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CORPORATION LAW TSN

Based on the Lectures of Fr. Agustin Nazareno

FIRST EXAM COVERAGE Because, going back to the Civil Code, a


JURIDICAL PERSON is an artificial being.
November 15, 2017 Unlike natural persons (like you and me), we
(Eliza Devilleres) have a physical existence. The
corporation does not have a physical
THE IMPORTANCE OF FORMALITY IN existence. The corporation exists in
CORPORATIONS contemplation of the law. It is a creature.
In fact, it cannot act without the agency of
This is where you have to grasp the natural persons like you and me.
importance of formality. For the acts of a
corporation, reality is not as important as the How does a corporation enter into
formality. contracts?

Why is it that formality is more important It cannot sign because it has no arm. The
than reality? Board of Directors pass a resolution
approving the corporation’s entrance into an
You will then later on find out that there is agreement, and designates the person who
such a thing as table meetings of the will sign for and in behalf of the corporation.
corporation. The board is said to have met Without that natural person who will sign,
but they actually did not meet. But all the there is no contract. In other words, the
directors are made to sign beforehand that corporation is dependent on an AGENT.
they already met. That is the only time that you see that a
principal must act through an agent. It cannot
What is the reality? act by itself. It has no arms, no mouth, no
There was no meeting. But formally, there feet. It does not exist, except in
was a meeting because everybody signed contemplation of the law. Now, that is why
an ostensive minutes of the meeting. formality is very important.

Who will question whether or not there Formality: Whether or not there was a
was a meeting? If you sign that there was meeting. If there was a meeting, whether
a meeting and you were not there, can or not there was a a quorum in that
you say that there was no meeting – why meeting – because quorum determines
did you sign? validity. Whether or not the resolution was
passed by the required majority – whether
it be absolute majority or simple majority or
qualified majority (2/3 of the stockholders
If in that meeting, there was a crucial __ because there are different gradations
resolution that was passed, what is the in the corporation).
status of that resolution? Is it binding on
the corporation or is it not?
Now that it the forest – the details. You have
It is binding because the formality is there. to pay attention to those details. You have to
know all those details, esp. when you are a
Where is the reality? corporate secretary of a corporation because
that is your job. The lawyer in the Board is
It is prima facie presumed that that there
the one who thinks of the worst so that he
was a reality because there was a formality.
can defend the corporation. So that is the
Why is it that that is the NATURE OF reason why details and formality is very
CORPORATE ACTS? important.

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

Now, we go back once more to the Civil its legally binding and valid obligations. After
Code. We go back to the notion of which, there is still something left to be
PERONALITY. We are taught in Civil law divided among the stockholders in proportion
that a PERSON is a subject of rights and to the ownership of the outstanding shares.
obligations. Only a person has rights only a That is the ownership of shareholders.
person has obligations. Because a person
has rights and obligations, only a person So strict language, you say na tag-iya na
can sue and be sued. If you are not a cyas corporation. Do you use that language?
person, you cannot be sued and neither NO! But there is a caveat there. That is
can you bring suit. Bisag unsa pa gani nimo legally deficient in language. When you are
ka bright na iro, duklon cyas ulo, mukiha ba in a formal setting, you cannot use that
cya? Does he have the personality to bring language because it betrays your lack of
suit? NO! Because he is not a natural grasp of basic principles in Corporation Law.
person. No one can own a corporation. Bisag si
Gokongwei, Henry Sy pa. Bisag ikaw pa
What does it take to be a natural person? nagimbento anang korporasyona. Have you
heard of Double Dragon? It is a corporation,
All you have to be is to be born. Neither you, the controlling stockholders of which are
much less me, decided that we will be Batman ad Robin. Bat man is Caktiong – the
persons. Not even your parents decided that founder and president of Jollibee. Robin is
you will be persons. They were hoping that Mr. Sia – the former owner of Mang Inasal.
they could have children, but they did not Together, they came and form this
decided anymore than the rooster can meet corporation (Double Dragon). Double
the sunrise by crowing at dawn. Somebody Dragon Story: (Why is Caktiong suddenly
else up there decided that you will be a forming Double Dragon? Because he does
person. And so you are – you are the subject not own Jollibee. He founded Jollibee, it was
of rights and obligations. his idea, he founded it, he pushed it, but it
was funded by the family of his wife. So it is
A corporation is a juridical person. That the Lim family who controls Jollibee. And
means, by fiat of law, by consent of the state, now Caktiong and the wife are estranged. So
it is a person – it has rights, it has obligations. he decides to form his own corporation
Because it has rights and obligations, it can where he knows he is in control. His partner
file suit and it can be sued. And precisely is Mr. Edgar Sia is the owner of Mang Inasal.
because it is a person, no stockholder can Cokationg went and offered him a price that
say – even if he owns 99% of that he cannot refuse – P900M for 50% of Mang
outstanding shares of the corporation – that Inasal. Those are the magic numbers. Mr.
he owns that corporation. Sia could not refuse because even if she
How can you own a person? sells 50%, he still runs Mang Inasal. He
increased the branches from 300 to 700.
You cannot own a person. Jollibee was the one financing the
expansion. By the time he reached 700
How is that expressed in Civil Law? branches, Jollibee said that it is now time for
us to buy you out – to buy your remaining
The stockholders’ interest in the corporation 48%. This time it was over a billion pesos. He
is always inchoate. was paid over P1.4B, because it was already
bigger than the original. Together they
What is inchoate?
formed Double Dragon. What are they
Dependent upon a condition that should the selling? Katol? (Haha). Unsa man ilang
corporation dissolve, the corporation has ginabaligya? Have you not heard of Double
enough assets to be liquidated to answer for Dragon? The price of its shares of stock has
already doubled in 3 yrs from the time that

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

there was an initial public offering. Their transferability agreeable


strategy is to capture, retail, upper retail of of shares in to the
business through secondary source. They the articles of partners.
put up City Mall. Wa na dris Davao because incorporation What binds
this is not considered as a secondary city. of the parties. the
But if you go to Tagum, etc. there is City Mall You can only partnership
– a lower cost mall. BCD market. Retail is a put some is utmost
very tricky business. limitations. trust and
confidence.
2.) The
moment
So, you have Uber valued at $70B more than
that a
any taxi company in the world and not
partner
owning a single taxi. You have Air BnB that
dies, the
makes available millions of goods without
partnership
owning a single hotel. That could not have
is
been done post-industrial revolution. It’s only
dissolved.
done because we are now in the 3rd industrial
revolution and that is the digital age. You will
later on find out that the certificate of stock Why do you need to study corporation law?
which in law is a good evidence of ownership Because it is the mistress of taxation. It helps
of shares is actually a barrier for trading. As taxation. The ultimate aim is tax. You want to
long as you keep the roster of your lower taxes, you have to go through
shareholders by the certificate of stock, you importation. You know that there are so
discourage trading. Now, it is de-certified many corporations who have engaged into
shares. It’s now digital shares. tax avoidance, like Shell, etc? there are also
Ivy League schools which have also these
What made the industrial revolution?
endowment funds which are all in banks.
Technology they say, made the industrial Discussion about Mighty Corp. tax
revolution. The invention of the spin engine avoidance – P25B. Attorney’s fees of P250M
and the cotton gin. So that now instead of a will go to Fortun and Narvasa and Narvasa.
family making thread and sowing it into cloth, These gal who who will pocket it will be
now it’s a factory that does it. They say that dancing and smiling all their way to the bank
is what makes the industrial revolution. will get P100M – Talks about the alumni of
Except that, supporting that is the juridical ADDU. I’m not bullshitting you (Haha).
person of limited liability – the corporation.
Without the corporation, there would have
November 16, 2017
been no large-scale projects, because it is
(Jennifer Lim)
very difficult to martial huge amounts if you
do not have limited liability.
We parted yesterday with the nationality of a
CORPORATION v. PARTNERSHIP
corporation. The most important issue on the
CORPORATION PARTNERSHIP nationality of a corporation is with respect to
the control test.
1.) Ownership of 1.) You cannot I give to you a decision of the Supreme Court
shares can transfer its – PCGG vs. Pea in relation to Yuchengco
be easily shares. vs. Sandiganbayan wherein Supreme Court
transferred The says “In PCGG v. Pea, this Court, describing
2.) You cannot transferee the rule of Marcos as a well-entrenched
deny may not be

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

plundering regime of twenty years, noted the Fox News and all those foreign corporations
magnitude of the past regimes organized are allowed to function in the Philippines and
pillage and the ingenuity of the plunderers even broadcast.
and pillagers with the assistance of the
experts and best legal minds available in the What is the rule with respect to
market. The evidence presented in this case communications media? The corporation
reveals one more instance of this grand allowed to stream in the Philippines by the
scheme. This Court guardian of the high Constitution is 100% Filipino.
standards and noble traditions of the legal
profession has thus before it an opportunity The SC issues an En Banc resolution
to undo, even if only to a certain extent, the dismissing the petition unlike in Wilson
damage that has been done.” Gamboa. It is premature and it should go
through the right channels.
So, it is official pronounced by the Court. Mao
na inig mitindog kani na si Ferdinand Jr. Why is it that they allowed Gamboa to go
basaha ning PCGG vs. Pena. Official na! It’s straight to the SC? Even the SEC in Wilson
in the books. Dapat sagpaon na siya ni-ini. Gamboa followed and issued a
Organized plunder village, magnitude of memorandum this is how we measure a
which has never been seen. Basta dili gani corporation 60% Filipino, 40% foreign. It was
ka mubasa ning kaso ni ug dili ka katubag… questioned again directly to the SC in ROI
HAGBONG KA sa akoang klase. It’s not just vs. SEC and PLDT November 22. 2016.
a simple case of missing the point; you are They questioned again the memorandum
supposed to be enlightened kay kahibalo ka and said that it does not follow the ruling in
sa balaod. Gamboa.

There’s a case here which the Supreme Who said it does not follow? The same
Court removed from its Supreme Court people in the SC who wrote the in Gamboa.
records. Ngano man? Kay naulaw sila. Carpio, Sereno, Leonnen, Jardeleza. They
Ridon vs. AXN Networks Philippines, it is still entertained it. Why? They should have
an En Banc Resolution but Per Curiam. It is dismissed it following Ridon. Gitangtang kay
just the Clerk of Court and Vidal who says uwaw man kaayo.
this decision is En Banc. It was for 1 week in Let us move to the first attribute that a
the website of the Supreme Court but not in corporation is an artificial being. That is
the SCRA because it was removed. Ngano why you cannot say that a stockholder owns
man? Nauwaw ang Supreme Court. a corporation because it is a person even if
Why? Because Gamboa, in the case of that person has no being. You cannot own a
Wilson Gamboa vs. Secretary of Finance, person because it is a free- center, subject to
that is how they questioned the Filipino rights and obligations. In other words, it is the
composition in the share holders. Gamboa only entity in reality that is given standing by
went straight to the Supreme Court for an the court. He can sue and be sued-that is
order of prohibition against Secretary Teves, standing.
asking the court to order Teves not to sell What is the difference of standing and the
those shares. Because that sale would make personality to sue? ‘Pag about sa
PLDT a foreign corporation. The SC personality, cause of action na. You might
entertained it and entered an En Banc have standing but you are not the proper
decision, by Senior Justice Carpio who wrote person to sue. You have not suffered a
that decision in 2011 and 2012. wrong. You have no cause of action that is
In 2014, Ridon et.al. went straight to the why you have no personality to sue.
Supreme Court and questioned why AXN,

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

Muingon gani ang POEA that there should 6. Cockpits under Section 5 PD
be no deployment to Iraq and Afghanistan, 449. Should be all Filipino. Pilipino
kinsa man mu-sue? Association of lagi nang ni dagan dira pero ang
Recruitment and Manning Agencies. Daghan manok foreign man. Puros man
mi mag suffer ani, wala na mi mapadala sa imported.
Iraq. The court says you have no personality
to sue. It should be the OFW who should sue 7. Manufacture, stock-repair
because they are the ones standing to suffer and/or distribution of nuclear
directly to suffer a wrong. weapons under Article 2 Section
8 of the Constitution.

WHAT ARE THE FULLY OR 8. Manufacture of firecrackers and


PARTIALLY NATIONALIZED other pyrotechnic devices under
CORPORATIONS? Section 5 RA 4783. Very unsafe!

This is why I’m so wary about


1. Mass media except recording nationality laws because it protects
studios – Article 15 Section 7 of abusive Filipinos. They have an
the Constitution. unfair advantage. The Filipinos
suffer!
2. Retail trade business with trade-
up capital of less than 2.5 million
dollars under RA 8762.
25% FOREIGN- EQUITY
3. Private security agencies under 1. Private recruitment local or
RA 5487. Section 4 provides overseas Article 27 PD 447
“Private security agencies must be Labor Code. Must be 75% Filipino.
Filipinos if they operate within the
country.” 2. Construction and repair of
locally funded works.
Ngano man nang American
executives nagdala ug foreign
security along with helicopters to 3. Construction of defense related
the Davao Coal Plant? We can structures – 25% foreign
only brush aside. We cannot maximum.
question that to court. It was said to
be a diplomatic relation.

4. Small scale mining under FILIPINO CORPORATIONS- 40%


Section 3 of RA 7076. One of the FOREIGN, 60% FILIPINO
most abused laws. It is not small
scale at all but hiding under this 1. Exploration, development and
law. You must be 100% Filipino. utilization (EDU) of natural
resources under Article 12
5. Utilization of natural resources Section 2 Constitution
under Article 12 Section 2 of the
Constitution 2. Realty Corporations that own
private lands under Article 12
Section 7

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

Born in the Philippines but never


changed his citizenship after he
3. Operation and management of stayed in Colombia. It was allowed by
public utilities under Article 12 the Laurel-Langley Parity Act –
Section 11. Americans have the same rights as
Filipinos for 30 years.
4. Culture, milling, processing,
trading except retail of rice and
corn and by products. Section 5 In Quasha vs. Republic, Quasha was an
PD 194. American lawyer who came to the
Philippines and started practicing here
during the Commonwealth period.
5. Adjustment companies. i.e.
When the LLA was passed, he continued
appraisers
practicing even after the 2nd World War. He
bought properties one of which was in
They are different from asset
Forbes Park. Then, the LLA was about to end
valuators who are employed in
in 1965. He went to the Supreme Court with
mergers and acquisitions that
a petition for declaratory relief. He was
come with value of machineries
saying “I bought it in good faith. I am the
and buildings and how they are to
owner of the land in fee-simple which I call
be reckoned with. There is a
home. What will happen after Parity ends?
different body that controls it just
Will I be stricken-off my land? Dili mo maluuy
like CPAs, CNAs they are asset
nako na I am a simple lawyer from
valuators.
Delaware”.

The one who wrote the decision was JBL


Reyes, that was his valedictory decision, his
last decision. He says when the parity ends,
In the Philippines, if you are an
your right to own ends. So you better
appraiser, the maximum capital is
disinvest it. Transfer it. That’s what
25%.
Americans did. Except, one person
If you exercise the profession is
recognized by the Court, Del Monte
100%.
International.
NOTE: Because Del Monte obtained ownership of
the property in Bukidnon in 1899 before the
 APPRAISER – LLA. They are not covered by it. Of course,
25% Max. Capital they transferred it later on to Campos. Del
 EXERCISE OF A Monte now is owned by Mr. Campos and his
PROFESSION – group – the Maveric group. Datu Puti, Mang
100% Tomas. Where did he get his money? You
read Yuchiengco. Because his father was a
friend of Marcos even before he became
congressman. Mr. Campos was the one who
was first to return hidden wealth entrusted to
That is why SGV split because they him by Marcos. He owned the biggest
are beginning to be controlled by pharmaceutical company in the Philippines,
Ernst and Young. Wa sila gisumbong UNILAB. It became really big because at the
ilahang founder na si Washington time of Marcos, the DOH was directly
Sycip who is an American citizen. transacting with them. They did toll-

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

manufacturing. Unlike in India, they just copy have weight, you cannot touch it, you
the composition of medicines and produce cannot smell it but it is there by legal
their own. They say “To hell with copyright!”. postulate. It has no physical
existence.

*Talks about the current US Now, most of the Bill of Rights apply to the
President.* corporation as a person, but the right against
self-incrimination does not apply to a
corporation. Why? Because the corporation
November 17, 2017 (1st Half) has no mouth and the freedom against self-
(Therese Candolita) incrimination is freedom against testimonial
evidence. The one who can invoke it is
We are still in Section 2. The section which somebody who can express himself. The
gives us the definition of a Corporation. corporation cannot express itself except
through an agent. It needs to go through
Section 2. Corporation defined. A the formality of passing a resolution.
corporation is an artificial being
created by operation of law, Now, suppose you are paralyzed, such as
having the right of succession when di ka katingog, di ka kasulat, pero
and the powers, attributes and gasiga pa ng mata nimo. Di ka kasulti kay
properties expressly authorized paralyzed ka, makapirma ba na sya ug
by law or incident to its existence. contract? Di na sya kapirma ug contract pero
makuha nimo iyang thumbmark. Maka-
communicate sya kay naa sya’y physical
ATTRIBUTES OF A CORPORATION:
existence, ang corporation, wala man. The
only way to go is through the formality of a
A. It is an artificial being
resolution –that’s why resolutions are
B. Its legal personality is
important.
separate and distinct from the
personality of its stockholders.
A corporation as an artificial being also
C. It is created by operation of
means that it cannot accept new agents if
law.
it has no agents anymore. They cannot act.
D. It has the right of succession.
– SITUATION: Suppose here is a
E. It has only the powers,
corporation with 5 incorporators, they are all
attributes, and properties
classmates and they are the same
expressly authorized by law
stockholders who are also in the Board of
or incident to its existence.
Directors. 5 sila
incorporators/stockholders/sa Board kay sila
ra nag-piliay sa ilang kaugalion. They love
A. A CORPORATION IS AN
each other, no complications. Unya karon
ARTIFICIAL BEING
pagbakasyon nila sabay 5, ni-crash ilang
gisakyan, namatay ang 3. What happens?
It has no physical existence. But it
The corporation is paralyzed. 2 na lang man
is a being nonetheless. How many
ang nahibilin. You cannot be elected a
here have taken up metaphysics? To
Director unless you are the owner of at least
exist you must be something, either a
1 share, meaning you are a stockholder of
stone, an animal, a tree. You have to
the corporation, so the Board of Director has
be something. But here, we postulate
no quorum, it cannot act, it cannot pass a
an existence that is a creature of the
resolution. This is why the corporation has
state by mere consent of the law. It
to be dissolved. When the formalities can
does not occupy space, does not

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

no longer be done than it could end up law will disregard


that the corporation will have to be the corporation
dissolved. It’s not like a person, amang na as an association
sya and paralyzed, naa pa man sya. of persons.”
Makalihok gihapon, thumbmark gihapon.
Maski comatose pa, maka-transact pa. That
is when he needs an agent, you go to court 2 WAYS OF PIERCING THE VEIL:
to be appointed as guardian of his properties
and another appointment to be the guardian 1. The corporation is used defeat
of his person. public convenience, justify wrong,
protect fraud or perpetrate crime
B. THE CORPORATION HAS A
SEPARATE PERSONALITY FROM You have the corporation and you
THE PERSONALITY OF ITS have a dominant, overwhelming,
CONSTITUTENTS, WHETHER controlling stockholder and he uses
MEMBERS OR ITS the corporation either to defeat public
STOCKHOLDERS OR ITS OFFICES convenience, justify wrong, protect
fraud or perpetrate crime. That is why
That is the DOCTRINE OF LEGAL the law will disregard the separate
ENTITY. legal entity of the corporation and the
veil is pierced. The dominant
GENERAL RULE: Mainly, stockholder using the corporation as
the corporation has a a conduit and he will be the only
personality separate and person considered by the court.
distinct from the personality
of its stockholders or officers 2. The subsidiary is used by the
or other constituents. mother corporation

EXC: Piercing the veil of You have 2 corporations, the mother


corporate entity and the subsidiary, and it ends up
that the subsidiary is just used by the
PIERCING THE VEIL OF mother corporation. In fact the funds
CORPORATE ENTITY of the subsidiary are not placed in a
separate bank account but co-
Laid down by the US mingled with the mother
Supreme Court in the case corporation. For all practical
of United States vs purposes, the officers of the mother
Milwaukee Refrigerator corporation considers the officers of
Transit Company; 142 the subsidiary corporation as a
Federal Reports 247 (1905) division of the mother corporation
as follows: and in so doing they avoid payment
of tax, they disregard their
“When the notion obligations under contract, or they
of legal entity is perpetrate crime. What does the
used to defeat court do? The court cancels out the
public separate and distinct personality
convenience, of the subsidiary and only the
justify wrong, mother corporation is considered.
protect fraud or
defend crime, the

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

So those are the 2 ways by PCMC; GR 224099; June 21,


which Piercing the Veil is 2017)
exercised. What are the cases
that you have to remember? Question: Is the corporation that is
disregarded ceases to be a corporation?
1. Mother corporation and Does it mean that the said corp is
subsidiary corporation - cancelled as to its registration?
PNB vs Ritratto; 362 scra
216 (2002) The application of piercing the veil of
2. Then a corporation as a corporate entity in a particular case does
mere conduit of a not deny the corporation of legal
dominant overwhelming personality for any and all purposes, but
stockholder – Francisco only for the particular transaction or
vs Mejia; 326 scra 738 instance of which the doctrine is invoked.
(2001) It is a reference to a particular
transaction.
The SC says in the case of a
person dominating a
corporation, what are the General Rule: Doctrine of Corporate
elements that must be present to Entity (meaning separate legal
justify piercing the corporate personality)
veil on the ground that the
corporation is a mere alter ego: Exception: Piercing the Veil of Corporate
Entity
1. Control, not mere majority
or complete stock control,
but complete domination C. A CORPORATION IS CREATED BY
not only of finances but of OPERATION OF LAW
policy and business practice
in respect to the transaction It is not created by law. Historically, a
attacked so that the corporation was created by law, in the
corporate entity as to this days where the King had all the great
transaction had at the time powers, executive, legislative and
no separate mind, will or judicial. All the King had to do was
existence of its own. issue a decree that the following
2. Such control must have been group of people are now to be
used by the defendant to accepted as a corporation of limited
commit fraud or wrong, to liability, and shall be called, let’s say
perpetuate the violation of a “East India Company Ltd.” So all
statutory or other positive those who put their money there, they
legal breach of duty, or a are the stakeholders. Now that is
dishonest and unjust act in prohibited by the Constitution.
contravention of plaintiff’s
legal right; and Section 16, Article XII on
3. The aforesaid control and National Economy and
breach of duty must have Patrimony which stated
approximately caused the that “Congress shall not,
injury or unjust loss except by general law,
complained of. (Carillo vs provide for the
formation, organization,

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

or regulation of private Because its work is governmental, to


corporations. respond to victims of human tragedy, either
Government-owned and natural or man-made calamities. But when
controlled corporations Red Cross responds to victims of man-made
may be created or tragedy such as terrorism, kidnapping of
established by special hostages, that is their private aspect. The
charters in the interest of court says neither public nor private but it has
common good and aspects of both.
subject to the test of
economic viability.” Begin to distinguish by law or by operation of
law. All you have to do is comply with the
CHARTER TEST requirements of the general enabling law.
Please take note that there is not just 1
By law means there is a charter. Baluyot vs general enabling law. Not just the
Holganza; 324 scra 248 (2000) where the Corporation Code. The Labor Code is
SC said also a general enabling law. Because a
“The test to determine whether a group of persons can so constitute
corporation is government-owned themselves and apply to be issued a cert of
and controlled or private in nature is registration to be a union. And that union has
simple: Is it created by its own a separate and distinct personality from its
charter for the exercise of a public members. That is also creation of a juridical
function or by incorporation under person by operation of law.
the General Corporation Law?
Those with special charters are In the Cooperative’s Code, when a group of
government corporations subject persons at least 15, constitute themselves
to its provisions, and its employees into a cooperative they are issued a
are under the jurisdiction of the certificate of registration by the Cooperative
Civil Service Commission and Development Authority then you have
are compulsory members of the another juridical personality. There are many
GSIS.” ways to have a separate juridical personality,
not just one. But for us, that is the
Corporation Code. Whether it be by law or by
The charter test is applied prospectively, operation of law, what is common with the
it does not apply retrospectively. So it does two is government intervention. The
not apply to the Philippine Society for the consent in corporations created by law is
Prevention of Cruelty to Animals, because DIRECT. The consent of government in
it was issued a charter by law on January 19, private corporations is INDIRECT. You
1905. comply with the requirements than you are
granted.
How does the coporation act?
If you are not granted but you think you have
By passing its own laws equivalently through fully complied with the law, what is your
a resolution. remedy? Mandamus. Because for SEC to
grant a certificate of registration is not
In Liban et al vs Gordon; January 18, 2011 discretionary, it is purely ministerial.
en banc resolution by J. de Castro. In
2010 the decision was penned by J. Abad.
The original decision as its stands is that the November 17, 2017 (2nd Half)
Red Cross is neither private nor public, it has (Marry Suan)
the characteristics of both. Why public?

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

So as we said, whether it is a corporation


created by law or created by operation of law,
the common denominator of the two is the So a DE FACTO CORP. has a certificate of
consent of the state. That is the THEORY incorporation but it is fatally defective. It
OF CONCESSION, to the point of saying that is really not a corporation.
the corporation is really a corporation of the
state. Now what is the effect? It lacks consent of
the state and yet the law says that nobody
GENERAL RULE: Without the consent of can attack this collaterally. You must attack it
the state, there is no corporation. directly. In other words, it stands as a
corporation until it is impugned. You
EXC: cannot attack it indirectly.

A. De facto corps. What is an example of a de facto


B. Corp. by estoppel corporation? An example is Sawadjaan vs.
C. Corp. by prescription CA 459 SCRA 516 (2005). This corporation
is in Loyola Heights Villa. This is
homeowners association versus the
corporation. That the party employee is
Sawadjaan. What was the defect of that
Is that true? Many commentators say that corporation? It functioned for thirty years but
there are exceptions to the rule. What are it did not file any by-laws with the SEC. It just
some of the exceptions? presumed it had all the laws but it did not
have any by-laws. It just followed the
Corporation Code. So there’s a big question
A. DE FACTO CORPORATION mark as to the validity of all its acts. And yet,
Sawadjaan acknowledge it as a true
Section 20. De facto corporations. – The corporation and became a member of it when
due incorporation of any corporation he bought a piece of land there. He cannot
claiming in good faith to be a corporation just say, you have a fatal defect so I will
under this Code, and its right to exercise stop paying my subdivision dues. You
corporate powers, shall not be inquired must bring an independent suit to attack
into collaterally in any private suit to the invalid corporation.
which such corporation may be a party.
Such inquiry may be made by the How do you do that? You must bring a quo
Solicitor General in a quo warranto warranto petition. Who brings the quo
proceeding. (n) warranto? It’s the solicitor general. This is
a permissive quo warranto. You must xxx
4 ELEMENTS OF A DE FACTO the solicitor general to bring the action. You
CORPORATION: must prove your cause of action and its
merits to the solicitor general. Once you have
1. There is a general enabling act – convinced him, then you must put up a bond
the Corporation Code. which is at the disposal of the solicitor
2. There is a xxx attempt to general if he loses the case, that is to protect
incorporate under such law. him against damages that may be awarded.
3. There is an assumption of And then, he files the quo warranto
corporate power. proceeding.
4. Despite the fatal defect, a serious
defect, it is issued a certificate of There’s another way to attack it. You
incorporation. convince the SEC and the SEC brings a

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cancellation proceeding under Section 6 of involved in the simulated corporate


P.D. 902-8, the expanded powers of the existence.
SEC.
One who assumes an obligation to an
So de facto corporation, in effect, there is ostensible corporation as such cannot resist
no state consent and yet it is protected. performance thereof on the ground that there
You cannot attack it indirectly. Because of was in fact no corporation. So if you deal with
that principle in labor, unions cannot also be this ostensive corporation and it is not really
attacked indirectly. You have to bring the a corporation, you cannot later on say that
action to cancel union registration. That is you are not obligated because you’re not a
now the uniform xxx with respect to juridical corporation. Your obligation is valid.
persons.
Again, that is an exception to the
B. CORPORATION BY ESTOPPEL CONCESSION THEORY – that the
corporation exists only by the concession of
the state.
Section 21. Corporation by estoppel. – All
persons who assume to act as a C. CORPORATION BY
corporation knowing it to be without PRESCRIPTION
authority to do so shall be liable as
general partners for all debts, liabilities There is only one corporation by prescription
and damages incurred or arising as a and that is pronounced by the Supreme
result thereof: Provided, however, That Court in Barlin vs. Ramirez 7 Phil. 41. This
when any such ostensible corporation is is in the 1990s.
sued on any transaction entered by it as
a corporation or on any tort committed by Barlin was the archbishop of Manila.
it as such, it shall not be allowed to use Ramirez was the one who questioned why
as a defense its lack of corporate the archbishop is allowed to organize and
personality. coordinate the activities of the police in the
city of Manila in order to celebrate the first
One who assumes an obligation to international Eucharistic congress. (chika)
an ostensible corporation as such,
cannot resist performance thereof on the So why was public money used to
ground that there was in fact no commemorate a religious event? That is the
corporation. (n) whole issue. It’s sectarian and then you put
up a stand. It is a public corporation using
This one clearly does not have a consent government funds to glorify a religious event.
of the state. They just pretend to be a That is when the SC says, it is no longer
corporation but they are not and they religious. Suwayig saway ang mga tao na dili
know they are not. ta magcelebrate ug pasko sa gobyerno. It is
religious from the beginning but by long
What happens? They cannot deny that tradition and practice, it has become
they are a corporation. They are a culture. It is part of the culture. And it has
corporation because they are estopped even antedated the republic.
from denying that they are not, even if in
reality they are not. They have the liabilities So according to the SC, the Roman Catholic
of general partners. That means they church is a CORPORATION BY
absorb the liability of the corporation – PRESCRIPTION. It is in reality part and
every single one of these persons that are parcel of the Philippine society. Where a
body of men have been for a long time in the

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exercise of corporate powers, a presumption subway will cost something like P35 billion.
arises of an ancient character that a charter (chika about drilling holes for subway and
was granted to their predecessors making issuing 60 year bonds to fund it)
the exercise of such powers by them lawful
and right. So this is the Roman Catholic What is the legal reality that you negate?
church. When you are a corporation, the longest you
exist according to your term is 50 years. And
(chika about the Jesuit’s corporate name) yet you issue 60 year bonds. The last 10
years, kinsay muservice ana? You review
XXX and amend your Articles for another 50
Continuation from last meeting kay naputol… years. That is the power of succession.

D. POWER OF SUCCESSION But the Philippine SC says, a corporation


cannot enter into usufruct for more than 50
The fourth attribute is that the corporation years because its term is only 50 years
has the power of succession. Disabuse maximum. Pagkakitid sa utak. The
yourself of the notion that succession which corporation has power of succession!
means that which it put out under the xxx.
No, that’s not the succession. In the States, they are issuing 100-year
bonds. (chika about Branson and Virgin
Succession here means continuity. You Airlines, rocket ships) Giilugan ng iyang
have a corporation. You have the persons bonds! So it is deemed viable by many
that originally formed it. Even after the business savants.
persons who originally formed it died and
then replaced, it is still the same corporation. So why is our SC xxx? They just xxx service
Let’s say that the first 50 years is expired and to power of succession.
then it renews its term for another 50 years,
that corporation that is in existence in the E. POWERS, ATTRIBUTES AND
next 50 years is still the same corporation. PROPERTIES ARE EXPRESSLY
There is continuity. AUTHORIZED BY LAW OR INCIDENT TO
ITS EXISTENCE
But the corporation cannot write a will. Only
a natural person can write a will. 1. Express
2. Implied
So that is to the advantage of the corporation 3. Inherent
– that the corporation can be perpetual by
just renewing its term for an indefinite
number of 50-year terms. It is capable of 1. Express – Those that you can read
perpetual existence by the power of from its Articles, those that are
succession. provided by the Corporation Code,
those that are provided by other
And many times that is necessary for special laws. Those are the express
projects that have very long gestation powers.
periods. Let’s say the making of Suez Canal.
That was more than 50 years. (chika about 2. Implied – are those powers that are
Suez Canal and Mr. Nobel) necessary if you have to exercise the
express power. Example, purpose
Soon, we will have that reality. Next year they clause of this corporation is to
say they will sign a contract with the organize, xxx, operate, maintain a
Japanese to build the subway in Manila. The cement factory. That is the express

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power. It cannot operate, maintain


and build a cockpit. It’s not there in Section 3. Classes of corporations. –
the purpose clause. What is there is Corporations formed or organized under
the cement factory. Now, how can this Code may be stock or non-stock
you do it? Implied powers! You can corporations. Corporations which have
hire people, enter into contract with capital stock divided into shares and are
people, employer-employee authorized to distribute to the holders of
relationship. Because if you cannot such shares dividends or allotments of
do that, how can you build your the surplus profits on the basis of the
cement factory? That is the meaning shares held are stock corporations. All
of implied powers. other corporations are non-stock
corporations. (3a)
3. Incidental powers or inherent
powers – Are the powers that define CLASSIFICATION OF CORPORATIONS:
a corporation. All corporations
necessarily have this power because 1. Stock, or
otherwise, it is no corporation. It’s like 2. Non-stock
police power or power to tax or power
of eminent domain of the state. What is the key difference between the two?
Without those powers, it is not a The proviso in the Articles of Incorporation
state. The Constitution does not grant that the corporation is allowed to
those powers. It merely recognizes distribute dividends.
those powers because those are
what defines a state. It’s not that you STOCK CORP. NON-STOCK
are a state first then you have those CORP.
powers. It is the power that makes It is allowed to It is not allowed to
you a state. distribute dividends distribute dividends
to its stockholders. to its members.
It is inherent for water to wet. If it does
not wet, it is not water. Labayon kag
ice, di ka mabasa pero mawad-an You are a non-stock corporation. You are
kag panimuot kay naigo man ka. not allowed to distribute dividends. But you
Solid man ng ice. It is not water. make profits. Your revenues that you derive
Wetness is inherent in water. The from your activity is larger than your
longer it is no longer wet, it’s ice. It is expenses so you have accumulated profits.
no longer water. Does that make you a stock corporation? No,
it does not make you a stock corporation.
So even if there is no more law, it is
still there. Because it is part and That is why the SC berated the BIR. Just
parcel of being a corporation. What because you make profits, you already tax
are those powers? The power to sue, his income. Di man! You are non-stock, non-
the power to acquire and dispose of profit. Kung masayop ang BIR niini, sa ato pa
properties (real or personal, tangible murag lisod-lisod ni sya sabton.
or intangible), the power to enter into
contracts, and so on. These are all Ngano man na si Henares nanggukod na
inherent, incidental powers. It cannot man na sya? Ang iyang gigukod, ang San
be xxx, it can only be recognized. Juan de Dios Hospital. That is non-stock
non-profit. It has paid rooms and it has free
Now we go to Section 3, classes of wards for indigents. But their revenues
corporations. exceed their expenses. So they have profit.

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The BIR wants to tax them. The lawyers of Corporators in a non-stock corporation
this corporation fought the BIR. Does that are called members. (4a)
make us stock corporation just because we
make profits? No. It is the proviso that you TAKE NOTE OF THESE TERMS:
can distribute dividends.
 Corporators - Are those who
You are taking up taxation now. First compose a corporation, whether
semester, you took income tax. Now you are as stockholders or as members.
taking up business tax. For income to be
taxable must be realized income. Unrealized  Incorporators – Are those
income is not taxable. So if you are given stockholders or members
stock dividends, there is no realization of mentioned in the articles of
income. There is no tax. When are you taxed incorporation as originally forming
on that dividend? Only when you dispose of and composing the corporation
that dividend. Then that’s capital gains tax. and who are signatories thereof.

Now, stock and non-stock. Later on, we will  Stockholders or Shareholders –


come to discussion on non-stock Corporators in a stock corporation.
corporations. There are only the purposes
listed in Section 88 that allow you to be a  Members – Corporators in a non-
non-stock corporation. Because if the stock corporation.
purpose is other than those listed in Section
88, you are a stock corporation. The significance of this terminology must be
understood together with what is said in
Section 4. Corporations created by Section 15 of the Corporation Code.
special laws or charters. –Corporations
created by special laws or charters shall Section 15. Forms of Articles of
be governed primarily by the provisions Incorporation. – Unless otherwise
of the special law or charter creating them prescribed by special law, articles of
or applicable to them, supplemented by incorporation of all domestic
the provisions of this Code, insofar as corporations shall comply substantially
they are applicable. (n) with the following form:
xxx
We have taken this up – created by law,
created by operation by law. So they give you a form here in the Articles.
The standard is not literal compliance. It is
So we are now beginning formation of a just substantial compliance. More or less,
corporation. you comply with the language here. But there
are several terminologies that must be used
Section 5. Corporators and incorporators, and it cannot be changed.
stockholders and members. –
Corporators are those who compose a What are those terminologies? The first one
corporation, whether as stockholders or is Section 5.
as members. Incorporators are those
stockholders or members mentioned in 1. Corporators
the articles of incorporation as originally 2. Incorporators
forming and composing the corporation 3. Stockholders
and who are signatories thereof. 4. Members
Corporators in a stock corporation
are called stockholders or shareholders.

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Based on the Lectures of Fr. Agustin Nazareno

These terminologies cannot be corporation cannot be sold. It is not


substituted. A corporation has constituents, commercially viable.
persons who make up the organization.
TAKE NOTE:
SEVERAL TERMINOLOGIES YOU
OUGHT TO REMEMBER: PRIMARY SECONDARY
FRANCHISE FRANCHISE
 Sole proprietorship – Has only
one constituent. Primary franchise to Secondary
 Partnership – Has the partners as exist as a franchise, with the
constituents. corporation cannot consent of
be sold. It is not government, can be
In a Corporation: commercially sold for a
viable. consideration.
 Shareholders or Stockholders –
If it is a stock and profit corp.
 Members – If it is a NPSP.
 Corporators – Members ans
stockholders. Now, where is the seat of right to exist as a
 Incorporator – If you are a corporation? where is that located? It is
corporator that signs the Articles of located among the incorporators. So who
Incorporation. can bring a petition for mandamus to compel
the SEC to issue a certificate of registration?
* Not all corporators are stockholders Even if you have complied with all the
but all stockholders are corporators. All requirements but the SEC has not issued you
the corporators are corporators but not a certificate of registration, you file a
all corporators sign and so, they are not mandamus. Who can file that? The one who
all incorporators. has the right to be corporation. The seat
where the right is vested, those are the
incorporators.

Articles of Incorporation of XYZ Corporation.


Why is it important? It is important to “Know all men by these presents, we the
determine where the seat is of the primary undersigned incorporators have this day
franchise. What is primary franchise, as constituted and organized ourselves into a
opposed to secondary franchise? stock and profit corporation under the
Secondary franchise is awarded by a following terms and conditions, to wit: (a) the
government agency to a corporation, like name of the corporation shall be XYZ
public utility, the right to ply the roads Corporation, (b) the term of the corporation
between Davao and Tagum. That is your is 50 years from and after the issuance of the
franchise. certificate of incorporation.”

How about the right and privilege to exist as Sugod na. We are here now, formation of a
a corporation? That is a primary franchise. corporation. That’s from Section 5 up to
What is the difference between primary Section 15. Ayaw lang mog basa ining
franchise and secondary franchise? sample ini. Read as many Articles of
Secondary franchise, with the consent of Incorporation as you can hold of. Naa na
government, can be sold for a consideration. tanan sa internet. (chika about articles of
But the primary franchise to exist as a incorporation of BDO and all its corporate
name in the articles)

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Before we move on to our topic, I’m gonna


November 22, 2017 give you a copy of a bill now pending in
(Ria Lumapas) Congress. It’s HB 45011 authored by


1
Commentary: Defining the future of public utilities
limitations on foreign management;
By Hannah Viola (philstar.com) | Updated October 6, 2017 - 11:05am  non-exclusivity;
 maximum limit of fifty (50) years;
(First published on October 5, 6:08 p.m.)
 amendment, alteration, or repeal by Congress when the common good
so requires;
The United Nations Conference on Trade and Development published  temporary take-over and operation of public utilities during times of
a World Investment Report on June 2017 showing that out of 104 national emergency when public interest so requires;
economies, including the Philippines, transportation ranked as the industry  in the interest of national welfare or defense, establishment and
most affected by restrictions on foreign direct investment. operation of vital industries and transfer to public ownership utilities
and other private enterprises to be operated by the Government upon
The five most-affected industries are transportation, media, electricity, payment of just compensation;
telecommunications and mining, oil and gas.  supervision or regulation of the enjoyment or utilization of franchises
or permits for the operation of public utilities during election period.
Legal limbo over our economic future
New solutions from the House and Senate
Of these five industries, a majority (transportation, electricity and
telecommunications) are considered “public utilities” in the Philippines. On Sept. 8, 2017, the House of Representatives approved on third
This is because the term “public utilities” is interpreted with reference reading House Bill 5828 which seeks to provide a clear definition of a
to “public service” as provided in Commonwealth Act No. 146, more public utility. Meanwhile, five bills have been filed in the Senate which
commonly known as the “Public Service Act.” also seek to amend the Public Service Act.

Under this law, a public service is said to include: These bills are of the same view that a public utility should be clearly
defined as a “person that operates, manages, and controls the
distribution and transmission of electricity, and water pipeline
[E]very person that now or hereafter may own, operate, manage, or distribution system or sewerage pipeline system for public purpose.”
control in the Philippines, for hire or compensation, with general or This list can only be changed by a subsequent law, subject to some
limited clientele, whether permanent, occasional or accidental, and criteria.
done for general business purposes, any common carrier, railroad,
street railway, traction railway, sub-way motor vehicle, either for freight
or passenger, or both with or without fixed route and whether may be Investments and job creation
its classification, freight or carrier service of any class, express service,
steamboat or steamship line, pontines, ferries, and water craft, Data from the Labor Force Survey show that while unemployment and
engaged in the transportation of passengers or freight or both, underemployment are generally improving, it still remains high.
shipyard, marine railways, marine repair shop, [warehouse] wharf or Unemployment in July 2017 inched higher to 5.6 percent, compared to
dock, ice plant, ice-refrigeration plant, canal, irrigation system, gas, 5.4 percent in the previous year. By sector, services still accounted for
electric light, heat and power water supply and power, petroleum, over half of the labor force.
sewerage system, wire or wireless communications system, wire or
wireless broadcasting stations and other similar public services.
Thus, non-government groups such as CitizenWatch Philippines and
the Foundation for Economic Freedom have expressed their support
Despite some legal antecedents (e.g. NAPOCOR vs. Court of Appeals for the legislative reform measure. At CitizenWatch, we stress that the
in 1997 and JG Summit Holdings, Inc. vs. Court of Appeals in 2003), ambiguous interpretation and application of the law have prevented the
the definition of “public utility” is still wanting in clarity. The definition utilities sector from seizing its potential to attract investments, create
itself is a source of confusion in the interpretation and application of high-quality jobs, and consequently drive economic growth.
the law—with serious economic consequences.

By way of example, several industries, notably the telecommunications


...the definition of “public utility” is still wanting in clarity. The definition and airline industries, were opened to more competition during the
itself is a source of confusion in the interpretation and application of administration of former President Fidel Ramos. The economic growth
the law—with serious economic consequences. and job creation resulting from the removal of major barriers to
competition and investment demonstrated the economic potential that
the monopolies had long suppressed.

These consequences are the result of our constitutional prohibitions on The economic growth and job creation resulting from the removal of
foreign participation in “public utilities” (undefined). Under Section 11, major barriers to competition and investment demonstrated the
Article XII of the 1987 Constitution, “No franchise, certificate, or any economic potential that the monopolies had long suppressed.
other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens.”
Taking the UNCTAD Report and the proposed amendments to the
Public Service Act into account, only the distribution and transmission
Aside from the limitations on foreign ownership, public utilities are also in the electricity industry, as opposed to the whole of three industries
subject to other constitutional restrictions such as: (transportation, electricity and telecommunications), will fall under the

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Congressman Arthur C. Yap. Does he ring a utility. Bus transportation, rail, no longer
bell? He was the former Agriculture public utility. You have the super majority?
Department Secretary of Gloria Arroyo. He Lusot ni. Digong wants all these people to
replaced this guy. (Fr. can’t seem to invest, unsaon nya pagpa-invest na 40% ra
remember the name) Came from the family man ang foreign? Wa na ron! Tungod ani,
of the owners of La Panday. He’s very ang mga pikot makasulod na.
famous because he cannot come home from Telecommunications, they are no longer
the US. He was involved in the fertilizer covered by the 60-40. Kaingon kag buang2x
scam. But somebody up there in the na si digong, kaingon kag unggoy na si
stratosphere was machinating, and he was digong? Tanawa ni o! Lusot ni sa majority.
just the signatory of the checks. He’s indicted Basaha ninyo ug mag-agik-ik mo ug katawa
but he is a person of interest that’s why he is o diba maghilak mo. As far as I’m concerned
not coming back. I’m beginning to forget all nationalism laws are stupid!
names now. The same family that owns
pancake house. And then Arthur Yap took Tanawa the city of Tokyo. I told you it has
over. He was the student of Gloria Arroyo. He 125,000 cell sites. The entire Philippines has
ran for governor when GMA ended her term 25,000 cell sites that’s why you understand
and now he is congressman. ngano hina kayo atong telecommunication.
Why don’t they put up more cell sites?
This house bill proposes to redefine the Because the return of investment of adding
meaning of the word public utility. This is more cell sites will not be sufficient to justify
the pertinent provision: it business-wise. Kay unli man tanan. Now,
there’s another issue, most of us when we
the term public utility shall mean electric use the internet, when we go surfing, we go
power transmission, so national grid is all the way to the States. And you need trunk
covered; electric power distribution so Davao lines for that, undersea cable, because the
Light and Meralco; water pipeline internet is the most wired system of
distribution, so Maynilad, Manila Water is communication, only the last line is not wired:
included; and sewerage pipeline system your smartphone to the cell site is not wired.
unless otherwise subsequently provided by But everything else is wired, in between cell
law any existing law to the contrary sites, even the cloud that they say, there are
notwithstanding, no other business or huge computer storage machines. Close to a
service shall be deemed a public utility hundred gud ng Google, Facebook. Hain
unless otherwise subsequently provided by man nila gibutang ilang storage? Tua si
law upon recommendation by the National kinatugnawang country kay init man kayo na.
Economic Development Authority. So bisag ang atong housemates adto sa
America kung magsurf sa net, FB man. Ang
So what happens? By a stroke of pen, hapon di man kabalo mag English, di tua
telecommunications is no longer public lang sila nagutyok2x sa Japan. Naa pud sila

definition of a “public utility” and will thus be subjected to the Lawyer Hannah Viola is a convenor and legal counsel
constitutional limitations. of CitizenWatch Philippines and a fellow of
the Stratbase ADR Institute, a partner of Philstar.com.

The opportunity to accelerate reforms through the amendments to the


Public Service Act will help create more and better jobs for the 2.37 Business ( Article MRec ), pagematch: 1, sectionmatch: 1
million Filipinos who are currently unemployed. By considering the
operation of public utilities as one of the priorities for investment Click here to join the discussion
liberalization measures, the government clearly defines its plan to cater
to industry players and potential investors, hopefully towards a more
competitive and vibrant public service sector.

___

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kaugalingong FB sa Japan pero dira lang sila public transport. That’s why the population of
kutob sa Japan. Kita ron, pirti ng grabeha kay New York has stabilized for more than 100
ultimo maid or guard ga-FB. years. Wa na nagtubo. It’s just not even 8
million people. Nganu man? Because there’s
Kadungog mo anang ARPU, average so much transport that you can live in the
revenue per user. US, it’s between 30-50 outskirts. Nya muadto ka, buhata ng riles diri,
dollars a month. Diri sa Pilipinas, ang ARPU, bagsak ng presyo sa yuta sa Davao.
may gani makaabot 100 pesos. Kay register Magpuyo ka bisan Tagum ka pa o Digos,
ka man lang dayun ug unli, 3 days unli makaabot ka dinhi in less than 30 mins, wa
surfing ug muadto pa gyud ka ug laing man trapik. Abot ka diri trabaho ka, pauli ka
number ma extend pa gyud ug one day. Di sa inyo, maayo pa ang hangin na gihanggab
na nimo buhaton masuko man nimo ang mga nimo. Gibuhat pa ng Digong samtang mayor
tao human mangutana dayun, nganung sya, 30 years gud sya mayor diri, nothing to
hinay man? show for!  Ug kinsa tung mga advisers sa
There will be a 3rd or 4th that will come in, sa kilid, ang Cebu dugay na kayo sige float ug
sinugdanan gwapo kayo. Wa pa may sud. bonds, si Osmena na naglakaw2x nagkupot
Abtan na ug unom ka buwan o isa ka tuig, wa sa iyang tae, nag colonoscopy naman na
na sad. Kabuang na sad. sya. Naa naman nay bag. Sya mismo nag
ingon “ako ray mayor gadala-dalag tae maski
You know how much 25,000 cell sites cost? asa.” Mao nay tao nag-float ug bonds. O
Asset base sa PLDT, which is 15 billion US karon, way approval sa Congress, buhat sila
dollars, Globe is about 8-9 dollars, i-combine ug bridge, ikatulong bridge. Ako dili ko
na nimong duha, 25,000 cell sites. Pila man against ana. Akong inahan sultian ta mo,
diay ng naa sa Tokyo? Pirting mahala diay 1960s pa, palit sya ug yuta dira sa Mactan.
ana! More than 100 billion dollars diay na! Piso ra ang yuta ikaw pa magpatitulo. Nya
Mangutana ko, naa bay foreign investor wa man nya gibaligya hantud sa ni-70 years
muingon na bundakan nako ni ug 100 billion nalang. Tagpila naman ang yuta ron? 6-7k
kay mabawi man nako na. pero diri, mabawi per square meter, piso, ngadto sa 6-7
na nimo ug unli? Ay sus. Maabtan kag thousand, walay investment manager
syam2x, tubuan kag side burns do! Di pa makalupig ana.
gihapon na. Mao na istoryang mingaw.
Karon sige ra gihapon ta ug istorya, buhat ta
Let it not be said that I did not tell you about ug bridge didto sa Samal, sige lang gihapon
this. Sulod na na, mga Intsik, Hapon. I’m all ug istorya. Ang importante ana ang kwarta
for building infrastructure, sige buhata na. man. Float kag bonds, baligya kag bonds.
You know at the turn of the century, katung Cebu, baligya man ug bonds, di gani paliton
1800-1900, that’s when New York built its sa Cebu adto sila sa Hongkong, Singapore.
subway. Katung panahon na gipusil si Rizal Toll hantud mabayran. Utility, gwapo ni.
sa Luneta, nagkalot sila sa New York Gawas ani ron, wa nay utility.
pagbuhat sa subway nila. Kita diri, gipusil si
Rizal. Pila ka kompanya nakadaog sa Now, naa pa ni giingon diri:
bidding? Walay nadaog kay walay bidding.
Kutob sa gusto mukalot, hala kalot mo. Unsa Any existing law to the contrary
may imo? Hoboken to Manhattan buhat ko notwithstanding the following shall not be
subway, 32 sila nagkalot, nag away2x na considered public utility operation: electric
gud sila sa ilalom. Unsay nahitabo? Nahapay power generation, electric power supply in
sila tanan except for 3 unya gobyerno mu- sec. 29 of RA 9136, crude oil and petroleum
take over kay most of them were bonds production, transportation in this Act and EO
guaranteed by the government. That is why 202, broadcasting, telecommunications and
New York is the most provided by way of

19
CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

value added services in RA 7835, other incorporator, your name appears and then
public services in this Act. you sign.

Not content na gi-change ang definition, How many incorporators when you form a
gibutang na gyud, explicit. This is not public corporation? Not less than 5, not more
utility. Unsa may epekto ana? Do you think than 15. But the original subscribers of
the price of the shares of stock of PLDT or shares of stock or the original members in
Globe will rise? If you think it’s going up you case of nonstock can appear in the articles
better buy now. Kay once this becomes a law but they are not incorporators if they do not
it will be too late. Naa nay naghuwat dinha. sign.

SHARES OF STOCK *NOTE: It is VERY IMPORTANT that


incorporators sign!
So first we will go to shares of stock. Humana
man ta sa name of a corporation, articles of If you are a minor, can you be an
incorporation. (FGN asks Ms. Domingo what incorporator?
topic the class was in)
You cannot be because you are not sui juris.
FGN: Okay we are still in constituents of a You are limited in your personality, in your
corporation. We are still in section 5. capacity to act. So you cannot be an
Corporators, incorporators, stockholders incorporator if you are a minor, less than 18.
and members.
Is you’re a minor, can you be a
shareholder? A subscriber?
Corporators
Yes. Ownership does not discriminate with
Shareholders respect to age. You can be an owner of
Members shares of stock even before you are born.
(Stock and
(NPSP)
Profit Corp. Your parent can donate to you while you are
still in the womb provided later on you are
born. So you can be a shareholder but you
You will try to put this in modern math, what cannot be an incorporator.
is the set? The subset, and the sub subsets.
The biggest set here, the biggest genus is You are made an incorporator, your name
corporators, which may be divided into two appears there and there are only 5 of you,
subsets: members and shareholders. You the certificate of incorporation is issued.
are a shareholder if it is a stock and profit What happens if later on you are convicted
corporation. You are a member if it is a of plunder? Niapil ka sa gobyerno human
nonstock corporation. Kaning incorporator naapil ka sa fertilizer scam. Convicted ka.
is also a shareholder or a member. But he is Nya ang imong corporation, ang isa ka
so at the inception of the corporation’s incorporator kani, convicted na sya of
existence. In other words before the plunder. Kangil-ad sad ani. So i-amend nato
corporation is formed he already intervenes, aron mawala ng ngan anang tawhana na
his name is in the articles and he signs the makauulaw. You cannot amend that part
articles of incorporation. He has liabilities of the articles because it’s historical. Ma-
with respect to what appears in the articles of amend ba nimo ang imong amahan? Ilisddan
incorporation. If there's something illegal ni nako. Wala. Di na nimo, maski adopted pa
there then he is legally responsible. He can ka, natural father nimo magpabilin na. Di na
be made to account for it. So, if you are an nimo mailisdan ang historical facts. Mao
nay bahin sa corporation na dili ma-amend.

20
CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

Mao na that’s one thing you have to keep in there is also a criminal liability if you sell
mind. Ikaw ang abogado gipabuhat sa shares without a license.
dokumento, unya you foresee that this
corporation will live for many years. Huna- Who is the most famous person in the
hunaa nimo. Pilia ng mga tiguwang na Philippines who sold shares without a license
hapit na mamatay ba. Mao na ibutang and went scot-free? El Shaddai, Brother
dinha na founders. After pirma nila, patay Velarde. He sold shares of his broadcasting
sila, wa na. Kabaw na ka sa record. Di na corporation because he needed money. But
madaot ang corporation. Pero batan-on nobody prosecuted him. All the politicians
imong gibutang, naa pa na sya dugang are afraid of him because he will only say one
panahon na magbuhat ug binuang. Nya word to his followers that means you do not
ikaw ang pasangilan. Sa kadaghang tao na vote for him. But he really sold shares.
atong pilian nganu kato man gyud sya?
(Talks about Charles Manson, the serial killer Now if you sell shares to the public, you will
as example). need a promoter2 and an underwriter3.
What is the function of a promoter? In what
May gani ang dagan way mutan-aw. Naa way does he differ from an underwriter?
gani gamayng ligas tanang tao mahimong
expert sa articles of incorporation. So, you A promoter brings together those who issue
have to reckon with that. securities, whether shares of stock, bonds,
derivatives, futures contracts and then there
Now, aside from these corporators, are those who are investors who buy these
incorporators, stockholders, members, we instruments. Who are these? They are
said that we have these two characters that retirement funds, insurance companies,
play a role in the formation of a corporation if mutual funds, hedge funds – he brings them
your corporation sells shares to the public. together. He rents a place in Wall Street. He
The SEC has come out with a plan when you sends out invitations to the ones he knows
sell shares to the public. If you sell shares to are investors. And he prepares a buffet.
more than 19 people then it’s like banking. If Mangadto na sila and there is a presentation.
you accept deposits of more than 19 people So let’s say you are one of these
then you are already engaged in banking. entrepreneurs, you have a new business that
Wa gani kay lisensya priso ka because there you are proposing. You are proposing this
is a criminal liability for engaging in banking new toilet that can be maintained without
without a license. So if you sell shares to water. There was a contest sponsored by Bill
more than 19 people it means you are Gates to solve the problem in Africa. Apil
violating the Securities Regulation Code and tanan, MIT, Harvard. Kinsay nakadaog? Wa
gyud mo. Toilets are the last thing for you.

2 3
A promoter is an individual or organization that An underwriter is a company or other entity that
helps raise money for some type administers the public issuance and distribution
of investment activity. Promoters may raise of securities from a corporation or other issuing
money for a company by offering investment body. An underwriter works closely with the
vehicles other than traditional stocks and bonds, issuing body to determine the offering price of the
such as limited partnerships and direct securities, buys them from the issuer, and sells
investment activities. Often, promoters are paid them to investors via the underwriter's distribution
in company stock or free entrance into network. Underwriters generally
the investing activity though a more standard fee receive underwriting fees from their issuing
for service structure may also be used to dictate clients, but they also can earn profits when selling
the level of compensation. the underwritten shares to investors.

21
CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

Toilets are just something, a matter of fact Corporators in a non-stock corporation


that you’d rather not include in your are called members. (4a)
conversations because they are toilets. Dako
kayo ng problema sa India. Sa Cannes, a TERMS TO REMEMBER:
foreign movie about toilets. A woman
suddenly finds out on the night that she’s  Corporators – Are those who
married that there’s no toilet in the house. compose a corporation, whether
Half of the houses in India have no toilets. as stockholders or as members.
You bring a bottle of water, you walk down  Incorporators – Are those
the railroad and you do it somewhere there. stockholders or members
Tutal ang makakita nimo muagi man lang. mentioned in the articles of
And the untouchables in India are those incorporation as originally forming
tribes exclusively whose jobs are to clean and composing the corporation
toilets. Father whispers: naa bay Indian diri? and who are signatories thereof.
Wa ma nay silay quota sa gobyerno. Mao na  Stockholders or Shareholders –
nanganhi na sila kay nakakwarta na sila pero Corporators in a stock corporation.
di sila kasulod sa mga medical schools didto  Members – Corporators in a non-
kay wa na sila quota. They are discriminated stock corporation.
against by traditional practice. Mga lagum
gyud sila. There is a gradation of darkness
even among the dark! (Fr. talks about mga Corporators are the basic constituents of a
kabaw na) corporation. You are a shareholder or
stockholder of a corporation if it is stock
November 24, 2017 (1st Half) and profit corporation. So you are a
(Florienne Melendrez) corporator. But not all corporator are
shareholder or stockholder because if it is
FORMATION OF A CORPORATION non-stock, the corporator is a member, not a
stockholder.
A corporation whether stock or non-stock Now, if in the by-laws your name appears
has constituents. And it is these constituents and you sign the by-laws, you are a
that make up the corporation. As it is placed corporator but you are also more importantly
in section 5, the constituents are divided into an incorporator.
subsets from corporators.
CORPORATOR v. INCORPORATOR
 Section 5. Corporators and
incorporators, stockholders and CORPORATOR INCORPORATOR
members. – Corporators are
those who compose a -Are those who -Are those
corporation, whether as compose a stockholders or
stockholders or as members. corporation, members
Incorporators are those whether as mentioned in the
stockholders or members stockholders or as articles of
mentioned in the articles of members. incorporation as
incorporation as originally originally forming
forming and composing the and composing the
corporation and who are corporation and who
signatories thereof. are signatories
thereof.
Corporators in a stock corporation are
called stockholders or shareholders.

22
CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

-Has certain obligated to maintain a website. Or the


liabilities attached to Philippine Stocks Exchange makes available
the articles of a list of 100 biggest stockholders of a
incorporation which corporation.
is a public document
because it (Father tells about the list of the biggest
eventually ends up stockholders of Ayala Corporation as can be
with the Securities seen in the internet. MerMac Corp has been
and Exchange the biggest stockholder since 2005 with 58%
Commission (SEC). of the total outstanding capital stocks. Shows
It is possible that the obituary of Mercedes Ayala McMicking to
your are telling an class. Story about the Ayala family. Father
untruth there. You asks to look up the biggest 100 stockholders
can say that this of Ayala)
number of shares is
already paid-up Now we discussed 2 persons who are not in
even when it is not. section 5 but are just as important--- the
-You may be an That is falsification promoter and underwriter. If the
ordinary corporator of public document. corporation you are forming tries to sell to the
if you are a minor. That is a notarized public shares of stock, then you cannot help
You can be a document. but employ the services of a promoter and
stockholder. underwriter.
- You cannot be an
incorporator if you Underwriter enters into contract with the
are a minor because corporation as to the sale of shares— how
you must assume much he gets as a commission. If it is a
liability and age is corporation still to be formed, then once you
one of the limitations really enter into contract with the promoter
of the capacity to act and underwriter are the incorporators.
of the person.
NOTE: When is the corporation in existence?

 Stockholders or Shareholders – After the issuance of certificate of


Corporators in a stock corporation. incorporation by the SEC. It is by consent of
the state and the agent of the state is the
 Members – Corporators in a non- SEC.
stock corporation.
So if you are selling shares of the
corporation still to be formed and you
If you are to find out who are the stockholders engage an underwriter, with whom is the
of a corporation, where do you go? underwriter in contract with?
Repository of all the stockholders(?) in the
corporation is the stock and transfer book It is in contract with the corporation but it is
of the corporation. That is where everything negotiated by the incorporators. Upon the
about the incorporators and shareholders is formation of the corporation, the corporation
recorded. The subscription, the balance, assumes the obligations, the rights that the
everything is there. incorporators agreed to.

Is it open to everybody? No. However, if you Is there a violation of contract law?


are listed in the stocks exchange, you are

23
CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

The corporation is the successor-in-interest


of the incorporators. The incorporators act in Is an agreement Underwriting is the
and for behalf of this corporation still to be which the process by
formed. underwriter which investment
promises to bankers raise
So this promoter and underwriter are make a full- investment capital from
bound to the corporation. They must fleged attempt to investors on behalf of
answer to the corporation. sell as much of a corporations and
securities governments that are
The underwriter may agree to the so-called offering, such as issuing
English type agreement. an initial public either equity or debt
offering, as it securities. The word
English type agreement- That in the can to the public. "underwriter" originally
event that the public does not take all of came from the practice
the number mentioned in the agreement of of having each risk-
shares of stock, the underwriters will take taker write his name
shares which the public will not take. So under the total amount
there is an assurance that all the shares of risk he was willing to
they will issue will be bought. accept at a specified
premium. This
(Father talks about Wallstreet having a centuries-old practice
mathematical calculations of all the shares continues, in a way,
which may be bought) as new issues are
usually brought to
Best efforts type4 market by an
Vs. underwriting syndicate,
Firm commitment type – paliton na nako in which each firm
tanan. Wala pa nagsugod gipalit na, sya na takes the
bahala retail ana. responsibility, as well
(Father did not explain further huhu) as the risk, of selling its
specific allotment
BEST EFFORT UNDERWRITING

4
Best efforts is an agreement in which Commission (SEC) to sell $20 million in an initial public
an underwriter promises to make a full-fledged attempt to sell offering. WR Hambrecht+ Co. was the agent that was going
as much of a securities offering, such as an initial public to sell the shares, using best efforts.
offering, as it can to the public. Best-effort agreements are
used mainly for securities with higher risk, such as
Aperion is a small company that qualified as an emerging-
unseasoned offerings, or in less-than-ideal market conditions.
growth company, defined in the Jumpstart Our Business
Startups Act (JOBS). For the latest fiscal year, which ended
Best Efforts vs. Firm Commitment on Sept. 30, 2015, revenue was just $34,000. In light of the
company's small size, WR Hambrecht chose a best-efforts
Underwriters and issuers can handle public offerings in offering to minimize the risk that it would not be able to sell the
different ways. In contrast to a best-efforts agreement, deal in a firm commitment underwriting.
a bought deal, also known as a firm commitment, requires the
underwriter to purchase the entire offering. The underwriter's The latest filing, in January 2016, registered 3.1 million
profit is based on how many shares or bonds it sells, and on shares, and the proposed price range was $7 to $9. The
the spread between the discounted purchase price and the company has not yet gone public, as of July 2016. The shares
sale price of the shares to the public. will be offered on an all-or-none basis.

Example

In September 2015, Aperion Biologics, Inc. filed an offering


statement on Form 1-A with the Securities and Exchange

24
CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

The promoter is one that brings the sellers shares of stock or any series thereof:
and buyers together. Sya na muadto kung Provided, That such terms and
nay mga biddings, buhat siyag conditions shall be effective upon the
presentations, nay pagkaon diha. These are filing of a certificate thereof with the
the rituals of selling shares of stock in the Securities and Exchange Commission.
market. Once you go into a certain amount,
you have to sell it in the big market so you go Shares of capital stock issued without
abroad. par value shall be deemed fully paid
and non-assessable and the holder of
So you have section 6 such shares shall not be liable to the
corporation or to its creditors in
Section 6. Classification of shares. – respect thereto: Provided; That shares
The shares of stock of stock without par value may not be issued for
corporations may be divided into a consideration less than the value of
classes or series of shares, or both, any five (P5.00) pesos per share: Provided,
of which classes or series of shares further, That the entire consideration
may have such rights, privileges or received by the corporation for its no-
restrictions as may be stated in the par value shares shall be treated as
articles of incorporation: Provided, capital and shall not be available for
That no share may be deprived of distribution as dividends.
voting rights except those classified
and issued as "preferred" or A corporation may, furthermore,
"redeemable" shares, unless otherwise classify its shares for the purpose of
provided in this Code: Provided, insuring compliance with
further, That there shall always be a constitutional or legal requirements.
class or series of shares which have Except as otherwise provided in the
complete voting rights. Any or all of the articles of incorporation and stated in
shares or series of shares may have a the certificate of stock, each share shall
par value or have no par value as may be equal in all respects to every other
be provided for in the articles of share.
incorporation: Provided, however, That
banks, trust companies, insurance Where the articles of incorporation
companies, public utilities, and provide for non-voting shares in the
building and loan associations shall cases allowed by this Code, the holders
not be permitted to issue no-par value of such shares shall nevertheless be
shares of stock. entitled to vote on the following
Preferred shares of stock issued by any matters:
corporation may be given preference in 1. Amendment of the articles of
the distribution of the assets of the incorporation;
corporation in case of liquidation and in 2. Adoption and amendment of by-laws;
the distribution of dividends, or such 3. Sale, lease, exchange, mortgage,
other preferences as may be stated in pledge or other disposition of all or
the articles of incorporation which are substantially all of the corporate
not violative of the provisions of this property;
Code: Provided, That preferred shares 4. Incurring, creating or increasing
of stock may be issued only with a bonded indebtedness;
stated par value. The board of 5. Increase or decrease of capital stock;
directors, where authorized in the 6. Merger or consolidation of the
articles of incorporation, may fix the corporation with another corporation
terms and conditions of preferred or other corporations;

25
CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

7. Investment of corporate funds in


another corporation or business in Par-value share – has a nominal value as to
accordance with this Code; and its share.
8. Dissolution of the corporation.
Except as provided in the immediately No par-value share – does not have a
preceding paragraph, the vote nominal value. It is just one unit.
necessary to approve a particular
corporate act as provided in this Code Now the rule says if you have par-value
shall be deemed to refer only to stocks shares you cannot issue or sell it initially from
with voting rights. (5a) the corporation to the subscriber at lower
than par-value. The minimum price of a par-
value share upon issuance is the par-value.
TYPES OF STOCKS: Can you sell it at higher than par-value? Yes
you can. The difference between the issued
price and the par-value is the premium of
stock. You identify that in the balance sheet.

Example:

Authorized capital at 10 million


Divided into 10 million shares at Php1.00
par-value per share
(So 1 peso is 1 share)
And you multiply it by 10 million
= authorized capital

that is the maximum number of shares that


After you give the name of the corporation,
you can issue. But take note that that is not
you give the place of its office, then you have
the maximum amount that you can issue
the purpose of the corporation, the term of
because you may sell it at higher than par-
the corporation, now you have to put the
value. What determines the issued price? It
authorized capital, subscribed capital, paid-
is your understanding of the market’s
up capital of the corporation.
capacity to buy.
Kung inilog imong share, patas-an nimo.
Capital stock is divided into shares. So you
Kung wa jud kisaw imong share then kutob r
enter into classification of shares.
aka sa par-value. Mao nang kelangan jud ug
presentation.
CLASSIFICATION OF SHARES
(Talks about Double Dragon corporation
having a good presentation)
First you have to divide shares whether they
are par-value shares or no par-value
But what is really the value of the shares?
shares.
The par-value is just the starting value, what
is called the nominal value.
PAR VALUE NO PAR VALUE
SHARES SHARES
(Talks about inflation. 100 peso 10 years ago
vs now)
Has a nominal Does not have a
value as to its nominal value. It is
You cannot issue shares at lower than par-
share. just one unit.
value. If there is no par-value, what is the

26
CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

amount that is critical? The issued value. The of the subscribed, and the subscribed is 25%
law says if you have no par-value shares, of the paid-up, that’s enough.
you cannot issue no par-value shares at
lower than 5 pesos. Classification of shares

All consideration received in the issuance of  Common shares – not found in the
no par-value shares are considered the full corporation code.
payment of the shares. No par-value shares  Preferred
that are issued are issued as non-  Redeemable
assessable until entire consideration is  Founder’s shares
already given. So you cannot purchase  Treasury shares – not a classification
shares on installment if it is no par-value in the articles. You have a treasury
share. share because of what happens to
you. If the corporation repurchases or
Par-value: you can have subscription of reacquires you, you become a
installment. Mubayad kag allowable treasury share. You stay in the
downpayment and balance is to be paid on treasury of the corporation. It is not by
the date stated in the contract or on the date virtue of presentation but what
on call of the board. Those are the two happens to you.
possible dates when you can pay the
balance of the subscription.
November 24, 2017 (2nd Half)
Now if the articles of the incorporation says: (Althea Astrid Gopo)
1. “this is the authorized capital stock”
2. “this is the subscribed capital” then the PREFERRED AND REDEEMABLE
subscribed capital is at least 25% of the SHARE–
authorized capital stock.
According to section 6, you cannot
Now if you as a subscriber have a classify preferred or redeemable if there
subscription of 100 shares, are you obliged are no par value shares. They must be par
to pay at least 25% of your subscription? value shares.
That is Php25 that is equivalent to 25 shares You cannot classify redeemable and
of the 100 shares total. preferred shares if there are no par value
shares. They must be par value shares.
3 kinds of capital:
authorized Thereby, section 6 says, “only
subscribed redeemable shares and preferred shares
paid-up may ble classified as non-voting shares.”
So, only par value shares may be deprived
NO. You do not have to pay 25%. The of voting rights.
obligation is in the aggregate. That the entire
subscribed capital is at least 25% of the Okay, let’s go to PREFERRED.
authorized and the paid-up capital is at least
25% of subscribed. The whole obligation not
Q: What do you mean by “preference”?
the individual shareholders.
a. Preference as to distribution of
Kung sugtan ka sa treasurer of the
assets at the time when the
corporation na 20% imong bayran, okay.
corporation is dissolved. So
Some might pay the entire subscription. As
liquidating dividend. You can have
long as the aggregate paid-up capital is 25%
preference there. You will be first

27
CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

paid if the corporation is dissolved, bills every Monday, the Bangko Sentral.
ahead of the common shares or other Because that is a problem of cash flow. Ang
shares. imong kinahanglan kada adlaw, unya ang
imong kita periodic. So wa kay panggasto so
b. Or you can have preference in the kinahanglan manghuwam ka.
distribution of dividends. When the
corporation makes money, before What does the law prohibit? It prohibits
any other share receives dividends, issuing dividends without profits. You might
you receive. And it’s a percentage. have profits but you don’t have the cash flow.
Let’s say: 8% preferred dividend. So So you have to borrow and be able to pay it.
8% of par, that is what you get as
dividend preferred. You might be preferred. Bayran kag una. If
you are preferred cumulative, cumulative
Now, time and again the Supreme Court prefered shares. Whats the maning? If in one
has said: dividends can only be taken year the company cannot make the issuance
from profits, and profits is the result of of dividends. It has profits but it cannot issue
the strenous and ordinary course of dividends. What happens? Purdoy ka ana!
business operation of a company. Unya preferred man ka? Cumulative man
ka? The following year, you can ask payment
So if the corporation has no profits, it for the dividends paid for that year plus the
cannot issue dividends. year before that was not paid you. That is
called dividends in arrears. Mu-cumulate na.
Q: Can a corporation borrow money in Kay cumulative preferred man ka.
order to pay dividends?
Please keep this in mind clearly: no
That is a trick question. But because a company, no corporation can guarantee
corporation may register profits, but because the payment of dividends every year. You
of cash flow, it cannot pay out dividends if it cannot. But a company may be able to
does not borrow. So it borrows in order to issue guaranteed cumulative preferred
have cash, to pay cash dividends. shares.

Now, if the corporation does not have What’s the meaning of that? NOT that the
accumulated retained earnings it cannot same company who issued the shares is
issue dividends. So it cannot borrow if it has guaranteeing preferred dividends every year,
no accumulated retained earnings. It does with or without profits. But that there is
not have profits. another company that guarantees it. This
company will come to the rescue if this
Asa may corporation nga nag-ganansya subsidiary cannot pay the dividends. It may
pero way kwarta nga ikabayad? Cash flow borrow money, because that is his expense,
ba. Cash flow. Kamong mga dili accountant, because he guaranteed this subsidiary. But
pa-explain mo sa inyong mga accounting the company itself who owns the shares
nga classmate kung unsa ning cashflow. cannot guarantee the preferred every year.

That’s a problem of cashflow. Diri sa Pilipinas


o, the government needs money everyday, PARTICIPATING PREFERRED.
every month; it has to pay salaries. But then
they only get collection from taxes, periodic Q: What is the meaning of participating
times: when income tax is paid, at the end of preferred?
the year. How do they manage in between?
Ah, that’s why the government floats treasury

28
CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

You get your preferred dividends. There is Walay mupalit sa iyang common shares.
profit, you get your preferred dividends. After Muingon nang corporation: we will create
you get it, there is still profits remaining. So preferred shares, and they will be voting
now the common shares will get their profits shares. So mabotohan na; i-amend na ang
after you’ve gotten yours. But because you articles. You reclassify shares. There are still
are participating, you also go with the remaining 1M common shares unissued.
common to receive dividends. So kaduha ka Then you will amend it, and you will say 200K
muigo. Preferred ka pa, common ka pa. Sa of these shares are now reclassified as
ato pa, in earning terms, you are actually two preferred, voting shares.
shares: you are common and you are
preferred. Kay participating man ka. When that resolution is passed, and you
are a dissenting stockholder, you can
Kinsa may buang nga corporation nga mu- exercise what is called “APPRAISAL
issue ana? Mao na nang mga gwapo gani RIGHT”.
kaayo nga shares. Buot pasabot ana,
nagkagidlay na nang corporation kay way Muingon kag “I want out in the corporation
mupalit kung ordinary shares ra. So because you are giving more privileges to
butangan nila na’g daghan kaayog features somebody other than me. Nauna gud ko
dira para paliton nimo. Kay nanginahanglan dinhi!” so I can ask the corporation to value
silag capital pero way mupalit ana ug my shares then pay me because I am leaving
ordinary lang ang shares, way daghang this corporation. That is appraisal right. Mag-
buloloy. So butangan nilag daghang features usab gani sila..
– cumulative, participating, naa pa gani nay
voting. Kay kasagran sa mga preferred, they Preferred shares:
are classified as non-voting. Preferred na
gud ka, unya muboto pa ka. Mura na sad kag 1. Must be voting; cannot be non-
common stock. Wa kanay apil sa boto. Non- voting. Maski pag valued up (?) It’s
voting ka. Pero wa may mupalit nimo. Hala! the only share that can be deprived
Butangan nalang natog voting aron paliton of vote;
gyud.
2. Like the redeemable shares,
VOTING, NON-VOTING. must be par value; cannot be no
par value shares;
Q: What is the presumption.. if you are
preferred shares and there is common 3. Gets preferrence as to being paid
shares, are you voting or are you non- out in dissolution. It’s the senior
voting? What is the assumption? proprietary interest - senior to the
common shares. In terms of
The assumption is you are VOTING! Why? dividends, it’s also senior to the
Because there is an assumption that all common shares;
shares have equal rights, UNLESS
otherwise provided in the articles of 4. It may be convertible. Convertible
incorporation and when it comes to preferred. What do you mean by
limitations to transfer shares also in the convertible shares? Convertible
certificate of stock. Feature of a corporation shares are preferred shares or
shares are found in the articles of some other share that may be
incorporation. converted to common shares either
at the option of the
You are an original share holder who bought shareholder/owner or at the option
shares. Nagkahina na ang corporation.

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of the corporation. Convertible they rely that the corporation has money
shares. to answer for its validly incurred
obligations. Unya diay gisekreto diay’g
So, daghan na tag nakit-an: preferred, uli ngadto sa mga stockholders katong
ordinary, cumulative, participating, ilang kwarta nga gibayad sa shares.
convertible.
That is a violation of what is called
the “TRUST FUND DOCTRINE”.
REDEEMABLE SHARES.
That is why redemption of shares, the
Q: What are redeemable shares? buy-back of shares by the corporation is
not allowed unless there is unrestricted
In the articles of incorporation, it says, retained earnings. However, if the
“these shares may be put back by the shares are redeemable shares
corporation at a pre-determined price. classified under the articles as such,
Now, it could be at the option of the that at certain point will be put back, then
stockholder or it could be at the option even if the corporation does not have
of the corporation: unrestricted retained earnings, it may be
purchased/re-acquired by the
a. At the option of the coporation. So long as the corporation’s
corporation, that is capital is not impaired, or the
DIRECTORY. corporation’s operation is not fatally
injured by the redemption even if it does
b. At the option of the not have unrestricted retained earnings.
stockholder, that is
MANDATORY. Q: What happens when a corporation
redeems the shares even if it has no
Now, the GENERAL RULE is: no unrestricted retained earnings?
corporation can pay the stockholder
and get his shares if it does not have In that instance, what is said in the
unrestricted retained earnings or articles is already no longer true. There
accumulated profits. is this amount that is subsribed, there is
25% that is paid-up – no more! Giuli man
That is the rule. Why is that the rule? nimo! It’s no longer true. So what do you
Because if it were not the rule, what have to do? You have to amend the
would prevent the corporation from articles of incorporation. You have to
forming? Formed na sya. Nangutang retire the shares that you have
sya’g daghan kaayo. Unya paghuman redeemed. So that the articles will
niyag pangutang, niingon sya “paliton reflect the true state of your capital
nako’g balik tanan ninyong mga shares. stock.
Hala panagan na mo!” Paliton niya.
Unya, wa na na’y kwarta ang Q: But if you redeem with profits, do
corporation, kay giuli man niya ang you have to retire the shares that are
kwarta didto sa mga nag-increase ang now with the treasury?
shares. Wa pa ma’y ginansya. There is
no unrestricted and retained earnings. They are now treasury shares because
you have redeemed/re-acquired them
And then in your articles you say, “this is by paying the stockholder. You do not!
subscribed. Mao ning amount. This is Why? Because what is written in the
paid up.” And the public reads that, and articles remains true! You did not give

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CORPORATION LAW TSN
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back the articles that you paid. You paid founder shares were owned by the Ford
out the profits. So the capital stock still family. And because of this feature, it is
remains intact. So you do not have to the only car company that remains
amedn the articles of incorporation. under the control of its original founder
today while all the rest have already –
– Break – the founders have already lost control of
the corporation. Like General Motors,
Section 6 says that at all times there the original founder had long lost
must be a classification of shares control. Ford still controls it because
that must have COMPLETE VOTING Ford created founder shares. Shares of
RIGHTS. You cannot split voting by stock that have ten times more voting
classifying shares. rights than the others. And that is
allowed. That is owned by the family.
Let’s say, these shares can only vote in Actually it is owned by the Ford
the election of directors; these shares Foundation.
can only vote when it is for questions of
amending the corporation for increase Now, if you are a member of the Ford
or decrease of capital stock. You cannot Family, unya naa man gyud kay right.
split voting that way. If you do that, there “Cash out na ko! Ibaligya na nako akong
must still be a class of shares that has shares unya kwartahon na nako. Bahala
complete voting rights. na mo. I will go forth somewhere.”

This is important because when we What is the solution of Ford


come to Founder Shares - Section 7, a Foundation? Ford Foundation has, in
corporation may classify shares as the meantime, bought ordinary shares.
founder shares that have exclusive right They bought ordinary shares. So if you
to vote (exclusive voting rights) and be have Ford shares that has 10 votes, you
voted for in the Board of Directors, but are equivalent to 10 shares. But Ford
only for a limited period of five (5) years, has bought ordinary shares. Kung ikaw
non-renewable. gusto na ka mucash out, they will sell
the equivalent number of shares in
I’ll give you something from other ordinary shares and give you the cash.
jurisdictions that it not true in the But then Ford Founder Shares that have
Philippines and which makes our 10 times voting rights, they did not give
securities here by contrast, different you that. So it’s still intact. So kinsa to’y
from others. mulaban nila, lisud kaayo. Ka-napulo
kadaghan na shares imong
For instance, in the US, you incorporate kinahanglanon aron mutumpag sa isa
according to the State. Most nila ka buok na share. That’s why they
corporations in the US that were big, remain under control, the Ford family.
were incorporated in the State of
Delaware. And the Stae of Delaware Alright. That is not allowed in the
allowed enhanced voting rights for Philippines. You classify a share with
certain classes of shares. ten votes more than the ordinary.
That is not allowed because of the
So this is what Ford Motor Company did principle of equality.
before it went public: it created founder
shares of Ford. But these founder Europe. They decided in the 70s and
shares have 10 times more vote than 80s that public owned corporations,
the rest of the shaes. Now, these government owned corporations, are

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very inefficient because the officers are


appointed by politicians, and they are “Re-issued” for me is a common
answeable to their appointing powers. inaccurate term. Because issuance is
So they were not profit-oriented. They only once. That’s actually sold.
were not efficiency-geared. So they
decided to privatize – privatization, And treasury shares can be sold to
shrinking of governments. the public for a consideration less
than par value.
But they said, there are certain You can resell those shares for a
corporations, public utilities, that are consideration less than par value or less
crucial to national security. We cannot than issued value before. Because it is
afford to lose control. Communications. presumed that the original capital that
Petroleum. Water. So what they did you contribute to the corporation when it
was, they still went private but they issued is still remaining there. In other
provided in the articles of incorporation words, you already acquired with the
what they called a Golden Share – one use of accumulated profits. So there is
share that can veto in the name of no impairment of the capital stock of the
national security. If it casts its vote corporation by selling less than par
against a particular measure in the value.
name of national security, pildi ka na.
That golden share is held by the Q: What is the use of treasury
government. In all other instances of shares?
voting, wa na syay round, usa ra sya ka
vote. But when it exercises its veto vote, The man in the street thinks that the
bisag pila pa mo kabuok dira, di mo more money you have in business, the
makapildi niya. That is the Golden better for you. Kinahanglan mag-
Share. negosyo ka, kinahanglan 5M capital
padagan sa negosyo. Pero naa kay
German Telecom. Telefunken. Naa nay 10M, ang extra 5M nimo gibutang nimo
Golden Share. The Petroleum company sa bangko, for siguro ra ba. Magkuha
of France. Naa nay Golden Share. kag pedicab, dali ra kaayo ka kahulbot,
di ka kinahanglan manghiram. Safe
In certain instances, the government will kaayo ka. Muingon ang mga tao, “mao
just whip out that single share and nay negosyo”.
announce that this is the exercise of the
veto power of the Golden Share. And Beh, palista ka sa stock market. Daghan
that measure cannot prosper. kaayo kag cash. The market will punish
you! What are you doing with all that
Diri sa Pilipinas, is it possible here? Can cash? Lost opportunity! Buang-buang
be. All we have to do is just legislate. ba ka nga magsugod kag business, diba
mag expand ka? Because the ideal
financial situation is you just have
TREASURY SHARES. enough cash, enough capital to run your
business. Not more. Because if you
If you are reacquired by a corporation, have more, you lose opportunity! That
shares are reacquired, they go to the money could have made more money
treasury. They have no voting rights, somewhere! If you have less money that
they have no dividend rights, they just is needed to run, then your cost of
stay in the treasury. But they can be re- operation increases because you have
issued. to borrow money. And there is a cost to

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CORPORATION LAW TSN
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borrow money. So the ideal cost picture ug daghan ka nang shares. It becomes
for a corporation is just enough money. very expensive for him. After a while,
Then you are efficient. mugive up na na sya. Kay daghan man
ni syag bala.
Pareho na sa car racing driver Formula
One. Ingon bitaw na sila, mupakusog See? That’s one of the uses of treasury
kag dagan, ika’y kinakusgan, shares. That is why people keep
kinapaspasan mupadagan. Di man ikaw treasury shares.
mao’y makadaog ana. Ang makadaog
sa Formula One, those who can take on Corporations have a buy-back policy
average, maximum speed all the curbs. once the market price does not reflect
This particular curb is taken at 120, 119, what they think is the real market value.
120, 118. Ang uban lagyo kaayo. But If the real value from their estimate is
just enough. Why? Because if you go $100 per share. And the market is
more than the maximum, lagpot ka. If trading your shares at $80. Muingon
you go less than the maximum, dayon na sila’g, well, my shares are
overtake-an ka. So enough ka lang. So trading at a discount of 20%. Why
the trick of the best Formula One driver should we invest on someone else. Let’s
is memory. Gwapo kaayo kag memory. invest on ourselves – let’s buy our
Kada corner, kada curb, naa kay shares!
memory. Sugod ka nag tapak ug brake,
buhian nimo diri. Kakapoy ana. Mga What is the effect? You reduce the
maayo na sila’g memory. Kanang number of outstanding shares that will
makadaog ana, di na sila pinaka- divide the profits. So gamay nalang ang
paspas. shares na mudivide sa profits. Mutaas
ang earnings per share. Pag taas sa
350kph. Mubo pa gyud kaayo. Ang earnings per share, kita ang mga
naga-separate sa imong sampot ug sa investors, musaka ang price traded. O
dalan, 4 inches ra. (LOL) Mukibra (?) diba, edi kaduha ka muginansya. Saka
lang nag gamay, pangos imong sampot ang earnings per share, saka ang price
ana! at which it is traded, meaning, ana ka na
mu-unload. Kay kaduha man ka muigo.
That is the ideal finance-wise. Karon kay But it will take time because you have to
daghan mag sigeg takeover. If you play with the public perception of your
become very profitable, you become the value and what is relative to the price of
target. Non-profitable also, kining mga your shares.
profitable nga gusto muexpand,
manguha nalang na sila. They will just You know there is a corporation in the
acquire by merger. US that has never declared – since its
beginnings in the NY Stock Exchange in
Kung controlling interest ka, naa kay the mid 1960s – it has never declared
daghang treasury shares. Naa na gani’y profits, either stock or cash. Never
gusto mu-takeover, release your declared. Par value, 5 pesos per share.
treasury shares at less than par value. Now, it is trading at over $200K per
Kinsa ma’y mupalit? Ikaw ra sad! Kinsa share. Mupalit kag usa ka share – and
may mupalit, ang board may magbuot! many do that, there are so many
Ikaw may nag control sa board. Baligya analysts who buy just one share. Why?
nimo ang treasury shares. Ang katong So they can attend the annual
mu-takeover nimo, mupalit man at stockholders meeting and listen. It is
market rate. Mag sige syag gukod nimo

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$200K per share. Wa may declare-


declare ug profits. Now it says “preferred series A-2. How many
of these series A-2 are issued? 8 million
Now, di man na mahimo sa ato. You series. Assuming that it is issued at $10
have declare dividends – either stock or million, what is the gross amount that they’re
cash – the moment your accumulated supposed to get? $80 million dollars. But
unrestricted and retained earnings is as there is a proviso. It says oversubscription of
much as your paid up capital. The up to 8 million series A-2 preferred shares.
moment it is 100% of your paid up So they can issue more if there are more who
capital, you are required to declare are willing to buy. You are off bringing 8
profits UNLESS there is a reason for you million but h ten there are so many lining up.
to justify. Naay disaster or something How will they know that they are called?
like that – then maybe you will be given Because their underwriters are swapped with
postponement by the SEC. first to buy.

But that is the rule in the corporation. WHO ARE THE UNDERWRITERS?
You cannot not declare. If you want to
know, go to Youtube. Tyoe there and BDO, Capital Investment Corporation,
search Warren Buffet. Very famous guy. Chinabank. What else? All those listed
He’s already in his 80s. He can survive there. (refer to handouts) PNB Investment
just on burgers and coke. Unhealthy Corporation, Chinabank, BDO Securities
food. 80s na siya. He runs Berkshire Corporation.
Hathaway. It is just a ___ company now.
And there is not right or reason for the Now what is the preference exactly? First of
way he buys subsidiaries. But he is the all, what kind of shares are these? It says
most successful investor in the stock preferred shares but did you read the fine
market. Warren Buffet. You will see him print (in the handout)? The corporation has
lecturing to Harvard Business Students, an option that upon the 5th anniversary, it can
Stanford Students. Simple kaayo na’g redeem its shares. So redeemable.
mga rules si Warren Buffet, makatawa Preferred redeemable.
ka.
Okay, let’s continue next meeting. WHEN IS IT REDEEMABLE?

On the 5th anniversary. So 5 years.

November 29, 2017 What happens if the corporation is showing


(Carra Tito) the issuer, Del Monthe, does not redeem?
There is a step-up date. Musaka ka. Unsa
So there is a stock in the Philippines’ listed man isaka nimo? Your preferred rate of
corporation, not in pesos. So what does this return can go up. How? The benchmark rate
make Del Monte? Del Monte is a foreign is the 10-year US Treasury Bond Rate. It
corporation. It’s listed in Singapore but it is says here, the dividends shall be adjusted on
making its shares available in the the step-up date to the sum of the 10-year
Philippines. The owner of Del Monte in US Treasury Bond Rate as of the step-up
Bukidnon is Nutri Asia. It’s the holding date + initials spread + margin of 2.50% per
company. Del Monte is listed in Singapore annum. So if the 10-year bond rate is
but it is owned by a Philippine corporation, already higher than the rate provided here.
Nutri Asia, one of the groups of Mr. Campos, What is the dividend rate? 6.5%. if it is
the eldest main son of the original founder of already higher, dungagan pa jud ug 2.5%.
Unilab. So that’s where they get their money. however, if the dividend rate is higher than

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

the applicable step-up rate, then there shall How much interest do you get in the bank?
be no adjustment of the dividend rate. So if Wa pa 1%. Kini, 6.5%. Why profit? Unsaon
the 10-year US Bond nibagsak, lower than man nila paghatag ug preferred shares..
that 6.5, and 10-year needed the margin of When shares of stock are entitled to
2.5, it is lower than 6.5, what will happen? So dividends only when there is profit. You can
you can only go higher. You are already only issue dividend profits. And yet they are
guaranteed 6.5%. but is that really a compelling it with bonds as if it were a bond.
guarantee? Of these are shares and the But the giving of preference of 6.5% and is
benchmark is a bond rate. not unconditional unlike a bond. It is still
conditioned on the registration of profits. So
WHAT IS THE DIFFERENCE BETWEEN A you can have preferred shares series A,
BOND AND A SHARE? series B. if you go to PLDT, you can have
preferred shares series A, B, up to A. And
The return of the share is dependent on the then they start again, AA, BB, etc. Preferred
existence of retainer on its profits. The shares that are non-voting.
returnable bond, regardless of whether you
make profits or not, you have to pay the This one, is this voting or non-voting? Since
interest to the creditors. That is the big there is no disclosure as to whether or not
difference between a bond and a share of there ___, it must be voting. The
stock. presumption of stocks have the same rights
and properties unless it is so provided in the
WHAT IS THE DIFFERENCE BETWEEN A articles or by-laws of the corporation.
CLASS OF SHARES AND SERIES OF
SHARES? Diba there was as time was when Del Monte
was ruled by the technical team. Now, all
The class share is preferred redeemable. agricultures are ruled by finance. They have
The series is preferred redeemable A-2 first it passed around at one time. AKR was the
class. Una pa to baligya. Mahalin gani owner of Del Monte but they sold it so that
tanan, naa pa guro gusto ug up to another 8 now it is very huge.
million release, that is it. Another series.
Because it says here 8,000 series A-2 Sec. 6. Classification of
preferres shares with oversubscription option shares. - The shares of stock of stock
of up to 8 million series into preferred shares. corporations may be divided into classes
So naa pa gani gusto mupalit, mao na or series of shares, or both, any of which
ginatawag sa Wall Street “GreenShoe.” classes or series of shares may have
Green shoe provision. such rights, privileges or restrictions as
may be stated in the articles of
Now, the Philippine stock exchange can incorporation: Provided, That no share
approve anyone. Details of the offer can be may be deprived of voting rights except
found in the supplement uploaded on the those classified and issued as "preferred"
company’s website. The Philippine Stock or "redeemable" shares, unless
Exchange approves the listing of the otherwise provided in this Code:
abovementioned securities on November 24, Provided, further, That there shall always
2017. While the Philippine Securities and be a class or series of shares which have
Exchange Commission (SEC) issued an complete voting rights. Any or all of the
updated permit to sell the securities of Del shares or series of shares may have a
Monte’s Series A-2 preferred shares on par value or have no par value as may be
November 27, 2017. Bag-o pa lang ni. Init provided for in the articles of
kayo ni. incorporation: Provided, however, That
banks, trust companies, insurance

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

companies, public utilities, and building nevertheless be entitled to vote on the


and loan associations shall not be following matters:
permitted to issue no-par value shares of 1) Amendment of the articles of
stock. incorporation;
Preferred shares of stock issued 2) Adoption and amendment of by-laws;
by any corporation may be given 3) Sale, lease, exchange, mortgage,
preference in the distribution of the pledge or other disposition of all or
assets of the corporation in case of substantially all of the corporate
liquidation and in the distribution of property;
dividends, or such other preferences as 4) Incurring, creating or increasing
may be stated in the articles of bonded indebtedness;
incorporation which are not violative of 5) Increase or decrease of capital stock;
the provisions of this Code: Provided, 6) Merger or consolidation of the
That preferred shares of stock may be corporation with another corporation
issued only with a stated par value. The or other corporations;
board of directors, where authorized in 7) Investment of corporate funds in
the articles of incorporation, may fix the another corporation or business in
terms and conditions of preferred shares accordance with this Code; and
of stock or any series thereof: Provided, 8) Dissolution of the corporation.
That such terms and conditions shall be Except as provided in the
effective upon the filing of a certificate immediately preceding paragraph, the
thereof with the Securities and Exchange vote necessary to approve a particular
Commission. corporate act as provided in this Code
Shares of capital stock issued shall be deemed to refer only to stocks
without par value shall be deemed fully with voting rights.
paid and non-assessable and the holder
of such shares shall not be liable to the Alright, we have taken up the Articles of
corporation or to its creditors in respect Incorporation (AOI), the name, the principal
thereto: Provided; That shares without office, the purpose, the term, and then the
par value may not be issued for a capital, the classification of shares, under
consideration less than the value of five Section 6.
(P5.00) pesos per share: Provided,
further, That the entire consideration Now there is Section 6. I keep telling the
received by the corporation for its no-par class, it is a kind of corporation. You have to
value shares shall be treated as capital know this Section 6. You cannot understand
and shall not be available for distribution it? Outline it. There are rules about voting
as dividends. rights, what shares are voting rights, in
A corporation may, furthermore, relation to par on par value, in relation to
classify its shares for the purpose of preferred redeemables, in relation to
insuring compliance with constitutional or treasury shares. So you must be familiar
legal requirements. with the different ways of classified shares .
Except as otherwise provided in
the articles of incorporation and stated in Where the articles of incorporation provide
the certificate of stock, each share shall for non-voting shares in the cases allowed by
be equal in all respects to every other this Code, the holders of such shares shall
share. nevertheless be entitled to vote on the
Where the articles of following matters
incorporation provide for non-voting 1) Amendment of the articles of
shares in the cases allowed by this Code, incorporation;
the holders of such shares shall 2) Adoption and amendment of by-laws;

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3) Sale, lease, exchange, mortgage, pledge nimo dayon ang proxy. Naa na gani ka 2/3,
or other disposition of all or substantially you can already start mailing. Sigurado na b
all of the corporate property; aka? Ayaw pag-gasto-gasto kung wa pa ka
4) Incurring, creating or increasing bonded kaibaw. Di man ni lumba sa kabayo na
indebtedness; mangpusta ka. In fact, you could not call a
5) Increase or decrease of capital stock; meeting the results of which you do not
6) Merger or consolidation of the know. Siguraduha na daog ka. If you are
corporation with another corporation or willing to pass a resolution, they they give
other corporations; you a proxy. Ikaw corporate secretary amn
7) Investment of corporate funds in another ang pangutan-on, “O, do we have the
corporation or business in accordance numbers?” Corp. Sec: “I don’t know.” Patay.
with this Code; and Mao na imong trabaho.
8) Dissolution of the corporation.
So I give you an example. Before, you only
have common shares in your AOI. 25% of
1) AMENDMENT OF THE ARTICLES OF that are already issued and subscribed which
INCORPORATION (AOI) is the basic requirement. So if 1 billion
Now we said in the amendment of the authorized capital share at 1 peso par value,
AOI, the 2/3 vote that is necessary to 240,000 shares at 1 par value each share
approve the amendments of the parties ‘ has already been issued by way of
stockholders can be either in the form of subscription. Of that 24%, 50% is paid up.
secret ballots in a meeting duly called for the 12.5% is paid up. Now, you want to raise
purpose or just written assent. You read more capital. You are thinking of issuing the
about that in \section 16, amending the AOI. remaining 750,000 shares but your
corporation is not making money. In fact, it
Unless otherwise provided by this lost money. So what is the book value now?
Code or other special law and for The book value now is lower than the par
legitimate purposes, any provision or value. So naa kay problema. You cannot
matter stated in the AOI may be issue your shares at a price lower than the
amended. par value. Kinsa kaya mupalit? At even par
value when your book value is lower than par
I told you, the incorporators cannot be value, way mupalit sa imong shares.
changed. The directors cannot be changed. Langawon ka.
They are historical in nature. Now what if it
is discovered that one of you incorporators is Unsa may solusyon ani?
Jack the Ripper (one of America’s serial
killers)? Di na nimo ma-change. Wa na ka #1 Solution: You do a road show. Pareha
mahimo ana. Mamatay tao. Dili na nimo bas a Dayang Dayang sa imong
mailisdan sa AOI. So not any provisions but kaugalingon. Mag make-up ka, palit ug
in the ___ that is changed does not suffice a gwapo na sanina, etc. Don’t laugh because
a meeting of the stockholders or secret these are the terminologies in the finance
ballots change it by written consent then world. Do a road show. Once they say an
send forms to stockholders and they will mail international roadshow, you cover the most
back. They will think of the amendment if likely source of capital – New York, London,
they agree or disagree. If they do not agree, Zurich, Singapore, Hong Kong, Tokyo. Kada
they will say so. If they agree, they give their lugar, mangita kag promoter kay muhimo
written assent. kag imbestigasyon sa investors. Then make
a presentation. Unsa imong role as CEO,
So what will the corporate secretary do? CFO or COO? After the presentation, you sit
Mangolekta lang daan ug proxy. Koletkahon

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down and they ask clarificatory questions. What is an instance when you need voting by
You are selling your corporation. That is #1. secret ballot in the meeting duly called for the
purpose?
#2 Solution: the other solution is send
preferred shares in a preference that is Increase or decrease of capital stocks. You
attracting. Common sharese lang ))) voting. will increase authorized capital. Once you
Unya way siguro. Makakuha b aug dibidendo increase authorized capital, you change that
basig way gawas na kwarta? Wa may number. Once you change the number the
obligsasyon and corporation to issue cash subscribed capital must also change. Why?
dividends even if there are profits. So it’s not Because for every increase, 25% of the
attractive. So unsaon man niya paghatag ug increase must be subscribed. And then, of
preferred shares na wa man preferred the subscribed, 55% must be paid up. It is
shares? Then the consultant says, “amend here in Section 6, number 5.
your Articles.” Naa man gud ka 750,000
shares, magkuha ka 50,000 or 100,000 So that is an instance where you cannot use
shares ba, buhaton nag preferred. Unya, written assent. You have to have a meeting
mao na imong i-issue ug bag-o. now, so you duly called for the purpose.
are now to go through the process of
amending the article. In any case, the stockholders have a role to
play. It is an indispensable role depending
on whether or not the stockholders are voting
INSTANCE OF AMENDING THE AOI. or non-voting shares.
Pangutan-on nimo ang corporate
secretary, “Do we need a stockholder’s Let us leave that for a while. Let us go
meeting?” If the secretary knows the Section 7.
Corporation Law, no need. Mere written
assent is enough. Why? Because it is not Sec. 7. Founders' shares. -
one of the cases provided for a meeting duly Founders' shares classified as such in the
called for the purpose. It is a minor change. articles of incorporation may be given
So, ingon nimo ang secretary na get the certain rights and privileges not enjoyed
proceeding going. Kuhaon nimo ang by the owners of other stocks, provided
proxies. Kung daghan na, anha pa ka that where the exclusive right to vote and
magpadala ug forms for written assent. be voted for in the election of directors is
Assuming of course, that the controlling granted, it must be for a limited period not
interest in the board has already a minimum to exceed five (5) years subject to the
of majority vote of all the members of the approval of the Securities and Exchange
board. Because of the cases mentioned in Commission. The five-year period shall
Section 6, it requires majority votes first of commence from the date of the aforesaid
directors or trustees. It is an absolute approval by the Securities and Exchange
majority. If there are 11, then 6 are needed Commission.
for a quorum. If you only have 5 attendees,
all 6 must vote because that is the absolute This classification of shares is temporary.
majority of 11 people to vote. So that is an You cannot have founders’ shares for the
instance where you only need written assent entire time you have a corporation. The
to amend the AOI. shares are good up to 5 years because that
is what the Section 7says. Founders’ shares,
INSTANCE WHEN VOTING BY SECRET classified as such in the AOI, is given certain
BALLOT IN THE MEETING DULY CALLED rights and priviliges not enjoyed by the
FOR THE PUROSE IS REQUIRED owner’s other stocks or by where their right
to vote and be voted for in the election of

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CORPORATION LAW TSN
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directors is granted, it must be for a limited set aside a sinking fund. Mamalit sila ug
period not exceeding 5 years. ordinary shares na equivalent sa imong 10
voting shares. Unya, ibaligya nimo ang
Some object to the approval of the SEC. The imong shares sa market, kwarta na nimo.
5-year period shall commence on the day of Pero intact gihapon ang ilang Ford Shares
said approval of the SEC. na 10 times voting rights. So hantod karon,
5th generation na, sila gihapon ga-control.
FOUNDERS’ SHARES DO NOT APPLY TO Ang GM ug Chrysler, wala na. Thus, the
NON-STOCK CORPORATION. CEO there is elected by the Ford Company.
Di na sila gabutang ug Ford na CEO. They
Christian School Inc., nagbutang sila ug are not hungry for that anymore. Di na sila
proviso. Ang kadtong founder, is honorary kinahanglan mutrabaho.
trustee for life kay siya man nagsugod sa
Christian School. For life siya non-stock, Mahimo man na diri. Muhimo ka ug class of
non-profit corporation. But for 20 years, they shares of stocks with 10 times voting rights.
operated that way until somebody It’s allowed by the SEC. Voting for the ___.
questioned it before the SEC and finally, it
went to the Supreme Court. The Supreme Now I also told you about the so-called
Court says that is VOID. They cannot make “golden share.” Mao nang golden shares sa
somebody a director or trustee without gobyerno. Thy want to have their pie and eat
voting. it too. Ila rang i-publicly sell ang mga shares
of stocks. Pero naa gihapon silay PC
So founder shares must be provided in the Ownership power because they can veto
Articles. Kaning “added to the articles’ actions in the name of public necessity. So
amendment,” there is no proviso prohibiting when they exercise that vote, pildi ka na.
it. So it can be added. Ako pa, founder ko,
di ko mag founders’ shares dayon. Tig 5 In Asia, they say that there is 1 corporation
years lang na. Mupalit ka ug shares, amend that has that kind of power. Siam Cement of
ka dayon, muhatag ka dayon sa imong Thailand. It is 10 times beigger than San
kaugalingon ug another 5 years. Ikaw na Miguel.But cement is not even 1/10 of the
ang muboto ug botohan as directors. sale of Siam. Who is the controlling owner of
Siam Cement? The Royal Family of
I told you about Ford Motors Company. Thailand. They have a veto power as to its
There is a reason why it is still controlled by direction. So unsa ang number 1 sales nila?
the Fords. Because before, Henry Ford, the candy resins. So that’s how the Royal Family
founder, listed the share of stock in Wall finance its life standing. Unlike in the UK, the
Street. He amended the articles. He created Royal Family has approproations. Kanang
a class called “founders’ shares” and 2 mga kabayo nila, gikan na sa taxpayer’s
shares had 10 times more voting rights than money.
the ordinary shares. Then he transferred it
to Ford Foundation, nonstock, nonprofit, ang
tag-iya sa share. And who are these in the December 1, 2017
Ford Foundation? Only if you are a Ford. If (Miles Buhay)
you’re not a Ford, you cannot af-Ford!
(HAHAHA!) So naa ka dinha. Now you want Let us go to this very exciting process of
to cash out. Ingon ka ang equivalent sa creating a corporation.
akong shares dinha, kwartahon na nako kay
di na ko gusto ani niya. Unsa man buhaton We have gone through the different
sa Ford Foundation? Mukuha sila sa classifications of shares of stock because
reserves nila kay as they gain profits, they that is how the capital stock of the

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CORPORATION LAW TSN
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corporation is divided. You have authorized want an example of different par values, and
capital and there’s a figure there. Then you it’s a successful corporation, you go to
have subscribed capital and you’ll have a Warren Buffon Berkshire Hathaway. He has
figure there. And you have a paid-up capital, different par value shares that he has issued
and you also have a figure there. after he was successful. People put in there
money in Berkshire Hathaway because of
Alright, what do you have to remember? The Warren Buffon and not because they know
authorized capital, the figure there, is always where he is going because nobody does.
bigger or best equal to the subscribed Story… Warren considers what is profitable.
capital. You cannot have the subscribed
capital bigger than the authorized capital. Classification of Shares
The paid-up capital can only be equal to the Suppose you sell shares at higher than par
subscribed capital but cannot be bigger than value. Is it possible to sell shares at a
the subscribed. Sa accounting, ang kinadak- premium that is several times more than par
an, mag-una. Unya musunod ang mas value? It is. So much so that in the balance
gamay. sheet you will have common stock (Let us
Now, this is what you have to reconcile say 100M) and premium on stock; that
because commentaries say, the authorized excess of par value at which you issue
capital is the limit that a corporation can shares. It might be 200M. It’s possible. Rare
brace by way of capital. So it’s a ceiling no. but possible. Now when you have that par
Is it true? [No.] The number is not the ceiling. value at premium of a stock, the perception
It is the number of shares derived from the of people will already [be that they will] win
authorized capital. That is the ceiling. Is it because you are already selling at above par
possible to raise more money that the value and you declare dividends out or
authorized capital? The answer is yes. Why? premium on stock that you issued. Sobra-
Because a corporation can issue shares sobra naman ang inyong kwarta. Premium
higher than par value if the market can take on stock is in excess of par value that you
it. The authorized capital is the amount that issued your stock for and because people
is the result of the total no.of shares that a have such great faith in you, your premium
corporation can issue multiplied by the par on stock is double your capital stock. Can
value. That is the authorized value. You you declare dividends out of premium on
divide that authorized capital with the par stock?
value of shares then you have maximum
no.of shares. The general rule is, you declare your
dividends out of profits. What is profit? Profit
Is that the hard and fast rule? Not exactly according to the SC is the positive result of
because a corporation can issue different recurring business in the ordinary operation
classes of shares at different par values. You of the corporation; the strenuous operation of
can have preferred shares with a par value the corporation. Ginansya gani, results from
of 10. You can have common shares at a par the day to day operation of the corporation
value of 5. But most corps will not do that by which its revenues exceeds its expenses.
because you will just confuse the market. But Mao nang naay profits and it is from there
there is no prohibition against a corporation that you declare dividends. That is the main
from classifying shares according to different traditional source of dividend.
par values. There is even no prohibition in
issuing par value shares and no par value When you sell capital of the corporation; the
shares. You can classify in your articles of corporation sells assets and realized profit
incorporation par value shares and no par from the sale of assets, is that part of profit?
value shares. But you will end up confusing What’s an example?
the public and so, no too many corps. If you

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

In the olden days, technology was such that until his successor is fully elected and
when you were a telephone company, you qualified. So he is the interim treasurer. He is
needed huge buildings because the switches named in the articles of incorporation.
were big and you had to have generating Actually, “treasurer” of the corporation is a
power; you had to have big transformers misnomer because there is still no
because the telephone machinery needed corporation. It is still a corporation in the
bigger machines so you had to have bigger process of coming into being. It begins to
real properties. exist the moment the SEC issues a certificate
of incorporation. So he is the treasurer of the
With the advent of new tech the switches interim corporation.
became smaller; switches became smaller.
You did not need real property anymore. The period from the signing of the articles up
PLDT now is selling its real properties. They to the day the SEC issues a certificate. The
sold one here to a developer. Obviously, moment that there is a certificate of
when they bought that 15 years ago, it was incorporation issued, the corporation must
inexpensive. But now, they are selling it organize. Then the corpo elects the directors
several times higher than their acquisition and then the directors elect now the
price. Is that profit? Is that the result of treasurer. The interim treasurer may be
strenuous day to day work? Security and elected so that he will also become the
Exchange Commission (SEC) says, that is treasurer of the corporation.
part of profit. You can declare dividends out
of capital gains. Cash and stock dividends. What is the duty of the interim treasurer?
But premium on stock, you need the He is the one who collects the paid-up capital
permission of SEC if you have to declare and deposits it in the bank. He tells the bank,
dividends out of premium on stock and you “I am a trustee because this is for the
can only issue out of premium on stock NOT corporation the papers of which are still with
cash dividend, but stock dividend only. the SEC and it’s not yet formed. So I am the
trustee of the funds of this corporation still to
If in the formation of the corporation you be formed because these are all pre-
already make money, you’re not operating incorporation (before being a corporation)
yet the corporation. But because you are payments of the subscription.
already selling the corporation at so much
higher than par value, your premium is higher Q: If that interim treasurer is suddenly hit by
than your realization of consideration of lightning and dies, what happens to the
stock at par value. That is rare. But that money?
happens. If the corporation is formed:
You will find out later on that if your 1. The Board will pass a resolution
unrestricted retained earnings (these are appointing the treasurer after the
capital accounts in the balance sheet) is Board is constituted by the
already in excess 100% of paid-up capital, stockholders in the organization.
you have to issue/give out dividends. You 2. With that resolution and appointment
cannot accumulate profits more than the he [new treasurer] will just go the
paid-up capital unless you have a very good bank and say, “Here am I, I am the
reason and you have to prove that to the successor of the one who passed
SEC. away and so I will take charge. I am
the treasurer.”
After authorized capital, subscribed capital 3. The Board will pass another
and paid-up capital in the articles of resolution that the corporation will
incorporation, you have the provision that open a bank account in this particular
names the treasurer who shall act as such bank. It could be the bank where the

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

deceased interim treasurer put the formed fails to acquire a certificate of


money or it could be another bank in incorporation? No.
which case the treasurer will transfer
the money to the new bank. The SC said that the intent to form a
4. With that resolution will be provided corporation does not contain within it a
the signatories to the official account partnership. So there is no implied
of the corporation. Not just one (1) partnership formed if the corporation does
signatory, a juridical person cannot not succeed. Implied partnership is not within
risk just one (1) signatory. Normally, the intent to form a corporation.
corporations have several
signatories. What will happen is the paid-up capital will be
distributed.
If the corporation is not formed (denied a
certificate of corporation): Now if there is somebody who donates to the
Who can act? Without the certificate corporation, let us say a piece of land which
of incorporation, all you have is the the corporation needs. Who is the donor?
contract entered into by the The parent of one of the incorporators whose
incorporators. subscription and paid-up portion of his
1. So the incorporators have to go subscription is the biggest among all the
to the bank and say, “This is the incorporators and subscribers. What
list of those who had subscription happens to the donation? The donation is
and who put in money. You have ineffectual and it will be reconveyed to the
to help us give this money back to donor. There is reconveyance.
their lawful owners because the
corporation did not go through. If you need to count it as part of the capital,
the donation must be registered with the
Pareho ra nag Donation propter Registry of Deeds then the title is transferred
nuptias. When the marriage to the corporation. But the corporation is not
ceremony did not go through, unsa given a certificate of incorporation. So, there
may mahitabo atong mga donation? will be reconveyance.
What happens to those donations
propter nuptias? The donations are If the interim treasurer runs away with the
ineffectual because it is given by money, what is that? Is that theft? Is that
reason of marriage, and there is no estafa? Does the interim treasurer have the
marriage. So you give it back to right to the physical possession of the
where it came from. If the father of the money? Yes! Asa pa may lain nilang
groom donated a condominium unit, butangan ug kwarta? If he puts himself as the
it must be returned (ouch) to him. sole signatory as the trustee, does he have
So that is what the incorporators do. the right to title to the monies? Until the
They go to the bank. They give a list corporation is formed, he has the right. That
and they contact these people and is why he is the signatory. No other
they say, “Get back your money from incorporator is the signatory; He alone.
the bank. Appear in the bank with Therefore, that is estafa because he is the
proper identification.” That is what will trustee.
happen.
The treasurer executes the treasurer’s
How about the theory that if a corporation affidavit. The treasurer’s affidavit is separate
does not go through, a de facto partnership and distinct from the articles of incorporation
is formed? Is that correct? Is there a de facto although it is always attached to the articles
partnership created if a corporation that is of incorporation. Why? Because he takes

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

personal responsibility and liability - criminal capital stock subscribed and/or


and civil - as to the compliance of the paid is false;
corporation. The treasurer says “under oath (4) That the percentage of
that at least 25% of the authorized is ownership of the capital stock to
subscribed.” And then “the 25% of the sub is be owned by citizens of the
paid-up”. Not only paid-up but “received by Philippines has not been
me”. Walay lain nidawat, ako ra. In cash or complied with as required by
property, in the amount of not less than 5K in existing laws or the
accordance with the Corporation Code.” Constitution.
Then he signs it. No articles of incorporation or
amendment to articles of incorporation
Minus gani anang gisulti sa treasurer; less of banks, banking and quasi-banking
than 25% of the authorized is paid-up, who is institutions, building and loan
to blame? It is the treasurer. The assumption associations, trust companies and
is he pocketed the difference. He is the only other financial intermediaries,
one who received it, he says. That is the insurance companies, public utilities,
weight of the treasurer’s responsibility. educational institutions, and other
corporations governed by special laws
(5 min break. Chika ni Clemm and friends sa shall be accepted or approved by the
recording. LOL) Commission unless accompanied by a
favorable recommendation of the
Let us take a look at the grounds for rejecting appropriate government agency to the
or disapproving a corporation under Section effect that such articles or amendment
17. is in accordance with law. (n)
Sec. 17. Grounds when articles of
incorporation or amendment may be (1) That the articles of incorporation
rejected or disapproved. – The Securities or any amendment thereto is not
and Exchange Commission may reject substantially in accordance with
the articles of incorporation or the form prescribed herein;
disapprove any amendment thereto if
the same is not in compliance with the Remember that the compliance is not
requirements of this Code: Provided, necessarily literal, but just substantially the
That the Commission shall give the same as to its form.
incorporators reasonable time within
which to correct or modify the (2) That the purpose or purposes of
objectionable portions of the articles or the corporation are patently
amendment. The following are grounds unconstitutional, illegal, immoral,
for such rejection or disapproval: or contrary to government rules
(1) That the articles of incorporation and regulations;
or any amendment thereto is not
substantially in accordance with What is your purpose? To develop 100
the form prescribed herein; hectares of Cannabis for medicinal purpose.
(2) That the purpose or purposes of Is that recognized here in the Philippines?
the corporation are patently No, walay mutuo nimo. 100 hectares for
unconstitutional, illegal, medicinal purpose? Ay, negosyo.
immoral, or contrary to
government rules and What is your purpose? To enable desirous
regulations; single Filipina to the brides of western and
(3) That the Treasurer’s Affidavit other foreign gentlemen. Declared by SEC to
concerning the amount of be illegal because it is immoral. Mail-order

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

brides as a purpose is immoral according to formed. How much money is in the bank
the SEC. What about those in the internet? account of the interim treasurer?” Mailhan
Those are foreign-based corporations. They kung namakak. Bahala nag masobra, dili
are not allowed here to form a corporation for lang makulang sa 25%.
that purpose. (4) That the percentage of ownership
of the capital stock to be owned by
You cannot put up a corporation whose citizens of the Philippines has not
purpose is to practice a profession. You can been complied with as required by
only have a partnership. That is why law existing laws or the Constitution.
firms have partners. Accounting firms, they
are partnerships. The relationship between This might be a thing of the past. A law
clients and attorneys is personal. It is based limiting public utilities is about to be passed.
on trust and confidence. It is personal. You You will place in your articles that you will be
cannot have a corporation acting as your paid the proportionate ownership of Filipinos
counsel. The corporation cannot be because this particular corporation is
subjected to criminal liability whereas a engaged in public utilities or the development
lawyer (natural person) can be made to of natural resources or whatever reason.
answer criminally if he violates the canons of SEC will check that.
professional ethics.
The SEC is usually very patient with articles
So those are the grounds for rejecting the of incorporation. They usually don’t reject.
articles of a corporation as to their purpose/s. Ipa-usab lang kung niay mga mali. They’re
Your primary purpose might be lawful and very patient and yet some corporations still
your secondary purpose is not lawful. Or both get past them and there is a fatal defect. So
your primary and secondary purposes are you still end up with a de facto corporation.
lawful but they are not legally combinable.
They are especially very meticulous with
Ex. Imong primary purpose: ospital. respect to banks, banking and quasi-banking
Secondary purpose nimo: funeral parlor. institutions, building and loan associations,
Illegal na. trust companies and other financial
But you won’t find that illegal in the US. intermediaries, insurance companies, public
Department for ICU for babies and utilities, educational institutions, and other
department for abortion in the same building. corporations governed by special laws. They
(Chika on visiting a former student who is a are closely scrutinized.
neonatal specialist in Toledo.)
(3) That the Treasurer’s Affidavit Suppose you have complied with everything
concerning the amount of capital and the SEC still does not issue a certificate
stock subscribed and/or paid is of incorporation and they did not give a
false; reason. What is your remedy? This is
different from when you submit an
How can he determine if it is false? The amendment on your articles. When the SEC
treasurer has to execute a waiver of his rights does not act on it for a period of 6 months
under the Secrecy of Bank Deposits Act. So and the reason why the SEC has not acted
he gives his account no. and executes the is not attributable to you who filed the
waiver. So the SEC can verify and call the amendment, then the amendment becomes
bank. effective for inaction by the SEC. That is
“This is the SEC and we are on verification. Section 16, last paragraph. But if it is articles
Please call this number after we put the of incorporation, unya unom (6) na ka buwan
phone down.” Tawag ang banko balik. “We wala lang giyapon certificate of
are interested in this corporation still to be incorporation, do you become a corporation

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

by the inaction? No. You need to get that successors shall constitute a body
certificate of incorporation. How do you get politic and corporate under the name
it? You need to file a mandamus. stated in the articles of incorporation
If the SEC has objection to your name, it will for the period of time mentioned
be returned to you. You must not have therein, unless said period is extended
confusingly similar or similarly confusing or the corporation is sooner dissolved
corporation name. All corporations now in accordance with law.
must have “incorporated” or “incorporation”.
You cannot use an already protected name. From that time that you have been issued
You cannot use somebody else’s name. your certificate of incorporation, you have 30
days to organize. You have 2 years to
(Story about Brother Eddy who was expelled commence your business. If you have
from Iglesia ni Kristo Haligi ng Suhay at commenced your business and you have
Katotohan and put up his own corporation organized and for some reason you stop the
with the name Iglesia ni Kristo, H.S.K. This works of your business, you have 5 years
was considered confusingly similar to an continuous non-operation. If you do not work
already protected name) as a corporation for 5 years, what happens?
It is a ground for revocation or cancellation of
If your name is objectionable, the certificate your certificate of incorporation. If you do not
of incorporation shall not be issued. begin your work within 2 year after you have
Now, you already know beforehand that the organized, then you are also in danger of
name is acceptable because when you go to revocation or cancellation of your certificate
the SEC office and you pay a certain amount of incorporation. You must begin or you ask
and you give your preferred name, they the SEC to condone your non-operation or
communicate with the data bank in SEC non-inception of business because your
Manila and find out if the name is already reason is valid. What is a valid reason why
taken and word will come back to you on the you cannot begin your business?
same day. You have this name for 30 days
for an amount of 200 Pesos. So you have Ex. You want the business of rehabilitating
that name, dali dali na dayon ka ug buhat ug the rubber plantation in Basilan. The
Articles ana. If you can file your Articles Philippine marine commander however does
within 30 days, that name is yours. If you fail not give you the clearance to do so. You
to submit, you pay another 200 Pesos to communicate this situation to SEC. Is it a
extend to another 30 days to have that name valid reason? It is up to SEC.
reserved. You are allowed an extension.
Wala na gani, it’s up for grabs. That is how Once a certificate of incorporation is issued it
you find out whether the name is already cannot be cancelled or revoked unless there
restricted or already owned or is no longer is notice and hearing. (Section 6, PD 902-A)
open to be appropriate. There has to be notice and hearing before
Sec. 19. Commencement of corporate the cancellation or revocation of the
existence. A private corporation formed certificate of incorporation.
or organized under this Code
commences to have corporate (Story on Father Gus being the lawyer of
existence and juridical personality and Maryknoll Fathers and Brothers, Inc. which is
is deemed incorporated from the date non-stock, non-profit. Father suggested to
the Securities and Exchange work towards the dissolution of the
Commission issues a certificate of corporation but letting the government do the
incorporation under its official seal; job. He suggested non-operation for 5
and thereupon the incorporators, years). The SEC will put you in the twilight
stockholders/members and their list. This corporation has not been in

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CORPORATION LAW TSN
Based on the Lectures of Fr. Agustin Nazareno

operation for 5 years or more. They will send Sec. 23. The board of directors or
you notice that you are in the list and you will trustees. - Unless otherwise provided in
be directed to show cause why your this Code, the corporate powers of all
certificate of incorporation should not be corporations formed under this Code shall
cancelled. And when we receive that, we will be exercised, all business conducted and
not act upon it. all property of such corporations controlled
You can have a corporation dissolved this and held by the board of directors or
way if you have no debts. Otherwise, mag- trustees to be elected from among the
una2x ug file ang imong creditors ug holders of stocks, or where there is no
involuntary insolvency. stock, from among the members of the
corporation, who shall hold office for one
The last paragraph of Section 22 says: (1) year until their successors are elected
This provision shall not apply if the failure and qualified.
to organize, commence the transaction of
its business or the construction of its Every director must own at least one (1)
works, or to continuously operate is due share of the capital stock of the
to causes beyond the control of the corporation of which he is a director, which
corporation as may be determined by the share shall stand in his name on the books
Securities and Exchange Commission. of the corporation. Any director who
The SEC can still make you continue in ceases to be the owner of at least one (1)
existence if the cause is not within your share of the capital stock of the
control. corporation of which he is a director shall
Wala na moy bag-ong member, is that within thereby cease to be a director. Trustees of
your control? No. Can the SEC consider that non-stock corporations must be members
as a valid or reasonable excuse? I doubt it thereof. a majority of the directors or
because it goes to the very essence. You trustees of all corporations organized
need at least 5 to function as a corporation. under this Code must be residents of the
When you erase a corporation; when you Philippines.
cease as a corporation, it is just as, if not
more than, complicated with its formation. What is the term of Board Of Directors?
It is not right to say 1 year. It is 1 year until
their successors are elected and qualified.
December 6,2017
(April Pareno) What is the meaning of elected?
It means that the stockholders or members
We will begin with board of directors. of the corporation cast a vote to elect you.

What is the meaning of qualified?


It means you accept it and sit down as BOD.
You are elected and qualified.

You called for a director/stockholder’s


meeting; and then there is no quorum
because less than 50% of the share holders
+1 is represented in the meeting. What
happens? Can you go on to elect the BOD?
(Because Every annual meeting you elect
the BOD.)

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CORPORATION LAW TSN
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Usually if it is a stock and profit corporation, lots and homes in Forbes Park are all
you do not have a stock holder’s meeting that corporations.
failed to have a quorum. Ingon ka, why? Why in heaven’s name is it a
corporation?
But if you have a non-stock non-profit Because nobody sells land in Forbes Park. If
corporation, like the corporation that is made you want to sell your land, you sell the
up of the homeowners of Bell-Air Subdivision corporation who owns the land.
I, that is more than 1k houses. And they do Why? So that your capital gains tax will not
not bother to send a proxy; proxy is allowed be punitive in size.
by the specific provisions of Bell-Air
Homeowners Corporation. Ever since Pacquiao bought property in
Forbes Park, the price of property in Forbes
What happens if they do not have a quorum? Park is 400,000/sq.m.
They have given notice so let’s go ahead with The size of the property is 2,500 sq.m
the election. Is that valid? minimum; how much is that at 400,000/sq.?
1 billion. Why is it that expensive? Because
No it is not valid. What happens is the entire BGC is already 450,000/sq.m. Ayala, the
Board becomes a hold-over board. That is other side, is also 450,000/sq.m. That’s
when the second part of the last sentence of Forbes Park in between.
1st paragraph of section 23 takes effect.
They continue to hold office because there is In Forbes Park, there is an annotation: you
no successor that has been elected and cannot build more than two stories. It is
qualified. limited, but the first 25 years is over. And it’s
already 10 years into the next 25 years when
The problem is, if a hold over director dies, they reviewed the annotations in the titles by
does he have an unexpired term? the subdivision owners. They elected to
No, he does not have unexpired term renew it. Pagkahuman 15 years to go na lng,
because he is just a hold-over. The Board of there is a potential it becomes an extension
Directors cannot elect another to replace him of BGC or extension of Ayala. That’s why
to serve the unexpired term. It has to be the corporations are the ones positioned in them
stockholders to elect him or the homeowners
who will elect the replacement. Do you know that UP has three lots there?
You may ask why? If you have studied your
But they can’t get a quorum, what happens? Property laws then you would have come
I-abort. Next meeting, wala gyapon quorum across the case of Quasha vs Republic of
so hold-over gyapon. Hantod maghinay the Philippines.
hinay na silang kamatay, wala na gyuy
quorum na mabilin. But I am telling you it is a They have land in Forbes Park. Two years
problem of 90% of Home Owners before the end of parity, they filed a case
Association that are high end. The problem straight to the SC. What was the case?
of condominiums. They are so busy with Petition for Declaratory relief.
some other businesses that their I am an American under Parity; I own a
Homeowners Corporation is given second residential land in Forbes Park. What is the
priority or no priority at all. scope and extent of my right post-parity?
Can I continue to own? Am I still the owner?
The Only corporation meeting of That is the question he brought up. And it
homeowners which is non-stock non-profit was JBL Reyes who wrote the decision.
but has always with quorum is Forbes Park.
Why? Because the owners are not JBL Reyes said you had parity while the
individuals but corporations. The owners of amendment lasted. After the amendment

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expired, that is the end. You have to


disinvest. What the SC pronounce becomes Why is it wholly-owned when it is only 95%?
law of the land. So all the Americans in It’s not 100%. Because you cannot own
Forbes Park that had property had to think 100%.
what are we going to do. What did they do?
They conveniently donated the property to Why?
the Universty of the Philippines; but not Because you need a Board of directors. And
before the UP signed a deed of assignment a Board Of Directors constitutes, the
so that executives will continue to live there smallest number is 5. You cannot be elected
for a sum of money, 25 years renewable for as a member of Board of Directors unless
another 25 years. That is why the UP is an you own 1 share in the books of the
owner of property next to the property of corporation.
Senator Boxer Manny Pacquiao. You own 95%, you have to allow co-
ownership by at least other 4 people, so that
The rule in Forbes Park is that you can only you will be at least be followed.
build of 60% of the lot; the rest is easement
and that includes for another development The business language is accommodating.
like swimming pool. *Fr talks abt prop of 95% is wholly-owned already.
Napoles*
Let us say you are 95% owner of outstanding
If the sale of 2,500 is according to market capital stock, and then, all of a sudden, you
value, it will be 1 billion. How much is capital die. And in your will you already bequeath
gains plus doc stamps? What is 7.5% of the shares of stocks of the corporation to
that? 75 million. Maghilak ka. Whereas if it is your only daughter. You have other business
owned by a corporation and you sell the and you disposed according to your will. Let
corporation, you sell the shares of stocks of us say you die in February, just a week after
all the stockholders there who are under your the annual meeting of the corporation and all
control at par value, that is the extent of your 5 directors are already elected and you
capital gains. chose not to be one of the directors. You
have a nominate, all, in fact, are your
Let us say you are 95% owner of an nominates. You die, your daughter becomes
outstanding capital stock of a corporation. the stockholder that owns 95%.
The moment you are 95% owner, the
business parlance term is that corporation is Can she say, I demand to attend the BOD
wholly-owned by you. That is business meeting? Can she demand attendance to a
parlance ha, that is not legal. meeting of the BOD legally?

The moment you own 50% + 1 of the Unless she is elected to the Board, she
outstanding capital stock of a corporation, cannot demand.
that corporation is called a subsidiary of
the owning corporation. Why?
Because the powers are directly given by
Wholly-owned, subsidiary, the next term is Section 23. It is not a derivative power. It is a
an affiliate. power granted by law, directly by law.
“xx the corporate powers of all corporations
If the corporation outstanding capital stock is formed under this Code shall be exercised,
owned less than 50% by another all business conducted and all property of
corporation, this corporation is said to be an such corporations controlled and held by the
affiliate of the owning corporation. board of directors xx”. Make no mistake bout
that.

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stockholder or member of the corporation


Can the majority stockholder, 95% owner of signing the demand. Notice of the time and
the outstanding capital stock, can he remove place of such meeting, as well as of the
all the directors? intention to propose such removal, must
be given by publication or by written notice
We go to section 28. prescribed in this Code.

Sec. 28. Removal of directors or


trustees. - Any director or trustee of a
corporation may be removed from office by What is qualified notice?
a vote of the stockholders holding or It contains not only the time, ate place of the
representing at least two-thirds (2/3) of the meeting but also of that item in the agenda
outstanding capital stock, or if the for which the meeting is called. If it is for
corporation be a non-stock corporation, by removal, then you must state in the notice
a vote of at least two-thirds (2/3) of the that this is a meeting for the removal of the
members entitled to vote: directors, so and so. Notice must be
qualified.
From that first sentence, there is possibility
that you can remove because you have 95% Must be given by publication and by written
of the shares and not only 2/3. But let us notice as prescribed in this code. The
continue. vacancy resulting pursuant to this section
may be filled by election at the same meeting
Provided, That such removal shall take without further notice or at any regular or
place either at a regular meeting of the special meeting called for that purpose.
corporation or at a special meeting called
for the purpose, and in either case, after Removal may be with or without cause:
previous notice to stockholders or Provided, That removal without cause may
members of the corporation of the not be used to deprive minority
intention to propose such removal at the stockholders or members of the right of
meeting. A special meeting of the representation to which they may be
stockholders or members of a corporation entitled under Section 24 of this Code.
for the purpose of removal of directors or
trustees, or any of them, must be called by
the secretary on order of the president or 95% ka stockholder, ang tulo ana
on the written demand of the stockholders matangtang nimo without cause because
representing or holding at least a majority they are deemed to be your representative, if
of the outstanding capital stock, or, if it be you call a meeting.
a non-stock corporation, on the written
demand of a majority of the members But the two, you cannot remove without
entitled to vote. cause, because they deem to be the minority
representation. It has to be for cause that
So the 95% owner can demand a special they must be removed.
meeting.
How do you guard against it? In most
Should the secretary fail or refuse to call corporations, if you are the controlling
the special meeting upon such demand or investor, when you invite somebody to
fail or refuse to give the notice, or if there become a director, make him sign a letter of
is no secretary, the call for the meeting resignation that is undated. Ready na ka,
may be addressed directly to the aron dili ka mamoroblema aning section 28.
stockholders or members by any

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This is not asked in the Bar exam but please What is the reason for holding the validity of
memorize the formula for the number of the cut-off date 1 month before the annual
votes that is required to elect directors. meeting?
What is the formula? Because it will be chaotic if you do not have
that cut-off date. Suppose all 1 million decide
(AB/C + 1) +1 = number of votes that can to transfer their sales the day before election,
be shares or proxies that is required to how can you process that? And you must
elect directors. grant because theoretically they have the
right.
It is a way of solving the orderly transfer
What does A stand for? AB over C. ownership and the keeping of the stock and
transfer book.
A = total outstanding shares that are voting
shares Corporation law, especially, stock and profit
corporation is all about control. Who controls
B = desired number of directors the corporation?

C = total number of directors you want Muingon ka, magbuhat kog corpo na walay
elected or voted ga control. 33% diri, 33% sad diri, 33% diri.
Walay ga control.
Do you know what you’re doing? You are
inviting chaos. Your proposal is that the
You have to memorize this formula if you are purpose of the corporation is not fulfilled kay
the secretary. magsigeg away. Equal force man sila.

PLDT has more than 2 million stockholders. In the formation of the corporation, drawing
Ngano kadaghan? Kay Marcos passed a law up of the articles, you make sure that there is
favoring the Coangcos. If you wanted a control and control is not necessarily
telephone connection, part of the fee you padaghanay shares. You can have control
paid PLDT for that telephone connection is even if you have the smallest number of
for the purchase of preferred non-voting shares.
shares.
½ of the 2M stockholders of the PLDT has no If you are swing interest, 40% and 40%
votes; only 1 million has voting powers. magka- away gyud na sila gikan sauna.
So you count; but how can you count when Musulod ka naa kay 20%, ikaw naay control.
everyday it is being bought and sold in the Kay kung kinsa imo dapigan, mao man ng
stock market? How can you identify the value madaog.
of A?
If you are the swing vote and you do it very
PLDT has this thing called a “cut-off date”. well in the articles of the corporation, even if
1 month before the annual meeting, the you are the minority, you will control.
stock transfer book is closed. If you buy or Classification of shares is very important
sell, it is not recorded. Because that day because in the end what determines is
freezes the number of voters for the annual control.
meeting.
Section 24
Is that valid? Sec. 24. Election of directors or
The SC already said it is valid. trustees. - At all elections of directors or
trustees, there must be present, either in
person or by representative authorized to

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act by written proxy, the owners of a How do you cast it?


majority of the outstanding capital stock, or You can cast it all on one candidate; you can
if there be no capital stock, a majority of divide it equally; or divide it according to the
the members entitled to vote. proportion that you want.

Can you provide for a higher requirement for Why is it allowed to cumulate all its votes and
quorum than simple majority? put it in one candidate?
The Securities and Exchange Commission’s To allow or give chance to minority to have
opinion is: Yes, you can provide for a higher representation. That is why cumulative
requirement for quorum but you cannot voting cannot be denied in the by-laws in a
reduce the quorum to less than majority. profit and stock corporation.

The election must be by ballot if requested In a non-stock, non-profit corporation, if the


by any voting stockholder or member. by-laws is silent, there’s only one vote per
person, you cannot have cumulative voting.

Is the election to be by ballot?


No. Only if requested. December 7, 2017
(Janice Molina)
I will tell you how most elections are carried
out. Board of Directors or Trustees
W corporation, they require cut-off of the
stock and transfer vote one month before the If the corporation were a ship, the BOD is the
annual meeting of the stockholders. The by- captain of the ship. Remember that analogy.
laws also require that those who want to put The captain of the ship, mao nay tinood nga
themselves up as candidates to be directors manager, gusto ka makakitag tinood nga
must be nominated by at least 10% of the manager, kapitan sa dakong bapor nga
outstanding capital stock and the names overseas. Wa kay tabang ana ikaw ra, naay
must be submitted before the cut-off. magbuang buang ana nimo nga tripulante
unsa man imong buhaton ana makiglayog
Ang mga minority they have to organize nimo? desiplinahon nimo kay kon d na nimo
themselves so they can submit somebody in desiplinahon manunod nang uban.
voting.
So the BOD is the captain of the Corporation.
The Corporation Code requires that you
must allow for cumulative voting. You cannot Who elects the Board?
deny cumulative voting in a stock and profit As a general rule, it is the stockholders or the
corporation. members of the corporation. But there are
times when it is the BOD that elect the
What is “cumulative voting”? members of the Board. In case a member
If you’re a stock holder, your maximum dies, is incapacitated, resigned, or is
number of votes is your number of shares disqualified, the one who elect is the board
multiplied by number of director to be itself. I will summarize it to you; there are five
elected. That is your total number of votes (5) instances when the stockholders elect the
board:
Pila man imong shares? 10
Pila ka directors ang pillion? 11 First Instance. Annual Meeting - usually
11 x 10 = 110 Fiscal year. The annual meeting is dictated
that is your maximum number. by the by laws, you cannot just change the
date of the annual meeting. It is provided in

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the by-laws and normally it coincides with the incapacitated? If napiang sya? Incapacitated
cycle of the fiscal year. Fiscal Year meaning ba na? dili! He can still attend meeting by
the twelve month period not necessarily teleconferencing, by video conferencing,
coinciding with the calendar but it is the mahimo man. So he is not incapacitated.
accounting period to recon the financial story Kani adto, incapacitated ka ana, marayuma
of the corporation. Usually 2 to 3 months at ka, ma gout ka, d naka kalakaw,
the end of the fiscal year, that is the annual incapacitated ka na. Karon dili na! dili ka
meeting in the by laws incapacitated ug buhi lang imong utok.

Why 2 to 3 months? Second Instance. When the numbers of


Because you have to give time to the BOD is increased - by an amendment to the
independent external accountants to review Articles. Even if it's in the middle of the term,
the Financial Statements of the Corporation it is the stockholders who elect the additional
Because one of the items in the agenda of BODs
the annual meeting after you elect the
directors is to present the financial When can they do that?
statements. The President together with the When the amendment is approved
treasurer, they make a report. Why did we
register laws? They explain. Why did we How is it approved?
make less money? They also explain. Why When the SEC issues a Certificate of Filing
did we make a lot of money? that's when they
also explain. And then the stockholders vote Third. When the Director is removed - First
to accept the financial statement. After they of all, to remove a director you need a
have voted, then that is the Financial meeting duly called for a purpose. Di na
Statement of the Corporation. But that is mahimo ang written assent ha. And 2/3 must
already audited. vote to remove you. If you are the
representative of the majority, you can be
What is the significance of audited removed by two-thirds vote of the
Financial Statements? Stockholders with or without cause. Cause?
The significance of the audited FS is that a nangawat ka, tangtang ka. Without cause?
third party that is respected in his field wa ka, gisumhan ra sila sa imong hitsura!
certifies that the number in the FS, Balance
Sheet, and Profit and Loss Statement When do you elect the replacement?
reflects accurately the financial story of the You can elect the replacement at the same
Corporation in accordance with Generally meeting of his removal.
Accepted Accounting Principles (GAAP).
Then you are not afraid to present it to Fourth. When a director resigns, dies or is
anybody. If there are investors, dia ra ang FS incapacitated, and the remaining directors no
namo! naay magsukit sukit diha nga longer constitute a quorum. The example is
Government Agency? Dia ra sagpaon nimo Texas Instruments Philippines Inc., five
ana :) kay audited naman. Mao nay purpose directors in their corporation, nag inaugurate
ana nga di ka mag tago-tago. sila ug ika-duhang factory sa Baguio. Ngano
sa Baguio man? Bacause higher altitude and
You have an election then, annual meeting. ostensibly the air in Baguio is contains less
One year man ang term or until the pollutants, they manufacture, not ordinary
successor is elected and qualified, one year chips but they manufacture intelligent
ang term. Unya mapatay sya in the middle of controlling chips. In fact the likelihood of the
the term? patawag kag stockholder's Texas Instruments controlling chips in your
meeting para mupili sa mupuli nya? dili! Only smartphone is 70% because Texas
the directors choose the replacement. If Instrument manufactures 90% of all

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controlling chips. Mao nay technology nga niingon nga dili namo makapili kay hold-over
gitaguan sa Amercano. Japan and China? man mo. Wa man xay term nga nahibilin,
puro na memory pero pag abot na sa naghulat nalang sa puli. Wa man paminawa
controlling chips, wa pa na nila buhi-i. abogado, nagkaso sila hangtod naabot sa
SC. SC said correct, the Board cannot elect
How about the 5 Directors of the Texas the replacement if there is no unserved
Instruments? portion of the term that is left behind because
The law requires that the majority in the BOD he is a holdover director. So, that is what
must be a resident of the Philippines. There happens. When the director resigns, dies,
is no citizenship requirement, majority is disqualified, incapacitated or in any way
residents. That is what is required by the law. cannot continue to serve a remaining portion
Now they were inaugurating a factory, the 3 of his term and the remaining director also
Americans choose to fly, the 2 Filipinos are hold-over directors, they cannot elect the
decided to go by tag. but ang gisakyan sa replacement. It must be the stockholders.
Americano na-crash man, patay ang 3.When
a director dies, it’s only the BOD who elects Those are the 5 instances that a director
the replacement but the replacement is to be must be elected by the stockholders or the
elected by at least the majority of the Board. members of the Corporation.
Absolute majority or at least 3. Duha naman
lang nahibilin? So they have to call a Remember if the director dies, you have
stockholder's meeting. So that is the work. 30days to report. If he disqualified himself?,
here is a question. There is a disqualification
Fifth. Recently decided case (2 years ago) - provision, Section 27.
The case of Bel-Air vs. SEC. Bel-Air is one of
the subdivisions created by the Ayalas. Pila Section 27. No person convicted by final
mana ka subdivision diha sa Makati? Forbs, judgment of an offense punishable by
Dasmarinas, Bel-Air 1, Bel-Air 2,San imprisonment for a period exceeding six (6)
Lorenzo. Residential Subdivisions created years, or a violation of this code, committed
out of the Ayala estate. In the middle is the within five (5) years prior to the date of his
Ayala Central Business District. This is one election or appointment, shall qualify as a
of the most expensive Real Estate. Aron director, trustee, or officer of any corporation
makabawi ka naa kay dapat at least 30
stories nga building, naay 600 to 650T per This is a disqualification. So if na-priso na
square meter. gani ka ug 6 years, di naka ma director or if
you violated any provision of the Corporation
Ang Bel-Air mao na ila problema, walay Code or directive of the SEC within 5 years
quorum kada magmeeting sila homeowners. from your election, you cannot serve as a
Bel-Air Homeowners Associations, Inc. Unsa director or trustee.
may meetingan ana? Gasto sa garbage,
repair, security, discipline (husay) sa Can the Articles or the By Laws add
subdivision. What happens? 3 na ka-tuig qualification or disqualification to a
walay quorum, so all the directors were so Directorship in that Corporation?
called "hold-over directors" because a The Leading case is Gokongwei vs. SEC 89
director is supposed to have a term of 1 year SCRA 336. I remember this case because
or until the successor is elected and that was 1977, I was still in Ateneo de Manila
qualified. Toa na sya sa "until elected and Law school and the lawyer of Gokongwei
qualified". Ni-resign man sya, ang director ni was teaching us and the lawyer of San
resign, pag resign niingon ang nahibilin nga Miguel was also teaching us. This is their
sige magpili ta ug replacement. Unya naa issue, Gokongwei slowly accumulated
may bag-o abogado, gi-challenge nya, shares of San Miguel. All you need to be

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CORPORATION LAW TSN
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elected to San Miguel, you need only one- director? SC says yes. A corporation is free
fifteenth of Outstanding Capital Stock. The to add disqualification or additional
story here is Gokongwei, after he has qualification.
accumulated about one-twelfth of the
Outstanding Capital Stock, he started getting Second, is there a valid disqualification
proxies and one month before the annual here when his disqualification was voted
elections, they already submitted his name upon by the stockholder when the
and nominations to be a director. So he is Outstanding Capital stock was only one-
registered 1 month before, so San Miguel third of the present number of shares that
started floating articles in the newspaper that is in__? gamay pa tong corporation niadto
Gokongwei has antagonistic business when this disqualification was set. The SC
against San Miguel, that Gokongwei is in says yes, the disqualification still operates
San Miguel precisely to spy on the product later
developments of San Miguel so that he could
have advance knowledge of where San Is Gokongwei disqualified from running?
Miguel is now. Now, even before that, San SC answered, the presumption is
Miguel already passed an amendment to Gokongwei can run. If as the controlling
their Article. The amendment was this, if you share says that he is disqualified then he
have an interest, personally or in another must be given his day in __. He must be
Corporation, financially or indirectly of a investigated, he must be heard, and there
business that is in competition with San must be an investigation as to whether he
Miguel or of any of its product lines, then you really fits the disqualification. So it is not
are disqualified from becoming a member of automatic. If there is a disqualification in the
a BOD. So they said, you Gokongwei, you by-laws, that still has to go to an
have antagonistic business. investigation. The order is to remand to the
SEC but itw as settled amicably. Gokongwei
What is SMC's antagonistic business? was first made a director of San Miguel
Nakahinumdom mo atong Presto Ice cream? International in Hong Kong and afterwards
Gokongwei had Presto IceCream, SMC had they offered him price he could not refuse
Magnolia. Gokongwei had Robina Feeds, and so he made a lot of money. The money
SMC had BMeg Feeds. So in competition. So he got, he bought PCI bank together with the
they said, Gokongwei, you cannot run for Lopez’s. Later on, they sold PCI bank to
Board of Director of SMC. But d man nila Equitable Bank.
mapugngan naa naman siyay one-fifteenth,
you just cumulate that, dba cumulative Say, there were people in the board who are
voting? You cumulate that lingkod jud ka di also disqualified but they did not raise the
ka ma prevent. So Gokonwei did not accept objection later. One of them is Jaime Zobel
the warning of the secretary. He filed a case de Ayala, used to sit on the board of SMC
with the SEC, the SEC ruled in favor of SMC. and yet the Ayala's at that time owned Pure
The decision of the SEC is appealable to the foods because SMC bought them up and
CA but the lawyer decided to go to the SC for SMC had Monterey. Ngano gi-allow man nila
the question of law. si Ayala na mulingkod diha? Naa sila BMeg,
Ayala also had a Joint Venture with
Can a stockholder be disqualified from Harvel(?), high breed corn. They allow Ayala
becoming a member of the BOD when he because Ayala and Soriano are first cousins.
has enough shares to be voted as
director? Director’s Compensation has a limit in the
First, the SC divided the issue, can there Corporation. What is the limit? It cannot be
be a disqualification added in the by-laws collectively more than 10% of the Net Income
preventing a stockholder to become a of the Corporation before tax. When you are

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given a problem about this, make sure that is 3. That the contract is fair and
a pure director because there are directors reasonable under the
who are also officers of the Corporation. Let's circumstances; and
see you are President and CEO of the 4. That in case of an officer, the
Corporation and you are also a director, your contract has been previously
compensation as an officer does not have a authorized by the board of
limit, but your compensation as a director has directors.
a limit. The limit is not more than 10% of the
net profit before tax. That ceiling does not Where any of the first two conditions set
include per diem. Per Diem is the expenses forth in the preceding paragraph is absent,
that you must incur in order for you to in the case of a contract with a director or
perform the Director's duties. trustee, such contract may be ratified by
the vote of the stockholders representing
Probably you remember that PNB was still a at least two-thirds (2/3) of the outstanding
GOCC, it was the President who appointed capital stock or of at least two-thirds (2/3)
the directors and during the time of Ramos, of the members in a meeting called for the
he was very grateful with this Dabawenyo, purpose: Provided, That full disclosure of
because he helps during the elections, he the adverse interest of the directors or
appointed him as the director of PNB. PNB trustees involved is made at such meeting:
has a meeting once a month. Director’s fee? Provided, however, That the contract is fair
100k per meeting excluding per Diem. The and reasonable under the circumstances.
per diem is not included in the ceiling of
1/10th of the net income before tax. SELF-DEALING DIRECTOR are those who
enter contract with the corporation of which
What is the Director's fee in PLDT? 250K, they are directors. Technically speaking, it is
one board meeting. If you are called in a an anomalous dealing. A director is an agent
committee meeting, it is 150K. So once a of the corporation who acts for the
month you have a meeting 250k, tawgon sad corporation. Yet, a self-dealing director also
acts for himself.
ka ug committee meeting 150K.
REQUISITES:
1. His presence in the meeting, which
December 8, 2017 (1st Half)
approved the transaction, must not
(Lizette Estillore)
be counted for purposes of quorum.
2. He cannot vote on said issue.
Sec. 32. Dealings of directors, trustees
3. The contract is fair and reasonable
or officers with the corporation. - A
under the circumstances
contract of the corporation with one or
4. In case of an officer, the contract has
more of its directors or trustees or officers
been previously authorized by the
is voidable, at the option of such
board of directors (SELF-DEALING
corporation, unless all the following
OFFICER e.g. president of the
conditions are present:
corporation, general manager who is
1. That the presence of such director
not a director)
or trustee in the board meeting in
which the contract was approved
If the 1st and 2nd requisites are not met, for as
was not necessary to constitute a
long as the contract is fair and reasonable (In
quorum for such meeting;
NIRC, it is termed as arms length
2. That the vote of such director or
transaction), there is no fair advantage that
trustee was nor necessary for the
is given to the director.
approval of the contract;

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Illustration: You are a director of Bachelor 100 of the stockholders owning at


Bus. You are also one of the biggest dealers least 100 shares
in second hand tires and brand-new tires in 3. Banks, financial institutions, and
Davao. As a director, you offer it to Bachelor quasi-banks
Bus. This transaction must go through
Section 32 of the Code. There’s a meeting. Who is an INDEPENDENT DIRECTOR?
1. He cannot own more than 10% of the
The presence of the director is not counted. outstanding capital stock of the
Tangtang na siya sa minutes for this corporation. The PSE raised the
particular discussion on the transaction requirement. The law says not 10%.
because in the end the BOD will pass a The PSE says not more than 5%.
resolution approving the transaction. That’s 2. He cannot be related to any of the
how a corporation acts! controlling owners
3. He cannot be an employee of the
Put it in record that he did not vote. The corporation or the external auditor, or
others who voted shall still constitute as the consultant of the corporation, its
majority of the BOD. mother or subsidiary

Have a comparative pricing of others. The whole thinking is you can think better for
“These are the pricing of others. This is the the good of the corporation if you are not
price that he gives. Therefore, it is fair and related to the corporation – you are thinking
reasonable.” of the general welfare of the investing public.
In Section 32, if you have 2/3, you are
It’s another story when this self-dealing thinking about the good of the corporation
director owns 2/3 of the outstanding capital that is why you can ratify the transaction.
stocks because even with the absence of the Asa ma’y tinuod ana? If you ask me, none of
1st and 2nd requisites, these transactions can those two. It’s the actual running of the
be ratified by the stockholders. corporation. It’s the oversight! In the end,
good governance is good governance in any
What is the assumption behind this rule? If language provided that it exists.
the self-dealing director is a stockholder with
2/3 of the outstanding capital stock, he is less Q: Are the directors prohibited from entering
likely to take advantage of the corporation. into contracts with the corporation?
Mura ka ug nag-dunggab sa imong
kaugalingon – imo na gud na ang 2/3 unya A: No, they are not. But there is a formality
imo pang lawgawon ang corporation! that has to be done.
Maluoy ka man sa imong kaugalingon.
Charity begins at home!
Sec. 33. Contracts between
I’d like to point this out to you because there corporations with
is another applicable assumption applicable interlocking directors. - Except in cases
to directors. Now, the Securities Regulation of fraud, and provided the contract is fair
Code requires of certain corporations to have and reasonable under the circumstances,
independent directors at least 20% or at least a contract between two or more
2, whichever is lower, in the Board. These corporations having interlocking directors
are Listed shall not be invalidated on that ground
1. Listed Corporations alone: Provided, That if the interest of the
2. Corporations with at least P50M interlocking director in one corporation is
assets and at least 200 stock holders, substantial and his interest in the other
corporation or corporations is merely

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nominal, he shall be subject to the


provisions of the preceding section insofar The corporation where that interlocking
as the latter corporation or corporations director has only nominal interest needs to
are concerned. be ratified by 2/3 of the outstanding capital
stock or 2/3 of the members of the
Stockholdings exceeding twenty (20%) corporation. There has to be full disclosure
percent of the outstanding capital stock of the adverse interest of the directors and
shall be considered substantial for the contract must be fair and reasonable.
purposes of interlocking directors.
Kanusa man naa’y ratification kinahanglan
Normally, it is the corporation who enters into 2/3? If your interest is less than substantial
a contract of which the director is also a or if it is nominal, the assumption is that you
director because he is also a stockholder, may favour the corporation where your
and he is entering into contract with the interest is substantial.
corporation of which he is also a director.
This is what we call INTERLOCKING A director might act as an agent for another
DIRECTOR. corporation and that other corporation has
nothing to do with that, but he brings in to the
There is an INTERLOCKING DIRECTOR in director. That is not covered. (Huh?)
a croprations where one or some, or all of the
directors of one corporation is/are a director Illustration: For example a corporation is
in another corporation. putting up a building. They are opening it for
bidders. One of the directors is related to a
If the interest of the interlocking director of a well-known construction company because
corporation are both substantial where his brothers are architects and engineers.
stockholdings exceed 20% of the So dad-on niya ang corporation sa iyang
outstanding capital stock, you become a brothers. Is he a stockholder there? No, he
substantial interest in the corporation, as far is not! How do you handle that? Then you
as interlocking directors is concerned, then a enter into *** because *** requires full
contract between two or more corporations disclosure if a director brings a business
having interlocking directors shall not be opportunity to the corporation through the
invalidated on that ground alone, except if board, then he must make full disclosure.
the contract is fraudulent or not fair or Muiingon siya – “Kini akong giduso, I am
reasonable. related to them. My brothers are officers of
the corporation and a major stockholder.”
The contract, as a general rule, is voidable if For delikadeza, muingon siya – “I better
the interest of the interlocking director in one refuse myself so you can freely discuss the
of the corporations is nominal, while merits and demerits of this transaction.”
substantial in the other stockholdings in Sibat siya! Ang iyang proposal debatehon sa
another corporation. It will only be valid if the BOD and wala siya diha kay related man
following conditions are present: siya. Mao na ang full-disclosure, honest, and
1. The presence of such director/trustee transparent. Kinsa man muingon ana? Ang
in the board meeting in which the corporate secretary.
contract is approved was not
necessary *Father talks about SMC and derivative suit*
2. The vote of such director/trustee is DERIVATIVE SUIT is filed by a stockholder
not necessary or not counted in the in the name of the corporation.
approval of the contracts
3. The contract must be fair and Who files the suit for the corporation? It’s not
reasonable the corporation because it has no hands to

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sign the complaint. It has to be the BOD who


files the suit. It files the suit by passing a
resolution where a natural person, normally December 8, 2017 (2nd Half)
the President, is named who will act for and (Zarah Domingo)
in behalf of the corporation. This is approved
by the majority of the BOD. Section 31 lists down the 3 ways in which a
Director is liable.
If the corporation acts against the very
agents who are supposed to act for him, the 1.) When he votes for or consents to a
suit shall be filed through a derivative suit. A patently illegal act;
stockholder can file the suit in the name of 2.) Willfully and knowingly vote for or
the corporation. The stockholder is the assent to patently unlawful acts of the
representative party to the corporation corporation;
because the mortal representatives of the
It was reported a week ago that the Mayor of
corporation are themselves the respondents.
the IGACOS (Samal) said he has money for
microfinance and he appointed the multi-
Only one share is needed for a stockholder
purpose cooperative of Samal that it will
to validly file a derivative suit. At the time the
process the applicants, after which they will
controversy arose, you must be a
release the microloans. The cooperative
stockholder. At the time you file the suit, you
passed a resolution which provided that in
must still be a stockholder.
gratefulness to the Mayor, it is giving the
mayor a gift of P100,000. The following year,
*Fathers talks about the whereabouts of
they passed another resolution giving
Danding Conjuanco and SMC*
P100,000. This is in violation of the Anti-Graft
and Corrupt Practices Act-“gifts by reason of
Sec. 31. Liability of directors, trustees
office.” The Mayor received the check and
or officers. - Directors or trustees who
subsequently encashed it and deposited it in
willfully and knowingly vote for or assent to
his account. The check was recorded in the
patently unlawful acts of the corporation or
cooperative. There is no way he can deny
who are guilty of gross negligence or bad
that he has not received the money.
faith in directing the affairs of the
corporation or acquire any personal or Give a law that makes the director and the
pecuniary interest in conflict with their duty office liable, criminally. An example is the
as such directors or trustees shall be liable violation of the Trust Receipts Law. If the
jointly and severally for all damages corporation is the trustee, the officers are the
resulting therefrom suffered by the ones who serve the prison term, not the
corporation, its stockholders or members corporation because it cannot be put in jail.
and other persons.
Section 13. Penalty clause. The failure of
When a director, trustee or officer attempts an entrustee to turn over the proceeds of
to acquire or acquires, in violation of his the sale of the goods, documents or
duty, any interest adverse to the instruments covered by a trust receipt to
corporation in respect of any matter which the extent of the amount owing to the
has been reposed in him in confidence, as entruster or as appears in the trust receipt
to which equity imposes a disability upon or to return the said goods, documents or
him to deal in his own behalf, he shall be instruments if they were not sold or
liable as a trustee for the corporation and disposed of in accordance with the terms
must account for the profits which of the trust receipt shall constitute the
otherwise would have accrued to the crime of estafa, punishable under the
corporation. provisions of Article Thirteen hundred and

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fifteen, paragraph one (b) of Act acquires for himself a business opportunity
Numbered Three thousand eight hundred which should belong to the corporation,
and fifteen, as amended, otherwise known thereby obtaining profits to the prejudice of
as the Revised Penal Code. If the violation such corporation, he must account to the
or offense is committed by a corporation, latter for all such profits by refunding the
partnership, association or other juridical same, unless his act has been ratified by a
entities, the penalty provided for in this vote of the stockholders owning or
Decree shall be imposed upon the representing at least two-thirds (2/3) of the
directors, officers, employees or other outstanding capital stock. This provision
officials or persons therein responsible for shall be applicable, notwithstanding the
the offense, without prejudice to the civil fact that the director risked his own funds
liabilities arising from the criminal offense. in the venture.

For instance, you import a machine (8-color ‘Nangilog ko ug business sa corporation.’


printing machine from Italy). You obtain a You are all directors, you went to Australia.
loan from a corporation. You open a letter of Cattle-fattening is your business. As long as
credit in the name of the corporation (bank), the cattle is still increasing its weight, you do
assigned to you. You will be made to sign a not yet kill it. When it stops growing, that is
trust receipt which provides that the the time you slaughter it. While you were
proceeds of that, if you are a printing press, choosing a cow, somebody came near you
go directly to the corporation to service the and told you they were looking for leather. It
debt. If you cannot pay, that will amount to made an offer that the former will make
estafa. The proceeds belong to the bank leather from their cattle and they will buy it.
because it is the owner of that machine. You as director, you say this is my chance, I
will not give this to the corporation. When you
That is the same case with Avon. You will be went back to the Philippines, you put up a
asked to open an account and issue leather-tanning business. You get the skin of
postdated checks so that you will work hard the cow that will be slaughtered. Is that a
to sell them, and at the same time, you will violation of the Doctrine of Corporate
be made to sign trust receipts because Avon Opportunity? No.
is the owner of the beauty products (pa-pula)
and you are merely an agent. If you cannot The requisites of the Doctrine of Corporate
pay and you cannot return the beauty Opportunity: The Doctrine says that if there
products, you are deemed to have is presented to a corporate director a
appropriated these products for your benefit. business opportunity which:
You have committed estafa.
1.) The corporation is financially able to
The provision of law states that if it is the undertake;
corporation who is the trustee in a trust 2.) From its nature is in line with the
receipts contract, the officers, the members corporation’s business and is of
of the board, they are criminally responsible. practical advantage to it;
They will answer for the fine or imprisonment 3.) One in which the corporation has an
that is meted out to the corporation, jointly interest or a reasonable expectancy.
and severally liable.
And then, wala nimu gihatag, imuhang gi-
What is the “Doctrine of Corporate solo. Then you must account for the profits,
Opportunity”? even if you spent you money in that
business.
Section 34. Disloyalty of a director. –
Where a director, by virtue of his office,

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The Supreme Court said that it is not a case directors for a meeting. It was found out that
of violation of the Doctrine of Corporate although all the former’s properties in the
Opportunity. Cattle-fattening and Leather- Philippines were already attached, a special
Hide/Cattle-Hide Tanning, Curing and information was received that the debtor
Selling, are 2 different businesses. corporation owned a plane in Burbank,
California. The directors agreed that they will
What is an example of a violation of the hire a lawyer to attach the property. Now, one
Doctrine of Corporate Opportunity? Bitong vs of the directors stands up and goes outside
CA (1998) and makes a phone call. He called his lawyer
in LA and told him that since the debtor
Bitong was the President of Jaka corporation also had debts to him, he
Corporation (the holding company of Juan instructed the said lawyer to go to Burbank
Ponce Enrile).The corporation was named and attach the same property which the
after Enrile’s two children. It was the 2nd creditor corporation has agreed to attach. He
biggest owner of real property along Ayala is a director of a corporation. He used his
Avenue, the main avenue of the Central knowledge for his own benefit/ That I
Business District in Makati. Jaka was in the disloyalty.
development of high-rise condominium and a
law was passed than when you are a high- If you are a director of a corporation, it is like
rise developer, 10% of your project must also partnership, if the debtor has a debt to a
be in low-cost housing. They looked for lot partnership and a debt to you personally, not
where they will be putting up the low-cost as a partner, but in your other business, and
housing project. They found 3 prospects: the both obligations have ripened. Naa siya
first one was flat, already with electricity and gihatag na payment pero dili paigo sa duha,
NAWASA connection; the second one was sa usa ra. Asa man na i-apply kung ikaw ang
also flat but without water and electricity; and mukulekta? To his debt to you or to the
the third one will require high cost of corporation? (But, charity begins at home.)
development because it is not in a flat area, You have, first and foremost, a fiduciary duty,
which although having access to electricity, which is higher than your personal duty. It is
had no access to water. Bitong said that Jaka higher.
will get the third option. He got the first one
for his own corporation which was also In the same way, when a friend requests that
involved in real property development. The he parks his car in your parking space while
SC said that it was a violation of the Doctrine he is away for a conference and your house
of Corporate Opportunity because it was no got burned and you chose to save your own
longer speculative, the corporation needs car before your friend’s car, are you liable.
that, it was in-line with the business. There Yes, you are liable for it. That is a contract of
are no ifs and buts. deposit. You have an obligation as the
depositary to attend to what is deposited
If you compare this case with the previous ahead of your own. That is the obligation that
example, layo pa, daghan pa itranslate, you accepted when he deposited it to you.
agian. There is a way of slaughtering to When you deposit in the bank, it is fungible
produce leather—there is curing and so it is not a true deposit. It is a mutuum.
stretching. In other words, the process of
producing leather is not part of the business Contract of Deposit, Contract of Partnership,
of cattle-fattening. Hence, there was no Fiduciary nature of a corporation, mau ra na.
violation of the Doctrine of Corporate It’s a common thread.
Opportunity.
If you are not careful, you will end up
There is a corporation that has a debt with betraying the corporation because you
another corporation. The latter calls the

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obtain an interest to your benefit, at the I will tell you the story of the Execom of the
expense of the corporation. old PCI Bank. PCI Bank was bought by the
Lopez Group and the Gokongwei Group.
EXECUTIVE COMMITTEE They teamed up together, equal shares sila
and they bought it right after EDSA
Section 35. Executive Committee. –The Revolution. The way it was bought is, the
by-laws of a corporation may create an Romualdez shares, most of it, were
executive committee, composed of not sequestered by government and the
less than three members of the board, to government said, since the Romualdez’s did
be appointed by the board. Said not contest, we are selling it. The way they
committee may act, by majority vote of all sell it is by obtaining dollar credits. At that
its members, on such specific matters time, the Philippines had so much foreign
within the competence of the board, as debt. If you pay the foreign debt, you obtain
may be delegated to it in the by-laws or on credits equivalent to the debt that you paid.
a majority vote of the board, except with And that is how they gained control over
respect to: (1) approval of any action for these different corporations that were for
which shareholders’ approval is also sale. So since Lopez did not have enough
required; (2) the filling of vacancies in the money to pay for everything, he teamed up
board; (3) the amendment or repeal of by- with Gokongwei who had money, but did not
laws or the adoption of new by-laws; (4) have enough to buy everything. So pareho
the amendment or repeal of any resolution sila, they teamed up. 35%-35%, so 70% sila.
of the board which by its express terms is Karun, gipalit nila, pagkahuman palit nila,
not so amendable or repealable; and (5) a ingun dayun si Gokongwei kay Eugenio
distribution of cash dividend to the Lopez “ since you are more used to the
shareholders. public, you be the Chairman and President,
tapos ako, Execom ra ko.” Lipay kayo si
Eugenio kay siya man ang starring, siya man
Those are the exceptions which the
ang chairman. Si Gokongwei, Execom ra
Executive Committee cannot act.
siya. Sa ngadtu-ngadtu na, nakamatikud na
There are so many corporations who do not si Lopez na ang mga corporation ni
want to call it Execom. They call it Mancom Gokongwei ang sige kahuwam sa kwarta
(Management Committee). The problem with because it is the Execom that processes the
that is that it is the terminology that is found loans, they meet every week. Ka-isa ra man
in FRIA (Financial Rehabilitation and magmeeting every month ang board.
Insolvency Act of 2010). It is a technical
Nothing reaches the board unless it is
group which may be appointed by the SEC in
approved by the execom. So nawala na sa
a distressed corporation. So, the correct term
passing si Eugenio Lopez Jr. Mauna niingun
is Executive Committee, not Mancom.
siya na ibaligya na natu. Who wants to buy
It says here that the by-laws of the 35% when you do not control. So, niduol siya
corporation may create. Suppose there is no kang Gokongwei ingun siya “let’s sell
provision in the by-laws, can the board create together” so it’s 60%, they have to pay a
an Execom? The Supreme Court said YES. premium for control, not only the buying of
Why? Because the powers of the Board is the shares, but you add a price to being in
plenary. It is supposed to exercise such control of the corporation, that is the
powers and create such committees to premium, because you get 70%. Ingun si
enable it to govern and administer the affairs Gokongwei “no I am not interested in selling.”
of the corporation. So even if there is no So what did Eugenio Lopez Jr do? He did the
provision in the by-laws, the board can create unthinkable, he went to Romualdez (mau nit
an Execom. u siyang gipriso ni Marcos unya gipa-eskapo
sila) who was a minority stockholder with

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20%. Giingnan niya si Romualdez “I am just ratified in passing, paspas ra na kaayo.


approaching you, I am asking for your help The Board begins to look at the loans once it
(hinay na tu sila, wala na man tu sila sa is above P5 Million. So for a big bank like
Board), let us organize and let us sell Unibank or PCI Bank, higher tingali ang
togather because the Equitable Bank is threshold, P10 Million or P20 Million. So that
interested in buying.” was how Gokongwei made PCI Bank the
financing company of his corporations kay
This is the time of Estrada. Gipahuwam ni siya man ang sa Execom, siya man gakupot.
Estada sa SSS and GSIS ang Equitable Is it not covered by the Interlocking
Bank, so naa siya kwarta ikapalit. So Directors? It is covered supposed to be if it
Romualdez said “Go atu ni ibaligya arun was the Board that approved it, but it is not
maka-kwarta ko kay I will have a premium. If the Board that approved it, it was the
I sell by myself, there will be no premium Executive Committee.
because there will be no control, but if I sell
together with Lopez, there will be control, it Alright, we are finished with the Board of
will be 55%.” Lopez told Romualdez wait for Directors. We are now with Powers of a
my signal. Corporation (Father hands in a handout to
the class).
Lopez went to Gokongwei and he told him
“you don’t have to attend the meeting
because if you do, you will just be
embarrassed. You will no longer be in the
Executive Committee, and I am and
Romualdez will sell to Equitable Bank-Mr.
Go, and that will be the end of you, you are
just 35%, no premium, you will only be 2nd
beadle to Mr. Go of Equitable Bank.” What
did Gokongwei say “Okay I am selling with
you.”

Lopez said “Okay, we were in this together


when we came in, we will exit together.” And
than was te ultimate stabwound to
Romualdez because Romualdez grabbed
Meralco from the Lopez’s so Lopez did not
have any qualms at all to betray Romualdez.

That is the story of how it became Equitable


Bank, then afterwards, it got into trouble
because of bankrun (remember that vice-
president who testified that it was Velarde
himself who signed it but that was Estrada,
edi, bankrun).

Who got Equitable Bank? BDO. Equitable


Bank is lost in BDO who bought it.

Sometimes, it is the Executive Committee


who runs the corporation. Naa man na
resolution ang Board of Directors, let us say
for loans, P5 Million and below, approval of
the Executive Committee is enough and it is

62