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In computing 25-25 rule, subscriptions made by a

LAW on CORPORATION corporation will be included. Corporations can be


(2007 edition) subscribers, only that they can not be incorporators.

A corporation is an artificial being created by operation of 2006 notes:this 25-25 is only applicable in terms of par
law, having the right of succession and the powers, value shares since if no par value is involved, whatever is
attributes and properties expressly authorized by law or issued is fully paid.
incident to its existence.
CORPORATE TERM
It is deemed organize when after issuance to it of its
certificate of incorporation,it proceeds to adopt its by- It should have a corporate term which should not exceed
laws, elect its board, which in turn elects its President, 50 years. And it may be extended for another 50 years. But
secretary, treasurer,and other officers nad occupies an you cannot incorporate today, then tomorrow, extend the
office for the transaction or business allowed it by its corporation life. You can only do that in the last 5 years of
articles. its existence (except for justifiable reasons like in securing
a loan of 8 yr life and corp term remaining is only 7 yrs so
2 yr period to run from the date the certificate of dapat na i-amend for reason of securing a loan)
incorporation is issued to the corporation, if the 2006 notes:corporation cannot be granted a usufruct over
corporation within 2 yrs from said date fails to perform the 50 yrs.
organizational acts above indicated, then it is a ground for
involuntary dissolution. DIFFERENCE FROM PARTNERSHIP:
1.How Created: Corpo is by law while partnership is by
Advantages: agreement
1.easier to raise capital and to attract other persons as 2.Powers: corp can exercise only those powers expressly
investors because of limited liability granted or fairly inferable from those granted to them
2.it has the attribute of perpetual succession and a while partnerships can exercise any power except those
juridical personality independent from its stockholders prohibited by law,morals,good customs and public policy
3.managed by group of persons called the board of 3.Corpo is managed through a board of directors while
directors partnerships is by all partners or through a managing
4.transfer of interest is easier and will not dissolve the partner
enterprise 4.Corpo has 5 to 15 persons while partnership has 2 or
more
Disadvantages:
1.it takes time to organize 2006 notes: If person does not want to risk his other
2.business decisions may be stalemated by differences of properties, he can organize a private stock corporation
opinion among the board members where his liability will be limited to his stock subscription
--if he do not want to manage, and wants others to
manage,then he can form a partnership with others with
MINIMUM CAPITAL himself as capitalist partner and other person as industrial
partner or he can form a stock corporation and make other
Now, as a rule, there is no minimum required capital, person as director and President or general manager and
although the law requires the 25-25 rule which is that let latter run the business with the board.
atleast 25% of the authorized shares(amount fixed in the --if he wants to manage and control the business ,then he
articles of incorporation to be subscribed and paid by should form a sole proprietorship
stockholder) must be subscribed, and at least 25% of that
shares subscribed was already paid. DIFFERENCE FROM COOPERATIVES:
You need not have everybody paying 25% (since individual 1.coop members run the cooperative while employees of a
subscriber may pay less than 25%, as long as the 25% of corp run it.
the aggregate amount of the subscribe shares is already 2.coop members are entitled to one vote each.
paid). Stockholders vote according to the number of shares they
hold.
Although, the law says that paid-up capital should not be 3.coop member employee cannot assert collective
less than P5K, so you can form a corporation with a paid- bargaining .the employees of corp can.
up capital of P80K subscription would be 20K and paid-
up would be 5K. But for certain lines of businesses, special DIFFERENCE FROM JOINT VENTURES:
laws require minimum, authorized capital, like banks,
insurance companies, financing companies. Joint ventures is a business organization between two corp
where the participants deviate from traditional matters on

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corporate management in the ff manner: On the other hand, the Court has said that Lyceum of the
Phils. cannot prevent other schools from using lyceum
1.required vote might be greater than a mere majority because lyceum is a generic name. It means a school. Like
2.group of stockholders may be given the power to elect university, UE cannot prevent others from using university
specified number of directors as part of their name because it's a generic name. So
3.stockholders control the selection and retention of Lyceum of the Phils. cannot have an exclusive right to use
employees lyceum because it is a generic term for schools.
4.venture may set up a procedure for settling disputes by
arbitration. 2006 notes: It may change its name by merely amending
2006 notes: corporations may enter into joint venture its Articles of Incorporation in the manner prescribed by
(pooling of resources or formal creation of another law.
corporation) with another but not a partnership. 2006 notes: Change of name has no more effect upon the
identity of the corporation,since it is just a change of
4blue 95 notes:SINGLE PROPRIETORSHIP is composed of one name, not of being. It remains and continues to be the
person doing business either under his own name or a original corporation.
business name. It has no personality separate from its
owner. 2006 notes: in corporation corp, incorp may be used
and if it contain initials, an explanation must be included.
4blue 95 notes: in JOINT ACCOUNT, it is a business 2006 notes:in partnershipthe words company and
arrangement whereby 2/more persons contribute capital ltdmay be used.
in a business and participate in the results thereof. No 2006 notes: words in ordinary language are not susceptible
common fund is formed and no juridical personality is of appropriation ,but words use together ,attained a 2 nd
created. meaning, they are subject to appropriation (secondary
meaning rule).
2006 notes:cannot use brgy, national, state and
ATTRIBUTES OF A CORPORATION Philippines as part of a name.

1.Personality distinct from the persons composing it 2006 notes:if name only lacks even a single word/entry
you may dismiss the case since such constitute a
Corporation is a creature without any existence until it has substantial defect which would tantamount a lack of cause
received imprimatur of the state acting according to law. It of action.
cannot legitimately refuse to yield obedience to acts of its
state organs. 2.Perpetual succession
Continued corporate existence irrespective of death or
2006 notes: incapable of intent ,so it cannot commit withdrawal of its component members, limited in duration
felony. But it can be fine due to officers acts. to the pds stated in charter.

2006 notes: Corp not subject to Moral damages even if 3.Acquisition of Property, contracting obligations and
corporation may have establish a reputation of its own and bringing of suits
created goodwill in the course of its business operations
over the years. And even if they get besmirched Property of the corporation is not the property of its
,corporation has still no cause of action against the stockholders or members and may not be sold by the
offender (ABS-CBN v CA). stockholders or members without express authorization
from the corporations board of directors.
2006 notes:where president is impleaded in his personal Obligations incurred by the corporation acting through its
capacity, as such,he becomes a real party in interest so he directors ,officers and employees are its sole liabilities. As
cannot sign in his own behalf (but he can sign in behalf of such, corporate officers are not personally liable for money
the corporationdue to the 2 signature rule 1 st in behalf claims of discharged corporate employees unless they
of the corporation and 2nd in his personal capacity) acted with evident malice and bad faith in terminating
their employment.
Corporate name:
Stockholder is not directly ,individually and/or personally
No corporation name may be allowed if it is identical or liable for the indebtedness of the corporation. Being the
deceptively or confusingly similar to that of any existing officer or stockholder of corporation does not make ones
corp. And that the way the jurisprudence has developed, property the property also of the corporation for they are
the name will not be allowed if it uses a dominant word in separate entities.
the name of another corporation, and they are engaged in
the same line of business. Interest of stockholders in corporate property is purely

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inchoate, and will not entitle them to intervene in a confuse legitimate issues
litigation involving corporate property(rights belonging to
corp cannot be enjoined by stockholder). 5.where parent corp assumes complete control of its
subsidiarys business
DOUBLE TAXATION. When a corporation earns profits, it
pays income tax, when the corporation distributes the 6.when corporation is an alter ego of one of the principal
profits to the stockholders, the income will again be stockholders
subject to tax---as you know, dividends are subject to
withholding tax. 7.forum shopping since the corporate veil cannot be used
to shield an otherwise blatant violation of the prohibition
EVERY CORPORATION INCORPORATED UNDER THIS CODE against forum shopping shareholders whether suing as
HAS THE POWER AND CAPACITY TO SUE AND BE SUED IN the majority in direct actions or as the minority in a
ITS CORPORATE NAME. derivative suit cannot be allowed to trifle with the court
--if party wants to intervene, it must used its corporate processes.
name as the law requires and not another name which it
had not registered. (Laureano v CA) 2006 notes: Piercing applies to sale of stocks but not
applicable to sale of assets or properties.
4blue 95 notes: Doctrine can only come into play if
(2000 BAR) suit will prosper against A Corp since it is the summons is served on the corporation through any one of
one renting the office space as lessee from the owner of the persons named: President, Managing Partner,
building as the lessor but the suit will not prosper against Corporate secretary, Treasurer, or in-house counsel (Rule
Y,the President of A Corp since he has a legal personality 14)
distinct and separate from that of the corporation.

4.Receipt and enjoyment in common of privileges and


immunities Not applicable when:

DOCTRINE OF PIERCING THE VEIL 1.Director has no participation to a representation made


by the President ,and the execution of a promissory note
When the separate juridical personality of a corporation is with we as maker has a reference to the corporation and
used to defeat public convenience, to justify wrong, to not to the directors.
protect fraud, to commit a crime, its separate juridical 2.for the separate juridical personality of a corporation to
personality will be disregarded. BUT, time and again, the be disregarded, the wrongdoing must be clearly and
Court said that the mere fact that one stockholder is the convincingly established it cannot be presumed
controlling stockholder of a corporation, is not sufficient 3.In Liddel v CIR, mere ownership by a single stockholder
for disregarding the separate juridical personality. Mere or by another corporation of all or nearly all of the capital
control, in other words is not enough to constitute a stock of a corporation is not of itself a sufficient reason for
ground for disregarding the separate personality. disregarding the fiction of separate corporate
personalities.
It must be CONTROL + something else, like fraud.
For example, somebody is suedthere is a judgment
against himso what does he do----he forms a corporation Consequences if Viel is Pierced:
and transfers his properties to that corporation so that 1.if only one corporation is involved, to regard its existence
they cant levy upon the property by saying that they as an association of persons
belong to the corporation. 2.if two corporations participate, to merge them, and
consider them only as one entity.
It is applicable when:
4Blue 95 notes: members or stockholders of the
1.used as a cloak to cover fraud, illegality, or it results in corporation will be considered as the corporation that is
injustice liability will attach directly to the officers and stockholders.
Test in determining applicability of Piercing the Veil:
2.defeat public convenience, justify wrong, defend crime
1.control, not mere majority or complete stock control, but
3.necessary to achieve equity or to protect creditors and complete domination, not only of finances but of policy
other valid grounds and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction
4.where two factories are made to appear as one and used had at the time no separate mind,will or existence of its
as a device to defeat the ends of law or as a shield to own.

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2.such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a 2006 notes: for Non stock ,# 1-6 in lieu of stock
statutory or other positive legal duty or dishonest and subscriptions and payments ,the names of donors and
unjust act in contravention of plaintiffs legal rights. their citizenship ,residences and amounts contributed or
donated should be indicated.
3.control and breach of duty must proximately cause the
injury or unjust loss compliance of. The absence of any one CONVERSION FROM STOCK TO NON-STOCK
of these elements prevents piercing the veil.
(BAR) X company is a stock corporation composed of the
INSTRUMENTALITY RULE (ALTER EGO) Reyes family engaged in the real estate business. Because
of the regional crisis, the stockholders decided to convert
Where one corporation is so organized and controlled and their stock corporation to charitable non-stock corporation
its affairs are conducted so that it is a mere and non profit association by amending the articles of
instrumentality or adjunct of the other. The fiction of the incorporation.
corporate entity of the instrumentality may be HELD: This can be legally done. In conversion by mere
disregarded. amendment, the stock corporation is not distributing any
In applying this rule,the courts are concerned with the of its assets to the stockholders. On the contrary, the
reality and not form with how the corporation operated stockholders are deemed to have waived their right to
and the individuals relationship to that operation. The share in the profits of the corporation which is a gain not a
question of where corporation is a mere alter ego is one of loss to the corporation.
fact, essentially then ,a matter of proof.
If at inception, such company is a non-stock, then, the
2006 notes: in Francisco v Mejia: SC states that mere members are not entitled to share in the profits of the
ownership of substantial capital in a corp is not enough corporation since all present and future profits belong to
that piercing is appied, since there should be disregard of the corporation. In converting the non-stock corporation to
rights of third parties. a stock corporation by a mere amendment of Articles of
Incorporation, the non stock corp is deemed to have
ARTICLES OF INCORPORATION distributed an asset of the corporation.

It contains the following: Non stock must be dissolved first.

1.name of corporation 2006 notes:nonstock to stock di pwede since it would


2.purposeprimary and secondary violate prohibition of nonstock to distribute surplus profits
3.place of its principal office, which must be a city or to members (an exception to such is when corp. has
municipality. distribution plan approved by SEC and included in its
4.duration articles of incorporation whereby assets are return to its
assets or given to another nonstock to be used for a
5.the name, nationality, and residence of the incorporators specific purpose and if there still remains ,it shall be
6.the name, number of directors [which should not be less returned to members.
than 5 nor more than 15], those who will act as directors
until the regular directors are elected. Documents accompanying the Articles:

7.if stock corporation, amount of capital stock ,number of 1.treasurers certificate


shares in case of par value stock corporations ,the par 2.statement of assets and liabilities
value of each share 3.bank statement of money paid in for subscriptions
4.letter of authority for SEC examiners to examine the bank
8.names and residences and number of shares and acct
amount of subscription of the subscribers,which shall not 5. the favorable recommendation of the appropriate
be less than 25% of the authorized capital stock government agency
-- like in an insurance corp it must be with
9.name,residences and amounts paid by each subscriber recommendation of insurance commissioner, if it is a
on their subscriptions which shall not be less than 25 % of school it should be with the DECS or CHED (4blue 95)
total subscriptions
10.name of treasurer elected by subscribers Grounds for Rejection or Disapproval by SEC of Articles or
11.if the corporation engages in a nationalized industry, a Amendments:
statement that no transfer of stock will be allowed if it will
reduce the stock ownership of Filipinos to a percentage 1.not substantially in the prescribed form
below the required legal minimum. 2.purpose patently unconstitutional ,illegal or immoral

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3.treasurers affidavit false laws duly certified to by the secretary and a
4.non-compliance of required percentage of Filipino stock majority of the directors is then filed with the
ownership in nationalized corporations SEC.

Ways of proving corporate existence where this is put in 2. by board of directors :


issue are by producing:
In a stockholders meeting ,those representing at
1.original of the certificate of Incorporation with the seal least 2/3 of the outstanding capital stock
of the SEC or a copy of the same certified by the SEC approve a resolution delegating the power to
2.copy of the Articles of Incorporation certified by the SEC amend or adopt new by laws to the board
3.copy of the Articles of Incorporation filed with some
government office like the Register of Deeds ,and certified The board ,by majority vote, then approves the
by the custodian of that document. amendments to the by-laws. The amendments
duly certified by a majority of the directors and
2006 notes:In a stock corporation, the articles of countersigned by the Secretary are then filed
incorporation should mention a primary and secondary with the SEC.
purpose (no need if it is a non-stock)
Purpose should be specific and lawful. And the 1st and 2nd In case of banks and other special corporations,
purpose must be combinable. the amendments should be accompanied by a
Corporations not allowed for more than 1 purpose are: certificate of the appropriate government
banks/quasi-banks, trust company and public utilities agency. The amended or new by laws become
effective upon issuance by SEC of a certificate of
Summary: Procedure for organizing a corporation: filing.

1.execution of the Articles of Incorporation and


accompanying documents and filing them whether or not 2006 notes:amendment of by-laws cannot be used to
together with the by-laws ,with the SEC.The accompanying defeat the security of tenure of an individual
documents consist of the treasurers certificate of deposit
of paid up capital, letter authorizing SEC to examine said 2006 notes: Proposal to restrict election to all holders of
depositand other required documents majority of outstanding cap stock is invalid since it deprives
minority stockholders of right to election.
2.Issue by SEC of Certificate of incorporation
2006 notes:Corporation Code so states that it will not
3.Election of the board and corporate officers and allow a non-stockholder to occupy President position
adoption of the by laws within 30 days from the issue of whereby it requires among the directors elected by the
the certificate of incorporation if the by laws was not filed stockholders.
with the articles of incorporation.
2006 notes:Proposal to give bonuses to directors
Procedure for amendment of the Articles: equivalent to 10% of the gross revenues in any given year
violates Corpo Code restricting the total directors salaries
1. board by majority vote approves the amendment to not more than 10% of the net income of the corp b4
2. stockholders representing at least 2/3 of the income tax for the year.
outstanding capital stock on proper notice,
approve the amendment without prejudice to 2006 notes:It is only in the stockholders meetings where
the appraisal right of a dissenting stockholder venue is restricted to the principal place of business.
3. copy of the amended articles certified by the INSPECTION OF BOOKS
President, Corporate secretary and a majority of
the board is filed with the SEC. Corporate books and records are open to the inspection of
any director, stockholder, or member of the corporation at
Procedure for amendment of the By-laws: reasonable hours during any business day, including the
right to copy excerpts of the same.
1. by majority vote of the board and approval of a it may be refused if shown that a prior right
majority of the outstanding capital stock at a granted was improperly used or that he was not
meeting called for the purpose acting in good faith or for a legitimate purpose.
It may be exercise by stockholder personally or
In stockholders meeting ,those representing a through his representative and if refused without
majority of the outstanding capital stock approve justification, the Corporate officers responsible
the amendment to the by-laws. The amended by may be criminally liable

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This right to inspect is not absolute and corp may surviving/consolidating corporation
deny said right on the basis of propriety of
motive and purpose. b.approval of the plan by stockholders of each of the
constituent corporations by a vote of at least 2/3 of the
This right is subject to the ff limitations: outstanding capital stock of each in stock corporations, or
2/3 of the members in a non-stock corp in meetings
It must be done during reasonable hours on a separately held on at least 2 wks advance notice stating
business day the purpose of such meeting
Right has not been used in the past by the
stockholder improperly c.execution of the articles of merger/consolidation by each
He should act in good faith and for a legitimate of the constituent corporations,signed by the Pres/Vice
purpose Pres of each and certified by their respective
secretaries/asst secretaries.
4Blue 95 notes: Stockholders right to inspection of books
will have to bow to the provisions of the Law on Non- d.submission of 4 copies of the duly executed articles of
Disclosure of Deposits ,which provides as a general rule merger/consolidation to the SEC and issuance by the SEC
that the deposit account of a depositor in a bank cannot of the certificate of merger/consolidation in the proper
be inquired into by any person even including the case.
government.
The remedy of the stockholder is not an inquiry 4Blue 95 notes: If SEC believes such merger or
into the bank deposit but merely an order to the consolidation to be contrary to law, a hearing will be
bank to inform the court whether or not the conducted
defendant has a deposit therein Effect:
As such, stockholder must secure a writ of
execution from the court to be serve on the a.in merger, the constituent corporation shall become one
bank. corporation ,in consolidation, new consolidated corp shall
be the remaining corp.
Within 10 days from request of a stockholder or
member ,the corporation shall furnish him a copy of its b.separate existence of the constituent corporation shall
most recent financial statements including a balance cease
sheet and net income statement.(NCC)
c.surviving or consolidated corp shall possess all rights and
At regular meetings of stockholders and members ,the liabilities of a corp(like with regard CBA of the old
corporation should furnish them a financial report of corporation)
operations including certified financial statements (NCC)
d.all rights, privileges,immunites and franchises of each are
MERGERS AND CONSOLIDATION transferred to the surviving/consolidated corp.

In merger, one corp. is absorbed by another as the e.surviving/consolidated corp shall absorb and be liable for
surviving corporation. liabilities and obligations of each of the constituent
In consolidation, a new corp. is formed which will absorb corporations.
two or more existing corporations. Due Diligence Rule:

2006 notes: with regard mergers: If a corporation is planned to be purchased on cash, the
a.a corpo engaged in transportation cannot engage in any latter must exercise due diligence in order to maintain the
other business alien to transportation. stable standing of its assets for a period of time as to be
b.operation of a transpo business opens the operator to observed by the one who is planning to bought such
the risk of liability to passengers injured or killed in corporation.
accidents. This liability might encroach on the investment
in the clothing business if joined with the transportation If a corporation is acquire by share of stocks of the
business. acquiring corporation ,both corporation must maintain due
diligence with regard the status of their assets.
Procedure:

a.approval of a plan of merger by the boards of directors or NATIONALITY OF A CORPORATION


trustees of the constituent corporations setting forth the
terms of the merger or consolidation and a statement of Gen Rule: The country where the corporation was
changes in the articles of incorporation of the incorporated determines the nationality of a corporation

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(Domiciliary Test) majority of the incorporators to be residents not
necessarily citizens of the Philippines.However,in
Foreign corporations classified under the domiciliary test nationalized corporations (retail,agriculture, mining,tranpo
are subject to the laws of the country of their creation on and shipping)no aliens or some but not all can form the
the ff matters: corporation depending on its percentage control.
1.creation,formation, organization or dissolution of
corporations 2006 notes:Foreign corp can secure lease of lands but
2.relations, liabilities, responsibilities and duties of cannot own it.They can acquire stock solely for investment
members, stockholders or officers of corporation to each but not to exercise control.
other or to the corporation. FOREIGN OWNERSHIP IS LIMITED BY MANDATE OF THE
CONSTITUTION AND SPECIFIC LAWS( NATIONALIZED).
In times of war or national emergency , the control test is
used, whereby if the controlling stock of a corporation is
owned by citizens of a particular country which is at war Corporations with No Foreign Equity:
with the Philippines then that corporation although 1.mass media except recording
organized in the Philippines is a foreign corporation. 2.retail enterprise with paid up capital of less than
$2500000.
3.private security agencies
FOREIGN OWNERSHIP IS LIMITED FOR REASONS OF SECURITY 4.small scale mining
,DEFENSE, RISK TO HEALTH AND MORALS AND PROTECTION OF 5.utilization of marine resources in archipelagic waters,
SMALL-AND-MEDIUM SCALE ENTERPRISES: territorial sea and exclusive economic zone.
6.ownerhip, repair ,stockpiling and distribution of nuclear
Upto 40% Foreign Equity: weapons
7.manufacture , repair ,stockpiling and distribution of
a. manufacture ,repair ,storage and distribution of biological chemical and radiological weapons and anti-
products and ingredients requiring PNP personal mines
clearance 8.manufacture of firecrackers and other pyrotechnic
devices
b. manufacture, repair, storage and distribution of 9.rural banks except shareholdings of corporations
products requiring Dept of National Defense organized primarily to hold equities in rural banks and of
clearance Filipino-controlled domestic banks.

c. manufacture and distribution of dangerous drugs


Upto 60% Foreign Equity
d. sauna and steam bathhouses, massage clinics a.financing companies regulated by SEC
and other like activities regulated by law due to b.investment houses regulated by SEC
risk posed to public health and morals
e. all forms of gambling
Upto 40% Foreign Equity
f. domestic market enterprises with paid in capital a.exploration, development and utilization of natural
of less than the equivalent of $200,000. resources
g. domestic market enterprise which involve b.ownership of private lands
advanced technology or employ at least 50% c.operation and management of public utilities
direct employees with paid in equity capital of d.ownership/establishment and administration of
less than the equivalent of $100,000. educational institutions
e.culture, production, milling, processing, trading except
retail of rice and corn and acquiring by barter or purchase
2005 notes: there is no law prohibiting a foreigner from of rice and corn and by products thereof.
becoming a stockholder and consequently from becoming f. contracts for the supply of materials , goods and
a director of a corporation engaged in the lumber business, commodities to GOCCs.
irrespective of whether the lumber utilized is taken from g.project proponent and facility operator of a BOT project
private forest lands or from timber lands of the public requiring a public utilities franchise
domain, provided that in the latter case, at least 60% of h.operation of deep sea commercial fishing vessel
the capital of said corporation is owned by Filipinos.
Corporation cannot however engage in retailing of lumber. 2006 notes:if foreigner become head of board of directors
of logging company(exploitation of resources)it is possible,
4Blue 95 notes:A corp composed entirely of aliens may be as long as share must not exceed 40%.
organized in the Philippines.The corp law only requires a

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separate and distinct from the government and their funds
Upto 30% Foreign Equity although considered to be public in character are not
a.advertising exempt from garnishment (PNB v Pabalan)

b.domestic banks except where new bank is established as


a result of
-local incorporation of any of the existing branches or There are distinctions between a corporation going
agencies of foreign banks in the Philippines pursuant to sec public and a corporation going private
68 of General Banking Act
-consolidation of existing banks in any of which there are 1.corporation going public allows its stocks to be issued to
foreign owned voting stock at time of consolidation person other than its registered stockholders
Going private restricts the issue of its stocks to its
registered stockholders only, and prevents transfers by
Upto 25% Foreign Equity: stockholders of their stocks without first giving the
a.private recruitment ,whether local or overseas corporation and its stockholders the first opportunity of
employment acquiring the same.
b.contracts for the construction and repair of locally-
funded public works except: 2.going public may allow its stock to be sold in stock
-infrastructure/development projects covered by RA 7718 exchanges, going private may not allow its stock already
-contracts for construction of defense-related structure issued to be traded in stock exchanges/
-projects which are foreign funded or assisted and required
to undergo international competitive bidding 3.articles of incorporation and by laws of a corporation
going private usually contains right of first refusal clause
Upto 20% Foreign Equity: giving corp and its stockholders preference as against non-
Private radio communication network stockholders in the acquisition of stocks. The articles and
or by laws of a corporation going public would not contain
the right of first refusal.
CLASSIFICATIONS OF A CORPORATION

General classification of corporation is into Public and New Corporation Code(NCC) classifies corporations into
Private. stock and non-stock corporations. And those created by
Special laws and those incorporated under the NCC.
a.as to organizers:
Public-by state only NCC under scattered sections also provides for close
Private-by private persons alone or with the state corporations and special corporations. No mention was
made of public corporation.
b.as to functions:
Public-governmental and other public functions
Private-private, usually for profit making 8 CLASSIFICATIONS OF PRIVATE CORPORATION:

c.governing law
Public-special laws (with original charter) 1.Stock Corporation
Private-law of Private Corporations Capital stock divided into shares and are authorized to
distribute profits on the basis of the shares thus held.

4Blue 95 notes: by engaging in a particular business a.Par value is where latter is stated in the articles and
through the instrumentality of a corporation, the which value remains generally unchangeable.
government divest itself pro hac vice of its sovereign b.No Par value are those which have stocks where the
character, so as to render the corporation subject to the issue value ,which changes from time to time, is left to the
rules of law governing private corporations. discretion of the corporation to determine.jt may be issued
-- when government enters into a commercial business, it at different prices.
abandons its sovereign capacity and is to be treated like
any private corporation so as to render the corporation 2005 notes: A holder of one share of no par value stock is
subject to the rules of law governing private corporations. entitled to the same rights as another holder of one share
-- it therefore cannot invoke immunity from suit. of par value stock irrespective of the difference in issue
values of the two shares.
2005 notes: when articles or by-laws are silent, the
4Blue 95 notes: GOCC have personality of their own, corporation is deemed to have the power to declare

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dividends.
2005 notes: prohibition in its articles that at dissolution the For educational corporations, where the trustees should
assets of the corporation shall be given to a charitable be divided into multiples of five. So you should have five,
corporation does not prohibit the corporation from ten, or fifteen trustees if they are organized as non-stock
declaring dividends before dissolution. corporation. And unless otherwise provided in the articles
of incorporation or by-laws, the terms of the trustees
should be five years, and every year only one fifth (1/5) is
2.Non Stock Corporation elected, again to provide for continuity in policies. But you
Corporation organized for non profit purposes, and can provide that they will all be elected instead for a term
primarily for charitable ,religious, educational ,fraternal of one year, so every year, everybody has to be elected.
etc..
2006 notes:di pwede ang stock and profit (like
manufacture soap and sell it ,di yan pwede pag non stock 2.CLOSE CORPORATIONS
corporation)
It is one whose articles provides :

3.Aggregate and Sole a.that its shares shall not be held by a group of more than
Aggregate are those with incorporators not less than 5 nor 20 persons
more than 15 in stock corp or up to more than 15 in non- b.all of the issued stocks shall be subject to one or more
stock corporations restrictions on transfer
Corporation sole is a special form of corporation c.corporation shall not list in any stock exchange or make
associated with the clergy consisting of one person only public offering of any of its stocks
and his successors to give him some legal capacities and
advantages for and in behalf of the church represented by
him. If at least 2/3 of the voting stock of the above corporations
is owned or controlled by another corporation which is not
4.Ecclesiastical and Lay a close corporation, then the above corporation shall not
In Lay, it is divided into civil (organized for profit) and be deemed a close corporation.
eleemosynary which is a non religious corporation
organized for charitable purposes. 4blue 95 notes: In a close corporation, the restriction as to
the transfer of shares has to be annotated in the articles of
5.Domestic and Foreign incorporation ,the by-laws and the certificate of stock. This
serves as notice to the person dealing with such shares ,as
such, the person is bound by the pricing stated in the by
6.De Jure, De Facto, by Estoppel & by Prescription laws.
Prescription is recognize by immemorial usage as a corp
though not lawfully organized as corporation like the
Roman Catholic Archbishop of Manila before the law on 3.RELIGIOUS CORPORATIONS
corporation sole took effect

There are three (3) ways by which a religious organization


7.Quasi-Public and Quasi-Corporation can provide for the administration of its properties:
Quasi-public is a private corp performing functions where 1. by forming a non-stock corporation
public has an interest(like MERALCO & PLDT) while Quasi- 2. by corporation sole
corp is a municipal society though not vested with gen 3. by religious aggregate or society
powers of corporation is recognized as such (no charter
like the BIR & AFP)

8.Condominium Corporation Corporation sole may constitute of one person only so the
Private corporation organized for the construction of a head of a religious sect would incorporate himself for the
building with complete living or office units which it sells purpose of administering the properties of a religious sect.
creating full ownership for the buyers of the units thus To incorporate what you will file with the SEC is an
sold, and a co-ownership over the land and other portions affidavit. The affidavit will state that the affiant is the head
of the building used in common by the unit buyers. of a religious denomination or sect and would want to
SPECIAL CORPORATIONS become a corporation sole. and the rules of his religion
allow him to incorporate as a corporation sole and that he
is charged with the administration of its properties and in
1.EDUCATIONAL CORPORATIONS fact he will be required to submit an inventory and the

Page 9 of 39
manner in which the successor will be chosen and the corporate basis among the parties involved are required.
place where he will hold his office. Also, where not all requisites for corp de facto are present,
you can have corp by estoppel.
The Roman Catholic Archbishop of Manila is a corporation
sole so if Cardinal Sin dies the new archbishop will simply 2006 notes: The principle of estoppel can be invoked by
submit his appointment and he need not incorporate again the victim but not by the corporation as duly organized as
because the corporation is different from the occupant of against the victim of said misrepresentation.
the position. The Iglesia ni Kristo is incorporated as a
corporation sole. Christian Childrens Fund Case
There was a teacher hired by the CCF, which was
The court has held in Roman Catholic Apostolic Adm. of unincorporated. She wanted to go after the one with
Davao, Inc. v. Land Registration Commission that although money, the organization that was funding CCF, and she was
the Bishop was a foreigner, he could register a parcel of claiming Im an employee of that org and not the CCF.
land in his name because he is a mere administrator the But the court said that since she accepted employment
property really belongs to the faithful and since they are with CCF, she was estopped from claiming that CCF is not a
Filipinos they could register the land in the administrators corp.
name .
2006 notes:the people who represented themselves as
Under the law if a corporation sole wants to dispose of or forming that corp would be liable as general partners, they
mortgage real property, he has to get authorization from will be solidarily liable. Thats why in one case the court
the Regional Trial Court unless the rules of the religious said the people who represented themselves as the
sect allow him to dispose of or mortgage real property and officers of a corporation that is really an unincorporated
that is usually the case. org they were illegally recruiting persons the court said
they were liable as general partners, solidarily liable for all
The last is the religious aggregate or religious society. It can claims.
incorporate for the purpose of managing its properties and
the articles would indicate that the members constitute a
religious order or society and that at least 2/3 of the 5. DE FACTO CORPORATIONS
members have agreed to incorporate, that the rules allow
them to incorporate they desire to incorporate to manage A de facto corporation is one that is defectively created so
their properties in the place where located. The recollects as not to become a de jure corporation. It is the result of
are incorporated to manage their properties, they are the an attempt to incorporate under an existing law coupled
single biggest bloc of stockholder of San Miguel with the exercise of corporate powers.
Corporation.
(while a dejure on the other hand is a corporation formed
2006 notes:the test of nationality in corporation sole is not with all of the requirements of law)
the nationality of the head in a corporation sole,but the
nationality of the congregation, as such, even if foreigner is The existence of a de facto corporation can only be
the head, if the whole congregation are Filipinos, then the attacked directly by the state through quo warranto
nationality is that of a Filipino. proceedings. If the corporation does not qualify as a de
facto corporation, its existence may be attacked
collaterally. This doctrine is based on public policy to
4.CORPORATION BY ESTOPPEL ensure stability in business transactions.

It is a corp, which is a group of a persons, which is so 4blue 95 notes: a corporation was created by special law,
defectively formed so that it is not a de jure or a de facto later, the law creating it was declared invalid. May such
corp but is considered as a corp with respect to those who corporation claim to be a de facto corporation? No, a
cannot deny its existence because of some agreement or private corporation may be created only under the
admission or conduct on their part. corporation code. Only public corporation may be created
under a special law.
This doctrine requires that there must be dealings among
the parties on a corporate basis. 2006 notes:where private corporation is created under a
special law ,there is no attempt at a valid incorporation,
And there are differences between a de facto corp and a such cannot claim a de facto status.
corp by estoppel. A de facto corp has a real existence in
law, while a corp by estoppel has none. A de facto corp 2006 notes: where a person convinces others to form a
may exist even if there are no dealings among parties on a corporation, which however was not formed at all, the
corporate basis. In corps by estoppel, dealings on a parties are partners inter se and are governed by the law

Page 10 of 39
on Partnerships .the relationship is not that of a de facto there are no trade-offs because a branch and a subsidiary
corporation. are taxed in the same way but a subsidiary may be
beneficial in the sense that it limits the exposure of the
mother company to its subscription instead of risking all
(BAR) 7 persons form a corporation by registering their the assets of the mother company. Another is the regional
articles of incorporation with SEC. but after the certificate headquarters which does not do business, it is just a
of incorporation has been issued ,it is discovered that only coordinating and communication center. Foreign
5 of the 7 have acknowledged the articles of incorporation companies are setting up regional headquarters here
before a notary public. because it has subsidiaries in Southeast Asia or licensees
HELD: It is a de facto corporation , although defectively and franchisees and its function is to supervise and
formed ,it may nevertheless exercise corporate powers coordinate with those subsidiaries or franchisees so
validly until the state dissolves it by quo warranto normally a regional headquarters would have a one room
proceedings. office here probably with country manager and secretary, a
telephone, computer and fax machine.

4 REQUISITES OF A DE FACTO CORPORATION: If a foreign corporation wants to do business here it has to


appoint a resident agent who may be a corporation,
1.Valid law under which the corporation was partnership or individual, if individual he must be of good
incorporated. moral character, sound financial standing, although his
Attempt in good faith form a corporation according to the only function is to receive summonses in behalf of the
requirements of the law. Here the SC requires that you corporation.
must have filed with the SEC articles of incorporation and
gotten the certificate with the blue ribbon and gold seal. If a foreign corporation is being sued, the summons must
For instance the majority of the directors are not residents be served on the resident agent. The corporation is also
of the Philippines or the statement regarding the paid up required to file with the SEC a power of attorney or
capital stock is not true, those are defects that may make resolution which says that if it has no resident agent it
the corporation de facto. agrees that the summons be served with the SEC which
will forward the summons and the complaint to the foreign
2.User of corporate powers. The corporation must have corporation. If no resident agent and any officer who will
performed acts which are peculiar to a corporation like be in the Philippines may be served with summons.
entering into a subscription agreement, adopting by-laws,
electing directors. Section 133 says that if the foreign corporation will be
doing business without a license it cannot sue or intervene
3.It must act in good faith. So the moment, for example, in any action in court or administrative agency.
there is a decision declaring the corporation was not
validly created, it can no longer claim good faith. The SC had said that if a foreign corporation is doing
business here without a license, a contract it entered into
4.A de facto corporation will incur the same obligations, is valid, it is not rendered void so the court said the
have the same powers and rights as a de jure corporation. legislature made a judgment call that imposing penal
It can acquire property, sue or be sued, enter into sanctions and denying access to the courts are sufficient
contracts. Likewise, the officers, directors, and penalties for doing business without a license. The
stockholders will have the same rights, powers, and legislature did not provide that the contract it entered into
liabilities as those of a de jure corporation. is void. Although the foreign corporation did not have
6.FOREIGN CORPORATIONS license to do business when it entered into in that
contract, it could sue if later on it acquired a license to do
business.
Section 123 defines what is a foreign corporation, one
formed, organized, or existing under any laws other than (BAR) If a foreign corporation which has been licensed to
those of the Philippines and whose laws allow Filipino do business in the Philippines by the BOI and SEC ,wants to
citizens and corporations to do business in its own country expand its business activities in the Philippines, is further
or state. Note the element of reciprocity is included in the approval from the BOI necessary?
definition of a foreign corporation as an ingredient of a HELD: Board of Investments (BOI) approval of the
foreign corporation. expansion of business of a foreign corporation already
licensed on or before the effectivity date of the foreign
investments law(1968) to engage in business is not
There are different ways by which a foreign corporation necessary. BOI approval is needed only in situations where
can establish its presence here. one is by setting a branch foreign enterprise desires to exceed the permitted
office, another is by setting up subsidiary, for tax purposes percentage of equity of its investments under the Foreign

Page 11 of 39
Investments Law. Maintaining stock of goods to have them
processed like this garment business in the
United States which send their textiles to be
The Foreign Investment Act and its implementing processed into dresses which are then shipped
regulations define what is doing business. It includes: back to United States or components for
Soliciting orders. When we talk of soliciting electronic products which are sent here to be
orders we mean negotiations of the specific processed and sent back to Silicon Valley.
terms and conditions of the contract. If you just Consignment of the equipment to be used in
advertise, that is not doing business. processing the products for export. So that if the
Opening offices foreign company sends its equipment to be used
Appointing representatives or distributors by the local processor, that is not doing business.
Operating under full control of the foreign Gathering information about the Philippines
corporation Performing service auxiliary to an isolated
Domiciled in the Philippines or who in any contract not in a continuing basis such as
calendar year stay in the Philippines for at least installing in the Philippines machinery, servicing
180 days the same, and training workers to operate it.
Participating in the management, supervision or
control of any domestic corporate entity
Any other acts that involve continuity of 2006 notes: Consequences on Foreign corporations
commercial dealings, and engaging in business in the Philippines without license :
(1) it shall not be permitted to transact business in the
Performance of acts or functions incident to or in
Philippines
progressive prosecution of commercial gain
(2) it cannot sue, but it can be sued.
The rules also state certain acts which do not constitute
Contract Test- foreign corporation not doing business in RP
doing business like:
and entered into contract w/ a domestic corporation
Mere investment in a domestic corporation. This whereby the perfection and consummation was done
repudiates the ruling in the Granger case where outside, the same would not constitute doing business in
Justice Cruz said that being a mere investor is RP.
doing business. That is wrong. It could have
been just a passive investment. So that decision
is being repudiated here. When Unlicensed Foreign Corporation can sue:
Having a director to represent you in a
corporation because of your investment. 1. corporation not doing business in the Philippines can
Appointing a representative distributor which bring suits on isolated acts, If it can sue, it can likewise be
transacts business in the distributors own name. sued.
The usual distributorship agreement will contain -- if a foreign corporation not engaged in business is not
a provision something like this, The relationship barred to seek redress from Philippine courts, with more
between the parties is that of seller and buyer. reason can said corporation not claim exemption from
This means that the local distributor has to pay being sued in Philippine courts.
for the goods he purchased irrespective of
whether he is able to resell them or not. And it Isolated transactions means a series of transactions set
is up to him to sell them for whatever price he apart form the common business of a foreign enterprise in
can get. Now if the distributor is transacting the sense that there is no intention to engage in a
business not in his own name, but as agent of progressive pursuit of the purpose and object of the
the foreign corporation, then the foreign business organization.
corporation will be doing business. This is what The fact that a foreign corporation does not do business
happened to BMW. They have a distributor here here,that is a matter that should be ventilated in the trial
but if somebody wants to buy a car, the on the merits but not in a motion to dismiss.
distributor will merely forward the order to
BMW in Bavaria and he will send the payment to
BMW in Bavaria and BMW in Bavaria will ship 2.action to protect good name ,good will and reputation
the car to him. So the court said that BMW was of foreign corporation
actually doing business here, because the agent
was dealing with customers in the name of 3.where contract provides Philippine court as venue for
BMW. controversies
Publication of advertisement. Like the
advertisement in magazines which are sold here. 4.license subsequently granted enables foreign

Page 12 of 39
corporation to sue on contracts executed before grant of
license ONE MAN CORPORATION

5.recovery of misdelivered property 2006 notes: A one man corporation is a corporate entity
where one person holds directly or indirectly all or
6.where the unlicensed foreign corporation has domestic substantially all of the stocks of the corporations.
corporation as co-plaintiff -- this form of corporation enjoys all the attributed of a
corporation although it always faces the risk of its
7.estoppel corporate existence being attacked of said corporate
fiction is utilized for unlawful pruposes.
-- to assure that corporation will continue to enjoy the
Acquisition by Philippine courts of Jurisdiction over attributes, the corporation should have a duly constituted
Foreign Corporation board which should meet regularly to pass upon the
problems of the corporation. The stockholder who holds
1. by serving upon the resident agent designated in substantial stocks should consider his holdings as merely
accordance with law to accept service of summons for investment purposes.
when corporation designated a person to receive
service of summon pursuant to corporation 2006 notes: in concession theorythe state concedes that
code, that designation is exclusive and service of youre a person (the corp) and once it is created, it should
summons on other person is inefficacious. be for public purpose.
As such, congress cannot enact law creating private corp
2.it there is not resident agent ,by service on the with special charter.
government official designated by law (like the SEC) All waterworks are public corp, exception to such is a de
facto corporation where it failed to comply in a fatal matter
3.by serving on any officer or agent of said corporation resulting to a fatal defect but once a special law is
without the Philippines. enacted ,it is not anymore a defacto corp

IMPORTANT RULES: COMPONENTS OF A CORPORATION.

GRANDFATHER RULE
1.INCORPORATORS - Stockholders or members who
The test being used here is the nationality/ citizenship of appear in the articles of incorporation, as originally
the stockholders. According to the formula under the forming and composing the corporation and who are
grandfather rule, if you have a corporation owned by signatories thereof.
another corporation, you trace who are the owners of this
owning corp.
In other words, if a company is 60% Filipino and such 60%
is acquired by company w/c is 50%fil & 50% foreign, so it is 2.CORPORATORS - those who compose a corporation.
30% Filipino (60 x 50%); but if it the acquiring company is
60% Filipino, so since lampas 50 then the whole 60% of the
acquired corporation is Filipino

2006 notes: in JG Summit v CA (2005 case)- the


stockholders are not limited to transfer their shares to
another even if it is a foreigner, such limitation only apply 3.PROMOTER Person who undertakes to form a
to the corporation. conrporation and to produce for it the rights
An illustration is that you can sell your 60% shares to ,instrumentalities,and capacity by which it is to carry out
foreign corporation which would not violate the 60-40 the purposes set forth in its charter ,and to establish it as
rule, the only effect of such undertaking is that such fully able to do its business.
foreign corporation cannot acquire real property.
2005 notes: a promoter although an agent of the
incorporators is not an agent of the corporation unless
4blue 95 notes: However, the Foreign Investment Act has prevented by estoppel or ratification from honoring a
disregarded the grandfather rule. It adopted the liberalized contract executed by the promoter in its behalf before
interpretation of Filipino-ownership. incorporation, the corporation may validly refuse to accept
the sale.

Page 13 of 39
2005 notes: corporation, if it accepts the sale, may validly d.when he agrees to hold himself personally and solidarily
claim the 30% commission. The acceptance by the liable with the corporation
corporation of the sale ratifies the agency relationship and
all benefits acquired by the agent inure to the corporation. e.when he is made by a specific provision of law to
personally answer for the corporate action.

4.EXECUTIVE COMMITTEE By-laws may create an (BAR) the trial court erred in holding D, President and
executive committee composed of not less than 3 directors General Manager of Turtle jointly and severally liable with
appointed by the board Turtle Mercantile.
In issuing the check issued to SHAMRON and thereafter
It cannot act on the following (1) matters needing stopping payment thereof, S was acting in his capacity as
stockholders approval (2) filling up of board vacancies (3) an officer of Turtle. He was not acting in his personal
amendment ,repeal or adoption of by laws (4)amendment capacity.
or repeal of board resolution and (5) cash dividend Furthermore, no facts have been provided which would
declarations. indicate that the action of S was dictated by an intent to
defraud SHAMRON by himself or in collusion with Turtle.
2006 notes:it can only perform delegate acts by the board. Having acted in what he considered as his duty as an
2006 notes:purpose of an executive committee is to officer of the corporation, S should not be held personally
remedy situation in between board meetings (sec 35) liable.

2006 notes:to bind corporation,it must act by a majority


vote of all its members ,thus ,the committee cannot
delegate its authority to one of its members 2006notes: there is no law which prohibits a corporate
officer from binding himself personally to answer for a
corporate debt while the limited liability doctrine is
intended to protect a stockholder by immunizing him from
5.OFFICERS- President, Secretary and Treasurer. personal liability for corporate debts ,he may nevertheless
However ,law does not limit corporate officers to these divest himself of this protection by voluntarily binding
three.(secretary of the president is not the secretary himself to the payment of corporate debts.
mentioned by law)
2006notes: corporate officer is not personally liable for the
2006 notes: suit for damages for illegal outster of a money claims of discharged corporate employees unless
corporate officer prescribes in 4 years. he acted with evident malice and bad faith in terminating
2006 notes:An officer appointed at the pleasure of the their employment.
board, per the corporate by-laws may be terminated at any
time. 2006 notes:appointment/election of a corporate officer is
with the board; the stockholders has no say in the election
2006 notes: where a loan procured for corporate purposes or appointment.
and an official signed for and in behalf of corporation
solidarily with himself in his personal capacity, both
corporation and official are solidarily liable.
A Corporate director, trustee or officer may be held 6.STOCKHOLDERS - corporators in a stock corporation.
personally liable with the corporation under the ff MEMBERS - corporators in a non-stock corporation.
circumstances:
2006 notes:PROXY- only allowed if stockholder (di pwede
a.when he assents to a patently unlawful act of the sa board of director), and as such it is only the stockholder
corporation who may revoke it either expressly or impliedly.

b.when he acts in bad faith or with gross negligence in


directing the affairs of the corporation ,or in conflict with Proprietary Rights of Stockholders:
the interest of the corporation resulting in damages to the
corporation, its stockholders or other persons. A.RIGHT TO DIVIDENDS
NCC prohibit the issuance of any stock dividend without
c.when he consents to the issuance of watered stocks or the approval of the stockholders representing not less than
who having knowledge thereof ,does not forthwith file 2/3 of the outstanding capital stock at a meeting called for
with the secretary his written objection that purpose.
Payment by a corporation of dividends to a wrong party

Page 14 of 39
will not absolve the corporation from paying the party against creditors.
adjudged by the court to be lawful owner of the stocks. B. APPRAISAL RIGHT

Right to withdraw is called Appraisal right and is available


(BAR) for past 3 yrs , X Company has been earining in favor of a stockholder who dissents to the :
tremendously in excess of 100% of the corporations paid
in capital. All of the stockholders have been claiming their a.amendments of the articles to change ,restrict existing
share in the profits by way of dividends but the board of rights or to authorize new preferences of stockholders
directors failed to lift its finger . -extension/reduction of corporate term

a. Is corporation guilty of violating the law? b.sale or other dispositions of all or substantially all of the
corporate assets
It is guilty of violationg sec 43 of Corporation code c.merger or consolidations
since this provision prohibits stock corporations from d.investment of corporation funds in another corporation
retaining surplus profits in excess of 100% of their or for a different purpose.
paid-in capital

b. Are there instances when a corporation shall not (BAR) X subscribed and paid for P10t worth of shares of
be held liable for not declaring dividends? stock of R Mines as an incorporator and original
subscriber. He was employed as the mine superintendent.
1.when justified by definite corporate expansion After some time, the corporation suffered a loss of which it
projects or programs approved by the board of accused X of infidelity and breach of trust and confiscated
directors his shares.
HELD: Action of Board is not legal. The rights of X as a
2.when corporation is prohibited under any loan stockholder and his obligation as a mine superintendent
agreement with any financial institution/creditor are two different matters.Code provides for the manner by
whether local or foreign ,from declaring dividends which the corporation may become owner of the stocks of
without its consent and such consent has not yet a stockholder (like where the stockholder is declared
been secured delinquent, his stocks sold at auction, and there is no
person interested in the bidding as a consequence of
3.when it can be clearly shown that such relation is which the corporation becomes owner of the stocks).His
necessary under special circumstances obtaining in being remiss as an employee in his obligations is not a
the corporation such as when there is need for special ground for the corporation to confiscate his shares.
reserve for probable contingencies.

4blue95 says: If I were a stockholder who did not vote to


2005 notes:dividend has no existence until declared; authorize the action of the board, I will compel the
profits are part of the assets of a corporation and do not corporation to buy my stocks. To avail of this remedy , I
belong to the stockholders individually. will have to do the following:
a.within 30 days after action was taken by corporation, I
2005 notes: dividends are declared by the board, but in should object in writing and demand payment of my
case of stock dividends ,approval by stockholders shares.
representing 2/3 of the outstanding capital stock is
necessary and in all cases only if unrestricted retained b.if I and corporation agree with the price, or in case of
earnings exist. disagreement(a 3-man committee of disinterested persons
2005 notes: corporation can pay cash dividends when is created within 60 days), where the committee of
declared by the board and can have stock dividends when appraisers fixes the price, the corporation pays me the
declared by the board and approved by stockholders price within 30 days from agreement or from award (in
owning 2/3 of the capital stock outstanding. case of disagreement).
2005 notesDividends ,whether cash or stock can be paid
only from unrestricted retained earnings. This fund is the c.upon payment, I will indorse my certificate of stock and
balance of net profits, income and gains of a corporation deliver the same to the corporation.
from the date of incorporation after deducting losses and
contributions of stockholders and transfers to capital stock
accounts when made out of such surplus. (BAR) ABC Corp has an authorized capital stock of P1M
2005 notes:If dividends was made from a source other divided into 50000 common shares and 50000 preferred
than surplus profits, it would constitute a violation of sec shares.At its inception, the Corporation offered for
43 and of the trust fund doctrine and would be a fraud subscription all the common shares.however, only 40000

Page 15 of 39
shares were subscribed.Recently,the directors thought of to his shareholding.
raising additional capital and decided to offer to the public Stockholder can exercise the pre-emptive right
all the authorized shares of the corporation at their market after the corporation has complied with the
value.Assuming a stockholder disagrees with the issuance notice requirement to all examining stockholders
of new shares and the pricing for the shares, may the of record.
stockholder invoke his appraisal rights?
Stockholder cannot exercise appraisal right since the 2006 NOTES: IF THE UNRESTRICTED RETAINED EARNINGS IS AT 100%
matter that he dissented from is not one of those where OF PAID UP CAPITAL ,THEN , CORP MAY DECLARE DIVIDENDS.
right of appraisal is available.
Obligation of a corporation to pay a withdrawing
stockholder for his stocks availing of his appraisal right is D.ISSUANCE OF STOCK CERTIFICATE
dependent on the existence of unrestricted retained
earnings otherwise the preference of creditors to A stockholder is entitled to the issuance of a certificate of
corporate assets is violated stock to him after his compliance of the conditions for its
C.PRE-EMPTIVE RIGHT OF STOCKHOLDERS issuance , usually full payment of the subscription.

Right at time of issue of capital stock, in preference to 2006 notes: A corporation against whom stocks are
other persons and as between themselves, to subscribe claimed by two different persons should initiate an
for , or purchase ,the unissued stocks in proportion to the interpleader suit between the claimants, and not wait for
number of shares of the original stock held by them the claimants to file a suit against it (Dy v Enage)
respectively.

It applies to all issues or disposition of shares of any class Right of First Refusal (Swiss Challenge)
unless such right is denied by the corporate articles or its
amendments like in the following (denial of right): no stockholder shall transfer any share of corporation to
1.shares to be issued in compliance with laws requiring any other person w/Io first notifying the secretary-
stock offerings or minimum stock ownership by the public treasurer in writing and under same conditions the
2.shares to be issued in good faith with the approval of corporation shall have the right to acquire for itself the
stockholders representing 2/3 of the outstanding capital shares intended to be transferred . This is valid under
stock in exchange for property needed for corporate certain conditions:
purposes or in payment of debt.
1.right should appear in the Articles or by-laws
2.it should be stated in the stock certificate
2006 notes:The additional issue of unissued shares from 3.reasonable time limit to the exercise of said right
the original stock may be made by the board without need 4.terms and conditions for its exercise should be
of getting stockholder approval. reasonable
Shares will be offered at a price fixed by the board of
directors but not less than the par value of such shares. TRUST FUND DOCTRINE
A stockholder cannot invoke his appraisal right and
demand payment for his shareholdings under the pre- It always involved the stockholder. The usual question
emptive right. asked : is there authorization in giving back of capital to
stockholder?
It considers the subscribed capital stock as a trust fund for
The remedies of the stockholder in case his pre-emptive the payment of the debts of the corporation, and to which
right is denied are: the creditors have a right to look up to for the satisfaction
1.he may maintain an action to compel the corporation to of their credits. Hence , the corporation cannot dissipate it
give him that right to the prejudice of its creditors.
2.if denial is by an appointment of the articles of
corporation, he may exercise his appraisal right. It is an extablished doctrince that subscription to the
capital stock of a corporation constitute a fund to which
the creditors have a right to look put to for satisfaction of
(BAR) X as stockholder of 4000 shares or 1/10 of the total their claims and that the assignee in insolvency can
outstanding share of 40000 has pre-emptive right to maintain an action upon any unpaid stock subscription in
subscribe to 1/10 of the unissued common shares or 1/10 order to realize assets for the payment of its debtors.
of 10000. 2006 notes:in connection with this rule,a corporation
aside from that , the law allows the stockholder cannot issue a share below par value(or else it would
to subscribe to all issues or disposition of shares violate trust fund doctrine).
of any class(preferred or common) in proportion 2006 notes:trust fund doctrine is not about

Page 16 of 39
mismanagement (like buying property which is not really the purpose of vesting in such person/s or corporation as
necessary) trustee voting or other rights pertaining to the shares for a
certain period not exceeding that fixed by the code and
upon the terms and conditions stated in the agreement.
(BAR) A,B &C are shareholders of X Corp. A has an unpaind
subscription of P100T, Bs shares are fully paid up while Trustees may vote by person or by proxy
Cowns only nominal but fully paid up shares and is a
director and officer. X Corp becomes insolvent, and it is
established that the insolvency is the result of fraudulent
practices within the company.
HELD: If I were counsel for a creditor of X Corp, I would
advise my client that his course of actions are:
1.he can claim against the unpaid subscription of A to
answer for the companys liability by virtue of the Trust
Fund.
2.he can no longer run after B since Bs subscription have
been fully paid up and being a mere stockholder, his
personality and liability is separate and distinct from X
Corp
3.he may hold C personally liable not as a stockholder but Distinction between Voting Trust and Proxy
as director and officer for fraudulent practices in the
company that produced its insolvency.
1.Proxy has no legal title to the shares of the stockholder
giving the agency
(BAR) A corp executed a promi note binding itself to pay its Trustee acquires legal title to the shares of the transferring
president who had tendered his resignation a certain sum stockholder
of money in payment of the latters shares and interest in
the company. The corp defaulted in paying the full amount 2.Proxy unless coupled with interest is revocable at any
so that said former President filed suit for collection of time while a voting trust agreement if validly executed is
sum of money with the SEC. irrevocable
HELD:Agreement is dependent on the existence of
unrestricted retained earnings (same fund available for 3.Proxy can only act at the specified stockholders or
dividends) otherwise, the disbursement would result in a members meeting (if the proxy is not continuing in nature)
preference to persons other than the creditors of the while a trustee is not limited to any particular meeting.
corporation hence would constitute a violation of trust
fund doctrine. 4.Proxy votes only in the absence of the owner of the
stock while a trustee can vote and exercise all the rights of
the transferring stockholder even when the latter is
Acts in violation of trust fund: present

1.Corp condone/excused/released non payment 5.Proxy is usually of shorter duration than a voting trust
of a subscription (or unpaid portion) agreement, although under the law the maximum duration
of both cannot exceed 5 years at any one time.
2.Payment of dividends without Unrestricted
Retained earnings

3.Properties transferred in fraud of creditors Limitations on a voting trust agreement:

4.Properties disposed or undue preference given 1.no voting agreement can be entered into:
to stockholders ahead of creditors (especially
when corp is insolvent) a.for period exceeding 5 years at any one time except in
case of a voting trust specifically requiring a longer period
as a condition in a loan agreement, in which case, the
VOTING TRUST AGREEMENT period may exceed 5 yrs but shall automatically expire
upon full payment of the loan.
Agreement in writing whereby one or more stockholders
of a stock corporation transfer their share to any person/s b.for purpose of circumventing the law against monopolies
or to a corporation having authority to act as a trustee for and illegal combinations in restraint of trade.

Page 17 of 39
A derivative suit will be dismissed if the petitioners fail to
2.agreeement must not be used for purposes of fraud show that they have a legal basis for representing their co-
members and have not shown what acts of the board are
3.agreement must be in writing and notarized and specify detrimental to the interests of the corporation and its
the terms and conditions thereof members(PPSTA v Quisumbing)

4.certified copy of said agreement must be filed with the Fact that no other stockholder has made common cause
corporation and with the SEC otherwise it is ineffective and with the plaintiff is irrelevant since the smallness of
unenforceable plaintiffs holding is no ground for denying him relief (Rep v
Cuaderno)
5.agreement is subject to examination by any stockholder
of the corporation in the same manner as any other 2005 notes: stockholder has a cause of action to annul
corporate book or record. certain actions of the board of directors of a bank which
actions were considered anomalous and a breach of trust
6.unless expressly renewed, all rights granted shall prejudicial to the bank.
automatically expire at the end of the agreed period.
STOCKHOLDERS SUIT AND REMEDIES 2005 notes: A person cannot bring a derivative suit in the
name of the corporation concerning an act that took place
before he became a stockholder,but if its a continuing one,
1.individual suit then the person may do so.

One brought to assert a right by a stockholder peculiar to 2005 notes:third party cannot question the right of a
himself. stockholder to sue in behalf of the corporation since in
Suits brought by a stockholder for the issuance to him of a derivative suit ,the action is instituted in the name of the
stock certificate ,payment of his dividend, payment to him corporation, and reliefs are prayed for therein by a
of the book value of his stocks , in those instances where minority stockholder. (SMC v Khan)
the law allows him the right of appraisal are individual
suits.
(BAR) As counsel for minority stockholders, I will file an
action in behalf of my clients and other stockholders for
2.representative suit the benefit of the corp.(aka stockholders derivative suit
One brought by a stockholder in his own behalf and in
behalf of other stockholders similarly situated and having a To succeed in this action ,I will have to prove the
common cause against the corporation. following

3.derivative suit 1.wasting away and fraudulent disposition by the


management of corporate assets
Action brought by a minority shareholders in the name of
the corporation to redress wrongs committed against it for 2.refusal of the board to sue after the matter was brought
which the directors refuse to sue. to the attention of the board
It is a remedy designed by equity and has been the
principal defense of the minority shareholders against 3.injury to the corporation
abuses of the majority.

4.exhaustion of intra-corporate remedies


Requisites before it can be filed
1.cause of action in favor of the corporation Such a suit need not be authorized by the corporation
2.refusal of corporation to sue where its objective is to nullify the action taken by its
3.party filing the suit is a stockholder manager and the board of directors ,in which case, any
demand for intra corporate remedy is futile.

The minority shareholder suing must allege in his When corporate directors are guilty of breach of trust or
complaint before the proper forum that he is suing on a abuse of discretion, then , intra corporate remedies is
derivative cause of action on behalf of the corporation and futile, a stockholder may bring a derivative suit.
all other shareholders similarly situated who wish to join
(Tan v Makasiar) GenRule: It is the board of directors which determines
whether or not the corporation should file a case in court,

Page 18 of 39
however, if the board itself or members of it are the former is hindered from being Director of SMC, the SC said
defendants,then a stockholder may file a derivative suit. that before a stockholder is disqualified ,there should be
an opportunity to be heard.
5.that they are suing on a derivative cause of action on
behalf of the corp and all other stockholders similarly 2006 notes: A person cannot be a director because he
situated. ceased to be a stockholder by the sale of all his stocks. A
director is required to be owner of at least one share of
2005 notes: stockholder may sue for mismanagement stock in a corporation, and the moment he totally disposes
,waste or dissipation of corporate assets because of special of his stocks, he automatically terminates his directorship.
injury to him for which he is otherwise without redress.
In effect, the suit is an action for specific performance of 2006 notes: A person cannot be a director since he was not
an obligation owed by the corporation to the stockholders elected as such, neither can he claim appointment as such
to assist its rights of action when the corporation has been to replace the person who sold his stocks to him since he
put in default by the wrongful refusal of the directors or was never appointed to the position by the remaining
management to make suitable measures for its protection. members of the board his basis of claim being that he
acquired all of the shares of the stockholder who sold his
2005 notes:It is not a derivative suit where a stockholder shares to him.
was merely praying that she be allowed to subscribe to the
additional issuances of stocks in proportion to her 2006 notes: the acquisition by a person of all the stocks of
shareholdings to enable her to preserve her percentage of an incumbent director of a corporation will not make him
ownership in the corporation. She was not acting in behalf (the transferee) a director of that corporation.
of the corporation. (Lim v Lim-Yu)

LIABILITIES OF STOCKHOLDERS (BAR) The board of directors of C Corp amended its by-laws
so as to disqualify any stockholder who is also a
a. to corporation for unpaid subscription plus stockholder and director of a competitor ,from being
interest elected to its board of directors.
S,a stockholder holding sufficient shares to assure him a
b. to creditors for unpaid subscription seat in the board filed a petition with the SEC for a
declaration of nullity of the amended by-laws and the
stockholder may be sued directly by creditors to the cancellation of the certificate of filing of amended by-laws.
extent of their unpaid subscription to the corporation He alleged among others that as a stockholder, he had
(Keller v COB) acquired rights inherent in stock ownership such as the
right to vote and be voted upon in the election of
c. to corporation for watered stock (sec 65) directors.
7.BOARD OF DIRECTORS HELD: Petition of S should be denied. It is within the
authority of the stockholders of a corp to enact by-laws
The directors must be owners of at least one share of stock which would disqualify as a candidate for a director any of
in a stock corporation, must be subsisting members in a its stockholders who holds a substantial equity in a
non-stock corporation. Cessation as stockholders or competing corporation.
members, respectively automatically disqualifies them as Matters taken up in board meetings could involve trade
directors. A majority of them must be Philippine Residents. secrets which ought not to go out of the board room for
the protection of the corporations business interests. The
The corporation law now provides that an incorporator presence as a member of the board a person who holds a
must be a stockholder. That was not required before in the substantial interest in a competing corp can destroy that
corporation law. Moreover, only natural person may be secrecy on many business matters.
incorporators, but a corporation may be a subscriber but
not an incorporator coz he is not a natural person. (BAR) A group of stockholders of S Corp filed a court suit
against the members of the Board of Directors to make
Directors are elected by the SHs. And the law says they good to the shareholders, in proportion to their
should be elected annually except in the case of corps shareholdings, the losses incurred by the corporation due
where the law allows directors to hold a longer term like to the boards mismanagement.
schools, non-stock corps. But for ordinary stock corps, HELD: Action will not prosper. It is not enough to show that
they have to be elected every year. So you cannot put a losses were incurred due to mismanagement. It is
provision there that the outgoing president will necessary that the stockholders who brought the suit
automatically be a director because they must be elected. should show that the losses were incurred due to the fraud
and malice of the defendant directors. If cause of loss is
2006 notes:like in case of Gokongwei v SEC, whereby merely error of business judgemtn, the directors could not

Page 19 of 39
be held liable for the loss. making the director account to his corporation ,gains and
profits from any transactions entered into by him or
2006 notes: Remedy in this situation is to remove the another competing corporation or entity where he has a
errant directors by resolution of the stockholders substantial interest WHICH SHOULD HAVE BEEN a
representing 2/3 of the outstanding cap stock in a meeting transaction undertaken by his corporation.
called for the purpose.
2006 notes:which means the officer should account any
2006 notes:In a board of nine members, the quorum transaction which he entered on his benefit whereby dapat
would be 5 and it remains as such inspite of the death of sana it should be entered and for the benefit of the
the two and the absence of one who is abroad. corporation.

2006 notes: The President of a corporation or the 2006 notes: A corporation is authorized to prescribed
chairman of its board of directors cannot bind the qualifications for its directors (Gokongwei v SEC) A director
corporation because the powers of a corporation generally stands in a fiduciary relation to the corporation and its
reside in the board unless the board delegates specific stockholders. The disqualification of competitor from being
powers to the President . elected as the board is a reasonable exercise of corporate
authority.
Resolutions passed by the board of directors in a duly
constituted meeting or a person delegated by said board 2006 notes: ABC Pigery is engaged in the raising and selling
binds the corporation (and not by stockholders nor a of pigs in the local market. The sale of pig skins for leather
compromise agreement by its corporate lawyer) . goods manufacture is different from the business of ABC of
raising and selling pigs.The act of Director de dios of
organizing another company to export pig skins does not
(BAR) S Cement was organized primarily for cement violate the doctrine of corporate opportunity. (it is
manufacturing. Anticipating substantial profits, its because it is a pig skin and not raising and selling pigs
President proposed that S invest in (a) power plant project, which the former is not related to the primary business of
(b) concrete road project and (c) quarry operations for the corporation)
limestone used in the manufacture of cement.
What corporate approval or votes are needed for the Consequences of the Board of Directors being the organ
proposed investments? of management are:
HELD: Unless the power plant and the concrete road 1.stockholder cannot disapproved contract entered into
project are reasonably necessary to the manufacture of by the board.
cement by S (and they do not appear to be so) then ,the 2.dismissal of a general manager is not with the
approval of the said projects by a majority of the Board of stockholder (even if there is resolution passed), it is with
Directors and the ratification of such approval by the board.
stockholders representing at least 2/3 of outstanding
capital stock would be necessary. 2006 notes: a stock corporation may have not less than 5
nor more than 15 directors (exception to such is under the
As for the quarry operations,the same is an indispensable General banking Law which allows 21 directors in cases of
ingredient in the manufacture of cement and may be merger and also another exception is in non stock
considered reasonably necessary to accomplish the corporation whereby it is more than 15)
primary purpose of S, in such case, only the approval of
the Board of Directors would be necessary.(BP 68) 2006 notes: a mere pledgee of stock is not a stockholder
and therefore disqualified to become a candidate, and to
2 ways by which members of the board can be granted be elected a director of the corporation.
compensation apart from reasonable per diems: 2006 notes: subsequent act of X,Y and Z of electing A as
the sixth director(or president) is invalid as only one of the
1.when there is a provision in the by-laws fixing their 3 was a valid director.
compensation
2.when the stockholders representing majority of the 2006 notes: director must not be convicted of final
outstanding capital stock at a regular or special meeting judgment of an offense carrying a penalty of 6 years and
agree to give it to them. not disqualified by law and the by-laws (since latter may
2005 notes: bonus or other forms of compensation not per provide for additional requirement for the director but
diems should not exceed 10% of the net income before qualification in the Code must first be met)
income tax of the corporation during the preceding year.
DOCTRINE OF CORPORATE OPPORTUNITY: 2006 notes:term of director is 1 yr and until his successor
is elected and qualify( while waiting for successor,he is
Rule expressly provided for by the corporation code called HOLD OVER DIRECTOR)

Page 20 of 39
manage a close corporation)
Independent Directors: 2.when directors or officers acted with fraud, gross
negligence or in bad faith
3.guilty of conflict of interest
The Securities Regulation Code so provides that there must 4.contractually the director holds himself personally liable
be atleast 2 independent directors on any of the ff
grounds: then stockholder may seek judicial relief (derivative suit)

1.corporation is listed on the stock exchange In voting for the members of the board of directors:
2.sold on open market
3.atleast P50 Million in assets whereby it has 200 or more stockholders may only elect board members on the ff
stockholders, of which 20% atleast owns 200 shares of ground: (all else it is with the board of directors)
stock.
1.removal of director
2006 notes: the purpose of the independent directors are 2.at beginning/expiration of term of a director (annual
for the public (not for the minority nor majority meeting)
stockholders) 3.when remaining directors no longer constitutes a
quorum
An independent director should have the following: 4.amendment of the by-laws that increases number of
directors (and as to increase ,it is the stockholders who will
1.not a holder of more than 10% of shares of the elect)
corporation
2.not related to any of the directors 2006 notes: Proxies are not allowed in a board of directors
3.not employee of the corporation within the last 5 years meeting and also in constitution of by-laws
4.not retained for service by the company (like an external However, in stockholders meetings, pwede and proxy
auditor) (except in a condominium corporation)
5.lastly, if the corporation is a bank or a quasi-bank, the
independent auditor should pass the fit and proper rule 2006 notes: in stock corporation, you cannot prohibit
(sec16 Gen Banking law) Central Bank has power to cumulative voting ( which is no. of shares x no.of directors
prescribe additional qualifications of a board member to be elected)
-- since it is the only way that the minority may have a
2006 notes: members of the board can be granted chance to be represented.
compensation when there is a provision in the by-laws In Non-stock corporation, if silent, no cumulative voting (it
fixing their compensaton or when stockholders should be explicitly stated)
representing majority of outstanding capital stock at a
regular/special meeting agree to give it to them 2006 notes: A director of the majority can be remove w/ or
w/o cause by 2/3 vote.
2006 notes: aside from that he may receive a fee when 2006 notes:A director of the minority can be remove only
they render services to the corporation in a capacity other with cause.
than as a director/trustees and also per diem (it usually
signifies a reimbursement of expenses incurred in trade or 2006 notes: holders of non-voting shares and owners of
profession) delinquent shares are not allowed to vote
2006 notes:an officer appointed at the pleasure of the
2006 notes:compensation of all directors must not exceed board per corporate by-laws may be terminated any time.
10% of income of corp (applicable also to trustees of non- Liability of Directors:
stock)
As a general rule, the directors are not liable personally
since obligations incurred by the corporation acting
BUSINESS JUDGEMENT RULE through its directors ,officers and employees are
its(corporation) sole liabilities .
Resolutions or contracts transactions of the board cannot
be set aside by the stockholder or by the court. Nevertheless , being a mere fiction of law, peculiar
situations or valid grounds can exist to warrant ,albeit done
Directors and officers cannot be held liable personally for sparingly ,the disregard of its independent being and the
acts done in exercise of their business function. lifting of the corporate veil.

Except when As a rule, it should only be the corporation, not the person
1.corporation code so provides (when stockholder directly acting for and on its behalf ,that a property could be made

Page 21 of 39
liable under the ff questioned transactions:
Powers inherent in all corporations as legal entities such as
1.a corporation is used to evade a just and due obligation perpetual succession.
or to justify a wrong ,
2.to shield or perpetrate fraud ,
3.to carry out similar other unjustifiable aims or intentions 2005 notes: The concession theory is followed in the
4.as a subterfuge to commit injustice and so circumvent Philippines in the creation of the corporations.Under this
the law. theory, a group of persons wanting to create a corporation
will have to execute documents and comply with the
Exception to this is when corporation is no longer existing requirements set by the state before the latter gives to the
and is unable to satisfy judgment in favor of employee, the group corporate personality.
officers should be liable for acting on behalf of the -- the grant being a privilege, the state provides for the
corporation. causes and reasons by which such privilege may later on
be withdrawn by it.
Members of the board who acted in good faith and in 3 levels of Control in a Corporation
behalf of the corporation keep within the lawful scope of
their authority in so acting do not become liable whether 1.board of directors ,which is responsible for corporate
civilly or criminally for the consequences of their acts policies and the general management of the business
which are considered acts of the corporation itself. affairs of the corporation.
2.officers, who in theory execute the policies laid down by
Unauthorized used/distribution of the Central Bank the board, but in practice often have wide latitude in
certificate of indebtedness by a corporate officer cannot determining the course of business operations
bind the said corporation ,not without the approval of its 3.stockholders who have the residual power over
board and the maintenance of the required reserve fund. fundamental corporate changes like amendments of the
articles of incorporation.
A director is not liable for the misconduct or dishonesty of
his co-directors or other officers of the corporation since a 2005 notes: However, just as a natural person may
director is not an insurer of the fidelity of agents of the authorize another to do certain acts in his behalf, so may
corporation. the board of directors of a corporation validly delegate
--he may be held liable if it is shown that he neglected his some of its functions to individual officers or agents
duty to supervise the business with attention or to use appointed by it
proper care in the appointment of agents.
2005 notes: corporation has no power except those
expressly conferred on it by the corporation code and
CORPORATE POWERS those that are implied or incidental to its existence.

CORPORATE LIABILITIES
Corporate Powers exercisable through the Board of
Directors fall under three classifications: Contractual

1.Express Corporation is bound by contracts entered into, or


authorized to be entered into by its board.
Powers expressly vested in the corporation by purpose
clause of its articles of incorporation ,the corporation law The residence of the corporation is the place where its
and by special laws principal office is established .It can be sued in that place
not in the place where its branch is located (Clavecilla v
2.Implied Antillon)

Those which can be fairly inferred from the express powers Principal place of business of the suing corporation ,not
and fall under 5 classification to wit: the place of residence of its President, determines venue
a.acts in the usual course of business for suits by the corporation.
b.acts to protect debts owing to the corporation
c.embarking in different business Jurisdiction under the Civil Procedure, persons eligible to
d.acts to aid employees receive service of summons for a domestic juridical entity
e.acts to increase business are now limited to the
President
Managing Partner
3.Incidental General Manager

Page 22 of 39
Corporate Secretary common shareholder is 1/3 owner managed corporation
Treasurer see #9)
In-house counsel
b.Vote of Stockholders Holding 2/3 of Subscribed Capital
2006 notes: The requirement that the petitioner should Stock(after Absolute Majority vote of directors approved
sign the certificate of non-forum shopping applies even to such)
corporations that the mandatory directives of the circular -- the 2/3 includes non-voting shares except in acquiring
and the Rules of Court make no distinction between own shares, declaring stock dividends,entering
natural and juridical persons. management contracts and revocation of delegation to
amend by-laws
2006 notes: Certification should have been signed by a --items mentioned needs a qualified notice
duly authorized director or officer of the corp who has
knowledge of the matter being certified. 1.extension or shortening of corporate term (appraisal
right is also applicable)
2.amendment of articles to increase or decrease capital
stock
In decreasing capital stock, it requires amendment of the
articles

3.approval of issue shares in exchange for property needed


Torts for corporate purposes or payment of prior debts.

Corporation is liable for torts committed by its agents or 4.sale/disposition of all or sublstantially all of corp assets
subordinates in the performance of their duties under the (appraisal right is also applicable)
Principle of its negligence in the selection or supervision of
its employees. 5.investment of fund for purposes different from those
stated in the articles of incorporation
A principal or master is liable for every tort which he
expressly directs or authorizes and this is just as true of a 6.investment in another corporation or business (appraisal
corporation as of a natural persons. right is applicable)

Crimes 7.stock dividend declaration (no qualified notice)

Criminal case can only be filed against the officers of a 8.execution of management contracts
corporation and not against the corporation itself. It does
not follow however that the corporation cannot be a real 9.delegation of board of directors of power to amend the
party in interest for the purpose of bringing a civil action by-laws or adopt new by-laws
for malicious prosecution. 2006 notes: in delegation, there is qualified notice, but in
amendment of by-laws,qualified notice do not exist.
ACTS NEEDING STOCKHOLDERS VOTE 2006 notes:revocation of delegation do not require a
qualified notice.

a.Vote of Stockholders Holding Majority of Outstanding 10.other amendments to the articles of incorporation
Capital Stock 11.ratification of certain corporate contracts with a
1.fixing of issue value of no par stocks director or officer
2.adoption, amendment or repeal of by-laws 12.ratificaiton of acquisition of business opportunity by a
director or officer
(in adoption of bylaws ,no stockholder is involved but if 13.approval of merger or consolidation(appraisal right
late na nagawa, then stockholders are involved) exist)
-- by laws is either through the stockholder or delegated to 2006 notes: every amendment or change in plan of merger
board of directors (but it must have assent of stockholders needs vote of 2/3
holding 2/3 of subscribed capital stock)
-- to repeal such delegation,it needs the majority of 14.removal of directors
outstanding capital stock. 15.voluntary dissolution of corporation
16.incurring, creation or increase of bonded indebtedness
3.compensation, other than per diems for directors.
4.entering into management contracts (an additional Bond--Certificate of indebtedness issued by the
requirement is that 2/3 stockholder vote is needed if corporation for money borrowed from the public in

Page 23 of 39
general.It is used by the corporation where the corporation dissolution
needs capital in big amounts but does not have any desire On a specific period and after all
to increase its capitalization(4blue 95). creditors are paid

Registered Bond , which by nature is registered in the No right to participate has right to
books of the corporation in the name of the bondholder, participate
can be transferred but only by assignment It is not In management
negotiable since it is made payable in the name of a
specificed person only. in acquiring own share, only the board action by majority
Coupon Bond is one with detachable coupons bearing vote is needed
dates and amounts, which on surrender to the corporation --and only when there is unrestricted retained earnings.
on the dates stated, entitles the holder to receive cash if it buys back its own shares, it is not decreasing, since the
which represents interest on the bond up to that date. It is corporation is using the unrestricted retained earnings
payable to bearer and negotiable by delivery however, after you redeem, then you retire it so capital is
reduced , however the reduction is limited so as to protect
Detachable Bonds may be sold apart from the bond the right of creditors
Non-Detachable Bond warrant are those which cannot be --in reissued treasury shares, the stockholders has no right
sold separately from the bond. to such except when it is a close corporations.
SPECIAL CORPORATE POWERS
Convertible Bond is one entitling the holder to exchange it
with other types of bonds
Mortgage Bond are secured by a lien or mortgage on 1.Eminent Domain (Private Land)
specific property of the corporation No private corporation may occupy or use property
without the consent of the owners or prior condemnation
Collateral Trust Bond are secured by pledge of personal proceedings and paying or tendering just compensation.
property which may consist of shares of stock, bonds or
both which are deposited with a trustee.
2.Franchise
Debenture do not have any specific fund or property as
security for their payment. They rest on credit of the Primary (Gen Franchise)- right to exist, as such it is vested
corporation and not on security. Usual protection is a on an individual who compose the corp and not on the
negative pledge clause against new mortgages on corp itself. Such is not subject to transfer (sale)
corporate assets. Secondary(Special Franchise)- right granted by the state to
use public property for public use but with a private
Callable/Redeemable Bonds are due and payable at a profit.it is a right/privilege confirmed on corp (like right to
specific time but may be redeemed at the pleasure of the engage in business), it may be transferred so subject to
issuing entity(but not obliged to do so until date of levy, execution etc..
maturity)
The special corporate power referred to here is the
Equipment Bonds are secured by specific equipment of secondary franchise. An example is the right to operate a
the issuer such as its buses,cars,trucks,locomotives and messenger and delivery service by virtue of a legislative
similar properties. enactment.

Bond v Shares of stock


3.Investment in other corporations for purposes other
Govern by Civil code Corporation code than those stated in articles
Since it is a mutuum
Corporation may invest its funds in another corporation
Interest is paid Dividends is paid only if they can comply with the ff requirements(NCC):

Interest paid on bond Surplus profit must a.investment must be approved by a majority of the board
exist of directors or trustees
Whether corp has profit or before payment
non b.invetment must be ratified by the stockholders
representing at least 2/3 of the outstanding capital stock or
Interest is fixed dividend depends on profit by at least 2/3 of the members in case of non stock, in a
meeting called for that purpose
Creditor gets his money back stockholder waits for

Page 24 of 39
c.written notice of the proposed investment and the time provisions ( Baseco v PCGG)
and place of the meeting shall be addressed to each
stockholder or member at his place of residence.
ULTRA VIRES ACTS

Requisites in order that a corporation may validly Acts done by a corporation outside of the express or
sell,lease ,exchange or otherwise dispose of all or implied powers vested in it by its charter and by the law.
substantially all its assets: (Ex: merchandise corp engaging in buying and selling of
real estate)
1.sale must be authorized by the board of directors or
trustees
2.authorization of the board must be approved by all the
stockholders representing 2/3 of the outstanding capital 1.By the Corporation Itself
stock or 2/3 of the members(non stock) as the case may be
Settled rules:
3.authorization must be done at a stockholders or
members meeting duly called for the purpose. 1.wholly executory ultra vires contract cannot be enforced

2006 notes:any stockholder who dissents shall have 2.wholly executed ultra vires contract on both sides will
appraisal right to demand payment of the fair value of his not be set aside nor interfered with by the courts
shares in case of sale or other disposition of all or
substantially all of the corporate property and assets 3.in ultra vires contracts executed by one party but
executory on the other, recovery may be had under the
2006 notes:board may sell or dispose without principle of unjust enrichment.
authorization any of its property or assets if such is
necessary in the usual and regular course of business &
proceeds is appropriated for the conduct of its remaining 2005 notes: contracts ultra vires entered into by board of
business in case of its dissolution.(Approval of SH and right directors are binding upon the corporation and courts will
of appraisal is not required in case of ordinary disposition) not interfere unless such contracts are so oppressive and
Special Limitations on Corporate Powers unconscionable as to amount to a wanton destruction of
the rights of the minority.
Corporations engage in agriculture are prohibited from
having any interest in any other corporation organized for
the purpose of engaging in agriculture. The same extends An Ultra Vires act may be differentiated from illegal act in
to mining corporations the ff manner:

A Philippine corporation not a realty corporation can 1.ultra vires is an act not necessary unlawful but outside
acquire real estate only up to the extent that the purpose the purposes and authority of the corporation to perform
for which the corporation may permit and up to the extent Illegal act is an act which goes against the law,morals,
that the lawful business of the corporation may require .It public policy and public order and therefore unlawful for
cannot engage in buying and selling of public lands. the corporate to perform

2.ultra Vires Acts may be ratified, an illegal act cannot


Constitutional Rights of Corporations 3.unlta vires act ,if fully or partly executed ,can bind the
parties to ti, an illegal act can never be binding.
Entitled to immunity against unreasonable searches and
seizures.
2.By Corporate Officers
While an individual may lawfully refuse to answer
incriminating question unless protected by an immunity A corporate officer entrusted with the general
statute, it does not follow that a corporation vested with management and control of its business has implied
special privileges and franchises may refuse to show its authority to make any contract or do any other act which is
hands when charged with an abuse of priviledge. necessary to the conduct of the ordinary business of the
corporation.
Corporations are not entitled to all constitutional -- he may without special authority from the board of
protections which private individuals have. They are not directors perform all acts of an ordinary nature which by
within the privilege against self incrimination although that usage or necessity are incident to his office and may bind
privilege runs very closely with the search and seizure the corporation by contracts in matters arisng in the usual

Page 25 of 39
course of business.

Ratification can be made by the corporate board either Section 32. A contract between a corporation and (one of
expressly(it hold out agent to public as possessing power its directors or trustees or) its officers is voidable at the
to do those acts) or impliedly. option of such corporation, unless all the following (4)
Implied ratificationi may take various forms (like silence or conditions are satisfied/ present:
acquiescence, by acts showing approval or adoption of
contract or by acceptance or retention of benefits) 1.That 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;
(BAR) X,a domestic corp, owns and operates a sugar
central. In 1965,President invested P1M of company funds 2.That the vote of such director or trustee was nor
in shares of A, a domestic corporation engage in the necessary for the approval of the contract;
manufacture of sugar bags out of bagasse as basic raw
materials. X became the biggest consumer of the bags 3.That the contract is fair and reasonable under the
produced by A. In 1967, A shut down its operation due to circumstances; and
high cost of production and huge losses already suffered.
Stockholder B of X Corp assailed the investment as 4.That in case of an officer, the contract has been
violative of Corporation law. previously authorized by the board of directors.
Board of Directors of X then met and ratified the
investment made by the President. Where any of the first two conditions set forth in the
preceding paragraph is absent, in the case of a contract
HELD: Effect of such ratification by the board of the act of with a director or trustee, such contract may be ratified by
the President investing the funds of the corporation did the vote of the stockholders representing at least two-
not operate to validate the Presidents act. thirds (2/3) of the outstanding capital stock or of at least
the investment of funds of a corporation in the two-thirds (2/3) of the members in a meeting called for the
equity of another corporation is an extraordinary purpose:
corporate power which can be exercised by its Provided, That full disclosure of the adverse interest of the
board of directors only on authority from directors or trustees involved is made at such meeting:
stockholders holding atleast 2/3 of the Provided, however, That the contract is fair and reasonable
outstanding capital stock of the corporation, the under the circumstances.
decision being made in a regular or special
meeting of said stockholders. Now, if the presence of that director is needed to have a
Claim of B is not valid since corporations are quorum or to approve the contract, to validate the
expressly authorized by New Corporation Code contract, it should be ratified by the stockholders. You
(NCC) to invest in equity of other corporations. would need the 2/3 vote of the stockholders to ratify the
However, before either boards can do so, they contract. When the stockholders are asked to ratify the
should be authorized by stockholders holding at contract, there must be full disclosure. In other words, you
least 2/3 of the outstanding capital stock. This must tell the stockholders that theres this contract, one of
authority for the stockholders is what is missing our directors wants to buy this parcel of land and these are
in the problem the terms and conditions.

2006 notes: Teleconferencing as a general rule is not


Effect when no Ratification (under the 1898 Civil code) allowed in corporation code but in SEC issued memo, this
is allowed only with regard board of directors meeting but
Acts of agent beyond the scope of authority do not bind not in a stockholders meeting since a stockholder is
the principal unless the latter ratifies the same expressly or allowed a proxy)
impliedly. -- those entering into teleconferencing ,the
secretary of the corporation must specify the type of
It also bears emphasizing that when third persons knows device used, that the director & secretary can clearly
that agent was acting beyond his authority, the prinicipal comprehend the event occurring and he receives the
cannot be held liable for the acts of the agent . If said third documents in the meetings and the secretary must state
person is aware of such ,he is to blame and is not entitled that a quorum was attained and lastly that all directors
to recover damages from the agent unless the latter must sign in the minutes of the meeting.
undertook to secure the principals ratification.
1.(BAR) L is the chairman and President while R is a
director of NT Corp. On one occasion, NT represented by L
CONFLICT OF INTEREST and A Enterprise, a single proprietorship owned by R

Page 26 of 39
entered into a dealership agreement whereby NT 2/3 of the outstanding capital stock in a meeting called for
appointed A Enterprise as exclusive distributor of its the purpose. Furthermore, the adverse interest of C in the
products in Northern Luzon. contract must be disclosed and the contract is fair and
reasonable
HELD: Dealership agreement is voidable at option of NT
inasmuch as the facts do not indicate that the same was
approved by the Board of NT before it was signed or CAPITAL STOCK
assuming such approval that it was approved under the ff
conditions: It is the actual property or estate of a corporation whether
in property or in money including surplus and undivided
a.presence of R, the owner of A, in the meeting of the profits.
Board at which the agreement was approved was not
necessary to constitute a quorum for such meeting Capital stock of a par value stock corporation is called
authorized capital stock
b.vote of R was not necessary for the approval of the while that of no par it is stated capital (corp fixes the issue
agreement value of these shares at the time of issue for consideration
c.agreement is fair and reasonable under the which shall not be less than P5).
circumstances (NCC)
Authorized Capital (only in stock corp,and it is fixed by
2006 notes: As such, kung walang approval ng board, hindi corp unless amended) is the amount fixed in the articles of
valid ang transaction in isang individual or president or incorporation to be subscribed and paid by stockholders
chairman. Subscribed Capital is the portion of authorized capital
covered by subscription agreement and that at least 25%
2006 notes: NCC provides that a corporation may conclude of such authorized capital is subscribed.
a management contract with another corporation for a
period not exceeding 5 years, which contract should be Paid-up Capital is the portion of authorized capital that
approved by the board of both corporations has been subscribed and actually paid (at least 25% of
-- and by the stockholders holding a majority of the subscribed capital has been paid)
outstanding capital stock or by majority of member of
both. The majority requirement is increased to 2/3 in case Outstanding Capital is the total shares of stock issued
of interlocking directors or ownership by same person of whether or not fully paid (it is issued less treasury)
at least 1/3 of the stock in both corporations.
Share of stock is a unit of capital stock representing the
2.(BAR) C is a director of both P and K Corporations.He proportionate interest of its owner in the management
owns 1% of the outstanding capital stock of P and 40% of ,dividends ,and assets on liquidation of the corporation.
K. P plans to enter into contract with K that will make both 2006 notes: even if theres stock but if dividends not
companies earn very substantial profits. The contract is declared and no RE is distributed, it is still not a stock
presented at the respective board meetings of P and K.. In corporation.
order the contract will not be voidable, what conditions
will have to be complied with?
Difference from Capital:
HELD:At meeting of Board of Directors of P to approve the 1.capital stock is amount of money stated in articles to be
contract, C would have to make sure that: subscribed and paid in while capital represents the actual
property of a corporation.
1.his presence as director at the meeting is not necessary 2.capital stock remains fixed unless changed by proper
to constitute a quorum for such meeting amendment of the articles, capital varies according to the
2.his vote is not necessary for the approval of the contract results of the business operations of a corporation.
3.contract is fair and reasonable under the circumstances

At the meeting of Board of K, C would have to make sure 2006 notes:if sobra sa par- - it can only be distributed by
that: way of stock dividend.
1.no fraud involved
2.contract is fair and reasonable under the circumstances 2006 notes: shares cannot be issued lower than the par
value (only when selling Treasury shares can it be lower
than par since treasury shares are only bonus since entire
4Blue 95 notes: If conditions relating to quorum and capital is still there,it is not impaired)
required number of votes not met. Contract must be
ratified by the vote of stockholders representing at least

Page 27 of 39
(BAR)
(BAR) Action of the board is not correct and is not
a.the name of the corporation should contain the word sufficient. The act to increase capital stock from P800T to
incorporated or corporation. P1M is in effect an amendment to the seventh article .The
b.principal office should mention the town and province or approval of the board of this increase of capital requires
the city where it is located. The board by resolution cannot the further approval by stockholders representing 2/3 of
designate the principal office of the corporation or change the outstanding capital stock in a meeting called for the
the same from time to time. purpose.
Furthermore, the setting aside by the board of P200T
c.the seventh article should not only mention the amount worth of shares (the whole of the increase) in exchange for
of capital stock, but also the number of shares into which a 5 hectare land at the same time stipulating that existing
said capital stock is divided and the par value for each stockholders would have no preemptive right to said
shares, if the shares are of the par value type. increase ,requires again the vote of approval of
Increase or Decrease of Capital Stock stockholders, representing at least 2/3 of the outstanding
It may be increased/decreased at a stockholders meeting capital stock in a meeting called for said purpose.
called for the purpose wherein 2/3 of the outstanding
capital stock shall favor such increase or decrease, after (BAR) Suppose X corp has an authorized capital stock of
prior approval by a majority vote of the board of directors. P1M divided into 100000 shares of stock with par value of
P10 each.Give two ways whereby said authorized capital
Three practical reasons for a corporation to increase its stock may be increased to about P1.5M
capital stocks are: HELD:
1.generate more working capital 1.increase the number of shares from P100000 to P150000
2.to have more shares with which to pay for the acquisition shares with the same par value of P10 each.
of more assets like acquisition of company car etc 2.increase par value of the 100000 shares to P15 each.
3.to have extra shares with which to cover or meet the
requirement for declaration of stock dividend. Cash dividend v Stock dividend :

Procedure 1.cash dividends withdraw assets from the corporation ,


1.notice to stockholders specifying the purpose of the stock dividends do not.
meeting 2.cash dividend, money is received by the stockholder
2.affirmative vote of 2/3 of the entire corporate capital ,stock dividend the stock instead of money is received
stock 3.cash dividend is taxable while stock dividend is not
3.certificate signed by majority of the directors and 4.cash dividend may be declared by the board alone , a
countersigned by the chairman and secretary of the stock is declared by .
stockholders meeting
4.treasurers certificate that 20% of the increase has been
subscribed and 25% of such subscription paid up. (BAR) X Corporation has an authorized capital stock of
P500T divided into 50000 shares with each share having a
par value of P10. 30000 shares of which have been
Limitation on Power to Decrease or Increase Capital subscribed. The total payment on these shares is P200t
Stock: only. As of July 16, 2005 (birthday ni 4blue95) ,the
corporation had a surplus of P150t .May the corporation
1.a corporation cannot lawfully decrease its capital stock if declare a stock dividend? If so, to what extent?
such decrease will have the effect of relieving existing HELD: Yes, corporation can declare a stock dividend .it can
subscribers from the obligation of paying for their unpaid do so up to the full extent of its surplus of P150T or 15000
subscriptions w/o a valuable consideration for such shares. Since the only limit is that the stock dividend can
release,as such an act of the corporation constitutes an be absorbed by the unissued shares of the corporation.
attempted withdrawal of so much capital upon which Only 30000 shares of the 50000 authorized number of
corporate creditors are entitled to rely. shares were issued by the corporation, leaving a balance
unissued of 20000 shares. 15000 shares only are needed
2.corporation cannot issue stock in excess of the amount to absorb the P150000 stock dividend.
limited by its articles of incorporation; such issue is ultra
vires and the stock so issued is void even in the hands of a
bona fide purchaser for value (BAR) A company was incorporated in 1999 with an
3.reduction or increase of the capital stock can take place authorized and paid-in capital in cash of P1M .it has not
only in the manner and under the conditions prescribed by engaged in business up to now and its cash of P1M is intact
law. at the PNB .may the board of directors declare dividends of
P50t from that cash?

Page 28 of 39
HELD: NO, board may not declare dividend from its paid
in capital. The only fund available for dividends is the 2006 notes: issue value of no par is fixed by the articles of
unrestricted retained earnings .since such corporation not incorporation. Any updated value cannot be had especially
having engaged in business, then it cannot possibly earned so when there has been surplus at retained earnings
profit. (usually no par by this time is issued at a premium w/c is
higher than par value)
(BAR) P Corporation has an authorized capital stock of
P500t all subscribed and outstanding as of Dec 31,2004.
the corporation also has an unrestricted retained earnings
in its books amounting to P375T. Since the corporation Following corporations may not issue no-par value shares:
needed the cash surplus to carry out its expansion 1.banks
projects, the board of directors, in its meeting held on Jan 2.insurance companies
5,2005 approved a resolution declaring and ordering the 3.building and loan associations
issuance of 50% stock dividends in lieu of cash dividends. 4.public utility companies without approval of any of the
appropriate boards created to replace the PSC
HELD: Resolution of the board declaring 50% stock 5.trust companies
dividend is invalid for the following reasons 6.public utilities
a. no unissued capital stock.
b. Stock dividend declarations need further Following shares of stock may not be issued without a
approval of stockholders holding at least 2/3 of stated par value:
the outstanding capital stock of the corporation. 1.preferred shares
2.shares issued issued by the above stated corporations
In order that stock declaration may be implemented ,the
following steps should be taken Paid Up Capital

a.articles should be amended to increase the capital stock Amount actually paid in money or property on account of
by at least P250T,this needs approval by a majority of the the subscribed capital stock.It is the actual money paid or
board and approval by stockholders holding atleast 2/3 of property delivered to the corporation on account of the
the outstanding capital stock of the corp filed with the SEC subscription of a stockholder.

b.declaration of 50% stock dividend already approved by Subscribed Capital stock


the board, should be approved by stockholders holding
atleast 2/3 of outstanding capital stock of the corporation It is the capital stock or a portion of it which has been
issued the corporation to its stockholders or subscribed,
c.notice to stockholders and paid for in part or in whole.
d.issuance of stockholders of stock certificates For purpose of incorporation, law requires that at least
corresponding to the stock dividend. 25% of the authorized shares of capital stock has been
No Par Value subscribed.

When a corporation has no par value shares, no amount CLASSIFICATION OF SHARES


will be mentioned. Unlike corporations with par value
shares, for ex., the Authorized Capital Stock (ACS) of the I. Voting shares
corporation shall be P1M consisting of 10,000 shares with
a par value of P100 each, if you have a corporation with no
par value shares, it will simply be, the ACS of the Founders shares
corporation consists of 10,000 no par value shares---no
amount is mentioned. That's why these banks, trust these shares may be given rights and privileges not
companies, etc. are not allowed to have no par value enjoyed by owners of other stocks. Where however, the
shares because these are enterprises which are required exclusive right to vote and be voted for in the election of
by law to have a minimum paid-up capital - so that you directors is granted ,said right cannot exceed 5 yrs, subject
can easily see right away - has it met the minimum paid-up to SEC approval and counted from the date of said
capital, because if its shares have no par value - you cannot approval(not renewable).
see if it has satisfied the required minimum paid-up
capital.
II. Non-voting Shares
2006 notes: No par value shares are issued to allow
flexibility in the price at which they may be issued, the
issue value being usually pegged to their book value.

Page 29 of 39
Voting Rights exercisable by owners of Non-voting shares
Guaranteed stock entitled to receive dividends at fixed
Except for treasury shares which cannot be voted upon on annual rate .payment is guaranteed by 3rd person or by
any corporate matter, holders of other non voting shares corporation.
shall nevertheless be entitled to vote on the ff matters:
Promotion stock is stock issued by corporation usually a
1.amendment of articles (effected by SEC or after 6 months mining company to owners of mining ground deeded to
where no action from SEC occurs) the corporation and to promoters and other persons for
2.adoption and amendment of the by laws services rendered before incorporating.

2006 notes:it should be consistent with articles of Escrow stock is stock deposited with a third person to be
incorporation, consistent with law and reasonable not delivered to the stockholder or his assigns after complying
arbitrary or oppressive. with certain conditions usually the payment of the full
subscription price.
3.sale or other disposition of all or substantially all of the
corporate property 2006 notes:it occurs since dati, corporation would give
option to management officers to buy such option at less
4.incurring bonded indebtedness than market value (not par). GAAP dictates that it should
be reported at cost. Option is not part of financial
5.increase/decrease of capital stock statement since no payment of cash but only options. As
such,instead of options, corporations issues escrow stock.
6.merger or consolidation with other corporations
Over-issued stock is stock issued in excess of the
7.investment of funds in another corporation or for a authorized amount or number of shares of the capital
different purpose stock hence null and void.

8.corporate dissolution Watered stocks are issued by corporation gratuitously, for


money or property or services less than par value in form
2006 notes: in cases of shortening or lengthening the life of dividends when no unrestricted retained earnings exist.
a notice for a meeting should be had and in the meeting Liability of officer consenting (having knowledge)of
there should be atleast 2/3 vote that is required (no issuance of such stock is solidarily liable with the one who
written assent is needed) issued such as against the corp and the creditors for the
difference between the fair value received at the time of
2006 notes:in cases where there is increase/decrease of issuance of the stock and the par or issued value of the
number of directorsthere should be a written assent same
(directors should be by odd numbers in order to prevent
tie) b.Preferred Shares

2006 notes: if corporation has no by-laws, then it is One which entitles the holder thereof to certain
considered as de facto. preferences like preference as to dividend/assets upon
dissolution.
a.Par Value and No Par Value shares
However, preferred shareholders do not give them a lien
Shares issued without par value are deemed fully paid and upon the property of the corporation nor make them
non assessable and their holders are not liable to the creditors of the corporation since their right is subordinate
corporation or to its creditors in respect thereto. They to the creditors.
cannot be issued for a consideration less than P5 per
share, and payment thereon are treated as capital and are Dividends are only payable where there are profits earned
therefore not available for dividend distribution. by the corporation and as a general rule ,even if there are
existing profits, the board of directors has the discretion to
Price at which no par value shares may be issued may be determine whether or not dividends are to be declared.
fixed by articles of incorporation or by the board or by law
or in absence, by the stockholders at a meeting called for
the purpose representing atleast a majority of outstanding
capital stock. Preferred v Common Shares

Doctirne of Equality of Shares: All stocks issued by


(classifications as to what occurred to the stock) corporation are presumed equal with the same privileges

Page 30 of 39
and liabilities provided that the Articles of Incorporation is
silent on such differences. 1. eliminate fractional shares
2. compromise an indebtedness arising out of
Common stock represents residual ownership interest in unpaid subscriptions
the corporation. It is a basic class of stock ordinarily and 3. purchase delinquent shares
usually issued without extraordinary rights or privileges 4. exercise its right of appraisal
and entitles shareholder pro rata division of profits.

Preferences to preferred shareholders may be (1) on the


dividends (if there are unrestricted retained earnings left) 2006 notes:before corp may purchase or acquire its own
up to a stated percentage and (2) on liquidation of assets shares,the ff must be present:
(they are refunded of their investments after creditors are 1.acquisition must be for a legitimate purpose
paid). 2.execise in cases allowed by law
3.corporation has unrestricted retained earnings to cover
-Redeemable Shares the shares to be purchased or acquired

Usually preferred which by their terms are redeemable at a 2006 notes:source of corporate assets are:
fixed date or at option of either issuing corp or stockholder 1.contributions of shareholders
or both at a certain redemption price. 2.loans by creditors
3.profits
A redemption by the corp of its stock is in a sense a 4.declaration of stock dividends the effect of which is to
repurchase of it for cancellation. The present code allows convert retained earnings into capital
redemption of shares even if there are no unrestricted
retained earnings on the books of the corporation. 2006 notes: Stock split up occurs like if it is formerly
Redemption may not be made where the corporation is p100/shareafter split up it is change to 100 shares at p1.
insolvent or if such redemption will cause insolvency or
inability of the corporation to meet its debts as they CERTIFICATE OF STOCK
mature.
Upon maturity, it should be paid by corporation even if Written acknowledgement by the corporation of the
latter has no unrestricted retained earnings. It should be stockholders interest in the corporation. It should be
retired (since Capital stock is reduced)unlike in treasury signed by the President or Vice President countersigned by
shares where latter do not reduce capital since it came the secretary or assistant secretary and sealed with the
from surplus of the shares. corporate seal.

2006 notes:redemption cannot be made if such would As soon as stockholder pay for the subscription, he is
result to insolvency/inability of corp to pay its obligation. entitled to the issuance of a certificate of stock.

2006 notes: Optional redeemable shares are option to Where stock certificate prepared by the corporation in the
redeem is vested on corp, and stockholder cannot compel name of a registered stockholder are claimed by another
nor refuse redemption of the shares that he hold. person who alleges that they are merely held in trust by
2006 notes: Compulsory redeemable shares pertains to said registered stockholder,an interpleader filed by the
the corporation ,it must redeem after stated period or if issuing corp against the two claimants is a proper remedy.
demanded by the holder .It can be restricted by police
power. 2006 notes:stock certificate is not necessary for
stockholder to exercise his rights as long as his name is
-Treasury Shares listed in the corporate books.
2006 notes:if stated books closed by March 30- - it
It is not classified as such,it only becomes as such due to means that it will not entertain any new stockholder after
what happens to it. such date (so no voting right to the latter)
Stocks previously issued by corporation, fully paid for and
reacquired by it by lawful means( purchase, donation, As a general rule, stockholder who pays partially his
forfeiture). It is not considered as outstanding shares (so subscription is not entitled to the issue of prescribed
no dividends) ,but if theres surplus in retained earnings,its stock certificates to him, the requirement being that the
may be distributed as property dividend but not as stock total par value of stocks subscribed by him should first be
dividend. paid.

Conditions whereby a stock corporation empowered to Exception:


acquire its own shares:

Page 31 of 39
1.by laws of corporation allows it 3.if after lapse of one year from last publication, no contest
2.corporate board does not prohibit it. is made by any third person, the corp shall cancel from its
book the said lost, stolen or destroyed certificate and issue
a new one to the stockholder who will file a bond
2005 notes: Under the NCC, stock certificates issued in an acceptable to the board in which case ,the certificate may
and/or capacity may be voted upon by any of its joint be issued even before the expiration of said period
owners, who can also appoint a proxy to vote for the 4.if contest is presented to the corp or a case is pending in
stocks. court, issuance shall be suspended until final decision is
rendered.

Pledge/ Mortgage of Shares 2006 notes:Intracorporate controversy is now lodged with


theRTC.

a.Pledge of Shares (BAR) A is the registered owner of a certificate. He


entrusted possession to B who borrowed said endorsed
It is enough that the pledge to affect the third persons certificate to support Bs application for passport(or for
must be in a public instrument containing among others a purpose other than a transfer) but B sold it to X,a bonafide
description of the thing pledged and the date of the purchaser who relied on the endorsed certificate and
pledge. Registration either with the Register of Deeds or believed him to be the owner thereof. Can A claim the
with the books of the corporation is unnecessary. shares of stocks from X?
A pledge or chattel mortgagee does not have voting rights
in stockholders meetings unless such right is expressly HELD: No, since certificate have been duly endorsed by A
given in the contract and recorded in the books of the and entrusted by him to B. by his act ,A is now estopped
corporation. from claiming said shares from X.
But if A lost it ,then he has right to claim the certificate of
b.Chattel Mortgage stock from the thief who had no right or title to it.

Rules of Court and NCC do not require annotation in the 2006 notes: stock certificate are not negotiable
corporations stock and transfer books for the attachment instruments, but it is quasi-negotiable since it can be
of shares of stock to be valid and binding on the transferred by delivery and indorsement.
corporation and third parties.
To protect right of mortgagee, the chattel mortgage of the 2006 notes:a street certificate is indorsed in blank, as such
certificate should be registered with the Register of Deeds the holder of which is prima facie to be the owner of the
of the province of the domicile of the mortgagor ,and with same.
the Register of Deeds of the province of the corporate
domicile, the corporation should be notified of said TRANSFER OF SHARES OF STOCK
mortgage and or furnished a copy of the contract.
A stockholder has an absolute and inherent right as an
Lost and Stolen Certificates incident of ownership to sell and transfer his stocks at will,
except as may be restricted by the articles, the general law,
2006 notes:If certificate of stock is lost , then there should the by laws or the agreement between him and the
be an affidavit of lost and state that it is lost beyond corporation.
retrieval and there must be publication. However, period is Transfer of shares, it must be transferred by the selling
shorten by depositing with the corporation a bond or other stockholder with intent to make the purchaser the owner,
security in satisfaction of the board. and that the latter must bring to the secretary of the
The moment it is issued, if certificate is lost (by stockholder corporation such certificate and demand issuance of new
or by the corporation) then follow the above rule. stock certificate.

Finder or one who steals does not become owner and Transfer be effected by
cannot vest in his transferee a valid title, even if latter (1) indorsement of the certificate followed by delivery and
acquires it in good faith and for value. (2) sale or assignment evidenced by a notarial document.

Procedure for reconstitution: Requisites to be valid:


1.stockholder executed an affidavit in triplicate stating the (1)there must be delivery of stock certificate
circumstances of the loss, destruction or stealing and (2)it must be endorsed by owner or atty in fact or other
submits the same to the corporation persons legally authorized to make transfer
2.corp shall publish in a newspaper of gen circulation once (3)to be valid against third persons, transfer must be
a wk for 3 wks. recorded in the books of the corporation.

Page 32 of 39
invalid as against the creditor of the transferor without the
2006 notes:the person who acquires such share is already notice of transfer.
a shareholder, but he is not entitled to certificate if there is
still a balance. 2006 notes: it is the corporate secretary(purely ministerial
who will not decide question of ownership) who is duly
When balance of subscription be paid: authorized to make entries in stock and transfer books and
(1)date fixed on day of subscription contract w/o need of a not the chairman or the owner since if they do it ,that
call would tantamount to an invalid transfer.
(2)in absence of subscription contract, upon call of board
of directors. A transferee of 20 shares out of the 80 shares subscribed
by the transferor who has paid P2T or only of the par
As far as the corporation is concerned, no transfer is valid value of said subscription cannot compel the corporation
except as between the parties, until the transfer is to record said sale in the corporate stock and transfer book
recorded in the stock and transfer book of the corporation --only transfers evidence by indorsements by the
showing the names of the parties to the transfer ,date of stockholder at the back of duly issued stock certificates
transfer and the number of certificates and shares may be thus recorded, the indorsed stock certificate
transferred. cancelled and a new one issued to said transferee.

2006 notes: a corp cannot refuse payment before date 2006 notes: for transfer to be effective, certificate must be
fixed in subscription contract or before call of board of properly indorsed and that title to said stock certificate is
directors. vested in the transferee by delivery of such indorsed stock
certificate to the latter.
2006 notes:A corporation cannot refuse registration as 2006 notes:shares may be transferred by delivery of
such ,Mandamus can be maintained in the RTC to compel a certificate indorsed by the owner or his atty-in-fact or
corporation to register stock transferespecially so if other persons legally authorized to transfer (sec62) or by
there is substantial compliance and if corp will not register issuing deed of sale.
it ,you may also go to SEC and latter will give you a receipt
w/c is equivalent to recording. Valid Denial (reasonable Restriction)
2006 notes: A stock certificate already delivered to the
transferee recorded in the stock and transfer book and When a corporation holds any unpaid claim on shares of
reported to the SEC but returned to transferor for stock (whether for unpaid subscription or loans), transfer
indorsement which he refused to make of said shares shall not be recorded in corporate books.
-- it does not prevent the transferee from being owner of (Sec63)
the stocks represented by said unendorsed stock There is reasonable restriction on transfer so long as it is
certificate. necessary and convenient to the attainment of the object
for which corporation was incorporated.
A corporation cannot inquire into or pass upon the legality
of the transaction nor can it question the consideration 2006 notes:the restriction to be valid must appear in the
upon which the transfer is made. by-laws , in the articles of incorporation and in the
Stamping of cert as non-negotiable constitutes undue certificate of stock.
limitation on transfer 2006 notes:there should be a right of first refusal on behalf
if shares are still unpaid, then,corp may refuse registration of the stockholders (swiss challenge)
Effect of the failure to register a transfer of shares:
Corporation are given option to match to match the price
1.as between the transferor and transfereevalid and offered to third person (this is the most common
binding restriction as to transfer)

2.as between the corporation and transferee -- invalid In close corporation,the most common restriction as to
transfer is that the number of shareholders is either not
3.between corporate corporation and transferor latter is more than 20 or that stated in the articles whichever is
still the stockholder but he is the trustee of the real owner lower.- - - as such, if 1 died, it will not transfer to heirs of
(transferee) the deceased the shares of the latter but the remaining
shareholders may choose if 1 of them will buy the shares
4.between corpo creditors and transferor transfer of or sell it to 3rd party.
shares is invalid, transferor is still liable to the corporation
for any unpaid subscription MODES OF ISSUANCE OF STOCKS

5.between transferee and transferors creditors it is

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(1) by subscription subscription unless all stockholders rescind for non
agreed and no creditor is prejudice fulfillment
If it is through subscription, then it must be fully paid corporate creditors may proceed against creditors
before issuance. cannot
subscriber in case the asset of proceedcorporation is
subscription contract insufficient
Consideration
Contract for acquisition of an unissued share (since
corporation is still to be formed.) This is a pre- Stocks shall not be issued for a consideration less than the
incorporation subscription w/c is irrevocable for atleast 6 par or issue value. The consideration may take any of the
months unless all other subscribers consent to the following forms (sec62):
revocation or the corporation fails to materialize. 1.cash paid
2.property delivered at fair value to the corporation
A subscription for shares of stock of a corporation may be 3.labor or services actually rendered to the corporation
revoked either by the subscriber or by the corporation, 4.prior corporate obligations
provided that(sec61): 5.amounts transferred from unrestricted retained earnings
to stated capital
1.all of the other subscriber consent to the revocation or 6.outstanding shares exchanged for stocks in the event of
2.if the incorporation of the corporation fails to materialize reclassification or conversion.
within the said period or within a longer period as may be
stipulated in the contract of subscription unless in either 2006 notes: Services actually rendered to the company is a
case, the articles of incorporations has already been lawful consideration for the issuance of stocks.
submitted to SEC in which case the pre-incorporation is 2006 notes: A lawyer who has already rendered service to
irrevocable. the corporation is entitled to be paid for such service
which credit is considered as property the value of which is
ascertainable. Stocks may be issued for this purpose.
2006 notes: subscription is irrevocable
(a)for a period of at least 6 months from date of
subscription notwithstanding any agreement to the (2) by sale or exchange of unissued stock,
contrary
(b)after submission of the articles of incorporation to SEC 2006 notes: where unissued stocks are merely exchanged
although beyond the said period for real property, there is no transfer of ownership but
Subscription contract v ordinary sale merely a change of form of ownership in the same hands.
of shares The right of first refusal is not violated.

(3) in payment of obligations


in any form and not covered if over P500,it is (4) stock dividends
by statute of frauds covered by statute
of
fraud (BAR) On Jan 1,1972, C signed a written subscription to
the corporate stock of S in the ff terms:
deemed subscriber even if not fully not become holder I hereby subscribe for 100 shares of capital stock of S
paid unless fully paid payable form the first dividends declared on any or all
shares of said company owned by me at time dividends are
if subscription not fully paid, it is not declared until the full amount of this subscription has been
complete paid
the corporation who may demand Will this stipulation to the first dividends declared has
payment,transferring effect of relieving the subscriber C from personal liability
payment (by filing with ordinary court) stockholder cannot in an action to recover the value of the share?
or make the share delinquent resort to HELD: NO, stipulation to have the subscription payable
corporation, from first dividends declared is null and void since the
he has to go to court and file an ordinary dividends which can be the consideration for the issue of
suit (since not an intra stocks are those coming from operations at the time the
corporate dispute) stocks are issued. The dividends contemplated in the
problem have no right to exist yet.
subscriber cannot be release from
corporation may 2006 notes: Source of fund for dividends is the

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unrestricted retained earnings. 1.Call- subject to the provisions of the subscription
contract, if any, a declaration is made by the board as to
the percentage of the subscription due and when it is to be
(BAR) S bought shares of stock from a stock broker who paid.
delivered a street certificate to S. As security for a loan, S
delivered the certificate to R who in turn pledged the 2.if no payment is made within 30 days from said date, the
certificate to a bank to secure his own loan. After S paid whole subscription is declared delinquent and subject to
R,S demanded the return of the certificate from R and sale.
from the bank. Can S recover the certificate? 2006 notes:30 days from due date will interest begin,but
HELD: NO, a street certificate is a stock certificate endorsed board must declare that subscriber has become
by the registered holder in blank and upon its face, the delinquent.
transferee is entitled to demand its transfer into his name
from the issuing corporation .When so indorsed in 3.board shall fix the date ,time and place of sale which
blank,the certificate is transferable by mere delivery. shall not be less than 30 nor more than 60 days from the
When delivered by R to the bank still with the blank date the stocks became delinquent.
indorsement,the latter had perferct right to assume that R
was its holder.Hence, until the bank returns it to R after R 4.notice is sent to all delinquent stockholders and
has paid in full his loan ,S cannot recover it.If it is in publication of the declaration of delinquency and fixing the
possession of R ,S can recover it because of their contract. date, time and place of sale ,is made in a newspaper of
general circulation, once a week for two weeks.
COLLECTION OF UNPAID SUBSCRIPTION
5.sale at auction and award to highest bidder. The highest
A stockholder cannot ask to be release from his bidder is the one who bidsthe lowest number of shares (in
subscription(if he has still an unpaid balance), such is illegal it ,the delinquent subscriber has a share if there is excess
and violating the trust fund doctrine. Even if he is released, in the proceeds)
the assignee of the insolvent corp or the creditor can still
collect from the released holder the unpaid balance of his 4Blue 95 notes: if no bidder, the corporation may buy back
subscription. all subscription (w/c would make it Treasury shares),
therefore delinquent subscriber has no share in the
1.Call , delinquency and sale at auction of delinquent proceeds.
shares Or corporation, if they dont want to buy the shares, may
file in court asking the subscriber to pay the unpaid
(BAR) Victor was employed in NAIA. He subscribed to 1500 amount then execute it against latters personal property.
shares of the corporation at P100 per share or a total of
P150000. He made an initial down payment of P37500. He
was appointed President and General Manager. Due to 6.issue of certificate of stock to highest bidder.
disagreement with the Board ,he resigned and demanded (BAR) Corporate secretary can validy refuse to issue a stock
payment of his unpaid salaries ,his cola,his bonus and certificate for 25 shares to allegedly correspond to the 25%
reimbursement of his gasoline and representation that X paid on his subscription for 100 shares. When a
expenses. subscriber makes a partial payment on his subscription
NAIA admits that it owed Victor P40000 but told him that ,the amount is applied proportionately to all the number
this will be applied to the unpaid balance of his of shares subscribed by him.
subscription in the amount of P100T.there was no call or ---X is not correct also in refusing to pay for the balance of
notice for the payment of the unpaid subscription. Victor his subscribed shares since unpaid subscription is a trust
questioned the set off. fund the creditors of the corporation may look up to for
HELD: NAIA cannot set off the unpaid subscription with the payment of their credits should anything adversely
Victors claim for salaries. The unpaid subscription is not affect the corporation.
yet due as there is no call. (BAR) The board of Directors of a corporation ,by a vote of
If there had been a call for the unpaid subscription ,still the ten in favor and one against ,declared due and payable all
corp cannot set it off since Victor is entitled to the unpaid subscription to the capital stock. The lone
payment of his salaries which NAIA has no right to dissenting director failed to pay on due date his unpaid
withhold in payment of unpaid subscription.To do so would subscription. Other than the shares whereon he was
violate Labor Laws(Apodaco v NLRC) unable to complete the payment ,he did not own any
share in the corporation. He was later informed by board
that unless due payment is meanwhile received, he:
Extrajudicial Remedy for collecting Unpaid subscriptions,
steps: a.could no longer served as director of the corporation:
INVALID, removal is not valid due to prerequisite of prior

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notioe to the stockholders of the company is missing done by filing a quo warranto case under rule 66 of the
ROC on the ground mentioned there or a corporation can
b.would not be entitled to cash and stock dividend which be dissolved for certain violation of the corporation code
were declared and payable a day after such information . as mentioned in the Corporation Code or PD 902-A and
INVALID, shares although unpaid has not yet become also a minority stockholder may file a petition to dissolve
delinquent, since it is delinquent only upon failure of the the corporation where the majority is mismanaging the
stockholders to pay the unpaid subscription or balance assets of the corporation, dissipating its assets, and
thereof within the grace period of 30 days from the date fraudulently disposing of its properties and a receiver may
stated in the call. be appointed in an action for involuntary dissolution.
Owners of delinquent stocks are entitled to cash
dividends.cash dividends due on delinquent stocks should Board of Directors cannot pass a resolution to extend
be applied first to the unpaid balance on the subscription corporate life after the corporation was dissolved since:
plus cost and expenses.
1.corporate life terminates , so there is no more life to
c.could not vote in the stockholders meeting extend
INVALID, since not yet delinquent ,they shall have all the
rights of a stockholder, including right to vote. 2.if board is given 3 years grace period after its dissolution
to wind up and liquidate, that grace period can be utilized
2.Ordinary Court Action for nothing more than a liquidation. Board cannot pass
resolution not germane to the liquidation process.

3.Collection from cash dividends and other amounts due 3.even if extension was done by the board before its
to the stockholder, if allowed by the by-laws or agreed by dissolution, the extension and filing of an amendment to
him. the articles of incorporation need the approval of
stockholders holding atleast 2/3 of the outstanding capital
2006 notes:if there is no interest stated in the by-laws, stock of the corporation.
then the subscriber must not pay interest, but if it
becomes delinquent, then subscriber must pay interest
even if not stated in the by-laws. 2006 notes:full liquidation can be effected only after 3
years.
2006 notes:as a general rule, the corporation will not
release subscriber from subscription,an exception is when Main Modes of Dissolution
shares become delinquent as declared by the board.
1.voluntary

DISSOLUTION OF A CORPORATION by filing the proper papers w/ sec .no hearing is required if
there are no creditors affected.

Publication is needed and SEC will require to get a tax a.where no creditors are affected
clearance from the BIR and the stockholders will be In all the methods of voluntary dissolution, you need a
required to sign an undertaking that they will answer for resolution approved by a majority of directors and a
the claim of the creditors to the extent of the liquidating resolution approved by at least 2/3 of the stockholders In
dividends they will receive. Section 118, where no creditors are affected the directors
and the stockholders pass the resolution dissolving the
Once dissolution is approved, the Board of Directors is corporation and that will be filed in the SEC for approval. In
dissolved and so the corporation have either an assignee a case where a suit was filed and the corporation said, we
dissolution or a receiver dissolution. have already been dissolved and they submitted a board
resolution, the SC held that it is not enough to dissolve a
Effect of dissolution is that there is a transfer of legal titles corporation.
of property to stockholder, and corporation exist for 3yr
period for it to liquidate (it is not anymore conducting b.where creditors are affected
business since no Board of Directors anymore) however, Here the board and the stockholders will approve the
with regard cases filed by Corporation for sum of money, it dissolution but a petition will be filed signed by the
would still goes on and if it goes beyond 3 years, the majority of the directors and verified by the president,
lawyer of corporation becomes the assignee for the secretary or one of the directors which will indicate the
successful recovery of the money. claims of creditors. That will be set for hearing and not less
than thirty (30) days nor more than sixty (60) days after the
Then you can have a voluntary dissolution. This could be entry of the issuance of the order and a copy of the order

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will be published once a week for 3 consecutive weeks in a
newspaper of general circulation and that will also be Methods of Winding Up:
posted for three weeks in three public places like the
bulletin board of a municipal hall, post office, the plaza and 1.upon voluntary dissolution of a corporation ,the court
then the SEC will set that for hearing and determine w/n may direct such disposition of its assets as justice requires
the corporation should be dissolved and may appoint a receiver to collect such assets and pay
c.by shortening corporate term the debts of the corporation (Rule 104 of Rules of Court)
this is the simplest and fastest way of dissolving the
corporation voluntarily like when Ford Philippines decided 2.corporation whose corporate existence is terminated,
to close its subsidiary they simply amended the articles of shall nevertheless be continued as a body corporate for 3
corporation that the corporation will exist until December years after the time when it would have been so dissolved
31, 1978. for the purpose of prosecuting and defending suits by or
against it and of enabling it gradually to settle and close its
2.involuntary affairs ,to dispose of and convey its property and to divide
Upon verified complaint filed w/ SEC its capital stock but not for the purpose of continuing the
business for which it was established.
Grounds:
a.continuous inactivity of the corporation for a period of 3.by vitue of which the corporation, within 3 year period
at least 5 years. just mentioned, is authorized and empowered to convey
b.commission by the corporation of ultra vires/illegal acts all of its property to a trustee for the benefit of members,
c.corporation was illegally organized stockholders ,creditors and others interested.
d.serious dissension in the corporation
The corporation has three years after it should have been
The Court said the employees of a railroad are required to dissolved for the purpose of winding up its affairs. The SEC
wear uniform indicating their positions in their nameplate, has said the three year period should be counted from the
now you mean tell me if one employee did not have such a time the dissolution was approved by the SEC even if the
nameplate you are going to dissolve a corporation because directors and stockholders pass a resolution dissolving the
that is a legal requirement, it has to be a serious violation. corporation that is not effective until it has been approved
by the SEC.
But in one case, the SC dissolved a corporation which was
engaging in banking without authorization from the For three years , the corporation will continue to exist it
monetary board, it was accepting deposits from the public, will no longer be a going concern but only for the purpose
the court considered that as a serious violation. of winding up that is why the SC has said that the
corporation cannot for example renew its contract of lease
When a minority stockholder files a case and asks to because it is no longer a going concern.
dissolve the corporation, the court said that that is a harsh During the three year period, it should devote its time
remedy unless the situation is really beyond redemption prosecuting and defending law suits, winding up its affairs
you should not impose that remedy. disposing its properties so they can be used to pay off its
Winding Up or Liquidation creditors and to distribute balance to the stockholders.

2005 notes:As such, cases can still be pursued even beyond


Liquidation means the winding up of the affairs of the the date when its corporate existence is terminated for a
corporation by getting in the assets,settling with creditors period of 3 years. As such ,prosecution of cases within the
and debtors and apportioning the amount of profit and 3 year period of liquidation is allowed.
loss.
Partition of Properties:
Liquidation ,in corporation law, connotes a winding up or
settling with creditors and debtors. It is the winding up of a 1.physical division or partition based on the proportion of
corporation so that assets are distributed to those entitled values of their stockholdings
to receive them. It is the process of reducing assets to
cash, discharging liabilities and dividing surplus or loss. 2.selling the property to a third person and dividing the
proceeds among themselves in proportion to their
2005 notes: On the opposite end of the spectrum, it is stockholdings.
rehabilitation which connoted a reopening or
reorganization .Rehabilitation contemplates a continuance 3.after determination of value of property, by assigning or
of corporate life and activities in an effort to restore and transferring the property to one stockholder with the
reinstate the corporation to its former position of obligation on the part of said stockholder to pay the other
successful operation and solvency. stockholders the amounts in proportion to value of their

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stockholdings. from date of issuance of certificate of incorporation

2005 notes: lawyer who handled the case in the trial court The effect of non use of corporate charter and continouos
may be considered as trustee for the dissolved inoperation of the corporation within 2 yrs from the date
corporation, with respect to the matter in litigation only of its incorporation, its corporate powers shall cease and
,although no appointment as such was extended to him. the corporation shall be deemed dissolved (not
automatically since there should be a notice and hearing)

2005 notes:trial court has jurisdiction to order a receiver of However, if a corporation has commenced the transaction
a corporation under receivership to do any act so as to of its business but subsequently becomes continouosly
protect and preserve its properties and to that end it may inoperative for a period of at least 5 yrs, the same shall be
order the secretary of the corporation to do an act within a ground for the suspension or revocation of its corporate
the internal affairs of the corporation aimed at protecting franchise or certificate of incorporation.
the interest of the stockholders(Hodges v Lezama)
2006 notes:this is not applicable if failure to organize or
2005 notes: at any time during the said 3 years(for winding commence is due to causes beyond the control of the
up) said corporation is authorized and empowered to corporation as may be determined by SEC.
convey all of its properties to the trustee for the benefit of
stockholders, creditors and other interested persons.The 4.legislative dissolution
trustee holds legal title to these assets but beneficial
interest remains with the stockholders and creditors. INSOLVENCY, REHABILITATION & DISSOLUTION

Take over of Assets of a Dissolved Corporation Insolvency (Bankruptcy)

Objective is to discharge a corporation from debt since


Corporation taking over the assets of a dissolved there is still intention that corporation can still continue its
corporation becomes liable for the obligations of the transactions
dissolved corporation ,even if the charter of a corporation
taking over limits its liabilities with respect to obligations Proceedings involved:
of the dissolved corporation (Gonzales v SRA)
1.suspension of payments
How assets distributed:
Occurs when a corporation has sufficient assets but latter
1.creditors starting with the preferred and continuing with do not mature at same time with the debt.
all common if the assets can pay all As such ,it operates whereby the amount of debt is not
reduced, only the payment is postponed
2.refund of the par value of stocks of preferred
stockholders However, it must involved publication and authentication
of debts and that after debts are proven, the plan of
3.refund of the par value to common stockholders repayment are approve by the regular court.

4.if assets still remain, then they are proportionately 2.voluntary insolvency or involuntary insolvency
distributed to all stockholders ,common or preferred.
In this scenario, the corporation or the person do not have
There can be no distribution of assets to stockholders sufficient assets to meets its obligation.
without first paying the creditors.
Since the liabilities are greater than assets, then the law
Assets distributable to any creditor ,stockholder or followed is the concurrence and preference of credit.
member who is unknown or who cannot be located shall
be escheated to the city or municipality where such assets But there must be publication for 60 days.
are located (Sec 122)
Other Modes of Dissolution: In voluntary insolvency, it is the debtor who filed, while in
involuntary insolvency, it is the creditiors who filed such
1.expiration of term (involuntary) proceeding (since the debtor might abscond, or remove a
security from place where it should belike transferring a
2.shortening of corporate term car from Manila to Davao, or that debtor is out of country
and no intention to return).
3.failure to organize and commence business within 2 yrs

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After applying the payment in accordance with the
concurrence of credit, the natural debtor is discharge,
however, if the debtor is a corporation it is not discharge.

2006 notes:if after discharge, you win lotto, la na habol ang


mga creditors sa yo

Rehabilitation

Objective is for the approval of the plan of rehabilitation


and its implementation.

If court finds it adequate that a plan of rehabilitation must


be carried out, then it orders that no creditors can touch
property of the corporation (even those already foreclose
by creditors and applied shall be stop ,as such, even
secured creditors are covered by suspension of
payments---- so there is automatic stay)

Once plan of rehabilitation is approved, it is subject to its


implementation / execution.

End Result: Corporation continues to carry on its business.

2006 notes: Aside from plan of rehabilitation, the


corporation may also propose for an interim plan.

Dissolution

Objective is to liquidate since corporation is already


dead(read the corporation lectures by 4blue 95).

In voluntary dissolution ,it is the debtor who files it on


grounds of fraud or corporate officers mismanage the
corporation resulting to depletion of its assets.

As such, if liabilities is greater than assets, it can be a


ground for insolvency or the creditors may propose for
rehabilitation.

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