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Corporation Law Bonilla 1

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What is a corporation and what is the role of the State in its creation? LAW JURISPRUDENCE CONCEPTS AND DOCTRINES Relevant Constitutional Provisions The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates, reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos. In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to qualified Filipinos. The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities. (Sec. 10, Art. XII) No franchise, certificate, or any 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; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the RRSE.RBA. DLSU College of Law 2010

Sec. 1. Title of the Code. - This Code shall San Juan Structural v. CA (1998) be known as "The Corporation Code of the Philippines". FACTS: Motorich Sales sold a parcel of land to San Juan Structural through a document signed by Gruenberg, the Sec. 2. Corporation defined. - A former s corporate treasurer, and by the president of the corporation is an artificial being created latter corporation. Despite continuous demands, Motorich by operation of law, having the right of Sales refuse to execute necessary documents in succession and the powers, attributes and transferring the ownership over the parcel of land. properties expressly authorized by law or incident to its existence. ISSUES: 1. May a corporate treasurer, The present statutory definition of the by herself sell a parcel of land and without any corporation is a narrow and antiquated authorization from the board of directors? view of the corporate vehicle because it 2. May the veil of corporate look at only one aspect the relationship fiction be pierced on the mere ground on the ground between the corporation and the State that almost all of the shares of stocks of Motorich Sales of otherwise multifaceted relationships Corporation are owned by said treasurer and her that a corporation represents in the husband? business environment. (Villanueva) HELD: Sec. 3. Classes of corporations. - 1. No, because a corporation is a juridical person separate Corporations formed or organized under and distinct from its stockholders or members. As such this Code may be stock or non-stock it may only act through its board of directors or, when corporations. Corporations which have authorized either by its bylaws or by its board capital stock divided into shares and are resolution, through its officers or agents in the normal authorized to distribute to the holders of course of business. The power to sell the corporation s such shares dividends or allotments of assets is foreign to the corporate treasurer s function; the surplus profits on the basis of the and thus, such authority must be granted by the board shares held are stock corporations. All or the properly authorized officer. other corporations are non-stock 2. No, because San Juan Structural failed to establish any corporations. purpose of shielding any alleged fraud or illegal

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Sec. 4. Corporations created by special laws or charters. - Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. Sec. 5. Corporators and incorporators, stockholders and members. - Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code:

activities of the officers or stockholders of San Juan Philippines. (Sec. 11, Id.) Structural. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or NPC v. Philipp Bros. (PHIBRO) (2001) controlled corporations may be created or established by special charters in FACTS: NPC accepted a bid from PHIBRO to deliver coal. the interest of the common good and subject to the test of economic However, due to an industrial strike in Australia, PHIBRO viability. (Sec. 16, Id.) was in delay in delivering the coal. When NPC had another public bidding, it disqualified PHIBRO from participating in The rationale behind the Corporation Code may be inferred from this article it. Claiming that there was bad faith in NPC s because it shields the legislators from favoring private corporations. (Bonilla) disqualification, PHIBRO filed a case for damages. The trial court ruled in favor of PHIBRO and awarded, among other In times of national emergency, when the public interest so requires, the State may, during the emergency and under reasonable terms prescribed by things, moral damages. it, temporarily take over or direct the operation of any privately-owned public utility or business affected with public interest. (Sec. 17, Id.) ISSUES: 1. Whether or not NPC acted wrongfully or with bad faith in disqualifying PHIBRO from participating in the The State may, in the interest of national welfare or defense, establish and operate vital industries and, upon payment of just compensation, transfer to subsequent public bidding? public ownership utilities and other private enterprises to be operated by 2. Whether or not PHIBRO is entitled to moral damages? the Government. (Sec. 18, Id.) HELD: 1. No, because NPC was merely exercising its right to The State shall regulate or prohibit monopolies when the public interest so reject bids for it was not bound any contract to re- requires. No combinations in restraint of trade or unfair competition shall be approve PHIBRO s pre-qualification requirements. allowed. (Sec. 19, Id.) NPC s disapproval of PHIBRO was without any intent to injure or a purposive motive to perpetrate damage. Concept of a Corporation Instead, the measure it adopted was one of selfprotection. Apparently, NPC acted on the strong A corporation is basically a group of individuals who decide to get together. conviction that PHIBRO had a seriously-impaired track The State participates in forming a corporation because its creation is record. subject to the former s approval. (Bonilla) 2. No, because NPC did not act in bad faith. Moreover, moral damages are not, as a general rule, granted to a Attributes of the Corporation corporation. While it is true that besmirched reputation is included in moral damages, it cannot cause mental 1. Artificial Being anguish to a corporation, unlike in a case of a natural person, for a corporation has no reputation in the sense It is the fiction of law that creates the person of the corporation, with the RRSE.RBA. DLSU College of Law 2010

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Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock. Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. Shares of capital stock issued without par value shall be deemed fully paid and nonassessable and the holder of such shares

that an individual has, and besides, it is inherently same attributes of an individual with full capacity to enter into contractual impossible for a corporation to suffer mental anguish. relations. (Villanueva) (LBC Express Inc. v. CA) a. The assets of the corporation belong to the corporation and not coowned by its shareholders or members. See San Juan Structural v Filipinas Broadcasting v. Ago Medical (2005) CA. b. The liabilities of the corporation, as a general rule, cannot be held FACTS: Ago Medical filed a complaint for damages against Filipinas Broadcasting because employees of the latter against its directors, officers or shareholders; and vice versa. See Francisco v. CA. made libelous statements about the former on air. The lower courts ruled that the statements were libelous per se c. If a corporation is guilty of a tort, it is because of the actions of the and awarded Ago Medical damages. Among the other corporate officer. Thus, the corporation is liable through the action of the officer and the officer will be held solidarily liable with the issues raised by Filipinas Broadcasting on appeal was that corporation. Ago Medical was not entitled to moral damages because it is a corporation. d. The corporation can be held criminally liable depending on the penal law violated. If the penal law subjects a fine will be paid, the ISSUE: Whether or not moral damages may be awarded to corporation can be held liable; while if the penalty is imprisonment, Ago Medical? the officer responsible will be penalized. e. The corporation also has constitutional rights. HELD: Yes, because Ago Medical s claim for damages falls i. Due process and equal protection the constitutional provision under Article 2219(7) of the Civil Code and this provision does not limit its application for it does not qualify the term expressly authorizes the recovery of moral damages in person . cases of libel, slander or any other form of defamation. This ii. In Stonehill v. Diokno, the SC recognized that corporations are article does not qualify whether the plaintiff is a natural or protected by the constitutional guarantee against unreasonable juridical person. Therefore, a juridical person such as a searches and seizures. However, the Court ruled that the corporation can validly complain for libel or any other form corporate officers cannot contest the legality of a seizure of defamation and claim for moral damages. because such right is purely personal. iii. Corporation have no right to claim protection on the constitutional right against self-incrimination because such right Crystal v. BPI (2008) is a personal one and applies only to natural persons. f. As a general rule, corporations, being juridical in nature, are not FACTS: Spouses Crystal obtained a loan from BPI in behalf entitled to moral damages because they cannot experience of CCCC secured by real and chattel mortgages. BPI filed a wounded feelings, mental anguish, etc., unless provided by law. See complaint for a sum of money against CCCC and the NPC v. PhiBros to Crystal v. BPI. spouses because CCCC an spouses Crystal failed to pay the balance of their loan. The trial court ruled in favor of BPI Moral damages are awarded because of intangible injury to a and thus BPI instituted extrajudicial foreclosure of the person. (Bonilla) mortgages. Later, spouses filed an action for injunction to RRSE.RBA. DLSU College of Law 2010

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shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends.

stall the foreclosure. The trial court, however, dismissed the complaint and ordered them to pay moral damages. The spouses appealed to the CA on the ground that, among others, BPI is not entitled to moral damages because it is a corporation. The CA dismissed this claim and found that BPI having been famous and having gained its familiarity and respect not only in the Philippines but also internationally because of its good will and reputation must protect and defend the same against any unwarranted suit. ISSUE: Whether or not BPI is entitled to moral damages?

2. Creature of the Law The juridical existence of a corporation is depended on the consent or grant of the State. From a strict legal point of view, and under the theory of concession, a corporation cannot come into being by mere consent of the parties, there must be a law granting it, and once granted, forms the primary franchise of the corporation. (Villanueva) 3. Right of Succession A corporation has the capacity for continuous existence despite the death or replacement of its shareholders or members, for it has a personality separate and distinct from those who compose it. (Villanueva) 4. Creature of Enumerated Powers, Attributes and Properties A corporation is a creature of limited powers, such as those expressly conferred on it by law and those that are implied by or are incidental to its existence. (Villanueva) Separate Legal Personality A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it; and that obligations incurred by the corporation, acting through its directors, officers and employees are its sole liabilities. While not in fact and in reality a person, the law treats the corporation as though it were a person by process of a fiction or by regarding it as an artificial person distinct and separate from its individual stockholders. (Villanueva) Even if an individual is the owner of the corporation, the corporation is its own person as far as managing is concerned. The corporation may run its own affairs separate from its members. In fact, the corporation may have stronger rights than its members. (Bonilla) RRSE.RBA. DLSU College of Law 2010

A corporation may, furthermore, classify its shares for the purpose of insuring HELD: No, because although the spouses complaint against compliance with constitutional or legal BPI proved to be unfounded, it does not automatically requirements. entitle BPI to moral damages. Indeed, while the Court may allow the grant of moral damages to corporations, it is not Except as otherwise provided in the automatically granted; there must still be proof of the articles of incorporation and stated in the existence of the factual basis of the damage and its causal certificate of stock, each share shall be relations to the defendant s acts. equal in all respects to every other share. Reynoso v. CA (2000) Where the articles of incorporation provide for non-voting shares in the cases FACTS: CCC (now GCC) controlled the finances of its allowed by this Code, the holders of such subsidiaries but this became unlawful when the Central shares shall nevertheless be entitled to Bank adopted the DOSRI prohibitions directors, officers, and stockholders are prohibited from borrowing money vote on the following matters: 1. Amendment of the articles of from their company. In order to circumvent the DOSRI prohibitions, CCC organized CCC-Equity where resident incorporation; 2. Adoption and amendment of by- managers of CCC s subsidiaries were appointed positions in CCC-Equity; and were told to observe illegal business laws; 3. Sale, lease, exchange, mortgage, practices. Reynoso, a resident manager of CCC-QC who pledge or other disposition of all refused to comply and thus was later fired, won a case filed or substantially all of the against him by CCC-QC. Later, Reynoso asked the court to execute the judgment against GCC but the latter insisted corporate property; 4. Incurring, creating or increasing that it was not a party to the case since the judgment was against its subsidiary. bonded indebtedness;

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ISSUE: Whether or not Reynoso s favorable judgment against CCC-QC may be executed against GCC? Should the As a general rule, the corporation has a separate juridical personality from veil of corporate fiction be pierced? its member and its subsidiaries. The exception is when you apply the doctrine of piercing the veil of corporate fiction. (Bonilla) HELD: Yes, because when the mother corporation and its subsidiary cease to act in good faith and honest business See cases Reynoso v. CA to FMC v. CA. judgment, or cause injustice, the law steps in to remedy the problem. When that happens, the corporate character is As a general rule, corporations cannot be part of a partnership, but not necessarily abrogated. It continues for legitimate corporations may enter into joint ventures. However, joint ventures do not objectives. However, it is pierced in order to remedy create a separate legal entity. (Bonilla) Except as provided in the immediately injustice. The court judgment would become useless if CCC preceding paragraph, the vote necessary is placed beyond the legal reach of the judgment creditor. Stock Corporation v. Non-Stock Corporation to approve a particular corporate act as provided in this Code shall be deemed to COMMENTS: The DOSRI rule is still presently applicable in Stock Corporation Non-Stock Corporation banking law. (Bonilla) refer only to stocks with voting rights. capital stock divided into shares absent either of the two requisites authorized to distribute to of a stock corporation Sec. 7. Founders' shares. - Founders' There was an actual finding that there was a transfer of shareholders dividends shares classified as such in the articles of assets made from CCC to GCC, which was admitted in court. incorporation may be given certain rights (Id.) A non-stock corporation may have capital stock but the corporation may not and privileges not enjoyed by the owners distribute shares of stock; instead they only sell them. (Bonilla) of other stocks, provided that where the The court favored in Reynoso in this case because of the exclusive right to vote and be voted for in principle that those who have less in life, have more in Dividends are the profits of the corporation which cannot come from the the election of directors is granted, it law . (Id.) capital stock. (Id.) must be for a limited period not to exceed five (5) years subject to the Kukan v. Reyes (2010) Private Corporation v. Public Corporation approval of the Securities and Exchange Commission. The five-year period shall FACTS: Morales won the bidding conducted by Kukan Inc. Private Corporation Public Corporation commence from the date of the aforesaid for the supply and installation of signages in a building. Set up by individuals who decide to Set up by the government to help approval by the Securities and Exchange Despite his compliance with his contractual obligations, engage in profit or non-profit it administer its territory. (Bonilla) Commission. Morales was only paid almost have of the amount he was objectives. (Bonilla) entitled to under the contract. Kukan Inc. refused to pay Formed or organized for some Formed or organized for the Sec. 8. Redeemable shares. - Redeemable despite demands; and thus, Morales filed a case for a sum private purpose, benefit, aim, or end. government or a portion of the shares may be issued by the corporation of money. Kukan Inc. was declared in default because they State. when expressly so provided in the articles no longer participated in the trial. The trial court rendered Created for political purposes of incorporation. They may be purchased judgment, which became final and executory, in favor of RRSE.RBA. DLSU College of Law 2010

5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation.

Doctrine of Piercing the Veil of Corporation Fiction

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or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares. Sec. 9. Treasury shares. - Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors.

Morales. When the sheriff was levying personal properties found at Kukan Inc. s office, Kukain Internation Corporation (KIC) filed a third party claim saying that the personal properties belonged to them and not Kukan Inc. Notably, KIC was incorporated shortly after Kukan Inc. had stopped participating in the trial. In reaction, Morales filed an omnibus motion to pierce the veil of corporate fiction saying that Kukan Inc. and KIC were one and the same entity. The lower courts granted this motion. ISSUE: Was the piercing of the veil of corporate fiction proper? HELD: No, because those who seek to pierce the veil must clearly establish that the separate and distinct personalities of the corporations are set up to justify a wrong, protect fraud, or perpetrate a deception. In the concrete and on the assumption that the RTC has validly acquired jurisdiction over the party concerned, Morales ought to have proved by convincing evidence that Kukan, Inc. was collapsed and thereafter KIC purposely formed and operated to defraud him.

Created under the Corporation Code.

connected with the public good in the administration of the civil government. Created by its own charter; the Corporation Code is only supplementary.

Public Corporation Private Character LGUs Public Character GOCCs Private corporations of the government; solely/majority owned by the government. Generates profit for the government. Structured and operates like a private corporation.

According to the Constitution, GOCCs may be created or established by special charters. (Sec. 16, Art. XII) Since public corporations have their own charters, this course will only concern itself with private corporations. (Bonilla) Domestic Corporation v. Foreign Corporation

OBITER: The implication of the above comment is twofold: DOMESTIC FOREIGN (1) the court must first acquire jurisdiction over the Formed, organized, Formed, organized or existing under any laws corporation or corporations involved before its or their or existing under the other than those of the Philippines and whose law separate personalities are disregarded; and (2) the doctrine laws of the allows Filipino citizens and corporations to do of piercing the veil of corporate entity can only be raised Philippines. business in its own country and State. during a full-blown trial over a cause of action duly commenced involving parties duly brought under the A foreign corporation may be licensed by the SEC to do business in the authority of the court by way of service of summons or Philippines only: what passes as such service. 1) under the principle of reciprocity; 2) after securing a certificate of authority from the Board of COMMENTS: Investments under EO 226; and 3) after complying with the conditions for issuance of the license on As compared to Reynoso v. CA, Morales never proved that RRSE.RBA. DLSU College of Law 2010

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there was a transfer of assets. He committed a mistake of directly going after KIC without proving this fact first. (Bonilla) PNB V. Ritratto Group (2001)

application forms, structural organizations and capitalization. (Villanueva) See SBMA v UIG.

The incorporation test is used to determine whether the corporation is a FACTS: PNB-IFL, a subsidiary company of PNB, extended a domestic or foreign corporation. (Bonilla) letter of credit in favor of respondent corporations secured by real estate mortgages. Despite respondents repayments, Another test to determine the nationality of a corporation is the control test their outstanding obligations stood at $ 1.5 M. PNB-IFL, where you look at the controlling stockholders of the corporation. (Id.) through its attorney-in-fact PNB, notified the respondents of the foreclosure of all the real estate mortgages. This The grandfather rule is the method of checking the degree of percentage of prompted respondents to file a complaint for injunction to ownership of nationals and foreign corporations investing in a subsidiary prevent PNB from foreclosing the mortgage. PNB then filed corporation in connection to nationalized industries. This rule is applied a motion to dismiss on the ground of failure to state a when there are 2 or more corporations involved, one owning the other. (Id.) cause of action and the absence of any privity between them and respondents. The lower court ruled dismissed the Ex. Corporation A owns Corporation B. Corporation B is 40% owned by Corporation A. Corporation A is 40% Filipino-owned. Therefore, Corporation motion to dismiss and issued the injuction. B is 16% Filipino-owned. ISSUE: Whether or not PNB is privy to the loan contracts between PNB-IFL and respondents? Was the lower court Share of Stock justified in piercing the veil of corporate identity? The share of stock is essential to the concept of the corporation for it is the HELD: No, because (1) there is no showing of the indicative means of getting the resources from the people and even the government. factors that PNB-IFL is a mere instrumentality of PNB; and Once you buy a share of stock, your investment now is owned by the (2) there is no demonstration that any of the evils sought to corporation. (Bonilla) be prevented by the doctrine of piercing the corporate veil exists. A share of stock merely promises that if the company earns money and if the company decides to distribute dividends, the holder thereof will be entitled Yamamoto v. Nishino Leather Industries (NLI) (2008) to a portion of the profits. However, the company still has the decision whether or not it will distribute its profits. (Id.) FACTS: Yamamoto and Nishino organized under Philippine laws WAKO, now known as NLI. They entered into a The purpose of trading stock is, not so much the dividends but, more of the Memorandum of Agreement under which they agreed that capital gains earned. The promise of dividends generate huge demand for a Nishino would only acquire 70% of the authorized capital share of stock. As a result, the value of the company per share of stock may stock of WAKO. Eventually, Nishino and his brother increase. In return, the company has capital coming in. (Id.) RRSE.RBA. DLSU College of Law 2010

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The SEC has ruled that the term capital stock or authorized capital stock is the amount fixed in the articles of incorporation that may be subscribed ISSUE: Whether or not the veil of corporate fiction should and paid by the stockholders of the corporation. (Villanueva) be pierced? The definition of capital stock clearly shows that it is composed of two items, HELD: No, because there is no showing that Nishino used namely: (a) the portion which have been paid by the stockholders; and (b) the separate personality of NLI to unjustly act or do wrong the portion which is to be paid on the subscriptions. (Id.) to Yamamoto in contravention of his legal rights. Capital stock is the contributions of people for the corporation to run its business. The share of stock is the evidence that they contributed to the COMMENTS: capital stock. (Bonilla) Francisco Motors Corporation (FMC) v. CA (1999) Composition of Corporation FACTS: FMC filed a complaint against Manuel to recover a sum of money. In his answer, Manuel interposed a Corporators Incorporators counterclaim against FMC for his unpaid legal services when temporary Permanent he represented members of the Francisco family, who are was not part of the beginning of the helped start the corporation the incorporators, directors and officers of FMC, in an corporation intestate proceeding. The trial court decided in favor of A corporation may be a corporator A corporation cannot be an FMC but also allowed the counterclaim. On its appeal to the RRSE.RBA. DLSU College of Law 2010

acquired more than 70%, reducing Yamamoto s investment to less than 10%. When the negotiations that Nishino would buy-out the shares of stock of Yamamoto, Nishino said that Yamamoto may take out the machinery and equipment he invested, provided, the value of such machines is deducted his and WAKO s capital contributions. Due to his frustration, Yamamoto filed a complaint for replevin against Nishino. Respondents claimed that the machineries and equipment subject of replevin form part of Yamamoto s capital contribution and should thus be treated as the corporate property. In reversing the RTC decision, the CA ruled that Nishino was not authorized by any board resolution to offer to return the machineries and equipment. Bringing up the issue to the SC, Yamamoto argues that the Nishinos are the ones deciding for the corporation and that the WAKO is but a mere instrumentality of them.

Shares of stock is an intangible property; as compared to the certificate of stock, which is the evidence owning a share of stock in a company. (Id.) The one who buys shares of stock executes a subscription agreement and becomes a subscriber to the shares of stock. In this case, the subscriber becomes a debtor of the corporation but when he fully pays his subscription, he is no longer indebted to the corporation. (Id.) Capital Stock The term capital stock or outstanding capital stock is the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid (as long as there is a binding subscription agreement), except treasury shares. (Sec. 137, CC)

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CA, FMC s position was that the counterclaim should not prosper against them because Manuel s claim is should be against the Francisco family and not against FMC, following their separate legal personality. The CA sustained the decision of the trial court; hence this appeal by both parties.

but cannot be an incorporator.

incorporator because an incorporator should be a natural person. A corporation cannot sign in the An incorporators is included in the Articles of Incorporation. Articles of Incorporation.

Doctrine of Equality of Shares ISSUE: Was the piercing the veil of corporate fiction correctly applied? Except as otherwise provided by the Articles of Incorporation and stated in the certificate of stock, each share shall be in all respects equal to other HELD: No, because instead of holding certain individuals or shares. (Bonilla) persons responsible for an alleged corporate act, the situation has been reversed. It is FMC being ordered to Those enumerated in Section 6(5) of the Corporation Code are matters that answer for the personal liability of certain individual all shares have a right to vote on even if they may have been denied because directors, officers and incorporators concerned. If the they are major changes in the Articles of Incorporation. (Id.) corporate assets could be used to answer for the liabilities of its individual directors, officers, and incorporators, the Different Classes of Shares same could easily prejudice the corporation, its own creditors, and even other stockholders. Par Value No Par Value Shares of stock with a specific Shares of stock that are fully paid SBMA v. Universal International Group (UIG) (2000) money value fixed in the articles of and non-assessable and where the incorporation and appearing in the holder of such shares are not liable FACTS: SBMA and UIG entered into a lease agreement certificate stock for each share of to the corporation or to its where the latter shall lease from the former a golf course. stock of the same issue. creditors in respect thereto. These Under the lease agreement, SBMA was authorized to preshares many not be issued for a terminate the contract should UIG commit a material The primary purpose of par value is consideration less than the value of breach or violation of any of the conditions of the to fix the minimum issue price thus P 5.00 per share and that the entire agreement. Later, SBMA served a letter of pre-termination assuring creditors that the consideration received by the because UIG failed to comply with its contractual corporation would receive a corporation for its no-par value obligations. Thus, UIG filed a complaint against SBMA for minimum amount for its stock. It is shares be treated as capital and injunction and damages. The lower court denied SBMA s not usually the price at which shall not be available as dividends. motion to dismiss the case because SBMA is estopped from investors buy or sell the stock. (De (Villanueva) questioning UIG s capacity to sue; and granted the Leon) injunction. The price of these shares are not Par value is the minimum amount specific but the law provides that it ISSUE: Does UIG have the capacity to sue despite being a RRSE.RBA. DLSU College of Law 2010

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foreign non-resident corporation not licensed by the SEC to do business in the Philippines? HELD: Yes, because after contracting with a foreign corporation, a domestic firm is estopped from denying the former s capacity to sue. In Merril Lynch Futures v. CA, the SC explained that the principle behind this is to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes, chiefly in cases where such persons has received the benefits of the contract. OBITER: A corporation has legal status only within the state or territory in which it was organized. For this reason, a corporation organized in another company has no personality to file suits in the Philippines. In order to subject a corporation doing business in the country to the jurisdiction of our courts, it must acquire a license from the SEC and appoint an agent for service of process. Without such license, it cannot institute a suit in the Philippines.

the corporation can charge for each cannot go below P 5.00. (Bonilla) share of stock it sells to the public. (Bonilla) Payment of any amount not less that P 5.00 is deemed fully paid. Full payment is necessary before (Id.) the issuance of the certificate of stock. (Id.) The reason why corporations issue no par value shares is to allow speculative buyers to invest so that their investments would be flexible. (Id.) Common Shares Preferred Shares Shares that don t have any special Preferred shares of stock issued by contractual rights or preferences. any corporation may be given (Villanueva) preference in the distribution of the assets of the corporation in Shares that represent the residual case of liquidation and in the ownership interest in the distribution of dividends, or such corporation; a basic class of stock other preferences as may be stated ordinarily and usually issued in the articles of incorporation without extraordinary rights or which are not violative of the privileges and entitles the provisions of this Code: Provided, shareholder to a pro rata division of That preferred shares of stock may profits. (CIR v. CA) be issued only with a stated par value. The board of directors, Common shares always have voting where authorized in the articles of rights. These are the shares that are incorporation, may fix the terms being traded in the stock market. and conditions of preferred shares These shares, however, can only of stock or any series thereof: have a right to the net assets and Provided, That such terms and dividends of the corporation after conditions shall be effective upon preferred shares. (Bonilla) the filing of a certificate thereof with the Securities and Exchange Commission. (Sec. 6)

RRSE.RBA. DLSU College of Law 2010

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Share that entitles the holder thereof to certain preferences over the holders of common stock; designed to induce persons to subscribe for shares of a corporation. (RPB v. Agana) Preferred shares are rarely given voting privileges. (De Leon) If the nature of the preference is expressly stated in the Articles of Incorporation and Certificate of Stock, it is a preferred share. Preferred shares have the first crack at the dividends and net assets. (Bonilla) Redeemable Shares Shares issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares. (Sec. 8, CC)

Founder s Shares Shares classified in the articles of incorporation that may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. (Sec. 7, CC)

Shares issued basically to the founders or initial organizers of the corporation, but nothing under Section 7 of the Corporation Code Shares of stock issued by a RRSE.RBA. DLSU College of Law 2010

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expressly so provide. (Villanueva)

corporation which the corporation can purchase or take up from their Founders shares allow the holders as expressly provided for in incorporators to manage the its articles of incorporation and corporation during its inception certificates of stock representing years. (Bonilla) said shares. (SEC Rules) The SEC Rules also provide that redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings, provided that the corporation has, after such redemption, sufficient assets in its books to cover debts and liabilities inclusive of capital stock. (Villanueva) Redeemable shares are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price. (RPB v. Agana) As a rule, stockholders can only get hold of the capital stock when the company is liquidated and dissolved. If there are net assets, then that is the only time assets are distributed. (Bonilla) The law allows some shares to be bought back by the corporation so RRSE.RBA. DLSU College of Law 2010

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that the corporation can attract sigurista investors and assure them that they will get their shares even after the corporation is dissolved. Redeemable shareholders are assured that they will get their shares even after the corporation is dissolved. The nature of redeemable shares is like a loan or bond. (Bonilla) When the company redeems the shares back, it may: 1) Cancel the shares; or 2) Purchase back the shares and issue them again in the future. If the shares are retained, they become treasury shares. (Id.) Treasury Shares Shares of stock which have been issued and fully paid for, but subsequently re-acquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. (Sec. 9, CC) Treasury shares are therefore shares that a corporation acquires after it has issued them. (Villanueva) There must be unrestricted retained earnings for the company to buy back shares. (Bonilla) The corporation buying back the shares does not acquire any voting rights and treasury shares are considered as assets of the corporation. (Id.)

RRSE.RBA. DLSU College of Law 2010

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2. How is a corporation established? LAW Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission. JURISPRUDENCE International Express Travel v. CA (2000) FACTS: IET secured airline tickets for PFF amounting to almost P 450,000. IET filed a complaint against Kahn, president of PFF, and impleaded PFF as an alternative defendant because PFF failed to pay the balance of the tickets purchased. Kahn filed his answer where he averred that IET has no cause of action against him in either in his personal or official capacity of PFF. The trial court ruled in favor of IET and declared Kahn personally liable for the unpaid obligation of PFF because PFF had no separate personality since it was not a corporation. The CA reversed this ruling by recognizing the juridical existence of PFF. CONCEPTS AND DOCTRINES Steps in the Creation of a Corporation 1. Promotion Once the corporation is formed, it is not liable to promoters; instead, the promoters are. As far as the corporation to be formed is concerned, the corporation cannot be made liable to whatever contracts the promoter has with the incorporators because (1) the promoter is not the agent of the corporation; and (2) the corporation is a separate juridical person from its incorporators. But the corporation may be liable if it ratifies the obligation of the incorporators to the promoter. (Bonilla) 2. Incorporation Incorporation is taking on a franchise. The primary franchise is the right to exist as a corporation. The secondary franchise, or the purpose for the existence of the corporation, certain laws will govern how the franchise is obtained depending on the business. A primary franchise is inalienable. (Bonilla) a. Incorporators Incorporators must comply with the following requirements: 1) legal age; 2) at least 5 incorporators but not more than 15; 3) nationals 4) majority of the incorporators reside in the Philippines; and 5) owns at least 1 share of the capital stock. b. Corporate Term The corporate term must not exceed 50 years from the date of RRSE.RBA. DLSU College of Law 2010

Sec. 12. Minimum capital stock required of stock corporations. - Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by ISSUE: Whether or not PFF existed special law, and subject to the provisions of the following as a juridical person? section. HELD: No, because the laws national sports Sec. 13. Amount of capital stock to be subscribed and paid concerning for the purposes of incorporation. - At least twenty-five associations only recognize that percent (25%) of the authorized capital stock as stated in the entities like PFF may be accorded

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articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paidup capital be less than five Thousand (P5,000.00) pesos. Sec. 14. Contents of the articles of incorporation. - All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are he secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such; 3. The place where the principal office of the corporation is to be located, which must be within the Philippines; 4. The term for which the corporation is to exist; 5. The names, nationalities and residences of the incorporators; 6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); 7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and

corporate status, but does not automatically create them. Before an entity acquire a separate personality, it must be recognized by the accrediting organization. There was nothing said or presented in this case that PFF was accredited. Acebedo Optical v. CA (2000) The primary purpose of the corporation should not be too specific to the point that it would limit the corporation s operations to avoid unnecessary hassle and from courts inquiring into the corporation s purpose. (Bonilla) Gala v. Ellice Agro-Industrial (2003) FACTS: The Galas formed and organized Ellice Agro-Industrial. As payment for their subscriptions, the Gala spouses transferred several parcels of land. Subsequently, the children incorporated Magro, Later, the Gala spouses transferred their shares in Ellice to Margo and their children. In the stockholders meeting of both corporations, Raul Gala was elected chairman, president and general manager of each. Ellice, Margo and Raul Gala filed against his siblings with the

incorporation, unless sooner dissolved or extended. The corporate term cannot be extended earlier than 5 years prior to the expiration of the term, unless there are justifiable reasons for an earlier extension as determined by the SEC. Upon the expiration of the term, in the absence of compliance with the legal requisites, the corporation ceases to exist but does not produce the corporation s immediate dissolution. (Bonilla) The corporation may reincorporate but that does not mean the corporation is revived; instead, a new corporation is formed. The new corporation can retain the name of the expired corporation provided that the stockholders will agree to use the old name. The use of an expired corporation name will not be allowed by the SEC if it will cause confusion to the public. The new corporation must follow the same procedure as when applying for a new corporation. The liabilities of the expired corporation will depend on its dissolution with regard to its transfer to the new corporation. (Id.) The corporate term must be reasonable and in line with the purpose of the corporation. (Id.) c. Minimum Capital Stock Required There are special laws that specify the minimum capital stock for certain corporations; however, Section 13 of the Corporation Code provides that there is no minimum capital stock, but in no case shall the paid up capital be less than P 5,000.00. The authorized capital stock is the maximum amount that the corporation may distribute as shares of stock and depends on the value of the stock. (Bonilla) If the corporation decides to increase its capital stock, it must comply with Section 13. Under said section, 25% of the authorized capital stock must be subscribed and 25% of subscribed capital stock must be paid up. In no case the paid up capital be less than P 5,000.00. (Id.) d. Contents of the Article of Incorporation The Articles of Incorporation is the basic contract document defining the RRSE.RBA. DLSU College of Law 2010

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SEC a petition for the appointment of a management committee, accounting, and restititution by the directors and officers, and the dissolution of Ellice for alleged mismanagement, diversion of funds, financial losses and the dissipation of assets. In turn, the siblings initiated a complaint against the them with the SEC praying for the nullification of the elections of directors and officers in both corporations. The SEC dismissed the case filed by Raul Gala and nullified the election of the new set of directors and officers in Ellice and Margo. The SEC en banc reversed this decision, The Securities and Exchange Commission shall not accept the which the CA affirmed. articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected ISSUE: Whether or not the Court by the subscribers showing that at least twenty-five (25%) should disregard the separate percent of the authorized capital stock of the corporation has juridical personalities of Ellice and been subscribed, and at least twenty-five (25%) of the total Margo for the purpose of treating subscription has been fully paid to him in actual cash and/or all property purportedly owned by in property the fair valuation of which is equal to at least said corporations as property twenty-five (25%) percent of the said subscription, such paid- owned by the Gala spouses? up capital being not less than five thousand (P5,000.00) HELD: Collateral attacks on the pesos. legality of the purposes for which a Sec. 15. Forms of Articles of Incorporation. - Unless corporation was organized are otherwise prescribed by special law, articles of incorporation prohibited in the jurisdiction. If a of all domestic corporations shall comply substantially with corporation s purpose, as stated in the Articles of Incorporation, is the following form: lawful, then the SEC has no authority to inquire whether the (Form of Articles of Incorporation) qualified in accordance with this Code; 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; 9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and 10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient.

charter of the corporation, and the contractual relationships between the State and the corporation, the stockholders and the State, and between the corporation and its stockholders. (Government v. MRC) 1) Name of the Corporation The SEC requires that there must be 2 words that have to be added different to copy from the corporate name of another corporation. (Bonilla) See Industrial Refractories v. CA. 2) Purpose The primary purpose is used by the SEC and other government agencies to classify the corporation, i.e. determine what kind of taxes the corporation shall be liable for. For investors, it is used to find out what business the incorporators say it is. It also helps ascertain if an act of the corporation is ultra vires, or beyond its scope. (Bonilla) See Acebedo Optical v. CA and Gala v. Ellice. The secondary purpose may be numerous depending on the needs and objectives of the corporation. If the corporation has difficulty with its primary purpose, it can have a majority vote of the board and the stockholders representing 2/3 share in the outstanding capital stock to follow the secondary purpose. This way, the corporation does not need to go through the process of amending with the SEC. However, the secondary purpose should not be inconsistent with the primary purpose. (Bonilla) 3) Principal Office It is not advisable to be too specific in the address of the principal office because if the corporation changes its principal office, it needs to amend its Articles of Incorporation, which is a hassle. (Bonilla) 4) Specific Nationality RRSE.RBA. DLSU College of Law 2010

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Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a nonstock corporation. The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. Such articles, as amended shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation. Sec. 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. - The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the

corporation has purposes other than those stated. As such, the courts have no power to inquire behind what the Articles of Incorporation state as the corporation s primary purpose. Industrial Refractories v. CA (2002)

SEC only inquires into the nationality if the law specifically requires that the specific corporation shall be owned by Filipinos. (Bonilla) 5) Number of Incorporators The incorporators are the first directors of the corporation. Once the SEC issues the certificate of incorporation, the first order of the corporation is to elect its first set of directors who will serve a term of 1 year. the elected directors sends a general information sheet to the SEC thereafter. (Bonilla)

FACTS: RCP registered its corporate and business name with the Bureau 6) Capital Stock of Domestic Trade on June 22, 1977. On the other hand, SMC The capital stock should be expressed in Philippine currency. (Bonilla) amended its Articles of Incorporation on August 23, 1985 7) Subscribers to change its corporate name to IRCP. Both companies are in the same industry and engaged in A subscribers are not necessarily incorporators and they are not limited to almost the same business. RCP filed the 5 natural incorporators. There may be foreign subscribers, provided that with the SEC a petition to compel they fully pay their subscription. (Bonilla) IRCP to change its corporate name on the ground that its corporate 8) Incorporators must be Signatories name is confusingly similar with that of IRCP s such that the public It is possible that another would sign for the incorporator, provided that, the may be confused or deceived into person signing is armed with an SPA. The SPA should be attached with the believing that they are one and the Articles of Incorporation. (Bonilla) same corporation. The SEC decided in favor of RCP. IRCP appealed to 9) Treasurer s Affidavit the SEC en banc arguing that RCP has no right to the exclusive use of The incorporators or subscribers elect the treasurer-in-trust. A certification its corporate name as it is from the bank that says the paid up capital was deposited in the name of the composed of generic or common treasurer-in-trust is necessary. (Bonilla) words. The SEC en banc modified the appealed decision in that IRCP 10) The Articles of Incorporation must be Notarized was ordered to delete or drop from its corporate name only the word Under Section 15 of the Corporation, the Articles of Incorporation must RRSE.RBA. DLSU College of Law 2010

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incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval: 1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; 3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if false; 4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law.

Refractors. The CA upheld the decision of the SEC en banc. ISSUE: Who has the right to use word Refractors in its corporate name? HELD: RCP has the right to use the word Refractors because its business name was registered on a date earlier than IRCP changed its corporate name. The SC applied the doctrine of prior use or priority of adoption whoever used the name first or who was incorporated first is given the right over the word used in the corporate name.

substantially comply with the form provided thereby, unless otherwise specified by law. (Bonilla) 3. Formal Organization and Commencement The life of the corporation begins on the date of issuance of the certificate of incorporation. Amendments of the Articles of Incorporation Section 6 of the Corporation Code provides the items that require the vote of the stockholders. Those enumerated require a majority vote of the board of directors and the vote of the stockholders representing 2/3 vote of the outstanding capital stock. As a rule, the votes need not be casted in a meeting; it may be via written assent, except those found in Section 3, 38 & 103 of the Corporation Code. (Bonilla) Requirements: 1) Amended Articles of Incorporation retaining the original provision and underscoring the changes made. 2) The amended articles should be certified by the corporate secretary and the signatures of the majority of the directors. The SEC will have to act on the amendment within 6 months, otherwise the article shall be deemed amended, unless the delay was not attributable to the corporation. (Bonilla) Grounds for Rejection of Articles of Incorporation or Amendments 1) Substantial compliance of the requirements; 2) Form; 3) Nationality if it a necessary requirement based on the primary purpose of the corporation; 4) The capital stock, subscribed shares and paid up capital. De Facto Corporation RRSE.RBA. DLSU College of Law 2010

COMMENTS: The case mentioned the generic rule where, as a general rule, generic words cannot be used as a corporate name. The exception to the rule is the doctrine of secondary meaning if the generic word has been used for a long period of time and it has imparted a perception in the public s mind that the name is identified with the Sec. 18. Corporate name. - No corporate name may be corporation, then the corporation allowed by the Securities and Exchange Commission if the may use the generic word as its proposed name is identical or deceptively or confusingly corporate name. similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended

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name. Sec. 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. Sec. 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. Sec. 22. Effects on non-use of corporate charter and RRSE.RBA. DLSU College of Law 2010 De Jure Corporation De Facto Corporation A corporation created in strict or A corporation that exists for all substantial conformity with the practical purposes as a corporation mandatory statutory requirements. but has no legal right to corporate existence as against the State. Certificate of Incorporation Substantial Compliance Colorable Compliance The main importance of the application of the de facto corportion doctrine is the ancillary application of the rule that the defect or alleged inexistence of the juridical personality of the corporation cannot be raised collaterally, and can only be pursued in a direct suit filed that seeks to question such juridical personality. In essence it promotes the policy that a contracting party cannot avoid the legal consequences of his contractual commitment by pointing to the technical defects in the person of the contracting corporation. (Villanueva) For the de facto corporation doctrine to apply, the following requisites must concur: 1) The existence of a valid law under which the corporation may be incorporated; 2) An attempt in good faith to incorporate, or existence of a colorable compliance with provisions on incorporation; and 3) The assumption by the enterprise of corporate powers. The existence of a corporation cannot be questioned collaterally, instead, it must be done in a quo warranto proceeding. (Bonilla) Once the corporate officers are in bad faith or find out that there is an irregularity in the Articles of Incorporation, the corporation the becomes de facto and they cannot invoke its non-existence. (Id.) The liability of the corporate officers of the de facto corporation are as follows: 1) If they are in good faith, then there is still separate identity but they are liable in a limited capacity.

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continuous inoperation of a corporation. - If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission.

2)

If they are in bad faith, they will be considered partners of the corporation, ad thus their liability becomes subsidiary. (Id.)

Corporation by Estoppel The corporation by estoppel doctrine presents a clear exception to the general treatment of unregistered associations. The application of the doctrine seeks to enforce a contract where clearly the element of consent is lacking because one of the parties thereto, a purported corporation, does not in fact exist at the time of perfection. The corporation by estoppel doctrine represents therefore an exemption to the principle that a corporation is a creature of the state, and cannot come into existence by mere agreement of the parties to a contract. (Villanueva) Corporations by estoppel do not exist as to the state but are existent only to the persons recognizing the existence. A corporation by estoppel did not comply with the requirements and form at all; and there is no certificate of incorporation. The corporate officers cannot use the non-existence of the corporation as a defense. See International Express Travel v. CA. Inoperation of a Corporation See Section 22 of the Corporation Code. Commence means when the corporation enters into contracts and/or submits its by-laws to the SEC. The purpose of this law is to compel the corporation to operate. (Bonilla) So that there is no need to have a full blown corporation, set up a corporation shell and just collapse the shell if you no longer want to pursue the business. Section 22(2) of the Corporation Code is the most cost efficient way of setting up a corporation for limited purposes. Just make sure that there will be no creditors affected with the inoperation of 5 years. If the corporation has been inactive for 5 years and the SEC does not notice, the corporation may still resume. (Id.) RRSE.RBA. DLSU College of Law 2010

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3. How is a corporation organized and managed? LAW Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. a majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. Sec. 24. Election of directors or trustees. - At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares JURISPRUDENCE Gokongwei v. SEC (1979) FACTS: Gokongwei wanted to become a director of SMC. To prevent him from becoming a director, SMC amended its by-laws that stockholders who are directors of a competing corporation cannot be apart of their board. Gokongwei wants to nullify the amendment. CONCEPTS AND DOCTRINES Centralized Management Doctrine The Centralized Management Doctrine is expressed Section 23 of the Corporation Code whrere it mandates corporate powers to be directly vested in the Board of Directors/Trustees, rather than being delegated powers coming from the stockholders/members. In any organizational set-up, the congruence of authority and responsibility in the same person, committee, or board always promotes efficiency. This is the rationale for the doctrine. (Villanueva)

HELD: The amendment of the by-law The stockholders have the voting power to elect the directors and to make was valid because SMC is empowered constituent acts or fundamental changes enumerated in Sec. 6 of the to provide certain qualifications for its Corporation Code. (Bonilla) directors. The Board of Directors is basically the governing body of the corporation. Aubach v. Sanitary Wares They have powers of ownership and management over the assets of the corporation. They have a fiduciary relationship with the stockholders, and Manufacturing (1989) thus, loyalty and due diligence are required of them. (Id.) FACTS: ASI, a foreign corporation, entered into an agreement with The unless otherwise provided in this Code of Section 23 of the Corporation Saniwares and some Filipino Investors Code pertains to the constituent acts. (Id.) whereby ASI and the Filipino investors agreed to participate in the ownership See Gokongwei v. SEC. of an enterprise which would engage primarily in the business of The Board of Directors must act as a body and not separately. They must manufacturing in the Philippines and meet and discuss as a group. They hold the fate of the corporation and have selling here and abroad vitreous china the power to dispose of corporate properties with the intervention of and sanitary wares. The parties agreed stockholders. (Id.) that the business operation shall be RRSE.RBA. DLSU College of Law 2010

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of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote. Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall

carried on by an incorporated enterprise named Saniwares. According to its Articles of Incorporation, ASI was to own 30% of outstanding stock, which was later increased to 40%; and 3 of the 9 directors shall be designated by ASI and the other 6 shall be designated by the other stockholders. Basically, the agreement contained provisions designed to protect ASI as a minority group. In one of Saniwares stockholder s meeting the ASI group had 3 nominees, while the Filipino investors had 8 nominees. The chairman ruled that the last 2 nominations from the Filipino investors were out of order. Because of the dispute in this stockholders meeting, the parties filed cases against each other.

Directors/Trustees 1. Qualifications Director/Trustee Every director must own at least 1 share of the capital stock of the corporation of which he is a director, which share shall stand in his name in the books of the corporation. No person shall be elected as trustee unless he is a member of the corporation. What the law only requires is that the director has legal title to the share, thus, the fact that a director is only holding the share as a nominee of another person does not disqualify him as a director. The ownership of shares in the corporation does not give one a vested right to be elected in the Board of Directors. (Gokongwei v. SEC) A majority of the directors or trustees of all corporations organized under the Corporation Code are required to be residents of the Philippines. 2. Disqualifications

A director must not have been convicted of an offense punishable by imprisonment of exceeding 6 years or has not committed any violation of the ISSUES: What was the nature of the Corporation Code within 5 years prior to his election. business established, a joint venture or a corporation? The by-laws of the corporation can provide other qualifications and disqualifications in addition to those provided in the Corporation Code. HELD: The parties agreed to a joint venture and not a corporation because However, the Board of Directors does not have the power, by the exercise of of the history of the organization and its business judgment expressed through a resolution, to provide for the unusual arrangements which additional qualifications and/or disqualifications to those who are to be govern its policy making body are all nominated and elected into the Board. (Gokongwei v. SEC) contents with a joint venture and not with an ordinary corporation. The Under Section 19 of the General Banking Law of 2000, except for rural banks, agreement uses the word designated no appointive or elective public official, whether full-time or part-time shall at and not nominated or elected in the same time serve as officer of any private bank, save in the cases where the selection of the 9 on a 6:3 ratio; such service is incidental to financial assistance provided by the government RRSE.RBA. DLSU College of Law 2010

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act as president and secretary or as president and treasurer each group is assured of a fixed or GOCC to the bank or unless otherwise provided under existing laws. No at the same time. number of directors in the board. delinquent stock shall be voted. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the bylaws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings. Sec. 26. Report of election of directors, trustees and officers. - Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees, and officers elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the Securities and Exchange Commission. Sec. 27. Disqualification of directors, trustees or officers. No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall OBITER: Under Philippine law, a joint venture is a form of partnership and should thus be governed by the law of partnership. However, the SC has recognized a distinction between these two business forms, and has held that although a corporation cannot enter into a partnership contract, it may engage in a joint venture with others. Any meeting of the stockholders/members called for an election may adjourn from day to day from time to time but not indefinitely, for any reason, no election is held, or there are no present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock/members entitled to vote. 3. Election

Under Section 24 of the Corporation Code, at all elections of directors or trustees, there must be present, either in person or by representatives COMMENTS: The ASI group and the authorized to act by written proxy, the owners of the majority of the Filipino investors entered into a pre- outstanding capital stock, or if there be no capital stock, a majority of the incorporation contract, called members entitled to vote. shareholder s agreement, to protect their individual rights. (Bonilla) The election must be by ballot if requested by any stockholder entitle to vote, who shall have the right to vote in person or by proxy the number of shares of People s Aircargo v. CA (1998) stock standing at the time fixed in the by-laws, in his own name on the stock books of the corporation; or where the by-laws are silent, at the time of the The general rule is that, in the absence election. No delinquent stock shall be voted. of authority from the board of directors, no person, not even its Any meeting of the stockholders/members called for an election may adjourn officers, can validly bind a corporation. from time to time but not indefinitely, for any reason, no election is held, or if Just as a natural person may authorize there are no present or represented by proxy, at the meeting, the owners of another to do certain acts for and on a majority of the outstanding capital stock / majority of the members entitled behalf, the board of directors may to vote. validly delegate some of its functions and powers to officers, committees or For stock corporations, the general rule is cumulative voting. This is to enable agents. The authority of such minority stockholders to elect a member that will represent them in the individuals to bind the corporation is board. generally derived from law, corporate by-laws or authorization from the No. of Shares x No. of Directors = No. of Votes board, either expressly or impliedly by habit, custom or acquiescence in the Cumulative voting cannot be deprived from the minority. (Bonilla) RRSE.RBA. DLSU College of Law 2010

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qualify as a director, trustee or officer of any corporation. Sec. 28. Removal of directors or trustees. - Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code.

general course of business. Apparent authority is derived not merely from practice. Its existence may be ascertained through: 1) the general manner in which the corporation holds out an officer or agent as having the power to act; or 2) acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. It is a familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts, and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent s authority. Even if a certain contract is outside the usual powers of the president, the corporations ratification of the same and acceptance of benefits make it binding. For non-stock corporations, only 1 vote is allowed per candidate, unless otherwise provided in the Articles of Incorporation or by-laws. As far as election of directors are concerned, when it comes to majority directors, they may be removed without cause because the law do not provide that directors must be removed with just cause. However, this does not apply to directors who are elected to represent the minority. (Bonilla) 4. Removal Under Section 28 of the Corporation Code, any director/trustee of a corporation may be removed from office by a vote of the stockholders representing 2/3 of the outstanding capital stock / by a vote of 2/3 of the members entitled to vote. The removal shall take place either at a regular or special meeting called for the removal of directors/trustees, or any of them, which must be called by the Secretary on order of the President or on the written demand of the stockholders/members representing at least majority of the outstanding capital stocks. In these cases, only the stockholders may fill the vacancy: 1) increase in the number of the board of directors; 2) expiration of the term; 3) removal by the stockholders. There is only one set of vacancy the board may fill up, provided that there is still a quorum: 1) death; 2) resignation; 3) disqualification. Corporate Officers Corporate officers are not elected, as compared to directors who are elected by the stockholders. Directors are removable anytime, except when representing the minority; while, corporate officers cannot be removed RRSE.RBA. DLSU College of Law 2010

In the absence of a charter or by-law provision to the contrary, the president of a corporation is presumed to have the authority to act within the domain Sec. 29. Vacancies in the office of director or trustee. - Any of the general objectives of its business vacancy occurring in the board of directors or trustees other and within the scope of his usual

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than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in office. A directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. Sec. 30. Compensation of directors. - In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable pre diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year.

duties. DBP v. Ong (2005) If a corporation knowingly permit one of its officers, or any other agent, to do acts within the scope of an apparent authority, and thus holds him out to the public as possession power to do those acts, the corporation will, as against any one who has in good faith dealt with the corporation through such agent, be estopped from denying his authority; and where it is said: if a corporation permits this means the same as if the thing permitted by the directing power of the corporation. Ong v. CA (2003)

without just cause. (Bonilla) Only the president, secretary and treasurer are named as corporate officers under the law. Legally speaking, they are the only ones who are voted upon by the board of directors. Among the 3, the president is required to be a director; but the by-laws may require other officers to be directors as well. The president cannot be a secretary/treasurer because the positions are incompatible. The secretary must be a resident and citizen of the Philippines. The treasurer has no legal requirement of residence or citizenship. (Id.) As far as officers are concerned, their authority comes from the law and the by-laws of the corporation. In the current setting in the Philippines, the president has the inherent authority to commit the corporation to obligations as well as other implied powers. The treasurer has the inherent authority to manage the funds of the corporation. The secretary is responsible for the custody of the corporate books and records. (Id.) To be considered as a corporate officer, it should be in the by-laws or by virtue of a board resolution and the position is assumed by way of election in the board. Some companies, by virtue of by-laws, the board is allowed to appoint a position. This is a way for corporations to avoid security of tenure of employees. Thus, the court has become more strict in following the law where the by-laws cannot authorize someone to appoint another to be a corporate officer. Instead, the board must name such person as a corporate officer by majority vote. Mere authority from the by-laws will not make the appointed person a corporate officer. Thus, if the by-laws allow appointment, the person appointed is considered to be an employee; but if person was elected by the majority of the board, that person is a corporate officer. (Bonilla) See Nacpil v. IBC, Locsin v. Nissan Lease, Matling Industrial v. Coros and Francisco v. Mallen. RRSE.RBA. DLSU College of Law 2010

A corporation cannot be imprisoned. Hence, if the penal law imposes a penalty of imprisonment, the law makes the officers and employees or other persons responsible for the offense liable to suffer the penalty of imprisonment. However, it is the corporation which are made liable for the civil liabilities arising from the Sec. 31. Liability of directors, trustees or officers. - Directors criminal offense. or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty Cebu Country Club (CCCI) v. Elizagaque of gross negligence or bad faith in directing the affairs of the (2008) corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be FACTS: Elizagaque applied for propriety liable jointly and severally for all damages resulting membership with CCCI who was later

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therefrom suffered by the corporation, its stockholders or able to buy a share and was issued a members and other persons. certificate of ownership. However, the board of CCCI disapproved his When a director, trustee or officer attempts to acquire or application for proprietary membership acquires, in violation of his duty, any interest adverse to the and never explained why. Thus, corporation in respect of any matter which has been Elizagaque filed a complaint for reposed in him in confidence, as to which equity imposes a damages against CCCI. The RTC ruled in disability upon him to deal in his own behalf, he shall be favor of Elizagaque and held the board liable as a trustee for the corporation and must account for solidary liable with CCCI for damages. the profits which otherwise would have accrued to the The CA affirmed the RTC decision, hence this petition. corporation. Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was nor necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in case of an officer, the contract has been previously authorized by the board of directors. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least twothirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such ISSUE: Whether in disapproving Elizagaque s application for proprietary membership with CCCI, the board and the club are liable to Elizagaque for damages? HELD: Although the board, under CCCI s Articles of Incorporation, has the right to approve or disapprove an application for proprietary membership, this right should not be exercised arbitrarily. In rejecting respondent s application, the SC finds that the board violated the rules governing human relations, the basic principles to be observed for the rightful relationship between human beings. It bears stressing that the amendment to CCCI s by-laws requiring the unanimous vote of the directors present at a special or regular meeting was not printed on the application form Elizagaque filled up and submitted to CCCI. What was printed thereon was

The Nacpil ruling is no longer controlling. (Bonilla) Compensation of Directors/Trustees & Officers Under Section 30 of the Corporation Code, in the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as each director, except for reasonable per diems. However, this section also provides that such compensation, other than per diems, may be granted to directors by the vote of the stockholders representing at least majority of the outstanding capital stock at a regular or special stockholder s meeting. In no case shall the total yearly compensation of directors exceed 10% of the net income before income taxes of the corporation during the preceding year. (SEC Opinion) When it comes to officers, no prohibition from compensation is found in the Corporation Code. Liability of Directors, Trustees or Officers A corporate director has a fiduciary role and is required to exercise diligence and loyalty to the corporation. In accordance with Sec. 31 of the Corporation Code, the director must actively disagree against the unlawful act to avoid liability; mere abstaining is not enough. Also, a director should not acquire personal or pecuniary interest in conflict of their duty. This usually happens when directors acquire secret profits. In relation to the doctrine of corporate opportunity, the damages to the corporation are the secret profits the director acquired that was suppose to be for the corporation. A simple mistake or bad judgment, however, is not actionable. Bad faith implies an unlawful purpose with an ill motive, moral oblique and breach of a known duty. (Bonilla) Fiduciary Obligations of Directors/Trustees The fiduciary relationship of directors with the corporation entails that they RRSE.RBA. DLSU College of Law 2010

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meeting: Provided, however, That the contract is fair and the original provision which was silent reasonable under the circumstances. on the required number of votes needed for admission. It is clear that Sec. 33. Contracts between corporations with interlocking Elizagaque was left in the dark directors. - Except in cases of fraud, and provided the wondering why his application was contract is fair and reasonable under the circumstances, a disapproved. The court below was contract between two or more corporations having correct in making the board solidarily interlocking directors shall not be invalidated on that liable with CCCI because, under Section ground alone: Provided, That if the interest of the 31 of the Corporation Code, the board interlocking director in one corporation is substantial and members shall be solidarily liable with his interest in the other corporation or corporations is the corporation when they are guilty of merely nominal, he shall be subject to the provisions of the bad faith in directing the affairs of the preceding section insofar as the latter corporation or corporation. corporations are concerned. Francisco v. Mallen (2010) Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for FACTS: Mallen was hired as a waiter for purposes of interlocking directors. VIPS Coffee Shop. He took a number of sick leaves from which he was given a Sec. 34. Disloyalty of a director. - Where a director, by memo that he was not to go to work virtue of his office, acquires for himself a business because he was not physically and opportunity which should belong to the corporation, needed to regain his health. When thereby obtaining profits to the prejudice of such Mallen reported back presenting a corporation, he must account to the latter for all such medical certificate showing that he was profits by refunding the same, unless his act has been fit to work, he was refused work. The ratified by a vote of the stockholders owning or labor arbiter rendered a decision in representing at least two-thirds (2/3) of the outstanding favor of respondent and found that capital stock. This provision shall be applicable, there was constructive dismissal. When notwithstanding the fact that the director risked his own this case was appealed to the CA, the court also found that there was funds in the venture. constructive dismissal. Sec. 35. Executive committee. - The by-laws of a corporation may create an executive committee, composed of not less ISSUE: Whether petitioner is personally than three members of the board, to be appointed by the liable for the monetary awards granted board. Said committee may act, by majority vote of all its in favor of Mallen arising from his members, on such specific matters within the competence alleged illegal termination?

must act in the best interest of the corporation. (Bonilla) Doctrine of Apparent Authority This doctrine is based on the principle of estoppel. See People s Air Cargo v. CA and DBP v. Ong. Apparent authority manifests through different sources: 1) Nature of the business; or 2) Business practices and traditions that have been long accepted as being part of the business scenario. Corporate officers, by necessity, have to be given express authority coming from the by-laws or a board resolution. The best practice to follow when dealing with a corporate officer is to ask for their authority to act. (Bonilla) Doctrine of Corporate Opportunity Under this doctrine, a director acquires for himself an opportunity which is supposedly for the corporation. It is based on taking advantage of the opportunity of the corporation. The damage to the corporation in this case is the opportunity it lost. In this particular case, there must be manifest action by a director taking advantage of an opportunity. (Bonilla) Section 34 of the Corporation Code allows the stockholders to ratify the taking of corporate opportunity by the director. But unless ratified, even if the director uses his own funds, the taking of corporate opportunity would still be voidable by the corporation. (Id.) Self-Dealing Doctrine Under this, there is a transaction between the director and the corporation. Generally the contract may be annulled by the corporation unless: 1) presence of the self-dealing director in the board meeting was not necessary for a quorum; RRSE.RBA. DLSU College of Law 2010

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of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders' approval is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new bylaws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders.

HELD: No, because based on the records, respondent failed to allege either in his complaint or position paper that petitioner, as Vice-President of VIPS Coffee Shop and Restaurant, acted in bad faith. Neither did respondent clearly and convincingly prove that petitioner, as Vice-President of VIPS Coffee Shop and Restaurant, acted in bad faith. In fact, there was no evidence whatsoever to show petitioner s participation in respondent s alleged illegal dismissal. Clearly, the twin requisites of allegation and proof of bad faith, necessary to hold petitioner personally liable for the monetary awards to respondent, are lacking. To hold a director or officer personally liable for corporate obligations, two requisites must concur: (1) complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.

2) the vote of the director is not necessary for the approval; 3) the contract is fair and reasonable; and 4) the contract was previously authorized. (Bonilla) The transaction may be ratified provided that the contract is deemed fair and reasonable. (Id.) Interlocking Directorates Under this, there is a transaction between 2 corporations with a common director. The contract is valid as long as there is no fraud and it is reasonable. (Bonilla) The transaction can only be ratified if the share of the director is more than 20%. But if the share of the interlocking director in both corporation is nominal, there is no need to comply with the requirements in Section 32 of the Corporation Code because there is a remote possibility to do evil and he will probably be overruled anyway. If it is substantial for both, there is also no need because most likely the interlocking director will protect both corporations. Thus, the only time the rules in Section 32 is necessary is when the share is nominal for one and substantial for the other because there is a tendency that the interlocking director will favor the corporation which he holds substantial shares. Executive Committee The execom must be allowed by the by-laws and at least 3 members of the board belong to it. The execom may not act upon the following: 1) approval of any matter for which the shareholders approval is also required; 2) amendment of the by-laws; 3) amendment of a board resolution; 4) fill vacancies in the board; and 5) distribute cash dividends to the shareholders. RRSE.RBA. DLSU College of Law 2010

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The execom is used in practice to sterilize the board by stripping some powers from some directors. It may implement actions without the need of quorum of the board. Majority stockholders have the best interest in the establishment of an execom because the majority can make decisions all the time without needing the quorum of the board. For this to be possible, it must be clearly stipulated in the by-laws. (Bonilla) Nacpil v. IBC March 21, 2002 FACTS Nacpil was the comptroller of IBC. He assumed the position because he was appointed by the General Manager of IBC. Later, he filed a complaint for illegal dismissal with the labor arbiter because he was dismissed. When Nacpil brought this case on appeal to the SC, he argued that he should have been considered an employee (to give the labor arbiter and the NLRC jurisdiction), and not a corporate officer because he was only appointed and the position of comptroller was not provided in the by-laws. Matling Industrial v. Coros October 13, 2010 Matling Industrial claimed that Coros was a member of is board aside from being its VP for Finance prior to his termination. On the other hand, Coros insist that his status as a director is doubtful, considering that he had not been formally elected and that he did not own a single share of stock. The labor arbiter granted Matling s motion to dismiss ruling that Coros was a corporate officer of the company because he was occupying the position of VP for Finance and at the same time was a member of the board. However, the NLRC set aside the dismissal, concluding that Coros complaint for illegal dismissal was properly cognizable by the labor arbiter because, by virtue of his position not being among the positions listed in the by-laws, he was not a corporate officer. On its appeal to the SC, Matling argue that the power to create corporate offices and to appoint the individuals to assume the offices was delegated by its board to its president through an amendment in its by-law. Locsin v. NCL October 20, 2010 Locsin was elected EVP/Treasurer of NCL. He held this position for 13 years until he was nominated and elected chairman of the board. Seven months after his election as chairman, the board held a special meeting to elect of a new set of officers. Unfortunately, Locsin was neither re-elected chairman nor reinstated to his previous position as EVP/Treasurer. Aggrieved, Locsin filed a complaint for illegal dismissal before the labor arbiter against NCL.

ISSUE

Was Nacpil a corporate officer or an Was Coros a corporate officer or an employee of Matling Industrial? May the Was Locsin a corporate officer or an employee of IBC? board delegate its power to create a corporate office? employee of NCL? Nacpil was because: officer Coros was an employee because he was appointed by Matlings's general manager and not by the board of directors of petitioner. It was also the general manager who determined Coros compensation package. 1) even assuming that he was in fact appointed, such appointment was The board of Matling could not validly delegate the power to create a subsequently approved by the board; corporate office to the president, in light of Section 25 of the Corporation Code and requiring the Board of Directors itself to elect the corporate officers. Verily, the a corporate Locsin was because: a corporate officer

HELD

1) pursuant to NCL s by laws, he was undoubtedly elected by the board; and RRSE.RBA. DLSU College of Law 2010

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power to elect the corporate officers was a discretionary power that the law 2) the position EVP/Treasurer was 2) even if his position was not exclusively vested in the board of directors, and could not be delegated to expressly provided in the by-laws. expressed in the by-laws, the board is subordinate officers or agents. empowered to appoint such other To emphasize, the power to create new offices and the power to appoint the officers as it may deem necessary. officers to occupy them vested by the by-laws of Matling merely allowed its president to create non-corporate offices to be occupied by ordinary employees of Matling. Such powers were incidental to the president s duties as the executive head of Matling to assist him in the daily operations of the business. Considering that the observations earlier made herein show that the soundness of their dicta is not unassailable, Tabang and Nacpil should no longer be controlling. An "office" is created by the charter of the corporation and the officer is elected by the directors or stockholders. On the other hand, an employee occupies no office and generally is employed not by the action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. 4. What are the things a corporation can and cannot do? LAW Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in JURISPRUDENCE PTC v. Rivera (1923) FACTS: Rivera was an incorporator of Cooperativa Naval Filipina who subscribed for 450 shares. In the course of time, the company became insolvent and went into the hands of PTC, as assignee in bankruptcy. PTC filed an action to recover of the stock subscription of Rivera, which admittedly has never been paid. The reason why Rivera did not pay his entire subscription is because it was resolved CONCEPTS AND DOCTRINES Express, Implied and Inherent Powers Corporations have inherent rights and they are vested upon the corporation by the mere fact of its being a corporation. In relation to the Constitution, corporations do not have the inherent right to life because state approval is necessary for its existence; nor does corporations have the inherent right to liberty because they can only do things allowed by law and provided by the Articles of Incorporation. The doctrine of limited capacity explains how corporations do not have inherent rights. Corporations, however, have the inherent right to property, such as to own property and those necessary implicated therewith. (Bonilla)

RRSE.RBA. DLSU College of Law 2010

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accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into merger or consolidation with other corporations as provided in this Code; 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. Sec. 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or

Those that are not allowed by the code or the Articles of Incorporation are ultra vires acts. Illegal acts are not synonymous with ultra vires acts because the former are acts contrary to law; while ultra vires acts may simple be beyond the scope of the Code and the Articles of Incorporation but not ISSUE: Whether or not Rivera is still liable necessarily illegal. The primary purpose needs to be specific because an act for his unpaid subscriptions? would be considered an ultra vires act if it is beyond the the primary purpose.Ultra vires acts of a corporation can be ratified. As a rule of thumb, HELD: Yes, because the resolution releasing if the act may be ratified by the board, then it is not an ultra vires act; only the shareholders from their obligation to acts beyond the scope of the Code or the Articles of Incorporation can be pay 50% of their respective subscriptions ratified, provided that it is not illegal. (Id.) was an attempted withdrawal of so much capital from the fund upon which the See Section 36 of the Corporation Code. company's creditors were entitled ultimately to rely and, having been effected Among those expressly provided in Section 36 of the Corporation, only the without compliance with the statutory express provision of the power of the corporation to make donations is requirements, was wholly ineffectual. It is necessary because there are limitations provided. (Bonilla) established doctrine that subscription to the capital of a corporation constitute a See Gonzalez v. Climax Mining. find to which creditors have a right to look for satisfaction of their claims and that the Trust Fund Doctrine assignee in insolvency can maintain an action upon any unpaid stock subscription The capital stock of a corporation, or the assets of an insolvent corporation in order to realize assets for the payment of representing its capital, is a trust fund for the benefit of the corporation s its debts. A corporation has no power to creditors. (Fletcher) release an original subscriber to its capital stock from the obligation of paying for his It is an established doctrine that subscriptions to the capital of a shares, without a valuable consideration corporation constitute a fund to which the creditors have a right to look for for such release; and as against creditors a satisfaction of their claims and that the assignee in insolvency can maintain RRSE.RBA. DLSU College of Law 2010

among the stockholders that the capital stock should be reduced by 50% and the subscribers be released from the obligation to pay any unpaid balance of their subscription in excess of 50%. As a result of this resolution it seems to have been supposed that the subscription of the various shareholders had been cancelled to the extent stated; and fully paid certificate were issued to each shareholders for onehalf of his subscription.

Some powers of corporations are expressed, implied or incidental all at the same time. For instance, the power to sue and be sued in its corporate name is expressly provided under Section 36 of the Corporation Code but it is also incidental upon a corporation s existence; to issue stocks to stockholders is also another example. Thus, the classification is not a very helpful distinction to some extent. (Id.)

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by at least two-thirds (2/3) of the members in case of nonstock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n) Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, twothirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) That the requirements of this section have been

reduction of the capital stock can take place only in the manner an under the conditions prescribed by the statute or the charter or the articles of incorporation. PLDT v. NPC (2007) Stock dividends are part of the outstanding capital stock. Dividends, regardless of the form these are declared, that is, cash, property or stocks, are valued at the amount of the declared dividend taken from the unrestricted retained earnings of a corporation. Thus, the value of the declaration in the case of a stock dividend is the actual value of the original issuance of said stocks. The SC said that "in the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account" or "it is the amount that the corporation receives in consideration of the original issuance of the shares." It is "the distribution of current or accumulated earnings to the shareholders of a corporation pro rata based on the number of shares owned."14 Such distribution in whatever form is valued at the declared amount or monetary equivalent.

an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. (Phil. Trust v. Rivera) The Trust Fund Doctrine is a corporate theory which seeks to protect the interest of corporate creditors. Under the this doctrine, it would be a violation of the rights of creditors of the corporation to allow the return to the stockholders the return of their capital, or to declare dividends outside the unrestricted retained earnings. Likewise, upon insolvency of the corporation, the board of directors are duty bound to hold the assets of the corporation primarily first for the payment of the corporation s liabilities. (Mead v. McCullough) The trust fund doctrine was set up to protect the creditors because creditors cannot run after the stockholders of a corporation since there is a separate juridical entity. (Bonilla) The trust fund doctrine usually applies in four cases: 1. Where there has been a distribution or an attempt to distribute corporate properties, or a return of the capital or portion thereof, to stockholders, without providing for the payment of creditors; 2. Where it had released the subscribers to the capital stock from their subscriptions without valuable consideration; 3. Where it haas transferred the corporate property in fraud of its creditors; and 4. Where the corporation is insolvent.

Under the capital impairment rule and the profit rule, a fixed capital must be preserved for protecting the claims of creditors so that dividend distributions to stockholders should be limited to profits earned or accumulated by the corporation. Impliedly therefore, for a solvent Thus, it cannot be said that no corporation, the trust fund doctrine encompasses only the capital stock of consideration is involved in the issuance of the corporation, and does not cover unrestricted retained earnings. stock dividends. In fact, the declaration of stock dividends is akin to a forced purchase Until the liquidation of the corporation, no part of the subscribed capital of stocks. By declaring stock dividends, a may be returned or released to the stockholders (except in the redemption corporation ploughs back a portion or its of redeemable shares) without violating the trust fund doctrine. Thus, RRSE.RBA. DLSU College of Law 2010

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complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing,

entire unrestricted retained earnings either to its working capital or for capital asset acquisition or investments. It is simplistic to say that the corporation did not receive any actual payment for these. When the dividend is distributed, it ceases to be a property of the corporation as the entire or portion of its unrestricted retained earnings is distributed pro rata to corporate shareholders. When stock dividends are distributed, the amount declared ceases to belong to the corporation but is distributed among the shareholders. Consequently, the unrestricted retained earnings of the corporation are diminished by the amount of the declared dividend while the stockholders equity is increased. Furthermore, the actual payment is the cash value from the unrestricted retained earnings that each shareholder foregoes for additional stocks/shares which he would otherwise receive as required by the Corporation Code to be given to the stockholders subject to the availability and conditioned on a certain level of retained earnings.15 Elsewise put, where the unrestricted retained earnings of a corporation are more than 100% of the paid-in capital stock, the corporate Board of Directors is mandated to declare dividends which the shareholders will receive in cash unless otherwise declared as property or stock dividends, which in the latter case the stockholders are forced to

dividends must never impair the subscribed capital; subscription commitment cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as a the consideration therefor. (PLDT v. NTC) The protective reach of the trust fund doctrine, when the corporation is not in a state of insolvency, would be only up to the extent of the capital stock of the corporation. In other words, since retained earnings, although part of stockholder s equity, do not constitute part of capital stock, it is not covered by the doctrine, and the corporation is at liberty to declare and pay out assets to the stockholders by way of dividends up to the extent of its unrestricted retained earnings. In relation to the trust fund doctrine, the SC held that the funds received by the corporation to cover subscription payment on increase in authorized capital stock prior to approval thereof of the SEC would not be covered within the ambits of the trust fund doctrine. The Court held: As a trust fund, this money is still withdrawable by any of the subscribers at any time before the issuance of the corresponding shares of stock, unless there is a pre-subscription agreement o the contrary. Consequently, if a certificate of increase has not been issued yet by the SEC, the subscribers to the unauthorized issuance are not to be deemed as stockholders possessed of such legal rights to vote and dividends. (Textile Mills v. NWPC) The trust fund doctrine is a limitation to several powers of the corporation. (Bonilla) Power Over Corporate Term The corporation may virtually have a perpetual lifespan renewable every 50 years. The limit of a 50-year term emphasizes the contractual nature of the corporation: people would be discouraged from investing if the period could last forever. Likewise, management would theoretically be more honest because a renewal of the corporate term would be a vote of confidence by the stockholders or members. (Villanueva) RRSE.RBA. DLSU College of Law 2010

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the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. (17a) Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That

forego cash in lieu of property or stocks. In essence, therefore, the stockholders by receiving stock dividends are forced to exchange the monetary value of their dividend for capital stock, and the monetary value they forego is considered the actual payment for the original issuance of the stocks given as dividends.

See Section 37 of the Corporation Code.

There seems to be a conflict between Section 81(1) and Section 37 of the Corporation Code. In the former, it provides the exercise of appraisal rights in both extending and shortening the corporate term; while the latter provides that appraisal may only be exercised during the shortening of the corporate term. Upon the reading the provisions together, Section 81(1) seems to be a general rule enumerating the instances when to exercise appraisal rights; while the Section 37 is a specific rule when it comes to the corporate term. Under the rules of statutory construction, Section 37 Madrigal v. Zamora (1987) prevails over Section 81(1) because the former is a specific provision while the latter is a general one. Thus, the appraisal right cannot be exercised FACTS: On two occasions, M&C reduced its during the shortening of the corporate term because the specific rule in capital stock by distributing its marketable Section 37 does not expressly provide it. (Bonilla) securities to its stockholders in exchange for their shares in an equivalent amount in Section 37 is useful in practice for it is a pragmatic tool to close shop. In the corporation because of the desire of its fact, the SEC recommends this. (Id.) stockholders to phase out the operations of the corporation due to lack of business In practice and essence, extension of the corporate term is the same with incentives and prospects, and in order to renewal of the corporate term. It must be noted that, in renewing, the prevent further losses. After M&C s failure corporate term cannot be extended earlier than 5 years prior to the to sit down with its labor union who is expiration of the term, unless there are justifiable reasons for an earlier asking for wage increases and other extension as determined by the SEC. (Id.) economic benefits, the latter filed a complaint for unfair labor practices. M&C Capital Stock & Bonded Indebtedness filed its position paper, alleging that has no substantial income to speak of, See Section 38 of the Corporation Code. necessitating reorganization, by way of retrenchment of its employees and Increasing or decreasing capital stock deals with the equity of the operations. In appealing the unfavorable corporation; while creating bonded indebtedness means incurring liabilities judgments of the NLRC and the Office of for the corporation. (Bonilla) the President, M&C contend that it was sustaining losses because whatever profit it Incurring bonded indebtedness is different from acquiring a loan because earned, were in the nature of dividends long periods are involved in the former. There is a need to register the bond declared on its shareholding in other with the SEC for the sale of the bond to the public; issuing bond usually companies in the earning of which the means selling to the public 20 or more persons. Regardless wither the RRSE.RBA. DLSU College of Law 2010

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such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt. Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of nonstock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for

Increasing (decreasing) capital stock may be done in either the following ways: 1) increase (decrease) the number of shares; ISSUE: Whether or not the dividends 2) increase (decrease) the par value ; received by M&C are not considered to be 3) increase (decrease) both. company profits and beyond the reach of its employees? In either case, SEC approval is necessary. More often than not, there is no problem with increasing the capital stock because it improves the situation HELD: No, because the dividends received for the corporate creditors. by the corporation are corporate earnings arising from corporate investments. As When the corporation needs more funds, especially when it is expanding, it found by the NLRC, M&C had entered such may be cheaper to use other people s money to expand. They can leverage earnings in its financial statement as capital stock to raise more money through borrowing. Although, this is profits, which it would not have done if limited because creditors might not be willing to lend/reach the limits of the they were not in fact profits. Moreover, it is borrowing capacity. In this case, the corporation must raise the capital stock incorrect to say that such profits in the to support their expansion plans. form of dividends are beyond the reach of M&C s creditors since it received them Overtime corporations may keep on losing money and start incurring losses. as compensation for its management These losses are reflected in their equity; first in the retained earnings, then services in favor of the companies it later on equity. This is called impairment of capital. Corporations would managed as a shareholder thereof. As such usually decrease capital stock to create a surplus which can be used to shareholder, the dividends paid to it were cover losses. This is called a quasi-reorganization correcting an impaired its own money, which may be then capital situation. A quasi-reorganization helps the corporation make capital available for wage increments. It is not a accounts look better in terms of marketing its shares and borrowing from case of a corporation distributing dividends banks. To create a surplus, it must be noted that the corporation does not in favor of its stockholders, in which case, have to be in a loss situation; it can be that the stocks of the corporation are such dividends would be the absolute not in demand. But as a rule set by the trust fund doctrine, the reduction of property of the stockholders and hence, capital stock should not prejudice the rights of creditors. (Bonilla) out of reach by the creditors of the corporation. Here, M&C was acting as a There are other ways to quasi-reorganize: stockholder itself, and in that case, the right to share in such dividends, by way of 1. Appraisal Surplus RRSE.RBA. DLSU College of Law 2010

employees had no participation whatsoever; and cash dividends are the absolute property of the stockholders and cannot be made available for disposition if only to meet the employee s economic demands.

company is making profits or not, there is need to pay the bond. It must me noted that incurring bonded indebtedness requires stockholder approval. (Id.)

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which it was incorporated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. (28 1/2a) Sec. 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the

salary increases, may not be denied its employees. Lincoln Phil. v. CA (1998) FACTS: Lincoln Philippines issued 50,000 shares of stock as stock dividends, with a par value of P 100 or a total of P 5 M. The corporation paid documentary stamp taxes on each certificate on the basis of its par value. The CIR took the view that the book value of the shares should be used as a basis for determining the amount of the documentary stamp tax; and accordingly, he issued a deficiency assessment. The CTA rendered its decision holding that the amount of the documentary stamp tax should be based on the par value stated on each certificate of stock. However, the CA reversed the CTA s decision and held that the bais should be the actual value represented by the subject shares on the assumption that stock dividends, being a distinct class of shares, are not subject to the qualification in the law as to the type of certificate of stock used (with or without par value).

This only happens when the real estate properties held by the corporation appreciate in value. When the real estates owned by the corporation appreciate, the value of the assets of the corporation increase. When they do, the corporation may opt to revalue the real estate s value to its appreciated value. By increasing the value of the assets, it follows that the equity of corporation also increases because the assets of the corporation must always be equal to the liabilities and equity of a corporation. When the corporation does revalue, the SEC must approve the change in the corporation s books. 2. Conversion of Stockholder s Advances to Equity Usually, investors split their investments in a corporation into two; thus, they can either be both creditors and stockholders of a corporation. Rather than tinkering with the value of the stock or increasing the number of shares, a corporation may opt to simply convert the advances made by creditors (liability to the corporation) into subscribed capital (equity of the corporation). However, it is necessary that the stockholders and will give their approval. What do corporations, especially multinational ones, who earn a lot and incur a lot of taxes, do to protect their profits from taxes?

Initial answer would be to use charitable donations but this is limited as far as the corporation is concerned. But The best way to protect company profits is to get the foreign investment on the corporation out and let the business earn on its own. In order to do this without being subject to taxes ISSUE: In determining the amount to be is find ways to make it look like the company is incurring a lot of expenses, paid as documentary stamp tax, whether it and in turn, losses. Multinational companies use transfer pricing pricing is the par value of the certificates of stock something that the subsidiary buys domestically from abroad; the or the book value of the shares which subsidiary buys it in such a way that is costly or make it seem like the should be considered? expenses are incurred abroad. Basically, the trick of the trade is if you have huge profits, make it seem like you have huge expenses. HELD: Stock dividends are in the nature of shares of stock, the consideration for which Sale & Other Disposition of Assets RRSE.RBA. DLSU College of Law 2010

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corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (n) Sec. 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a) Sec. 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided,

is the amount of unrestricted retained earnings converted into equity in the corporation s books. Thus, a stock dividend payable in shares of stock of the corporation declaring or authorizing such dividend. It is a distribution of the shares of stock of the corporation among the stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead of cash, and is properly payable only out of surplus of profits. From the foregoing, it is clear that the stock dividends are shares of stock and not certificates of stock. There is, therefore, no reason for determining the actual value of such dividends for purposes of documentary stamp tax if the certificates representing them indicate a par value. PNB v. Andrada Electric (2002) FACTS: PASUMIL engaged the services of Andrada Electric, most of which were partially paid by, leaving several unpaid accounts with the latter. Later, PNB acquired the assets of PASUMIL that were foreclosed by DBP. Andrada Electric now is demanding PNB to pay the outstanding obligation of PASUMIL, inasmuch as the defendant PNB and NASUDECO now owned and possessed the assets of PASUMIL, and all of them benefited from the services it did. In PNB and NASUDECO s answer, they claim that the taking over of assets of PASUMIL was solely for the purpose of recondition the sugar central of PASUMIL;

See Section 40 of the Corporation Code. The important question to consider here is whether the sale or disposition of assets impair the ability of the corporation to continue operating. The disposition of assets may not be over the percentage of total assets. This was designed to protect the corporation s creditors. (Bonilla) If the corporation decides to sell 80% of the value of its assets, this would be considered a sale of substantial assets. In tax terms, this is called a quasimerger. Also, compliance with the bulk sales law is necessary. If a corporation intends to sell all of its assets, it must inform the public and its creditors: 1) Come up with a statement of liabilities stating all the creditors and liabilities of the corporation and how the assets can cover the credits; and 2) File this statement with the DTI. If this procedure is not followed, the sale would be considered void. (Id.) Acquire Own Shares Those enumerated in Section 41 of the Corporation Code are not the only instances when a corporation may acquire its own shares because the corporation may acquire treasury shares and sell again as subscription. (Bonilla) Investment of Corporate Funds See Section 42 of the Corporation Code. Normally corporations are not prevented from investing in another business if the investment is necessarily included in the ordinary course of its business. What requires a majority vote is an investment not covered by the corporation s primary purpose. RRSE.RBA. DLSU College of Law 2010

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and that they never assumed any of PASUMIL s obligation. The trial court rendered a decision in favor of Andrada Electric, which the CA affirmed. The appellate court held that it was offensive to the basic tenents of justice and equity for a corporation to take over and operate the business of another corporation, while disavowing or repudiating any responsibility, obligation or liability arising Stock corporations are prohibited from retaining surplus therefrom. profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite ISSUE: Whether or not PNB and NASUDECO corporate expansion projects or programs approved by should be held liable for the corporate the board of directors; or (2) when the corporation is debts of PASUMIL? prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from HELD: No, because their takeover of the declaring dividends without its/his consent, and such latter s assets did not make them consent has not yet been secured; or (3) when it can be assignees. clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as As a rule, a corporation that purchases the when there is need for special reserve for probable assets of another will not be liable for the debts of the selling corporation provide the contingencies. (n) former acted in good faith and paid Sec. 44. Power to enter into management contract. - No adequate consideration for such assets, corporation shall conclude a management contract with except when the following circumstances is another corporation unless such contract shall have been present: approved by the board of directors and by stockholders 1) where the purchaser expressly or impliedly agrees to assume the debts; owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case 2) where the transaction amount to a consolidation or merger of the of a non-stock corporation, of both the managing and the corporations; managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or 3) where the purchasing corporation is merely a continuation of the selling stockholders representing the same interest of both the corporation; and managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital 4) where the transaction is fraudulently That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a)

Power to Declare Dividends See Section 43 of the Corporation Code. People join corporations because they want to get dividends; thus, it would be pointless if a corporation cannot declare dividends. However, there must be unrestricted retained earning before a corporation declare dividends. A corporation can declare: 1. Cash Dividends declared by the Board 2. Property Dividends declared by the Board 3. Stock Dividends declared by the Board and 2/3 vote of the stockholders See PLDT v. NTC and Lincoln Phil. v. CA. As a general rule under the trust fund doctrine, you cannot distribute any surplus including profit except unrestricted earnings. But there are instances where you can distribute surplus by stock dividends: 3. When decreasing capital stock; 4. In the case of redeemable shares; or 5. When you liquidate and dissolve the corporation and all that s left is capital. The law requires corporations to declare dividends because they are not allowed to exceed more that 100% of their paid up capital. Otherwise, corporaitons have to pay improperly accumulated earnings tax (IAET, which is 10% of the improperly accumulate earnings. The tax paid is a penalty for not distributing dividends. In effect, if the corporations ditribute dividends, the stockholders will shoulder the tax; while if the company retains, the company will be required to pay the tax as a penalty. (Bonilla) Pre-emptive Right Pre-emptive right refers to the common law right granted to stockholders of RRSE.RBA. DLSU College of Law 2010

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stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. (n) Sec. 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (n)

entered into in order to escape liability a corporation to be granted the first option to subscribe to any opening of for those debts. the corporation s unissued capital stock, or to any increase of its authorized capital stock. (Villanueva) A careful review of the records reveals that DBP foreclosed the mortgage executed by See Section 39 of the Corporation Code. PASUMIL and acquired the assets as the highest bidder at the public auction As a rule, pre-emptive right exists unless denied in the Articles of conducted. PNB, as the second mortgagee, Incorporation. The presumption is that there is a pre-emptive right, even if redeemed from DBP the foreclosed assets. not mentioned in the Articles of Incorporation. The reason behind this right Thus, there was no basis for the lower is that people would want to keep the percentage of control they have over courts to lift the corporate masks. Also, the corporation. (Bonilla) there was no merger or consolidation with respect to PASUMIL and PNB because the The recognition of the pre-emptive right is intended to protect both the procedure under the Corporation Code was proprietary and voting rights of a stockholder in a corporation. The not followed and, in fact, PASUMIL s proportionate interest of a stockholder in a corporation determines his corporate existence, had not been legally proportionate power to vote in corporate affairs when the law gives the extinguished or terminated. Lastly, neither stockholders a right to affirm or deny board actions. The proportionate did PNB or NASUDECO expressly or interest of stockholder to the outstanding capital stock also determines his impliedly agree to assume the debt of proportionate share in the dividends declared by the corporation, as his PASUMIL. proportionate right to the remaining assets of the corporation upon its dissolution. (Villanueva) Acesite v. NLRC (2004) The SEC has ruled that in determining the proportionate right of the As a rule set in Bogo-Medellin v. NLRC, stockholders to subscribe to a proposed increase of the authorized capital unless they have exceeded their authority, stock, subscription deposits are excluded because these are payments corporate officers are, as a general rule, not received for future issuance of stock which may or may not materialize. (Id.) personally liable for their official acts, because a corporation has a personality The SEC has rules that a majority vote of stockholders waiving the preseparate and distinct from its officers, emptive right would not be valid and binding on the individual stockholder stockholders and members. Corporate since the pre-emptive right is a personal right of a stockholder, and directors and officers are solidarily liable accordingly, the waiver should be given individually by the stockholder with the corporation, where terminations concerned. When a stockholder has effectively waived the exercise of his of employment are done with malice or in pre-emptive right to an issuance of shares, it is not necessary that said shares should again be offered on a pro-rata basis to the stockholders who bad faith. took advantage of their right of pre-emption. Gonzales v. Climax Mining (2005) RRSE.RBA. DLSU College of Law 2010

Corporation Law Bonilla 40

The use of the terms issues or disposition clearly provides that the preIf the petitioner is a corporation, a board emptive right should not be available even to issue from the existing resolution authorizing a corporate officer unsubscribed portion of the authorized capital stock when the board to execute the certification against forum decides to open them for subscription, and even to re-issuance or sale of shopping is necessary certification not treasury stocks of the corporation. (Id.) signed by a duly authorized person renders the petition subject to dismissal. Management Contracts In case of a management contract, a corporation can manage another corporation for 5 years. In cases of exploration/development of natural resources, however, the period is not longer than 5 years. (Bonilla)

RRSE.RBA. DLSU College of Law 2010

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