
Note: In no case shall the total yearly compensation of directors, as such directors, exceed 10%
of the net income before income tax of the corporation during the preceding year.
(g)
or
(h) Liability (See subsequent discussion under Duties of Directors and Controlling Stockholders.)
(i)
(v)
(vi)
Any 2 or more positions may be held concurrently by the same person, except that no one shall act as (a) president and secretary,
or (b) president and treasurer at the same time.
(b) Disqualifications (Sec. 27)
- Conviction by final judgment of an offense punishable by imprisonment > 6 yrs.
(c)
Violation of Corporation Code committed within 6 yrs. prior to the date of election or
appointment
nor will it be permitted to shrink from its responsibility for such frauds, even though no benefit may
accrue to the bank therefrom.
Accordingly, a bank is liable to innocent third persons where the representation is made in the course of its business by its
agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and
attempting to perpetrate a fraud upon his principal or some other person for his own ultimate benefit. Application of these principles
is especially necessary because banks have a fiduciary relationship with the public and their stability depends on the confidence of the
people in their honesty and efficiency. Such faith will be eroded where banks do not exercise strict care in the selection and
supervision of its employees, resulting in prejudice to their depositors.
YU CHUCK V. KONG LI PO (46 Phil. 608; 1924)
The power to bind a corporation by contract lies with its board of directors or trustees. Such power may be expressly or
impliedly be delegated to other officers and agents of the corporation. It is also well settled that except where the authority of
employing servants or agents is expressly vested in the board, officers or agents who have general control and management of the
corporation's business, or at least a specific part thereof, may bind the corporation by the employment of such agents and employees as
are usual and necessary in the conduct of such business. Those contracts of employment should be reasonable. Case at bar: contract
of employment in the printing business was too long and onerous to the business (3-year employment; shall receive salary even if
corp. is insolvent).
THE BOARD OF LIQUIDATORS V. HEIRS OF MAXIMO KALAW (20 SCRA 987; 1967)
Kalaw was a corporate officer entrusted with general management and control of NACOCO. He had implied authority to
make any contract or do any act which is necessary for the conduct of the business. He may, without authority from the board,
perform acts of ordinary nature for as long as these redound to the interest of the corporation. Particularly, he contracted forward sales
with business entities. Long before some of these contracts were disputed, he contracted by himself alone, without board approval. All
of the members of the board knew about this practice and have entrusted fully such decisions with Kalaw. He was never questioned
nor reprimanded nor prevented from this practice. In fact, the board itself, through its acts and by acquiescence, have laid aside the
by-law requirement of prior board approval. Thus, it cannot now declare that these contracts (failures) are not binding on NACOCO.
ZAMBOANGA TRANSPO V. BACHRACH MOTORS (52 Phil. 244; 1928)
A chattel mortgage, although not approved by the board of directors as stipulated in the by-laws, shall still be valid and binding
when the corporation, through the board, tacitly approved and ratified it. The following acts of the board constitute implied
ratification:
1. Erquiaga is one of the largest stockholder, and was the all-in-one officer (he was the President, GM, Attorney, Auditor, etc.)
2. Two other directors approved his actions and expressed satisfaction with the advantages obtained by him in securing the chattel
mortgage.
3. The corporation took advantage of the benefits of the chattel mortgage. There were even partial payments made with the
knowledge of the three directors.
ACUNA V. BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION (20 SCRA 526; 1967)
Acuna entered into an agreement with Verano, manager of PROCOMA, in which the former would be constituted as the latter's
agent in Manila. Acuna diligently went about his business and even used personal funds for the benefit of the corporation. During the
face-to-face meeting with the board, Acuna was assured that there need not be any board approval for his constitution as agent for it
would only be a mere formality. Later on, the board disapproved the agency and did not pay him. The SC ruled that the agreement
was valid due to the ratification of the corp. proven by these acts:
1. He was assured by the board that no board approval was necessary.
2. He delivered P 20,000, performed his work with the knowledge of the board.
3. Due to acquiescence, the board cannot disown or disapprove the contract.
Board Committees
The By-laws of the corporation may create an executive committee, composed of not less than 3 members of the Board,
to be appointed by the Board. The executive 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 either (1) the By-laws, or (2) on a majority vote of the board.
However, the following acts may never be delegated to an executive committee:
(1)
(2)
(3)
(4)
HAYES V. CANADA, ATLANTIC AND PLANT S.S CO., LTD. (181 F. 289; 1910)
In this case, the Executive Committee:
a)
b)
c)
d)
Stockholders or Members
In the following basic changes in the corporation, although action is usually initiated by the board of directors or trustees, their decision is
not final, and approval of the stockholders or members would be necessary:
(1)
(2)
(3)
(4)
(5)
BOARD OF DIRECTORS AND ELECTION COMMITTEE OF SMB VS. TAN (105 Phil. 426; 1959)
Meeting was invalid for lack of notice. By-laws provide for a 5-day notice before meeting. March 26 posting not enough for
March 28 election.
Section 21 of the Corporation Law provides that a corporation may prescribe in its by-laws the qualifications, duties, and
compensation of its directors.
A stockholder has no vested right to be elected director for he impliedly contracts that the will of the majority shall govern.
Amended by-laws are valid for the corporation has its inherent right to protect itself.
VOTING
Pooling agreement
- Pooling agreements refer to agreements between 2 or more SHs to vote their shares the same way. They are different from
voting trust agreements in that they do not involve a transfer of stocks but are merely private agreements between 2 or more
SHs to vote in the same way.
- Sec. 100, par. 2 of the Corporation Code provides for pooling and voting agreements in close corporations. Although there
is no equivalent provision for widely-held corporations, Justice and Prof. Campos are of the opinion that SHs of widely-held
corporations should not be precluded from entering into voting agreements if these are otherwise valid and are not intended to
commit any wrong or fraud on the other SHs that are not parties to the agreement.
Proxy Device
Sec 58. Proxies. Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies
shall be in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless
otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for
a period longer than five (5) years at any one time.
Character: agency relationship; revocable at will (by express revocation, by attending the meeting) and by death, except when
coupled with interest or is a security.
IN RE GIANT PORTLAND CEMENT CO. (21 A.2d 697; 1941)
Even if stocks are sold, the stockholder of record remains the owner of the stocks and has the voting right until the by-law
requiring recording of transfer in the transfer book is complied with. Thus, a proxy given by the stockholder of record even if he has
already sold the share/s of stock remains effective.
STATE EX REL EVERETT TRUST V PACIFIC WAXED PAPER, (159 A.L.R. 297; 1945)
The general rule is that a proxy is revocable even though by its express terms it is irrevocable. The exceptions are: (a) when
authority is coupled with interest; (b) where authority is given as part of a security and is necessary to effectuate such a security. It is
coupled with interest when there is interest in the share themselves (such as a right of first refusal in case of sale) and the rights
inherent in the shares (such as voting rights; capacity to obtain majority).
DUFFY V LOFT (17 Del. Ch. 376, 152 A. 849; 1930)
Where a stockholders meeting was validly convened, the proxies must be deemed present even if the proxies were not
presented, provided: (a) their existence is established; (b) the agents were so designated to attend and act in SHs behalf; (c) the agents
were present in the meeting.
Q: Is it valid for the corporation to pay the expenses for proxy solicitation?
A: In the case of Rosenfeld v. Fairchild Engine and Airplane Corp. (128 N.E. 2d 291; 1955), it was held that in a contest over
policy (as opposed to a purely personal power contest), corporate directors have the right to make reasonable and proper
expenditures, subject to the scrutiny of the courts when duly challenged, from the corporate treasury for the purpose of persuading
the SHs of the correctness of their position and soliciting their support for policies which the directors believe, in all good faith, are
in the best interests of the corporation. The SHs, moreover, have the right to reimburse successful contestants for the reasonable
and bona fide expenses incurred by them in any such policy contest, subject to like court scrutiny.
However, where it is established that such monies have been spent for personal power, individual gain or private advantage,
and not in the belief that such expenditures are in the best interest of the stockholders and the corporation, or where the fairness
and reasonableness of the amounts allegedly expended are duly and successfully challenged, the courts will not hesitate to
disallow them.
Voting Trust
A Voting Trust Agreement (VTA) is an agreement whereby the real ownership of the shares is separated from the voting rights, the usual
aim being to insure the retention of incumbent directors and remove from the stockholders the power to change the management for the duration
of the trust.
Advantages
Accumulates power. Small shareholders are given the chance to have a representation in the BOD or at least a spokesperson during
stockholders meetings.
Continuity of management.
More effective than proxies because it is irrevocable.
Ensures that the required number of stockholders is met thereby facilitating smooth corporate operations.
Disadvantages
Rights given up by the shareholder in a VTA in exchange for the fiduciary obligation of the trustee:
Voting rights
Proprietary rights/naked title/legal ownership
Incidental rights such as to attend meetings, to be elected, to receive dividends)
Want of consideration
Voting power not coupled with interest
Fraud
Illegal or improper purpose
What rights does a shareholder give up/ retain with a pooling agreement?
Shareholders retain their right to vote because the parties are not constituted as agents. However, the will of the parties may not
be carried out due to non-compliance with the pooling agreement.
Methods of Voting
1.
Straight voting:
2.
Cumulative voting:
(one candidate)
3.
Cumulative voting:
If A has 100 shares, there are 5 directors to be elected, and he only
(multiple candidates) wants to vote for two nominees, he can divide 500 votes between the
two, giving each one 250 votes.
2.
Baker & Carys formula (minimum no. of votes needed to elect multiple directors)
X= # of shares required
Y= # of shares represented at meeting
D= # of directors the minority wants to elect
D= total # of directors to be elected
X= Y x D + 1
D' + 1
NOTES
Levels playing field or at least ensures that the minority can elect at least one representative to the board of directors (BOD)
Cannot of itself give the minority control of corporate affairs, but may affect and limit the extent of the majoritys control
By-laws cannot provide against cumulative voting since this right is mandated by law in Section 24.
Common:
2.
Preferred:
share has preference over dividends and distribution of assets upon liquidation;
right to vote may be restricted (Sec. 6)
3.
Redeemable: share is purchased or taken up by the corporation upon the expiration of a fixed
period (Sec. 8); right to vote may be restricted (Sec. 6)
NOTES
Even though the right to vote of preferred and redeemable shares may be restricted, owners of these shares can still vote on certain
matter provided for in Sec. 6.
SEC requires that where no dividends are declared for three consecutive years, in spite of available profits, preferred stocks will be
given the right to vote until dividends are declared.
Provision granting right to vote to preferred stock previously prohibited from voting, constitutes diminution of the voting power of
common stock.
Provision in the articles of incorporation granting holders of preferred stock right to vote in case of default in payment of
dividends after July 1, 1951 was construed as denial by necessary implication of the right to vote even prior to July 1, 1951.
Most common restriction: granting first option to the other stockholders and/or the corporation to acquire the shares of a stockholder
who wishes to sell them.
This gives to the corporation and/or to its current management the power to prevent the transfer of shares to persons who they may
see as having interests adverse to theirs.
As long as the qualifications imposed are reasonable and not meant to unjustly or unfairly deprive the minority of their rightful
representation in the BOD, such provisions are within the power of the majority to provide in the by-laws.
According to Gokongwei vs. SEC, aside from prescribing qualifications, by-laws can also provide for the disqualification of anyone in
direct competition with the corporation.
Founders shares
See Sec. 7 for definition
Exception to the rule in sec. 6 that non-voting shares shall be limited to preferred and redeemable shares
If founders shares enjoy the right to vote, this privilege is limited to 5 years upon SECs approval, so as to prevent the perpetual
disqualification of other stockholders.
Contract to manage the day-to-day affairs of the corporation in accordance with the policies laid down by the board of the managed
corporation.
BOD can and usually delegate many of its functions but it cant abdicate its responsibility to act as a governing body by giving absolute
power to officers or others, by way of a management contract or otherwise. It must retain its control over such officers so that it may recall
the delegation of power whenever the interests of the corporation are seriously prejudiced thereby.
SHERMAN & ELLIS VS. INDIANA MUTUAL CASUALTY (41 F. 2d 588; 1930)
Although corporations may, for a limited period, delegate to a stranger certain duties usually performed by the officers, there
are duties, the performance of which may not be indefinitely delegated to outsiders.
UNUSUAL VOTING AND QUORUM REQUIREMENTS (Sec. 25, 97 [for close corporations])
In exchange for the numerical majority in the BOD, minority can ask for a stronger veto power in major corporate decisions.
A requirement that there shall be no election of directors at all unless every single vote be cast for the same nominees, is in direct
opposition to the statutory rule that the receipt of plurality of the votes entitles a nominee to election. (See Sec. 24)
Requiring unanimity before the BOD can take action on any corporate matter makes it impossible for the directors to act on any
matter at all. In all acts done by the corporation, the major number must bind the lesser, or else differences could never be
determined nor settled.
The State has decreed that every stock corporation must have a representative government, with voting conducted conformably to
the statutes, and the power of decision lodged in certain fractions, always more than half, of the stock. This whole concept is
destroyed when the stockholders, by agreement, by-law or certificates of corporation provides for unanimous action, giving the
minority an absolute, permanent and all-inclusive power of veto.
The requirement of unanimous vote to amend by-laws is valid. Once proper by-laws have been adopted, the matter of amending
them is no concern of the State.
Device
Favorable To:
Limitations
Cumulative voting
Classification of shares
Restriction on transfer of
shares
*applicable only to close
corporations
See Sec. 98
Prescribing qualifications
for directors; founders
shares
Qualifications must be
reasonable and do not deprive
minority of representation on the
board
Management contracts
the corporation
MEETINGS
Meetings of Directors / Trustees
KINDS:
SPECIAL:
NOTICE:
Must be sent at least 1 day prior to the scheduled meeting, unless otherwise provided by the by-laws.
Note:
WHERE:
QUORUM:
Generally, 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. (Sec. 25)
Exceptions:
(1) If the AOI or by-laws provide for a greater majority;
(2) If the meeting is for the election of officers, which requires the vote of a majority of all the
members of the Board
WHO PRESIDES:
KINDS:
Held annually on a date fixed in the by-laws. If no date is fixed, on any date in April of every year as
determined by the Board of Directors or trustees.
Notice: Written, and sent to all stockholders or members of record at least 2 weeks prior to the meeting, unless a
different period is required by the by-laws.
SPECIAL:
Notice: Written, and sent to all stockholders or members of record at least 1 week prior to the meeting, unless
otherwise provided in the by-laws.
Note:
WHERE:
In the city of municipality where the principal office of the corporation is located, and if practicable in the principal
office of the corporation. Metro Manila is considered a city or municipality. (Sec. 51)
QUORUM:
Generally, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock, or a
majority of the members.
Exception: If otherwise provided for in the Code or in the
by-laws.
WHO PRESIDES:
(2) All the stockholders or members of the corporation were present or duly represented at the meeting. (Sec.
51)
In addition to this general liability, the Corporation Code provides for specific rules to govern the following situations:
(1)
(2)
(3)
(4)
corporation and
to amount to a
WHAT FACTORS SHOULD BE CONSIDERED IN DETERMINING WHETHER REASONABLE DILIGENCE HAS BEEN
EXERCISED?
The nature of the business, as well as the particular circumstances of each case. The court should look at the facts as they
exist at the time of their occurrence, not aided or enlightened by those which subsequently took place. (Litwin v. Allen)
the duty to act for the corporation according to their best judgment, and in so doing, they cannot be controlled in the reasonable
exercise and performance of such duty. It is a well-known rule of law that questions of policy or of management are left solely to the
honest decision of officers and directors of a corporation, and the court is without authority to substitute its 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.
LITWIN (ROSEMARIN ET. AL., INTERVENORS) VS. ALLEN ET. AL.
(25 N.Y.S. 2d 667; 1940)
FACTS:
Alleghany Corp. bought terminals in Kansas City and St. Joseph. It needed to raise money to pay the balance of the
purchase price but could not directly borrow money due to a borrowing limitation in its charter. Thus, it sold Missouri Pacific bonds
to J.P. Morgan and Co. worth $IOM. J.P. Morgan, in turn, sold $3M worth of the bonds to Guaranty Trust Company. Under the
contract, the seller was given an option to repurchase at same price within six months.
HELD:
Option given to seller is invalid. It is against public policy for a bank to sell securities and buy them back at the same
price; similarly, it is against public policy for the bank to buy securities and give the seller the option to buy them back at the same
price because the bank incurs the entire risk of loss with no possibility of gain other than the interest derived from the securities during
the period that the bank holds them. Here, if the market price of the securities rise, the holder of the repurchase option would exercise
it to recover the securities at a lower price at which he sold them. If the market price falls, the seller holding the option would not
exercise it and the bank would sustain the loss.
Directors are not in a position of trustees of an express trust who, regardless of good faith, are personally liable. In this case,
the directors are liable for the transaction because the entire arrangement was improvident, risky, unusual and unnecessary so as to be
contrary to fundamental conceptions of prudent banking practice. Yet, the advice of counsel was not sought. Absent a showing of
exercise of good faith, the directors are thus liable.
WALKER VS. MAN, ET. AL. (253 N.Y.S. 458; 1931)
FACTS:
Frederick Southack and Alwyn Ball loaned Avram $20T evidenced by a promissory note executed by Avram and
endorsed by Lacey. The loan was not authorized by any meeting of the board of directors and was not for the benefit of the
corporation. The note was dishonored but defendant-directors did not protest the note for non-payment; thus, Lacey, the indorser who
was financially capable of meeting the obligation, was subsequently discharged.
HELD:
Directors are charged not with misfeasance, but with non-feasance, not only with doing wrongful acts and committing
waste, but with acquiescing and confirming the wrong doing of others, and with doing nothing to retrieve the waste. Directors have
the duty to attempt to prevent wrongdoing by their co-directors, and if wrong is committed, to rectify it. If the defendant knew that an
unauthorized loan was made and did not take steps to salvage the loan, he is chargeable with negligence and is accountable for his
conduct.
STEINBERG VS. VELASCO (52 Phil. 953; 1929)
FACTS:
The board of directors of Sibuguey Trading Company authorized the purchase of 330 shares of stock of the corporation
and declared payment of P3T as dividends to stockholders. The directors from whom 300 of the stocks were bought resigned before
the board approved the purchase and declared the dividends. At the time of purchase of stocks and declaration of dividends, the
corporation had accounts payable amounting to P9,241 and accounts receivable amounting to P12,512, but the receiver who made
diligent efforts to collect the amounts receivable was unable to do so.
It has been alleged that the payment of cash dividends to the stockholders was wrongfully done and in bad faith, and to the
injury and fraud of the creditors of the corporation. The directors are sought to be made personally liable in their capacity as directors.
HELD:
Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the BOD
will not use the assets of the corporation to buy its own stock, and will not declare dividends to stockholders when the corporation is
insolvent.
In this case, it was found that the corporation did not have an actual bona fide surplus from which dividends could be paid.
Moreover, the Court noted that the Board of Directors purchased the stock from the corporation and declared the dividends on the
stock at the same Board meeting, and that the directors were permitted to resign so that they could sell their stock to the corporation.
Given all of this, it was apparent that the directors did not act in good faith or were grossly ignorant of their duties. Either way, they
are liable for their actions which affected the financial condition of the corporation and prejudiced creditors.
BARNES V. ANDREWS (298 F. 614; 1924)
A complaint was filed against a corporate director for failing to give adequate attention (he relied solely on the Presidents
updates on the status of the corp) to the affairs of a corporation which suffered depletion of funds.
The director was not liable. The court said that despite being guilty of misprision in his office, still the plaintiff must clearly
show that the performance of the directors duties would have avoided the losses. When a business fails from general mismanagement,
business incapacity, or bad judgment, it is difficult to conjecture that a single director could turn the company around, or how much
dollars he could have saved had he acted properly.
FOSTER V. BOWEN (41 N.E. 2d 181; 1942)
Cushing, a director and in charge of leasing a roller skating rink of the corp, leased the same to himself. Minority stockholders
filed suit against Bowen, the corporation's President, to recover for company losses arising out of an alleged breach of fiduciary duty.
Bowen was held to be not liable because: (1) Cushing's acts were not actually dishonest or fraudulent; (2) Cushing performed
personal work such as keeping the facility in repair which redounded to the benefit of the company and even increased its income; (3)
Bowen did not profit personally through Cushing's lease; and (4) the issue of the possible illegality of the lease was put before the
Board of Directors, but the Board did not act on it but instead moved on to the next item on the agenda. Absent any bad faith on
Bowen's part, and a showing that it was a reasonable exercise of judgment to take no action on the lease agreement at the time it was
entered into, Bowen was not liable.
LOWELL HOIT & CO. V. DETIG (50 N.E. 2d 602; 1943)
Lowell Hoit filed action against directors of a cooperative grain company for an alleged willful conversion by the manager of
grain stored in the company facility. The court said that the directors were not personally liable. There was no evidence that the
directors had knowledge of the transaction between the manager and Lowell Hoit.
The court will treat directors with leniency with respect to a single act of fraud on the part of a subordinate officer/agent. But
directors could be held liable if the act of fraud was habitual and openly committed as to have been easily detected upon proper
supervision. To hold directors liable, he must have participated in the fraudulent act; or have been guilty of lack of ordinary and
reasonable supervision; or guilty of lack of ordinary care in the selection of the officer/agent.
BATES V. DRESSER (40 S.Ct.247; 1920)
Coleman, an employee of the bank, was able to divert bank finances for his benefit, resulting in huge losses to the bank. The
receiver sued the president and the other directors for the loss.
The court said that the directors were not answerable as they relied in good faith on the cashiers statement of assets and
liabilities found correct by the government examiner, and were also encouraged by the attitude of the president that all was well (the
president had a sizable deposit in the bank). But the president is liable. He was at the bank daily; had direct control of records; and had
knowledge of incidents that ordinarily would have induced scrutiny.
corporate managers, directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "is
not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs
and property and hence of the property interests of the stockholders." (Prime White Cement Corp. v. IAC, 220 SCRA 103; 1993)
Prime White Cement Corp. (through the President and Chairman of the Board) and Alejandro Te, a director and auditor of the
corporation, entered into a dealership agreement whereby Te was obligated to act as the corporation's exclusive dealer and/or
distributor of its cement products in the entire Mindanao area for 5 years. Among the conditions in the dealership agreement were that
the corporation would sell to and supply Te with 20,000 bags of white cement per month, and that Te would purchase the cement from
the corporation at a price of P 9.70 per bag.
Relying on the conditions contained in the dealership agreement, Te entered into written agreements with several hardware
stores which would enable him to sell his allocation of 20,000 bags per month. However, the Board of Directors subsequently
imposed new conditions, including the condition that only 8,000 bags of cement would be delivered per month. Te made several
demands on the corporation to comply with the dealership agreement. However, when the corporation refused to comply with the
same, Te was constrained to cancel his agreements with the hardware stores. Notwithstanding the dealership agreement with Te, the
corporation entered into an exclusive dealership agreement with a certain Napoleon Co for marketing of corporation's products in
Mindanao. The lower court held that Prime White was liable to Te for actual and moral damages for having been in breach of the
agreement which had been validly entered into.
On appeal, the Supreme Court held that the dealership agreement is not valid and enforceable, for not having been fair and
reasonable: the agreement protected Te from any market increases in the price of cement, to the prejudice of the corporation. The
dealership agreement was an attempt on the part of Te to enrich himself at the expense of the corporation. Absent any showing that
the stockholders had ratified the dealership agreement or that they were fully aware of its provisions, the contract was not valid and Te
could not be allowed to reap the fruits of his disloyalty.
the stockholders
MAJORITY RULE:
NO. Directors and officers owe no fiduciary duty at
all to
stockholders, but may deal with them at arms
length. No duty of disclosure of facts known
to
the
director
or
constitute constructive fraud.
officer
exists.
Nondisclosure
cannot
Directorship in 2 competing corporations does not in and of itself constitute a wrong. It is only when a business opportunity
arises which places the director in a position of serving two masters, and when, dominated by one, he neglects his duty to the other,
that a wrong has been done.
IRVING TRUST CO. VS. DEUTSCH (79 L. Ed. 1243; 1935)
Fiduciary duty applies even if the corporation is unable to enter into transactions itself.
LITWIN V ALLEN (25 N.Y.S. 2d 667; 1940)
In this case, it was held that the common stock purchased by the defendants wasnt a business opportunity for the corporation.
Having fulfilled their duty to the corporation in accordance with their best judgment, the defendant directors were not precluded from
a transaction for their own account and risk.
Interlocking directors
WHAT IS AN INTERLOCKING DIRECTOR?
An interlocking director is one who occupies a position in 2 companies dealing with each other.
WHAT IS THE RULE ON CONTRACTS INVOLVING INTERLOCKING DIRECTORS?
Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between 2
or more corporations having interlocking directors shall not be invalidated on that ground alone. This practice is tolerated by the
Courts because such an arrangement oftentimes presents definite advantages to the corporations involved.
However, if the interest of the interlocking director in one corporation is substantial ( i.e., stockholdings exceed20% of the
OCS) and his interest in the other corporation or corporations is merely nominal, he shall be subject to the conditions stated in
Sec. 32, i.e., for the contract not to be voidable, the following conditions must be present:
(1) The presence of the self-dealing director or trustee in the board meeting for which the contract was approved
was not necessary to constitute a quorum for such meeting;
(2) The vote of such self-dealing director or trustee was not necessary for the approval of the contract;
(3) The contract is fair and reasonable under the circumstances;
(4) In the case of an officer, the contract has been previously authorized by the Board of Directors.
In the event that either of or both conditions (1) and (2) are absent ( i.e., the presence of the director/trustee was
necessary for a quorum and/or his vote was necessary for the approval of the contract), the contract may be ratified by a 2/3 vote
of the OCS or all of the members, in a meeting called for the purpose. Full disclosure of the adverse interest of the directors or
trustees involved must be made at such meeting.
Note: The Investment House Law prohibits a director or officer of an investment house to be concurrently a director or
officer of a bank, except as otherwise authorized by the Monetary Board. In no event can a person be authorized to be
concurrently an officer of an investment house and of a bank except where the majority or all of the equity of the former is
owned by the bank. (P.D. 129, Sec. 6, as amended)
The Insurance Code likewise prohibits a person from being a director and/or officer of an insurance company and
an adjustment company. (Sec. 187)
GLOBE WOOLEN CO. V. UTICA GAS & ELECTRIC (121 N.E. 378; 1918)
Maynard, president and chief stockholder of Globe but nominal SH in Utica Gas, obtained a cheap, 10-year contract for Utica
to supply power. Maynard did not vote during the meeting for the approval of the contract.
Can Globe seek to enforce contract? The Supreme Court held that Globe could not enforce the contract and that said contract
was voidable at the election of Utica. It was found that based on the facts of the case, the contract was clearly one-sided. Maynard,
although he did not vote, exerted a dominating influence to obtain the contract from beginning to end.
The director-trustee has a constant duty not to seek harsh advantage in violation of his trust.
Directors as such are not entitled to compensation for performing services ordinarily attached to
their office.
(1) If the articles of incorporation or the by-laws expressly
(2) If a contract is expressly made in advance.
so provide;
GOV'T OF THE PHILIPPINES VS. EL HOGAR FILIPINO (50 Phil. 399; 1927)
The compensation provided in sec. 92 of the by-laws of El Hogar Filipino which stipulated that 5% of the net profit shown by
the annual balance sheet shall be distributed to the directors in proportion to the attendance at board meetings is valid. The
Corporation Law does not prescribe the rate of compensation for the directors of a corporation. The power to fix it , if any is left to the
corporation to be determined in its by-laws. In the case at bar, the provision in question even resulted in extraordinarily good
attendance.
BARRETO VS. LA PREVISORA FILIPINA
This action was brought by the directors of defendant corporation to recover 1% from each of the plaintiffs of the profits of the
corporation for 1929 pursuant to a by-law provision which grants the directors the right to receive a life gratuity or pension in such
amount for the corporation.
The SC held that the by-law provision is not valid. Such provision is ultra vires for a mutual loan and building association to
make. It is not merely a provision for the compensation of directors. The authority conferred upon corporations refers only to
providing compensation for the future services of directors, officers, and employees after the adoption of the by-law in relation
thereto. The by-law can't be held to authorize the giving of continuous compensation to particular directors after their employment has
terminated for past services rendered gratuitously by them to the corporation.
CENTRAL COOPERATIVE EXCHANGE INC VS. TIBE (33 SCRA 596; 1970)
The questioned resolutions which appropriated the funds of the corporation for different expenses of the directors are contrary
to the by-laws of the corporation; thus they are not within the board's power to enact. Sec. 8 of the by-laws explicitly reserved to the
stockholders the power to determine the compensation of members of the board and they did restrict such compensation to actual
transportation expenses plus an additional P30 per diems and actual expenses while waiting. Hence, all other expenses are excluded.
Even without the express reservation, directors presumptively serve without pay and in the absence of any agreement in relation
thereto, no claim can be asserted therefore.
FOGELSON VS. AMERICAN WOOLEN CO. (170 F. 2d. 660; 1948)
A retirement plan which provides a very large pension to an officer who has served to within one year of the retirement age
without any expectation of receiving a pension would seem analogous to a gift or bonus. The size of such bonus may raise a justifiable
inquiry as to whether it amounts to wasting of the corporate property. The disparity also between the president's pension plan and that
of even the nearest of the other officers and employees may also be inquired upon by the courts.
KERBS VS. CALIFORNIA EASTERN AIRWAYS (90 A. 2d 652; 1952)
This is an appeal filed to enjoin the California Eastern Airways from putting into effect a stock option plan and a profit-sharing
plan. The SC held that the stock option plan was deficient as it was not reasonably created to insure that the corporation would receive
contemplated benefits. A validity of a stock option plan depends upon the existence of consideration and the inclusion of
circumstances which may insure that the consideration would pass to the corporation. The options provided may be exercised in
toto immediately upon their issuance within a 6 month period after the termination of employment. In short, such plan did not insure
that any optionee would remain with the corporation.
With regard to the profit-sharing plan, it was held valid because it was reasonable and was ratified by the stockholders pending
the action.
Close Corporations
Sec. 97 provides that the AOI of a close corp. may specify that it shall be managed by the stockholders rather than the BoD. So long as
this provision continues in effect:
Generally, stockholders deemed to be directors for purposes of this Code, unless the context clearly requires otherwise;
Stockholders shall be subject to all liabilities of directors. The AOI may likewise provide that all officers or employees or that specified
officers or employees shall be elected or appointed by the stockholders instead of by the BoD.
Further, Sec. 100 provides that for stockholders managing corp. affairs:
They shall be personally liable for corporate torts (unlike ordinary directors liable only upon finding of negligence)
If however there is reasonable adequate liability insurance, injured party has no right of action v. stockholders-managers
A SH/director is still entitled to vote in a stockholders meeting even if his interest is adverse to a corporation. But a stockholder able to
control a corp. is still subject to the duty of good faith to the corp. and the minority.
Persons with management control of corporation hold it in behalf of SHs and can not regard such as their own personal property to
dispose at their whim.
The ff. acts are legal:
Transfer of managerial control through BoD resignation & seriatim election of successors if concomitant with the sale and actual
transfer of majority interest or that which constitutes voting control;
Disposal by controlling SH of his stock at any time & at such price he chooses
Selling corp. office or management control by itself, that is NOT accompanied by stocks or stocks are insufficient to carry voting
control;
Transferring office to persons who are known or should be known as intending to raid the corporate treasury or otherwise improperly
benefit themselves at the expense of the corp. (Insuranshares Corp. V. Northern Fiscal);
Receiving a bonus or premium specifically in consideration of their agreement to resign & install the nominees of the purchaser of
their stock, above and beyond the price premium normally attributable to the control stock being sold;
Duty to Creditors
General rule: Corporate creditors can run after the corp. itself only, and not the directors for mismanagement of a solvent corp.
If corp. becomes insolvent, directors are deemed trustees of the creditors and should therefore manage its assets with due consideration
to the creditors interest.
If directors are also creditors themselves, they are prohibited from gaining undue advantage over other creditors.
In what instances does personal liability of a corporate director, trustee or officer validly attach together with corporate
liability?
When the director / trustee / officer:
I.
II.
Consents to the issuance of watered stocks, or who, having knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;
III.
IV.
Agrees to hold himself personally and solidarily liable with the corporation;
Is made, by a specific provision of law, to personally answer for his corporate action.
(Tramat Mercantile v. CA, 238 SCRA 14)
Installments paid and unpaid on all stock for which subscription has been made, and the date of any installment;
A statement of every alienation, sale or transfer of stock made, the date thereof, and by whom and to whom made;
The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent, and
shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days.
WHAT IS A STOCK TRANSFER AGENT? (Sec. 75)
A stock transfer agent is one who is engaged principally in the business of registering transfers of stocks in behalf of a
stock corporation. He or she must be licensed by the SEC; however, a stock corporation is not precluded from performing or
making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the
payment of a license fee, shall be applicable.
Ordinary stockholders, the beneficial owners of the corporation, usually have no say on how business affairs of the corp. are run by
the directors. The law therefore gives them the right to know not only the financial health of the corp. but also how its affairs are managed so that if
they find it unsatisfactory, they can seek the proper remedy to protect their investment.
WHAT IS THE NATURE OF THE RIGHT TO INSPECT?
PREVENTIVE :
REMEDIAL:
A dissatisfied SH may avail of this right as a preliminary step towards seeking more direct and
appropriate remedies against
mismanagement.
2.
By-laws
These are expressly required to be open to inspection by SH/members during office hours (Sec. 46). Note: There is no similar
provision as to AOI, but these are filed with the SEC anyway.
3.
This is to inform stockholders of Board policies. Such right arises only upon approval of the minutes, however.
4.
5.
6.
1.
The exercise of this right is subject to reasonable limitations similar to a citizens exercise of the right to information. Otherwise, the corp.
might be impaired, its efficiency in operations hindered, to the prejudice of SHs.
2.
Such limitations to be valid must be reasonable and not inconsistent with law ( Sec. 36[5] and 46).
3.
A corp. may regulate time and manner of inspection but provisions in its by-law which gives directors absolute discretion to allow or
disallow inspection are prohibited.
Limitations as to time and place:
Such business days should be THROUGHOUT THE YEAR. BoD cannot limit such to merely a few days within the year.
(Pardo v. Hercules Lumber)
4.
5.
Inspection should be made in such a manner as not to impede the efficient operations
6.
Place of inspection: Principal office of the corp. SH cannot demand that such records be taken out of the principal office.
7.
As to purpose:
PRESUMPTION: that SHs purpose is proper. Corp. cannot refuse on the mere belief that his motive is improper (sec 74).
BURDEN OF PROOF: lies with corp. which should show that purpose was illegal.
To be legitimate, the purpose for inspection must be GERMANE to the INTEREST of the stockholder as such, and it is not
contrary to the interests of the corporation.
Legitimate:
Not legitimate:
Belief in good faith that a corp. is being mismanaged may be given due course even if later, this is proven unfounded.
Every director, trustee, stockholder, member may exercise right personally or through an agent who can better understand and
interpret records (impartial source, expert accountant, lawyer).
As to VTA: both voting trustee and transferor
SH of parent corp. over subsidiary:
If the two are operated as SEPARATE entities
: NO right of inspection
(3) Action for damages against the officer or agent refusing inspection. Also, penal
sanctions such as fines and / or imprisonment (Sec. 74; Sec. 144)
What defenses are available to the officer or agent?
(1)
(2)
(3)
The person demanding has improperly used any information secured through any prior examination; or
Was not acting in good faith; or
The demand was not for a legitimate purpose.
Considering that the foreign subsidiary is wholly owned by SMC and therefore under its control, it would be more in accord
with equity, good faith and fair dealing to construe the statutory right of Gokongwei as petitioner as SH to inspect the books and
records of such wholly subsidiary which are in SMCs possession and control.
DERIVATIVE SUITS
Nature and Basis of derivative suit
Suits of stockholders/ members based on wrongful or fraudulent acts of directors or other persons:
a.
Individual suits - wrong done to stockholder personally and not to other stockholders
(ex. When right of inspection is denied to a stockholder)
b.
c.
But since the directors who are charged with mismanagement are also the ones who will decide WON the corp. will
sue, the corp. may be left without redress; thus, the stockholder is given the right to sue on behalf of the corporation.
An individual stockholder is permitted to bring a derivative suit to protect or vindicate corporate rights, whenever the
officials of the corp. refuse to sue or are the ones to be sued or hold the control of the corp.
Suing stockholder is merely the nominal party and the corp. is actually the party in interest.
A SH can only bring suit for an act that took place when he was a stockholder; not before. (Bitong v. CA, 292 SCRA
503)
Stockholder/ member must have exhausted all remedies within the corp.
2)
Stockholder/ member must be a stockholder/ member at the time of acts or transactions complained of or in case of a
stockholder, the shares must have devolved upon him since by operation of law, unless such transaction or act continues
and is injurious to the stockholder.
3)
Any benefit recovered by the stockholder as a result of bringing derivative suit must be accounted for to the corp. who is
the real party in interest.
4)
If suit is successful, plaintiff entitled to reimbursement from corp. for reasonable expenses including attorneys' fees.
Should the corporation be made a party? The English practice is to make the corp. a party plaintiff while the US practice is to
make it a party defendant. What is important though is that the corporation should be made a party in order to make the court's ruling
binding upon it and thus bar any future re-litigation of the issues. Misjoinder of parties is not a ground to dismiss the action.
REYES VS. TAN (3 SCRA 198; 1961)
The importation of textiles instead of raw materials, as well as the failure of the board of directors to take actions against those
directly responsible for the misuse of the dollar allocations constitute fraud, or consent thereto on the part of the directors. Therefore,
a breach of trust was committed which justified the suit by a minority stockholder of the corporation.
The claim that plaintiff Justiniani did not take steps to remedy the illegal importation for a period of two years is also without
merit. During that period of time plaintiff had the right to assume and expect that the directors would remedy the anomalous situation
of the corporation brought about by their wrong-doing. Only after such period of time had elapsed could plaintiff conclude that the
directors were remiss in their duty to protect the corporation property and business.
BITONG v. CA (292 SCRA 503)
The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the Board of Directors that
exercises its corporate powers and not in the president or officer thereof.
It was JAKA's Board of Directors, not Senator Enrile, which had the power to grant Bitong authority to institute a
derivative suit for and in its behalf.
The basis of a stockholder's suit is always one in equity. However, it cannot prosper without first complying with the legal
requisites for its institution. The most important of these is the bona fideownership by a stockholder of a stock in his own
right at the time of the transaction complained of which invests him with standing to institute a derivative action for the
benefit of the corporation.
Capital Structure
WHAT IS MEANT BY CAPITAL STRUCTURE?
This refers to the aggregate of the securities -- instruments which represent relatively long-term investment -- issued by the
corporation. There are basically 2 kinds of securities: shares of stock and debt securities.
DEFINITION
CAPITAL STOCK
CAPITAL
CONSTANCY
business.
FLUCTUATING
PREFERRED
PAR
NO PAR*
DEFINITION
VALUE
VOTING RIGHTS
Depends if its
common or
preferred.
PREFERENCE
UPON LIQUIDATION
No advantage, priority,
or preference over any
TREASURY
REDEEMABLE
Sp
wh
rig
are
the
assets
NOTE: Only preferred and redeemable shares may be deprived of the right to vote. (Sec. 6, Corporation Code)
EXCEPTION: As otherwise provided in the Corporation Code.
* No-par value shares may not be issued by the following entities: banks, trust companies, insurance companies, public utilities, building & loan association (Sec.
6)
Subscriptions constitute a fund to which the creditors have a right to look for satisfaction of their claims.
The assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the
payment of its debts.
A subscription contract subsists as a liability from the time that the subscription is made until such time that the
subscription is fully paid.
A share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness and therefore, it is
not a credit. Stockholders as such are not creditors of the corporation.
The capital stock of a corporation is a trust fund to be used more particularly for the security of the creditors of the corporation
who presumably deal with it on the credit of its capital.
Pre-incorporation subscription
RULE: When a group of persons sign a subscription contract, they are deemed not only to make a continuing offer to the corporation, but also to
have contracted with each other as well. Thus, no one may revoke the contract even prior to incorporation without the consent of all
the
others.
WHEN IS A PRE-INCORPORATION SUBSCRIPTION IRREVOCABLE?
1)
revocation; or
UTAH HOTEL CO V. MADSEN (43 Utah 285, 134 Pac. 557; 1913)
Sec 332 in express terms confers powers upon the stockholders to regulate the mode of making subscriptions to its capital
stock and calling in the same by-laws or by express contract.
Since it may be done by express contract, this shows that it was intended that a contract to that effect may be entered into even before
the corporation is organized, and the contract agreement is enforced if the corporation is in fact organized.
Post-incorporation subscription
NOTE:
3)
cash;
activities.
Note: In Nos. (2) and (3), such acts require approval of 2/3 of the OCS or
2/3 of total members.
In Close Corporations
corporate
In close corporations, the preemptive rights extends to ALL stock to be issued, including re-issuance of treasury shares, EXCEPT if
provided otherwise by the AOI. (Sec. 102). Note that the limitations in Sec. 39 do not apply.
Injunction;
Mandamus;
Cancellation of the shares (NOTE: but only if no innocent 3rd parties are
In certain cases, a derivative suit
prejudiced)
The doctrine of preemptive right is not affected by the identity of the purchasers. What it is concerned with is who did not get
it. But when officers and directors sell to themselves and thereby gain an advantage, both in value and in voting power, another
situation arises. In the case at bar, the directors were not able to prove good faith in the purchase and equity of transaction, since the
corp. was a financial success. There was constructive fraud upon the other SHs.
Debt Securities
Borrowings
Borrowings are usually represented by promissory notes, bonds or debentures.
Oftentimes, a financial institution will be willing to lend large amounts to private corporations only on the condition that
such institution will have some representation on the Board of Directors. The role of such representative is to see to it that his
institution's investment is protected from mismanagement or unfavorable corporate policies.
Of course it goes without saying that the corporation must set aside enough of the junior securities in case the
holders of the option decide to exercise such option.
MERRITT-CHAPMAN & SCOTT CORP. VS. NEW YORK TRUST CO. (184 F. 2d 954; 1950)
If the corporation is allowed to declare stock dividends without taking account of the warrant holders (who have not yet
exercised their warrant), the percentage of interest in the common stock capital of the corporation which the warrant holders would
acquire, should they choose to do so, could be substantially reduced/diluted. Thus, the corporation is wrong in contending that a
warrant holder must first exercise his warrant before they may be issued stock dividend.
Hybrid securities
Because preferred shares and bonds are created by contract, it is possible to create stock which approximates the characteristics of debt
securities. Hybrid securities, as the name implies, therefore combine the features of preferred shares and bonds.
Determining the true nature of the security is crucial for tax purposes. The American courts use the following criteria:
(1) Is the corporation liable to pay back the investor at a fixed maturity date?
(2) Is interest payable unconditionally at definite intervals, or is it dependent on earnings?
(3) Does the security rank at least equally with the claims of other creditors, or is it subordinate to them?
WHAT IS THE NATURE OF THE SECURITY AND THE PAYMENT MADE?
BONDS
STOCK
WHAT IS PAID?
Interest
Dividends
TO WHOM PAID?
Creditor-investor
Stockholder
WHEN PAID?
NATURE
Expense
Not an expense
TAXABILITY
CANNOT be deducted
purposes
MATURITY DATE?
Yes
No
RANK ON
DISSOLUTION
Superior to stockholders,
inferior to corporate
creditors
JOHN KELLY VS. CIR TALBOT MILLS VS. CIR (326 U.S. 521; 1946)
In the Kelly case, the annual payments made were interest on indebtedness (therefore, a bond is held) because there were sales
of the debentures as well as exchanges of preferred stock for debentures, a promise to pay a certain annual amount if earned, a priority
for the debentures over common stock and a definite maturity date in the reasonable future.
In the Talbot Mills case, the annual payments made were dividends and not interest (therefore, shares are held), because of the
presence of fluctuating annual payments with a 2% minimum, and the limitation of the issue of notes to stockholders in exchange only
for stock. Besides, it is the Tax Court which has final determination of all tax issues which are not clearly delineated by law.
(1) debtor-corporation
(2) creditor-bondholder
(3) trustee: representative of all the bondholders
cash;
property actually received by the corporation: must be necessary or convenient for its use and lawful purposes;
labor performed for or services actually rendered to the corporation
(NOTE: Future services are NOT acceptable!);
previously incurred indebtedness by the corporation;
amounts transferred from unrestricted retained earnings to stated capital;
outstanding shares exchange for stocks in the event of reclassification or conversion
future services
promissory notes
value less than the stated par value
Watered Stocks
(2)
Upon payment of less than its par value in money or for cost at a discount;
(3)
Upon payment with property, labor or services, whose value is less than the par value of the shares; and
(4)
In the guise of stock dividends representing surplus profits or an increase in the value of property, when there are no
sufficient profits or sufficient increases in value to justify it.
PRIVATE TRIPLEX SHOE V. RICE & HUTCHINSTC \L 1 "TRIPLEX SHOE V. RICE & HUTCHINS" (72
A.L.R. 932; 1930)
In this case, the stocks issued to the Dillman faction were no par value shares, the consideration for which were never fixed as
required by law. Hence, their issuance was void. Moreover, the stocks were issued to the Dillmans for services rendered and to be
rendered. Future services are not lawful consideration for the issuance of stock.
Holders of watered stock are generally held liable to the corporations creditors for the difference between the par value of the
stock and the amount paid in.
Under the misrepresentation theory, the creditors who rely on the misrepresentation of the corporations capital stock are entitled to
recover the water from holders of the watered stock. Reliance of creditors on the misrepresentation is material.
However, under
the statutory obligation theory, reliance of creditors on the capital stock of the corporation is irrelevant. (It must be noted that here in the
Philippines, it is the statutory obligation theory which is prevailing.)
Issuance of Certificate
Certificate of stock
CONDITION FOR ISSUANCE:
BEARS:
AMOUNT ISSUED:
1. kind of shares
2. date of issuance
3. par value, if par value shares
Signatures of the proper officers, usually president
or secretary, as well as the corporate seal
For no more than the number of shares authorized in
articles of incorporation; excess would be void
A certificate of stock is not necessary to render one a stockholder in a corporation. Nevertheless, a certificate of stock is
the paper representation or tangible evidence of the stock itself and of the various interests therein. The certificate is not stock in
the corporation but is merely evidence of the holder's interest and status in the corporation, his ownership of the shares
represented thereby, but is not in law the equivalent of such ownership. It expresses the contract between the corporation and the
SH, but it is not essential to the existence of a share in stock or the creation of the relation of shareholder to the corporation. (Tan
v. SEC, 206 SCRA 740)
Unpaid Subscriptions
Unpaid subscriptions are not due and payable until a call is made by the corporation for payment. (Sec. 67)
An obligation arising from non-payment of stock subscriptions to a corporation cannot be offset against a money claim of an
employee against the employer. (Apodaca v. NLRC, 172 SCRA 442)
Interest on all unpaid subscriptions shall be at the rate of interest fixed in the by-laws. If there is none, it shall be the legal
rate. (Sec. 66)
It was held that the Board call became immaterial in insolvency which automatically causes all unpaid subscriptions to become
due and demandable.
The Court held that the subscription contract was void since it works a fraud on creditors who rely on the theoretical capital of
the company (subscribed shares). Under the contract, this theoretical value will never be realized since if there are no dividends,
stockholders will not be compelled to pay the balance of their subscriptions.
The Court held that payment of half the subscription price does not make the holder of stock the owner of half the subscribed
shares. Plaintiff's rights consist in an equity in 500 shares and upon payment of the unpaid portion of the subscription price he
becomes entitled to the issuance of certificate for the said 500 shares in his favor.
Effect of delinquency
Stock that remains unpaid 30 days after the date specified in the subscription contract or the date stated in the call made
by the Board.
WHAT ARE THE EFFECTS OF DELINQUENCY?
1.
The holder thereof loses all his rights as a stockholder except only the rights to dividends;
2.
Dividends will not be paid to the stockholder but will be applied to the unpaid balance of his subscription plus costs
and expenses. Also, stock dividends will be withheld until full payment is made.
3.
Such stockholder cannot vote at the election of directors or at any meeting on any matter proper for stockholder
action.
4.
5.
WHAT IS THE PROCEDURE FOR THE CONDUCT OF A DELINQUENCY SALE? (Sec. 68)
(1) Issuance of Board resolution
The BOD issues a resolution ordering the sale of delinquent stock, specifically stating the amount due on each
subscription plus all accrued interest, and the date, time and place of the sale.
Note: The sale shall not be less than 30 days nor more than 60 days from the date the stocks become
delinquent.
(2) Notice of sale and publication
Notice of the date of delinquency sale and a copy of the resolution is sent to every delinquent stockholder either
personally or by registered mail. The notice is likewise published once a week for 2 consecutive weeks in a
newspaper of general circulation in the province or city where the principal office of the corporation is located.
(3) Sale at public auction
If the delinquent stockholder fails to pay the corporation on or before the date specified for the delinquency sale, the
delinquent stock is sold at public auction to such bidder who shall offer to pay the full amount of the balance on the
subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of
shares or fraction of a share.
(4) Transfer and issuance of certificate of stock
The stock so purchased is transferred to such purchaser in the books of the corporation and a certificate of stock
covering such shares is issued.
If there is no bidder at the public auction who offers to pay the full amount of the balance on the subscription and its
attendant costs, the corporation may bid for the shares, and the total amount due shall be credited as paid in full in the
books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as
treasury shares and may be disposed of by said corporation in accordance with the Code.
Note that this is subject to the restrictions imposed by the Code on corporations as regards the acquisition of their
own shares. (See the discussion under Dividends and Purchase by Corporation of its Own Shares.)
CAN A DELINQUENCY SALE BE QUESTIONED? (Sec. 69)
Yes. This is done by filing a complaint within 6 months from the date of sale, and paying or tendering to the party holding
the stock the sum for which said stock was sold, with interest at the legal rate from the date of sale. No action to recover
delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the
delinquent stock unless these requirements are complied with.
WHAT IS THE PROCEDURE FOR THE ISSUANCE OF NEW CERTIFICATES TO REPLACE THOSE STOLEN, LOST OR
DESTROYED? (Sec. 73)
(1) File an affidavit in triplicate with the corporation. The affidavit must state the following:
(a) Circumstances as to how the certificates were SLD;
(b) Number of shares represented; and
(c) Serial number of the certificate
(d) Name of issuing corporation
(2) The corporation will publish notice after the affidavit and other information and evidence have been verified with the books
of the corporation, (Note however that this is not mandatory. The corporation has the discretion to decide whether to publish
or not.)
The notice will contain the following information:
(a)
(b)
(c)
(d)
(e)
(3) SLD certificate is removed from the books if after one year from date of last publication, no contest is presented.
NOTE: One-year period will not be required if the applicant files a bond good for
1 year.
(4) The corporation will then issue new certificates.
However, if a contest has been presented to the corporation, or if an action is pending court regarding the ownership of the
SLD certificate, the issuance of the new certificate shall be suspended until the final decision by the court.
NOTE: Should corporation issue new certificates without the conditions being fulfilled and a third party proves that he is
the rightful owner of the shares, the corporation may be held liable to the latter EVEN IF it acted in good faith.
NOTE: Even if the above procedure was followed, if there was fraud, bad faith, or negligence on the part of the
corporation and its officers, the corporation may be held liable.
TRANSFER OF SHARES
HOW ARE SHARES OF STOCK TRANSFERRED?
By delivery of the certificate/s indorsed by the owner or his attorney-in-fact or other person legally authorized to make the
transfer. (Sec. 63)
WHAT ARE THE REQUISITES FOR A VALID TRANSFER?
(1) Delivery;
(2) Indorsement by the owner or his attorney-in-fact or other persons legally authorized to make the transfer
Indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a
certificate of stock. (Razon v. CA, 207 SCRA 234)
(3) Recording of the transfer in the books of the corporation (so as to make the transfer valid as against third parties)
Until registration is accomplished, the transfer, though valid between the parties, cannot be effective as
against the corporation. Thus, the unrecorded transferee cannot enjoy the status of a SH: he cannot vote nor be
voted for, and he will not be entitled to dividends.
company when the attachment was levied on 18 January 1932. The sheriff sold said shares at a public auction with Uson being the
highest bidder. Jollye claims to be the owner of said certificate of sock issued to him by the co. on 13 February 1933.
There is no dispute that Diosomito was the original owner of said shares, which he sold to Barcelon. However, Barcelon did
not present these certificates to the corporation for registration until 19 months after the delivery thereof by Barcelon, and 9 months
after the attachment and levy on said shares. The transfer to Jollye was made 5 months after the issuance of a certificate of stock in
Barcelon's name.
Is a bona fide transfer of the shares of corp., not registered or noted on the books of the corp., valid as against a subsequent lawful
attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not.
NO, it is not valid. The transfer of the 75 shares in the North Electric Co., Inc made by the defendant Diosomito as to the
defendant Barcelon was not valid as to the plaintiff. Toribia Uson, on 18 Jan. 1932, the date on which she obtained her attachment lien
on said shares of stock which still stood in the name of Diosomito on the books of the corp. Sec. 35 says that No transfer, however, is
valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names
of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred.
All transfers of shares not so entered are invalid as to attaching or execution creditors of the assignors, as well as to the
corporation and to subsequent purchasers in good faith, and indeed, as to all persons interested, except the parties to such transfers.
In close corporations, restrictions may be placed on the transfer of shares. Such restrictions must appear in the
AOI and in the by-laws, as well as in the certificate of stock. Otherwise, the restriction shall not be binding on any
purchaser thereof in good faith.
The restrictions imposed shall be no more onerous than granting the existing stockholders or the corporation the
option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period
stated therein. If this option is not exercised upon the expiration of the period, the transferring stockholder may
sell his shares to any third person. (Sec. 98)
UNAUTHORIZED TRANSFERS
the conveyance is for purposes other than transfer
that relying on the stock certificate, the purchaser believes the possessor to be the owner thereof or has authority to
transfer the same.
This proceeds from the theory of quasi-negotiability which provides that in endorsing a certificate in blank, the real owner clothes
the possessor with apparent authority, thus, estopping him later from asserting his rights over the shares of stock against a bona
fide purchaser.
Quasi-negotiability does not apply in cases where the real owner:
a.
b.
Forged Transfers
A corporation does not incur any misrepresentation in the issuance of a certificate made pursuant to a forged transfer. It
can always recall from the person the certificate issued, for cancellation.
In case where the certificate so issued comes into the hands of a bona fide purchaser for value from the original
purchaser, the corporation is estopped from denying its liability. It must recognize both the original and the new certificate. But if
recognition results to an over-issuance of shares, only the original certificate may be recognized, without prejudice to the right of
the bona fide purchaser to sue the corporation for damages.
2) WON the Bank was obligated to inquire into the ownership of the certificate
(1) The facts of the case justify the conclusion that she was negligent. She delivered the certificate, which was endorsed in
blank, to Campos without having taken any precaution. She did not ask the Batangas Minerals to cancel it and instead, issue another in
her name. In failing to do so, she clothed Campos with apparent title to the shares represented by the certificate. By her misplaced
confidence in Campos, she made possible the wrong done. She was therefore estopped from asserting title thereto for it is well-settled
that where one of the innocent parties must suffer by reason of a wrongful or unauthorized act, the loss must fall on the one who first
trusted the wrongdoer.
(2) The subject certificate is what is known as a street certificate. Upon its face, the holder is entitled to demand its transfer into
his name from the issuing corporation. The bank is not obligated to look beyond the certificate to ascertain the ownership of the stock.
A certificate of stock, endorsed in blank, is deemed quasi-negotiable, and as such, the transferee thereof is justified in believing that it
belongs to the transferor.
It is the rule that if the owner of the certificate has endorsed it in blank, and is stolen, no title is acquired by an innocent
purchaser of value. This is so because even though a stock certificate is regarded as quasi-negotiable, in the sense that it may be
transferred by endorsement, coupled with delivery, the holder thereof takes it without prejudice to such rights or defenses as the
registered owner or credit may have under the law, except in so far as such rights or defenses are subject to the limitations imposed by
the principles governing estoppel.
Collateral Transfers
Shares of stock are personal property. Thus, they can either be pledged or mortgaged. However, such pledge or mortgage cannot have
any legal effect if it is registered only in the corporate books.
Where a certificate is delivered to the creditor as a security, the contract is considered a pledge, and the Civil Code will apply.
If the certificate of stock is not delivered to the creditor, it must be registered in the registry of deeds of the province where the principal
office of the corporation is located, and in case where the domicile of the stockholder is in a different province, then registration must also be made
there.
In a situation where, the chattel mortgage having been registered, the stock certificate was not delivered to the creditor but transferred to a
bona fide purchaser for value, it is the rule that the bona fide purchaser for value is bound by the registration in the chattel mortgage registry. It is
said that such a rule tends to impair the commercial value of stock certificates.
The Chattel Mortgage Law provides two ways of executing a valid chattel mortgage: 1) the possession of mortgaged property
is delivered and retained by the mortgagee; and, 2) without delivery, the mortgage is recorded in the register of deeds. But if chattel
mortgage of shares may be made validly, the next question then becomes: where should such mortgage be properly registered?
It is the general rule that the situs of shares is the domicile of the owner. It is also generally held that for the purpose of
execution, attachment, and garnishment, it is the domicile of the corporation that is decisive. Going by these principles, it is deemed
reasonable that chattel mortgage of shares be registered both at the owners domicile and in the province where the corporation has its
principal office. It should be understood that the property mortgaged is not the certificate but the participation and share of the owner
in the assets of the corporation.
It is recognized that this method of hypothecating shares of stock in a chattel mortgage is rather tedious and cumbersome. But
the remedy lies in the legislature.
Note: The provision of the Chattel Mortgage Law (Act No. 1508) providing for delivery of mortgaged property
to the mortgagee as a mode of constituting a chattel mortgage is no longer valid in view of the Civil Code
provision defining such as a pledge.
NON-TRANSFERABILITY
IN NON-STOCK CORPORATIONS
Although shares of stock are as a rule freely transferable, membership in a non-stock corporation is personal and non-transferable, unless
the articles of incorporation or by-laws provide otherwise. The court may not strip him of his membership without cause. (Sec. 90)
1.
Cash
2.
Property
3.
scrip - certificate issued to SHs instead of cash dividends which entitles them to a certain amount in the future
Stock dividends
Stock dividends are distribution to the SHs of the companys own stock.
Stock dividends cannot be declared without first increasing the capital stock unless unissued shares are available.
New shares are issued to the SHs in proportion to their interest.
No new income unless sold for cash.
Civil fruits belong to the usufructuary and not to the naked owner.
Can only be issued to SHs.
Whenever fractional shares result, corp may pay in cash or issue fractional share warrants.
Stock Dividend
Voting requirements
for issuance
Board of Directors
Board of Directors +
2/3 OCS
Effect on delinquent
stock
Stock dividends are issued only to SHs This is so because only stockholders are entitled to dividends. A stock dividend really
adds nothing to the interest of each stockholder; the proportional interest of each stockholder remains the same. If a stockholder is
deprived of his stock dividends - and this happens if the shares of stock forming part of the stock dividends are issued to a nonstockholder - then the proportion of the stockholder's interest changes radically. Stock dividends are civil fruits of the original
investment, and to the owners of the shares belong the civil fruits.
FROM WHERE CAN DIVIDENDS BE SOURCED?
Dividends can be sourced only out of the unrestricted retained earnings of the corporation.
Unrestricted retained earnings is defined as "the undistributed earnings of the corporation which have not been allocated for
any managerial, contractual or legal purposes and which are free for distribution to the stockholders as dividends." (SEC Rules
Governing Redeemable and Treasury Shares, 1982)
Retained earnings has been defined as "net accumulated earnings of the corporation out of transactions with individuals or firms
outside the corporation." (Simmons, Smith, Kimmel, Intermediate Accounting, 1977, ed. P. 635) The term implies the limitation
that no corporation can declare dividends unless its legal or stated capital is maintained. It does not include:
premium on par stock i.e. difference between par value and selling price of stock by corp since this is regarded as
paid-in capital; but SEC allowed declaration of stock dividends out of such premiums
transactions involving treasury stocks which are considered expansions and contractions of paid-in capital;
If subscribed shares have not been fully paid, the unpaid portion of subscribed capital stock is an asset, and as long as the net
capital asset (after payment of liabilities) including this unpaid portion is at least equal to the total par value of the subscribed
shares, any excess would be surplus or earnings from which dividends may be declared. However, if a deficit exists, subsequent
profits must first be applied to cover the deficit.
Restrictions on dividend distribution include:
Agreements with creditors, bondholders and preferred SHs requiring retention of certain percent of
corporate earnings to protect their interest and to secure redemption of their securities upon maturity;
SEC-imposed restrictions pursuant to law, like those imposed on banks and insurance companies;
Restriction on the retained earnings equivalent to the cost of treasury shares held by the corporation,
which is lifted only after such shares are reissued or retired (Sec. 195, PD 612)
BOD has discretion whether or not to declare dividends and in what form.
Exception:
However, such discretion cannot be abused and the BOD cannot accumulate surplus profits unreasonably on the excuse that
it is needed for expansion or reserves.
2.
BOD should declare dividends when surplus profits of the corporation exceed 100% of the corporation's paid-in capital stock.
Exceptions:
(a) When justified by definite corporate expansion projects or programs approved by the Board;
(b) When creditors prohibit dividend declaration without their consent as a condition for the loan, and such consent has
not yet been secured;
(c) When retention is necessary under special circumstances obtaining in the
corporation, e.g. when there is a need for special reserve for probable contingencies. (Sec. 43)
4.
The corporation may be subjected to additional tax when it fails to declare dividends, thereby unreasonably accumulating
profits. (See Sec. 25, NIRC)
5.
The dividends received are based on stock held whether or not paid. However, if the stocks are delinquent, the amount will
first be applied to the payment of the delinquency plus costs and expenses; stock dividends will not be given to a delinquent
SH.
This case involves an action against the Ford Motor Company to compel declaration of dividends. At the time this complaint
was made, Ford had concluded its most prosperous year of business, and the demand for its cars at the price of the previous year
continued. While it had been the practice, under similar circumstances, to declare larger dividends, the corporation refused to declare
any special dividends. The Board justified its refusal to declare larger dividends on the expansion plans of the company by erecting a
smelting plant, but maintaining the selling price of its cars (instead of reducing it as had been the practice in previous years). The
plaintiffs contend that such a proposal would be tantamount to the business being conducted as a semi-eleemosynary (or charitable)
institution instead of a business institution.
The court pointed out that a business corporation is organized and carried on primarily for the profit of SHs. The discretion of
the directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself reduction of
profits or to devote profits to another purpose. While the Court noted the capable management of the affairs of the corporation and
therefore was not convinced that the motives of the directors were prejudicial to the company's interests, it likewise noted that the
annual dividends paid were very small in relation to the profits that the company had been making. It therefore affirmed the amount
fixed by the lower court to be distributed to the stockholders.
Note: Prof. Jacinto is of the opinion that what happened in this case is
possible under the present Code, even without changing the AOI.
Preference as to Dividends
this, the corporation became prosperous and proposed to pay dividends to A & B common stock. Plaintiffs filed this case in order to
collect the dividends for fiscal years 1915-1926 before the other classes of stock are paid.
Were the Class A stockholders entitled to dividends for FY 1915 to 1926?
No, they were not. By the plain meaning of the words in the AOI and the certificates of stock, the holders are not entitled to
dividends unless directors declare so. It is likewise generally understood that in cases where the company's net earnings are applied
for improvements and no dividend is declared, the claim for such year is gone in case of non-cumulative stock, and cannot be later
asserted.
BURK V. OTTAWA GAS & ELECTRIC CO. (123 Pac. 875; 1912)
An action was brought by the preferred SHs of Ottawa against the directors of Ottawa to (1) require the directors to account for
all the property and assets of the corporation, (2) declare such dividends from the net profits of the business of such co. as should have
been declared since 1 Jan. 1906, and (3) restrain the officers and directors during the pendency of the action from paying out any of
the money or disposing of the assets of the company except such amounts as should be necessary to pay the actual necessary current
expenses of conducting the business of the corporation.
The BOD maintained that the corporation's funds were exhausted by expenditures for the extension of the cos plant, hence it
was unable to declare dividends. Expenditures were said to be necessary and for the betterment of the plant.
Were the corp funds were wrongfully diverted, and were preferred SHs entitled to dividends?
The case was remanded to the trial court, with instructions to make further findings to protect the preferred SHs in their rights.
The fair interpretation of the contract between Ottawa and its SHS is that if in any year net profits are earned, a dividend is to
be declared. To hold otherwise, meaning if the BOD had absolute discretion when to declare dividends and when not to, when the
corporation has funds for such dividends, would result in temptation to unfair dealing, giving one party the option to pay the other or
not. In the case at bar, the accumulated profits would be lost forever since the dividends were non-cumulative.
Preferred SHs, however, are not generally creditors until dividends are declared. In the case at bar, if dividends should have
been declared to such SHs, they are considered creditors from that time.
If the declaration has not yet been announced or communicated to the stockholders.
NOTE: When no dividends are declared for 3 consecutive years, preferred SHs are given the right to vote for
directors until dividends are declared.
NOTE: The extent of the SHs share in the dividends will depend on the capital contribution; NOT the number of
shares he has.
Dividends are defined as portions of profits/surplus funds of the corp. which have been actually set apart by a valid board
resolution or by the SH at a corp. mtg. for distribution among SH according to their respective interests. The mere declaration of the
dividend, without more, by competent authority under proper circumstances, creates a debt against the corporation in favor of the
stockholders the same as any other general creditor of the corporation. By the mere declaration, the dividend becomes immediately
fixed and absolute in the stockholder and from henceforth the right of each individual stockholder is changed by the act of declaration
from that of partner and part owner of the corporate property to a status absolutely, adverse to every other stockholder and to the
corporation itself, insofar as his pro rataproportion of the dividend is concerned.
WHAT ARE THE REQUISITES FOR ACQUISITION BY THE CORPORATION OF ITS OWN SHARES? (Sec. 41)
1.
2.
FOR WHAT PURPOSES CAN A CORPORATION ACQUIRE ITS OWN SHARES? (Sec. 41)
1.
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;
3.
To pay dissenting or withdrawing stockholders entitled to payment for their shares under the Corporation
Code (Appraisal Right).
WHAT ARE THE REQUISITES FOR THE EXERCISE OF THE APPRAISAL RIGHT? (Sec. 82)
(1)
(2)
(3)
(4)
(5)
WHAT IS THE EFFECT OF DEMAND FOR PAYMENT IN ACCORDANCE WITH THE APPRAISAL RIGHT? (Sec. 83)
All rights accruing to the shares, including voting and dividend rights, are suspended in accordance with the Corporation
Code, except for the right of the SH to receive payment of the fair value thereof.
Such suspension shall be from the time of demand until either:
(1) abandonment of the corporate action involved; or
(2) the purchase of the said shares by the corporation.
However, if said dissenting SH is not paid the value of his shares within 30 days after the award, his voting and dividend
rights shall immediately be restored.
WHAT ARE THE DUTIES OF THE DISSENTING STOCKHOLDER IN RELATION TO THE EXERCISE OF THE APPRAISAL
RIGHT?
The dissenting SH must submit the certificates of stock representing his shares to the corporation for notation thereon that
such shares are dissenting shares within 10 days after demanding payment for his shares. Failure to do so shall, at the option of
the corporation, terminate his rights under Title X of the Corporation Code. (Sec. 86)
WHAT ARE THE EFFECTS OF TRANSFER OF THE CERTIFICATES BEARING THE NOTATION THAT THEY REPRESENT
DISSENTING SHARES?
If the certificates are consequently cancelled, the rights of the transferor as a dissenting SH cease and the transferee has
all the rights of a regular stockholder. All dividend contributions which would have accrued on the shares will be paid to the
transferee. (Sec. 86)
AMENDMENTS OF CHARTER
The charter of a private corporation consists of its articles of incorporation as well as the Corporation Code and such other law
under which it is organized.
Amendment by Legislature
Subject to the limitation that no accrued rights or liabilities be impaired, the legislature has the power to make changes in
existing corporations through an amendment to the Corporation Code.
Amendment by Stockholders
One of the powers expressly granted by law to all corporations is the power to amend its articles of incorporation. This, in
effect, is a grant of power to owners of 2/3 of the outstanding stocks to change the basic agreement between the corporation and
its stockholders, making such change binding on all the stockholders, subject only to the right of appraisal, if proper.
(1)
(2)
PURPOSE:
must be legitimate
VOTE:
The appraisal right must be recognized in case the amendment has the effect of changing rights of any stockholder or
class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or
extending or shortening the term of corporate existence.
Extension of corporate term cannot exceed 50 yrs. in any one instance
(3)
(4)
(5)
(6)
A copy of the amended articles should be filed with the SEC, and with the proper governmental agencies, as
appropriate (e.g., in the case of banks, public utilities, etc.)
Original and amended articles should contain all matters required by law to be set out in said articles.
An amendment to increase/decrease capital stock as well as to extend/shorten corporate term cannot be made under
Sec. 16, but must be made under Sec. 37-38, respectively, both of which require a meeting; and
Amendment must be in the form prescribed by the Code
Purpose(s) patently unconstitutional, illegal, immoral, or contrary to government rules and regulations;
Required percentage of ownership of capital stock to be owned by citizens of the Phils. has not been complied with as
required by the Constitution or existing laws;
The Board of Directors gave notice to SH that among the matters to be acted upon in its annual meeting would be a proposal to
amend certificate of incorporation to add to the rights of preferred stockholders, voting rights equal to those of common stockholders.
Marcus, objected and demanded payment for the common stock owned by her.
The Court held that Marcus may invoke her appraisal right. The aggregate number of shares having voting rights equal to those
of common shares was substantially increased and thereby the voting power of each common share outstanding prior to the meeting
was altered or limited by the resulting pro rata diminution of its potential worth as a factor in the management of the corporate
affairs. Considering that she held diminished voting power; that she notified the corpo of her objection; that her shares were voted
against the amendmentthese were sufficient to qualify her to invoke her statutory appraisal right.
Effectivity of amendment
Amendments take effect only from the approval by the SEC. However, such approval or rejection must be made within six
months of filing of amendment; otherwise it shall take effect even w/o such approval (as of the date of filing), unless cause of
delay is attributable to the corporation. (Sec. 16)
Special amendments
It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to
look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in
order to realize assets for the payment of its debts.
A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares,
without valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the
manner and under the conditions prescribed by the statute or charter or the articles of incorporation.
(1) All issued stock of all classes should be held by not more than 20;
(2) All issued stock shall be subject to one or more specified restrictions on transfer permitted by law;
(3) Corporation should not be listed in the stock exchange or make any public offering of its stock.
If any of these are deleted, then the corporation will cease to be a close corporation and will lose the special privileges of
such corporations. Thereafter, it will be governed by the general provisions of the Code. Since such amendment involves a
change in the nature of the corporation, even non-voting stocks are given a voice in the decision. A stockholders meeting is
required and a 2/3 vote must approve the amendment, unless otherwise provided by the articles of incorporation.
DISSOLUTION
Modes of Dissolution
If the petition is sufficient in form and substance, the SEC shall fix a date on or before which objections
thereto may be filed by any person.
Date: not less than 30 days nor more than 60 days after the
entry of the order
(3) Publication of order
Before the date fixed by the SEC, the SEC order shall be published and posted accordingly.
Newspaper:
Posting:
For 3 consecutive weeks in 3 public places in the city or municipality where the
corporation's principal office is situated
(b) Quo Warranto proceedings (See Sec. 5b, PD 902-A and Rule 66, Rules of
Court. Previously, the SEC had exclusive jurisdiction over quo warranto proceedings involving corporation.
Under the Securities Regulation Code or RA 8799, however, the jurisdiction of the SEC over all cases
enumerated under Sec. 5 of PD 902-A have been transferred to the Regional Trial Courts.
The grounds for involuntary dissolution of a corporation under quo warranto proceedings are:
(1) When the corporation has offended against a provision of an act for its creation or renewal;
(2) When it has forfeited its privileges and franchises by non-user;
(3) When it has committed or omitted an act which amounts to a surrender of its corporate
rights, privileges or franchises;
(4) When it misused a right, privilege or franchise conferred upon it by law, or when it has
exercised a right, privilege or franchise in contravention of law
(PNB v. CFI, 209 SCRA 294; 1992)
(4) Shortening of corporate term (Sec. 120)
NOTE: The simplest and most expedient way of effecting dissolution
is by shortening the corporate term and waiting for such term
to expire.
Illegal;
Fraudulent;
Dishonest;
Oppressive or unfairly prejudicial to the corporation
or any other SH;
Effects of Dissolution
Corporation ceases to be a juridical person and consequently can no longer continue transacting its business.
Corporate existence continues for 3 years following dissolution for the ff. purposes only:
Corporation can no longer continue its business, except for winding up.
NOTE that the subsequent dissolution of a corporation may not remove or impair any right or remedy in favor of or against, nor
any liability incurred by, any corporation, its stockholders, members, directors, trustees or officers. (Sec. 145)
Plaintiff National Abaca Corporation filed a complaint against Pore for the recovery of a sum of money advanced to her for
the purchase of hemp. She moved to dismiss the complaint by citing the fact that National Abaca had been abolished by EO 372 dated
Nov. 24, 1950. Plaintiff objected to such by saying that it shall nevertheless be continued as a corporate body for a period of 3 years
from the effective date of said order for the purpose of prosecuting and defending suits by or against it and to enable the Board of
Liquidators to close its affairs.
Can an action commenced within 3 years after the abolition of plaintiff corporation be continued by the same after the expiration of
said period?
The Corp. Law allows a corporation to continue as a body for 3 years after the time when it would have been dissolved for the
purposes of prosecuting and defending suits by or against it. But at any time during the 3 years, the corporation should convey all its
property to trustees so that the latter may be the ones to continue on with such prosecution, with no time limit on its hands. Since the
case against Pore was strong, the corp.'s amended complaint was admitted and the case was remanded to the lower court.
Liquidation
2.
Conveyance of all corporate assets to trustees who will take charge of liquidation.
If this method is used, the 3-year limitation will not apply provided the designation of the trustees is made within
said period. There is no time limit within which the trustee must finish liquidation, and he may sue and be sued as
such even beyond the 3-year period unless the trusteeship is limited in its duration by the deed of trust. (See Nat'l
Abaca Corp. v. Pore, supra)
3.
Liquidation is conducted by the receiver who may be appointed by the SEC upon its decreeing the dissolution of
the corp.
As with the previous method, the three-year rule shall not apply. However, the mere appointment of a receiver,
without anything more, does not result in the dissolution of the corporation nor bar it from the exercise of its
corporation rights.
expired without a trustee or receiver having been expressly designated by the corporation itself within that period, the BOD itself
may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation.
WHAT CAN AND SHOULD BE DONE DURING THE PERIOD OF LIQUIDATION?
(Sec. 122)
(1)
(2)
(3)
(4)
No corporation shall distribute any of its assets or property except upon lawful dissolution and after
payment of all its debts and liabilities. (Sec. 122)
In cases of decrease of capital stock, and as otherwise allowed by the Corporation Code
the winding-up proceedings within the 3 years provided by the Corporation Law as the term for the corporate existence of the
corporation, and if a claim is disputed so that the receiver cannot safely allow the same, it should be transferred to the proper court for
trial and allowance, and the amount so allowed then presented to the receiver or trustee for payment. The rulings of the receiver on
the validity of claims submitted are subject to review by the court appointing such receiver though no appeal is taken to the latter
ruling, and during the winding-up proceedings after dissolution, no creditor will be permitted by legal process or otherwise to acquire
priority, or to enforce his claim against the property held for distribution as against the rights of other creditors.
Note: Under the Corporation Code, it is the SEC which may
appoint the receiver.
TAN TIONG BIO V. CIR (G.R. No. L-15778; April 23, 1962)
The creditor of a dissolved corp. may follow its assets, as in the nature of a trust fund, once they pass into the hands of the
stockholders. The dissolution of a corp. does not extinguish the debts due or owing to it.
An indebtedness of a corp. to the government for income and excess profit taxes is not extinguished by the dissolution of the
corp. The hands of government cannot, of course, collect taxes from a defunct corporation, it loses thereby none of its rights to assess
taxes which had been due from the corporation, and to collect them from persons, who by reason of transactions with the corporation
hold property against which the tax can be enforced and that the legal death of the corporation no more prevents such action than
would the physical death of an individual prevent the government from assessing taxes against him and collecting them from his
administrator, who holds the property which the decedent had formerly possessed. Thus, petitioners can be held personally liable for
the corporation's taxes, being successors-in-interest of the defunct corporation.
All liabilities and obligations of the corporation shall be paid, satisfied, and discharged, or adequate provision shall
be made therefor.
(2)
Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition
occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such
requirements.
(3)
Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious,
benevolent, education or similar purposes, but not subject to condition (2) above, shall be transferred or conveyed to
one or more corporations, societies or organization engaged in activities in the Philippines substantially similar to
those of the dissolving corp. according to a plan of distribution adopted pursuant to Sec. 95 of the Code.
(4)
Assets other than those mentioned in preceding paragraphs shall be distributed in accordance with the AOI or bylaws.
(5)
In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or
not organized for profit, as may be specified in a plan of distribution adopted pursuant to Sec. 95.
* The plan of distribution of assets may be adopted by a majority vote of the Board of trustees and approval of 2/3 of
the members having voting rights present or represented by proxy at the meeting during which said plan is adopted.
It must be noted that the plan of distribution of assets must not be inconsistent with the provisions of Title XI of the Code.
CORPORATE COMBINATIONS
(1) Merger (A + B = A)
(2) Consolidation (A + B = C)
(3) Sale of substantially all corporate assets and purchase thereof by another corporation;
(4) Acquisition of all / substantially all of the stock of one corporation from its SHs in exchange for the stock of the
acquiring corporation
Merger or Consolidation
If merger:
A foreign corporation authorized to transact business in the Philippines may merge or consolidate with any domestic
corporation if such is permitted under Philippine law and by the law of its incorporation.
The requirements on merger or consolidation as provided in the Corporation Code must be complied with.
Whenever a foreign corporation authorized to transact business in the Philippines is a party to a merger or
consolidation in its home country or state, such foreign corporation shall file a copy of the articles or merger or
consolidation with the SEC and the appropriate government agencies within 60 days after such merger or
consolidation becomes effective. Such copy of the articles must be duly authenticated by the proper officials of the
country or state under the laws of which merger or consolidation was effected.
If the absorbed corporation in such a merger / consolidation happens to be the foreign corporation doing business
in the Philippines, it shall file a petition for withdrawal of its license in accordance with Sec. 136.
WHEN IS A SALE OR OTHER DISPOSITION DEEMED TO COVER SUBSTANTIALLY ALL THE CORPORATE PROPERTY
AND ASSETS?
If by the sale the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which
it was incorporated. (Sec. 40)
(1) If the disposition is necessary in the usual and regular course of business; or
(2) If the proceeds of the disposition be appropriated for the conduct of its remaining business (Sec. 40)
IS THE APPRAISAL RIGHT AVAILABLE TO DISSENTING STOCKHOLDERS?
Yes. However, it must be stressed that this right is generally available only to dissenting stockholders of
the selling corporation, not the purchasing corporation. (It can be argued, though, that in instances wherein the purchase
constitutes an investment in a purpose other than its primary purpose, stockholders' approval of such investment is necessary,
and anyone who objects thereto will have the appraisal right under Sec. 42.)
Exchange of stocks
In this method, all or substantially all the stockholders of the "acquired" corporation are made stockholders of the
acquiring corporation. With the exchange, the acquired corporation becomes a subsidiary of the acquiring corporation.
Although this method does not combine the 2 businesses under a single corporation as in merger and sale of assets, from the
point of view of the acquiring (parent) corporation, there is hardly any difference between owing the acquired corporation's
business directly and operating it through a controlled subsidiary. In fact, the parent corporation would have the power to buy
all the subsidiary's assets and dissolve it, achieving the same result as in the other methods of combination. (Campos &
Campos)
FOREIGN CORPORATIONS
WHAT IS A FOREIGN CORPORATION? (Sec. 123)
A corporation formed and organized under laws other than those of the Philippines, regardless of the citizenship of the
incorporators and stockholders. Such corporation must have been organized and must operate in a country which allows
Filipino citizens and corporations to do business there.
In times of war:
For purposes of security of the state, the citizenship of the controlling stockholders determines
the corporations nationality.
100% EQUITY:
Except: Public works that would fall under the BuildOperate-Transfer Law, as well as those that are foreign-funded
70%-30% EQUITY:
Advertising
60%-40% EQUITY:
Other industries.
NOTE: Applications, if not acted upon within 10 days from official acceptance thereof, shall be considered automatically
approved! (Art. 53, Omnibus Investments Code)
(2) SEC license to do business (Sec. 125)
Application under oath setting forth the information specified in Sec. 125;
Additional information as may be necessary or appropriate to enable the SEC to determine whether the corporation is
entitled to a license to transact business in the Philippines, and to determine and assess the fees payable;
Duly executed certificate under oath by authorized official/s of the jurisdiction of the company's incorporation,
attesting to the fact that the laws of the country of the applicant allow Filipino citizens and corporations to do business
therein, and that the applicant is an existing corporation in good standing;
Statement under oath of the president or any other person authorized by the corporation showing that the applicant is
solvent and in good financial condition, and setting forth the assets and liabilities of the corporation within 1 year
immediately prior to the application.
Once the licensee ceases to do business in the Philippines, these deposited securities shall be returned, upon the licensee's application and proof
to the satisfaction of the SEC that the licensee has no liability to Philippine residents or the Philippine government.
Note: Foreign banking and insurance corporations are the exceptions to this requirement.
(1) The corporation will not be permitted to maintain agency in the Philippines;
Isolated transactions
ATLANTIC MUTUAL V. CEBU STEVEDORING (G.R. No. 18961; Aug. 31, 1966)
A foreign corp. engaged in business in the Phil. can maintain suit in this jurisdiction if it is duly licensed. If a foreign corp. is
not engaged in business in the Phil., it can maintain such suit if the transaction sued upon is singular and isolated, in which no license
is required. In either case, the fact of compliance with the requirement of license, or the fact that the suing corp. is exempt therefrom,
as the case may be, cannot be inferred from the mere fact that the party suing is a foreign corp. The qualifying circumstance, being an
essential part of the element of the plaintiffs capacity to sue, must be affirmatively pleaded. In short, facts showing foreign
corporations capacity to sue should be pleaded.
Curing of defect
business in the Philippines may bring a civil or administrative action for opposition, cancellation, infringement,
unfair competition, or false designation of origin and false description, whether or not it is licensed to do business
in the Philippines under existing laws.
WHAT IS CONSIDERED AS NOT DOING BUSINESS, AND THEREFORE NOT SUBJECT TO THE
REQUIREMENT?
LICENSING
Mere investment as a shareholder and the exercise of the rights as such investor;
Appointing a representative or distributor in the Philippines who transacts business in his own name and for his own
account
Example:
Whether or not there is continuity of transactions which are in pursuance of the normal business of the corporation.
(Metholatum v. Mangaliman)
FMC had appointed Jaime Catuira as its agent with authority to execute Employment Contracts and receive, on behalf of the
corp., legal services from, and be bound by processes of the Phil. Courts, for as long as he remains an employee of FMS. If a foreign
corp. not engaged in business in the Phil., through an Agent, is not barred from seeking redress from courts in the Phil., that same
corp. cannot claim exemption done against a person or persons in the Phil..
NOTE:
Under Sec. 12, Rule 14 of the 1997 Rules of Civil Procedure, the term "doing business" has been replaced with
the phrase "has transacted business," thereby allowing suits based on isolated transactions.
PACIFIC VEGETABLE OIL V. SINGSON (G.R. No. 7917; April 29, 1955)
This is an action instituted by the plaintiff, a foreign corporation, against the defendant to recover a sum of money for damages
suffered by the plaintiff as a consequence of the failure of the defendant to deliver copra which he sold and bound himself to deliver to
the plaintiff. Defendant filed a motion to dismiss on the ground that the plaintiff failed to obtain a license to transact business in the
Phil and, consequently, it had no personality to file an action.
Has appellant transacted business in the Philippines in contemplation of law?
Contrary to the findings of the trial court, the copra in question was actually sold by the defendant to the plaintiff in the US, the
agreed price to be covered by an irrevocable letter of credit to be opened at the Bank of California, and delivery to be made at the port
of destination. It follows that the appellant corporation has not transacted business in the Phil in contemplation of Sec. 68 and 69
which require any foreign corporation to obtain a license before it could transact business, or before it could have personality to file a
suit in the Phil.. It was never the purpose of the Legislature to exclude a foreign corporation which happens to obtain an isolated order
of business from the Phil., from securing redress in the Phil. Courts, and thus, in effect, to permit persons to avoid their contracts made
with such foreign corp.. The lower court erred in holding that the appellant corporation has no personality to maintain the present
action.
AETNA CASUALTY & SURETY CO. VS. PACIFIC STAR LINE (80 SCRA 635; 1977)
Aetna as subrogee of I. Shalom sued Pacific Star Line (PSL), the common carrier for the loss of Linen & Cotton piece goods
due to pilferage and damage amounting to US$2,300.00. PSL contends that Aetna has no license to transact insurance business in the
Philippines as gathered from the Insurance Commission and SEC . It also argues that since said company has filed 13 other civil suits,
they should be considered as doing business here and not merely having entered into an isolated transaction.
Based on rulings in Mentholatum and Eastboard Navigation, the Supreme Court held that Aetna is not transacting business in
the Philippines for which it needs to have a license. The contract was entered into in New York and payment was made to the
consignee in the New York branch. Moreover, Aetna was not engaged in the business of insurance in the Philippines but was merely
collecting a claim assigned to it by consignee. Because it was not doing business in the Philippines, it was not subject to Sec. 68-69 of
the Corporation Law and therefore was not barred from filing the instant case although it had not secured a license to transact
insurance business in the Philippines.
Topweld entered into 2 separate contracts with foreign entities: a license and technical assistance agreement with IRTI, and a
distributor agreement with ECED, SA. When Topweld found out that the foreign corporations were looking into replacing Topweld as
licensee and distributor, the latter went to court to ask for a writ of preliminary injunction to restrain the foreign corporations from
negotiating with 3rd parties as violative of RA 5445 (4).
Although IRTI and ECED were doing business in the Philippines, since they had not secured a license from BOI, the foreign
corporations were not bound by the requirement on termination and Topweld could not invoke the same against the former. Moreover,
it was incumbent upon Topweld to know whether or not IRTI and ECED were properly authorized to engage in such agreements. The
Supreme Court held that both parties were guilty of violating RA 5445. Being in pari delicto, Topweld was not entitled to the relief
prayed for.
As a rule, jurisdiction over a foreign corporation is acquired by the courts through service of summons on its resident agent.
If there is no assigned resident agent, the government official designated by law can receive the summons on their behalf and transmit the
same to them by registered mail within 10 days. This will complete the service of the summons. Summons can also be served on any of the
corporation's officers or agents within the Philippines. (See Sec. 128; Rule 14, Sec. 12, Rules of Court. Note that while Sec. 128 presupposes that
the foreign corporation has a license, Rule 14 does not make such an assumption.)
Note that if there is a designated agent, summons served upon the government official is not deemed a valid process.
Johnlo Trading case holds that the service on the attorney of an FC who was also charged with the duty of settling claims
against it is valid since no other agent was duly appointed.
Service on Officers or Agents of an foreign corporations domestic subsidiary will only vest jurisdiction if there is sufficient
ground to disregard the separate personalities.
GENERAL CORPORATION OF THE PHILIPPINES VS UNION INSURANCE (87 Phil. 313; 1950)
General Corporation and Mayon investment sued Union Insurance and Firemens Fund Insurance (FFI) for the
payment of 12 marine insurance policies. The summons was served on Union which was then acting as FFIs settling
agent in the country. At that time, it was not yet registered and authorized to transact business in the Philippines.
Issue: Did the trial court acquire valid jurisdiction over FFI?
Yes. The service of summons for FFI on its settling agent was legal and gave the court jurisdiction upon FFI. Section 14, Rule
7 of ROC embraces Union in the phrase, or agents within the Philippines. The law does not make distinctions as to corporations
with or without authority to do business in the Philippines. The test is whether a foreign corporation was actually doing business
here. Otherwise, a foreign corporation doing business illegally because of its refusal or neglect to obtain the corresponding authority
to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the
jurisdiction of the courts.
Failure to file its annual report or pay any fees as required by the Corporation Code;
(2)
(3)
Failure, after change of resident agent or of his address, to submit to the SEC a statement of such change;
(4)
Failure to submit to the SEC an authenticated copy of any amendment to its AOI or by-laws or of any articles of
merger or consolidation within the time prescribed by the Code;
(5)
A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such
corporation pursuant to Title XV;
(6)
Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine
government or any of its agencies or political subdivisions;
(7)
Transacting business in the Philippines outside of the purpose/s for which such corporation is authorized under its
license;
(8)
Transacting business in the Philippine as agent of or acting for and in behalf of any foreign corporation or entity not
duly licensed to do business in the Philippines; or
(9)
Any other ground as would render it unfit to transact business in the Philippines.
Educational corporations other than government-run institutions are governed first by special laws, second, by the special
provisions of the Corporation Code, and lastly, by the general provisions of the Corporation Code. (Sec. 106)
At least 60% of the authorized capital stock of educational corporations must be owned by Filipino citizens, and Congress
may require increased Filipino equity participation therein. (With the exception of educational institutions established by
religious groups and mission boards, which are not subject to this equity requirement.) However, control and administration
of educational institutions must be vested exclusively in citizens of the Philippines. (Art. XIV, Sec. 4 (2), 1987
Constitution) This means that no alien may be elected as a member of the BOD nor appointed as Principal or officer thereof.
Once a school, college or university has been granted government recognition by the DECS, it must incorporate within 90
days from the date of such recognition, unless it is expressly exempt by DECS for special reasons. (Act 2706, Sec. 5) In
addition, it must file a copy of its AOI and by-laws with the DECS. Without the favorable recommendation of the DECS
Secretary, the SEC will not accept or approve such articles. (Sec. 107, Corporation Code)
Religious corporations
(Sec. 109-116)
Religious corporations are governed by Title XIII, Chapter II of the Corporation Code and by the general provisions of the Code on
non-stock corporations insofar as they may be applicable. (Sec. 109)
In case of death, resignation, transfer or removal of the person in office, his successor replaces him and continues the corporation
sole. The property is not owned but is merely administered by the corporation sole, and ownership pertains to the church or congregation
he represents. On the other hand, he is the person authorized by law as the administrator thereof and the court may take judicial notice of
such fact and of the fact that the parish priests have no control over such property.
In determining whether the constitutional provision requiring 60% Filipino capital for corporation ownership of private agricultural
lands, the Supreme Court has held that it is the nationality of the constituents of the diocese, and not the nationality of the actual
incumbent of the office, which must be taken into consideration. Thus, where at least 60% of the constituents are Filipinos, land may be
registered in the name of the corporation sole, although the holder of the office is an alien. This ruling is based on the fact that the
corporation sole is not the owner but merely the administrator of the property, and that he holds it in trust for the faithful of the diocese
concerned. (See Gana v. Roman Catholic Archbishop of Manila, 43 O.G. No. 8, 3225; 1947)
Close Corporations
(Sec. 96-105)
WHAT ARE THE REQUISITES OF A CLOSE CORPORATION? (Sec. 96)
A close corporation, within the meaning of the Corporation Code, is one whose articles of incorporation provide that:
(1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by
not more than a specified number of persons not exceeding 20;
(2) All the issued stock of all classes shall be subject to one or more specified restrictions on transfer
permitted by Title XII of the Code; and
(3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any
class.
Notes:
A narrow distribution of ownership does not, by itself, make a close corporation. (San Juan Structural and Steel
Fabricators v. CA, 296 SCRA 631)
A corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting rights is
owned or controlled by another corporation which is not a close corporation.
Mining
Oil
Stock Exchange
Bank
Insurance
Public Utilities
Educational Institutions
Corporations declared vested with public interest
"Regular" Corporation
No. of stockholders
No limit
Management
Managed by Board of
Directors
Meetings
Buy-back of shares
Resolution of
deadlocks
Dissolution
Withdrawal Right
Type
of
involved
corporation
Appraisal Right
Close corporation
"Regular" corporation
When availed of
Only
the
grounds
enumerated in Sec. 81
and Sec. 42
Miscellaneous Provisions
(Sec. 137-149)
The SEC has the power to issue rules and regulations reasonably necessary to enable it to perform its duties under the Code,
particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or
officers. (Sec. 143)
Whenever the SEC conducts any examination of the operations, books and records of any corporation, the results thereof
must be kept strictly confidential, unless the law requires them to be made public or where they are necessary evidence
before any court. (Sec. 142)
All domestic and foreign corporations doing business in the Philippines must submit an annual report to the SEC of its
operations, with a financial statement of its assets and liabilities and such other requirements as the SEC may impose. (Sec.
141)
No right or remedy in favor of or against, nor any liability incurred by, any corporation, its stockholders, members, directors,
trustees or officers, may be removed or impaired by the subsequent dissolution of said corporation or by any subsequent
amendment or repeal of the Code. (Sec. 145)
Violations of the Corporation Code not otherwise specifically penalized therein are punishable by a fine of not less than P
1,000.00 but not more than P 10,000.00 or by imprisonment for not less than 30 days but not more than 5 years, or both, in
the discretion of the court. If the violation is committed by a corporation, the same may be dissolved in appropriate
proceedings before the SEC. (Sec. 144)