Chapter VIII DUTIES OF DIRECTORS AND CONTROLLING STOCKHOLDERS

I. Functions of Directors Directors act as a body in the formulation of all corporate powers and exercise all powers of management. Directors are not trustees but owe a degree of care, and a high degree of fidelity and loyalty to the corporation. Directors are not employees of the corporation; they need not spend their full time on corporate affairs. Directors owe their duties to the corporation as a whole rather than to individual shareholders or classes of shareholders. Threefold Duty to the Corporation !. To be Diligent ". To be #oyal $. To be %bedient A. Duty of Diligence Directors are re&uired to exercise diligence which an ordinary prudent person prompted by self'interest would exercise under similar circumstances in his personal business affairs. The ()*I+,** -)D./,+T 0)#, is the standard applied in determining whether directors have observed the re&uired degree of diligence in ma1ing decisions for the corporation. )nder the (-0, a director has met the re&uired standard of diligence if !. he is sufficiently informed with respect to the sub2ect of his 2udgment 31nowledge4; ". he is not interested in the sub2ect of his business 2udgment 3independence4; and $. he rationally believes that his business 2udgment is in the best interests of the corporation 3good faith4. (-0 is applicable only when decisions or 2udgments are made. In cases of failure to participate in the decisional process, the (-0 is inapplicable and the director5s conduct is evaluated under the 6prudent man7 standard. The plaintiff in the case involving a failure to direct must shoe that the failure to direct caused the in2ury complained of. 8hat are re&uired and expected of directors9 !. To possess at least ordinary 1nowledge and s1ill to enable them to ma1e sound business decisions. ". To attend directors5 meetings with reasonable regularity. $. To exercise reasonable care in the over'all management of the corporation. :. To 1eep themselves sufficiently informed about the general condition of the business. Directors5 #iability ; $!. Directors or trustees who willfully and knowingly vote
for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

Causes of Directors5 #iability !. <nowing authori=ation of wrongful acts; ". +egligence; and $. Conflict of interest. ,xtent of #iability >ll damages resulting from 1nowing authori=ation of wrongful acts, negligence and conflict of interest suffered by the corporation, its stoc1holders, and other persons. %TI* ? C%. @. A,++*B#@>+I> 0>I#0%>D C%., The bond issue complained of by %tis ? Co., a stoc1holder of A0C, as having been made without bidding was found by the court to be ade&uately deliberated and planned, properly negotiated and executed. The court also found that there was no lac1 of good faith, no motivation of personal gain or profit; and there was no lac1 of diligence, s1ill or care in selling the issue at a price approved by the Commission. Courts have properly decided to give directors a wide latitude in the management of the affairs of a corporation provided always that 2udgment, and that means an honest,

unbiased 2udgment, is reasonable exercised by them. Courts will not interfere with the internal management of the corporation and therefore will not substitute its 2udgment for that of the officers and directors. It is also clearly established that mista1es or errors in the exercise of honest business 2udgment do not sub2ect the officers and directors to liability for negligence in the discharge of their appointed duties. 0e&uirements for (-0 to free the directors of any liability for any loss or expenditures incurred resulting from the decision !. Decision made must have a reasonable basis; ". Directors must have acted in good faith; a. Decision made must be the result of the directors5 independent 2udgment; b. Decision made must be uninfluenced by any consideration other than what the directors honestly believed to be for the best interests of the company. /%+T,#I(>+%, ,T. >#. @. (>C%#%D'/)0CI> /I##I+. C%., I+C.

acts clearly beyond their power, whereby loss ensues to the corporation, or dispose of its property or pay away its money without authority, they will be re&uired to ma1e good the loss out of their private estates.7 68ant of <nowledge, *1ill or Competency. ' It has been said that directors are not liable for losses resulting to the corporation from want of 1nowledge on their part; or for mista1es of 2udgment, provided they were honest, and provided they are fairly within the scope of the powers and discretion confided to the managing body. (ut the acceptance of the office of a director of a corporation implies a competent 1nowledge of the duties assumed, and directors cannot excuse imprudence on the ground of their ignorance or inexperience; and if they commit an error of 2udgment through mere rec1lessness or want of ordinary prudence or s1ill, they may be held liable for the conse&uences. #i1e a mandatory, to whom he has been li1ened, a director is bound not only to exercise proper care and diligence but ordinary s1ill and 2udgment. >s he is bound to exercise ordinary s1ill and 2udgment, he cannot set up that he did not possess them.7 (>0+,* @. >+D0,8*

(acolod'/urcia /illing Co., Inc. cannot deny its obligation to increase the participation of their planters as embodied in the resolution duly adopted by its (oard of Directors when the corporation extended its milling contract with the planters. The court said that the act in &uestion is in direct and immediate furtherance of the corporation5s business, fairly incident to the express powers and reasonable necessary to their exercise. The court also reiterated the rule that &uestions 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 2udgment with that of the (oard of Directors; the board is the business manager of the corporation, and so long as it acts in good faith its orders are nor reviewable by the courts. *T,I+(,0. @. @,#>*C% The receiver of the corporation was allowed to recover the purchase price of its own stoc1 from board members who were allowed to resign so they could sell their stoc1s to the corporation and also the dividends declared and paid when the corporation did not have sufficient retained earnings to bac1 up such dividend declaration. The court &uoted the 0uling Case #aw on the matter 6.eneral Duty to ,xercise 0easonable Care. ' The directors of a corporation are duty bound to care for its property and manage its affairs in good faith, and for a violation of these duties resulting in waste of its assets or in2ury to the property they are liable to account the same as other trustees. >nd there can be no doubt that if they do

The receiver of the corporation charged a director for his failure to give ade&uate attention to the corporate affairs which had been conducted incompetently without regard to the waste in salaries during the period before production was possible. The court found the director guilty of misprision of his office but held that he is not liable to the corporation in as much as the plaintiff failed to show that had the director done his duty he could have made the company prosper , or at least could have bro1en its fall. Alaintiff also failed to show what sum the director could have saved the company that would have been the basis for the claim. A%%# @. A%%# > dispute between the brothers who are directors of a close corporation caused the delay in the receipt of dividends from another corporation where they hold an investment. The corporation was assessed a surtax for failure to distribute the earnings prior to the prescribed date of distribution. %ne of the directors filed suit to recover from the others the amount he paid for the surtax. Defendants cannot be said to have been negligent under the circumstances. They did not 1now that the earnings in dividends had to be distributed before a certain date and that failure to distribute said earnings would lead to their paying surtax. Defendants had a right to rely upon the advice of a certified public accountant and a lawyer whom

they had employed to loo1 after these legal and technical matters. Alaintiff as a director himself has a duty to inform his co' directors of the conse&uence of non'distribution of earnings. This he failed to do and he cannot burden the other directors of reimbursing him the surtax he paid. F%*T,0 @. (%8,+ >n action was brought by minority stoc1holders against (owen for recovery of alleged losses claimed to have been sustained by the company in conse&uence of (owen5s breach of his fiduciary as its president and director. The losses being claimed are for the failure of (owen to claim the benefits from the fidelity bonds against loss of money or other personal property through improper conduct of Cushing, the treasurer and manager of the company. Cushing, during his incumbency as treasurer and manager, had executed a lease of a roller s1ating rin1 owned by the corporation to him. The former president of the corporation 1new the transaction. 8hen (owen too1 over as president, he informed the other directors that the transaction was illegal but it was only when the other directors became dissatisfied with (owen that they pursued their claims on the illegal contracts. (owen is not liable. Cis failure to claim proceeds from the fidelity bonds was based on the belief that Cushing5s acts were not fraudulent as it was sanctioned by the other directors and therefore, would not come under the protection of the bond for fraud. (owen is also not liable for the sums received by Cushing on the leases from the time he discovered its existence. Ce did not profit personally through Cushing5s transactions. There is no absolute prohibition of dealings between a corporation and its officer, provided safeguards are observed to insure that those acting for the corporation are themselves disinterested and the utmost good faith is exercised. #%8,## C%IT ? C%. @. D,TI. ,T. >#. The directors cannot be held liable for the acts of the corporation5s manager done without the 1nowledge of said directors. Cermann leased the elevator bins for the storage of oats to the plaintiff without the 1nowledge of the directors. Ce

li1ewise sold the oats by himself. The directors were unaware of Cermann5s transactions. The mere fact that a person is a director of a corporation does not necessarily render him liable for the torts of the corporation or its agents. For a director to be held liable for the acts of corporate officers, the following conditions must be present !. The director must have participated in the act complained of; ". Ce must be guilty of lac1 of ordinary and reasonable supervision; and $. Ce must be guilty of lac1 of ordinary care in the selection of such officer. (>T,* @. D0,**,0 The receiver of a ban1 see1s to recover from the directors and the president the losses sustained by the ban1 through the fraud committed by one of the ban1 employees during the incumbency of said officers. The directors cannot be held liable. They relied on the examinations conducted annually by the government examiner and they were also encouraged in their belief that all was well with the ban1 by the president himself. Directors, in relying on statements made by technical people, cannot be said to be negligent in performing their functions. The president, however, should be held liable. Cis daily presence at the ban1 and the various warnings given him by subordinates should have put him on guard and would have led to the earlier discovery of the fraud and the prevention of the same in the future. The fraud was perpetuated under his very nose until the ban1 was insolvent. B. Fiduciary Duties !onflict of "nterests > director is a fiduciary of the corporation. >s such he cannot put his own interest above that of the corporation. If he does, he will be held liable for his disloyalty. The following are among the situations where possible conflict of interests may arise ,ntering into a contract with the corporation. Fixing the salaries of directors and officers. )sing inside information. *ei=ing corporate opportunity. *erving as director of two or more corporations.

!.

The self-dealing director

#ec. $%. Dealings of directors, trustees or officers with the corporation. & A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present' !. (hat the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting ". (hat the vote of such director or trustee was not necessary for the approval of the contract $. (hat the contract is fair and reasonable under the circumstances and :. (hat in the case of an officer, the contract with the officer has been previously authori)ed by the board of directors. *here any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by a vote of the stockholders representing at least two&thirds of the outstanding capital stock or of two&thirds of the members in a meeting called for the purpose' +rovided, (hat full disclosure of the adverse interest of the directors or trustees involved is made at such meeting' +rovided, however, (hat the contract is fair and reasonable under the circumstances.

The proceeds of the negotiation went to *tandard Capital Company, another corporation where Cowdin was also a director. The other directors of *perry Corporation demanded from Cowdin and *CC ?!D$,EEE. The dispute led to fruitful negotiations and ended in *perry accepting ?!E!,:EF.GE from Cowdin and *CC and releasing Cowdin from any liability. /inority stoc1holders filed a derivative suit against the directors claiming that the settlement was attended by bad faith and that the release was not the act or deed of the corporation the execution of which was never authori=ed by the board of directors. The minority stoc1holders claim was based on the fact that two of the directors who approved the settlement were not independent in that they were also stoc1holders of *CC at the time the settlement was approved. The court held that the charter of *perry specifically provides that even interested directors may be counted for purposes of &uorum. *uch provision is valid and does not offend any public policy with regards to the internal governance of the corporation. 2. Fixing compensation of directors and officers .%@. %F TC, ACI#IAAI+, I*#>+D* @. ,# C%.>0 FI#IAI+% The provision in the by'laws of ,l Cogar Filipino distributing GH of the net income of the preceding year to the directors in proportion to their attendance in directors5 meetings cannot be made the basis of the revocation of their corporate franchise. *aid provision led to highly beneficial results not only in securing a constant attendance on the part of the membership, but in obtaining their intelligent attention to the affairs of the association. The power to fix the compensation of directors, if any, is left to the corporation, to be determined in its by'laws. If a mista1e has been made, or the rule adopted in the by'laws has been found to wor1 harmful results, the remedy is in the hands of the stoc1holders who have the power at any lawful meeting to change the rule. (>00,T% @. #> A0,@I*%0> FI#IAI+> >n amendment to the by'laws of a loan and building association which provides for the payment of life pension to the persons named therein for past services they have gratuitously rendered to the association cannot be held to be in consonance with the power granted to corporations to grant salaries to their board of directors. The authority conferred upon corporations refers only to providing compensation for the future services of directors, officers,

/,>D @. ,.C. /CC%##%).C ,T. >#. /ead, one of the directors of Ahilippine ,ngineering and Construction Company, sought to recover his salary, share in profits and the value of the personal property he left with the corporation which were sold by the defendants. 8hen /ead went to China to wor1 as an engineer, the other four directors agreed to sell the assets of the corporation to /cCullough, another director of the corporation. The sale, which was approved by a ma2ority of the directors of the corporation, was held valid and binding. >t the time the sale was made, there was no hope that the enterprise would be profitable. >lthough /cCullough was present during the meeting when the sale was approved, his presence was not necessary to constitute a &uorum and li1ewise was not necessary to approve the sale. The sale was approved by the three other directors who constituted a ma2ority and would therefore be binding on /ead. AICC>0D @. *A,00B C%0A%0>TI%+ ,T. >#. Cowdin, a director of *perry Corporation, negotiated on behalf of the corporation with Field .lore and Company.

and employees thereof after the adoption of the by'law or other provision in relation thereto, and cannot in any sense be held to authori=e the giving of continuous compensation to particular directors after their employment has terminated for past services rendered gratuitously by them to the corporation. C,+T0># C%%A,0>TI@, ,ICC>+.,, I+C. @. TI(,, ,T. >#. This is an action instituted by the corporation against one of its former directors for advances drawn from the corporation by virtue of resolutions adopted by the board of directors allowing such directors to claim travel expenses and other allowances. The corporation claims that the board of directors has no right to determine the remuneration of directors and that the resolutions adopted by the board of directors are void. The fixing of the compensation of board of directors is lodged with the members of the cooperative as provided for in its by' laws. ,ven without the reservation in the by'laws, directors are not entitled to compensation. F%.,#*%+ @. >/,0IC>+ 8%%#,+ C%. > retirement plan that provides a very large pension to an officer is beyond the reach of any scrutiny from the courts. It was done on the exercise of the directors5 business 2udgment and the court will not interfere with such business 2udgment save on showing of a clear abuse of discretion as to amount to legal waste. <,0(* @. C>#IF%0+I> ,>*T,0+ >I08>B* *toc1holders are &uestioning the stoc1 option plan and the profit sharing plan adopted by the board of directors in favor of its executives. (oth plans were approved by eight members of the board of directors five of whom were beneficiaries under the plans. *aid plans were ratified by ma2ority of the stoc1holders. The court held that as to the stoc1 option plan, the same could not be upheld in that there was no sufficient showing that the contemplated benefit of the plan will inure to the corporation as there was no safeguards that the beneficiaries will remain in the employ of the corporation. *toc1 option plans adopted by the exercise of proper business 2udgment and in good faith will not be interfered with by the courts if the provisions of the plan, or the facts and circumstances surrounding it, are such as to reasonably insure that the contemplated benefit will inure to the corporation.

The profit sharing plan, on the other hand, was held valid because it was held reasonable and it was ratified by the stoc1holders pending the action.

$.

Using inside information

The fiduciary position of insiders, directors and officers prohibits them from using confidential information relating to the business of the corporation to benefit themselves or any competitor corporation in which they may have a more substantial interest.
#ec $,. Directors, officers and principal stockholders. & -a. ///. For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit reali)ed by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer within any period of less than si/ months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of holding the security purchased or of not repurchasing the security sold for a period e/ceeding si/ months. #uit to recover such profit may be instituted in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring suit within si/ty days after request or shall fail diligently to prosecute the same thereafter but no such suit shall be brought more than two years after the date such profit was reali)ed. (his subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security involved, or any transaction or transactions which the !ommission by rules and regulations may e/empt as not comprehended within the purpose of this subsection.

#ec $0. "nsider1s duty to disclose when trading. & 3a4 "t shall be unlawful for an insider to sell or buy a security of the issuer if he knows a fact of special significance with respect to the issuer of the security that is not generally available, unless -2. the insider proves that the fact is generally available or -%. if the other party to the transaction - or his agent. is identified, -a. the insider proves that the other party knows it, or -b. that the other party knows it from the insider or otherwise. 3b4 3"nsider4 means -2. the issuer, -%. a director or officer of, or a person controlling, controlled by, or under common control with, the issuer, -$. a person whose relationship with the issuer gives or gave him access to a fact of special significance about the issuer or the security which is not generally available, or -5. a person who learns such a fact from any of the foregoing insiders as defined in this subsection, with the knowledge that the person from whom he learns the fact is such an insider. 3c4 A fact is 3of special significance4 if -a. in addition to being material it would be likely, on being made generally

available, to affect the market price of a security to a significant e/tent, or -b. a reasonable person would consider it especially important under the circumstances in determining his course of action in the light of such factors as the degree of its specificity, the e/tent of its difference from information generally available previously, and its nature and reliability. 3d4 (his section shall apply to an insider as defined in subsection -b. -$. hereof only to the e/tent that he knows a fact of special significance by virtue of his being an insider.

6ajority 7ule J Directors and officers owe no fiduciary duty at all to stoc1holders, but they may deal with them at arm5s length. +o duty of disclosure of facts 1nown to the director or officer exists. +ondisclosure cannot constitute constructive fraud. 6inority 7ule J 0ecogni=es the director5s obligation to the stoc1holders individually as well as collectively, and refuses to permit him to profit at the latter5s expense by the use of information obtained as a result of his official position and duties. 3#pecial Facts4 Doctrine J Conceding the absence of a fiduciary relationship in the ordinary case, courts nevertheless hold that where special circumstances or facts are present which ma1e it ine&uitable for the director to withhold information from the stoc1holder, the duty to disclose arises, and concealment is fraud. The 6special facts7 doctrine was applied to the case. .%<%+.8,I @. *,C The amendment to the corporate by'law of */C which renders a stoc1holder ineligible to be director, if he be also a director in a corporation whose business is in competition with that of the other corporation, has been sustained as valid. >n officer of a corporation cannot engage in business in direct competition with that of the corporation where he is a director by utili=ing information he has received as such officer, under the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or in2ures the business of the corporation of which he is an officer or director. > director of */C has access to sensitive and highly confidential information such as 3a4 mar1eting strategies and pricing structure; 3b4 budget for expansion and diversification; 3c4 research and development; and 3d4 sources of funding, availability of personnel, proposals of mergers or tie'ups with other firms. 4. Seizing corporate opportunity
#ec. $5. Disloyalty of a director. & *here a director. By virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two&thirds -%8$. of the outstanding capital stock. (his provision shall be applicable, notwithstanding the fact that the director risked how own funds in the venture.

The liability of a director or officer guilty of using inside information is to the corporation and not to any individual stoc1holder. *T0%+. @. 0,AID, The director and controlling stoc1holder who purchased the shares of another stoc1holder through an agent was held to be guilty of concealing the impending purchase of the friar lands they own by the government, a significant fact which would affect the price of the shares. >lthough ordinarily, the relationship between directors and stoc1holders of a corporation is not of a fiduciary character as to oblige the director to disclose to a stoc1holder the general 1nowledge which he may possess regarding the value of the shares of the company before he purchases any form a shareholder, there are cases when such duty and obligation upon the director is present. (eing the chief negotiator for the sale of the lands, the director was the only person who 1new of the advantages and the impending increase in the value of the shares such that he is precluded from ac&uiring stoc1s from other shareholders without first informing them of the pertinent facts affecting the value of the shares being bought. It is fraudulent for a stoc1holder to buy from a shareholder without disclosing his identity. T>B#%0 @. 80I.CT, ,T. >#. >ction to recover damages for fraud alleged to have been committed by buying the shares at less than their actual value. The stoc1s in &uestion had a boo1 value which is less than its actual value because of investment in securities which are carried in the boo1s at cost but which have increased in value such that a sale of such mar1etable securities would enable the corporation to gain a si=able profit. The defendants who 1new all along the real situation employed a scheme to buy out other stoc1holders so that when the investment in the *hell stoc1 are eventually sold, they would be the ones to benefit from the profits derived. Court ruled for the plaintiffs. .eneral 0ule

#ec. $2. 9iability of directors, trustees or officers. & *hen a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the rpofits which otherwise would have accrued to the corporation.

G. Interlocking directors
#ec. $$. !ontracts between corporations with interlocking directors. & :/cept in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone +rovided, (hat if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. #tockholdings e/ceeding twenty -%0;. percent of the outstanding capital stock shall be considered substantial for the purpose of interlocking directors.

>n officer is similarly liable for sei=ing corporate opportunity because he is considered to have more chances than a board member to do so, since he is usually a full'time corporate agent, with great opportunity and with authority to ma1e decisions on the operational level. The main problem in most cases would be whether or not the corporate opportunity sei=ed was one which properly belonged to the corporation. *I+.,0 @ C>0#I*#, There was an unrecoverable dis1 error ciaries. There was a business opportunity for the corporation but the controlling interests successfully prevented the corporations from engaging in the business opportunity. There was no allegation, however, of the specific securities such that the liability of the directors cannot be ascertained. Directorship in two 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. 8here a fiduciary is engaged in a business in competition with his corporation, he cannot actively use his position and power over his corporation so as to prevent the corporation from see1ing certain business in competition with himself. I0@I+. T0)*T C%. @. D,)T*CC, ,T. >#. Directors cannot appropriate for themselves the right of the corporation to ac&uire interest in another corporation. The allegation of the directors that the corporation was without funds to meet the investment re&uirement cannot be a valid reason for them to individually purchase the stoc1s allocated for the corporation. >s directors, they should have exerted effort to raise the necessary funds for the corporation in order to meet its commitment to invest in the other corporation that would give patent rights beneficial to its operations.

.#%(, 8%%#,+ C%. @. )TIC> .>* >+D ,#,CT0IC C%. .lobe 8oolen Co. cannot exact performance of the contract obtained through the influence of /r. /aynard, its president, over the )tica .as and ,lectric Co. of which /r. /aynard is also a director. The contract that would grant .lobe with free supply of electricity, although approved by the board of directors of )tica .as without /r. /aynard casting his vote, is unfair to )tica .as. > dominating influence may be exerted in other ways than by a vote. !. !lose !orporations 8hen stoc1holders of a close corporation choose not to have a board of directors and instead manage the corporate affairs themselves, the law treats them as directors.
#ec. <=. Articles of incorporation. > /// (he articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. #o long as this provision continues in effect' 2. ?o meeting of stockholders need be called to elect directors %. @nless the conte/t clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this !ode and $. (he stockholders of the corporation shall be subject to all liabilities of directors. /////////////// #ec. 200. Agreements by stockholders. //////

A. (o the e/tent that the stockholders are actively engaged in the management or operations of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. #aid stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance.

D. Duty of !ontrolling "nterest > ma2ority stoc1holder is sub2ect to the duty of good faith when he acts by voting at a stoc1holders5 meeting with respect to a matter in which he has a personal interest. Controlling stoc1holders may dispose of their shares at any time and at such price as they choose provided they do not pervert these prerogatives by transferring office to persons who are 1nown as intending to raid the corporate treasury or otherwise improperly benefit themselves. I+*)0>+*C>0,* C%0A%0>TI%+ @. +%0TC,0+ FI*C># C%0A%0>TI%+ The transfer of the shares of the stoc1holders owning controlling interest in the corporation to outsiders whose main purpose was to divest the corporation of its assets leaving its mere shell to the remaining stoc1holders constitute fraud. *uch controlling stoc1holders would be liable to the corporation and the other stoc1holders.

,. Duty to !reditors
Directors cannot be personally liable to corporate creditors for general inefficient management of a solvent corporation. 8hen the corporation has become insolvent, the directors are deemed trustees of the creditors and should manage the assets of the corporation with strict regard to the creditors5 interests.

CHAPTER IX THE RIGHT OF INSPECTION

#ec. =5 Books to be kept stock transfer agent & :very corporation shall, at its principal office, keep and carefully preserved a record of all business transactions, and minutes of all meetings of stockholders -#B#. or members, or of the board of directors -BCD. or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authori)ed, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. @pon demand of any director, trustee,

stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes and on similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. (he protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. (he records of all business transactions of the corp and the minutes of any meeting shall be open to the inspection of any director, trustee, stockholder or member of the corp at reasonable hours on business days and he may demand, in writing, for a copy of e/cerpts from said records or minutes, at his e/pense. Any officer or agent of the corp who shall refuse to allow any director, trustee, stockholder or member of the corp to e/amine and corp e/cerpts from its records or minutes, in accordance with the provisions of the !ode, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under #ection 255 of the !ode' +rovided, (hat if such refusal is pursuant to a resolution or order of the BCD or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal' +rovided further, (hat it shall be a defense to any action under this section that the person demanding to e/amine and copy e/cerpts from the corp1s records and minutes has improperly used any info secured through any prior e/amination of the records or minutes of such corp or of any other corp, or was not acting in good faith or for a legitimate purpose in making his demand. #tock corporations must also keep a book to be known as the 3stock and transfer book1, in which must be kept a record of all stocks in the names of the #B# alphabetically arranged the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of nay installment a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made and such other entries as the by&laws may prescribe. (he stock and transfer book shall be kept in the principal office of the corp or in the office of the stock transfer agent and shall be open for inspection of any director or stockholder of the corp at reasonable hours on business days. ?o stock transfer agent or one engaged principally in the business of registering transfer of stocks in behalf of a stock corp shall be allowed to operate in the +hils. @nless he secures a license from the #:! and pays a fee as may be fi/ed by the !ommission, which shall be renewed annually' +rovided, (hat a stock corp is not precluded form performing or making transfer of its own stocks, in which all the rules and regulations imposed on stock transfer agents e/cept the payment of the license fee herein, provided, shall be applicable. #ec. =A 7ight to financial statements & *ithin 20 days from receipt of a written request of any #B or member, the corp shall furnish him its most recent financial statement, which shall include a balance sheet as of the end of the last ta/able year and a profit and loss statement for said ta/able year, showing in reasonable detail its assets and liabilities and the results of its operations. At the regular meeting of #B# or members, the BCD or trustees shall present to such #B# or members a financial

report of the operations of the corp for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant. Bowever, if the paid&up capital of the corp is less than +A0,000 the financial statements may be certified under oath by the treasurer or any responsible officer of the corp.

For both directors and *C*, same limitations but exercise of right has diff basis director ' due to corp duties 8hether the *C of a parent corp has right to examine the boo1s of its subsidiary depends on 8%+ the two have been operated as legally separate and independent entities If so, no right of inspection If they are practically one and the same insofar as mgnt and control, and inspection is demanded because of gross mismanagement of subsidiary by the parent5s directors who are also directors of subsidiary, there can be inspection 0emedies available if inspection refused !4 8rit of mandamus Directed against the corp but the secretary may be 2oined as a party since in charge of custody of boo1s and person against whom order of the court would be made effective. The president can also be made party defendant if necessary to effectuation of court5s order "4 In2unction $4 >ction for damages against officer or agent of the corp who refused to allow inspection +ote that the corp itself is not made liable although refusal is pursuant to a board resolution 3*ec F:4 Court should concern itself only with &uestions of whether the petitioner honestly believed the facts to be as set forth in his petition and whether he sought to protect his substantial investment in the corp A>0D% @* C,0C)#,* #)/(,0 C% %fficials in charge of a corp may deny inspection when sought at unusual hours or under other improper conditions but neither executive officers nor the (%D have power deprive *C of the right altogether (y'law unduly restricting right of inspection is undoubtedly invalid. 0easonable hours on business days throughout the year and not merely during some arbitrary period of a few days chosen by the directors .enerally spea1ing, *C motive in exercising right is immaterial 7ight of inspection ' incident of ownership of stoc1 so indirectly own boo1s *C should advise the corp that right of inspection is delegated to another person .%+K>#,* @* A+( *C has not set forth reasons and purposes for inspection. Circumstances under which he ac&uires one share of stoc1

(alance must be sought bet interests of individual *C and those of corp The (y'#aws may impose limitations on the right of inspection provided they are !4 0easonable >+D "4 +ot inconsistent with law > corp may regulate time and manner of the inspection of boo1s but it cannot ma1e a by'law which gives the directors absolute discretion to allow or disallow inspection A. 9imitation as to time and place Can exercise right only at reasonable hours on business days. (%D cannot limit inspection to merely a few days a year chosen by (%D. #aw means reasonable hours on business days throughout the year. (y'law cannot prescribe that inspection shall be exercised only upon authority of Aresident previously obtained Alace of inspection ' principal office of corp. *C* cannot demand that he be allowed to ta1e corporate boo1s out of the corp5s principal office of inspection 'Inspection should be made in such a manner as not to impede the efficient operations of corp
(4

+urpose

*toc1holder5s purpose for inspection is material *ec F: presumes purpose to be proper (urden of proving that the purpose is improper or illegal is on corp Aurpose legitimate when it5s .,0/>+, to the interests of the stoc1holders Fact that the *C is a *C in a competitor corp or is on unfriendly terms with its officer is not a 2ustifiable ground to deny access, if purpose is proper 8here *C5s motive is clearly inimical to corp5s interest and the info is desired for the purpose of crippling the corp for the benefit of a business rival, right to inspect may be denied Inspection right may be exercised by the director, trustee, stoc1holder, member personally or through an agent 3other person who can help him understand and interpret the records

in respondent ban1 purposely to exercise inspection right with respect to transactions before he became a *C do not argue in favor of his good faith and proper motivation. %bvious purpose was to arm himself with materials which he can used against the ban1 for acts done by the latter when petitioner was a total stranger to the same ' *uch purpose not germane to *C interest though impelled by a laudable sense of civic consciousness >los, A+( having its own charter, not governed by the Corp Code. *uch right of inspection violative of their charter provisions @,0>.)TC @* I*>(,#> *).>0 C% Directors have the un&ualified right to inspect the boo1s and records of the corp at all reasonable times 0ight not to be denied on ground that director is on unfriendly terms with officers of corp whose records are sought to be inspected Director without court order cannot be permitted to ta1e boo1s out of the corp +othing improper in secretary5s refusal since the minutes of these prior meetings have to be verified, confirmed and signed by the directors then present so @eraguth has to wait until after the next meeting *C or director may ma1e copies, extracts and memoranda of such records (y'law cannot provide for inspection only upon authority of president of corp previously obtained in each case .%<%+.8,I @* *,C #aw ta1e from the *C the burden of showing propriety of purpose and place upon corp the burden of showing impropriety of purpose and motive Considering that foreign subsidiary is wholly owned by */C and therefore under its control , it would be more in accord with e&uity, good faith and fair dealing to construe the statutory right of .o1ongwei as petitioner as *C to inspect the boo1s and records of such wholly subsidiary which are in */C5s possession and control Aurpose in inspecting subsidiary !. funds disposition ". income generation terms and conditions of purchase of facility of subsidiary

*uits of *toc1holders based on wrongful or fraudulent acts of directors or other persons a4 individual suits, wrong done personally to the stoc1holder and not to other stoc1holders 3i.e. when right of inspection is denied to a particular stoc1holder4; b4 class suits, wrong done to a group of stockholders 3i.e. the whole class of preferred stoc1holders5 rights violated4; c4 derivative suit, wrong done to the corporation itself. In a derivative suit, the cause of action belongs to the corporation and not the stoc1holder. (ut since the directors who are charged with mismanagement are also the ones who will decide whether or not the corporation will sue, then the corporation is left without redress, hence, the stoc1holder is given the right to sue on behalf of the corporation. Cere an individual stoc1holder is permitted to bring a derivative suit to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue or are the ones to be sued or hold control of the corporation. +ote that the stoc1holder is merely a nominal party while the corporation is the real party in interest. 7equirements 7elating to Derivative #uit !. *toc1holder bringing suit must have e/hausted remedies within the corporation meaning that 3a4 demand made on the directors to sue but they failed or refused to sue, or 3b4 no demand necessary when futile to do so specially when ma2ority of the board of directors are the ones guilty of the wrong complained of; ". Individual bringing suit must be a stockholder at the time the acts or transactions complained of, meaning a bona fide ownership by a stoc1holder of stoc1 in his own right suffices to invest him with standing to bring a derivative suit, the number of shares is immaterial since he is not bringing the suit in his own name but on behalf of the corporation; $. Any benefit recovered must be accounted for the corporation who is the real party in interest 3although the suit was brought by a stoc1holder4; :. If suit is successful, individual stoc1holder who brought suit is entitled to a reimbursement from the corporation for reasonable expenses including attorney5s fees 3personal observation this last re&uisite is not necessary as the cases enumerates only the first three4. +ote that refusal of the board of directors not to sue a third person may be defended as an exercise of business 2udgment, which under ordinary circumstances, no court is willing to interfere with. This is so since the right to sue

CHAPTER X DERIVATIVE SUITS

?ature D Basis of Derivative #uit' Distinguished from "ndividual and 7epresentative #uit

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includes the correlative right not to sue. )nless an equitable basis for intervention be shown, an individual stoc1holder has no more right to challenge by a derivative suit a decision of the board not to sue a third person ()T where the complaint alleges and it is proved that the directors acted in bad faith, dishonestly, or breach of trust, or were under the control of the wrongdoers , then a derivative suit against third person may be given due course. Derivative suits must be filed with the *,C, instead of the regular courts, unless they involve third persons. :EA?F:9"#(A, :( A9 E. #A?(C# Facts' Alaintiffs, minority stoc1holders of @itali #umber Company, alleges in their complaint that defendant as president, manager and treasurer of their company, through fault, neglect and abandonment allowed it lumber concession to lapse and its properties and assets to disappear causing the complete ruin of the corporation5s operation and total depreciation of its stoc1s. They pray for an accounting from the defendant of the corporate affairs and assets, payment to them of the value of their respective participation in said assets on the basis of the value of the stoc1s held by each of them and to pay the cost of the suit. 7uling' In derivative suits, the in2ury complained of must be one which is against the corporation, thus the action properly belongs to the corporation rather than the stoc1holders. The suit is brought by the individual stoc1holder as the nominal party plaintiff for the benefit of the corporation which is the real party in interest. In the case at bar, however, plaintiff stoc1holders brought the action not for the benefit of the corporation but for their own benefit since they as1 that the defendant ma1e good losses occasioned by his mismanagement and to pay them the value of their respective participation in the corporate assets on the basis of their respective holdings. Aetition dismissed for venue being improperly laid. !lass notes In effect what the stoc1holders petitioning for, in this case, was a distribution of corporate assets before li&uidation which is not allowed. Their remedy is to amend the complaint and bring it to the proper venue. Derivative suits may be brought by 3a4 a minority stoc1holder, 3b4 a corporate officer, 3c4 a treasurer, 3d4 a director, or 3e4 a ma2ority stoc1holder when re&uirement of "L$ affirmative vote is necessary.

7:+@B9"! BA?G E. !@AD:7?C, :( A9 Facts' This is an appeal from a dismissal of the case against respondent 0oman for alleged fraudulent grant of loans to relatives 3while he was chairman of the (oard of Directors of 0epublic (an1 and its ,xecutive #oan Committee4 and for the selection of respondents Cuaderno and Di=on 3as technical consultant and chairman of the board respectively4 in order to shield himself from the alleged wrongdoing and from any prosecution that may be instituted against him. The complaint also alleges that the present composition of the board of directors of the ban1 are constituted by men chosen by respondent 0oman so that it was futile to as1 them, in the first place, to institute this action on behalf of the ban1. 7uling' In a derivative suit, the corporation is the real party in interest and the stoc1holder is merely a nominal party. +ormally, it is the corporation through its board of directors that should bring the suit. (ut where, as in this case and it is alleged in the complaint, that the members of the board of directors of the ban1 were the nominees and creatures of respondent 0oman, thus, any demand for an intra'corporate remedy would be futile, the stoc1holder is permitted to bring a derivative suit. >s to the &uestion of 6should the corporation be made a party7, the ,nglish practice is to ma1e the corporation a party plaintiff while in the )* the practice is to ma1e it a party defendant. Cowever, in our 2urisdiction what is important is that the corporation should be made a party in order to ma1e the court5s 2udgment binding upon it, and thus bar future litigation of the issues. /is2oinder of parties 3in a derivative suit4 is not a ground to dismiss the action. 7:H:# E. (A?, :( A9 Facts' This is an action instituted by a stoc1holder of 0oxas'<alaw Textile /ills, Inc. praying for the appointment of a receiver of the said corporation. The case is filed against the corporation5s board of directors for the purchases made by the manager in +ew Bor1 supposedly for raw materials but it turned out that what was bought were finished products from companies where said manger had interests. *aid purchases led to the central ban15s stoppage of all dollar allocations in favor of said corporation which in turn paraly=ed the entire operation of the corporation.

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It is alleged that said directors failed to act on the fraudulent purchases for a period of two 3"4 years, thus, forcing plaintiff to bring this derivative suit. 7uling' The importation of textiles instead of raw materials as well as the failure of the board of directors to ta1e 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 2ustifies the minority stoc1holders to institute a derivative suit on behalf of the corporation. The appointment of a receiver was not only expedient but also necessary to restore the faith and confidence of the Central (an1 authorities in the administration of the affairs of the corporation, thus ultimately leading to a restoration of the dollar allocation so essential to the operation of the textile mills !lass notes The remedies of minority stoc1holders 3by the institution of a derivative suit4 include the appointment of a receiver or constitution of a management committee or removal of a director 3personal note it seems *ir -acinto implies that this last remedy is not automatically available as a conse&uence of a derivative suit4. >s regards the exhaustion of intra'corporate remedies, it is sufficient to allege that there was an actual exhaustion or that it is futile to resort to such remedy. #A? 6"F@:9 E. GAB? Facts' !: corporations initially ac&uired shares of outstanding capital stoc1 of *an /iguel Corporation and constituted a @oting Trust thereon in favor of >ndres *oriano, -r. 8hen the latter died ,duardo Co2uanco was elected as the substitute trustee. Cowever, after the ,D*> revolution, Co2uanco fled out of the country, and subse&uently an agreement was entered into between the !: corporations and >ndres *oriano III 3as an agent of several persons4 for the purchase of the shares held by the former. >ctually the buyer of the shares was +eptunia Corporation, a foreign corporation and wholly'owned subsidiary of another subsidiary wholly owned by *an /iguel Corporation. +eptunia paid the downpayment from the proceeds of certain loans. AC.. then se&uestered the shares sub2ect of the sale so *an /iguel suspended all the other installments of the price to the sellers. The !: corporations then sued for recission and damages. /eanwhile, AC.. directed *an /iguel to issue &ualifying shares to seven 3F4 individuals including ,duardo de los >ngeles from the se&uestered shares for them to hold in trust.

Then, the *an /iguel board of directors passed a resolution assuming the loans incurred by +eptunia for the downpayment. De los >ngeles assailed the resolution alleging that it was not passed by the board aside from its delitorious effects on the corporation5s interest. 8hen his efforts to obtain relief within the corporation proved futile, he filed this action with the *,C. 0espondent directors alleged that de los >ngeles has no legal standing having been merely 6imposed7 by the AC.. and that the twenty 3"E4 shares owned by him personally cannot fairly and ade&uately represent the interest of the minority. 7uling' The re&uisites of a derivative suit are !. the party bringing the suit should be a stoc1holder as of the time of the act or transactions complained of, the number of shares not being material; ". exhaustion of intra'corporate remedies 3has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea4; and $. the cause of action actually devolves on the corporation and not to the particular stoc1holder bringing the suit. The bona fide ownership by a stoc1holder in his own right suffices to invest him with the standing to bring a derivative suit for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong committed against him individually but in behalf and for the benefit of the corporation. It is undisputed that apart from the &ualifying shares given to him by the AC.., he owns "E shares in his own right, as regards which he cannot from any aspect be deemed to be beholden to the AC.., his ownership of his shares being precisely what he invo1es as the source of his authority to bring the derivative suit. Furthermore, it was not necessary for de los >ngeles to be a director in order to bring a derivative suit. De los >ngeles5 complaint is confined to the issue of the validity of the assumption by the corporation of the indebtedness of +eptunia, allegedly for the benefit of certain of its officers and stoc1holders and is distinct from the ownership of the se&uestered shares. The dispute concerns the acts of the board of directors claimed to amount to fraud and misrepresentation which may be detrimental to the interest of the stoc1holders, or is one arising out of intra'corporate relations between and among stoc1holders, or between any or all of them and the corporation of which they are stoc1holders 3meaning that the cause of action still belongs to the corporation4. !lass notes' In effect the result of the acts of the directors of *an /iguel is the use of corporate assets for the benefit of certain directorsLstoc1holders to the extent

12

that the corporation will not be able to devote its assets in ac&uiring its own shares. (ut even without the presence of a self'interested director, still the transaction would result to a premature retirement of the shares 3meaning a reduction of capital4. In a derivative suit, the number of shares of a suing stoc1holder is immaterial. ,ven assuming that the suing stoc1holder had only &ualifying shares, the law re&uires only 6one share7 without any distinction or &ualification. besides, it is precisely within the scope of AC..5s duty to preserve the assets of the corporation.

!4 right to early claim on corp profits before other security holders receive any payments "4 right to residual income $4 right to vote and hence power to control corp "GH subscription re&5t not bound to limit starting capital of business. >s long as complied with, may tap other sources !A+"(A9 #(C!G ' amount fixed usually by corporate charter ' 6to be subscribed and paid in or secured to be paid in by the *C , either in money or prop, labor or services at the org of the corp or afterwards and upon which it is to conduct its operations. 0emains the same unless the articles3>I4 are amended C@(#(A?D"?F !A+"(A9 #(C!G ' amount subscribed; M or N to authori=ed capital stoc1 9:FA9 C7 #(A(:D !A+"(A9 ' aggregate par or issued value of the subscribed capital stoc1, which sets the limit of corporate assets that shld be retained by the corp as protection of the creditors and which amount, as a rule, may not be withdrawn by to distributed to the *C* !A+"(A9 ' actual prop of the corp. Includes *C contributions, loans to $rd persons and earnings less loss incurred #BA7: CF #(C!G ' unit3s4 of interest into which capital stoc1 is divided; ac&uired by a person when he contributes capital by way of e&uity ' represents interest of holder to participate in mgnt of corp; to share proportionally in profits of business and upon li&uidation, to obtain ali&uot part of corp assets after all corp debts are paid ' investment long'term ; no 6maturity date7 ' as a rule, *C get bac1 investment only upon dissolution or earlier if exercised appraisal right ' *C not owner of any specific corp prop nor creditor of such ' personal prop of *C which can be transferred or disposed of !:7("F"!A(: CF #(C!G ' not shares ' merely evidenced the interest of *C in corp ' issued in name of holder and transfer is made on written order and on surrender of certificate
#ec , !lassification of shares & (he shares of stock of corp may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation -A".' +rovided, (hat no share may be deprived of voting rights e/cept those classified and issued as 3preferred4 or

CHAPTER XI FINANCING THE CORPORATION; CAPITAL STRUCTURE

$ main sources a4 *C contributions 3 e&uity investment4 b4 #oans or advances by creditors $4 Arofits or corp earnings Initial financing ' possibly involve !st " 8hen a going concern ' profits instead of giving as dividends may be capitali=ed %ther transactions in raising funds ' short'term financial instruments usually for immediate corporate needs which present cash position can5t meet payable within a short period 3not really part of the capital structure4 !A+"(A9 #(7@!(@7: ' aggregate of the securities issued by the corp. #:!@7"(":# ' instruments which represent relatively long' term investment in corp " classes !4 *enior *ecurities ' have prior but limited claim upon corporate earnings and would include debt securities and typical preferred stoc1 3A*4 >+D "4 ,&uity *ecurities ' have residual interest in such earnings; refer to common stoc1 3C*4 and is any, participating A* Determination of various classes of securities and their relative amounts wor1ed thru distribution of a4 ris1 b4 control >+D c4 profit /ost impt characteristics of such securities

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3redeemable4 shares, unless otherwise provided in this !ode' +rovided further, (hat there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in A"' +rovided, however, (hat banks, trust companies, insurance companies, public utilities, and bldg and loan associations shall not be permitted to issue no&par value shares of stock. +referred shares of stock issued by any corp may be given preference in the distribution of the assets of the corp in case of liquidation and in the distribution of the assets of the corp in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the Ai which are not violative of the provisions of this !ode' +rovided, (hat preferred shares of stock may be issued only with a stated par value. (he BCD, where authori)ed in the Ai, may fi/ terms and conditions of preferred shares of stock or any series thereof' +rovided, (hat such terms and conditions shall be effective upon filing of a certificate thereof with the #:!. #hares of capital stock issued without par value shall be deemed fully paid and non&assessable and the holder of such shares shall not be liable to the corp or to its creditors in respect thereto' +rovided, (hat shares without par value may not be issued for a consideration less than the value of +A.00 per share' +rovided, (hat the entire consideration received by the corp for its no&par value shares shall be treated as capital and shall not be available for distribution as dividends A corp may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal req1ts. :/cept as otherwise provided in the articles and stated in the certificate of stock, each share shall be equal in all respects to every other share. ///

Code allows the >I to authori=e the (%D to fix terms and conditions of A* provided that they will be effective only upon filing of certificate thereof with *,C. ' 3&ualifies the re&5t that preferences must appear in >I4 +7:F:7:?!: A# (C D"E"D:?D# & Dividends payable only when profits are earned and as a general rule, even if there are existing profits, the (%D has discretion to determine 8%+ dividends are to be declared. A* contract may give him privilege of being paid first before any dividend is paid to C*. >mount of this preference stated in contract, usually in terms of fixed H of the par value of stoc1. I4 articipating and !on- articipating ' Aarticipating ' after getting their fixed dividend preference ahead of C*, they share with the C* the rest of the dividends. )nless expressly provided, A* are nonparticipating ii4 "umulati#e and !on-"umulati#e ' In absence of any express stipulation, A* are deemed C)/)#>TI@, ' meaning if in any given year3s4 no dividends are declared, the arrears for such year3s4 have to be made up in subse&uent years b: any dividends can be paid to C*. II//>T,0I># 8%+ the corp have profits. %nce profits are made and dividends declared by (%D, all arrears must !st be paid. +%+'C)/)#>TI@, ' when contract ma1es dividends depend upon the existence of profits for year and if there are no profits in previous year, no arrears result that no dividend will be given to ma1e up for that year $ principal varieties of +%+'C)/)#>TI@, A* !4 Discretionary dividend type ' right of *C to get dividends in a particular year would depend on the (%D discretion even though profits are present for that year "4 6andatory dividend type ' contract imposes a positive duty on the directors to declare preferred dividends every year that profits are earned $4 :arned cumulative or Dividend credit type gives a right to arrears in dividends where there were profits earned during years when dividend were not declared; merely postpones the receipt of dividends earned to a later date and waits until the (%D decides to declare dividends

!. !ommon #tock 3C*4 'most commonly issued; usually, with full voting rights; in the presence of A*, the C* are usually vested with exclusive right to vote and have residuary rights to the profits and the net assets upon li&uidation, after preferences have been complied with. ". +referred #tock 3A*4 ' entitles holder to some preferences either in the !4 dividends or "4 in the distribution of assets upon li&uidation or $4 in both or to :4 such other preferences not inconsistent with the Code " limitations imposed on *ec O on A* issuance !4 can only be issued with stated par value "4 preferences must be stated both in the >I and in the certificate, otherwise each share be e&ual in all respects to every other share

A# (C EC("?F 7"FB(# A* usually denied to right to vote. (ut unless C#,>0#B withheld, a A* would have the right to vote since it is an incident to stoc1 ownership. %ftentimes, a contingent right to vote would be provided for 3 when dividends are passed until declared4. The Code also grants non'voting

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stoc1s the right to vote in specified instances involving ma2or changes in the corp 3*,C "$4 +7:F:7:?!: @+C? 9"I@"DA("C? Areference may be on !4 dividends ;"4 distribution of corp assets upon li&uidation or $4 both In the absence of any provision granting such preference in li&uidation, sLhe participates pro rata with the common *C* since each share is presumed to be in all respects e&ual to every other share BAH E# BAH >I provides that upon li&uidation, the A* should receive the par value plus an amount e&ual to 67all accrued unpaid dividends thereon7 before any assets should be distributed to C* The words unpaid and accrued modify the word di#idends. The words express the idea that the dividends, if not paid regularly out of available earnings, may be amassed or stored up, whether earned or not, at the regular dividend rates, and attach to the shares of such stoc1 until conditions arise when they may be declared and paid. Cumulative preferred become similar to creditors wrt to dividends unpaid 3after (%D declaration4 after the creditors are paid . It is accrued or corp liable if the dividend are already declared by (%D; no declaration, no liability #i&uidating dividends paid out of corporate assets +7:F:77:D #B "# NOT A !7:D"(C7 A* a e&uity holder; stoc1 sub2ect to all ris1s of ownership. It can get bac1 only upon the li&uidation of the corp, provided there are enough assets left after paying all creditors. A@F@#(A (7@#( E# A@F@#(A :(A9 A* may be issued in exchange of bonds as to ma1e the certificates thereof merely evidence of indebtedness and the holders creditors of the corp and not *C*. (ut in this case, the facts characteri=e the A* as preferred stoc1s. The *C* voted increases in the capital stoc1 by the creation of A*. The certificates delivered to the holders of the bonds exchanged therefor designated the stoc1 as A* and certified that the holders were entitled to the number of shared therein in the 6full paid preferred capital stoc17. The holders had the right to vote in the directors5 election. The certificates had none of a contract creating a relation of creditor'debtor (y surrendering their bonds and ta1ing in lieu thereof A*, the bondholders ceased to be creditors and become mere *C*. Those who have not made the exchange and holds

their bonds are entitled to the mortgage proceeds. A*C* not entitled thereto.

$4 Aar or +o Aar *hares ' a4Aar value fixed in the >I and is minimum issue price of such share; /ust be stated in certificate which cannot be issued until subscriber has fully paid. *toc1s cannot be issued or sold at less than par otherwise they would be 6watered stoc17 and the *C will be liable for the difference b4 +o par shares are those whose issued price is not stated in the certificate but may be fixed in the >I or by the (%D when so authori=ed by >I or by by'laws or in the absence thereof, by the *C* themselves. They are not considered issued until fully paid #imitations on the issuance of +o Aar stoc1 a4 once issued, they are deemed fully paid and non' assessable b4 consideration for their issuance cannot be less than AG c4 entire consideration for their issuance constitutes capital and hence not available for distribution as dividends d4 cannot be issued as A* e4 cannot be issued by ban1s, trust companies, insurance companies, public utilities and bldg and loan associations >+D f4 >I must state fact that corp issues no'par shares and the number of such shares :4 Treasury *hares '
#ec < (reasury #hares & (reasury shares are shares of stock which have been issued and fully paid for but subsequently reacquired by the issuing corp by purchase, redemption, donation or thru some or lawful means. #uch shares may again be disposed of for a reasonable price fi/ed by the BCD

/ay be sold even less than par; 0egarded as corp property G4 0edeemable *hares 30*4
#ec J 7edeemable #hares & 7edeemable shares may be issued by the corp when e/pressly so provided in the A". (hey may be purchased or taken up upon the e/piration of a fi/ed period, regardless of the e/istence of unrestricted retained earnings in the books of the corp, and upon such other terms and conditions as may be stated in the A" which terms and conditions must also be stated in the certificates of stock representing said shares

Features of 0*

15

0edemption privilege usually given only to A* It is also common feature of debt securities li1e bonds and debentures c4 8hen attached to shares of stoc1, it must be provided for in the >I and stated in the certificate d4 It ordinarily ta1es the form of an option on the part of the corp to purchase the shares or bonds usually at par or face value plus a specified minimum 3 permits ad2ustment of the capital structure and enable corp to pay off the securities and avoid certain restrictions4 e4 In case of redeemable bonds, the redemption privilege may be exercised when interests rates decline, to replace issue with another carrying a lower interest rate f4 0edemption is allowed even if there are no unrestricted retained earnings. *,C there must remain sufficient assets to cover liabilities, inclusive of capital and for mandatory 0*, set up a sin1ing fund to meet cost of redemption.
a4 b4

FA7!"A E# 9"6 !B@ #"?F > share of stoc1 is not an indebtedness to the owner nor evidence of indebtedness and therefore not a credit. *C* are not creditors of the corp. The capital stoc1 of a corp is a trust fund to be used more particularly for the security of the creditors of the corp, who presumably deal with it on the credit of its capital stoc1 Instances where *C can be a creditor !4 upon dissolution after corp debts are paid "4 when dividends declared re-Incorporation Su$scription
#ec 2$ Amount of the !apital #tock to be #ubscribed and +aid for +urposes of "ncorporation & At least %A; of the authori)ed capital stock as stated in the articles of incorporation , and at least %A; of the total subscription must be paid upon subscription, the balance to be payable on the date-s. fi/ed in the contract of subscription without need of call, or in the absence of a fi/ed date or dates, upon call by the BCD' +rovided, however, (hat in no case shall the paid up capital be less than +A,000

O. Founder5s *hares
#ec = Founder1s #hares & Founder1s shares classified as such in the A" may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the e/clusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to e/ceed A years subject to the approval of #:!. (he A year period shall commence from the date of approval of approval by #:!

+ature of a *ubscription Contract " ways to become a *C !4 by subscription before or after incorp "4 by ac&uisition of already issued shares from existing *C* #ubscription ' contract for the ac&uisition of unissued stoc1 whether existing or still to be formed and is in effect the contribution or promised contribution of a person to the capital +eed not be paid in full at time of contract Implied that it should be in writing although not covered by *tatute of Frauds because not a sale %nce perfected, the *C becomes a debtor to the corp and may be liable to pay any unpaid portion 8ith respect to unpaid portion, *C personally liable for the financial obligations of the corp to the extent of unpaid portion
#ec ,, "nterest on @npaid #ubscription #ubscribers for stock shall pay to the corp interest on all unpaid subscriptions for the date of subscription, if so required by, and at the rate of interest fi/ed in the by&laws. "f no rate of interest is fi/ed in the by&laws, such rate shall be deemed to be the legal rate.

,ffect of pre'incorporation subscription ' 8hen a group of persons sign a subscription contract, they are deemed not only to ma1e a continuing offer to the corp but also to have contracted with each other as well. +o one of them may revo1e the contract even prior to incorp without consent of all others
#ec ,2 +re&"ncorporation #ubscription & A subscription for shares of stock of a corp still to be formed shall be irrevocable for a period of at least , months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materiali)e within said period as may be stipulated in the contract of subscription' +rovided, (hat no pre&incorporation subscription may be revoked after the submission of A" to the #:!

%nce formed, not even the corp can release the subscriber from the obligation to pay unpaid subscription. The *C may however resist compliance if a diff corp as contemplated is formed, or there are serious defects in the incorp pre2udicial to *C, unless the acts show estoppel, waiver or ac&uiescence If a pre'incorporation subscriber is not satisfied with the way the promoters are handling pre'incorporation matters, he is free to get out of the venture after such period, regardless of what other pre'incorporation subscribers feel about the matter.

16

ost-Incorporation Su$scription Corp Code erased distinction between subscription and purchase
#ec ,0 #ubscription !ontract & Any contract for the acquisition of unissued stock in an e/isting corp or a corp still to be formed shall be deemed a subscription within the meaning of this (itle, notwithstanding the fact that the parties refer to it as a purchase or some other contract #ec J0 7ights of @npaid #hares & Bolders of subscribed shares are not fully paid which are not delinquent shall have all the rights of a #B

*ince a subscriber is a debtor to the corp, it remains liable to pay the balance of the subscription price even if the corp should subse&uently become insolvent BAH9A E# #"9A?F (7AFF"! "?! The contract is one of sale and not of subscription 8hether a particular contract is a subscription or a sale of stoc1 is a matter of construction and depends upon its terms and the intention of the parties *ubscription'mutual agreement of the subscribers to ta1e and pay for the stoc1 of a corp; involves $ parties a4 corp; "4 subscriber and $4 co'subscribers; even before full payment, en2oy all *C rights subscriber liable to corp if it becomes insolvent Aurchase ' independent agreement between the individual and the corp to buy shares of stoc1 from it at a stipulated price; if corp becomes insolvent, corp no claim against purchase for price since it is in no position to issue certificate +7:&:6+("E: 7"FB( (C #BA7:# Areemption 'create only a preference which may or may not be exercised Basis of right common law rule The preemptive right is the option privilege of an existing stoc1holder to subscribe to a proportionate part of shares subse&uently issued by the corp before same can be disposed of in favor of the others )nless this right is recogni=ed, his interest in the corporation would be diluted by the subse&uent issuance of shares :/tent and limitations of preemptive right under the !ode #aw includes all issues or dispositions of shares of any class Include not only new shares in pursuance of an increase of capital stoc1 but would cover the issue of previously unissued shares which form part of the existing capital

stoc1, as well as treasury shares. Former would come under all issues, the latter under disposition 8here the shares are issued in exchange for prop needed for corporate purposes, or for a debt previously contracted, the *C cannot demand his preemptive right for right may pre2udice corporate interest 8here the shares are issued by one corp in exchange for shares in another corp in pursuance of a merger, the preemptive right does not exist, provided that the issue is made with approval of "L$ of the holders of outstanding stoc1 and is not made in bad faith Code allows waiver or denial of the preemptive right provided it is made in the >I either as an original provision or an amendment
#ec $< +ower to Deny +re&:mptive 7ight & All #B# of a stock corp shall enjoy preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the A" or an amendment thereto' +rovided, that such preemptive right shall not e/tend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public, or to shares to be issued in good faith with the approval of the #B# representing %8$ of the outstanding capital stock, in e/change for prop needed for the corporate purposes or in payment of previously contracted debt.

"n !lose !orporations

#ec 20% +reemptive 7ight in !lose !orp & (he preemptive right of #B# in close corp shall e/tend to all stock issued, including reissuance of treasury shares, whether for money, prop or personal services or in payment of corporate debts, unless the A" provide otherwise

For close corp, control is main factor ,xceptions in *ec $D not applicable Areemptive right of *C* in close corp is broadened to include all issues, without exception unless otherwise denied or limited by the >I *aiver of +reemptive 7ight >ny prior waiver or denial of the preemptive right should appear in the >I and not merely in an ordinary waiver agreement > waiver through an >I amendment to the >I would need only "L$ who may have dissented but also all subse&uent *C* If all the existing *C* unanimously agree to a waiver, although for some reason no amendment of the >I is made no one among them can later complain since they are all bound by their private agreement. (ut it would not bind future *C* *C* must be given reasonable time in which to exercise their preemptive rights. )pon the expiration of said period,

17

any *C who has not exercised such right will be deemed to have waived it DA(@ B:?"(C E# #:! Aower to issue shares of stoc1 in a corp is lodged in the (%D and no stoc1holders5 meeting is necessary to consider it because additional issuance of shares of stoc1s does not need approval of the *C*. (y'laws authori=e (%D to provide for issue and transfer of shares Feneral rule Are'emptive right is recogni=ed only with respect to new issue of shares and not with respect to additional shares of originally authori=ed shares In case at bar, the preemptive right was recogni=ed with respect the increase in capital stoc1 only; reason ' when *C invested, he did not contemplate that his shareholdings would change *hen the issue is in breach of trust ,ven if the preemptive right does not exist, either because the issue comes within the exceptions in *ec $D or because it is denied or limited in the >I, an issue of shares may still be ob2ectionable if the directors have acted in breach of trust and their primary purpose is to perpetuate or shift control of the corp or to 6free=e out7 the minority interest 7emedies when right is violated !4 In2unction against the issue %0 "4 /andamus to allow *C to exercise his right %0 $4 *,C or court may order the cancellation of the shares provided no innocent $rd parties are pre2udiced In any case, the suit should be individual and not derivative because the wrong done not to the corp but to the *C* individually. (ut a derivative suit has been held proper where the plaintiff claimed not only a violation of his preemptive right but also that such violation resulted in the waste of corporate assets or in giving fraudulent directors control of the corp (BC6 E# BA9("6C7: (7@#(-B(. The *C* of a corp have a preferential right to purchase new issues of its shares, to the proportional extent of their respective interests in the capital stoc1 then outstanding, when the privilege can be exercised consistently with the ob2ect which the disposition of the addt5l stoc1 is legally designed to accomplish. The right adheres to stoc1 ownership as an essential means of enabling the *C to maintain ratio of his proprietary interests and voting power in the corp

(ut the transactions involving ac&uisition of prop, instead of money, by the corp in exchange for shares of stoc1 , the determining consideration to the owners of the prop may be the advantage of sharing as *C* in the profits of the corp with which they are contracting It would not be feasible to consummate a transfer based upon such a consideration if the preemptive right of the plaintiffs were to be held enforceable with respect to every new issues of stoc1s regardless the ob2ect of disposition. /erger was underta1en to increase the firms5 coverage, necessary for the business of both firms D@?9AH E# AE:?@: 6 FA7AF: D 7:+A"7 *to1es case principle 8ell established that a *C has an inherent right to a proportionate share of new stoc1 issued for money only and not to purchase prop for the purposes of the corp or to effect a consolidation and that while he can waive that right, he cannot be deprived of it without his consent except when the stoc1 is issued at a fixed price not less than par and he is given the right to ta1e it at that price in proportion to his holding or in some other e&uitable way that will enable him to protect his interest by acting on his 2udgment and using his own resources If the issue of the unissued original shares, whenever authori=ed, is reasonably necessary to raise money to be used in the business of the corp rather than the expansion of such business beyond the original limits, the original stoc1holders have no right to count on obtaining and 1eeping their proportional part of the original stoc1 The issuance of the shares was to pay off legitimate accrued corporate liability Directors may not authori=e the issue of unissued stoc1 to themselves for the primary purpose of converting them from minority to ma2ority *C* ' breach of fiduciary duty, irrespective of pre'emptive right 7C## (7A?#+C7( "?! E# !7C(B:7# ,xisting *C* are the owners of the business, and are entitled to have that ownership continued in the same proportion Doctrine of pre'emptive right is not affected by the identity of the purchasers of the issued stoc1 8hat it is concerned is who did not get it (ut when officers and directors sell to themselves, and thereby gain an advantage, both in value and in voting power, another situation arises, which it does not re&uire the assertion of pre'emptive right to deal with Directors5 purchase may not be ipso facto void, but it is necessary to establish that there has been actual fraud or imposition practiced by the party holding the confidential or fiduciary relation.

18

(urden of proof shifts upon the directors to establish its fairness *ale must be set aside as a constructive fraud upon the other *C* +o proof present to show that the corp needed money so badly and was such in a financial condition that the sale of the addt5l stoc1 to the directors themselves was the only way the money could be obtained D:B( #:!@7"(":# Form of $orro%ings The "nd main source of capital of a corp is from borrowings, represented usually by promissory notes, bonds or debentures. *ometimes a financial institution will be willing to lend large amounts to a private corp only on the condition that such institution will have some representation in the former5s (%D
!.

". &onds and de$entures *ub2ect to prior approval of and registration with the *,C and the vote of "L$ of the outstanding capital stoc1, a corp may incur bonded indebtedness by issuing bonds which are offered to the public or to a specified group of lenders. These debt securities are a series of instruments representing units of indebtedness and regarded as one entire debt. (onds differ from debentures in that the former are usually secured by a mortgage or pledge of corporate prop Debentures are issued on the general credit of the corp. *ince these are not secured by any collateral, they are not bonded indebtedness in the true sense, and thus would not need approval of the *C* although it would perhaps be a good policy to obtain it (onds and debentures earn interest. Interest is to creditor' investor what dividends are to the *. Cowever, interest must be paid by the corp whether it ma1es profits or not; dividends can be paid only if there are profits. Interest therefore, unli1e dividends, is a fixed charge which the corp cannot avoid or postpone even in times of business depression )nder *ec $P of Corp Code, bonds issued shall be registered with the *,C which shall have authority to determine the sufficiency of the terms thereof (onds and debentures must be paid at the stipulated period so that the creditor gets bac1 his investment on a specified date. > *C has to wait for the dissolution of the corp and li&uidation of it assets and even then recouping his investment depends on whether there are any assets left after paying all creditors, bondholders included. $. "on#erti$le securities' stock options The contract of the security holder may give him the privilege to exchange his class of securities with another class. The conversion is usually from a senior security 3bonds and preferred stoc1s4 to common stoc1s. The

contract will usually specify not only the security to which it may be converted but also the ratio of conversion and the period within which the privilege may be exercised Instead of a conversion privilege, the stoc1s and debenture may carry with it stoc1 option warrants. These are options to purchase stoc1s in the corp at a specified price not lower than par, exercisable by the grantee at any time within a specified period Convertible securities are often also redeemable, but the conversion privilege continues after notice of redemption is given until the date fixed for actual redemption The *,C has issued rules as to stoc1 options for the protection of the interests of the investors. The rules re&uire prior approval before the granting of any stoc1 option. If granted to non'*C* and to directors, officers or managing groups. *C* owning at least "L$ of the outstanding capital stoc1 must give their approval. The *,C shall then determine the reasonableness of the stoc1 option plan. In any case, the corp should retain or authori=e enough of the 2unior securities to meet the conversion or stoc1 option when exercised. 6:77"((&!BA+6A? D #!C(( E# ?H (7@#( In order to harmoni=e >I provisions, ma2ority riled that warrant holders are entitled to stoc1 dividends even before conversion, thus for an unlimited time 3no deadline or cut' off date4 *toc1 dividend does not change the proportional interest of each *C in corp; changes only the evidence which represents the interest %ther *C* are placed at a disadvantage because the resulting dilution of their interest in the stoc1 dividends. :. (y$rid securities *ince preferred shares and bonds are created by contract, it is possible to create stoc1 which approximate the characteristics of debt securities. The determination of whether such a hybrid is truly a bond or 2ust another 1ind of preferred stoc1 may be crucial for tax purposes. If it is a bond, then the interest thereof is deductible by the corp from its gross income in the determinable of its taxable income. If it is stoc1, then 6interest7 paid would be actually dividends and thus not deductible from corporate income for tax purposes Tests !. Is the corp liable to pay bac1 the investor at a fixed maturity date9 ". Is interest payable unconditionally at definite intervals or is it dependent on earnings9 $. Does the security ran1, at east e&ually with the claims of other creditors or is it subordinate to them9

19

+A9("?F E# #A? KC#: +:(7C9:@6 KC7DA? !C E# A99:? Certain factors or criteria which they considered significant in arriving at the true nature of the securities involved a4 treatment by the parties b4 maturity date and right to enforce collection c4 ran1 on dissolution d4 uniform rate of interest payable or income payable out of profits e4 participation in mgnt and the right to vote Corp treated the debenture stoc1s as obligation and the payments as interest Colders of such stoc1s ran1ed ahead of other *C* but inferior to general creditors %f utmost significance, the debenture stoc1s have no maturity date Fixed maturity date together with right to enforce payment is essential feature of a debtor and creditor as opposed to *C relationship Aayment of premiums upon retirement more consistent with retirement of stoc1 than with payment of past due obligations *hould termination of corporate existence be considered the maturity date of the debenture stoc1, it would not be a fixed date set in advance but could constantly be moved forward simple by corporate action +o maturity date, obligation to pay income only out of profits and the subordination debenture stoc1 holders to general creditors render payments made thereon more li1e dividends on A* rather than interest on bonds G. The Trust Indenture a4 $ parties to a bond issue 'debtor'corp 'creditor'bondholder 'trustee b4 among the $, only the corp and the trustee 3 as rep. of all bondholders4 are the parties in the trust indenture c4 trust indenture defines the rights of the parties, and usually contains the ff. 'description of the prop mortgaged 'provisions for its care and maintenance 'payment of taxes 'amount authori=ed under the issue 'conversion and redemption privilege 'conditions under which the mortgage may be released 'duties of the trustee 'conditions for default 'remedies in case of default 7:I@"7:6:?(# @?D:7 (B: 7:E"#:D #:! A!( +eed to register e&uity securities and bonds because with public at large Issue 8%+ registration of *>+ -%*, A,T0%#,)/ should be granted9 Aalting had personality to file petition because accdg to *ec >ct F >ny person opposed must file written opposition to *,C *o long as the securities are outstanding and are placed in the channels of trade and commerce, the investing public are entitled to have the &uestion of the worth or legality of the securities one way or the other Tie'up of *an -ose Aet 3foreign4 and *an -ose %il3domestic4 violative of #aurel'#angley >greement '+ot owned directly by )* citi=ens but owed by another Aanamanian corp 3%il Investments4; '%I owned by another " @ene=uelan corp so not owned directly and controlled by )* citi=ens; +o showing that the " @ene=uelan corp owned and controlled by >mericans; ,ven if owned by >mericans, still has to show that those *tates give same privilege to Filipinos *an -ose Aet essentially a holding company and accdg to *,C,its principal activity is limited to financing and giving assistance to *an -ose %il *ome provisions in >I violative Ahil corporation law. (y virtue of >I, the directors can do anything short of actual fraud. (y virtue of a $'party agreement, *-A received %I P/ shares of *-% stoc1 3presumably previously purchased4 worth QPEE,EEE and a Q"GE,EEE note in exchange for !Om shares 3QE.$GR4 for a total value of QG.O/. In effect, *-A actually Q:,GG/ which was received by %I. (ut in their boo1s, an asset not liab appeared 3>I+5T IT FI*CB4 Thus, the sale of *-A securities in Ahls would tend to wor1 fraud on Ahil investors @?D:7*7"("?F #:!@7"(":# )nderwriting the act or process of guaranteeing the distribution and sale of the securities of any 1ind issued by another corp $ (asic Types !. *T0ICT )+D,080ITI+. /,TC%D the underwriter agrees, for a premium or fee, to sell the securities to the public and ta1e up whatever portion of the issue not sold within a specified period ". FI0/ C%//IT/,+T )+D,080ITI+. assures the issuer of a specified amount of money at a certain time and shifts the mar1et to the investment houses $. (,*T ,FF%0T* )+D,080ITI+. availed of by corps which are not well yet established and therefore finds it difficult to find an underwriter who will give a firm commitment and assume the ris1 of distribution; not underwriting in the strict sense, since the underwriter merely acts as an agent of the corp

20

O. outstanding shares exchanged for stoc1s.

CHAPTER XII: CONSIDERATION FOR ISSUANCE OF SHARES

Form of Consideration
#ec. ,%. !onsideration for stocks. & #tocks shall not be issued for a consideration less than the par or issued price thereof. !onsideration for the issuance of stock may be any or a combination of any two or more of the following'

The value of the consideration received should be e&ual to the issue price of the shares of stoc1s which in no case should not be less than the par value. *toc1s may be issued at par or above par value but never below par value. In case of no par value shares, the issued price may be fixed !. in the articles of incorporation; or ". by the (oard of Directors if they are authori=ed to do so in the articles of incorporation; or $. by the stoc1holders representing at least a ma2ority of the outstanding capital stoc1 in a meeting duly called for the purpose. *hares of stoc1s cannot be issued in exchange for promissory notes or future services. Liability on Watered Stock 8hen stoc1s are issued below par value, watered stoc1s are created. Directors and officers who consented to the issuance of watered stoc1s are solidarily liable with the holder of such stoc1 to the corporation and its creditors for the difference between the fair value received at the time of the issuance and the par or issued value of the same.
#ec. ,A. 9iability of directors for watered stocks. & Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par value or issued value or for a consideration in any form other than cash, valued in e/cess of its fair value, or who, having knowledge thereof, does not forthwith e/press his objection in writing and file the same with the corporate secretary shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same.

!. >ctual cash paid to the corporation; ". Aroperty tangible or intangible, actually received by
the corporation and necessary or convenient for its use and lawful purposes at a fair valuation e&ual to the par or issued price of the stoc1s issued; #abor performed for or services actually rendered to the corporation; Areviously incurred indebtedness of the corporation; >mounts transferred from unrestricted retained earnings to stated capital and %utstanding shares exchanged for stoc1s in the event of reclassification or conversion.

$. :. G. O.

8here the consideration is other than actual cash, or consists of intangible property such as patents or copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, sub2ect to the approval by the *ecurities and ,xchange Commission. *hares of stoc1 shall not be issued in exchange for promissory notes or future services. The same consideration as provided for in this section insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no'par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by'laws, or in the absence thereof, by the stoc1holders representing at least a ma2ority of the outstanding capital stoc1 at a meeting duly called for the purpose. *toc1s should be issued only in exchange for valuable consideration which can be any of the following !. cash ". tangible or intangible property $. services rendered to the corporation :. outstanding obligations of the corporation G. amounts transferred from retained earnings

(7"+9:L #BC: !C. E. 7"!: D B@(!B"?#, "?!. +% A>0 @>#), *T%C< C>++%T (, 0,.>0D,D >* @>#ID >+D %)T*T>+DI+. )+#,** TC, C%+*ID,0>TI%+ TC,0,F%0 8>* FII,D >* 0,S)I0,D (B #>8. The stoc1s issued to the Dillman faction were no'par value shares, the consideration for which were never fixed as re&uired by law. Cence, its issuance was void. The certificate of incorporation did not confer upon the (oard of Directors authority to fix the consideration for no par

21

value stoc1, and therefore, the consideration could be fixed only by the stoc1holders as provided by the statute. The stoc1holders never fixed the consideration for any of the no par value stoc1 issued by the corporation after its organi=ation, and there is no escape from the conclusion that all such stoc1 was invalid at the tine of the election I &uestion and not entitled to be voted. F)T)0, *,0@IC,* >0, +%T #>8F)# C%+*ID,0>TI%+ F%0 TC, I**)>+C, %F *T%C<.

entitled to recover the 6water7 from holders of the watered stoc1. )nder this theory, reliance of corporate creditors on the misrepresentation is material. )nder the statutory obligation theory, reliance of creditors on the capital stoc1 of the corporation is irrelevant.

How Payment of Shares Enforced /oreover, the stoc1s were issued to the Dillmans in consideration for services rendered in organi=ing the company and in agreeing to serve the company at a much smaller compensation. Clearly, the stoc1s were issued not for services rendered but for services yet to be rendered, and are therefore, invalid for having no valid consideration. The Dillman faction, therefore, cannot vote the invalid stoc1s they hold and the directors they elected into office cannot be held to be validly elected. The Cutchison faction, on the other hand, who holds preferred stoc1 but the preference of which was not stated , was held to be validly elected into office although the amended certificate of incorporation provided that 6 The sole voting power shall reside in the holders of the common stoc1.7 The court interpreted the provision to mean that if there is any common stoc1 legally issued and outstanding, that is entitled to vote, the preferred stoc1 cannot vote, but if there is no such common stoc1, the situation is the same as would be if no common stoc1 had been issued at all. 7BCD: E. DC!G&BC+ !C. Innocent transferees of watered stoc1 cannot be held to answer for the deficiency I the stoc1s even at the suit of a creditor of the company. The creditor5s remedy is against the original owner of the watered stoc1. B"?F !7C#BH 6"?@(: 6A"D !C7+. E. :A(C? > subscriber to shares who pays only in part of what he agreed to pay is liable to creditors for the balance. Colders of watered stoc1 are generally held liable to the corporation5s creditors for the difference between the par value of the stoc1 and the amount paid in. )nder the misrepresentation theory, creditors who rely on the misrepresentation of the corporation5s capital stoc1 are Collection of unpaid subscriptions may be effected by the corporation either through delin&uency sale or through court action. Delin !ency Sale" #e !isites !. Time for payment of unpaid subscriptions may be specifically stated in the subscriptions contract either at a single date or several dates. ". In case payment date is not specified in the subscriptions contract, (%D may call for the payment of the subscriptions at any time; call for subscriptions may be total or partial. $. Aayment should be made on the date stated in the subscription contract or on the date stated in the call made by the (%D. :. +on'payment on the specified date renders the whole subscription due and payable. Interest at the legal rate or at the rate specified in the by'laws accrues from the specified payment date until full payment. G. >fter $E days from the specified payment date, all unpaid subscriptions will be declared delin&uent and will be sub2ected to delin&uency sale. Delin&uency sale will be effected a follows !. (%D adopts a resolution ordering the sale of delin&uent stoc1 specifically stating 3a4 the amount due on each subscription 3b4 the accrued interest 3c4 date, time and place of the sale. *ale should be made not less than $E days nor more than OE days from date the stoc1s became delin&uent. ". +otice of the sale together with the resolution shall be 3a4 sent to every delin&uent stoc1holder either personally or by registered mail

22

3b4 published once a wee1 for " consecutive wee1s in a newspaper of general circulation in the province or city where the principal office of the corporation is located. $. Delin&uency sale shall only proceed if the delin&uent subscriber fails to pay for the balance on his subscription plus accrued interest, costs of advertisement and expenses of sale. :. Delin&uent stoc1s will be sold at public auction. (idder who offers to pay the full amount of the subscription balance together with the accrued interest, costs of advertisement and expenses of sale shall ac&uire such shares and a certificate of stoc1 shall be issued in his favor.

once a wee1, for four consecutive wee1s in some newspapers. In a solvent corporation, there must be a published call for the payment of unpaid subscriptions before payment could be demanded. +o cancellation or release from obligation can be valid without the consent of the stoc1holder. 9@6A?9A? E. !@7A > stoc1 subscription is a subsisting liability from the time the subscription is made. *ubscriptions to the capital stoc1 of a corporation constitute a fund to which the creditors have a right to loo1 for the satisfaction of their claims. The assignee in insolvency can maintain an action upon any unpaid stoc1 subscription in order to reali=e assets for the payment of its debts. Effect of Delin !ency
#ec. =2. :ffect of delinquency. & ?o delinquent stock shall be voted for or be entitled to vote or to representation at any stockholders1 meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder e/cept the right to dividends in accordance with the provisions of this !ode, until and unless he pays the amount due on his subscription with accrued interest and the costs and e/penses of advertisement , if any.

G. If the winning bidder only bid for a number of shares

less than the total delin&uent shares, only the number of shares pertaining to his bid shall be issued to him and the balance of the shares shall be given to the original subscriber.

O. The corporation may bid and buy its own shares which
it may carry in its boo1s as treasury shares which can be subse&uently reissued. Co!rt $ction The corporation need not go through the process of delin&uency sale in order to collect the balance from subscribers. > court action for collection may be directly had. > valid call for the subscriptions is necessary before a court action for collection of delin&uent shares can prosper. E:9A#!C E. +C"MA( The corporation has no legal capacity to release an original subscriber to its capital stoc1 from the obligation of paying for his shares, in whole or in part. 8hen insolvency supervenes, all unpaid subscriptions become at once due and enforceable. Corollary 0ule The receiver or assignee, in an action instituted by proper authority, could himself proceed to collect the subscription without the necessity of any prior call whatever. 9"?FAH:? F@9F :9:!(7"! +C*:7 !C., "?!. E. BA9(AMA7 +otice of any call for the payment of unpaid subscription should be made not only personally but also by publication

%wner of delin&uent stoc1s loses all the rights of a stoc1holder except the right to dividends. Dividends due the delin&uent stoc1 shall be applied to the unpaid balance and the costs and expenses, if any. #i%hts and Obli%ations of Holders of &n'aid b!t Non( delin !ent Stock
#ec. =%. 7ights of unpaid shares. & Bolders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. #ec. ,,. "nterest of unpaid subscriptions. & #ubscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fi/ed in, the by&laws. "f no rate of interest is fi/ed in the by&laws, such rate shall be deemed to be the legal rate. #ec. ,$. !ertificate of stock and transfer of shares. L// ?o shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.

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#ec. ,5. "ssuance of stock certificate. & ?o certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and e/penses -in case of delinquent shares., if any is due, has been paid.

which evidences their ownership of shares in a particular corporation Lost or Destroyed Certificate
#ec. =$. 9ost or destroyed certificates. & (he following procedure shall be followed for the issuance by a corporation of new certificate-s. of stock in lieu of those which have been lost, stolen or destroyed.

F@A !@? E. #@66:7# ,&uity in shares of stoc1 may be assigned and the assignment is valid as between the parties and as to persons to whom notice is brought home. > subscriber does not become the owner of a particular number of shares corresponding to the amount he already paid but merely holds a right of e&uity in the total number of shares subscribed. Complete ownership over the total number of shares subscribed will only vest with the stoc1holder upon payment of the whole subscription price. BA9(AMA7 E. 9"?FAH:? F@9F :9:!(7"! +C*:7 !C., "?!. 8here the corporation has issued certificate of stoc1 of a definite number corresponding to the initial payment made on the subscription, said shares may validly be voted at all meetings and only the remaining number of shares in the unpaid subscription will be affected by the call and subse&uent declaration of delin&uency in case of non'payment of the subscription balance. ?AEA E. +::7# 6A7G:("?F !C7+. +o shares of stoc1 against which the corporation holds an unpaid claim are transferable in the boo1s of the corporation. /andamus will not lie to compel corporate officers to record the transfer of shares in its boo1s where no shares of stoc1s were issued for the unpaid subscription. The issuance of the certificate of stoc1, its indorsement and delivery to the transferee, and the surrender thereof to the corporation are re&uisites for the recording of the transfer in the corporate boo1s. Thus, 0icardo +ava, to whom Teofilo Ao transferred "E of the PE shares the latter subscribed but has not yet fully paid, and for which no certificate of stoc1 has been issued, has no cause of action against the officers of the corporation for the recognition and recording of the transaction in the corporate boo1s. The transfer of the shares to +ava is valid only between him and Ao. )ss!ance of Certificate %nce full payment for the stoc1s have been tendered to the corporation in any of the valid forms of consideration for the issuance of stoc1s, the purchaser or the subscribers entitled to be issued the corresponding certificate of stoc1

!. The registered owner of certificate3s4 or his legal

representative shall file with the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate3s4 were stolen or destroyed, the number of shares represented by each certificate, the serial number 3s4 of the certificate3s4 and the name of the corporation which issued the same. Ce shall also submit such other information and evidence which he may deem necessary;

". >fter verifying the affidavit and other information and

evidence with the boo1s of the corporation, said corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a wee1 for three 3$4 consecutive wee1s at the expense of the registered owner of the certificate3s4 of stoc1 which have been lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner and the serial number3s4 of said certificate3s4, and the number of shares represented by such certificate3s4, and that after the expiration of one 3!4 year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate3s4 of stoc1, the right to ma1e such contest shall be barred and said corporation shall cancel in its boo1s the certificate3s4 of stoc1 which have been lost, stolen or destroyed and issue in lieu thereof new certificate3s4 of stoc1, unless the registered owner files a bond or other security in lieu thereof as may be re&uired, running for a period of one 3!4 year for a sum and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of one 3!4 year period provided herein; Arovided, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate3s4 of stoc1 which have been lost, stolen or destroyed, the issuance of the new certificate3s4 of stoc1 in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate3s4 of stoc1 which have been lost, stolen or destroyed.

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,xcept in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate3s4 of stoc1 in lieu of those lost, stolen or destroyed pursuant to the procedure above'described.

CHAPTER XIII: DIVIDENDS AND PURCHASE BY CORPORATION OF ITS OWN SHARES

)ntrod!ction > stoc1holder has three very important rights. These are the following !. his right to vote, ". his right to a share of the corporate assets upon li&uidation, and, $. his right to a share in the corporate profits or his dividend right. Definition of Di*idend >. >ccording to Campos, a dividend is the portion of corporate profits which is set aside for distribution to the stoc1holders in proportion to their subscription to the capital stoc1 of the corporation. (. (lac1Ts #aw Dictionary on Dividends The payment designated by the board of directors of a corporation to be distributed pro rata among the shares outstanding. C. Time Dictionary of Finance and Investment Terms on Dividends The distribution of earnings paid to stoc1holders based on the number of shares owned. Form of Di*idends
#ection 5$. +ower to declare dividends. && (he board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them' +rovided, (hat any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and e/penses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid' +rovided, further, (hat no stock dividend shall be issued without the approval of stockholders representing not less than two& thirds -%8$. of the outstanding capital stock at a regular or special meeting duly called for the purpose. #tock corporations are prohibited from retaining surplus profits in e/cess of one hundred -200;. per cent of their paid&in capital stock, e/cept' -2. when justified by definite corporate e/pansion projects or programs approved by the board of directors or -%. when the

corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its8his consent, and such consent has not yet been secured or -$. when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies.

>. Cash Dividends ' Dividends declared and made payable in cash. (. Aroperty Dividends ' Consists of a portion of corporate property paid to shareholders instead of cash or the companyTs stoc1. >lso called as >sset Dividend, which is dividend paid in the form of an asset of the company, normally a product. *crip is a certificate issued to stoc1holders in lieu of cash dividends, entitling them to a certain amount at some future date. This form is rarely used. >lthough the law does not expressly mention this form, it may be included under the term UpropertyU dividend. C. *toc1 Dividends ' is a distribution to the stoc1holders of the companyTs own stoc1. This means that corporate profits or earnings are transferred to capital stoc1 and shares of stoc1 representing the increase in capitali=ation are distributed. )nless there are available unissued shares of the corporation, stoc1 dividends cannot be declared without first increasing the capital stoc1. +ew shares are then issued to the stoc1holders in proportion to their interests. >lthough the number of their respective shares increase, their investment and their proportional interest in the corporation remain the same. The stoc1 dividends represent no income to them but merely evidence of the increase in shares owned. )nless such stoc1 dividends are converted into cash by the sale thereof, they have therefore received no income, which is sub2ect to tax. *toc1 dividends are considered as civil fruits belonging to the usufructuary and not to the na1ed owner of the stoc1s on which they are declared. 3(achrach @. *eifert4 In the case of +ielson ? Co. @. #epanto Consolidated /ining Co., no stoc1 dividends can be issued to non'stoc1holders even for services rendered. *ince stoc1 dividends are distributed proportionally to the holdings of a stoc1holder, sometimes fractional shares result. Instead of issuing fractional shares, the corporation usually pays the e&uivalent of such fractions in cash, or, it may issue instead fractional share warrants. 0elevant Case ?":9#C? D !C. "?!. E. 9:+A?(C !C?#C9"DA(:D 6"?"?F !C.

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Facts Aursuant to an agreement in a management contract regarding the compensation of +ielson, #epanto Consolidated will pay +ielson !EH of any dividends declared and paid. #epanto declared stoc1 dividends worth one million in !D:D and two million in !DGE. This was during the period covered by an extension in the management contract. +ielson sued for his share in the stoc1 dividends. The *upreme Court declared that +ielson was entitled to receive !EH of the stoc1 dividends declared or shares of stoc1 worth $EET. In this motion for reconsideration, #epanto maintains that the court erred in such order because it is a violation of the Corporation #aw, *ection !O. Issue 8hether or not a corporation can issue stoc1 dividends to a person who is not a stoc1holder in payment of services rendered. Decision The *upreme Court ruled that +ielson is not entitled to a share in the stoc1 dividends since he is not a stoc1holder. Cowever, he must still be paid his !EH fee using as the basis for computation the cash value of the stoc1 dividends declared. Important Aoints on the Case of +ielson ,ffects of the Inclusion of a +on'stoc1holder as a *toc1 Dividend (eneficiary !. It deprives a stoc1holder of his right share in the corporate profits. ". The proportion of a stoc1holderTs interest changes radically to his or her detriment. $. The non'stoc1holder benefits without assuming the same ris1s as those born by a stoc1holder. So!rce of Di*idends .eneral 0ule +o *toc1 dividend may be declared, except out of unrestricted retained earnings. 0etained ,arnings ' the net accumulated earnings of the corporation out transactions with individuals or firms outside of the corporation. 0etained earnings include earnings from the sale of goods or services in the ordinary course of its business, as well as earnings from the sale of corporate property other than its stoc1 in trade, at a price higher than cost. Implicit from the term retained earnings is the limitation that a corporation has no power to declare dividends unless its legal or stated capital is maintained. 0etained earnings do not include transactions involving treasury stoc1, since the purchase and sale of such stoc1 are regarded as contractions and expansions or paid'in capital. +either do they include donations which are also considered as additional paid'in capital. 8here

the value of existing assets has increased and a are appraisal is made, the increase is merely an unreali=ed capital element and therefore does not constitute earnings from which dividends, whether in cash or stoc1, may be declared. )nrestricted 0etained ,arnings ' the undistributed earnings of the corporation which have +%T been allocated for any managerial, contractual or legal purposes and which are free for distribution to the stoc1holders as dividends. 0elevant Case B:7G# B7CAD!A#("?F !C. E. !7A@6:7 Facts The capital structure of (er1s (roadcasting Company was restructured. Aart of which was the clearing of the )npaid *toc1 *ubscriptions account balance with additional investments from the stoc1holders, a recognition of .oodwill, and with an entry recording the unreali=ed appreciation or revaluation increment of the assets of the company. The net result of this procedure was a surplus. From that the controlling stoc1holders through the (%D declared and paid dividends. During the period of declaration and payment of dividends, the sale of the corporation to a new group was perfected and was 2ust awaiting the approval of the Federal Communications Commission. In this present suit, the new stoc1holders are suing for the recovery of the dividends paid to the former stoc1holders since it has been unlawfully declared from a surplus which included the revaluation increment for the asset or the unreali=ed appreciation of its value. Issue 8hether or not dividends may be declared and paid out of surplus which is constituted by the recorded but unreali=ed appreciation of corporate assets. Decision The *upreme Court declared that such cannot be done. The surplus from which dividends must be ta1en must be a bona fide and not an artificial or fictitious one. It must be founded upon actual earnings or profits and not be dependent for its existence upon a theoretical estimate of an appreciation in the value of the companyTs assets. *uch reappraisals are sub2ect to mar1et fluctuations, or, merely anticipatory of future profit, or, may never be actually reali=ed as an asset of the company. Finally, the (usiness Corporation #aw of !D$$ expressly disallows such a funding of a dividend declaration and payment. Di*idend Declaration Limitations, Discretionary with +oard"

.eneral 0ule 8hether or not there should be a distribution of dividends in whatever form, such matters

26

are always sub2ect to the business 2udgment of the (oard of Directors and the courts will not interfere with the formerTs discretion. ,xceptions 3!4 8hen the decision is tainted with bad faith, 3"4 8hen the decision is tainted with fraud, 3$4 8hen the decision is tainted with gross negligence, %0 3:4 8hen the profits accumulated are in excess of !EEH of the corporations paid'in capital stoc1, )+#,**; 3a4 the accumulation is 2ustified by definite expansion pro2ects approved by the (oard, 3b4 the corporation is prohibited under a loan agreement without the creditorTs consent, and such consent has not been secured, 3c4 %r, it can be clearly shown that the retention is necessary under special circumstances. ,xplanation The 2ustification for this interference with the business 2udgment and discretion of the corporationTs board of directors was given in the preamble of Aresidential Decree "FE which is as follows U8C,0,>*, this failure to declare dividends where corporations are able to do so stultifies investorTs interest in channeling their investible funds in e&uities even of productive industries and enterprises and thereby retards the economic growth and development of the country; U8C,0,>*, a more favorable and healthier climate for investments would be promoted if stoc1holders are able to share in the profits of corporations whenever possible, the same not being sub2ect to the absolute or arbitrary action of management on the matter.U 0elevant Case DCDF: E. FC7D 6C(C7 !C. Facts *toc1holders led by Dodge were see1ing to compel the declaration of dividends by Ford /otor Company. It turns out that Ford /otors have operated successfully and profitably. Cowever, the management of the company has shifted its focus from see1ing profitability to one that has more emphasis on eleemosynary or charitable purposes. *pecifically, it sought to provide more cars for the public at the lowest price possible. To effect this, it was argued by management that the corporate profits earned must be set aside for the expansion of its production facilities so that it will have a more streamlined and cost efficient system.

Issue 8hether or not such a change in corporate policy is a valid reason for not declaring dividends. Decision The *upreme Court ruled that the stoc1holders must be dividends. The reasons for these are that the company has accumulated a very large amount of profit and that the costs of expansions are still feasible even if dividends will be declared. The financing of such are spread over a significant span of time. Therefore, not all of the retained earnings will be restricted especially for the current year. It is worth mentioning though that the change in policy by the companyTs board of directors was not pre2udicial to the interests of the stoc1holders. Bet, e&uity still demands that because of the large profits, dividends which are affordable must still be paid since the receipt of such is a right of a stoc1holder in the first place. Preference as to Di*idends The articles of incorporation may provide for stoc1s with preferences in the distribution of dividends other than stoc1 dividends. These are usually non'voting stoc1s. In many cases, preferred stoc1s get additional protection from the abuse of the directors in refusing to declare dividends by a provision in their contract that in case dividends are passed up for three consecutive years, the holders of such stoc1s will have the right to vote at the election of directors until dividends are declared. 0elevant Case B@7G E. C((A*A FA# A?D :9:!(7"! !C . Facts (ur1 is a holder of eight shares of OH non' cumulative preferred shares. In this action, he was see1ing the accounting of all assets, a declaration of dividends and a restraining order against the officers of the company from paying out any of the money or disposing of the assets except such amounts as would be necessary to conduct the business of the corporation. The lower court ruled for the defendant corporation and its officers on the ground that the extensions of the companies properties Uwere necessary and for the betterment of the plant and accommodation of the patrons.U Cence, this appeal. Issue 8hether or not the preferred stoc1holder has a right to a declaration and payment of dividends under the circumstances of the case. Decision The *upreme Court ruled that the case be remanded to the lower court for more determinative proceedings. This was needed because the manner and nature of the expenditures for the extensions or expansions of the companyTs plant was not clearly

27

illustrated. If the word UnecessaryU is interpreted to mean that the extensions were such as the corporation was re&uired to ma1e by its obligation to the public, then the trial court was right in holding that the plaintiff could not loo1 for dividends to any part of the funds so expended. Cowever, the *upreme Court noticed that the trial court seemed to have used the term UnecessaryU as meaning merely that the extensions were advisable as a matter of good 2udgment, for the benefit of the business. )nder such an interpretation, the *upreme Court is of the opinion that the funds so employed were wrongfully diverted from the payment of dividends to the plaintiffs. the directors of the corporation owed a positive duty to pay a dividend to the preferred stoc1holders whenever in any year there were net profits available. The funds that might be used for that purpose could not rightfully be expended for extensions merely for the benefit of the business, nor could they be withheld to meet the expenses of the nest year. When #i%ht to Di*idends -ests" #i%hts of Transferee. .eneral 0ule the right of the stoc1holders to be paid dividends vests as soon as the same have been lawfully declared by the (oard of Directors. From that time, it becomes a debt owing by the corporation to each stoc1holder and no revocation of the dividends can be made. The reason for this rule is based on reasons of policy which is to prevent the misleading of investors and the probable effect which a revocation may have on the stability of transactions involving shares of stoc1. ,xception It does not apply where the declaration of dividends was 3!4 +ot yet announced or communicated to the public, or, 3"4 8hen stoc1 dividends are declared since these are not distributions but merely represent changes in the capital structure. 0ights of Transferee *ince the right to dividends vests upon its declaration, the 0)#, is 8hoever owns the stoc1 at that time also owns the dividends. > subse&uent transfer of such stoc1 would not carry with it the right to the dividends which have been declared but not yet paid. The practice in most widely held corporations has been to provide, in the declaration of dividends, that the same are payable to *T%C<C%#D,0* %F 0C%0D on a specified date following the declaration. Thus, whoever is the registered owner on the record date, is entitled to the

dividends. >s against the transferor, however, a transferee of stoc1s after the declaration but before the specified date of payment, has presumably the right to such dividends, despite failure to record the transfer on the corporate boo1s, unless of course they have agreed to the contrary, which is often the case. 0elevant Case 6!9A7A? E#. !7:#:?( +9A??"?F 6"99 !C Facts The concerned company declared dividends and divided the payments into four payments. The first payment was made. (ut when the second payment was due, it was not paid upon the supposed discovery of an error that overstated assets by Q O,EEE.EE. For this and other business reasons, the (oard of Directors adopted a resolution that indefinitely deferred the payment of the rest of the dividends. Cence, this suit was filed by the plaintiffs to complete the payments. The defense raised was that there was no declaration of dividends for the reason that the board failed to set aside apart funds for the payment of the same. Issue 8hether or not a declaration of dividends creates an obligation to pay against the corporation. Decision The *upreme Court ruled that the corporation is liable for the payment of dividends it has declared. > declaration creates an implied promise on the part of the corporation to pay the stoc1holder the amount of the dividend. The stoc1holder under the present circumstances has the status of a general creditor. Furthermore, the declaration being proper, cannot be revo1ed by the subse&uent action of the corporation. To allow such would be granting a debtor to absolve himself from paying what he is obliged to pay. Important Aoints on the /c#aran Case 3!4 The mere declaration of the dividend by competent authority under proper circumstances creates a debt against the corporation in favor of the stoc1holders in the same light as any other general creditor of the same. 3"4 %n the other hand, the setting apart of a fund after or concurrent with the declaration, out of which the debt thus created is to be paid, passes one step further toward securing the payment of the identical fund to the shareholder inasmuch as the law treats the setting apart of such fund as a payment to the corporation as trustee for the use of the stoc1holder, on which fund the stoc1holder has a lien, and to which fund he has rights superior to the general creditor. Liability for )lle%al Di*idends

28

The directors are +%T personally liable for unintentionally declaring dividends in violation of law, unless they acted willfully, or, with negligence, or, in bad faith. This is consistent with the general rule that courts will not interfere with the business 2udgment of the directors, unless it is shown that they have acted in bad faith, or were negligent in the discharge of their duties.
#ection $2. 9iability of directors, trustees or officers. && Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest inconflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

*ection :! lays down the rule regarding the ac&uisition by a corporation of its own shares. Two conditions must be fulfilled First The corporation must have sufficient unrestricted retained earnings to cover the shares to be purchased. This re&uirement is primarily for the protection of the creditors whose claims must first be repaid before any distribution of corporate assets can be made to any stoc1holder. ,xception
#:! """. 2. ?o corporation shall redeem, repurchase or reacquire its own shares, of whatever class, unless it has an adequate amount of unrestricted retained earnings to support the cost of the said shares, :L!:+(' a. *hen the shares are reacquired in the redemption of redeemable shares of the corporation or pursuant to the conversion right of convertible shares of the corporation, e/pressly provided for in its articles of incorporation and certificates of stock representing said shares b. *hen the shares are reacquired to effect a decrease in the capital stock of the corporation as approved by the #:!. c. *hen the shares are reacquired by a close corporation pursuant to the order of the #:! acting to arbitrate a deadlock as provided for under #ection 205 of the !orporation !ode.

%n the &uestion of the right of creditors to follow the illegal dividends into the hands of the stoc1holders should the corporation subse&uently become insolvent, the ma2ority view is that in the absence of an express provision of law, an innocent stoc1holder is not liable to return the dividends received by him out of the capital, unless the corporation was insolvent at the time of payment. This view considers it an unfair and unreasonable burden to re&uire the innocent stoc1holders to repay dividends when the same were received in good faith from a solvent corporation in the regular course of the business, even if it later on becomes ban1rupt. P!rchase by the Cor'oration of its Own Shares >. #imitations on Aower; ,xistence of *urplus. Aroper Aurposes and

*econd The reac&uisition must be in pursuance of a legitimate corporate purpose. ,xamples are those mentioned in *ection :!. +ote, however, that the enumeration in the said section is +%T exclusive. (. 0emedies in Case of Improper Aurchase. Creditors who are pre2udiced by the repurchase made by an insolvent corporation have a remedy against the selling stoc1holders to recover the consideration paid. If the directors were negligent or were guilty of bad faith in approving the repurchase, they may be held personally responsible to the receiver of the corporate assets. The basis of their liability being *ec. $! of the Corporation Code.
#ection $2. 9iability of directors, trustees or officers. && Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest inconflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

.eneral 0ule > corporation has the power to ac&uire or purchase its own shares; provided, payment is made out of surplus profits and the ac&uisition is for a legitimate corporate purpose.
#ection 52. +ower to acquire own shares. && A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes including but not limited to the following cases' +rovided, (hat the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired' 2. (o eliminate fractional shares arising out of stock dividends %. (o collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale and, $. (o pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this !ode.

29

CHAPTER CHARTER

XIV:

A END ENTS

OF

be amended by a ma2ority vote of the (oard of directors or trustees and the vote or written assent of the stoc1holders representing at least "L$ of the outstanding capital stoc1, without pre2udice to the appraisal right of dissenting stoc1holders in accordance with the provisions of this Code, or the vote or written assent of at least "L$ of the members if it be a non'stoc1 corporation. The original and amended articles together shall contain all provisions re&uired by law to be set out in the >%I. *uch articles, as amended, shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a ma2ority of the directors or trustees stating the fact that said amendmentLs have been duly approved by the re&uired vote of the stoc1holders or members, shall be submitted to the *,C. The amendments shall ta1e effect upon the approval by the *,C or from the date of filing with said Commission if not acted upon within O months from the date of filing for a cause not attributable to the corporation. "n brief I want to amend the >%I. !. The amendment must be for a legitimate purpose; thus, see if there is any provision against it in the Corporation Code or other special laws. ". Convene the (oard of Directors and get ma2ority vote regarding the amendment $. .et the vote or written assent of "L$ of the stoc1holders. +ote that a meeting is re&uired if the amendment is to a4 increase or decrease capital stoc1 or b4 shorten or extend the corporate term, which can not be longer than GE years. :. If the reason why youTre amending the >%I is because you want to add a purpose different from the original one, you canTt invest in the new business automatically after such amendment. Bou must still get "L$ vote in accordance with ; :" unless the new purpose becomes now the primary purpose ; P! Power to in*est cor'orate f!nds in another cor'oration or b!siness or for any other '!r'ose . *ub2ect to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organi=ed, when approved by a ma2ority of the (oard of directors or trustees and ratified by the stoc1holders representing at least "L$ of the outstanding capital stoc1 . . . at a stoc1holdersT meeting duly called for the purpose. . . . Dissenting stoc1holders en2oy appraisal rights. . . . 3+ote where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the >%I, the approval of the stoc1holders shall not be necessary.

". Amendment by 9egislature > corporate charter consists of a4 >rticles of incorporation and b4 The law under which it was organi=ed Thus, it is a contract between a4 the stoc1holders b4 the corporation and c4 the *tate Though the legislature cannot directly amend the >%I of a corporation without violating the rule against impairment of contracts, it can amend or repeal the statutes under which the latter was created sub2ect to the limitation that no accrued rights or liabilities are impaired. ; !:G. $mendment or re'eal. +o right or remedy in favor of or against any corporation, its stoc1holders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stoc1holders, members, directors, trustees or officers shall be removed or impaired either by the subse&uent dissolution of said corporation or by any subse&uent amendment or repeal of this Code or any part thereof. "". Amendment by #tockholders > corporation is expressly granted by law the power to amend its >%I through the vote of "L$ of its stoc1holders. *uch a decision is binding on all the stoc1holders, including those who voted against it, sub2ect only to the appraisal right, if proper. +o stoc1holder can claim that such an amendment is an impairment of his contract with the corporation since he is deemed to have accepted this power to amend the charter when he subscribed or purchased the stoc1s to the corporation. ; $O grants the power to amend while ; !O prescribes the conditions to a valid amendment of the >%I. ; $O. Cor'orate 'owers and ca'acity . ,very corporation incorporated under this Code has the power and capacity x x x :4 To amend its >%I in accordance with the provisions of this Code. ; !O. $mendment of $O). )nless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated int he >%I may

30

G. If any stoc1holder dissents and wants out, follow procedure for right of appraisal. a. +ote ; P! )nstances of a''raisal ri%ht . >ny stoc1holder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the ff. instances !4 In case any amendment to the >%I has the effect of changing or restricting the rights of any stoc1holder or class of shares, or authori=ing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; x x x x b. 8ithin $E days of the vote, the dissenting stoc1holder must have made a written demand on the corporation for the fair value of his shares. If he does not ma1e any demand, he is deemed to have waived such right. O. 8rite down the new >%I, ma1ing sure that all the information re&uired by the law is contained therein. F. Indicate the changes made and give the *,C a copy duly certified by the corporate secretary and a (oard ma2ority that such changes have been duly approved by the re&uired vote. If you are a special corporation, get the appropriate government agency to give you a certificate to the effect that the amendment is in accordance with law. P. 8ait. D. >mended >%I ta1es effect when *,C approves it. If after O months from date of filing, *,C still fails to act on application for reasons not attributable to the corporation, then consider the >%I approved from date of filing. Frounds for 7ejection of Amendment ; !F. )rounds for re*ection of amendment . The *,C may re2ect the >%I or disapprove any amendment thereto if the same is not in compliance with the re&uirements of this Code. ro#ided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the ob2ectionable portions of the >%I or amendment. The ff. >re grounds for such re2ection or disapproval !. That the >%I or any amendment thereto is not substantially in accordance with the form prescribed herein; ". That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; $. That the Treasurer5s >ffidavit concerning the amount of capital stoc1 subscribed andLor paid is false; :. That the re&uired percentage of ownership of the capital stoc1 to be owned by citi=ens of the Ahilippines has not been complied with as re&uired by existing laws or the Constitution. +o >%I or amendment to >%I of ban1s, ban1ing and &uasi'ban1ing institutions, building and loan associations, trust companies and other financial intermediaries,

insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such >%I or amendment is in accordance with the law. "n brief The *,C may re2ect the >%I or disapprove the amendment if it violates the provisions of this Code or the Constitution, but incorporators will be given reasonable time to correct or modify the ob2ectionable portions. .rounds for re2ection or disapproval are !. +on'compliance with Form requirement ". )nconstitutional, illegal, immoral purpose $. False (reasurer1s Affidavit re amount of capital stoc1 subscribed andLor paid :. @iolation of required ; of Filipino ownership *,C re&uires financial, insurance and educational institutions, public utilities and those governed by special laws to get a favorable recommendation from the appropriate government agency that such >%I or amendment is legal before it approves it. Amendment changing stockholders rights ; P!. Instances of appraisal right. >ny stoc1holder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the ff. instances !. In case any amendment to the >%I has the effect of changing or restricting the rights of any stoc1holder or class of shares, or of authori=ing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence. Code allows amendments which would change and even restrict the existing rights of stoc1holders or any class of shares. This power of self'amendment is &uite extensive and has been held to include the power of changing, restricting or abrogating preemptive rights as well as voting rights. *uch power should be exercised in good faith, and for a legitimate purpose, and not merely to defraud or pre2udice the minority. Cowever, the dissenting stoc1holder has the burden of proving that such amendment was grossly unfair or done in bad faith. *toc1holders can5t argue vested rights whenever their rights are impaired by an amendment approved by "L$ because he is deemed to have 1nown about and accepted this power of self'amendment granted by ; $O 3 "orporate po%ers and capacity 4 when he entered into the contract with the corporation. >ll he can do is exercise his appraisal right.

31

Cowever, if there is bad faith or fraud on the part of the ma2ority, the in2ured stoc1holder may file an opposition to the registration of the amendment with the *,C, which may if it deem proper, disapprove the amendment. !ases' BA7(FC7D A!!"D:?( A?D "?D:6?"(H !C. E. *.#. D"!G:H !9AH 6FF. !C. The appellees directors, by resolution, recommended the adoption of an amendment to the corporate charter increasing the number of Class > shares to !,EEE,EEE, the amendment to be submitted to a *Cs7 meeting. +otice was sent to the *Cs, in wLc the purposes of the meeting were stated to be the election of the directors and the consideration of the proposed amendment. >t the *Cs7 meeting it was demanded on behalf of the complainant that the C* be voted separately on the proposed amendment. It was ruled, however, that the vote to be ta1en in " classes, the Class > shares as one class, the preferred and the C* as the other class. The appellant contends that under the .en. Corp. #aw, the affirmative vote of the ma2ority of the C*, voting as a separate class, was re&5d. to adopt the proposed amendment. >mendments to certs. %f incorporation are authori=ed by the .en. Corp. #aw J specifically, authori=ed capital stoc1 may be increased, decreased or reclassified 6by changing the number, par value, designations, preferences, or relative, participating optional or other special rights of the shares, or the &ualifications, limitations or restrictions of such rights xxx.7 >s affirmative vote of a ma2ority of the A and C*, considered as one class for voting purposes, was necessary to the adoption of the amendment. This affirmative vote was obtained, and was all that was re&5d. unless, it is asserted by the appellant, an affirmative vote of a ma2ority of the C*, voting separately as a class, was necessary. >ppellant argues that the provision in the .C# covering amendments to the certs. %f inc. includes the case where the increase in the V of a particular class of shares would affect the 6rights7 of ano. Class of shares thus re&uiring a class vote. "##@:' 8Ln the amendment of the corporate charter to increase the V of Class > shares is valid. 7A("C' %bviously, the relative position of the C* will be altered by the proposed amendment. (y the force of the amendment the burden on the C* will be increased to the extent of GEE,EEE add5l. Class > shares, if issued. In this way and to this extent the C* would be adversely affected. The relative position of one class of shares in the scheme of capitali=ation is not to be confused wL rights incident to that class as compared wL other classes of shares. 8here

the corporate amendment does no more than to increase the V of shares of a preferred or superior class, the relative position of subordinated shares is changed in the sense that they are sub2ected to a greater burden. The special or peculiar &uality wL wLc they are endowed, and wLc serves to distinguish them from *hares of another Class, remain the same. />0C)* @ />CB )* Case The (oard of /acy ? Co. submitted for stoc1holders5 action the proposal to amend its certificate of incorporation to add to the rights of preferred stoc1holders voting rights same as those held by common stoc1holders. > stoc1holder with GE shares of common stoc1 ob2ected to the proposed amendment, and in the same written notice of ob2ection, demanded payment for her common stoc1. 0espondent company argues that the effect of the amendment on the stoc1holder was so trivial and insignificant as to be de minimis since she only held GE out of !.O / shares. >lso, if she wanted to sell her stoc1 at mar1et value, she could have done so when the price was higher, thus, her application should be denied because it was not made in good faith. *C held that by limiting the voting power of the stoc1holders5 common shares, the corporate action to which she ob2ected to was of such a character as to afford her legal basis to invo1e her appraisal right. The #egislature has clearly prescribed the conditions under which a nonconsenting stoc1holder may have his stoc1 evaluated and enforce payment therefore. There is no re&uirement of a minimum percentage or value of stoc1 which must be owned by the nonconsenting stoc1holder to &ualify him to invo1e the prescribed statutory procedure.

G:99:7 E. *"9#C? A?D !C., "?!. FA!(#' (y the amendment the Class > *toc1 was made, in effect, a second A*. It was entitled to noncumulative dividends up to %ct. $!, !D$E and thereafter to cumulative dividends, before dividends payable on the C* was entitled to li&uidation at a fixed rate per share plus accrued unpaid dividends, was callable at a fixed rate per share, and was convertible at the option of the holder into Common *toc1 share for share. The (%D voted to submit to the stoc1holder a plan for recapitali=ation by which it was proposed to exchange the FH cumulative preferred stoc1 for a a new OH cumulative preferred stoc1 of no par value, and to cancel the Class > stoc1 and all dividends accrued

32

thereon, the holders of said stoc1 to receive in exchange G shares of common stoc1 for one share of Class > stoc1. >t a meeting of stoc1holders called to vote upon the plan, the vote of each class of shares was overwhelming in favor of it. "##@: 8L+ the accrued dividends in favor of the cumulative preferred stoc1 may be canceled by an amendment of the charter 3through the change of the stoc1 from one classification to another4. 7A("C' The &uestion presented is concerned with the nature and extent of the right of a holder of cumulative preferred stoc1 in a going concern, as to which dividends have accrued through lapse of time. The answer must depend upon the extent of the enlargement of the Uscope of sub2ects7, and the nature and character of the right affected. > vested right may not be destroyed. Therefore the &uestion to be determined is, what is the character of the right of a holder of cumulative preferred stoc1 in a going concern as to which stoc1 dividends have accrued through the lapse of time9 Is the right, in a real sense a vested right, or is a defeasable right, sub2ect to destruction by corporate action under subse&uent legislation. The right of a holder of cumulative preferred stoc1, issued at a time when the law did not permit the cancellation of accrued and unpaid dividends against the holder, to such dividends, is and ought to be regarded as a substantial right. It may reasonably be supposed that one who invests his money in cumulative preferred stoc1 relies largely upon the right to receive the stipulated dividends at some time. *pea1ing generally, the investor see1s certainty as against a speculative rise in price. The right to such dividends gives value to the stoc1, easily recogni=able even during periods when the dividends are not paid. >s the right is an inducement to buy, so oftentimes it is an inducement to retain. To say that cumulative dividends can not be paid where there are no profits at hand from which to pay them is not to say that they do nor accrue under the contract, and unless the corporate surplus and the financial condition of the corporation are such that it would be an abuse of discretion on the part of the management not to declare and pay a dividend on cumulative preferred stoc1, there seems to be no more reason to view the right of the shareholder as vested than in the case where no surplus exists at all, for in either situation the shareholder has no immediate assertable right, nor may he ever have such right. 8e are of opinion, therefore, that the amendment of the corporate charter, in so far as it assumed to destroy the rights of the complainants to dividends accrued upon their stoc1 up to the time of the accomplishment of the amendment, is null and void. >ccordingly, the arrears of such dividends accumulated upon their stoc1 must be paid to them before distribution may be made to the holders of the common stoc1.

The cancellation of cumulative dividends already accrued through the passage of time is not an amendment of a charter. It is the destruction of a right in the nature of a debt, a matter not within the purview of the section. The cancellation of the right to such dividends is foreign to the design and purpose of the section. The effect of the charter amendment, in so far as it concerns the status of the shares and rights of the owners, spea1ing from the time of its accomplishment, is not denied by the complainants; but there is nothing in the language of the section, as amended, which compels retrospective operation. The rights of cumulative preferred shareholders to the stipulated dividends accrue to them by virtue of the contract. That right exists and persists. 8hen the necessary corporate action, under the amended statute conferring the power is ta1en, the status of the shares may be changed, the right thereafter to claim dividends as originally stipulated may be canceled, but the amended statute under the general rule of construction, ought not to have retroactive effect.

:ffectivity of Amendment' )pon *,C approval which must be given within O months from filing. Cowever, if *,C fails to approve or re2ect within O months for reasons not attributable to the corporation, then the amendment ta1es effect as of the date of filing, even without such approval. ,xception when *,C gives the corporation reasonable time to correct ob2ectionable portions and the corporation fails to do so. Then, the amendment cannot ta1e effect even after the O'month period has elapsed. #pecial Amendments > stoc1holders meeting is re&uired for amendments involving !4 Increase of capital stoc1 "4 Decrease of capital stoc1; $4 ,xtension of corporate term :4 *hortening of corporate term >ll other amendments under ;!O 3+mendment of +,I4 only re&uire the stoc1holders5 written assent. +ote that all amendments re&uire *,C approval, and the grounds for re2ection or disapproval of amendments in general would also be applicable to these special amendments. -. Increase of "apital Stock If after the authori=ed capital stoc1 has been fully subscribed and the corporation needs to increase its capital, it will have to amend its >%I to increase its capital stoc1. *hares issued beyond the authori=ed limit are void;

33

however, subscribers in good faith have a right to recover damages for misrepresentation. 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness . No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the Board, and at a stockholders meeting duly called for the purpose, !3 of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness "#$ #%#B#&. 'ritten notice of the proposed #$ #%#B# and of the time and place of the stockholders meeting at (hich the #$ ##B# is to be considered, must be addressed to each stockholder at his place of residence as sho(n on the books of the corporation and deposited to the addressee in the post office (ith postage pre)paid, or served personally. * certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders meeting, setting forth+ 1. ,hat the re-uirements of this section have been complied (ith. 2. ,he amount of increase or diminution of the capital stock. 3. #f an increase in the capital stock, the amount of capital stock or number of shares of no)par thereof actually subscribed, the names, nationalities, and residences of the persons subscribing, the amount of capital stock or number of shares subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no)par stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend authori/ed therefor. 4. *ny bonded indebtedness to be incurred, created or increased. 5. ,he actual indebtedness of the corporation on the day of the meeting. 6. ,he amount of stock represented at the meeting. 7. ,he vote authori/ing the #$ #%#B# *ny #$ #%#B# shall re-uire prior approval of the 01%. 2ne of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed (ith the 01% and attached to the original *2#. 3rom and after approval by the 01% and the issuance by the %ommission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring or increasing of any bonded indebtedness authori/ed, as the certificate of filing may declare+ 4rovided, ,hat the 01% shall not accept for filing any certificate of increase of capital stock unless accompanied by the s(orn statement of the treasurer of the corporation la(fully holding office at the time of the filing of the certificate, sho(ing that at least 5 6 of such increased capital has been subscribed and that at least 5 6 of the amount subscribed has been paid either in actual cash to the corporation or that there has been

transferred tot he corporation property the valuation of (hich is e-ual to 5 7 of the subscription+ 4rovided, further, that no decrease of the capital stock shall be approved by the %ommission, if its effect shall prejudice the rights of corporate creditors. Non)stock corporations may incur or create bonded indebtedness, or increase the same, (ith the approval by a majority vote of the board of trustees and of at least !3 of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered (ith the 01% (hich shall have the authority to determine the sufficiency of the terms thereof. The increase or decrease in capital stoc1 cannot ta1e effect wLo prior *,C approval, signified by a certificate showing that the certificate of increase or reduction of capital stoc1 has been duly filed with the *,C.

2. .ecrease of capital stock Feneral 7ule *,C will not approve reduction of capital stoc1 if this will pre2udice corporate creditors +B"9(7@#( E 7"E:7A AhilTrust, the assignee in ban1ruptcy of #a Cooperativa +aval Filipina, is suing Cooperativa +aval stoc1holder for unpaid balance of his capital stoc1 subscription. *toc1holder claims that he has been released from the obligation to pay more than GEH of his subscription by virtue of a resolution adopted by the Cooperativa +aval stoc1holders after its incorporation reducing the capital stoc1 by GEH. The effect of this resolution was that fully paid certificates were issued to each stoc1holder for W of his subscription. 3%atered do%n stocks4 *C held that the said resolution is without effect for being !. An attempted withdrawal of so much capital from the fund which the company1s creditors were entitled ultimately to rely, and ". For having been effected without compliance with the statutory re&uirements of ; !F of the Corporation #aw regarding reduction of capital stoc1, and $. For failure to file a certificate with the (ureau of Commerce and Industry, showing such reduction. Thus, stoc1holder is still liable for the unpaid balance of his subscription. 0atio *ubscriptions to the capital of a corporation constitute a fund to which creditors have a right to loo1 for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stoc1

34

subscription in order to reali=e assets for the payment of its debts. > corporation has no power to release an original subscriber to its capital stoc1 from the obligation of paying for his shares, wLo a valuable consideration for such release; and as against creditors a reduction of the capital stoc1 can ta1e place only in the manner and under the conditions prescribed by the statute or the charter or the >%I. /oreoever, strict compliance with statutory regulations is necessary. ?ote' that for reasons " and $, Campos says that ; !F has been replaced by ; $P, and now, even if all the re&uirements are complied with, if creditors are pre2udiced by such reduction, it is most unli1ely that the *,C will approve it. #BA* E#. ?CH:# FA!(# 8hether, upon the facts stated, the appellee can be compelled, at the suit of the ban1ing commissioner, to pay, as a statutory liability, the assessment levied upon the ! !'"L$ shares held and owned by him before the reduction of the capital stoc1 of the ban1. ,ach shareholder on such corporate body incorporated in this state, so long as he owns shares therein, and for twelve months after the date of any bona fide transfer thereof, shall be personally liable for all debts of such corporate body existing at the date of such transfer, to an amount additional to the par value of such shares so owned or transferred. The plain and obvious meaning of the language above is that the stoc1holders are liable for the debts of the ban1 to an extent measured by the amount of stoc1 Uowned or transferredU by the. The liability is created exclusively for the benefit of the creditors of the ban1. It is the intention not to impose an unlimited and absolute liability for all the debts of the ban1, but to impose only a liability to pay a sum which comes to or is Ue&ual to the par value of such shares owned or transferred.U "##@: 8hether or not the appellee can be considered a shareholder in order to be held liable for the debts of the corp 3 this is a )* case 4. 7A("C' The appellee, in order to be held liable to pay the assessment in evidence, must be, in fact or in law, a 6shareholder7 or otherwise within the class held liable in the provision, at the time, and not before, the default or insolvency of the ban1. >ny ban1ing corporation doing business in this state may at any time reduce its capital stoc1 to any sum not less than, the minimum sum provided by law. +o reduction of such stoc1 shall be made except upon the written

consent of the owners of not less than two'thirds of the stoc1 of such corporation. Ixx The purpose and intention is to confer authority of reduction in order to cure reasonable impairment of capital stoc1 by loss, or in case the amount of capital stoc1 is too large for the demands of the ban1Ts business. >ccordingly, it plainly appears that a ban1 may exercise the authority conferred to reduce its capital stoc1 when Uat any timeU there is a need to do so to accomplish the purposes for which the reduction is allowable, upon compliance with the prescribed formalities. The ban1, having an authori=ed capital stoc1 of Q!GE,EEE reduced it to Q!EE,EEE. The reduction was made in good faith and in the manner and form re&uired by law. Inferably the reduction was to accomplish the purpose allowable by law, and ther is no suggestion for contention made to the contrary. >s a legal conse&uence to appelleeTs relation of stoc1holders, as the !!'"L$ shares legally ceased to exist from the time of reduction; he could not thereafter exercise any of the rights peculiar to a stoc1holder in a corporation as to such number of shares such as voting participation in dividends or profits and the li1e. The cancelled stoc1 was no longer legally existing and was incapable of ownership or transfer. >lthough the act does not expressly say so, yet it contemplates and intends that an authori=ed reduction of the capital stoc1, when regularly effected, and at the time, and under the circumstances when it may properly be done, shall be binding and effectual on the ban1ing corporation and the shareholders and creditors. The relation of UshareholderU, which gives rise to personal liability for the debts of a ban1, did not exist in fact or in law at the date, which was subse&uent to the reduction, on which the ban1 was placed in the hands of the ban1ing commissioner for li&uidation.

/. "hange in corporate term Code allows a corporation to extend as well as to shorten its term of existence. 8hen a corporation wants to dissolve prior to the expiration of the term fixed in the >%I, it can do this by amendment of its >%I to shorten its term. 8hen the shorter term expires, then the corporation is automatically dissolved, and its corporate assets li&uidated. Arocedural re&uirements ; $F o%er to extend or shorten corporate term . > private corporation may extend or shorten its term as stated in the >%I when approved by a majority vote of the Board and ratified at a meeting by the stoc1holders representing at least %8$ of the outstanding capital stockLmembers. 8ritten notice of the proposed action and of the time and

35

place of the meeting shall be addressed to each stoc1holder or member at his place of residence as shown on the boo1s of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally Arovided, that in case of e/tension of corporate term, any dissenting stockholder may e/ercise his appraisal right under the conditions provided in this Code. ?ote as in the case of increase or reduction of capital stoc1, any change in a corporate term has to be approved at a members5 or stoc1holders5 meeting. Cowever, unli1e in increase or reduction of capital stoc1, any stoc1holder who dissents to the extension or shortening of the term may exercise his appraisal right. ?ote while ; $F grants the appraisal right only in case of extension, ; P! 3>ppraisal 0ight4 gives the right in both extension and shortening of the term. ?ote since ; $F is silent as to when the amendment changing the term ta1es effect, and the procedure to be followed after the stoc1holders have approved it, apply the general provisions on amendment in ; !O a. file duly certified copy of the >%I as amended with the *,C b. amendment ta1es effect upon *,C approval, except if *,C fails to act within O months from filing for causes not attributable to the corporation, then the amendment will ta1e effect even without *,C approval Conditions for the grant of extension 88. Corporate term . * corporation shall e9ist for a period not e9ceeding 5: years from the date of incorporation unless sooner dissolved or unless said period is e9tended. ,he corporate term, as originally stated in the *2#, may be e9tended for periods not e9ceeding 5: years in any single instance by an amendment of the *2#, in accordance (ith this %ode. 4rovided, that no e9tension can be made earlier than 5 years prior to the original or subse-uent e9piry date unless there are justifiable reasons for an earlier e9tension as may be determined by the 01%. Amendments in close corporations 8:3. Amendments in close corporations . *ny amendment to the *2# (hich seeks to delete or remove any provision re-uired by this ,itle to be contained in the *2# or to reduce a -uorum or voting re-uirement stated in said *2# shall not be valid or effective unless approved by the affirmative vote of at least 2/3 of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the A ! for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose. >I% of a close corporation re&uires

!. 9imited number of #tockholders . >ll of the corporation5s issued stoc1 of all classes shall be held by not more than a specified number of persons, not exceeding "E; ". #tock subject to (ransfer 7estrictions . >ll of the issued stoc1 shall be sub2ect to one or more specified restrictions on transfer permitted by law; and $. ?ot +ublicly 9isted or +ublicly Cffered . The corporation should not be listed in the stoc1 exchange or ma1e any public offering of any of its stoc1s. If any of these is deleted, then it will no longer be a close corporation and it will lose its special privileges. *ince such an amendment is such fundamental change in the nature of the corporation, even non&voting stocks are given a voice in the decision. In case of deadloc1s when the re&uired vote cannot be obtained, and business can no longer be conducted as usual, then the *,C may order the cancellation or alteration of any provision in the certificate of incorporation or by'laws.

CHAPTER XV TRANSFER OF SHARES

6A??:7 A?D :FF:!("E"(H CF #BA7:# *hares of stoc1, although intangible, are personal property, and as such are freely transferable by the owner thereof.
. /0, Certificate of stock and transfer of shares, (( The ca'ital stock of stock cor'orations shall be di*ided into shares for which certificates si%ned by the 'resident or *ice( 'resident1 co!ntersi%ned by the secretary or assistant secretary1 and sealed with the seal of the cor'oration shall be iss!ed in accordance with the by(laws, Shares of stock so iss!ed are 'ersonal 'ro'erty and may be transferred by deli*ery of the certificate or certificates indorsed by the owner or his attorney(in(fact or other 'erson le%ally a!thori2ed to make the transfer, No transfer1 howe*er1 shall be *alid1 e3ce't as between the 'arties1 !ntil the transfer is recorded in the books of the cor'oration showin% the names of the 'arties to the transaction1 the date of transfer1 the n!mber of the certificate or certificates and the n!mber of shares transferred, No shares of stock a%ainst which the cor'oration holds any !n'aid claim shall be transferable in the books of the cor'oration,

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".

"ndorsement of stock certificate corporate books.

7egistration in

%n the bac1 of every stoc1 certificate is printed a transfer form with blan1 spaces for the transfereeTs name and the person authori=ed by the transferor to record the transfer on the corporate boo1s. "". +urpose of 7egistration The purpose of registration is two fold !. to enable the transferee to exercise all the rights of a stoc1holder, and, ". to inform the corporation of any change in share ownership so that it can ascertain the persons 3i4 entitled to the rights and 3ii4 sub2ect to the liabilities of a stoc1holder. .eneral 0ule )ntil registration is accomplished, the transfer, though valid between the parties, C>++%T be effective against the corporation. """. :ffect of 9ack of 7egistration. >. The transferee C>++%T vote. (. The transferee C>++%T be voted for. C. )ntil the transfer is registered, the transferee is not a stoc1holder but an outsider, and any action he may wish to bring against the corporation must be brought before the regular courts and not before the *,C.30ivera v. Florendo !:: *C0> OG"4 D. >n unregistered transfer, not being effective against persons other than the parties thereto, C>++%T prevail over the rights of a subse&uent attaching creditor. 3)son v. Diosomito O! ACI# G$G4 ,. The transferee will +%T be entitled to dividends. @#C? E. D"C#C6"(C ,2 +B"9 A$A -2<$A. Facts' )son filed a civil action for debt against Diosomito upon institution of which an attachment was duly issued and levied upon the property of the latter on -anuary !P, !D$", including seventy'five shares of the +orth ,lectric Co. Inc. > 2udgment was rendered infavor of )son on -une "$, !D$". >s a conse&uence of it , the sheriff sold the said shares at a public auction on /arch "E, !D$$ wherein the highest bidder was )son. In the present action, C.A.#. -ollye claims to be the owner of the said shares and it presents a certificate of stoc1 issued to him by the company on February !$, !D$$ as evidence of his ownership.

)pon evaluation of the facts by the lower court, the following were established 3!4 that Diosomito was the original owner of the &uestioned shares; 3"4 that on February $,!D$!, he sold the same shares to a certain (arcelon and delivered to the latter the corresponding certificates; 3$4 that (arcelon presented these certificates to the company for registration only on *eptember !O, !D$"; and 3:4, that (arcelon sold the same to C.A.#.-ollye to whom a new certificate was issued on February !$, !D$$. In short, the transfer of the said shares from Diosomito to (arcelon was registered and noted on the boo1s of the corporation nine months after the attachment had been levied on the same shares. The lower court ruled for )son. "ssue' 8hether or not a bona fide transfer of the shares of a corporation, not registered or noted on the boo1s of the corporation, is valid as against a subse&uent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not. Decision' The *upreme Court affirmed the lower court decision. It argued that the language of the legislature is plain to the effect that the right of the owner of the shares of stoc1 of a Ahilippine corporation to transfer the same by delivery of the certificate, whether it be regarded as a statutory or common law right, is limited and restricted by the express provision that Uno transfer, however, shall be valid except as between the parties, until the transfer is entered and noted upon the boo1s of the corporation.U Therefore, the transfer from Diosomito to (arcelon was not valid as to )son since at the time it was attached, the shares still stood in the name of Diosomito on the boo1s of the corporation. :#!A?C E. F"9"+"?A# 6"?"?F !C7+ =5 +B"9 =22 -2<55. Facts' > garnishment was served in favor of ,scano over certain shares of Filipinas /ining Corporation named under *alvosa but was held in escrow also by Filipinas /ining Corporation. Despite that, *alvosa managed to sell, subse&uently, the said shares to (eng=on who also later on sold the same to *tandard Investment of the Ahilippines. Filipinas /ining Corporation then issued the corresponding certificates over the said shares in favor of *tandard Investment of the Ahilippines. The trial court ruled for ,scano.

37

"ssue' 8hether or not the issuance of the certificate of stoc1 to *tandard was valid against the attaching 2udgment creditor of the original owner. Decision' The *upreme Court affirmed the decision of the lower court. *ection $G of the Corporation #aw, which re&uires that registration of transfer of shares of stoc1 upon the boo1s of the corporation as a condition precedent to their validity against the corporation and third parties, is also applicable to unissued shares held by the corporation in escrow. Additional "mportant +oints from the !ase of :scano 0easons of the #aw 0e&uiring 0ecording of Transfer in the Corporate (oo1s 3!4 to enable the corporation to 1now at all times who its actual stoc1holders are, because mutual rights and obligations exist between the corporation and its stoc1holders; 3"4 to afford to the corporation an opportunity to ob2ect or refuse its consent to the transfer in case it has any claim against the stoc1 sought to be transferred, or for any other valid reason; and, 3$4 to avoid fictitious or fraudulent transfers. """. ?o 7egistration of (ransfer of @npaid #hares If there is any unpaid balance on the stoc1holderTs subscription, there can be no stoc1 certificate on which an indorsement may be made. The shares are thus not transferable on the corporate boo1s. Cowever, there is nothing to prevent the stoc1holder from transferring his interest in the corporation by way of a deed of assignment. The words Uunpaid claimU in the second paragraph of section O$ &uoted above does not necessarily mean that there should have been a previous call by the board of directors. >s long as any portion of the subscription price remains unpaid, the corporation has a claim on the shares, payment for which it may demand either on the agreed date of payment or, if there be no such agreed date, by ma1ing a call at any time in accordance with section OF of the Code. The corporation may however agree to record a transfer although there still remains an unpaid balance on the subscription, provided the transferee assumes the obligation to pay the unpaid balance. "E. 7emedy if 7egistration 7efused The right to have the transfer registered exists from the time of the transfer and it is to the transfereeTs benefit that

the right be exercised early. Cowever, since the law does not prescribe any period within which the registration should be effected, the action to enforce the right does not accrue until there has been a demand and a refusal to record the transfer. If the corporation should wrongfully refuse to record the transfer or issue a new certificate in favor of the transferee, the latter may petition the court for a writ of mandamus to compel the corporation to do so and the writ will be granted provided it is shown that the transferee has not other plain, speedy and ade&uate remedy and that there are no unpaid claims against the stoc1s whose transfer is sought to be recorded. )nless the latter fact is alleged, mandamus will be denied due to failure to state a cause of action. BAF:7 E. B7HA? 2< +B"9 2$< -2<22. Facts' Aetitioner filed an original action to secure a writ of mandamus against the respondent, to compel him, as secretary of the @isayan ,lectric Company, to transfer upon the boo1s of the company certain shares of stoc1. Ce based the urgency of his action on a supposed agreement to sell the said shares to a /r. #evering. Furthermore, he also stated that the issuing company holds no unpaid claims against the shares of stoc1. Cowever, on the boo1s of the company, it turns out that petitioner is not the registered owner of the stoc1 which he see1s to have transferred. Cis only claim as owner is based on his averment that such were UindorsedU to him on February G by the (ryan'#andon Company, in whose name it is registered on the boo1s of the @isayan ,lectric Company. There was no allegation that the petitioner holds any power of attorney from the (ryan'#andon Company authori=ing him to ma1e demand on the secretary of the @isayan ,lectric Company to ma1e the transfer which petitioner see1s to have made through the medium of the mandamus of this court. "ssue' 8hether or not a writ of mandamus will lie under the circumstances of the case as allow the transfer of shares being re&uested by the petitioner. Decision' The *upreme Court denied the writ. Aetitioner did not have the right to demand the transfer since he was not the stoc1holder of record. This was proven by the fact that the said shares were still registered under the name of (ryan'#andon Company. Furthermore, even the latter did not demand from the company the transfer of said shares. +either did it give by way of a special power of attorney to petitioner the authority to effect such a transfer. Cence,

38

there is no clear and legal obligation upon the respondent that will 2ustify the issuance of a writ to compel the latter to perform a transfer. Additional "mportant +oints from the !ase of Bager' !yclopedia of 9aw and +rocedure N6andamus in (ransfer of #haresN Kudge #anborn %, !yc. $5= Ug. Transfer of *hares. '' (y the weight of authority, mandamus will not lie in ordinary case to compel a corporation or its officers to transfer stoc1 on its boo1s and issue new certificates to the transferee, since the right is a purely private one, and there is generally an ade&uate remedy for an action against the corporation for damages or by a suit in e&uity to secure a decree ordering the transfer. I I I The writ will if it is authori=ed by a statute, or if there are special circumstances in any case rendering the remedy by action for damages inade&uate. /andamus will lie, where the right is clear, to compel a transfer of stoc1 to the purchaser of the same at a 2udicial sale, as re&uired by statute. In no case will the writ be granted if the title to the stoc1 is disputed and the right to the relief as1ed for is not clear, or where the relatorTs claim rest on mere e&uitable rights, or e&uitable issues are involved.U 7"E:7A E. F9C7:?DC 255 #!7A ,5= Cctober J, 2<<, Facts' 0ivera, a registered stoc1holder of Fu2uyama Cotel and 0estaurant, Inc., is allegedly 2ust a front of a -apanese investor named >1asa1o. The latter sold the shares registered under 0ivera to the respondents. Initially, everybody agreed to effect the sale including 0ivera. Cowever, upon the consummation of such, 0ivera refused to ma1e the indorsement unless he is also paid. 0espondents attempted several times to have the shares registered but were refused compliance by the corporation. The trial court granted to the respondents by a writ of preliminary in2unction the right to manage the company upon the filing of a bond. "ssues' 8hether or not 0ivera had the right to refuse the indorsement of the shares of stoc1 in &uestion. 8hether or not the Corporation had the right to refuse the registration of the respondents shares. 8hether or not the *,C has 2urisdiction over the case. Decision' The *upreme Court denied the writ of preliminary mandatory in2unction and remanded the case to the lower court for a trial on the merits. >s found in

*ec. O$ of the Corporation Code, shares of stoc1 may be transferred by delivery of the certificate after indorsement by the owner or his attorney'in'fact or other person legally authori=ed to ma1e the transfer. (y this provision it is evident that 0iveraTs indorsement must be obtained before any transfer of the &uestioned shares is effected. %n the matter of 2urisdiction, the *,C does not have 2urisdiction of the case since the dispute is not an intra'corporate controversy. 8hat it simply involves is a conflict on the ownership of a group of shares between the registered owner and an outside party. Cence, because of this conflict in ownership rights, a mandatory in2unction can not lie. Additional "mportant +oints in the !ase of 7ivera' +elejo E. !A, 22= #!7A ,,J, Cctober 2J, 2<J% U> mandatory in2unction is granted only on a showing 3a4 that the invasion of the right is material and substantial; 3b4 the right of complainant is clear and unmista1able; and 3c4 there is an urgent and permanent necessity for the writ to prevent serious damage.U 7:#(7"!("C?# !C7+C7A("C?# C? (7A?#F:7' !9C#:

". Feneral 7ule' Free transferability of shares. >dvantages of the Free Transferability of *hares !. The li&uidity of the shares of stoc1 '' easily convertible to cash ". It provides a convenient means of raising funds whenever the need arises. $. The shares may be used as collateral for a loan. :. In widely held corporations where management is separate from ownership, a dissatisfied stoc1holder can easily get out by selling his share in the mar1et. "". :/ception' "n !lose !orporations .eneral Characteristics of Close Corporations !. Formed by persons who 1now each other well. ". %wnership and management are usually vested in the same people. $. /ost, if not all, of the stoc1holders are participants in policy decisions which are usually made with the minimum of formality. :. *uch stoc1holders may be held liable as directors and their acts of management are generally recogni=ed. Considering the special circumstances attending a close corporation, it is oftentimes 2ustifiable, and at times imperative, for its stoc1holders to protect themselves from future conflicts by placing restrictions on the right of each

39

one of them to transfer his shares to an outsider. It is perhaps for this reason that the Corporation Code expressly allows such restriction in, and in fact ma1es it an attribute of, the close corporation. The following are the pertinent provisions.
. 4/, Definitions and a''licability of Title, (( $ close cor'oration1 within the meanin% of this Code1 is one whose articles of incor'oration 'ro*ide that5 6 6 6 6" 789 $ll the iss!ed stock of all classes shall be s!b:ect to one or more s'ecified restrictions on transfer 'ermitted by this Title" 6 6 66 . 4;, $rticles on incor'oration, (( The articles of incor'oration of a close cor'oration may 'ro*ide5 <, For a classification of shares or ri%hts and the !alifications for ownin% or holdin% the same and restrictions on their transfers as may be stated therein1 s!b:ect to the 'ro*isions of the followin% section" 6 6 6 6 . 4=, -alidity of restrictions of shares,(( #estrictions on the ri%ht to transfer shares m!st a''ear in the articles of incor'oration and in the by(laws as well as in the certificate of stock" otherwise1 the same shall not be bindin% on any '!rchaser thereof in %ood faith, Said restrictions shall not be more onero!s than %rantin% the e3istin% stockholders or the cor'oration the o'tion to '!rchase the shares of the transferrin% stockholder with s!ch reasonable terms1 conditions or 'eriod stated herein, if !'on the e3'iration of said 'eriod1 the e3istin% stockholders or the cor'oration fails to e3ercise the o'tion to '!rchase1 the transferrin% stockholder may sell his shares to any third 'erson, . 44, Effects of iss!ance or transfer of stock in breach of !alifyin% conditions, (( <, )f stock of a close cor'oration is iss!ed or transferred to any 'erson who is not entitled !nder any 'ro*ision of the articles of incor'oration to be a holder of record of its stock1 and if the certificate for s!ch stock cons'ic!o!sly shows the !alifications of the 'ersons entitled to be holders of record thereof1 s!ch 'erson is concl!si*ely 'res!med to ha*e notice of the fact of his ineli%ibility to be a stockholder, 8, )f the articles of incor'oration of a close cor'oration states the n!mber of 'ersons1 not e3ceedin% twenty 78>91 who are entitled to be holders of record of its stock1 and if the certificate of s!ch stock cons'ic!o!sly states s!ch n!mber1 and if the iss!ance or transfer of stock to any 'erson wo!ld ca!se the stock to be held by more than s!ch n!mber of 'ersons1 the 'erson to whom s!ch stock is iss!ed or transferred is concl!si*ely 'res!med to ha*e notice of this fact, 0, )f a stock certificate of any close cor'oration shows a restriction on transfer of stock of the cor'oration1 the transferee of the stock is concl!si*ely 'res!med to ha*e

notice of the fact that he has ac !ired stock in *iolation of the restriction1 if s!ch ac !isition *iolates the restriction, ?, Whene*er any 'erson to whom s!ch stock of a close cor'oration has been iss!ed or transferred has1 or is concl!si*ely 'res!med !nder this section to ha*e1 notice either 7a9 that he is a 'erson not eli%ible to be a holder of stock of the cor'oration1 or 7b9 that transfer of stock to him wo!ld ca!se the stock of the cor'oration to be held by more than the n!mber of 'ersons 'ermitted by its articles of incor'oration to hold stock of the cor'oration1 or 7c9 that the transfer of stock is in *iolation of a restriction on transfer of stock1 the cor'oration may1 at its o'tion1 ref!se to re%ister the transfer of stock in the name of the transferee, @, The 'ro*isions of s!bsection 7?9 shall not be a''licable if the transfer of stock1 tho!%h otherwise contrary to s!bsections 7<91 7891 or 7091 has been consented by all the stockholders of the close cor'orations1 or if the close cor'oration has amended its articles of incor'oration in accordance with this Title, /, The term AtransferA1 as !sed in this section1 is not limited to a transfer for *al!e, ;, The 'ro*isions of this section shall not im'air any ri%ht which the transferee may ha*e to rescind the transfer or to reco*er !nder any a''licable warranty1 e3'ress or im'lied,

""". "ntrinsic Ealidity of Earious Ginds of 7estrictions The competing principles are on the one hand, the principle that since shares of stoc1 are personal property, their alienation cannot be sub2ected to any restriction; on the other hand, a share of stoc1 also represents a contract between the corporation and the shareholder, and, as a general rule, parties to a contract have the freedom to impose therein such terms and conditions as they may deem fit. To reconcile these competing principles, the following rule evolved in common law that the share contract may impose restrictions on stoc1 transfers, provided that these are 0,>*%+>(#, under the circumstances. It must be reasonable in order that such corresponding exception to the fundamental rule of free alienability of property is 2ustified. A. !onsent 7estriction. This type of restriction re&uires the consent of the directors or of other stoc1holders before any transfer of stoc1s can be made. )nder our Corporation Code, this restriction is not valid because it is obviously more onerous than the option restriction allowed under it. )nder the consent restriction, if the corporation or the stoc1holders refuse to give their consent, the stoc1holder who wants or needs to sell his shares cannot do so, regardless of the fact that an outsider has offered a good price.

40

B. Cption 7estriction Ealid if 7easonable. (y far the most popular provision restricting stoc1 transfers in close corporations is one which re&uires a stoc1holder who wishes to sell or transfer his stoc1, to first offer the same to the corporation or to the other stoc1holders and give the latter an opportunity to ac&uire the same should they wish to do so. The option may be in favor of the corporation, or of the other stoc1holders, or of the corporation and the stoc1holders, successively. The first option restriction is what is allowed under section DP of the Code &uoted above. In *ection :! of the Corporation Code, it may be construed that an option in favor of the corporation cannot be enforced if it has no unrestricted retained earnings out of which it can pay the price. Time Aeriod ''' The length of time during which the option may be exercised must be 0,>*%+>(#,. The period should be long enough to afford the optionees a reasonable time to determine whether they can raise the necessary funds, and, short enough so that there will be no substantial change in the corporationTs prospects between the time of the option offer and the acceptance or re2ection thereof. The present policy of the *,C is to limit the option period to one month, a period which it deems sufficient for the corporation or stoc1holders to decide whether or not they will ta1e the offer. %ption Arice ''' In most cases, the agreement itself either fixes the price or at least provides for a method of arriving at the value of the stoc1. Fix in the transfer price is a difficult tas1. > balance must be sought between the desire of the corporation to attract the proper investors and the interest of the future purchasers in not paying more than a fair price. !. +rescribing Iualifications of #tockholders A (ransfer 7estriction. Ta1ing together paragraph ! of *ection DF and paragraphs ! and : of *ection DD, it is &uite clear that the articles of incorporation of a close corporation may provide that only persons meeting specified &ualifications may become stoc1holders thereof. Cowever, the words Usub2ect to the provisions of the following section U in *ection DF 3!4 should be interpreted to &ualify only Urestrictions on their transfersU and not Uthe &ualifications for owning or holding the same.U D. Formal Ealidity of 7estrictions. The Code re&uires that the restriction on transfer of shares appear in the 3!4 articles of incorporation, 3"4 in the by' laws, and, 3$4 in the certificate of stoc1, otherwise they

cannot bind a purchaser in good faith. The implication is that a restriction may be binding on the corporation and the stoc1holders even if it appears only in the articles of incorporation or only in the by'laws, as these are both binding on all stoc1holders anyway. If the stoc1 certificate conspicuously shows the restriction, the purchaser or transferee is C%+C#)*I@,#B A0,*)/,D to have notice of the restriction, provided this appears in the articles of incorporation. %therwise stated, the purchaser C>++%T be heard to claim good faith. 8here the conclusive presumption of notice arises, the corporation may, at its option, refuse to register any transfer which was executed in violation of the restriction. If it appears in the certificate, but not conspicuously, then although he may be presumes to have notice of the restriction, he can prove the contrary. 8here a conclusive presumption of notice arises, the corporation may, at its option, refuse to register the transfer, unless 3!4 all the stoc1holders have consented to the transfer, or 3"4 the articles of incorporation have been properly amended to remove the restriction. In any case, the transferee retains his right against the transferor to rescind the transaction or to recover under any warranty. > restriction may be binding on the corporation and the stoc1holders even if such only appear in the articles of incorporation, or, only in the by'laws. *ection DP of the Code re&uires the appearance of the restriction simultaneously on the three documents only if it involves a purchaser in good faith. If it only involves the stoc1holders, then such appearance need not appear in all three documents. ;8. "alidity of restrictions of shares .)) <estrictions on the right to transfer shares must appear in the articles of incorporation and in the by)la(s as (ell as in the certificate of stock. other(ise, the same shall not be binding on any purchaser thereof in good faith. 0aid restrictions shall not be more onerous than granting the e9isting stockholders or the corporation the option to purchase the shares of the transferring stockholder (ith such reasonable terms, conditions or period stated herein. if upon the e9piration of said period, the e9isting stockholders or the corporation fails to e9ercise the option to purchase, the transferring stockholder may sell his shares to any third person. 0estrictions which are stated in a stoc1holders agreement is binding between and among them, although it C>++%T affect anybody else who was not a party to the contract. @?A@(BC7"M:D (7A?#F:7#

41

". !ertificates indorsed in blank negotiable.

when quasi&

The Theory of Suasi'+egotiability ''' 8here the stoc1holder indorses his certificate in blan1, in such a manner as to clothe whoever may be in possession of it, with apparent authority to deal with the shares as the latterTs own, he will be ,*T%AA,D from claiming the shares as against a bona fide purchaser. In such a situation, the latter ac&uires a better title than that which the stoc1holder has. This theory of &uasi'negotiability is based on the policy of giving stability to transactions involving stoc1 certificates, in order to encourage their commercial use. "". Forged (ransfers. If the corporation should issue a new certificate in pursuance of a forged transfer, the corporation incurs +% #I>(I#ITB to the person in whose favor it issued and it may demand its return for cancellation. The corporation in such case has been guilty of no misrepresentation. %n the other hand, it is the duty of the purchaser to determine that the indorsement of the owner is genuine. (ut with respect to a subse&uent purchaser in good faith and for value, the corporation is estopped from denying the validity of the newly issued certificate. 8hy9 (ecause by issuing such, it has represented that the person named therein is a stoc1holder of the corporation. If the corporation C>++%T impugn the validity of the new certificate, then, in effect, it is compelled to recogni=e both the old and the new certificate. ,xception 8here the recognition of both original and new stoc1holders would result in an over issue of shares in which case, only the original shareholder will be recogni=ed. The new stoc1holder would now have a right of damages against the corporation. the latter, in turn, would have a right of action against the person who made false representations, and in whose favor it issued the new certificate. The true owner of the shares which were wrongfully transferred would of course have a right to compel the corporation to issue him a certificate in lieu of the original one which was wrongfully cancelled.

Facts' >round February !D$F, *antamaria bought ten thousand shares for the sum of about AP,EEE.EE of the (atangas /inerals, Inc. through the offices of 8oo, )y' Tioco and +aftaly, a stoc1 bro1erage firm. The buyer received the stoc1 certificates in the name of 8oo, )y' Tioco and +aftaly and indorsed in blan1 by the firm. *ubse&uently, *antamaria placed an order for ten thousand shares of the Crown /ines, Inc. This time through another bro1erage firm by the name of 0.-. Campos and Company. To secure the transaction, she submitted the stoc1 certificate representing her prior purchase of (atangas /inerals, Inc. stoc1s which certificate was still in the same condition as *antamaria received it. )pon *antamariaTs return to 0.-. Campos and Company for payment, she found out that the firm was desisted by the *,C to continue transacting business. *he also learned that the certificate that was forwarded as security was in the possession of Cong1ong and *hanghai (an1ing Corporation by virtue of a document of hypothecation wherein all shares in the bro1erage firmTs custody was pledged to the ban1. In this aspect, C<*(C sent the certificate to (atangas /inerals, Inc. for registration. Cence, this civil action. "ssue' 8hether or not the contested certificate of stoc1 should be returned to *antamaria. Decision' The *upreme Court ruled that it should not be returned. *antamaria was negligent in the transaction and is stopped from claiming further title against the bona fide transfer to C<*(C. The latter was 2ustified in believing that 0.-. Campos and Company had title thereto considering it was indorsed in blan1, and, therefore, deemed &uasi'negotiable. Thus, C<*(C cannot be blamed for believing that such belonged to the holder and transferor. Furthermore, the ban1 was not obligated to loo1 beyond the certificate to ascertain the ownership of the stoc1 at the time it received the same from 0.-. Campos and Company, for it was given to the ban1 pursuant to their letter of hypothecation. A.D: 9C# #A?(C# E. K.B. 6!F7A(B, A((C7?:H F:?:7A9 CF (B: @?"(:D #(A(:# <, +B"9 A== -2<AA. Facts' In this case, De #os *antos contends that he ac&uired !.O million shares of the #epanto Consolidated /ining Co., Inc. from two people; namely, -uan Campos and Carl Cess, sometime in !D:". The shares are registered in the name of @icente /adrigal in the boo1s of the corporation. >fter the war, the property was

K. #A?(A6A7"A E. BC?FGC?F A?D #BA?FBA" BA?G"?F !C7+. J< +B"9 =J0 -2<A2.

42

se&uestered by the appropriate state agency since it was classified as -apanese property. >s lawyer for the state, the >ttorney .eneral argues that the said shares were bought by /adrigal, in trust for, and for the benefit of the /itsuis, a -apanese corporation, who is the true owner thereof. >fter such purchase, /adrigal delivered such shares to the /anila office of the /itsuis with his blan1 indorsement on it. It was 2ust 1ept there. The said shares were never sold and were most probably lost or stolen during liberation. "ssue' 8hether or not the contested certificates of stoc1 could be transferred to De #os *antos. Decision' The *upreme Court ruled that it cannot be transferred to De #os *antos. It was established that /adrigal never disposed of the said shares in any manner whatsoever, except by turning over the corresponding stoc1 certificates to the /itsuis. Furthermore, the managers of /itsui during the concerned period attest that the /itsuis neither sold, conveyed, or alienated the said shares of stoc1, nor delivered the aforementioned stoc1 certificates, to anybody during the said period. Finally, even one of the evidence of a receipt of the alleged purchase by De #os *antos from Campos and Cess, who were not the registered owners, was lost though a fire. In summary, if the owner of the certificate has indorsed it in blan1, and it is stolen from him, no title is ac&uired by an innocent purchaser for value. !C99A(:7A9 (7A?#F:7# *hares of stoc1 being personal property may be the sub2ect matter of pledge or chattel mortgage. *uch collateral transfers are not covered by the registration re&uirement of *ection O$ of the Code since our *upreme Court has held that such provision applies only to absolute transfer. In other words, the registration in the corporate boo1s of pledges and chattel mortgages of shares cannot have any legal effect. 8here the certificate of stoc1 is delivered to the creditor as a security for the performance of an obligation, the contract is one of pledge governed by the Civil Code and not by the Chattel /ortgage. > pledge can ta1e effect against third persons only if its date appears in a public instrument. If the certificate of stoc1 is not delivered to the creditor, the transaction must be registered in the chattel mortgage registry of the province where the principal office of the corporation is located, in order that it may be effective against third persons.

!B@A FA? E. #A6ABA?F 6AF#A#AGA, "?!. ,% +B"9 5=$ -2<$A. Facts' > certain Co Toco was the owner of G,PD: shares of *amahang /agsasa1a, Inc. which he mortgaged to Chua Chiu to guarantee the payment of a A"E,EEE.EE debt. The corresponding certificates were delivered to Chua Chiu and was duly registered in the office of the register of deeds of /anila and in the office of the said corporation. >bout five months after, Chua Chui assigned all his rights and interest in said mortgage to the plaintiff, Chua .an which was also duly recorded. Co Toco defaulted. The plaintiff foreclosed on the mortgage. In the public auction he won as the highest bidder. Cowever, upon presenting the certificates to the corporation for registration, the officers refused because they and the plaintiff could not agree on the noting of nine other attachments that had been issued, served and noted on the boo1s of the corporation against the shares of Co Toco. "ssue' 8hether or not the said mortgage ta1es priority over the already noted writs of attachment. Decision' The *upreme Court ruled that the attaching creditors are entitled to priority over the defectively registered mortgage of the appellant. The court argues that the registration in the register of deeds must be done both at the place where the owner is domiciled and at the place where the principal office of the corporation is located. The purpose of this is to give sufficient constructive of any claim or encumbrance over the recorded shares to third persons. Furthermore, any share still standing in the name of the debtor on the boo1s of the corporation will be liable to sei=ure by attachment or levy on execution at the instance of other creditors. Thus, the game here is to have the highest or most preferred priority over any pledged or mortgaged shares. !omment' The pledge of stoc1s is better than a chattel mortgage since the former re&uires the surrender of the ob2ect of pledge to the pledgee. ?C?&(7A?#F:7AB"9"(H A?D (:76"?A("C? 6:6B:7#B"+ "? ?C?&#(C!G !C7+C7A("C? CF

/embership in a non'stoc1 corporation is considered personal to the member and he cannot transfer his rights as such, unless the articles of incorporation or by'laws otherwise provide. The pertinent provisions are
O <0. ?on&(ransferability of membership. && 6embership in a non&stock corporation, and all rights arising therefrom,

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are personal and non&transferable, unless the articles of incorporation or the by&laws otherwise provide. O <2. (ermination of 6embership. && 6embership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by&laws. (ermination of membership shall have the effect of e/tinguishing all rights of a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by& laws.

The easiest way to dissolve a corporation before its term ends is to amend its >%I to shorten its original term of existence, following the procedure set in ; $F 3 o%er to extend or shorten corporate term 4 and ; !O 3+mendment of +,I4, to wit !. notice to each stoc1holderLmember of meeting to amend ". "L$ vote given in a stoc1holder5s meeting $. filing of duly certified articles with *,C :. approval of amendment by *,C +ote that *,C approval will not be given if creditors are adversely affected by the dissolution
O 2%0. Dissolution by shortening of corporate term. > A voluntary dissolution may be effected by amending the AC" to shorten the corporate term pursuant to the provisions of this !ode. A copy of the amended AC" shall be submitted to the #:! in accordance with this !ode. @pon approval of the amended AC" or the e/piration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings, subject to the provisions of this !ode on liquidation.

CHAPTER XVI DISSOLUTION

Dissolution the corporation ceases to be a 2uridical person. Cowever, it has $ years from such dissolution to wind up its affairs and li&uidate its assets. Dissolution may be !. voluntary ". involuntary Dissolution may be effected by !. expiration of term ". voluntary surrender of its charter, either a. extra'2udicially or b. on petition filed with the *,C $. by failure to organi=e and commence business wLin " years from incorporation :. revocation of its registration or certificate of incorporation ". :/piration of term )pon expiration of the term stated in the >%I, which cannot be longer than GE years, the corporation is automatically dissolved without any other proceeding, and it cannot be thereafter considered even as a de facto corporation Cowever, a corporation wishing to extend its business may extend its term any number of times, as long as each extension does not exceed GE years, by amending its >%I not earlier than G years before expiration of the original term. >n extension made after the expiration of the term would be ineffective because by that time the corporation has already been dissolved and the attempt would in effect be a renewal of the charter, an act which is clearly beyond any corporation5s powers.

)nder ; !"E, the corporation will be automatically dissolved upon the happening of either of two events !. approval of the amended >%I; or ". expiration of the shortened term. +o further proceedings are necessary, sub2ect to the li&uidation of its assets. ?ote If the shortened term expires before *,C approval, then there will not be automatic dissolution, but only upon *,C approval of the amendment. If *,C gives its approval before expiration of the shortened term, then the dissolution can ta1e effect only upon such expiration. IF *,C fails to act within O months from filing of the amended articles and shorted term does not expire until after O months, then the corporation is automatically dissolved when term expires 8hen shortened term expires before end of O'month period, corporation will not be dissolved until the end of the O'month period, unless in either case, *,C5s failure to act was due to corporation5s fault. Thus, corpo will not be dissolved even after expiration of O months Eoluntary dissolution, when no creditors are affected
O22J Eoluntary dissolution where no creditors are affected "n case dissolution of a corporation does not prejudice the

44

rights of any creditor having a claim against such corporation, then such dissolution may be effected by majority vote of the Board of directors or trustees, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least %8$ of the outstanding capital stock or of at least %8$ of the members at a meeting to be held upon call of the directors or trustees after publication of the notice of the time, place and object of the meeting for $ consecutive weeks in a newspaper published in the place where the principal office of said corporation is located and if no newspaper is published in such place, then in a newspaper of general circulation in the +hilippines, after sending such notice to each stockholder or member either by registered mail or personal delivery at least $0 days prior to said meeting. A copy of the resolution authori)ing the dissolution shall be certified by a majority of the Board of directors or trustees and counter&signed by the secretary of the corporation. (he #:! shall thereupon issue the certificate of dissolution.

order. Before such date, a copy of the order shall be published at least once a week for $ consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the +hilippines, and a similar copy shall be posted for $ consecutive weeks in $ public places in such municipality or city. @pon A days notice, given after the date on which the right to file objections as fi/ed in the order has e/pired, the !ommission shall proceed to hear the petition and try any issue made by the objections files and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation.

This provision is substantially the same as ; O" of the Corporation #aw, except for the publication re&uirement. +ote that you need both the stoc1holders5 resolution and the *,C certificate of dissolution for the dissolution to be legally effective since it is the *tate which gave life and only the *tate can ta1e life away. $. Eoluntary dissolution where creditors affected. The corporation can still terminate its existence prior to the expiration of its term even where there are corporate creditors, provided that they are given the opportunity to present their claims and ob2ections to protect their interests.
O 22<. Eoluntary dissolution where creditors are affected. *here the dissolution of a corporation may prejudice the rights of any creditor, a petition for dissolution shall be filed with the #:!. (he petition shall be signed by a majority of its Board of directors or trustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors, or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon the affirmative vote of the stockholders representing at least %8$ of the outstanding capital stock or by at least %8$ of the members, at a meeting of its stockholders or members called for the purpose. "f the petition is sufficient in form and substance, the !ommission shall, by an order reciting the purpose of the petition, fi/ a date on or before which objections thereto may be filed by any person, which date shall not be less than $0 days nor more than ,0 days after the entry of the

?ote' >ny petition for dissolution should now be filed before the *,C, and not the CFI as provided for in 0ule !E: of the 0ules of Court, the provision substantially similar to the one above In this method of dissolution, *,C may direct the manner of li&uidation of corporate assets, either by a. directing the corporation to do it, or b. appointing a receiver, if it deems proper In either case, the *,C will retain supervision over the (oard or the receiver for the protection of the stoc1holders and the creditors ali1e. "L$ vote is sufficient to signify the corporation5s intention to dissolve and no member or stoc1holder may prevent such dissolution. Cowever, if the ma2ority stoc1holders have acted in bad faith in dissolving the corporation in order to free=e out the minority, they can be held liable for damages which the minority may have suffered as a result of the wrongful dissolution. +ote There will be no dissolution if there is no filing with the *,C. Furthermore, the guilty directors or stoc1holders may be held criminally liable for violation of ; !"".
O 2%%. !orporate 9iquidation. :/cept by decrease of capital stock and as otherwise allowed by this !ode, no corporation shall distribute any of its assets or property e/cept upon lawful dissolution and after payment of all its debts and liabilities.

F"?A?!"?F E (:CDC7C D$ ACI# :E: 3!DG$4

45

The minority stoc1holders of the Financing Corporation are suing the corporation and its president and general manager for gross mismanagement and fraudulent conduct of corporate affairs and are as1ing for the dissolution of the corporation. #! Beld The general rule is that minority stoc1holders of a corporation cannot sue and demand its dissolution but such action should be brought by the .overnment through its legal officer in a &uo warranto. Cowever, there are instances when minority stoc1members who are unable to obtain redress and protection of their rights within the corporation may petition for dissolution without intervention of the *tate. 8hen such action is brought by the minority stoc1holders, the trial court has 2urisdiction, and may appoint a receiver as part of its power. The grounds of the prayer for receivership are !4 imminent danger of insolvency "4 fraud and mismanagement G. Failure to organi)e and commence business cessation of business for A years
O %%. :ffects of non&use of corporate charter and continuous inoperation of a corporation. "f a corporation does not formally organi)e and commence the transaction of its business within % years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. Bowever, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least A years the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. (his provision shall not apply if the failure to organi)e, commence the transaction of its business or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the #:!.

Failure to adopt by'laws will result in the suspension or revocation of the by'laws. Failure to elect directors is a ground for dissolution, but if the incorporating directors whose names appear in the >%I continue to act as such and begin transacting corporate business, then stoc1holders are deemed to have ac&uiesced to their acts as directors as if they had been duly elected, but only for the purpose of determining whether the corporation 6failed to organi=e.7 Transacting business implies a continuity of acts or dealings in the accomplishment of the purpose for which the corporation was formed. Cowever, even a single act would be sufficient if it is intended to be the beginning of a series of acts in pursuance of the corporate business. Code of Commerce. +rt. /. The legal presumption of ha$itually engaging in commerce shall exist from the moment the person %ho intends to engage therein announces through circulars0 ne%spapers0 hand$ills0 posters exhi$ited to the pu$lic0 or in any other manner %hatsoe#er0 an esta$lishment %hich has for its o$*ect some commercial operation. >ny advertisement in the media would thus be sufficient to raise the rebuttable presumption that the corporation has commenced business; thus one can present evidence to show that the business in face never commenced. *,C may suspend or revo1e the certificate of incorporation of a corporation which had been formally organi=ed and had commenced its business within the "' year period but discontinues its operations for at least G continuous years, unless it can prove that the cessation of its business was due to causes beyond its control. In this case, there is no automatic dissolution and a proceeding before the *,C is necessary. The corporation must be given due process notice and the opportunity to be heard. !ampos now as1s the 9 of what happens if the corporation is able to prove that the discontinuation of the corporation5s business was due to causes beyond its control9 Is the corporation revived, or will there be no dissolution until it is given the change to prove that its failure is beyond its control. O. "nvoluntary dissolution a. 1e#ocation of "ertificate of 1egistration $y S2"
O2%2. "nvoluntary dissolution. A corporation may be dissolved by the #:! upon filing of a verified complaint and

> corporation is formally organi=ed by the !. adoption of its by'laws; ". election of its directors and $. election of its officers Failure to do any of these steps within " years will cause the dissolution of the corporation.

46

after proper notice and hearing on grounds provided by e/isting laws, rules and regulations. +D <0%&A, O,. "n order to effectively e/ercise such jurisdiction, the !ommission shall possess the ff. powers' / /// e. (o suspend, or revoke, after proper ntocie and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law, including the ff' 2. Fraud in procuring its certificate of registration %. #erious misrepresentation as to what the corporation can do or is doing to the great prejudice of our damage to the general public $. 7efusal to comply or defiance of any lawful order of the !ommission restraining commission of acts which would amount to a grave violation of its franchise 5. !ontinuous inoperation for a period of at least A years A. Failure to file by&laws within the required period ,. Failure to file required reports in appropriate forms as determined by the !ommission within the prescribed period.

a right, privilege, or franchise in contravention of law. :. "G H minimum re&uirement for subscription andLor payment has not been complied with after incorporation, contrary to its >%I. This amounts to a fraud in procuring the corporation5s registration. 8here the offense of the corporation is not serious enough to cause great pre2udice to the public, such a severe penalty as revocation, or even should be suspension, should be avoided as it would affect the goodwill of the corporation. The *,C can instead en2oin the corporation from further committing the act or acts complained of, and has the power to issue prohibitory or mandatory in2unctions in all cases under its 2urisdiction. b. 3uo %arranto proceeding AD DE"'> grants exclusive 2urisdiction to the *,C over any controversy between the corporation and the *tate in so far as it concerns its individual franchise or right to exist as such entity. Consider as repealed by ADDE"'> the 0%C provision re &uo warranto proceedings should be filed before the 0TC. 7:+@B9"! E B"#AHA# 9A?D (7A?#+C7(A("C? P! *C0> D 3!DFP4 *ol .en filed petition for &uo warranto against (isayas #and Transportation Co, for pursuit of purposes not emboided in its >%I, for electing as presidents persons who were not stoc1holders, for failure to pay its wor1ers the re&uired minimum wage, and for failure to maintain accurate and faithful stoc1 transfer boo1s, thus enabling it to defraud the state, the general public, its creditors, investors and stoc1holders. (isayas5 former president, in his response to the petition, made other allegations, and re&uested for an appointment of a receiver for the purpose of preserving the assets of the corporation. Corporation filed a motion for 2udgment on consent, manifesting its consent to and moving for 2udgment to be rendered ordering the dissolution of the corporation, and the li&uidation of its assets on the ground that the pendency of the petition of &uo warranto had pre2udiced the corporation and its business as well as its stoc1holders.

0e&uired reports are the annual report of its operations and a financial statement of its assets and liabilities. The reference to any of the grounds provided by law, including the ff., implies that aside from the enumerated grounds, there are other grounds for suspending or revo1ing the certificate. *ome of these are !. @iolation of the corporation of any provision of the Corpo Code 3;!::4 ". In case of deadloc1s in close corporations and the *,C deems it proper to order the dissolution of the corporation as the only practical solution to the dispute. $. grounds for a &uo warranto proceeding to dissolve the corporation which may be initiated by the *ol .en or the fiscal on grounds which may also be used as a basis for *,C revocation of registration.
7C! 7ule ,, O %. 9ike actions against corporations. A like action may be brought against a corporation' a. when it has offended against a provision of an Act for its creation or renewal b. when it has forfeited its privileges and franchises by non&use c. when it has committed or omitted an act which

amounts to a surrender of its corporate rights, privileges, or franchises d. when it as misused a right, privilege, or franchise conferred upon it by law, or when it has e/ercised

47

#! Beld > motion for 2udgment on consent is not to be e&uated with a 2udgment by confession. The former is none of the provisions and terms of which are settled and agreed upon by the parties to the action, and which is entered in the record by the consent and sanction of the court. Cence, there must be an un&ualified agreement among the parties to be bound by the 2udgment on consent before said 2udgment is entered. The court does not have the power to supply terms, provisions or essential details not previously agreed to by the parties. %n the other hand, a 2udgment by confession is not a plea but an affirmative and voluntary act of the defendant himself. Cere, there was no agreement among the parties re motion for 2udgment on consent. the

is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. :/cept by decrease of capital stock and as otherwise allowed by this !ode, no corporation shall distribute any of its assets or property e/cept upon lawful dissolution and after payment of all its debts and liabilities.

!. 4oss of *uridical personality )pon dissolution, a corporation loses its 2uridical personality and can no longer lawfully continue its business, except merely for the purpose of winding up its affairs. It cannot even be a de fact corporation and its existence may thus be sub2ect to collateral attac1. It cannot enter into new contracts which would have the effect of continuing the business of the corporation. During the $'year period allowed, it must collect all debts owing to it, and pay all its creditors. For this purpose, it may sue and be sued, although upon the expiration of $ years, all pending actions by or against the dissolved corporation abate. >fter payment of all its creditors, its remaining assets should be distributed to the stoc1holders in proportion to their interest. ?A("C?A9 ABA!A E +C7:

*C affirmed lower court5s decision that the corporate acts and omissions complained of did not warrant a &uo warranto since they were personal controversies and had not resulted in substantial in2ury to the public nor were they willful and clearly obdurate, and the persons responsible could be held personally liable without need of dissolving the corporation. 0elief by dissolution will be awarded only where no other ade&uate remedy is available. :ffects of Dissolution *inding @p and 9iquidation
O 2%%. !orporate 9iquidation. :very corporation whose charter e/pires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate e/istence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for $ years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said $ years, said corporation is authori)ed and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors, and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors, and other persons in interest. @pon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who

In +ovember !:, !DG$, +ational >baca Corp. sued Aore for the collection of money due the corporation. Aore was sentenced to pay bac1 the money on >pril !!, !DGO. *he appealed from 2udgment on the ground that the corporation has no legal capacity to sue, it having been abolished by ,% dated +ov. $E, !DGE or $ years prior to the commencement of the suit. #! Beld It is generally held, that where a statute continues the existence of a corporation for a certain period after its dissolution for the purpose of prosecuting and defending suits, etc, the corporation becomes defunct upon the expiration of such period, at least in the absence of a provision to the contrary, so that no action can afterwards by brought by or against it and must be dismissed. >ctions pending by or against the corporation when the period allowed by the statute expires, ordinarily abate. The time during which the corporation, through its officers, may conduct the li&uidation of its assets and sue and be sued as a corporation is limited to $ years from the time the period of dissolution commences; but there is no time limit within which the trustees must complete a li&uidation placed in their hands. The authorities are to the effect that

48

suits by or against a corporation abate when it ceased to be an entity capable of suing or being sued, but trustees to whom corporate assets have been conveyed for the benefit of stoc1holders, members, creditors, and other persons in interest may sue and be sued as such in all matters connected with the li&uidation. (y the terms of the statute, the effect of conveyance is to ma1e the trustees the legal owners of the property conveyed, sub2ect to the beneficial interest therein of creditors and stoc1holders. ". 2xecutory "ontracts
O25A Amendment or repeal. ?o right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this !ode or of any part thereof.

dissolution of the corporation. $'year period does not apply because the corporation is substituted by the receiver. Cowever, 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 corporate rights. +ote In one case, the corporate term expired while pending action for collection. *C held that lawyer who represented the corporation in the suit be considered a trustee, and that the action did not abate by the expiration of the $'year period, or else, debtors would avail themselves of this provision at the expense of the dissolved corporation. )pon the expiration of the $'year period, an unsatisfied creditor may sue the trustee, or the court may allow him to follow the corporate assets in the hands of the stoc1holders, who may have received the same as li&uidating dividends. 4. .istri$ution of assets after payment of de$ts

The prevailing view is that executory contracts are not extinguished by the dissolution of the corporation. Cowever, some authorities ma1e an exception of contracts for personal services, such as employment contracts of officers and employees, where the dissolution is involuntary or the result of merger or consolidation, in which case the contracts are deemed terminated. $. 5ethods of li6uidation *inding up the affairs of the corporation ' the collection of all assets, the payment of all its creditors, and the distribution of the remaining assets, if any, among the stoc1holders thereof in accordance with their contracts, of if there be no special contract, on the basis of their respective interests. The manner of li&uidation or winding up may be provided for in the corporate by'laws which would prevail unless they were inconsistent with the law. $ 7ecogni)ed 6ethods of 9iquidation !. #i&uidation by the corporation itself through its (oard of directors who have only $ years to finish its wor1 of li&uidation. ". Conveyance of all corporate assets to trustees who will ta1e charge of li&uidation. )nless the trusteeship is limited in its duration by the deed of trust, the $'year limitation will not apply as long as the designation of trustees is made within said period. The (oard who can5t finish li&uidating in time may let trustees ta1e over the 2ob. $. #i&uidation by a receiver who may have been appointed by the *,C upon its decreeing the

> corporation cannot distribute any of its assets or property except upon lawful dissolution and only after payment of all its debts and liabilities, after which the remaining assets, if any, must be distributed to the stoc1holders in proportion to their interest in the corporation. " ,xceptions to rule that stoc1holder can5t get bac1 his investment until dissolution and li&uidation !. decrease of capital stoc1, resulting in a surplus, which can them be distributed tot he stoc1holders provided no creditors are pre2udiced ". as otherwise allowed by the Code, which covers all cases where Code allows some portion of the corporate assets to be distributed to one or more stoc1holders. a. appraisal right under ; P! and :" b. deadloc1 in a close corporation, under ; !E: where *,C orders corporation to pay the fair value of the shares of any stoc1holder c. ;!EG where a stoc1holder of a close corporation may, for any reason, compel the corporation to buy his shares at a fair value d. ;:!, where corporation repurchases the shares of any stoc1holder for any legitimate corporate purpose e. ; :$, where the corporation validly distributes dividends 9iquidating dividend share of each stoc1holder in the assets upon li&uidation.

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Directors who distribute li&uidating dividends wLo first satisfying all claims against the corporation may be held liable for negligence or fraud to any creditor pre2udiced by such distribution. They may also follow the assets of the corporation in the hands of the stoc1holders who have received them, to the extent necessary to satisfy his claim. ?ote *toc1holders of .uan=on v 0egister of Deeds where it was held that a distribution of corporate assets among the stoc1holders is not a partition of property among co' owners but a transfer or conveyance by the corporation, a separate 2uridical entity, and as such is sub2ect to the law imposing documentary stamp tax on transfer of property. +otice by publication to stoc1holders, members or creditors who cannot be found is enough before the assets distributable to them may escheat to the city. Creditors who are pre2udiced by the dissolution and are not given the opportunity to be heard can attac1 the validity of the dissolution for lac1 of due process as to them. BCA7D CF 9"I@"DA(C7# E GA9A* "E *C0> DPF 3!DOF4 (y ,% $F", the sole stoc1holder, the gov5t, abolished +>C%C% and placed its assets in the hands of the (oard of #i&uidators which became the trustee on its behalf. It was an express trust with the legal interest becoming vested in the (oard while the beneficial interest remained with the gov5t as sole stoc1holder. *ince the dissolution of the +>C%C% falls under the " nd method of winding up its affairs re conveyance to trustees who will settle its affairs, then it is clear that there is no limit to the lifeterm of the (oard of #i&uidators. 7:+@B9"! E 6A7#6A? :: *C0> :!P 3!DF"4 %n %ct. !G, !DG$, the (I0 demanded /arsman, a timer licensee, pay its unpaid taxes. The corporation alleges that inasmuch as it had been extra'2udically dissolved on >pril "$, !DG:, the filing of the original complaint for collection on *ept. P, !DGP and the amended complaint on >ugust "O, !DGO, is already beyond the $'year period. #! Beld The first assessment for deficiency taxes was made before the corporation5s dissolution and the last two made not later than O months after such dissolution. Thus, the gov5t became a creditor of the corp. before the completion of its dissolution by the li&uidation of its assets. The li&uidator chosen by the corporation became the trustee of all its assets for the benefit of interested parties,

including the .overnment, which is one of its creditors. To assume otherwise would render the extra'2udicial dissolution illegal and void since acc. To ; O" of the Corporation #aw, such dissolution is permitted only when it does not affect the rights of any creditor with a claim against the corporation. Distribution of Assets of ?on&#tock !orporations
O <5 7ules for Distribution. "n case of dissolution of a non& stock corporation in accordance with the provisions of this !ode, its assets shall be applied and distributed as follows' 2. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefor %. 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 $. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organi)ations engaged in activities in the +hilippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this !hapter 5. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the AC" or the by&laws, to the e/tent that the AC" or the by&laws determine the distributive rights of members, or any class or classes of members, or provide for distribution and A. "n any other case, assets may be distributed to such persons, societies, organi)ations or corporations, whether or not organi)ed for profit, as may be specified in a plan of distribution adopted pursuant to this !hapter. O <A. +lan of distribution of assets. A plan providing for the distribution of assets, not inconsistent with the provisions of this title may be adopted by a non&stock corporation in the process of dissolution in the ff. manner' (he board of trustees, shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. *ritten notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within the time

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and int he manner provided in this !ode for the giving of notice of meetings to members. #uch plan of distribution shall be adopted upon approval of at least %8$ of the members having voting rights present or represented by pro/y at such meeting.

become *hs of absorbing corp.

becomes *C5s consolidated corp.

of

A0%C,D)0, F%0 ,FF,CTI+. > A#>+ %F /,0.,0 >+D C%+*%#ID>TI%+ *ection $O3P4 expressly grants authority to a corporation 6to enter into with other corporations merger or consolidation7 in accordance with the procedure prescribed by *ections FO to PE. !. The board of directors of trustees of each corporation, party to the merger or consolidation shall approve plan of merger or consolidation setting forth the matters mentioned in *ection FO; ". The plan shall be submitted for approval by the stoc1holders or members of each of such corporation at separate corporate meetings duly called for the purpose with proper notice 3*ec. FF4 $. >fter approval by the prescribed vote of the stoc1holders or members, articles of merger or consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice'president and certified by the secretary or assistant secretary of each corporations setting forth the matters stated in *ection FP; :. The articles shall then be submitted for approval to the *,C in &uadruplicate for its approval, provided that in the case of merger or consolidation of corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained 3*ec. FD pag.!4 G. The *,C shall conduct a hearing with proper notice. If, upon investigation it has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of the Code or existing laws, it shall give the corporation concerned the opportunity to be heard 3Ibid, pag. "4; and O. The Commission shall issue a certificate of merger or of consolidation ass the case may be, at which time the merger or consolidation shall be effective, if satisfied that the same is not inconsistent with the provisions of the Code and existing laws. 3Ibid, pag. !.4 The consent of creditors of the corp is not necessary in merger and consolidation, it being authori=ed by law. 3*ee *ec. PE 3G4.The remedy of the creditors is to enforce their claims against the surviving or consolidated corp. as expressly provided by the Code, or if there has been a fraudulent conveyance, to follow the assets of the dissolved constituents in the hands of the surviving or consolidated corporation. Dissenting *C cannot prevent the merger or consolidation if the re&uired vote had been obtained. Their remedy is the exercise of appraisal right. 8here the merger or consolidation involves a

CHAPTER XVII CORPORATE CO BINATIONS

A)0A%*, !. For the rehabilitation or prevent li&uidation of a corporation with a wea1 financial condition or on the verge of insolvency ". +ecessity of reorgani=ation due to unsound financial structure involving fixed charges or continue the business under a different corporate set'up $. ,xpansion or desire to sell part of a large enterprise :. Arevent cutthroat competition; improve mar1eting facilities; economi=e on cost of operations /,TC%D* !. /erger ". Consolidation $. *ale of substantially all of corporate assets :. ,xchange of stoc1s The choice of method would depend not only on the purpose of the combination but other factors such as taxes, difficulty of obtaining *C approval, existence of preemptive and appraisal rights, the dilution of *C5s e&uity and effect on existing control. 8hichever method is chosen, the resulting combination and its effects must pass the test of fairness particularly to the minority *hs. /,0.,0 >+D C%+*%#ID>TI%+ 6erger %ne or more existing corporations are absorbed by another corporation which survives 3>X( N> or (4 Aarties called constituent corps. >bsorbed corporation dissolved without li&uidation of assets >bsorbing corporation ac&uires all assets and assumes liabilities of the absorbed corporation regardless of 8%+ creditors consented *hs of absorbed corp !onsolidation )nion of " or more corporations to form a new corporation called a consolidated corp. 3>X( NC4 *ame >ll constituent corps. are dissolved without li&uidation of assets; consolidated corpo survives Consolidated corp. ac&uires all assets and assumes liabilities of constituent corps. regardless of 8%+ creditors consented *hs of constituent corps.

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foreign corporation licensed to transact business in the Ahilippines, *ection !$" applies. (B: *>#, %F >**,T* *)(*T>+TI>##B >## C%0A%0>T, 8here one corporation sells or transfers all or substantially all its assets or shares of stoc1 to another corporation, the latter is not liable for the debts and liabilities of the transferor except !. where the purchaser expressly or impliedly agrees too assume such debts ". where the transaction amounts too a consolidation or merger of the corporations $. Aurchasing corporation is merely a continuation of the selling corporation and :. The transaction was entered into fraudulently in order to escape liability for such debts ,ICC>+., %F *T%C<* /ethods !. Aurchase of a corporation of all or substantially all of the shares of another corporation from individual shareholders in exchange for shares of stoc1s of the ac&uiring corporation. This does not need the consent of the ac&uired corporation but should bee considered as a transaction between individual shareholders and the ac&uiring corporation. The result would be a parent'subsidiary relationship. ". Aurchase of the unissued of the shares of another corporation in exchange for shares of stoc1. This obviously needs the consent of the ac&uired corporation since it is a purchase from the corporation itself. > parent'subsidiary relationship may also result. 0ights of stoc1holders who refuse to sell to the ac&uiring corporation would depend on whether the parent decides to !. 0etain ac&uired corporation as subsidiary' no appraisal right ". /erges r :D*A7D ?:99 !C. E#. +A!"F"! FA76#

%ne alternative to a merger or consolidation is the sale of one corporation of all or substantially all of its assets to another corporation . Consideration may be in the form of stoc1s, cash or other properties. > sale covers substantially all assets if the corporation would be rendered incapable of continuing the business or accomplishing the purposes for which it was incorporated The legal re&uirements for such sale are provided for in *ec :E. These are !. *ub2ect to provisions of illegal combinations and monopolies ". /a2ority vote of the (%D or trustees $. 8ritten notice of propose action and date, time and place of the meeting to the *C :. "L$ vote of the *C G. >ppraisal right of dissenting *C O. >bandonment o f such sale needs no further action or approval of *C The purchasing corporations acting in good faith will not assume the liabilities of the selling corporation. ,xceptions to this rule rare provided for in the case ,dward +ell @s. Aacific farms. 0emedies of dissenting *C !. >ppraisal right which can be exercised only if corp. has unrestricted retained earnings to cover such payment. This right can only be exercised by *C of the selling corp. and not the purchasing corp. ". >ction to en2oin sale if the minority *C can prove that transaction was fraudulent and entered into for the purpose of free=ing them out $. For executed contracts, recover the value of the proportionate interest in the new corp. if one was formed and may hold directors and ma2ority *C for damages. 0escission rarely granted because it may adversely affect third persons. C>*,* 7:H:# E#. B9C@#: The transfer of the assets of the #aguna Tayabas (us Co. to a new corporation is not to be deemed as a merger or consolidation. The two corporations #aguna Tayabas and (atangas Transpo were not dissolved but continued to exist. The new corporation did not assume the liabilities of #aguna and (atangas. >t most the transaction can only be deemed as a purchase designed to achieve operating efficiency.

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