Corpo Only

COMMERCIAL LAW REVIEWER
TABLE of CONTENTS
CORPORATION LAW
Table of Contents
Chapter I. Introduction...................................72 Chapter II. Classification of Corporations ...75 A. Stock Corporation ...............................75 B. Non-Stock Corporation........................75 C. Other Classifications ...........................75 Chapter III. Formation of Corporations........76 A. Components of a Corporation.............76 B. Steps in the Formation of a Corporation 77 C. De Facto Corporation..........................80 D. Corporation by Estoppel......................82 Chapter IV. The Corporate Entity .................83 A. The Doctrine of Separate Juridical Entity 83 B. Piercing the Corporate Veil Doctrine...83 C. Nationality of Corporation....................84 Chapter V. Corporate Powers .......................85 A. Express Powers ..................................85 B. Inherent/Incidental Powers .................85 C. Implied/Necessary Powers .................85 D. The Ultra Vires Acts (Sec. 45) ............85 Chapter VI. Internal Organization of the Corporation.....................................................87 A. By-Laws ..............................................87 B. Directors/Trustees...............................87 C. Corporate Officers...............................89 D. Stockholders or Members ...................90 Chapter VII. Management and Control.........93 A. Devices Affecting Control....................93 B. Duties and Liabilities of Directors........94 C. Duties and Liabilities of Officers..........96 D. Duties of Controlling Stockholders......96 E. Remedies in Case of Mismanagement 96 F. Right of Inspection ..............................96 G. Derivative Suits ...................................97 Chapter VIII. Capital Structure ......................99 A. Classification of Shares (Sec. 6) .........99 B. Subscription Contract........................101 C. Pre-emptive Right (Sec. 39, 102)......102 D. Consideration for issuance of shares102 E. Watered Stocks.................................103 F. Delinquent Shares.............................103 G. Enforcement of Payment ..............103 H. Rights and Obligations of Holders of Unpaid Non-Delinquent Stock ...................104 I. J. K. Certificate of Stock............................ 104 Lost or Destroyed Certificate ............ 104 Tender Offer...................................... 105
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CORPORATION LAW
Chapter IX. Dividends and Purchase of Corporation of Its Own Shares ................... 106 A. Forms of Dividends ........................... 106 B. Other Classes of Dividends .............. 106 C. Source of Dividends.......................... 106 D. Declaration of Dividends ................... 107 E. Treasury Shares ............................... 108 Chapter X. Transfer of Shares .................... 109 A. Manner of Transfer ........................... 109 B. Registration of Transfer .................... 109 C. Restrictions on Transfer.................... 109 D. Unauthorized Transfers .................... 109 E. Collateral Transfers........................... 110 Chapter XI. Amendments of Corporate Charter .......................................................... 111 A. General ............................................. 111 B. Specific Amendments ....................... 111 C. Exercise of appraisal rights in: .......... 112 D. Grounds for Disapproving Amendment (Sec. 17) .................................................... 112 E. Amendments in close corporations... 112 Chapter XII. Dissolution .............................. 113 A. Voluntary Dissolution ........................ 113 B. Involuntary Dissolution...................... 114 C. Effects of Dissolution ........................ 114 D. The Trust Fund Doctrine and the Distribution of Assets ................................. 115 Chapter XIII. Corporate Combinations....... 116 A. Definition ........................................... 116 B. Procedure (Secs. 76-79)................... 116 C. Effects of Merger or Consolidation (Sec. 80) 116 D. Effectivity of Merger or Consolidation116 E. De Facto Merger ............................... 117 F. Sale of All or Substantially All Assets117 Chapter XIV. Foreign Corporations............ 118 A. Definition of Terms............................ 118 B. Tests of Doing Business in the Philippines ................................................ 118 C. Doing Business Under the Foreign Investment Act of 1991 (RA 7042) ............ 118 D. Jurisprudential Rules on Not Doing Business in the Philippines....................... 118 E. Requisites for the Issuance of License to Do Business............................................... 119
TABLE of CONTENTS
F. Power to Sue and Be Sued of Foreign Corporations ..............................................119 G. Laws Applicable on Foreign Corporation ................................................119 Chapter XV. Close Corporations ................120 A. Requirements for Close Corporations (Sec. 96) ....................................................120 B. Characteristics ..................................120 C. Restrictions on Transfer of Shares ...120 D. Deadlocks .........................................120 E. Distinctions Between Close and Regular Corporations ..............................................121 Chapter XVI. Non-Stock Corporations .......123 A. Purposes of Non-stock Corporations 123 B. Rights of Members ............................123 C. Conversion ........................................123 D. Order of Distribution of Assets Upon Dissolution of Close Corporation ...............123 Chapter XVII. Special Corporations ...........124 A. Educational Corporations..................124 B. Religious Corporations......................124
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CORPORATION LAW
Chapter I. INTRODUCTION
Charisse Brion Pea

Lead Writer Sopfia Gay Guira Gayle Hazel Isip-Reyes Jenny Rose Reyes Patrick Sadeghi-Tajar Writers
CORPORATION LAW
CORPORATION LAW TEAM
Chapter I. Introduction
A. B. DEFINITION ATTRIBUTES OF A CORPORATION 1. ARTIFICIAL BEING 2. CREATED BY OPERATION OF LAW 3. HAS THE RIGHT OF SUCCESSION 4. HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE JURISDICTION OTHER TYPES OF BUSINESS ORGANIZATIONS
COMMERCIAL LAW
Therese Anne Cunanan Richmund Sta. Lucia
Subject Editor
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CORPORATION LAW
C. D.
ACADEMICS COMMITTEE
Kristine Bongcaron Michelle Dy Patrich Leccio
Editors-in-Chief
A. Definition
A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence. (Sec. 2, Corporation Code)
PRINTING & DISTRIBUTION

Kae Guerrero
DESIGN & LAYOUT

Pat Hernandez Viktor Fontanilla Rusell Aragones Romualdo Menzon Jr. Rania Joya
B. Attributes of a Corporation
1. An artificial being A corporation exists by fiction of law, hence, it can act only through its directors, officers and employees. Moral Damages cannot be awarded in favor of corporations because they do not have feelings and mental state. They may not even claim moral damages for besmirched reputation (NAPOCOR vs Philipp Brothers Oceanic, 2001). However, a corporation can recover moral damages under Art 2219 (7) if it was the victim of defamation Pilipinas Broadcasting Network vs. Ago Medical and Educational Center (2005). Criminal Liability Since a corporation as a person is a mere legal fiction, it cannot be proceeded against criminally because it cannot commit a crime in which personal violence or malicious intent is required. Criminal action is limited to the corporate agents guilty of an act amounting to a crime and never against the corporation itself (West Coast Life Ins. Co. vs. Hurd [1914], Time Inc. vs. Reyes [1971]).
LECTURES COMMITTEE
Michelle Arias Camille Maranan Angela Sandalo
Heads Katz Manzano Mary Rose Beley Sam Nuez Krizel Malabanan Arianne Cerezo Marcrese Banaag Volunteers
MOCK BAR COMMITTEE

Lilibeth Perez
BAR CANDIDATES WELFARE

Dahlia Salamat
LOGISTICS
Charisse Mendoza
SECRETARIAT COMMITTEE
Jill Hernandez
Head Loraine Mendoza Faye Celso Mary Mendoza Joie Bajo Members
2. Created by operation of law Mere consent of the parties to form a corporation is not sufficient. The State must give its consent either through a special law (in case of
government corporations) or a general law (i.e., Corporation Code in case of private corporations). 3. Has the right of succession Its continued existence during its stated term cannot be affected by any change in the members or stockholders or by any transfer of rd shares by a stockholder to a 3 person. 4. Has the powers, attributes and properties expressly authorized by law or incident to its existence As a mere creature of law, it can exercise only such powers as the law may choose to grant it, either expressly or impliedly.
or associates; and between, any or all of them and the corporation, partnership, or association of which they are stockholders, members or associates, respectively; 3. Controversies in the Election or appointment of directors, trustees, officers, or managers of corporations, partnerships, or associations; 4. Derivative suits; and 5. Inspection of corporate books.
Unlad Resources Development Corp. vs. Dragon (2008, Nachura): Q: Who has jurisdiction on cases involving intracorporate controversies? A: Under Sec. 5.2 of RA 8799, SECs jurisdiction over all cases enumerated under Sec. 5, PD 902-A was transferred to the Regional Trial Court which has jurisdiction over the principal office of the corporation, partnership or association concerned
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CORPORATION LAW
C. Jurisdiction
(Asked in 91 and 96) According to the Interim Rules of Procedure for Intra-Corporate Controversies (A.M. No. 01-204-SC), which took effect on April 1, 2001, the Regional Trial Court has jurisdiction over cases involving the following: (FIEDI) 1. Devices or schemes employed by, or any act of, the BOD, business associates, officers or partners, amounting to Fraud or misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners or members of any corporation, partnership, or association; 2. Controversies arising out of Intra-corporate, partnership, or association relations, between and among stockholders, members Partnership and Corporation Distinguished Partnership Creation
D. Other Types Organizations
of
Business
1. Sole Proprietorship is composed of the proprietor himself and his employees but it has no personality separate and distinct from the proprietor. 2. Partnership two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves (Art 1767).
Corporation
created by mere agreement of the parties created by operation of law may be organized by only two persons
Extent of partners are personally liable for Liability partnership debts Management (in the absence of an agreement) every partner is an agent of the partnership Powers A partnership may exercise any power authorized by the partners provided it is not contrary to law, morals, customs,
requires at least 5 incorporators stockholders are liable only to the extent of their investment/subscription management is centralized in a board of directors or trustees A corporation can exercise only the powers expressly granted by law or implied from those granted or incident to its existence
public order or public policy (Art. 1306, CC) Nature of based on mutual trust and confidence has more stability since a corporation has Relation-ship (delectus personae) right of succession; dissolution needs its existence is precarious since death or consent of the State (SEC) unilateral act of a partner may bring about dissolution 3. Joint Account (Asked in 00) - an arrangement whereby merchants may interest themselves in the transaction of other merchants, contributing thereto the amount of capital they may agree upon, and participating in the favorable and unfavorable results thereof in the proportion they may determine. Joint Account and Partnership Distinguished (Asked in 00) Joint Account Juridical Personality Business Name Management No juridical personality Partnership
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CORPORATION LAW
Parties cases
Has personality separate and distinct from the partners No commercial name common to all participants Can adopt a partnership name can be adopted (Art 241, Code of Commerce) general partners are ONLY the ostensible partner manages and ALL transacts business in his own name and under his managers individual liability (Art 241, Code of Commerce) in Only the ostensible partner the person carrying ALL general partners may be on the joint business can be sued by and is liable liable even up to the extent of their personal properties to other persons
4. Business Trust a legal relation whereby one person, called the trustor, conveys a property to another, called the trustee, for the benefit of a person called the beneficiary (Art. 1440 CC). 5. Joint Venture an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks (Kilosbayan vs. Guingona, 1994) 6. Cooperative duly registered association or persons, with common bond of interest, who have voluntarily joined together to achieve lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits. (Sec. 3, RA 6938 or The Cooperative Code of the Philippines)
Chapter II. CLASSIFICATION of CORPORATIONS
Chapter II. Classification of Corporations

A. B. C. STOCK CORPORATION NON-STOCK CORPORATION OTHER CLASSIFICATIONS
C. Other Classifications
1. Public corporation (Asked in 04) One formed or organized for the government or a particular state. Its purpose is for the general good and welfare. 2. Private corporation (Asked in 04) One formed for some private purpose, benefit, aim or end. 3. Close corporation (Sec. 96) 4. Educational corporation - One organized for educational purposes (Sec. 106). 5. Religious corporations a. Corporation sole is one formed for the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect, or church, by the chief archbishop, bishop, priest, rabbi, or other presiding elder of such religious denomination, sect or church (Sec. 110). b. Corporation aggregate is a religious corporation incorporated by more than one person. 6. Eleemosynary corporation One organized for a charitable purpose 7. Domestic corporation A domestic corporation is one formed, organized, or existing under the laws of the Philippines. 8. Foreign corporation One formed, organized or existing under any laws other than those of the Philippines and whose law allows Filipino citizens and corporations to do business in its own country and state (Sec. 123). 9. Corporation created by special laws or charter (Sec. 4) - Corporations which are governed primarily by the provisions of the special law or charter creating them. Corporation Code has suppletory application. 10. Subsidiary corporation one in which control, usually in the form of ownership of majority of its shares, is in another corporation (the parent corporation). 11. Parent corporation its control lies in its power to elect the subsidiarys directors thus controlling its management policies.
A. Stock Corporation
(Asked in 01 and 04) One which has a capital stock divided into shares and is authorized to distribute to the holders of such shares dividends or allotments of the surplus profits (i.e., retained earnings on the basis of the shares held (Sec. 3) It is organized for profit. The governing body of a stock corporation is usually the Board of Directors (except in certain instances, e.g. close corporations).
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CORPORATION LAW
B. Non-Stock Corporation
(Asked in 04) All other corporations are non-stock corporations (Sec. 3) One where no part of the income is distributable as dividends to its members, trustees, or officers, subject to the provisions of the Code on dissolution. Not organized for profit. Its governing body is usually the Board of Trustees.
CIR vs. Club Filipino de Cebu (1962): There are two elements for a stock corporation to exist: 1) Capital stock divided into shares, and 2) An authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of shares held. (Test of WON stock corporation) Even if there is a statement of capital stock, the corporation is still NOT a stock corporation if dividends are NOT supposed to be declared, that is, there is no distribution of retained earnings.
Under Sec. 43 of the Corporation Code, a corporation is deemed to have the power to declare dividends. Thus, so long as the corporation has capital stock and there is no prohibition in its Articles of Incorporation or in its by-laws for it to declare dividends, such corporation is a stock corporation.
Chapter III. FORMATION of CORPORATIONS
Chapter III. Formation of Corporations

A. COMPONENTS OF A CORPORATION 1. INCORPORATORS 2. CORPORATORS 3. FOREIGN INCORPORATORS/CORPORATORS STEPS IN THE FORMATION OF A CORPORATION 1. PROMOTION a. LIABILITY OF CORPORATION ON PROMOTERS CONTRACTS b. PERSONAL LIABILITY OF PROMOTERS c. COMPENSATION OF PROMOTERS 2. DRAFTING THE ARTICLES OF INCORPORATION a. DEFINITION OF TERMS b. CONTENTS OF ARTICLES OF INCORPORATION 3. FILING WITH SEC AND PAYMENT OF FEES 4. ISSUANCE OF CERTIFICATE OF INCORPORATION 5. INTERNAL ORGANIZATION AND COMMENCEMENT OF BUSINESS DE FACTO CORPORATION 1. REQUISITES OF DE FACTO CORPORATION 2. DE JURE VS. DE FACTO CORPORATION CORPORATION BY ESTOPPEL
3. Foreign Incorporators/Corporators
(Asked in 05) General Rule: All incorporators/ corporators may be foreigners. Exceptions: corporations. Fully or partly nationalized
B.
C.
D.
A. Components of a Corporation 1. Incorporators - are those stockholders or

members mentioned in the articles as originally forming and composing the corporation and who are signatories thereof. Requirements: a. Natural persons b. Of legal age c. Must own or subscribe to at least one share of stock of the corporation (Genuine interest) d. 5-15 incorporators who must sign the articles of incorporation e. Majority of the incorporators must be residents of the Philippines Original subscribers Persons whose names are mentioned in the Articles, but not as incorporators; they do not sign the Articles.
a. Where NO foreign stockholder is allowed. Mass media except recording (Art. XVI, Sec. 11 of the Constitution; Presidential Memorandum dated 04 May 1994) Retail trade enterprises with paid-up capital of less than US$2.5 Million (Sec. 5 of RA 8762) Private security agencies (Sec. 4 of RA 5487) Small-scale mining (Sec. 3 of RA 7076) Utilization of natural resources (Art. XII, Sec. 2 of the Constitution) Ownership, operation and management of cockpits (Sec. 5 of PD 449) Manufacture, repair, stockpiling and/or distribution of nuclear weapons (Art. II, Sec. 8 of the Constitution) Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons and anti-personnel mines (Various treaties to which the Philippines is a signatory and conventions supported by the Philippines) Manufacture of firecrackers and other pyrotechnic services (Sec. 5 of RA 7183) b. Up to 20% foreign equity. Private radio communications network (RA 3846) c. Up to 25% foreign equity. Private recruitment, whether for local or overseas, employment (Art. 27 of PD 442) Construction and repair of locally funded works (Sec. 1 of CA 541, LOI 630) Construction of defense-related structures (Sec. 1 of CA 541)
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CORPORATION LAW
2. Corporators - are stockholders or members

who join the incorporation. corporation after its
d. Up to 40% foreign equity.
Exploration, development and utilization of natural resources (Art. XII, Sec. 2 of the Constitution). Realty companies and other corporations that own private lands (Art. XII, Sec. 7 of the Constitution; Ch. 5, Sec. 22 of CA 141; Sec. 4 of RA 9182). Operation and management of public utilities (Art. XII, Sec. 11 of the Constitution; Sec. 16 of CA 146) Culture, production, milling, processing, trading except retail of rice and corn and by-products (Sec. 5 of PD 194; Sec. 15 of RA 8762). Adjustment companies (Sec. 323 of PD 612 as amended by PD 1814). Sauna and steam bath bathhouses, massage clinics and similar activities.
1. Promotion
Promoters are persons who, acting alone or with others, take initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor (RA 8799, The Securities Regulation Code). a. Liability of corporation on promoters contracts General Rule: A corporation is NOT bound by the contract. Since the corporation did not yet exist at the time of the contract, it could not have had an agent who could legally bind it. Exceptions: A corporation may bound by the contract if it makes contract its own by: 1. Adoption or ratification of ENTIRE contract. 2. Acceptance of benefits under contract with knowledge of terms thereof. b. Personal liability of promoters General Rule: The promoter binds himself PERSONALLY & assumes the responsibility of looking to the proposed corp. for reimbursement. Exceptions: Any express or implied agreement to the contrary, or novation of the contract c. Compensation of Promoters General Rule: The corporation is NOT liable to pay compensation because this would be an imposition on innocent investors. (Ballantine) Exceptions: 1. If after it is formed, corporation expressly promises to do so 2. Services done partly before and partly after incorporation and the corporation takes the benefits thereof Note: The Securities Act authorizes a promotion fee IF it is provided for in the registration statement of the securities involved. be the the the the
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e. Up to 60% foreign equity. Financing companies regulated by SEC (Sec. 6 of RA 5980 as amended by RA 8556) Investment houses (Sec. 5 of PD 129 as amended by RA 8366)
B. Steps in the Corporation
Formation
of
* Promotion Drafting the Articles of Incorporation

corporate name purpose clause principal office term of existence incorporators & directors capital stock; subscription treasurer-in-trust treasurers affidavit
Filing with SEC; Payment of the filing and publication fees
Issuance of the Certificate of Incorporation by the SEC (if, after examination, all the papers filed are in order)
Internal Organization (by-laws, election of officers) & Commencement of business operations
2. Drafting the Articles of Incorporation (AOI)

a. Definition of Terms 1. Articles of Incorporation - constitutes the charter of the corporation and defines the contractual relationships between the State and the corporation, the stockholders and the State, and the corporation and the stockholders. 2. Capital - It is used broadly to indicate the entire property or assets of the corporation. In the strict sense, it refers to that portion of the net assets paid by the stockholders as consideration for the shares issued to them, which is utilized for the prosecution of the business of the corporation (DE LEON, Corporation Code of the Philippines) 3. Capital Stock is an amount fixed in the AOI (where shares are with par value) and is unaffected by profits and losses. It limits the maximum amount or number of shares that may be issued without formal amendment of the articles of incorporation (See Sec. 38). 4. Authorized Capital Stock is synonymous with capital stock where the shares of the corporation have par value. If the shares of stock have no par value, the corporation has no ACS, but it has capital stock the amount of which is not specified in the AOI as it cannot be determined until all the shares have been issued. In this case, the two terms are not synonymous (DE LEON). 5. Subscribed Capital Stock - It is the amount of the capital stock subscribed whether fully paid or not. It connotes an original subscription contract for the acquisition by a subscriber of unissued shares in a corporation (Secs. 60 and 61) 6. Outstanding Capital Stock - it is the total shares of stock issued under the binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares (Sec. 137). It is broader than subscribed capital stock.
7. Paid-up Capital - Portion of the authorized capital stock which has been subscribed and paid (See Sec. 13). 8. Unissued Capital Stock - It is that portion of the capital stock that is not issued or subscribed. It does not vote and draws no dividends.
CORPORATION LAW
9. Legal Capital - It is the amount equal to the aggregate par value and/or issued value of the outstanding capital stock (DE LEON). b. Contents of Articles of Incorporation 1. Corporate name Must not be identical or deceptively or confusingly 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 (Sec. 18). Must include the word Corporation or Inc Change of corporate name requires the amendment of the AOI: majority vote of the board and the vote or written assent of stockholders holding 2/3 of the outstanding capital stock (Sec. 16). Republic Planters Bank vs. CA (1992): Amendment of a corporations AOI changing its corporate name does not extinguish the personality of the original corporation. It is the same corporation with a different name, and its character is not changed. Consequently, the new corporation is still liable for the debts and obligations of the old corporation. 2. Purpose clause Must indicate the PRIMARY and SECONDARY purposes if there are more than one purpose, which should not contradict or change the nature of the corporation (Sec. 14(2)) Must not be patently unconstitutional, illegal, immoral, and contrary to government rules and regulations (Sec. 17 (2)). Must not be for the purpose of practicing a profession
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4. Term of existence Maximum life of 50 years. Extendible for a period not exceeding 50 years at any one instance. No extension, however, can be made earlier than 5 years before the end of the term. (Sec. 11) Extension requires an amendment of the AOI. Any dissenting stockholder may exercise his appraisal right (Sec. 37). 5. Names, citizenship and residences of incorporators 6. Number, names, citizenship and residences of directors/trustees. (Asked in 05 and 08) Directors is used for stock corporations, trustees for nonstock corporations. General Rule: not less than 5 but not more than 15 directors/trustees Exception: In non-stock corporations, the articles or by-laws may provide for more than 15 trustees (Sec. 92). In educational non-stock corporations, trustees may NOT exceed 15. Number of trustees shall be in multiples of 5 (Sec. 108). In nationalized industries, aliens may be directors of a corporation only in such number as may be proportional to their allowable ownership of shares. 7. If stock corporation, amount of authorized capital stock, number of shares AOI must state the authorized capital stock in lawful money of the Philippines, the number of shares into which the ACS is divided, and the par value of each par value shares (Sec. 14(8), Sec. 15(7)).
11. Name of treasurer elected by the subscribers. 12. Other matters. Classes of shares, as well as the preferences or restrictions on any such class (Sec. 6). Denial or restriction of pre-emptive right (Sec.39). Prohibition against transfer of stock which would reduce stock ownership to less than the required minimum in the case of a nationalized business or activity (Sec. 15(11)).
3. Filing with SEC and payment of fees

Documents to be filed with SEC (Asked in 02): a. Articles of Incorporation b. Treasurers Affidavit certifying that 25% of the total authorized capital stock has been subscribed and at least 25% of such has been fully paid in cash or property. c. Bank certificate covering the paid-up capital. d. Letter authority authorizing the SEC to examine the bank deposit and other corporate books and records to determine the existence of paid-up capital. e. Undertaking to change the corporate name in case there is another person or entity with same or similar name that was previously registered. f. Certificate of authority from proper government agency whenever appropriate like BSP for banks and Insurance Commission for insurance corporations. (SUNDIANG AND AQUINO, Reviewer on Commercial Law)
CORPORATION LAW
3. Principal office Must be within the Philippines (Sec. 14 (3)) AOI must specify both province or city or town where it is located Important in (1) determining venue in an action by or against the corporation (2) determining the province where a chattel mortgage of shares should be registered (Chua Gan vs. Samahang Magsasaka, 1935).
8. In par value stock corporations, the par value of each share. 9. Number of shares and amounts of subscription of subscribers which shall not be less than 25% of authorized capital stock. 10. Amount paid by each subscriber on their subscription, which shall not be less than 25% of subscribed capital and shall not be less than P5,000.
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4. Issuance of Certificate of Incorporation by SEC

The SEC shall give the incorporators reasonable time to correct or modify the objectionable portions of the articles or amendment (Sec. 17). Grounds for disapproving AOI: (Sec. 17) AOI does not SUBSTANTIALLY comply with the form prescribed Purpose is patently unconstitutional, illegal, immoral, contrary to government rules and regulations Treasurers Affidavit concerning the amount of capital subscribed and or paid is false Required percentage of ownership of Filipino citizens has not been complied with. REMEDY in case of rejection of AOI petition for review in accordance with the Rules of Court (Sec. 6, last par., PD 902-A) Commencement of corporate existence and juridical personality upon issuance of certificate of Incorporation (Sec. 19) REVOCATION of certificate of incorporation if incorporators are found guilty of fraud in procuring the same after due notice and hearing (Sec. 6(i), PD 902-A)
C. De Facto Corporation
(Asked in 04)
1. Requisites of De Facto Corporation

a. Valid statute - There can be no de facto corporation under a statute subsequently declared unconstitutional. (Mun. of Balabagan vs. Benito, 1969) b. User of corporate powers in GOOD FAITH - there is transaction of business in some way as if it were a corporation (e.g., taking subscriptions to and issuing shares of stock, buying lot, constructing, and leasing a building) c. Substantial or Colorable compliance in GOOD FAITH A corporation must have been issued a certificate of incorporation to be able to claim in good faith that it is a de facto corporation. (Hall vs. Piccio, 1950)
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2. De Jure vs. De Facto Corporations

DE JURE One created in strict or substantial conformity with the statutory requirements for incorporation. DE FACTO One which actually exists for all practical purposes as a corporation but which has no legal right to corporate existence as against the State. Right to exercise powers cannot be inquired into collaterally in any private suit. But such inquiry may be made by the State in a quo warranto proceeding (SUNDIANG AND AQUINO).
5. Internal Organization Commencement of Operations
and Business
includes the adoption of by-laws and election officers
Right to exist cannot be successfully attacked even in a direct proceeding by the State
Substantial Compliance No effect DE JURE
MANDATORY
NON ENTITY No Compliance No compliance
REQUISITES DE FACTO
DIRECTORY
No Compliance
No effect
DE JURE
If the following are present: 1. Apparently valid law 2. Colorable attempt in GOOD FAITH to incorporate 3. User in GOOD FAITH of corporate powers
CORPORATION LAW
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D. Corporation by Estoppel
(Asked in 04) All persons who assume to act as a corporation knowing it to be without authority shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof (Sec. 21). When such ostensible corporation is sued on any transaction entered by it as a corporation or any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality (Sec. 21). One 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. 21). NOTE: An unincorporated corporation is not barred from transacting business before the commencement of corporate existence. Limit: the persons acting as such shall be personally liable. Lozano vs. De Los Santos (1997): Q: Action involving two incorporated drivers associations that decided to unite and elect one set of officers to be given authority to collect the daily dues of the drivers who are members of the consolidated association. A: Doctrine of estoppel applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Where there are no third persons involved and the conflict arises only among those assuming to form a corporation, who therefore know that it has not been registered, there is no corporation by estoppel. International Express Travel v. CA, (2000): Q. In what instances and to whom does the doctrine of estoppel applies? A: The doctrine of corporation by estoppel may apply to: a third party - a 3 party who had dealt with an unincorporated association as a corporation may be precluded from denying its corporate existence on a suit brought by the alleged corporation on the contract even if he did not
rd
know of the defective incorporation. 3 party is considered to have admitted the existence of a corporation by the fact that he dealt with it as a corporation. the alleged corporation - when a third person has entered into a contract with an association which represented itself to be a corporation, the association is estopped from denying its corporate capacity in a suit rd against it by such 3 person. It cannot allege lack of personality to be sued to evade responsibility on a contract it has entered into and by virtue of which it has received advantages and benefits associates as partners - when business associates fraudulently misrepresents the rd existence of a corporation and the 3 party contracts with the association as a corporation without knowing the serious defects in its rd incorporation, such 3 party may sue associates as general partners. Where both rd the associates and the 3 party were ignorant of rd the defective incorporation, 3 party cant hold the associates liable since they were in good rd faith. If 3 party knew of defects in incorporation and still dealt with the corporation, he must be deemed to have chosen to deal with the corporation as such and should be limited in his recovery to the corporate assets.
rd
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CORPORATION LAW
Chapter IV. The CORPORATE ENTITY
Chapter IV. The Corporate Entity

A. B. THE DOCTRINE OF SEPARATE JURIDICAL ENTITY PIERCING THE CORPORATE VEIL DOCTRINE 1. AN EQUITABLE REMEDY 2. EXTENT OF LEGAL EFFECTS 3. APPLICATION OF PIERCING DOCTRINE 4. PARENT-SUBSIDIARY RELATIONSHIP NATIONALITY 1. PLACE OF INCORPORATION TEST 2. THE GRANDFATHER RULE 3. CONTROL TEST 4. WAR-TIME TEST 5. INVESTMENT TEST
when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime or where the corporation is a mere alter ego or business conduit of a person. 2. Extent of Legal Effects - The application of the piercing doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance for which the doctrine was applied. (Koppel Phil. Inc. vs. Yatco, 1946) 3. Application of Piercing Doctrine If done to defraud the government of taxes due it. If done to evade payment of civil liability. If done by a corporation which is merely a conduit or alter ego of another corporation. If done to evade compliance with contractual obligations. If done to evade financial obligation to its employees.
Seaoil vs Autocorp Group ( 2008, Nachura): Q: Is a corporation liable for the individual acts of its stockholders or members? Is there an exception to the general rule? A: It is settled that a corporation has a personality separate and distinct from its individual stockholders or members, and is not affected by the personal rights, obligations and transactions of the latter. The corporation may not be held liable for the obligations of the persons composing it, and neither can its stockholders be held liable for its obligation. Of course, this Court has recognized instances when the corporations separate personality may be disregarded. However, we have also held that the same may only be done in cases where the corporate vehicle is being used to defeat public convenience, justify wrong, protect fraud, or defend crime. Moreover, the wrongdoing must be clearly and convincingly established. It cannot be presumed.
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C.
A. The Doctrine of Separate Juridical Entity

(Asked in 95, 96, 99 and 00) 1. Concept - A corporation has a personality separate and distinct from that of its stockholders and members and is not affected by the personal rights, obligations, and transactions of the latter. 2. Property - SHs have no claim on corporate property as owners, but mere expectancy or inchoate right to the same upon dissolution of the corporation after all corporate creditors have been paid. Such right is limited only to their equity interest (doctrine of limited liability). Although stockholders interest in the corporation may be attached by his personal creditor, corporate property cannot be used to satisfy his claim (Wise & Co. vs. Man Sun Lung, 1940). 3. Liability for torts - as a separate juridical personality, a corporation can be held liable for torts committed by its officers for corporate purpose (PNB vs. CA, 1978). 4. Constitutional Rights - Corporate entities are entitled to due process, equal protection, and protection against unreasonable searches and seizures. However, a corporation is not entitled to the privilege against self-incrimination (Bataan Shipyard & Engg Co. vs. PCGG, 1987)
4. Parent-subsidiary relationship General Rule: The mere fact that a corporation owns all or substantially all of the stocks of another corporation is NOT sufficient to justify their being treated as one entity. Exception: The subsidiary is a mere instrumentality of the parent corporation. Circumstances rendering subsidiary an instrumentality (PNB vs. Ritratto Group, 2001): The parent corporation owns all or most of the subsidiarys capital stock.
B. Piercing the Corporate Veil Doctrine

(Asked in 91, 01 and 04) 1. An Equitable Remedy - Piercing the veil of corporate entity is merely an equitable remedy, and may be awarded only in cases
Chapter IV. The CORPORATE ENTITY
The parent and subsidiary corporations have common directors or officers. The parent corporation finances the subsidiary. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation. The subsidiary has grossly inadequate capital. The parent corporation pays the salaries and other expenses or losses of the subsidiary. The subsidiary has substantially no business except with parent corporation or no assets except those conveyed to or by the parent corporation. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation or its business or financial responsibility is referred to as the parent corporations own. The parent corporation uses the property of the subsidiary as its own. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation in the latters interest. The formal ledger requirements of the subsidiary are not observed.
corporation in the first is multiplied by the latters own Filipino equity, and the product of these percentages is determined to be the ultimate Filipino ownership of the subsidiary corporation (SEC Opinion re; Silahis International Hotel, 4 May 1987). 3. Control Test A corporation shall be considered a Filipino corporation if the Filipino ownership of its capital stock is at least 60%, and where the 60-40 Filipino-alien equity ownership is NOT in doubt (SEC Opinion dated 6 November 1989; DOJ Opinion No. 18, s. 1989). Therefore, its shareholdings in another corporation shall be considered to be of Filipino nationality when computing the percentage of Filipino equity of that second corporation (SEC Opinion dated 23 November 1993). Control test is applied in the following: a. Exploitation of natural resources - Only Filipino citizens or corporations whose capital stock are at least 60% owned by Filipinos can qualify to exploit natural resources. (Sec. 2, Art. XII, Consti.) b. Public Utilities - xxx 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 60% of whose capital is owned by such citizens. (Sec. 11, Art. XII, Consti.) 4. War-time Test If the controlling stockholders are enemies, then the nationality of the corporation will be based on the citizenship of the majority stockholders in times of war (Filipinas Compania de Seguros v Christian Huenfeld, 1951). 5. Investment Test A Philippine National is a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of the funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of Philippine nationals. (Sec. 3(a) Foreign Investments Act of 1991, RA7042)
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CORPORATION LAW
C. Nationality of Corporation
1. Place of Incorporation test The corporation is a national of the country under whose laws it is organized or incorporated (Sec. 123) a. Domestic corporations organized and governed under and by Philippine laws b. Foreign corporations organized under laws other than those of the Philippines an can operate only in the territory of the state under whose laws it was formed. However, they may be licensed to do business here. 2. The Grandfather Rule It is a method of determining the nationality of a corporation which in turn is owned in part by another corporation by breaking down the equity structure of the shareholder corporation. It involves the computation of Filipino ownership of a corporation in which another corporation of partly Filipino and partly foreign equity owns capital stock. The percentage of shares held by the second
Chapter V. CORPORATE POWERS
Chapter V. Corporate Powers

(Asked in 02 and 07)
A. EXPRESS POWERS 1. GENERAL POWERS 2. SPECIAL/SPECIFIC POWERS INHERENT/INCIDENTAL POWERS IMPLIED POWERS ULTRA VIRES ACTS 1. DEFINITION 2. TYPES 3. EFFECTS 4. REMEDIES
B. C. D.
A. Express Powers
Granted by law, Corporation Code, and its Articles of Incorporation or Charter 1. General Powers of Corporations (Sec. 36) a. Sue and be sued in its corporate name; b. Succession; c. Adopt and use a corporate seal; d. Amend its Articles of Incorporation; e. Adopt by-laws; f. For stock corporations - issue or sell stocks to subscribers and sell treasury stocks; for non-stock corporation - admit members to the corporation; g. Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, pursuant to its lawful business; h. Enter into merger or consolidation with other corporations as provided in the Code; i. Make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; j. Establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and k. Exercise such other powers as may be essential or necessary to carry out its purposes. 2. Special/Specific Powers (Sec. 37-44) (BADD PIT MC) a. Extend or shorten the corporate Term (Sec. 37)
Notes: 2 general restrictions on the power of the corporation to acquire and hold properties: property must be reasonably and necessarily required by the business that the power shall be subject to the limitations prescribed by other special laws and the constitution (corporation may not acquire more than 30% of voting stocks of a bank; corporations are restricted from acquiring public lands except by lease of not more than 1000 hectares)
B. Inherent/Incidental Powers
Not expressly stated but are deemed to be within the capacity of corporate entities
C. Implied/Necessary Powers
These powers are deemed to exist because of the following provisions: Except such as are necessary or incidental to the exercise of the powers so conferred (Sec. 45) Such powers as are essential or necessary to carry out its purpose or purposes as stated in the AOI catch-all phrase (Sec. 36(11)).
D. The Ultra Vires Acts (Sec. 45)

1. Definition Ultra Vires acts are those acts which a corporation is not empowered to do or perform because they are not conferred by its AOI or by the Corporation Code, or not necessary or incidental to the exercise of the powers so conferred.
CORPORATION LAW
b. Increase or decrease Capital stock (Sec. 38) c. Incur, create or increase Bonded indebtedness (Sec. 38) d. Deny Preemptive right (Sec. 39) e. Sell or Dispose of substantially all its assets (Sec. 40) f. Acquire its own shares (Sec. 41) g. Invest in another corporation or business (Sec. 42) h. Declare dividends (Sec. 43) i. Enter into Management contracts (Sec. 44)
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Chapter V. CORPORATE POWERS
3. Effects of Ultra Vires Acts a. Executed contract courts will not set aside or interfere with such contracts; b. Executory contracts no enforcement even at the suit of either party (void and unenforceable); c. Partly executed and partly executory principle of no unjust enrichment at expense of another shall apply; d. Executory contracts apparently authorized but ultra vires the principle of estoppel shall apply.
ULTRA VIRES ACTS Not necessarily unlawful, but outside the powers of the corporation Can be ratified Can bind the parties if wholly or partly executed ILLEGAL ACTS Unlawful; against law, morals, public policy, and public order Cannot be ratified Cannot bind the parties
Seaoil vs Autocorp Group (2008, Nachura): An ultra vires act is distinguished from illegal act, the former being voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated.
4. Remedies in Case of Ultra Vires Acts a. State 1. Forfeiture by judgment of Court 2. Suspension or revocation of the certificate of registration by the SEC b. Stockholders 1. Injunction 2. Derivative suit c. Creditors 1. Nullification of contract in fraud of creditors
CORPORATION LAW
2. Types of Ultra Vires Acts a. Acts done beyond the powers of the corporation as provided in the law or its articles of incorporation; b. Acts or contracts entered into in behalf of a corporation by persons who have no corporate authority (Note: This is technically ultra vires acts of officers and not of the corporation); c. Acts or contracts, which are per se illegal as being contrary to law. (VILLANUEVA, Philippine Corporate Law)
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Chapter VI. INTERNAL ORGANIZATION of the CORPORATION may be required by law for an orderly governance and management of corporations but they are not essential to corporate birth. Therefore, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation
Chapter VI. Internal Organization of the Corporation A. BY-LAWS

1. DEFINITION 2. ADOPTION 3. REQUIREMENTS 4. EFFECTIVITY 5. AMENDMENT OR REPEAL DIRECTORS/TRUSTEES 1. QUALIFICATIONS 2. ELECTION OF DIRECTORS/TRUSTEES 3. METHODS OF VOTING 4. EXERCISE OF CORPORATE POWERS 5. MEETINGS OF THE BOARD 6. REMOVAL OF DIRECTORS/TRUSTEES 7. EXECUTIVE COMMITTEE CORPORATE OFFICERS 1. WHO ARE CORPORATE OFFICERS 2. DISQUALIFICATIONS 3. AUTHORITY OF CORPORATE OFFICERS STOCKHOLDERS OR MEMBERS 1. RIGHTS OF STOCKHOLDERS 2. OBLIGATIONS OF STOCKHOLDERS 3. STOCKHOLDERS/MEMBERS MEETING 4. CORPORATE ACTS REQUIRING APPROVAL OF ALL STOCKHOLDERS/MEMBERS 5. OTHER INSTANCES REQUIRING STOCKHOLDERS/MEMBERS ACTION 6. LIMITATIONS ON RIGHT TO VOTE 7. APPRAISAL RIGHT
3. Requirements (Sec. 46) Must be approved by the affirmative vote of the stockholders representing the majority of the outstanding capital stock or majority of members (if filed prior to incorporation, approved and signed by all incorporators) Must be kept in the principal office of the corporation; subject to inspection of stockholder or member during office hours (Sec. 74)
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B.
C.
4. Effectivity of By-Laws
ONLY from the issuance of SEC of certification that bylaws are not inconsistent with the Code CANNOT bind stockholders or corporation pending approval
D.
5. Amendment or Repeal (Sec. 48) Majority vote of the members of the Board and majority vote of the OCS or members, in a meeting duly called for the purpose Delegation to the BOD of power to amend or repeal by-laws by vote of stockholders representing 2/3 of the OCS or 2/3 of the members Revocation of the delegated power by majority vote only
A. By-Laws
(Asked in 98, 00 and 01)
1. Definition
By-laws are mere internal rules among stockholders and cannot affect or prejudice 3rd persons who deal with the corporation unless they have knowledge of the same (China Banking Corp v CA, 1997) 2. Adoption of by-laws (Sec. 46) Within 1 month after receipt of official notice of the issuance of its certificate of incorporation by the SEC. Prior to incorporation - approved and signed by all the incorporators & submitted to SEC together with AOI
B. Directors/Trustees
1. Qualifications
a. If STOCK, director must own at least 1 share of the capital stock, which stock shall stand in his own name (Sec. 23). If NONSTOCK, trustee must be a member. b. Majority of the directors/trustees must be residents. c. Not have been convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years or a violation of the Corporation Code, committed within five years from the date of his election. (Sec. 27) d. Natural person e. Of Legal Age f. Other qualifications as may be prescribed in the by-laws of the corporation.
Loyola Grand Villas Homeowners Assn vs. CA (1997): Q: What happens when there is failure to file the Bylaws on time? A: Failure to file the by-laws within that period does not imply the "demise" of the corporation. By-laws
Chapter VI. INTERNAL ORGANIZATION of the CORPORATION
2. Election of Directors/Trustees
a. There must be present, in person or by proxy, the owners of majority of the OCS or majority of the members entitled to vote in the meeting. b. Election may be by ballot if requested. c. A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory right to use any of the methods of voting in the election of directors. d. No delinquent stock shall be voted. e. The candidates receiving the highest number of votes shall be declared elected.
Note: In case the contracted manager is another corporation, the special rule in Sec. 44 applies. 3. In case of close corporations, the stockholders may manage the business of the corporation instead by a board of directors, if the articles of incorporation so provide.
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Spouses Constantine Firme vs. Bukal Enterprises and Development Corporation (2003): The power to purchase real property is vested in the board of directors or trustees. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the board, whose approval will finalize the transaction.
3. Methods of Voting
a. Straight Voting b. Cumulative voting for one candidate a stockholder is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. Illustration: If there are 5 directors to be elected and Pedro, as shareholder, has 100 shares, Pedro can give 500 (5 x 100 shares) votes to just one candidate. c. Cumulative voting by distribution - a stockholder may cumulate his shares by multiplying the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit. Illustration: In the illustration above, Pedro may choose to give 100 votes to candidate 1, 100 votes to candidate 2, 100 votes to candidate 3, 150 votes to candidate 4, and 50 votes to candidate 5. 4. Exercise of Corporate Powers (Asked in 93 and 98) a. Board as Powers Repository of Corporate
b. Requisites of a VALID Corporate Act by the Board of Directors 1. The Board must act as a BODY in a meeting. 2. There must be a VALIDLY constituted meeting. 3. There act must be supported by a MAJORITY OF THE QUORUM duly assembled (Exception: Election of officers requires a vote of majority of all the members of the board) 4. The act must be within the powers conferred on the Board.
5. Meetings of the Directors/Trustees
Board
of
a. When? (Sec.53) Regular meetings of directors or trustees shall be held monthly, unless the by-laws provide otherwise. Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the bylaws. b. Where? (Sec. 53) Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the bylaws provide otherwise. c. Who May Attend? The members of the Board themselves; directors in Board meetings cannot be represented or voted by proxies.
General Rule: The corporate powers of the corporation shall be exercised, all business conducted and all property of such corporation controlled and held by the board of directors or trustees. (Sec. 23) Exceptions: 1. Executive Committee duly authorized in the by-laws; 2. A contracted manager which may be an individual, a partnership, or another corporation.
d. Who Presides? (Sec. 54) The president, unless the by-laws provide otherwise.
e. Notice Requirements (Sec. 53) Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws. Notice of meeting is subject to waiver. f. Quorum Requirements (Sec. 25) General Rule: MAJORITY of the number of directors or trustees as fixed in the articles
CORPORATE EMPLOYEE Employed by the action of the managing officer of the corporation NLRC has jurisdiction in case of labor disputes
c.
CORPORATE OFFICER Position is provided for in the by-laws or under the Corporation Code RTC has jurisdiction in case of labor dispute
of incorporation. Unless the articles of Exception: incorporation or the by-laws provide for a greater majority, or in case of election of officers where a vote of a majority of all the members of the board is needed.
C. Corporate Officers
CORPORATE OFFICER Position is provided for in the by-laws or under the Corporation Code RTC has jurisdiction in case of labor dispute CORPORATE EMPLOYEE Employed by the action of the managing officer of the corporation NLRC has jurisdiction in case of labor disputes
6. Removal of Directors/Trustees
(Asked in 91 and 01) General Rule: Removal may be with or without cause. Exception: A minority director elected through cumulative voting cannot be removed without cause (Sec. 28) Other requisites: a. Vote of the stockholders representing at least 2/3 of the OCS or the members entitled to vote b. At a regular or special meeting after proper notice is given
1. Who are Corporate Officers
(POST)
a. President must be a director; b. Treasurer may or may not be a director; as a matter of sound corporate practice, must be a resident and citizen of the Phil (SEC opinion) c. Secretary need not be a director unless required by the by-laws; must be a resident and citizen of the Philippines; and d. Other officers as may be provided in the bylaws. Notes: Any two (2) or more positions may be held concurrently by the same person, EXCEPT that no one shall act as president and secretary or as president and treasurer at the same time. Additional qualifications of officers may be provided for in the by-laws (Sec. 47(5)). 2. Disqualifications (Sec. 27) a. Convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years b. Convicted by final judgment of a violation of the Corporation Code committed within 5
7. Executive Committee
A body created by the by-laws and composed of some members of the board which, subject to the statutory limitations, has all the authority of the board to the extent provided in the board resolution or by-laws (See Sec. 35). Limitations: a. Must be provided for in the by-laws and composed of at least 3 members of the board appointed by the board. b. Must act by a majority vote of all of its members.
CORPORATION LAW
CANNOT act on the following: 1. Matters needing stockholder approval (Sec. 35); 2. Filling up of board vacancies; 3. Amendment, repeal or adoption of bylaws (Sec. 35); 4. Amendment or repeal of any resolution of the Board which by its express terms is not amendable or repealable (Sec. 35); 5. Cash dividend declaration (Sec. 35); and 6. Acts which would render the BOD powerless and free from all responsibilities imposed on it by law (CAMPOS, The Corporation Code: Comments, Notes and Selected Cases).
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years prior to the date of his election or appointment
3. Authority of Corporate Officers

A person dealing with a corporate officer is put on inquiry as to the scope of the latters authority but an innocent person cannot be prejudiced if he had the right to presume under the circumstances the authority of the acting officers.
Associated Bank vs. Pronstroller (2008, Nachura): Q: What is the Doctrine of Apparent Authority? A: 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; the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agents authority.
d. Liability for dividends unlawfully paid (Sec. 31 and 43) e. Liability for assuming to act as a corporation knowing it to be without authority (Sec. 21)
3. Stockholders or Members Meeting

(Asked in 93) General Rule: Stockholders or members approval is expressed in a meeting duly called and held for the purpose. Exception: Referendum or written assent of the stockholders or members in case of amendment of AOI (Sec. 16) a. When? (Sec. 50) Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees. b. Where? Stock: City or municipality where the principal office of the corporation is located, or, if practicable, in the principal office of the corporation: Provided, Metro Manila shall be considered a city or municipality. (Sec. 51) Non-stock: Any place even outside the place where the principal office is located, in case of non-stock corporations (Sec. 93) c. Who May Attend and Vote? Stockholders, either in person or by proxy Pledgors or mortgagors (Sec. 55) Pledgee or mortgagee, IF expressly given such right by the pledgor or mortgagor in writing which is recorded on the corporate books. Executors, administrators, receivers, and other legal representatives duly appointed by the court, without need of any written proxy. ALL joint owners of stocks, or any one of them with the consent of ALL the coowners, unless there is a written proxy, signed by all the co-owners Any one of the joint owners of shares owned in an "and/or" capacity or a proxy thereof
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D. Stockholders or Members
1. Rights of Stockholders
(Asked in 96) a. Direct or indirect participation in management (Sec. 6) b. Voting rights (Sec. 6) c. Right to remove directors (Sec. 28) d. Proprietary rights 1. Right to dividends (Secs. 43 and 71 ) 2. Appraisal right (Sec. 81) 3. Right to issuance of stock certificate for fully paid shares (Sec. 64) 4. Proportionate participation in the distribution of assets in liquidation (Sec. 122) 5. Right to transfer of stocks in corporate books (Sec. 63) 6. Pre-emptive right (Sec. 39) e. Right to inspect books and records (Sec. 74) f. Right to be furnished with the most recent financial statements/reports (Sec. 75) g. Right to recover stocks unlawfully sold for delinquent payment of subscription (Sec. 69) h. Right to file individual suit, representative suit and derivative suits
2. Obligations of Stockholders
a. Liability to the corporation for unpaid subscription (Sec. 67) b. Liability to the corporation for interest on unpaid subscription if so required by the bylaws (Sec. 66) c. Liability for watered stocks (Sec. 65)
d. Who Presides? The president, unless the provide otherwise. (Sec. 54)
by-laws
Any petitioning stockholder or member upon order of the SEC when there is no person authorized to call a meeting. Such petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have chosen one of them as presiding officer. (Sec. 50)
Vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights Exceptions: Voting and non-voting shares shall be entitled to vote in the following cases: a. Amendment of Articles of Incorporation b. Extend or Shorten Corporate Term c. Increase or Decrease of Capital Stock d. Incurring, Creating or Increasing Bonded Indebtedness e. Sale, Lease, Mortgage or Other Disposition of Substantially all corporate assets f. Investment of funds in another corporation or business or for any purpose other than the primary purpose for which it was organized Requisites (Asked in 95): Approval of majority of the board of directors or trustees Ratification by the stockholders representing at least 2/3 of the OCS or the members at a meeting duly called for the purpose Written notice addressed to each stockholder or member at his place of residence as shown on the books of the corporation Appraisal right available to dissenting stockholders or members NOTES: If it is the same purpose or incidental or related to its PRIMARY purpose, the board can invest the corporate fund WITHOUT the consent of the stockholders. No appraisal right. If the investment is in another corporation of different business or purpose BUT in pursuance of the SECONDARY purpose, the affirmative vote of majority of the board consented by stockholders/ members is required. If the investment is OUTSIDE the purpose/s for which the corporation was organized, AOI must be amended first. g. Adoption, Amendment and Repeal of ByLaws (Sec. 48) h. Merger and Consolidation i. Dissolution of the Corporation
e. Notice Requirements (Sec. 50) Regular Meetingwritten notice sent to all SH or members at least 2 weeks prior to the meeting, unless a different period is required by the by-laws Special Meetingwritten notice sent at least 1 week prior to the meeting, unless otherwise provided in the by-laws. Subject to waiver, expressly or impliedly (i.e., attendance despite no notice) Failure to give notice would render a meeting VOIDABLE at the instance of an absent stockholder, who was not notified of the meeting (Board v. Tan, 1959). f. Quorum Requirements (Sec. 52) 1. General: stockholders representing majority of the OCS or majority of the members Exception: the Code or the by-laws provide otherwise 2. Where quorum is present at the start of a lawful meeting, stockholders present cannot without justifiable cause break the quorum by walking out from said meeting so as to defeat the validity of any act proposed and approved by the majority. (However, stockholders can break the quorum for justifiable causes.) (Johnston vs. Johnston, 1965 CA decision) g. Improperly Held Meetings All proceedings & transactions at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be VALID even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (Sec. 51)
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4. Corporate Acts Requiring Approval of ALL Stockholders or Members

General Rule:
5. Other instances requiring stockholders action (voting shares only)

a. Declaration of Stock Dividends b. Management Contracts (Sec. 44)
Any contract whereby a corporation undertakes to manage or operate ALL OR SUBSTANTIALLY ALL of the business of another corporation for a period NOT longer than 5 years Approval by the BOD Approval by SH owning at least the majority of the OCS or the members of BOTH the managing and the managed corporation (at meeting duly called) 2/3 vote required of the managed corporation when: Where a SH/s representing the same interest of both the managing and the managed corporations own or control more than 1/3 of the total OCS entitled to vote of the managing corporation; or Where a majority of the members of the BOD of the managing corporation also constitute a majority of the members of the BOD of the managed corporation
2. Change in the rights of stockholders, authorize preferences superior to those stockholders, or restrict the right of any stockholder (Sec. 81) 3. Investment of corporate funds in another business or purpose (Sec. 42) 4. Sale or disposal of all or substantially all assets of the corporation (Sec. 81) 5. Merger or consolidation (Sec. 81) b. Requirements for exercise of appraisal right(Secs. 82, 86) Stockholder must have voted against the corporate act. Stockholder must make a written demand on the corporation within 30 days after the vote was taken for payment of the fair value of his shares on the said date. Stockholder must submit the certificates to the corporation for notation within ten (10) days after demand for payment. Otherwise, right to appraisal may be terminated at the option of corporation. c. Effect of demand (Sec. 83) ALL rights accruing to such shares, including voting and dividend rights, shall be suspended EXCEPT the right of such stockholder to receive payment of the fair value thereof Immediate RESTORATION of voting and dividend rights if the dissenting stockholder is not paid the value of his shares within 30 days after the award.
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CORPORATION LAW
c.
Fixing the Consideration of No-par shares (Sec. 62) d. Fixing the Compensation of Directors (Sec. 30)
6. Limitations on Right to Vote

a. Non-voting shares are not entitled to vote except as provided for in the last paragraph of Sec. 6. b. Preferred or redeemable shares may be deprived of the right to vote c. Fractional shares of stock cannot be voted. d. Treasury shares have no voting rights as long as they remain in the treasury. e. No delinquent stock shall be voted (Sec. 71) f. A transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of the corporation.
d. Extinguishment of appraisal right (Sec. 84) Withdrawal of demand by the stockholder WITH CONSENT of the corporation Abandonment of the proposed action Disapproval by SEC of the proposed action
7. Appraisal Right
(Asked in 99 and 07) Right to withdraw from the corporation and demand payment of the fair value of the shares after dissenting from certain corporate acts involving fundamental changes in corporate structure (Sec. 81). a. Instances of appraisal right 1. Extension or reduction or corporate term (Sec. 11)
Chapter VII. MANAGEMENT and CONTROL
Chapter VII. Management and Control

DEVICES AFFECTING CONTROL 1. PROXY 2. VOTING TRUST AGREEMENT 3. POOLING AND VOTING AGREEMENTS B. DUTIES AND LIABILITIES OF DIRECTORS 1. THREE-FOLD DUTIES OF DIRECTORS 2. SELF-DEALING DIRECTOR 3. FIXING THE COMPENSATION OF DIRECTORS AND OFFICERS 4. INTERLOCKING DIRECTORS 5. SEIZING CORPORATE OPPORTUNITY 6. USING INSIDE INFORMATION C. DUTIES AND LIABILITIES OF OFFICERS D. DUTIES OF CONTROLLING STOCKHOLDERS E. REMEDIES IN CASE OF MISMANAGEMENT F. RIGHT OF INSPECTION G. DERIVATIVE SUITS A.
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CORPORATION LAW
A. Devices Affecting Control

General Rule: Extent of control is proportional to the number of shares owned by the SH Exceptions: proxy device, voting trust agreements, pooling and voting agreements, cumulative voting, classification of shares, restriction on transfer of shares, additional qualifications for directors, founders shares, management contracts, and unusual quorum and voting requirements
1. Proxy Stockholders and members may vote in person or by proxy in all meetings of stockholders or members (Sec. 58). 2. Voting Trust Agreement(Asked in 92) An arrangement created by one or more stockholders for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any time (Sec. 59). 3. Pooling and Voting Agreements Agreement between 2 or more stockholders to vote their shares in the same way. It does NOT involve a transfer of stocks but is merely a private agreement.
POOLING AND VOTING AGREEMENTS Consensual Merely an agreement to vote in the same way. Valid so long as they are not fraudulent or do not limit BOD discretion (except in close corporations). No formalities required Merely a contract between SHs. No transfer. Owner still exercises voting rights.
PROXY Principal agent Proxy cant exceed delegated authority.
TRUSTEE Trustee-beneficiary The only limit to authority is that the act must be for the benefit of trustee. (fiduciary obligation)
Must be in writing Copy must be filed with the corporation. No transfer. Proxy exercises voting rights only for a specific meeting (unless otherwise provided) Proxy cannot be director Revocable at will in any manner, EXCEPT if coupled with an interest. Max of 5 yrs at a time SEC can pass on validity
Must be in writing and notarized Copy must be filed with SEC and the corporation. Transfer of legal title to trustee. Trustee exercises absolute voting rights continuously, subject only to fiduciary duty. Trustee can be director Irrevocable, as long misconduct or fraud.
as
no
Max of 5 yrs at a time (unless coterminous with loan)
Owner can be director. Revocable by consent termination. If unilateral liable for damages. No maximum period.
or mutual termination,
B. Duties and Liabilities of Directors

1. Three-fold Duties of Directors
Duty Obedience Violation under Sec. 31 Willfully and knowingly vote for or assent to patently unlawful acts of the corporation Guilty of gross negligence or bad faith in directing the affairs of the corporation Acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees (VILLANUEVA)
placed in a conflict of interests scenario whereby it is unlikely that it would use such business discretion to file such suit for the best interest of the corporation. 2. Self-dealing Director (Sec. 32) General: A contract of the corporation with one or more of its directors or trustees is VOIDABLE, at the option of such corporation. Exception: Such contract is VALID if all of the following conditions are present: a. 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; b. That the vote of such director or trustee was not necessary for the approval of the contract; c. That the contract is fair and reasonable under the circumstances; and d. That in case of an officer, the contract has been previously authorized by the board of directors. Ratification: In case of absence of the first two conditions above, contract may be ratified if: a. Stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members in a meeting called for the purpose voted to ratify the contract. b. Full disclosure of the adverse interest of the directors or trustees involved is made at such meeting. c. Contract is fair and reasonable under the circumstances. 3. Fixing the Compensation of Directors and Officers (Sec. 30) (Asked in 91) General rule: Directors are only entitled to per diems, which are reasonable Exception: When AOI, by-laws, or an advance contract provides for compensation
Western Institute of Technology vs. Salas (1997): The position of being chairman and Vice-Chairman, like that of treasurer and secretary, are not considered directorship positions but officership positions that would entitle the occupants to compensation. Likewise, the limitation placed under Sec. 30 of the Corporation Code that directors cannot receive compensation exceeding 10% of the net income of the corporation would not apply to the
Diligence
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CORPORATION LAW
Loyalty
a. Duty of Obedience Directors must direct the affairs of the corporation only in accordance with the purposes for which it was organized. b. Duty of Diligence Directors are expected to possess at least ordinary knowledge and skill to enable them to make sound business decision and to exercise reasonable care in the management of the corporation c. Duty of Loyalty Directors should not attempt to acquire or acquire an interest adverse to their duties as such directors.
Questions of policy or of management are left solely to the decisions of directors and officers of a corporation, and the court is without authority to substitute its judgment of the Board, which is the business manager of the corporation, and so long as it acts in good faith its orders are not reviewable by the courts. (FLETCHER)
Business Judgment Rule General Rule: Directors cannot be held liable for mistakes or errors in the exercise of their business judgment if they acted in good faith, with due care & prudence. Contracts intra vires entered into by the board of directors are binding upon the corp. & courts will not interfere. Exception: If the contracts are so unconscionable & oppressive as to amount to a wanton destruction of the rights of the minority or if they violate their duties under Sections 31 & 34.
Dean Villanueva opined that a derivative suit may be an exception to such Rule: this occurs when it is apparent that the Board is not in a position to validly exercise its business judgment for the protection of the corporation, e.g., when the Board itself has committed an act causing damage to the corporation or when the Board is
COMMERCIAL LAW REVIEWER compensation given to such positions since it is being given in their capacity as officers of the corporation and not as board members.
to the latter for all such profits by refunding the same Exception: His act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. Note the differences between Section 31.2 and Section 34: First, while both involve the same subject matter (business opportunity) they concern different personalities; Sec. 34 is applicable only to directors and not to officers, whereas Sec. 31 applies to directors, trustees and officers. Second. Sec. 34 allows a ratification of a transaction by a self-dealing director by vote of stockholders representing at least 2/3 of the outstanding capital stock (VILLANUEVA)
Doctrine of Corporate Opportunity If there is presented to a corporate officer or director a business opportunity which: a. corporation is financially able to undertake b. from its nature, is in line with corporations business and is of practical advantage to it; and c. one in which the corporation has an interest or a reasonable expectancy. By embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation. Hence, the law does not permit him to be seize the opportunity even if he will use his own funds in the venture. (SUNDIANG AND AQUINO)
4. Interlocking directors (Sec. 33)

(Asked in 95 and 96) a. If the interests of the interlocking director in the corporations are both substantial (stockholdings exceed 20% of outstanding capital stock). General rule: A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone. Exception: If contract is fraudulent or not fair and reasonable. b. If the interest of the interlocking director in one of the corporations is nominal (stockholdings 20% or less) while substantial in the other, the contract shall be VALID, if the following conditions are met: 1. 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 not necessary for the approval of the contract 3. That the contract is fair and reasonable under the circumstances. Where (1) and (2) are absent, the contract can be ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members in a meeting called for the purpose voted to ratify the contract, provided that: 1. full disclosure of the adverse interest of the directors/trustees involved is made on such meeting; 2. the contract is fair and reasonable under the circumstances.
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6. Using inside information

(Secs. 3.8, 23.2, 27, 61, 71.2, Securities Regulation Code) (Asked in 94 and 04) The fiduciary position of insiders , directors, and officers prohibits them from using confidential information relating to the business of the corporation to benefit themselves or any competitor corporation in
1
5. Seizing corporate opportunity (Sec. 34)

(Asked in 01 and 05) General Rule: Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account
Insider means: (a) the issuer; (b) a director or officer (or person performing similar functions) of, or a person controlling the issuer; (c) a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public; (d) a government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (e) a person who learns such information by a communication from any of the foregoing insiders (3.8, Sec Regulations Code)
Chapter VII. MANAGEMENT and CONTROL Tramat Mercantil, Inc. vs. CA, (1994), reiterated in Atrium Management Corp. v. CA, (2001): Liability of Director, Trustee or Officer (Asked in 96 and 97) Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when: He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; He agrees to hold himself personally and solidarily liable with the corporation; or He is made, by a specific provision of law, to personally answer for his corporate action
which they may have a mere substantial interest. Since loss and prejudice to the corporation is not a requirement for liability, the corporation has a cause of action as long as there is unfair use of inside information It is inside information if it is not generally available to others and is acquired because of the close relationship of the director or officer of the corporation General rule: (Majority view) Directors owe no fiduciary duty to stockholders but they may deal with each other at fair and reasonable terms, as if they were unrelated. No duty to disclose facts known to the director or officer. Exception: Special Facts Doctrine: Conceding the absence of a fiduciary relationship in the ordinary case, courts nevertheless hold that where special circumstances or facts are present which make it inequitable for the director to withhold information from the stockholder, the duty to disclose arises and concealment is fraud (Strong vs. Repide, 1909).
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CORPORATION LAW
D. Duties of Controlling Stockholders

A majority stockholder is subject to the duty of good faith when he acts by voting at a stockholders meeting with respect to a matter in which he has a personal interest Controlling stockholders may dispose of their shares at any time and at such price as they choose provided they do not pervert these prerogatives by transferring office to persons who are known as intending to raid the corporate treasury or otherwise improperly benefit themselves. It is fraudulent for a stockholder to buy from another stockholder without disclosing his identity Principal stockholders are likewise prohibited from using inside information in the purchase and sale of equity security
C. Duties and Liabilities of Officers

General Rule: Members of the Board, who purport to acting in good faith for and in behalf of the corporation within the lawful scope of their authority, are not liable for the consequences of their acts. When they are of such nature and done under those circumstances, they are attributed to the corporation alone and no personal liability is incurred Price v. Innodata Phils., Inc. (2008) The provisions on seizing corporate opportunity and disloyalty (Secs. 31 and 34) shall also apply to corporate officers Note: Members of the BOD who are also officers are held to a more stringent liability because they are in-charge of day-to-day activities (CAMPOS).
DOCTRINE OF LIMITED LIABILITY Shields the corporators from corporate liability beyond their agreed contribution to the capital or shareholding in the corporation. DOCTRINE OF IMMUNITY Protects a person acting for and in behalf of the corporation from being himself personally liable for his authorized actions
E. Remedies in Case of Mismanagement

1. Receivership 2. Injunction if the act has not been done 3. Dissolution if the abuse amounts to a ground for quo warranto but the Solicitor General refuses to act 4. Derivative suit filed with the RTC
F. Right of Inspection
1. Basis of Right As the beneficial owners of the business, the stockholders have the right to know the financial condition and management of corporate affairs.
2. Records/Books to be Kept (Sec. 74) a. Books that record all business transactions of the corporation which shall include contract, memoranda, journals, ledgers, etc; b. Minute book for meetings of the stockholders/members; c. Minute book for meetings of the board/trustees; d. Stock and transfer book. Stock transfer agent - One engaged principally in the business of registering transfers of stocks in behalf of a stock corporation (licensed by the SEC). The corporate secretary is the one duly authorized to make entries in the stock and transfer book.
Torres et al vs. CA (1997) It is the corporate secretary's duty and obligation to register valid transfers of stocks and if said corporate officer refuses to comply, the transferor-stockholder may rightfully bring suit to compel performance.
5. Remedies when inspection is refused a. Mandamus b. Injunction c. Action for damages d. File an action under Sec. 144 to impose a penal offense by fine and/or imprisonment
G. Derivative Suits
(Asked in 93) A suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit, and the relief which is granted is a judgment against a third person in favour of the corporation Chua v. CA (2004) Suits of stockholders based on wrongful or fraudulent acts of directors or other persons. 1. Requisites of Derivative Actions a. That the stockholder or member at the time the acts or transactions subject of the action occurred and the time the action was filed; b. That the stockholder exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the AOI, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires. c. That there is no appraisal right available for the act(s) complained of; and d. That the suit is not a nuisance or harassment suit. (Rule 8, Interim Rules of Procedure for Intra-Corporate Controversies) Requisites based on jurisprudence a. The cause of action actually devolves on the corporation, the wrong or harm having been, or being caused to it and not the shareholder filing the suit.
3. Financial Statements (Sec. 75) Within 10 days from written request, the corporation shall furnish its most recent financial statement (balance sheet and profit or loss statement as of last taxable year) At a regular meeting, the Board shall present a financial report of the operations of the corporation for the preceding year, which shall include financial statements duly signed and certified by an independent CPA. 4. Requirements for the exercise of the right of inspection (Sec. 74) a. It must be exercised at reasonable hours on business days and in the place where the corporation keeps all its records (i.e., principal office). b. The stockholder has not improperly used any information he secured through any previous examination. c. Demand is made in good faith or for a legitimate purpose. If the corporation or
CORPORATION LAW
A stockholders right of inspection is based on his ownership of the assets and property of the corporation. Therefore, it is an incident of ownership of the corporate property, whether this ownership or interest is termed an equitable ownership, a beneficial ownership, or quasi-ownership. Such right is predicated upon the necessity of self-protection. Gokongwei Jr. vs. SEC (1979)
its officers contest such purpose or contend that there is evil motive behind the inspection, the burden of proof is with the corporation or such officer to show the same.
Gokongwei vs. SEC (1979): TEST to determine whether the purpose is legitimate A legitimate purpose is one which is germane to the interests of the stockholder as such and not contrary to the interests of the corporation.
97
Evangelista vs. Santos (1950), SMC vs. Kahn (1989). b. The reliefs sought pertain to the corporation. Symaco Trading Corp. vs. Santos (2005). Recent rulings on the matter a. Status of heirs as co-owners of shares before partition of estate does not make them shareholders until there is compliance with Sec. 63 on the manner of transferring shares, thus the heirs are not automatically registered shareholders of the corporation. Reyes vs. RTC of Makati (2008). b. Stockholder may commence a derivative suit for mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he is otherwise without redress. In effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders to assist its right of action when the corporation is put on default by the wrongful refusal of the directors or management to make suitable measures for its protection. Yu vs. Yukayguan (June 18, 2009)
Bitong vs. CA (1998): The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the BOD that exercises its corporate powers and not in the president or officer thereof. But where corporate directors are guilty of a breach of trust, not of mere error of judgment or abuse of discretion, and intracorporate remedy is futile or useless, a SH may institute a derivative suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders.
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CORPORATION LAW
2. Jurisdiction over derivative suits lies with the RTC (Sec. 5.2, Securities Regulation Code) 3. Other suits by stockholders/members a. Individual Actions those brought by the shareholder in his own name against the corporation when a wrong is directly inflicted against him. b. Representative or Class Actions those brought by the stockholder in behalf of himself and all other stockholders similarly situated when a wrong is committed against a group of stockholders.
Chapter VIII. CAPITAL STRUCTURE
Chapter VIII. Capital Structure

CLASSIFICATION OF SHARES SUBSCRIPTION CONTRACT 1. STATUS AS A SHAREHOLDER 2. TYPES OF SUBSCRIPTION CONTRACT 3. INTEREST ON UNPAID SUBSCRIPTION C. PRE-EMPTIVE RIGHT 1. DEFINITION 2. LIMITATIONS ON THE EXERCISE OF PREEMPTIVE RIGHT 3. REMEDIES IN CASE OF UNWARRANTED DENIAL D. CONSIDERATION FOR ISSUANCE OF SHARES 1. FORMS OF CONSIDERATION 2. LIMITATIONS ON CONSIDERATION E. WATERED STOCKS 1. DEFINITION 2. LIABILITY OF DIRECTORS OR OFFICERS F. DELINQUENT SHARES 1. DEFINITION 2. EFFECTS OF DELINQUENCY G. ENFORCEMENT OF PAYMENT 1. DELINQUENCY SALE 2. COURT ACTION 3. COLLECTION FROM CASH DIVIDENDS AND WITHHOLDING OF STOCK DIVIDENDS H. RIGHTS AND OBLIGATIONS OF HOLDERS OF UNPAID BUT NON-DELINQUENT STOCK I. CERTIFICATE OF STOCK J. LOST OR DESTROYED CERTIFICATE K. TENDER OFFER A. B.
General Rule: No share may be deprived of voting rights Exceptions: 1. Preferred or 2. Redeemable shares, 3. Provided by the Code There shall always be a class/series of shares which have a COMPLETE VOTING RIGHTS Doctrine of Equality of Shares Each share shall be EQUAL in ALL respects to every other share, except as otherwise provided in the AOI and stated in the certificate of stock (Sec. 6) 1. Common Shares The most common type of shares which enjoy no preference but the owners thereof are entitled to management of the corporation and to equal pro-rata division of profits after preference. It represents a residual ownership interest in the corporation. 2. Preferred Shares Stocks which are given preference by the issuing corporation in dividends and the distribution of assets of the corporation in case of liquidation or such other preferences as may be stated in the AOI which do not violate the Corporation Code. Limitations: a. Preferred shares can only be issued with par value. b. Preferred shares must be stated in the Articles of Incorporation and in the certificate of stock. c. The BOD may fix the terms and conditions only when so authorized by the AOI and such terms and conditions shall be effective upon filing a certificate thereof with the SEC. 3. Par value shares These are shares with a stated value set out in the AOI. This remains the same regardless of the profitability of the corporation. This gives rise to financial stability and is the reason why banks, trust corporations, insurance companies and building and loan associations must always be organized with par value shares. Par value is minimum issue price of such share in the AOI which must be stated in the certificate
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CORPORATION LAW
Sources of Financing 1. Contributions by stockholders (Equity) 2. Loans or advances from creditors (Borrowing) 3. Profits that the business may earn rd 4. Grants/donations from 3 parties (opinion of Prof DLC)
A. Classification of Shares (Sec. 6)

Shares of stock of stock corporations may be divided into classes or series of shares or both. Each class or series of shares may have rights, privileges or restrictions, as stated in the AOI. Classification of shares: 1. Common shares 2. Preferred shares 3. Par value shares 4. No-par value shares 5. Founders shares 6. Redeemable shares 7. Treasury shares 8. Convertible shares 9. Non-voting shares
4. No-par value shares These are shares without a stated value. A no par share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of such shares of the issuing corporation (AGBAYANI) Limitations: a. No-par value shares cannot have an issue price of less than P5.00 per share (Sec. 6). b. They shall be deemed fully paid and non-assessable and the holders of such shares shall not be liable to the corporation or to its creditors in respect thereto (Sec. 6). c. 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 (Sec. 6). d. AOI must state the fact that the corporation issues no-par shares and the number of shares. e. Banks, insurance companies, trust companies, building and loan associations, and public utilities cannot issue no-par value shares (Sec. 6). f. The issued price may be fixed in the AOI, or by the BOD pursuant to authority conferred upon it by the AOI, and by majority vote of the outstanding shares in a meeting called for the purpose (Sec. 62). 5. Founders Shares (Sec. 7) These are shares, classified as such in the AOI, which are given certain rights and privileges not enjoyed by the owners of other stocks. (7) Where exclusive right to vote and be voted for in the election of directors is granted, such right must be for a limited period not to exceed 5 years subject to approval by SEC. 5 year period shall commence from date of approval by SEC. (Ibid) 6. Redeemable Shares These are shares which permit the issuing corporation to redeem or purchase its shares (Sec. 8).
Limitations: a. Redeemable shares may be issued only when expressly provided for in the AOI (Sec. 8). b. The terms and conditions affecting said shares must be stated both in the AOI and in the certificate (Sec. 8). c. Redeemable shares may be deprived of voting rights in the AOI, unless otherwise provided in the Code. d. The corporation is required to maintain sinking fund to answer for redemption price if the corporation is required to redeem. e. The redeemable shares are deemed retired upon redemption unless otherwise provided in the AOI. f. Unrestricted retained earnings is NOT necessary before shares can be redeemed but there must be sufficient assets to pay the creditors and to answer for operations (Republic Planters Banks vs. Agana, 1997). Redemption cannot be made if such redemption will result in insolvency or inability of the corporation to meet its obligations (SEC Opinion, 24 Aug 1987). Note: Redeemable shares reacquired shall be considered retired and no longer issuable, unless otherwise provided in the Articles of the redeeming corporation (SEC Rules Governing Redeemable and Treasury Shares, 26 April 1982). 7. Treasury Shares These are shares 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 BOD (Sec. 9). Treasury shares are therefore issued shares, but being in the treasury, do not have the status of outstanding shares. Consequently, although a treasury share, not retired by reacquisition, may be reissued or resold, but such share, as long as it is held by the corporation as a treasury share, participates neither in the dividends, because dividends cannot be declared by the corporation to itself nor in the meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate
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CORPORATION LAW
their control of the corporation, though it still represents a paid for interest in the property of the corporation. CIR vs. Manning (1975). Note: Delinquent stocks, which are stocks that have not been fully paid, may become treasury stocks upon bid of the corporation in absence of other bidders (Sec.68). 8. Convertible shares A type of preferred stock that the holder can exchange for a predetermined number of common shares at a specified time. 9. Non-voting shares (Sec. 6) General Rule: Non-Voting Shares are not entitled to vote. Exceptions: a. Amendment of the AOI b. Adoption and amendment of by-laws c. Sale, lease, exchange, other disposition of all or substantially all of the corporate property d. Incurring, creating or increasing bonded indebtedness e. Increase or decrease of capital stock f. Merger and consolidation g. Investment of corporate funds in another corporation or business h. Dissolution of the corporation
1. Status as Shareholder
A person becomes a shareholder the moment he: a. enters into a subscription contract with an existing corporation (he is a stockholder upon acceptance of the corporation of his offer to subscribe whether the consideration is fully paid or not). b. purchases treasury shares from the corporation c. acquires shares from existing shareholders by sale or any other contract (SUNDIANG AND AQUINO)
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2. Types of subscription contracts

a. Pre-incorporation subscription It is a subscription for shares of stock of a corporation still to be formed. Irrevocable for a period of at least 6 months from the date of subscription, or after the submission of the AOI to the SEC. Revocable only when all of the other subscribers consent to the revocation, or when the incorporation fails to materialize within six (6) months or within a longer period as my be stipulated in the contract of subscription. b. Post-incorporation subscription It is entered into after the incorporation.
B. Subscription Contract
Sec. 60. Subscription contract. Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription contract within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract.
3. Interest on unpaid subscription

General Rule: Stockholder is NOT liable to pay interest on his unpaid subscription. Exception: Such rate as may be fixed in the bylaws or the legal rate (Sec. 66). Notes: Transfer for consideration of treasury shares is a sale by the corporation (not subscription). A transfer of previously issued shares by a stockholder to a third person is a sale. Transfer of unissued shares is subscription. Shareholders are not creditors of the corporation with respect to their shareholdings thereto and the principle of compensation or set-off has no application. Subscription contract is NOT required to be in writing.
Characteristics There can be a subscription only with reference to unissued shares of the Authorized Capital Stock (ACS), in the following cases: a. The original issuance of the ACS at the time of incorporation. b. The opening, during the life of the corporation, of the portion of the original ACS previously unissued; or c. The increase in ACS achieved through a formal amendment of the Articles and registration thereof with the SEC. (VILLANUEVA)
C. Pre-emptive Right (Sec. 39, 102)

(Asked in 99, 01 and 04)
1. Definition and Distinguished Right of First Refusal
from
c.
for property needed for corporate purposes or in payment of a previously contracted debt It shall not take effect if denied in the AOI or an amendment thereto.
Pre-emptive right is an option privilege of an existing stockholder to subscribe to a proportionate part of shares subsequently issued by the corporation before the same can be disposed of in favour of others; this right includes all issues and disposition of shares of any class. It is a common law right and may be exercised by stockholders even without legal provision. On the other hand, a right of first refusal arises only by virtues of contract stipulations, by which the right is strictly construed against the right of person to dispose or deal with their property. Stockholders of a corporation shall enjoy pre-emptive right to subscribe to ALL ISSUES OR DISPOSITIONS of shares of any class, in proportion to their respective shareholdings. Note: The broad phrase all issues or disposition of shares of any class is construed to include not only new shares issued in pursuance of an increase in capital stock or from the unissued shares which form part of the ACS, but also covers treasury shares. Treasury shares would come under the term disposition. Likewise considering that it is not included among the exceptions enumerated therein, where preemptive right shall not extend, the intention is to include it in its application. (SEC Opinion, 14 January 1993). A pre-emptive right is a right claimed against the corporation on unissued shares of its capital stock, and likewise on treasury shares held by the corporation; while the right of first refusal is a right exercisable against another stockholder on his shares of stock. (VILLANUEVA)
3. Remedies denial:
in
case
of
unwarranted
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CORPORATION LAW
a. Injunction b. Mandamus The suit should be individual and not derivative because the wrong done is to the stockholders individually c. SEC can cancel shares if the third party is not innocent
D. Consideration for issuance of shares

1. Forms of Consideration (Sec. 62)
a. Actual cash b. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued Valuation is initially determined by the incorporators or the board of directors, subject to approval by the SEC. Note: Property should not be encumbered. Otherwise, it would impair the consideration c. Labor performed for or services actually rendered to the corporation; d. Previously incurred indebtedness of the corporation; e. Amounts transferred from unrestricted retained earnings to stated capital (declaration of stock dividends); and f. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
2. Limitations on Consideration:
a. Stocks shall not be issued for a consideration less than the par or issued price thereof. b. Shares of stock shall not be issued in exchange for promissory notes or future service. Notes: Promissory notes and future service may be used as consideration provided that certificates of stock will be issued only after actual
2. Limitations to exercise of pre-emptive right (Sec. 39):

a. 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; b. It shall NOT extend 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
encashment of promissory note or performance of such services. Same consideration applies for the issuance of bonds by the corporation.
2. Effects of stock delinquency

a. No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholers meeting b. The holder thereof shall NOT be entitled to any of the rights of a stockholder except the right to dividends. c. Such shares shall be subject to delinquency sale.
E. Watered Stocks
1. Definition
These are shares issued as fully paid when in truth con consideration is paid, or the consideration received is known to be less than the par value or issued value of the shares. (Sec. 65) These include the following: a. Issued without consideration (bonus share) b. Issued as fully paid when the corporation has received less sum of money than its par or issued value (discounted share) c. Issued for consideration other than actual cash (i.e., property or services), the fair valuation of which is less than its par or issued value d. Issue stock dividend when there are no sufficient retained earnings or surplus to justify it. Note: Subsequent increase in the value of the property used in paying the stock does not do away with the watered stocks. Subsequent increase in the value of the property used in paying the stock does not cure the defect in issuance. The existence of watered stocks is determined at the time of issuance of the stock.
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G. Enforcement of Payment
(Asked in 97)
1. Delinquency sale
a. Procedure for delinquency sale (Sec. 68) 1. Call for payment made by the BOD. 2. Notice of call served on each stockholder. 3. Notice of delinquency issued by the BOD upon failure of the stockholder to pay within 30 days from date specified. 4. Service of notice of delinquency on the non-paying subscriber, PLUS publication in a newspaper of general circulation in the province or city where the principal office of the corporation is located, once a week for two (2) consecutive weeks. Note: Requirements on notice and publication are mandatory. Lacking such requirements, the stockholder may question the sale as provided under Sec. 69. 5. Public auction - the highest bidder is one who is willing to pay the balance of the subscription for the least number of shares. If there are no bidders, the corporation must bid for the whole number of shares regardless of how much the SH has paid. Such stocks will pertain to the corporation as fully paid treasury stocks. b. Irregularities in the delinquency sale (Sec. 69) 1. Action to recover delinquent stock must be on the ground of irregularity or defect in the notice of sale. 2. Party seeking to recover must first pay or tender to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate. 3. The action shall be commenced within six months from the date of sale.
2. Liability of directors or officers

Any director or officer of a corporation consenting to the issuance of stocks or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary shall be SOLIDARILY liable with the stockholder concerned to the corporation and its creditors for the difference in value (Sec. 65).
F. Delinquent Shares
1. Definition
These are shares for which the corresponding subscription or balance remains unpaid after a grace period of 30 days from the date specified in the contract of subscription or from the date stated in the call made by the BOD.
2. Court Action (Sec. 70)

General Rule: A valid call is a prerequisite to liability where court action is the remedy chosen. (Da Silva v. Aboitiz, 1923). Exceptions: a. The subscription contract specifies a date of payment. b. The corp. has become insolvent All unpaid subscriptions are immediately recoverable in a court action by the assignee in insolvency (Velasco vs. Poizat, 1918) Defense: The SH may contend that the subscription was induced by fraudulent misrepresentation, provided he is not barred by ratification, or guilty of laches.
subscription, he is not entitled to the issuance of certificates corresponding to 20% of the shares. Unpaid claim refers to any unpaid subscription and not to any indebtedness which a subscriber may owe the corporation rising from any other transaction (China Banking Corp. vs. CA, 1997).
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A certificate of stock is the best evidence of the rights and status of a SH (not a condition precedent to the acquisition of such rights). General rule: The entire subscription must be paid first before the certificates of stock can be issued. Partial payments are to be applied pro rata to each share of stock subscribed. (Nava v Peers Mktg Corp and Fua Cun v Summers, 1923). Exception: In the Baltazar v Lingayen Gulf Electric Power Company case, it was the practice of the corporation to issue certificates of stock to its individual SHs for unpaid shares of stock and to give full voting power to shares fully paid.
CORPORATION LAW
I.
Certificate of Stock
3. Collection from cash dividends and withholding of stock dividends

CASH DIVIDENDS due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses (Sec. 43). STOCK DIVIDENDS shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid (Sec. 43).
H. Rights and Obligations of Holders of Unpaid Non-Delinquent Stock

Sec. 72.Rights of unpaid shares. Holders of subscribed shares not fully paid which are not delinquent shall have ALL the rights of a stockholder.
J. Lost or Destroyed Certificate

(Sec. 73) Procedure for re-issuance in case of loss, stolen or destroyed certificates: 1. Registered owner to file an affidavit of loss with the corporation. 2. Publication of notice of loss in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for 3 consecutive weeks at the expense of the owner of the certificate of stock 3. Cancellation of the certificate in the books of the corporation and issuance of new certificates, after the expiration of 1 year from the date of the last publication and there is no contest. The right to make such contest shall be barred after the expiration of the one-year period. 4. Issuance of new certificates before 1 year period if the registered owner files a bond and there is no pending contest regarding the ownership of said certificates. Note: Except in cases of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought
1. Holders of unpaid subscribed shares which are not delinquent shall have ALL the rights of a stockholder (Sec. 72) 2. Such holders shall not be charged with interest unless otherwise stipulated (Sec. 66). 3. No certificate of stock shall be issued to such holders until the full amount of their subscription, together with the interest and expenses if any, has been paid (Sec. 64) 4. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation (Sec. 63). Notes: A subscription contract is unconditional (i.e., obligation to pay must not be subject to any contingencies) and indivisible (as to the amount and transferabilityFua Cun v. Summers, 1923). Hence, if the subscriber paid 20% of his
against the corporation which shall have issued certificates of stock in lieu of those lost, stolen or destroyed pursuant to the above procedure.
K. Tender Offer
(Asked in 02) It is a publicly announced intention of a person acting alone or in concert with other persons to acquire equity securities of a public company (Rule 19, Amended IRR of The Securities Regulation Code published on 13 Feb 2004). Instances where tender offer is required to be made: 1. Any person or group of persons acting in concert intends to acquire 35% or more of equity shares in a public company. 2. Any person or group of persons acting in concert intends to acquire 35% or more of equity shares in a public company in one or more transactions within a period of 12 months. 3. Any acquisition of even less than 35% results in ownership of over 51% of the total outstanding equity securities of a public company.
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CORPORATION LAW
Chapter IX. DIVIDENDS and PURCHASE of Corporation of Its Own Shares When declared and paid becomes absolute property of the SH and cannot be reached by corporations creditors in the absence of fraud Since it is still part of corporate property, may be reached by corporate creditors
Chapter IX. Dividends and Purchase of Corporation of Its Own Shares

A. B. C. D. E. FORMS OF DIVIDENDS OTHER CLASSES OF DIVIDENDS SOURCE OF DIVIDENDS DECLARATION OF DIVIDENDS TREASURY SHARES 1. DEFINITION 2. INSTANCES WHEN CORPORATION MAY ACQUIRE ITS OWN SHARES 3. REMEDIES IN CASE OF IMPROPER PURCHASE
B. Other Classes of Dividends

1. Optional Dividenddividend which gives the stockholder an option to receive cash or stock dividend. 2. Composite Dividenddividend partly in cash and partly in stocks. 3. Preferred or preferential dividenddividend payable to one class of SHs in priority to that to be paid to another class. 4. Cumulative Dividenddividend which is contracted to be paid at a certain rate at stated times and if net earnings at any dividend period are NOT sufficient to pay the contract dividend, it is to be made out of subsequent net earnings. 5. Scrip dividenddividend in the form of a writing or certificate issued to a SH entitling him to the payment of money, stock or other benefit at some future time inasmuch as the corporation at the time such dividends are declared does not have sufficient cash. 6. Bond Dividenddividend distributed in bonds of the corporation to the SHs 7. Liquidating Dividendsdividends which are actually distributions of the assets of the corporation upon dissolution.
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CORPORATION LAW
A. Forms of Dividends
1. Cash 2. Property 3. Stock Stock dividends are distributions of the corporations own stocks to stockholders. It involves a transfer of earnings to capital stock and does not represent income on the part of the SH. Limitations on the issue of stock dividends: a. There must be unissued shares of the corporation. If there are none, there must be an increase in capital stock first, which requires an amendment of the AOI. b. There must be unrestricted retained earnings. c. Stock dividends should not be issued to non-stockholders even for services rendered (Nielson v. Lepanto Consolidated Mines, 1968).
Cash Dividends Authority to declare Declared only by the board of directors at its discretion Stock Dividends Declared by the board with the concurrence of the SHs representing at least 2/3 of the OCS at a regular/special meeting Doesnt involve any disbursement of funds
C. Source of Dividends
Unrestricted retained earnings (URE) are the undistributed earnings of the corporation which have not been allocated for any managerial, contractual or legal purposes and which are free for distribution to the SHs as dividends. Should there be any capital deficit, subsequent profits, if any, during succeeding periods must st 1 be applied to cover the deficit, and only the profits remaining after eliminating the deficit, can be considered as URE. General Rule: Dividends cannot be declared out of capital since the trust fund doctrine will be violated. TRUST FUND DOCTRINE (Asked in 07)
Boman Environmental Development Corporation vs. CA (1988): Trust Fund Doctrine means that the capital stock,
Disbursement of funds Involves a disbursement to the SHs of accumulated earnings Corporate capital Does not increase the corporate capital
The common stock account increases but there is no change in corporate capital. There is merely a transfer from one equity account to another.
Creation of debts Its declaration creates a No debt is created by its debt from the corporation declaration to each of its SHs Liability to corporate creditors
Chapter IX. DIVIDENDS and PURCHASE of Corporation of Its Own Shares for dividend (SEC Opinion dated March 18, 1992 and August 22, 1991) Q: Can dividends be distributed on Gains on sale of real property? A: Yes. Gains on sale of the corporations real properties are part of retained earnings. Retained earnings include not only earnings realized from the ordinary course of business of the corp but also transactions not associated with but incidental to or necessary in keeping the business for which the corporation was organized. HOWEVER, there must be surplus profits. The corporation cannot distribute gains from the sale as dividends if the remaining assets after distribution is less than the amount of legal or stated capital and liabilities (SEC Opinion dated May 9, 1990)
properties and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. Stated simply, the trust fund doctrine states that all funds received by the corporation in payment of the shares of stock shall be held in trust for the corporate creditors and other stockholders of the corporation. Under such doctrine no fund shall be used to buy back the issued shares of stock except only in instances specifically allowed by the Corporation Code.
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CORPORATION LAW
Exceptions: 1. liquidating dividends 2. dividends from investments in wasting asset corporation Wasting asset corporation is a corporation solely or principally engaged in the exploitation of wasting assets to distribute the net proceeds derived from exploitation of their holdings i.e. mines, oil well, patents, leaseholds
Q: Can dividends be distributed out of PAID-IN SURPLUS? A: NO. Paid-in surplus is the difference between the par value and the issued value or selling price of the shares, and are not considered profits earned in the conduct of the business of the corporation. They are considered part of capital (SEC Opinions April 18, 1988) Exception: The SEC allows the distribution of paid-in surplus if: 1. They be declared only as stock dividends 2. No creditor is prejudiced 3. No resulting impairment of capital (SEC Opinion dated October 19, 1989) Applicable also to reduction surplusthose arising from the reduction of the par value of the issued shares of stocks (SEC Opinion dated August 8, 1991) Q: Can dividends be distributed out of Revaluation or Re-appraisal Surplus? A: No. Revaluation surplus or the increase in the value of assets cannot be considered earning of the corporation. They are by nature subject to fluctuations Exception: the SEC allows distribution of the portion of the increase in the value of fixed assets as a result of revaluation after the assets are depreciated and the depreciation is charged against the operation provided: 1. the company has sufficient income from the operations from which the depreciation on the appraisal increase is charged 2. the company has no deficit at the time the depreciation on the reappraisal increase was charged to operations 3. such depreciation on the appraisal increase previously charged to operations is not erased or impaired by subsequent losses, otherwise, only that portion not impaired by subsequent losses is available
D. Declaration of Dividends
(Asked in 91, 01 and 05) WHO? 1. Board of Directors alonecash, property dividends. 2. Board of Directors with approval of stockholders representing not less than 2/3 of the OCSstock dividends. CAN BOD BE COMPELLED TO DECLARE? General Rule: Declaration of dividends is discretionary upon the BOD. It is payable only when there are profits earned by the corporation and even if there are existing profits, the BOD has discretion to determine WON it should be declared (Republic Planters Bank v Agana, 1997) Exceptions: 1. When the decision is tainted w/ bad faith, fraud or gross negligence 2. If the court finds, upon complaint of a SH, that profits were accumulated in excess of 100% of the corporations paid-in capital stock, it may order the corporation to distribute dividends Exceptions to the exception: a. when justified by definite corporate expansion projects or programs approved by the board of directors; or b. when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or
Chapter IX. DIVIDENDS and PURCHASE of Corporation of Its Own Shares
c.
when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies (Sec. 43).
Exceptions: 1. Dividends are revocable if NOT yet announced or communicated to the stockholders. 2. Stock dividends even if already declared may be revoked prior to actual issuance since these are not distributions but merely represent changes in the capital structure. Note: Right to dividends vests upon declaration so whoever owns the stock at such time also owns the dividends. Subsequent transfer of stock would not carry with it right to dividends UNLESS agreed upon by the parties.
3. Remedies Purchase
in
case
of
Improper
a. Creditors prejudiced by the repurchase can go after the selling SHs to recover what was paid to them. b. Directors who were negligent or in BF for approving the repurchase can be held personally responsible. c. Prejudiced SH can also go after BOD who approved purchase (when their dividends are reduced, remaining assets cant cover debts, etc).
E. Treasury Shares
(Asked in 05)
1. Definition
Treasury shares are shares of stocks 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 (Sec. 9). Note: Treasury shares do not have voting rights so long as they remain as such (Sec. 57).
2. Instances when corporation acquire its own shares
may
a. A corporation must have unrestricted retained earnings in acquiring own shares except: 1. shares are acquired in the redemption of redeemable shares (Sec. 8) 2. shares are re-acquired to effect a decrease in capital stock approved by the SEC (Sec. 38) 3. shares are reacquired by a close corporation pursuant to the order of the
CORPORATION LAW
WHEN RIGHT TO DIVIDEND VESTS? General rule: Upon lawful declaration by the BOD, dividends become a debt owing to the SH. No revocation can be made.
SEC acting to arbitrate a deadlock (Sec. 104) b. The acquisition must be for a legitimate purpose, such as the following: 1. To eliminate fractional shares arising out of stock dividends 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code (appraisal right, Sec. 81).
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Chapter X. TRANSFER of SHARES
Chapter X. Transfer of Shares

(Asked in 96, 97, 01 and 04)
A. B. MANNER OF TRANSFER REGISTRATION OF TRANSFER 1. EFFECTS OF LACK OF REGISTRATION 2. REMEDY IF REGISTRATION IS REFUSED RESTRICTIONS ON TRANSFER UNAUTHORIZED TRANSFERS 1. CERTIFICATES INDORSED IN BLANK 2. FORGED TRANSFERS COLLATERAL TRANSFERS
B. Registration of Transfer
1. Effects of lack of registration
a. Transferee cannot vote b. Transferee cannot be voted for c. Transferee cannot prevail over rights of a subsequent attaching creditor (Uson v. Diosomito, 1935). d. Transferee not entitled to dividends. e. Stockholder of record has the right to participate in meetings. Notes: Until registration is accomplished, the transfer though valid between the parties CANNOT be effective against the corporation. Nevertheless, the stockholder can still transfer his interest in the corporation by way of a Deed of Assignment.
C. D.
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CORPORATION LAW
E.
A. Manner of Transfer
Shares of stock represented by certificates may be transferred as follows (Sec. 63): 1. Delivery of the certificate and 2. Indorsement by the owner or his attorney-infact or other person legally authorized to make the transfer 3. Recording of the transfer in the books of the corporation to be VALID against third parties If not represented by certificates: 1. Shares may be transferred by means of a deed of assignment. 2. Such transfer is duly recorded in the books of the corporation.
Rural Bank of Salinas vs. CA (1992) Is registration in corporate books necessary for transfer of shares of stock? NO. Shares of stock are personal property and may be transferred by delivery. Registration in corporate books is not necessary. The corporation may not impose any restriction on such transfer. The right of transferee/assignee to have stocks transferred to his name is inherent right, duty of the corporation to register the transfer is ministerial. Razon vs. IAC (1992): How to transfer Shares of Stock? a) Shares of stock is transferred by delivery and endorsement of the stock certificate b) Such mode of transfer is not complied with in this case c) In the books of the corporation, Chudian is still the owner of the stocks. He was even elected member of the board which proves that he is a stockholder d) One who claims ownership should show that the same was transferred to him in accord with the valid mode of transfer. This petitioner failed to show. Endorsement is a mandatory requirement of law for an effective transfer.
2. Remedy if registration is refused

Transferee may petition the court for a writ of mandamus to compel the corporation to do so (Price v. Sulu Development Corp., 1933)
C. Restrictions on Transfer
General Rule: Shares of stock so issued are personal property and may be transferred (Sec. 63). (FREE TRANSFERABILITY OF SHARES) Exception: In CLOSE corporations, restrictions on the right to transfer shares may be provided in the AOI, by-laws and certificates (Sec. 98).
D. Unauthorized Transfers
1. Certificates indorsed in blank (Theory of Quasi-Negotiability) where the stockholder indorses his certificate in blank in such a manner as to clothe whoever may be in possession of it with apparent authority to deal with the shares as the latters own, he will be estopped from claiming the shares as against a bonafide purchaser. (Santamaria v. Hongkong & Shanghai Bank, 1951) 2. Forged transfers if the corporation should issue a new certificate pursuant to a forged transfer, it incurs no liability to the person in
Chapter X. TRANSFER of SHARES
whose favor it issued it and may demand its return for cancellation. But with respect to a subsequent purchaser in good faith and for value, the corporation is estopped from denying the validity of the newly issued certificate because by issuing such, it has represented that the person named therein is a stockholder of the corporation. An exception is when the recognition of the original and new subscriber will result to an overissue of shares. In such case, the new SH would now have the right to damages against the corporation and the latter against those who made false representation (Hodges vs. Lezama, 1965).
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CORPORATION LAW
E. Collateral Transfers
Shares of stock being personal property may be the subject matter of pledge or chattel mortgage. Such collateral transfers need NOT be registered since Sec. 63 of the Code applies only to absolute transfer (Monserrat vs. Ceron, 1933). Thus, the registration in the corporate books of pledges and chattel mortgages of shares CANNOT have any legal effect.
Lim Tay v CA (1998): Q: Will pledged shares automatically entitle the pledgee to record transfer in the books? A: NO. Corporate secretary cannot be compelled to record transfer. The duty of a corporate secretary to record transfers of stocks is ministerial. However, he cannot be compelled to do so when the transferees title to said shares has no prima facie validity or is uncertain. Mandamus will not issue to establish a right but only to enforce one already established. Pledgee failed to establish a legal right. He is not owner of the shares without foreclosure and purchase at auction. He is merely a pledgee. Chempil Export & Import Corp vs. CA (1995) Attachment or mortgage of shares of stock need not be registered in the corporations stock and transfer books as a chattel mortgage over shares of stock doesnt involve a transfer or shares and only absolute transfers of shares are required to be recorded in the stock and transfer book to have force rd and effect as against 3 persons.
Chapter XI. AMENDMENTS of CORPORATE CHARTER
Chapter XI. Amendments of Corporate Charter

A. B. GENERAL SPECIFIC 1. INCREASE IN CAPITAL STOCK 2. DECREASE OF CAPITAL STOCK 3. CHANGE IN CORPORATE NAME EXERCISE OF APPRAISAL RIGHTS GROUNDS FOR DISAPPROVING AMENDMENT AMENDMENTS IN CLOSE CORPORATIONS
2. By increasing the par value of existing shares without changing the number of shares 3. By increasing the number of shares and increasing the par value
E.
A. General
1. Procedure Majority vote of directors or trustees AND the vote or written assent of the stockholders representing 2/3 of outstanding capital stock (including non-voting stock) or 2/3 or members of non-stock corporations, without prejudice to the appraisal right of dissenting stockholders. (Sec. 16). 2. Effectivity Upon approval of SEC or from the date of filing if not acted upon by SEC within 6 months from the date of filing PROVIDED that delay cannot be attributed to the corporation. 3. Congress The passage of statutes amending the Corporation Code or special laws may result in the amendment of the AOI provided that no vested rights are impaired (Sec. 145).
Note: The above requirements also apply in reduction of capital stock. c. Appraisal Right A stockholders right to demand payment of the fair value of his shares, after dissenting from a proposed corporate action involving a fundamental change in the corporate setting (Sec. 81) General Rule: NO appraisal right. Except: When the increase in capital stock has the effect of creating shares with preferences superior to those of existing ones (Sec. 81). d. Existing stockholders have pre-emptive right to the new shares issued. 2. Reduction of capital stock a. Ways of Decreasing Capital Stock 1. By decreasing the number of shares and retaining the par value 2. By decreasing the par value of existing shares without changing the number of shares 3. By decreasing the number of shares and decreasing the par value b. Limitation on the reduction No decrease of the capital stock shall be approved by the Commission if its effect
B. Specific Amendments
General Rule: Amendment of the AOI may be approved by the required number of directors/trustees AND stockholders/members by mere referendum or written assent; stockholders meeting is NOT necessary. (Sec. 16) Exceptions: Stockholders/members approval of the amendment should be made in a meeting duly called for the purpose in the following instances: 1. Increase of capital stock (Sec. 38) (Asked in 99 and 01) a. Ways of Increasing Capital Stock 1. By increasing the number of shares and retaining the par value
CORPORATION LAW
C. D.
b. Requirements 1. Approval by a majority vote of the board of directors 2. Ratification of stockholders representing 2/3 of the OCS at a meeting duly called for the purpose 3. Filing with the SEC a certificate of increase of capital stock 4. Filing with the SEC a Treasurers Affidavit showing that 25% of the increase in capital stock is subscribed and 25% thereof paid. 5. Issuance by the SEC of a certificate of filing. From and after such issuance, the capital stock shall stand increased.
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Chapter XI. AMENDMENTS of CORPORATE CHARTER
shall prejudice the rights of corporate creditors (Sec. 38). c. Appraisal Right Appraisal right may be exercised if the reduction of capital stock has the effect of altering the rights of any stockholder or class of stockholders (Sec. 81).
4. Percentage requirement of ownership by Filipino citizens as required by the Constitution not complied with Note: The SEC shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment.
E. Amendments in close corporations

Secs. 16, 17, 37, 38 also apply to close corporations. Sec. 103 applies only to close corporations.
3. Change in corporate term (Sec. 37) a. Requirements 1. Approved by a majority vote of the board of directors or trustees and 2. Ratified at a meeting 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 case of nonstock corporations. b. Appraisal right may be exercised (Sec. 81)
C. Exercise of appraisal rights in:

Changing primary purpose Increasing number of directors because it affects control and management Decreasing number of directors because it affects cumulative voting Changing classification of shares because it affects economic rights
D. Grounds for Amendment (Sec. 17)
Disapproving
(NUTO) 1. Amendment is not substantially with the form prescribed 2. Purpose patently unconstitutional, illegal, immoral, contrary to government rules and regulations 3. Treasurers Affidavit concerning the amount of capital stock subscribed and/or paid is false
CORPORATION LAW
d. Exception to the Trust Fund Doctrine Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of the assets or property except upon lawful dissolution and after payment of all its debts and liabilities (Sec. 122).
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Chapter XII. DISSOLUTION
Chapter XII. Dissolution

(Asked in 02)
A. VOLUNTARY DISSOLUTION 1. EXPIRATION OF TERM 2. VOLUNTARY DISSOLUTION WHEN NO CREDITORS ARE AFFECTED 3. VOLUNTARY DISSOLUTION WHEN CREDITORS ARE AFFECTED 4. DISSOLUTION BY MINORITY IN CLOSE CORPORATIONS 5. FAILURE TO ORGANIZE; CESSATION OF BUSINESS FOR 5 YEARS INVOLUNTARY DISSOLUTION 1. REVOCATION OF CERTIFICATE OF REGISTRATION 2. QUO WARRANTO PROCEEDINGS EFFECTS OF DISSOLUTION 1. LOSS OF JURIDICAL PERSONALITY 2. EXECUTORY CONTRACTS 3. WINDING UP AND LIQUIDATION THE TRUST FUND DOCTRINE AND THE DISTRIBUTION OF ASSETS
e. A copy of the resolution shall be certified by the majority of the directors or trustees and countersigned by the secretary. f. The signed and countersigned copy will be filed with the SEC and the latter will issue the certificate of dissolution. Note: Thus, except for the expiration of its term , no dissolution can be effective without some act of the state (Daguhoy Enterprises v. Ponce, 1954)
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CORPORATION LAW
B.
3. Voluntary dissolution when creditors are affected (Sec. 119)

a. Approval of the stockholders representing at least 2/3 of the OCS or 2/3 of members in a meeting called for that purpose. b. Filing of a petition with the SEC signed by majority of directors or trustees or other officers having the management of its affairs verified by the President or Secretary or Director. Claims and demands must be stated in the petition. c. If the petition is sufficient in form and substance, the SEC shall issue an order fixing a hearing date for objections. d. A copy of the order shall be published at least once a week for 3 consecutive weeks in a newspaper of general circulation, or if there is no newspaper in the city or municipality of the principal office, posting for 3 consecutive weeks in 3 public places is sufficient. e. Objections must be filed no less than 30 days nor more than 60 days after the entry of the Order. f. After the expiration of the time to file objections, a hearing shall be conducted upon prior 5 day notice to hear the objections. g. Judgment shall be rendered dissolving the corporation and directing the disposition of assets. The judgment may include appointment of a receiver.
C.
D.
Dissolution of a corporation is the extinguishment of its franchise and the termination of its corporate existence or business purpose.
A. Voluntary Dissolution
1. Expiration of term
Once the period expires, the corporation is automatically dissolved without any other proceeding and it cannot thereafter be considered a de facto corporation. A voluntary dissolution may be effected by amending the AOI. Upon approval of the amended AOI or the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings (Sec. 120).
2. Voluntary dissolution when creditors are affected (Sec. 118)
no
a. A meeting must be held on the call of directors or trustees. b. Notice of the meeting should be given to the stockholders by personal delivery or registered mail at least 30 days prior to the meeting. c. The notice of meeting should also be published for 3 consecutive weeks in a newspaper published in the place. d. The resolution to dissolve must be approved by the majority of the directors/trustees and approved by the stockholders representing at least 2/3s of the OCS or 2/3 of members.
4. Dissolution by minority corporations (Sec. 105)
in
close
Any stockholder of a close corporation may, by written petition to the SEC, compel the dissolution of such corporation: a. whenever any of the acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder b. whenever corporate assets are being misapplied or wasted.
5. Failure to organize and commence business; cessation of business for 5 years (Sec. 22)
a. Failure to formally organize and commence the transaction of its business or construction of its works within two years its corporate powers shall cease and the corporation is deemed dissolved Transacting business implies a continuity of acts or dealings in the accomplishment of the purpose for which the corporation was formed (Mentholatum vs. Mangaliman, 1946) Formal organization includes not only the adoption of the by-laws but also the establishment of the body which will administer the affairs of the corporation and exercise its powers b. Failure to operate for at least 5 consecutive years after commencement of business ground for suspension or revocation of its corporate franchise or certificate of incorporation. Note: The corporation may show that the failure to commence its business or to continuously operate is due to causes beyond its control (Sec. 22).
Other grounds: a. Violation by the corporation of any provision of the Corporation Code (Sec. 144 BP 68) b. In case of a deadlock in a close corporation, and the SEC deems it proper to order the dissolution of the corporation as the only practical solution to the dispute (Sec. 104 BP 68)
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2. Quo Warranto Proceedings (Sec. 2, Rule 66 ROC)

Grounds: a. When it has offended against a provision of an Act for its creation and renewal b. When it has forfeited its privileges and franchises by nonuser c. When it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges or franchise d. When it has misused a right, privilege, or franchise conferred upon it by law or when it has exercised a right, privilege or franchise in contravention of law
C. Effects of Dissolution
1. Loss of juridical personality
Corporation loses its juridical personality and can no longer lawfully continue its business except for the purpose of winding up. For this purpose, it may sue and be sued, although upon the expiration of three years, all pending actions by or against the dissolved corporation abate (National Abaca Corp. vs. Pore, 1961) It cannot even be a de facto corporation, hence subject to collateral attack (Buenaflor vs. Camarines Sur Industry Corp., 1960) It cannot enter into new contracts which would have the effect of continuing the business (Cebu Port Labor Union vs. States Marine Co, 1957)
B. Involuntary Dissolution
1. Revocation of certificate of registration (Sec. 121)
A corporation may be dissolved by the SEC, upon a verified complaint and after proper notice and hearing, on the following grounds (Sec. 6, par i, PD 902-A): a. Fraud in procuring its certificate of registration b. Serious misrepresentation as to what the corporation can or is doing to the great prejudice of or damage to the general public c. Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would amount to a grave violation of its franchise d. Continuous inoperation for a period of at least five years e. Failure to file by-laws within the required period f. Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period g. Other grounds
2. Executory contracts
General Rule: Executory contracts remain valid and existing. Under Sec. 145 of the Code, no right or remedy in favor of or against the corporation, its stockholders, members, directors, trustees, or officers shall be removed or impaired by the subsequent dissolution of said corporation.) Exception: Contracts for personal services such as employment contracts of officers and
employees where the dissolution is involuntary or the result of merger or consolidation.
3. Those with pecuniary interest in the assets, such as stockholders and creditors (Ibid) c. Escheat Any asset distributable to any creditor/SH/member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located.
Phil. Veterans Bank v. Employees Union (2001): Q: What is the difference between Liquidation and Rehabilitation? A: Liquidation is the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss. On the other hand, rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency. Both cannot be undertaken at the same time.
3. Winding Up and Liquidation

(Asked in 97, 00 and 01) Liquidation is the process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the stockholders. It is a proceeding in rem. a. Modes of Liquidation 1. By Board of Directors 2. Through a trustee to whom the properties are conveyed From and after any such conveyance by the corporation of its property in trust for the benefit of its SH/members/creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. 3. By management committee or rehabilitation receiver However, the mere appointment of a receiver, without anything more does not result in the dissolution of the corporation nor bar it from the existence of its corporate rights (Leyte Asphalt & Mineral Oil Co. Ltd., v. Block Johnston & Breenbrawn, 1928) b. Period of Liquidation General Rule: A corporation whose corporate existence has been terminated shall be continued for 3 years after the time when it would have been so dissolved. Exceptions: In case the corporate assets are conveyed to a trustee or a receiver appointed by the SEC, the three year limitation will NOT apply (Sumera v. Valencia, 1939) Even if no trustee or receiver was appointed and the 3-year period has already expired, the following were considered as trustees: 1. Counsel of record with respect to the matter in litigation (Gelano vs. CA, 1981) 2. BOD itself may be deemed trustees by legal implication to complete the corporate liquidation (Clemente vs. CA, 1995)
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CORPORATION LAW
D. The Trust Fund Doctrine and the Distribution of Assets

General rule: A corporation CANNOT distribute any of its assets or property except upon lawful dissolution and only after payment of all its debts and liabilities (last par., Sec. 122). Exceptions: 1. Decrease in capital stock resulting in a surplus which can then be distributed to stockholders provided no creditors are prejudiced (Sec. 122) 2. As otherwise allowed by the Code: a. Deadlock in a close corporation (Sec. 104) b. Redemption of redeemable shares (Sec. 8) Note: The TRUST FUND DOCTRINE is embodied in the last paragraph of Sec. 122. As held in Phil. Trust Co. vs. Rivera (1923), the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. The subscribed capital stock of the corporation is a trust fund for the payment of the debts of the corporation which the creditors have the right to look up to satisfy their credits. Corporation may not dissipate this and the creditors may sue stockholders directly for the unpaid subscription.
Chapter XIII. CORPORATE COMBINATIONS
Chapter XIII. Corporate Combinations

A. B. C. D. E. F. DEFINITION PROCEDURE EFFECTS OF MERGER/CONSOLIDATION EFFECTIVITY OF MERGER/ CONSOLIDATION DE FACTO MERGER SALE OF ALL OR SUBSTANTIALLY ALL ASSETS
6. If necessary, the SEC shall set a hearing, notifying all corporations concerned at least 2 weeks before. 7. Issuance of certificate of merger or consolidation.
C. Effects of Merger or Consolidation (Sec. 80)

1. The constituent corporations shall become a single corporation. 2. The separate existence of the constituents shall cease, except that of the surviving or the consolidated corporation. 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation. 4. The surviving or the consolidated corporation shall possess all rights, privileges, immunities and franchises of each constituent corporation and the properties shall be deemed transferred to the surviving or consolidated corporation. 5. All liabilities of the constituents shall pertain to the surviving or the consolidated corporation. 6. Any claim, action or proceeding pending by or against any of the constituent corporations may be prosecuted by or against the surviving or consolidated corporation; and 7. The rights of the creditors or lien upon the property of any of each constituent corporation shall not be impaired by such merger or consolidation.
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CORPORATION LAW
A. Definition
Merger a corporation absorbs the other and remains in existence while the others are dissolved. Consolidation a new corporation is created, and consolidating corporations are extinguished
B. Procedure (Secs. 76-79)

1. The board of each corporation shall draw up a plan of merger or consolidation setting forth: a. Names of the corporation involved; b. Terms and mode of carrying it; c. Statement of changes, if any, in the present articles of the surviving corporation to be formed in the case of consolidation. 2. Plan for merger or consolidation shall be approved by majority vote of each of the board of the concerned corporations at separate meetings, and a vote of 2/3 of the members or of stockholders representing 2/3 of the outstanding capital stock. 3. Any amendment to the plan must be approved by the majority vote of the board members or trustees of the constituent corporations and affirmative vote of 2/3 of the outstanding capital stock or members. 4. Articles of Merger or Articles of Consolidation shall be executed by each of the constituent corporations, signed by the president or vice-president, and certified by the secretary or assistant secretary setting forth: a. Plan of merger or consolidation; b. For stock corporation, the number of shares outstanding; for non-stock, the number of members; c. As to each corporation, number of shares or members voting for and against such plan respectively. 5. Submission of Four (4) copies of the Articles of Merger or Articles of Consolidation to the SEC for approval.
D. Effectivity of Merger or Consolidation

(Asked in 99) Upon issuance of the certificate of merger or consolidation, such merger or consolidation shall become effective (Sec. 79). PNB v. Andrada Electric & Engr. Co., (2002): Merger or consolidation does become effective by mere agreement of constituent corporations. The approval of SEC is required. Inc. not the the
Chapter XIII. CORPORATE COMBINATIONS
E. De Facto Merger
One corporation acquires all or substantially all of the properties of another corporation in exchange for shares of stock of the acquiring corporation. The acquiring corporation would end-up with the business enterprise of the selling corporation whereas the latter would end up with basically its remaining assets being the shares of stock of the acquiring corporation and may then distribute it as liquidating dividend to its stockholders. (VILLANUEVA)
4. Distinctions between Sale of Assets and Merger/ Consolidation

Merger and Consolidation 1. Sale of assets is always involved 2. There is automatic assumption of liabilities 3. There is continuance of the enterprise and of the stockholders 4. Title to the assets are transferred by operation of law 5. The constituent corporations are automatically dissolved Sale of Assets 1. Merger/consolidation is not always involved 2. Purchasing corporation is not generally liable for the debts and liabilities of the selling corporation 3. The selling corporation ordinarily contemplates a liquidation of the enterprise 4. Transfer of title is by virtue of contract 5. The selling corporation is not dissolved by the mere transfer of all its property
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CORPORATION LAW
F. Sale of All or Substantially All Assets

(Asked in 96)
1. Requisites
a. Approval of majority of the directors or trustees b. Assent of stockholders representing 2/3 of OCS or 2/3 of members in a meeting duly called for the purpose after written notice c. Compliance with the formalities of the Bulk Sales Law.
2. When covered
A sale or other disposition shall be deemed to cover substantially all corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated Sec 40).
3. Effect on creditors
General Rule: Where one sells or otherwise transfers ALL of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor. Exceptions: a. Purchaser agrees to assume such debts; b. Transaction amounts to merger or consolidation; c. Purchasing corporation is merely a continuation of selling corporation; and d. Fraudulent transactions (Edward J. Nell Co. v. Pacific Farms Inc., 1965).
Chapter XIV. FOREIGN CORPORATIONS
Chapter XIV. Foreign Corporations

A. B. DEFINITION OF TERMS TESTS OF DOING BUSINESS IN THE PHILIPPINES C. DOING BUSINESS UNDER THE FOREIGN INVESTMENT ACT D. JURISPRUDENTIAL RULES ON NOT DOING BUSINESS IN THE PHILIPPINES E. REQUISITES FOR THE ISSUANCE OF LICENSE TO DO BUSINESS F. POWER TO SUE AND BE SUED OF FOREIGN CORPORATIONS G. LAWS APPLICABLE ON FOREIGN CORPORATIONS
2. Contract test
A foreign corporation is doing business in the Philippines if the contracts entered into by the foreign corporation or by an agent acting under the control and direction of the foreign corporation are consummated in the Philippines (Pacific Vegetable Oil vs. Singson, 1955).
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C. Doing Business Under the Foreign Investment Act of 1991 (RA 7042)
CORPORATION LAW
1. Doing Business
A. Definition of Terms
Foreign Corporation One formed, organized, or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state (Sec. 123). Resident Agent An individual, who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated in a written power of attorney by a foreign corporation authorized to do business in the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against the foreign corporation (Sec. 127-128).
a. Soliciting orders, service contracts, or opening offices; b. Appointing representatives, distributors domiciled in the Philippines or who stay for a period or periods totalling 180 days or more; c. Participating in the management, supervision, or control of any domestic business, firm, entity, or corporation in the Philippines; d. Any act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to some extent the performance of acts or works or the exercise of some functions, normally incident to and in progressive prosecution of the purpose and object of its organization.
2. Not Doing Business

a. Mere investment as shareholder and exercise of rights as investor; b. Having a nominee director or officer to represent its interest in the corporation; c. Appointing a representative or distributor which transacts business in its own name and for its own account.
B. Tests of Doing Business in the Philippines

1. Twin Characterization Test

a. Under the Continuity Test, doing business implies a continuity of commercial dealings and arrangements, or performance of acts normally incidental to the purpose and object of the organization. b. Under the Substance Test, a foreign corporation is doing business in the country if it is continuing the body or substance of the enterprise of business for which it was organized (Mentholatum vs. Mangaliman, 1941)
D. Jurisprudential Rules on Not Doing Business in the Philippines

1. Products manufactured off-shore and returned back to foreign corporation (Agilent Tech. Singapore Ltd. v. Integrated Silicon Tech. Phils. Corp., 2004) 2. Single isolated transaction (Marshall-Wells Co. v. Henry Eiser & Co, 1924). Multiple transactions are still considered a single transaction where there are constantly failed attempts in complying with the same by one
Chapter XIV. FOREIGN CORPORATIONS
of the contracting parties Consolidated v. CA, 1986).
(Antam
3. Trademark protection; foreign corporations not doing business are merely protecting their property rights (General Garments v. Director of Patents, 1971). 4. A foreign firm which does business through middlemen acting on their own names shall not be deemed doing business in the Philippines. (Le Chemise Lacoste v. Fernandez, 1984).
E. Requisites for the Issuance License to Do Business
of
1. The foreign corporation should file a copy of its articles of incorporation and by-laws, a verified application (See Sec. 125) accompanied by the following: a. Name and address of its designated resident agent who will receive summons and notices for the corporation; a special power of attorney should also be submitted for such purpose b. An agreement that if it ceases to transact business or if there is no more resident agent, summons shall then be served through the SEC c. Oath of Reciprocity stating that the foreign corporations country allows Filipino citizens and corporations to do business in said country 2. Within 60 days from issuance of license, the corporation should deposit at least P100,000 (cash, property, bond) for the benefit of creditors subject to further deposit every six months (See Sec. 126).
Controlling Doctrine: Agilent Tech. Singapore Ltd. vs. Integrated Silicon Tech. Phils. Corp., (2004): The principles on the right of a foreign corporation to bring suit in Philippines:
1. 2. if a foreign corporation does business in the Philippines without a license, it cannot sue before Philippine courts; if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction; if a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporations corporate personality in a suit brought before Philippine courts; and If a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction.
3.
4.
G. Laws Applicable Corporation
on
Foreign
General Rule: Any foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class. Exceptions: Foreign law shall govern on the following matters: 1. Creation, formation, organization or dissolution of corporations or 2. Those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of corporations to each other or to the corporation.
F. Power to Sue and Be Sued of Foreign Corporations

Sec. 133. Doing business without a license. No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit, or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.
CORPORATION LAW
Instances when Unlicensed Foreign Corporations can Sue: 1. Isolated transactions; 2. Action to protect good name, goodwill, and reputation of a foreign corporation; 3. The subject contracts provide that Philippine courts will be the venue to controversies; 4. A license subsequently granted enables the foreign corporation to sue on contracts executed before the grant of the license; 5. Recovery of misdelivered property; 6. Where the unlicensed foreign corporation has a domestic corporation.
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Chapter XV. CLOSE CORPORATIONS
Chapter XV. Close Corporations

A. B. C. REQUIREMENTS CHARACTERISTICS RESTRICTIONS ON TRANSFER OF SHARES 1. VALIDITY OF RESTRICTIONS 2. PRESUMPTIONS DEADLOCKS 1. REQUISITES 2. POWER OF SEC DISTINCTIONS BETWEEN CLOSE AND REGULAR CORPORATIONS
D.
E.
A. Requirements for Close Corporations (Sec. 96)

1. The AOI must state that the number of stockholders shall not exceed 20. 2. The AOI must contain restriction on the transfer of issued stocks (which must appear in the AOI, by-laws and certificate of stock) Restriction on the transfer must NOT be more onerous than granting the existing SH or corporation the option to purchase the shares. 3. The stocks cannot be listed in the stock exchange nor be publicly offered. 4. The corporation must NOT be mining company, stock exchange, oil company, bank, insurance company, public utility, educational institution or other corporation declared to be vested with public interest. 5. At least 2/3 of its voting stock or voting rights must NOT be owned or controlled by another corporation which is not a close corporation.
otherwise, the same shall not be binding on any purchaser thereof in good faith. b. Restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares within a specified period. After expiration of said period and upon failure of the existing stockholders or the corporation to purchase said shares, the transferring stockholder may sell his shares to any third person. 2. Presumptions (Sec. 99): a. If the stock certificate CONSPICUOUSLY shows the restriction, the purchaser or transferee is CONCLUSIVELY presumed to have notice of the restriction, provided this appears in the AOI. b. Where a conclusive presumption of notice arises, the corporation may, at its option, refuse to register the transfer, unless (1) all the stockholders have consented to the transfer, or (2) the AOI has been properly amended to remove the restriction. c. If it appears in the certificate, but NOT CONSPICUOUSLY, then although he may be presumed to have notice of the restriction, he can prove the contrary.
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CORPORATION LAW
D. Deadlocks
(Asked in 95): 1. Requisites a. The directors or stockholders are so divided respecting the management of the corporation's business and affairs b. The votes required for any corporate action cannot be obtained that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally 2. Powers of the SEC in case of Deadlock in Close Corporations
a. b. c. d. Cancel or alter any provision in the articles of incorporation or by-laws Cancel, alter or enjoin any resolution of the corporation Direct or prohibit any act of the corporation Require the purchase at their fair value of shares of any stockholder either by any stockholder or by the corporation regardless of the availability of unrestricted retained earnings. Appoint a provisional director Dissolve the corporation Granting such other relief as the circumstances may warrant.
B. Characteristics
1. The stockholders themselves can directly manage the corporation and perform the functions of directors without need of election (Sec. 97): a. When they manage, stockholders are liable as directors; b. There is no need to call a meeting to elect directors; c. The stockholders are liable for tort. 2. Despite the presence of the requisites, the corporation shall not be deemed a close corporation if at least 2/3 of the voting stocks or voting rights belong to a corporation which is not a close corporation (Sec. 96).
C. Restrictions on Transfer of Shares

1. Validity of Restrictions (AO) (Sec. 98) a. Restrictions must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock;
e. f. g.
Chapter XV. CLOSE CORPORATIONS
E. Distinctions Between Close and Regular Corporations

CLOSE CORPORATIONS 1. Management / Board Authority There can be classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: No meeting of stockholders need be called to elect directors Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. There are no classification of board of directors REGULAR CORPORATIONS
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CORPORATION LAW
Corporate Powers devolved upon board of directors whose powers are executed by officers. Cannot provide that it be managed by stockholders
Board of directors must be elected in a stockholders meeting Stockholders of a corporation are separate and distinct from directors
Officers must be elected by the Board of Directors
2.
Meetings Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: 1. Before or after such action is taken, written consent thereto is signed by all the directors; or
The directors or trustees shall not act individually nor separately but as a body in a lawful meeting. They will act only after discussion and deliberation of matters before them. Contracts entered into without a formal board resolution does not bind the corporation except when ratified or when majority of the board has knowledge of the contract and the contract benefited the corporation. Absence of a prompt objection in writing does not ratify acts done by directors without a valid meeting. There must be express or implied ratification. Express ratification may consist of a Board Resolution to that effect Implied ratification may consist of acceptance of benefits from said unauthorized act while having knowledge of said act Failure to give notice would render a meeting voidable. Attendance to a meeting despite want of notice will be deemed implied waiver All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (51)
2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing.
4.
If a director's meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof.
COMMERCIAL LAW REVIEWER CLOSE CORPORATIONS 3. Voting / Quorum The AOI may provide for a classification of directors into one or more classes, each of which may be voted for and elected solely by a particular class of stock.
Chapter XV. CLOSE CORPORATIONS REGULAR CORPORATIONS No share may be deprived of voting rights, except Preferred or Redeemable shares, unless otherwise provided by the Code There shall always be a class/series of shares which have a COMPLETE VOTING RIGHTS EACH SHARE SHALL BE EQUAL IN ALL RESPECTS TO EVERY OTHER SHARE, except as otherwise provided in the AOI For Board of directors, the by-laws or AOI can provide for a greater majority in quorum For stockholders, the AOI can provide for a different percentage in quorum Limitations on the exercise of pre-emptive right: 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; Not extend to shares to be issued in good faith with the approval of the stockholders representing twothirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt Shall not take effect if denied in the Articles of Incorporation or an amendment thereto.
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CORPORATION LAW
The AOI may provide for a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code.
4.
Pre-emptive Right The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise.
a.
b.
c. 5. Transferability Restrictions on the right to transfer shares must appear in the AOI and in the by-laws as well as in the certificate of stock otherwise the same shall not be binding on any purchaser thereof in good faith Withdrawal Right Any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock Any stockholder of a close corporation may, by written petition to the SEC, compel the dissolution of such corporation whenever: Any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or Corporate assets are being misapplied or wasted.
Restrictions on the right to transfer not allowed
6.
Stockholders may require the corporation to buy-back their shares at fair value when the Corporation has unrestricted Retained Earnings: a. In case any amendment to the articles of incorporation which has the effect of: changing or restricting the rights of any stockholder or class of shares, or authorizing preferences in any respect superior to those of outstanding shares of any class, or extending or shortening the term of corporate existence b. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and c. In case of merger or consolidation d. Extension or shortening of the term of the corporation (37) e. Diversion of funds of corporation from primary purpose to secondary purpose (41) The corporation may buy-back shares of stockholders subject to the following limitations (Treasury shares): There must be unrestricted retained earnings Must be for a legitimate purpose
Chapter XVI. NON-STOCK CORPORATIONS
Chapter XVI. Non-Stock Corporations

A. B. C. D. PURPOSES RIGHTS OF MEMBERS CONVERSION ORDER OF DISTRIBUTION OF ASSETS UPON DISSOLUTION
D. Order of Distribution of Assets Upon Dissolution of Close Corporation

1. All its creditors shall be paid. 2. Assets held subject to return on dissolution shall be delivered back to the givers. 3. Assets held for charitable, religious purposes, etc., without a condition for their return on dissolution, shall be conveyed to one or more organizations engaged in similar activities as dissolved corporation 4. All other assets shall be distributed to members, as provided in the AOI or by-laws.
A. Purposes of Non-stock Corporations

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Charitable Religious Educational Professional Cultural Fraternal Literary Scientific Social Civic services Similar purposes, such as chambers or combinations trade, industry or agriculture
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CORPORATION LAW
B. Rights of Members
1. Right to Vote A member is entitled to one vote. However, such right may be broadened, limited, or denied in the AOI or by-laws (Sec. 89). 2. Right to Transfer Membership General Rule: A member cannot transfer his membership (and the rights arising therefrom) in a non-stock corporation. Exception: AOI or by-laws may provide for their transferability (Sec. 90).
C. Conversion
1. A non-stock corporation cannot be converted into a stock corporation through mere amendment of its AOI. This would violate Sec. 87 which prohibits distribution of income as dividends to members. Giving the members shares is tantamount to distribution of its assets or income (SEC Opinion, March 20, 1995). 2. A non-stock corporation can be converted into a stock corporation only if the members dissolve it first and then organize a stock corporation. However, there is a resulting new corporation (SEC Opinion, May 13, 1992) 3. A stock corporation may be converted into a non-stock corporation by mere amendment provided all the requirements are complied with. Its rights and liabilities will remain.
Chapter XVII. SPECIAL CORPORATIONS
Chapter XVII. Special Corporations

A. B. EDUCATIONAL CORPORATIONS RELIGIOUS CORPORATIONS 1. CORPORATION SOLE 2. RELIGIOUS SOCIETIES
A. Educational Corporations
Stock or non-stock corporations organized to provide facilities for teaching or instruction. A favorable recommendation of the DECS is essential for the approval of its articles and by-laws. It is primarily governed by special laws and suppletorily by the provisions of the Code.
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CORPORATION LAW
B. Religious Corporations
1. Corporation Sole (Asked in 04) A special form of corporation, usually associated with clergy and consists of one person only and his successors, who are incorporated by law to give some legal capacities and advantages. A corporation sole does not have any nationality but for purposes of applying our nationalizations laws, nationality is determined by the nationality of the members (Roman Catholic Apostolic Church vs. Land Registration Commission, 1957). A registered corporation sole can acquire land if its members constitute at least 60% Filipinos (SEC Opinion, 8 August 1994). 2. Religious Societies Non-stock corporation formed by a religious society, group, diocese, synod, or district of any religious denomination, sect, or church after getting the approval of 2/3 of its members.
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COMMERCIAL LAW REVIEWER

COMMERCIAL LAW REVIEWER

COMMERCIAL LAW REVIEWER

Charisse Brion Pea

CORPORATION LAW TEAM

PRINTING & DISTRIBUTION

DESIGN & LAYOUT

MOCK BAR COMMITTEE

BAR CANDIDATES WELFARE

COMMERCIAL LAW REVIEWER

D. Other Types Organizations

COMMERCIAL LAW REVIEWER

COMMERCIAL LAW REVIEWER

Chapter II. CLASSIFICATION of CORPORATIONS

Chapter II. Classification of Corporations

COMMERCIAL LAW REVIEWER

Chapter III. FORMATION of CORPORATIONS

Chapter III. Formation of Corporations

A. Components of a Corporation 1. Incorporators - are those stockholders or

2. Corporators - are stockholders or members

d. Up to 40% foreign equity.

COMMERCIAL LAW REVIEWER

Chapter III. FORMATION of CORPORATIONS

B. Steps in the Corporation

* Promotion Drafting the Articles of Incorporation

Filing with SEC; Payment of the filing and publication fees

Internal Organization (by-laws, election of officers) & Commencement of business operations

COMMERCIAL LAW REVIEWER

Chapter III. FORMATION of CORPORATIONS

2. Drafting the Articles of Incorporation (AOI)

COMMERCIAL LAW REVIEWER

Chapter III. FORMATION of CORPORATIONS

3. Filing with SEC and payment of fees

COMMERCIAL LAW REVIEWER

Chapter III. FORMATION of CORPORATIONS

4. Issuance of Certificate of Incorporation by SEC

1. Requisites of De Facto Corporation

2. De Jure vs. De Facto Corporations

5. Internal Organization Commencement of Operations

includes the adoption of by-laws and election officers

Substantial Compliance No effect DE JURE

COMMERCIAL LAW REVIEWER

NON ENTITY No Compliance No compliance

Chapter III. FORMATION of CORPORATIONS

COMMERCIAL LAW REVIEWER

Chapter III. FORMATION of CORPORATIONS

COMMERCIAL LAW REVIEWER

Chapter IV. The CORPORATE ENTITY

Chapter IV. The Corporate Entity

A. The Doctrine of Separate Juridical Entity

B. Piercing the Corporate Veil Doctrine

COMMERCIAL LAW REVIEWER

Chapter IV. The CORPORATE ENTITY

COMMERCIAL LAW REVIEWER

Chapter V. CORPORATE POWERS

Chapter V. Corporate Powers

D. The Ultra Vires Acts (Sec. 45)

COMMERCIAL LAW REVIEWER

Chapter V. CORPORATE POWERS

COMMERCIAL LAW REVIEWER

Chapter VI. Internal Organization of the Corporation A. BY-LAWS

COMMERCIAL LAW REVIEWER

Chapter VI. INTERNAL ORGANIZATION of the CORPORATION

5. Meetings of the Directors/Trustees