15906340 Utopia Corporation Law Reviewer 2008

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ATENEO DE MANILA UNIVERSITY SCHOOL OF LAW

ARIS S. MANGUERA

PHILIPPINE CORPORATE LAW Commercial Law Review

OUTLINE (1) Nature of Corporations (2) Formation and Organization of Corporations (3) The Corporate Entity (4) Powers of Corporation (5) Stockholders (6) Board of Directors (7) Officers (8) Meetings (9) Books and Records (10) Mergers and Consolidations (11) Non-Stock Corporations (12) Close Corporations (13) Educational Corporations (14) Religious Corporations (15) Dissolution (16) Foreign Corporations

1. NATURE OF CORPORATIONS 1.1 Concept of the corporation Sec. 2. Corporation defined. 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.

1.2 Advantages and disadvantages of the Corporate Form CLV ADVANTAGES (1) Strong Personality (2) Centralized Management (3) Limited Liability to the investors (4) Free Transferability of Units of Investments

DISADVANTAGES (1) Abuse of Corporate Management (2) Abuse of Limited liability feature (3) High cost of maintenance (4) Double Taxation (5) Lack of Personal Element

Sundiang (page 249)

ADVANTAGES

DISADVANTAGES

(1) The capacity to act as a legal unit; (2) Limitation of, or exemption from, individual liability of shareholders; (3) Continuity of Existence (4) Transferability of Shares; (5) Centralized management of BoD; and (6) Standardized method of organization, and finance (Salonga, Phil. Law on Private Corps, 3rd ed., page 9.)

(1) More complicated in formation and management; (2) Higher cost of formation and operation; (3) Lack of personal element; (4) Greater governmental control and regulation; (5) Management and control are separate from ownership; Stockholders have little voice in the conduct of business

Advantages:

I sweat, I bleed, I soar… Service, Sacrifice, Excellence

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1) Strong Legal Personality - The corporation has a legal capacity to act and contract as a distinct unit in its own name; and it has continuity of existence. A corporation’s creation, organization, management and dissolution are standardized as they are governed by a general incorporation law. A corporation is an entity separate and distinct from its stockholder. While not in fact and in reality a person, the law treats the corporation as though it were a person by process of fiction or by regarding it as an artificial person distinct and separate from its individual stockholders. (Remo vs. IAC) Stockholders vs. Register of Deeds The transfer of corporate assets to the stockholder is not in the nature of a partition but is a conveyance from one party to another. 2) Centralized Management - A corporation’s management is centralized in the board of director’s. A corporation presents a more stable and efficient system of governance and dealings with third parties, since management prerogatives are centralized in its board of directors. As can be gleaned from Sec 23 of Corporation Code, it is the board of directors or trustees which exercises almost all the corporate powers in a corporation. (Firme vs. Bukal) - The exercise of the corporate powers of the corporation rest in the Board of Directors save in those instances where the Corporation Code requires stockholder’s approval for certain specific acts. (Great Asain Sales Center vs. CA) 3) Limited Liability to Investors- The liability in a corporation is limited to their shares. Provided by jurisprudence only Simple division between “naked title” and “beneficial title” gives rise to limited liability. Peculiar only between the shareholders and a corporation Underlying Principle: Principle of Relativity CLV’s formula: Strong Juridical Personality + Centralized Management= Limited Liability

ARIS S. MANGUERA -

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CLV: There are ways to circumvent the law to make the shareholder liable for more than his actual share (ex. The chairman makes himself joint debtor for a loan) When a person invest its property in the corporation, he abdicates his “jus” of ownership One of the advantages of the corporation is the limitation of an investor’s liability to the amount of investment, which flows from the legal theory that a corporate entity is separate and distinct fro its stockholders. (San Juan vs. CA) It is hornbook law that corporate personality is a shield against personal liability of its officers- a coporate officer and his spouse cannot be personally liable under a trust receipt where he entered into and signed the contract clearly in his official capacity. (Consolidated Bank vs. CA) Obligations incurred by the corporation acting through its directors, officers and employees, are its sole liabilities. (Malayang Samahan vs. Ramos)

CLV Class Notes Q: Is a corporation in our jurisdiction given the feature of limited liability? A: No. The feature of limited liability is given to the stockholder and not to the corporation. Q: Is limited liability a normal run of things? A: No. It is only there because it comes with the separate juridical personality Q: If limited liability as shown in the corporation setting is good for the investors, does it mean that delectus personarum is a bad thing? A: No. It is good in a way, since person are bound by the contracts they enter into.

4) Free Transferability of Units of Investments - As a general rule, the shares of stocks can be transferred without the consent of other stockholders. This places more liquidity in the corporate setting and encourages investors to channel their investments through corporate vehicles. Authority granted to corporations to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer (Thomson vs. CA) 5) Advantages as registered Entity-


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ARIS S. MANGUERA

Corporations enjoy perpetual succession under its corporate name and in an artificial form; it has the capacity to take and grant property, and contract obligations; it can sue and be sued in its corporate name as a juridical person; it has the capacity to receive and enjoy common grants of privileges and immunities; and its stockholders or members generally have no personal liability beyond their shares.

Disadvantages of Corporate Form 1) Abuse of Corporate Management- In a practical sense, investors have very little voice over the conduct of business of the corporation. 2) Abuse of limited liability feature- Limited liability feature has tended to increase transaction cost by the parties being forced to enter into contractual schemes skirting the limited liability of the corporation when it is a party to a transaction. Limited liability hits innocent people. 3) High cost of maintenance- Complicated and Costly Formation and Maintenance. There is a greater degree of governmental control and supervision. 4) Double Taxation- The profits if the corporation which are already subjected to corporate income tax when declared and distributed as dividends to the stockholders are again subjected to the further income tax. Dividends received by individuals from domestic corporations are subject to final 10% tax fro income earned on or after January 1, 1998 (Section 24(B)(2), 1997 NIRC). Inter-corporate dividends between domestic corporations, however, are not subject to any income tax (Sec. 27 (D)(4), 1997 NIRC). In addition, there is re-imposition of the 10% “improperly accumulated earnings tax” for holding companies (Sec 29, 1997 NIRC) 5) Lack of Personal Element- This has spawned corporate irresponsibility.

1.3 Differentiated from business organizations

partnerships

and

other

1) SOLE PROPRIETORSHIP- Here, it is the owner who controls the business while in a corporation, it is the Board of Directors.


2) PARTNERSHIPS- The most important distinction between a partnership and a corporation is their legal capacities. A corporation has a stronger legal capacity. Enabling it to continue despite death, insolvency or withdrawal of any of its stockholders or members. Limited Liability is a main feature in a corporate setting, whereas partners are liable personally foe partnership debts. Generally, every partner is an agent of the partnership and by his sole act, he can bind the partnership whereas in a corporation, only the Board of Directors or its agents can bind the corporation. Here are the features of a partnership: Delectus Personarum Selection of Partners; No outsider can come in without the consent of all partners Prevents the development of any market for units of ownership because of no assurance that buyers would be able to become partners Mutual Representation Power to Dissolve Mutual Agency Each partner can legally bind the business enterprise Business may be undermined by act of one foolish partner Unlimited Liability Community of Interest Co-ownership of capital or property CLV Class Notes Q: How does contractual management of a corporation compare with the management of a partnership? A: Every partner, in the absence of a stipulation in the articles of partnership, binds the partnership as every partner is an agent of the others. In a corporation, only the Board of Directors and not the stockholders can bind the corporation. CLV: The principle in constitutional law that delegated power cannot be delegated further has no application in a corporate setting because a corporation is not a product of political text- it is a product of business. A corporate setting is best described as hierarchal and fiat. Just because the BoD are to be elected by the stockholders does not mean that the former derives its power from the latter. The powers of the BoD is original, said powers are not delegated by the stockholder. The powers are vested by law (and Articles of Incorporation). The BoD sit on the board not as representatives of the stockholders but because they are directors. Q: What are the 2 types of partnerships?

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A: Regular and joint venture Q: Can a corporation be a partner in a regular partnership? A: No, because a partner must be a natural person. It is against public policy for corporation to be a partner in a regular partnership. Q: Why did the legislature put such limited liability as an attribute of a corporation? If the feature of limited liability costs money then why not take it out? Why not leave it up to the investors who can decide if they want limited liability or not? A: Even though limited liability will cost a lot of money, borrowing makes a lot more sense. If I have 100M, it would be foolish to put all my eggs in one basket(if the basket falls, all eggs break). So I merely out 10M in one corp and then borrow the 90M while the rest of my money I put somewhere else. If the corporation fails, I do not lose all my 100 M. But if the corps succeeds and I get to pay my creditor, I retain the 10M plus profits acquired from the 90M paid up loan. This is the concept of Leveraging, using other people’s money to make a profit for yourself. This is why borrowing is an integral part of corporate life and it is up to the creditors to make a diligent appraisal of the credit standing of the corp. Q: What is the main distinction between a corporation and a partnership? A: A corporation is intermingling of corporation law and contract law. Partnership is purely contractual relationship and so every time a partner dies, the contract is actually distinguished. Q: What is a corporation law all about? A: It is all about jurisprudence actually built around the 4 attributes of a corporation. Q: Does a Defective Incorporation result into a Partnership? A: No. First, both corporate and partnership relationship are fundamentally contractual relationships created by the co-venturers. (so, yung intention is controlling)Second, there are important differences between a corporation and the partnership.(i.e. Limited liability, centralized management, easy transferability of units of ownership) Summary of the doctrinal pronouncement in PIONEER INSURANCE case: a) Parties who intended to participate or actually participate in the business affairs of the proposed corporation would be considered as partners under a de facto partnership, and would be liable for partnership obligations.


ARIS S. MANGUERA b) Parties who took no part except to subscribe for stock in a proposed corporation, do not become partners with other subscribers who engaged in the business under the name of pretended corporation, are not liable for action foe settlement of the alleged partnership contribution. Q: Why are we taking up Pioneer? Why were not they liable? A: Because Pioneer shows us that for a person to be liable as a partner, he should have actively participated in the conduct of the business, the SC held in this case that to be able to be held liable the person should possess powers of management business, the SC held in this case this case that to be able to be held liable the person should possess powers of management. Q: In cases where there is a defective attempt to form a corporation, which is the prevailing rule, a partnership inter se is created or a corporation by estoppel? A: It depends wholly on the extent of the participation of the party who claim is being mind. In PIONEER, there was no intent on the other parties to enter into a partnership but a corporation. As to Cervantes and Bormacheco, they cannot be considered to have entered into a partnership inter se, since there was no intention to do so ans to be held liable as such. But if it were Cervantes or Bormacheco, who entered into the contracts using the corporate name and actively participated in the activities of the corporation, then they are to be held liable as partners.

Lim Tong Lim vs. Phil. Fishing Gear Industries Q: What is the difference between Pioneer and Lim Tong Lim? A: In Pioneer, the SC stopped when it declared that to be liable, you have to possess powers of management. In Lim, it continues its pronouncement by saying that you have beneficial ownership over the business, then you are also liable as a partner CLV: Pioneer caseactors who knew of corporation’s nonexistence are liable as general partners while actors who did not know are liable as limited partners, passive investors are not liable. Lim Even passive investors should be held liable provided they benefited from such transactions. 3) BUSINESS TRUST- It is simply a deed of trust which is easier and less expensive to constitute for it is not bound by any legal requirements. It does not have separate juridical personality, and is mainly governed by contractual doctrines and common law principles on trust. Trust relationship

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centered upon properties, and which places naked tile in the trustor and the beneficial title in the beneficiary.

ARIS S. MANGUERA

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CLV Class Notes Q: What is the difference of a Business Trust and a corporation? A: The relationship in a business trust is essentially a trust relationship. The business trust does not have a personality which is apart from the trustor of the trustee/beneficiary. The concept of a separate juridical personality is absent from a business trust.

4) JOINT VENTURES Its legal concept is of common law origin. It is a form of partnership and should thus be governed by the law of partnerships. Joint venture is an association of persons or companies jointly undertaking some commercial enterprise; generally, all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern policy in connection therewith, and duty, which may be altered by agreement to share both in profit and losses. (Kilosbayan vs. Guingona) CLV Class Notes Q: What is the difference between a joint venture and a partnership? A: A joint venture is by law a partnership because it follows the same definition as having two or more persons binding themselves together under a common fund with the intention of dividing the profits between themselves. Therefore, every joint venture is a partnership. The distinction between the two is a joint venture is for a limited purpose only while a partnership involves an arrangement or an on-going concern. Q: Is it possible for a joint partnership not be a partnership? A: Yes, when the joint venture forms a corporation, it hen becomes a joint venture corporation. Q: Is the requirement of registration needed in a partnership required in a joint venture? A: No. Only in a partnership is registration required. (Art 1772)

5) COOPERATIVES


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It is a duly registered association of persons, with a 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 of the undertaking in accordance with universally accepted cooperative principles. It has a juridical personality distinct from its members and has a limited liability feature. Cooperatives are governed by principles of democratic control where the members in primary cooperatives have equal voting rights in a one-member-onevote principle. The general assembly in full membership exercises all the rights and performs all the obligations of the cooperative. They are under the supervision and control of the Cooperative Development Authority. (Primary objective: SELF HELP) Cooperatives are established to provide a strong social and economic organization to ensure that the tenant-farmers will enjoy on a lasting basis the benefits of agrarian reforms. (Corpuz vs. Grospe)

6) SOCIEDAD ANONIMAS - A sociedad anonima was considered a commercial partnership where upon the execution of funds and personal property, become a juridical person- an artificial being, invisible, intangible, and existing only in contemplation of law- with power to hold, buy, and sell property, and to sue and be sueda corporation- not a general co-partnership nor a limited copartnership… The inscribing of its articles of agreement in the commercial register was not necessary to make it a juridical person- a corporation. Such inscription only operated to show that it partook of the form of a commercial corporation, (Mead vs. McCullough) - The sociedades anonimas were introduced in the Philippine jurisdiction on 1 December 1888 with the extension to Philippine territorial application of Articles 151 to 159 of the Spanish Code of Commerce. Those articles contained the features of limited liability and centralized management granted to a juridical entity. But they were more similar to the English joint stock companies than the modern commercial corporations. (Benguet vs Pineda)

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Our corporation law recognizes the difference between sociedades anonimas and corporations and will not apply legal provisions pertaining to the latter to the former.(Phil Product vs. Primateria Societe Anonyme)

7) CUENTAS EN PARTICIPACION - A cuentas en particiapacion as a sort of an accidental partnership constituted in such manner that its existence was only known to those who had an interest in the same, there being no mutual agreement between the partners, and without a corporate name indicating to the public in some way that there were other people besides the one who ostensibly managed and conducted the business, governed under Article 239 of the Code of Commerce. Those who contract with the person under whose name the business of such partnership of cuentas en participacion is conducted, shall have only a right of action against such person and not against the other person interested, and the latter, on the other hand, shall have not right of action against third person who contracted with the manager unless such manager formally transfers his rights to them. (Bourns vs. Carman)

1.4 Government Regulation of Corporations Basis: Section 2 of Corp Code; Theory of Concession Theory of Concession: Looks at a corporation as a creature of the State within the control of the latter. This theory is essentially followed in the Philippines. A corporation is an artificial being created by operation of law. It owes it life to the state its birth being purely dependent on its will. Corporate by-laws must yield to judicial orders. As a matter of fact, a corporation, once it comes into being, comes more often within the ken of the judiciary than the other two coordinate branches. It institutes the appropriate court action to enforce its right. Correlatively, it is not immune from judicial control in those instances, where a duty under the law as ascertained in an appropriate legal proceeding is cast upon it. (Tayag v. Benguet Consolidation)


ARIS S. MANGUERA To organize a corporation that could claim a juridical personality of its own and transact business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose. cf. Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 (1962) “It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act,” and the procedure and conditions provided under the law for the acquisition of such juridical personality must be complied with. Although the statutory grant to an association of the powers to purchase, sell, lease and encumber property can only be construed the grant of a juridical personality to such an association . . . nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a finding that such association acquired a separate juridical personality, even when it adopts sets of constitution and by-laws. International Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000). Since all corporations, big or small, must abide by the provisions of the Corporation Code, then even a simple family corporation cannot claim an exemption nor can it have rules and practices other than those established by law. Torres v. Court of Appeals, 278 SCRA 793 (1997). Catindig Class Notes Q: How does government regulate corporations? A: From creation to dissolution xxx Homeowner’s HLURB Condos SEC Cooperative Bureau of Cooperative Development

1.5 Kinds of Corporations (a) Stock (b) Non-Stock (c) De Facto

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(d) Corporation by estoppel (e) Close (f) Educational (g) Religious; Sole and Aggregate (h) Special Charter (i) Foreign (j) GOCC (k) Homeowner’s Association

(a) Stock Sec. 3. Classes of corporations. Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations.

ARIS S. MANGUERA taxation. (CIR v. Club Filipino) •

(c) De facto Sec. 20. De facto corporations The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.

Nature of the Doctrine •

De facto corporation is formed also in accordance with law. It falls short of the requirements provided by law. Such is awarded a separate juridical personality, it may thus enter into contracts, it may sue and be sued. (note: third parties may sue the corporation, incorporators may sue but the corporation cannot sue) Only the actors will be held liable. In proceeding against such, compliance with due process must be had.

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The doctrine of de facto corporation applies as to the first level relationship (as between the State and corporations) and also to the third level of relationship.

(b) Non-stock Sections 3 and 87. Sec. 87. Definition. For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. (n)

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See page 902 of CLV’s Commercial Law Reviewer (2007). In spite of the existence of capital stock, a corporation may be considered a non-stock corporation for purpose of


Mere realization of profits does not make a corporation a stock corporation. (Collector v. UV)

Elements: (Arnold v. Piccio) (1) Valid Law under which it is incorporated (2) Attempt in good faith to incorporate (3) Assumption of corporate powers (1) Valid Law under which it is incorporated

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If the constitutionality of the statue is raised for the first time in an action wherein it is sought to prevent future incurring of

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rights and obligations, it will be proper to permit collateral attack; where the constitutionality of the statue is raised for the first time in litigation seeking enforcement of contracts or transaction which have been fully or partially consummated, collateral attack on the juridical personality of the corporation should not be permitted, since the corporation should be treated as a de facto corporation. Courts, however, through jurisprudence, arrived at the same result as that upheld by such minority opinion, holding that a corporation organized under a statute subsequently declared unconstitutional may nevertheless be considered a corporation by estoppel, where there have been previous dealing between the parties on a corporate basis. (2) Attempt in good faith to incorporate- colorable compliance. •

The Corporation must have filed its Articles of Incorporation and the SEC duly issued a Certificate of Incorporation. (The incorporators must have been aware of the issuance of the certificate of incorporation by the SEC for such good faith to exist.) (Mere intent is not sufficient)

(3) Assumption of corporate powers: Minimum requirement: Election of BoD. Rationale •

To prevent any party from raising the defect of authority as a means to avoid fulfillment of a contract or a transaction entered into.

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To protect the enforceability of corporate dealings and contracts, to allow the public to take at reasonable face value the authority of the corporation to enter into valid and binding contracts.

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The doctrine is meant to apply to extra –corporate dealings and not to intra-corporate relationship CLV Class Notes


ARIS S. MANGUERA Q: If a member of a public deals with a corporation knowing its defect, will the de facto doctrine apply? A: Yes, because (a) juridical personality cannot be subject to collateral attack (b) No juridical entity, no separate liability CLV: The de facto doctrine was formulated to safeguard the security of commercial transactions whenever they involve the corporation. Parties dealing with said corporation are secured by the fact that the transactions entered into with said corporations may be sued upon and they can recover. That is why aside from the other two requisites there must be a set of officers or directors because the principle that a corporation can only act through its officers.

Catindig Class Notes Sir: Once there is a certificate issued, there is no de facto corporation. So for me the concept is merely historical.

(d) Corporation by estoppel Sec. 21. Corporation by estoppel All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. CLV Class Notes Q: What is minimum requirement for a corporation by estoppel to exist? A: There must be an innocent party who believes that a corporation exists (believes in good faith) because of representations. Catindig Class Notes Q: Is a corporation by estoppel a corporation?

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ARIS S. MANGUERA corporation for the transportation of its merchandise. Ohta Dev. Co. v. Steamship Pompey, 49 Phil. 117 (1926).1

A: No. (See definition in Section 2) The parties are the one made liable-ASM. Q: How does government regulate corporations? A: From creation to dissolution xxx Homeowner’s HLURB Condos SEC Cooperative Bureau of Cooperative Development UP Class Notes COMMENT: The doctrine is founded on principles of equity and is applied n order to prevent injustice and unfairness to third persons visà-vis the corporation (or vice versa as in par. 2 Section 21). In this case the International Express Travel seeks to enforce a valid contract; it is the Federation and Henri Kahn who wish to do it injustice by trying to evade responsibility thereon. In the last point, the CA possibly tried to apply paragraph 2 Section 21, albeit mistakenly.

Nature of Doctrine • An admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon.

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Founded on principles of equity and designed to prevent injustice and unfairness, the doctrine applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Where no third person is involved in the conflict, there is no corporation by estoppel. A failed consolidation therefore cannot result in a consolidated corporation by estoppel. Lozano v. De Los Santos, 274 SCRA 452 (1997)

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A party cannot challenge the personality of the plaintiff as a duly organized corporation after having acknowledged same when entering into the contract with the plaintiff as such


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A person who accepts employment in an unincorporated charitable association is estopped from alleging its lack of juridical personality. Christian Children’s Fund v. NLRC, 174 SCRA 681 (1989).

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One who deals with an organization which is not duly incorporated is not estopped to deny its corporate existence when his purpose is not to avoid liability. Int’l Express Travel v. Court of Appeals, 343 SCRA 674 (2000).

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Under the law on estoppel including that under Sec. 21 of Corporation Code, those acting on behalf of an ostensible corporation and those benefited by it, knowing it to be without valid existence, are held liable as general partners. Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999).

Two Levels (1) With Fraud (2) Without Fraud

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When the incorporators represent themselves to be officers of the corporation which was never duly registered with the SEC, and engage in the name of the purported corporation in illegal recruitment, they are estopped from claiming that they are not liable as corporate officers under Sec. 25 of Corporation Code which provides that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all the debts, liabilities and damages incurred or arising as a result

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The same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil. 1 [1911] but that case pertained to a commercial partnership which required registration in the registry under the terms of the Code of Commerce).

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thereof. People v. Garcia, 271 SCRA 621 (1997); People v. Pineda, G.R. No. 117010, 18 April 1997 (unpub). (1) With Fraud • Actor is liable as a general partner for debts, damages and liabilities incurred. “Corporation” cannot set up as defense that corp actually does not exist. • •

Veil will be pierced to make corporators liable. If corporation sues the other party, it cannot resist obligation by saying that no corp exist.

(2) Without Fraud • Actors are liable as limited partner.

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Corporation by estoppel applies to save the contract but juridical entity is then broken down to make actors liable.

Note: Both in bad faith: Corporation by estoppel does not apply. (Pari Delicto Doctrine, or the contract is recissible)

(e) Close Sec. 96. Definition and applicability of Title. A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code.


ARIS S. MANGUERA Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides. Jack’s Lecture CLOSE CORPORATIONS This is a new title, made in recognition of the fact that the overwhelming majority of the corporations are family corps. In many family corporations here, the set-up is such that the husband is the president, the wife is the treasurer, but it is the wife who is actually running the corp. The husband is just the nominal figurehead. Ex. Tesoro Handicraft. A close corp. Has a technical meaning in the law. For it to be a close corp., the articles must provide that it cannot have more than 20 stockholders. There should be restrictions on the transfer of the shares, like usually it will be provided that if a stockholder wants to sell his share, he must first offer it to the other stockholders. Only if they are not willing to buy can he offer it to an outsider. Or it may also provide that if no stockholder is willing to buy the shares, then he must offer it to the corporation before offering to an outsider. The corporation shall not be listed in any stock exchange. The law says that the mere fact that a corp. is controlled by another corp. does not make it a close corp. The articles must contain the features mentioned in the law. But corps. Engaged in mining, oil companies, stock exchanges, banks, insurance companies, public utilities, schools, and corps. vested with public interest are not allowed to be close corps. Because they're engaged in lines of business vested with public interest and so they should be subject to regulation and close scrutiny. The law says the articles may provide for classification of shares and qualifications for owning them. For example, you have three brothers who form a close corp. So they may provide: a) we will classify these shares into class a, class b, class c. Only the members of the family of the first brother can own class a shares. Only members of 2 nd brother can own class b shares, and class c shares can be owned only by members of the 3rd brother; b) we will have nine (9) directors, and 3 will be

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elected by holders of class a shares; c) can provide for a greater quorum or voting requirements. It can be provided that you will need three fourths (3/4) majority to approve any action by the board, any action by the stockholder. Why? Because each group would want to be protected for otherwise if the two groups combine they can get anything approved, like there would be two thirds. And so the third group would want to be protected; d) the articles may provide that if it's the stockholders and not the board who will manage the affairs and that there is no need for formal meetings, if the stockholders will be the directors, then they will be subject to the same liabilities as directors.

•

See page 706-736 of CLV’s textbook or page 909 of CLV’s Commercial Law Reviewer (2007).

(f) Educational Sec. 106. Incorporation Educational corporations shall be governed by special laws and by the general provisions of this Code. (n) Sec. 107. Pre-requisites to incorporation Except upon favorable recommendation of the Ministry of Education and Culture, the Securities and Exchange Commission shall not accept or approve the articles of incorporation and by-laws of any educational institution. (168a) Sec. 108. Board of trustees Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5). Unless otherwise provided in the articles of incorporation on the bylaws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority of trustees shall be


ARIS S. MANGUERA defined in the by-laws. For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations. (169a)

•

See page 917 of CLV’s Commercial Law Reviewer (2007).

(g) Religious: sole and aggregate Sec. 109. Classes of religious corporations Religious corporations may be incorporated by one or more persons. Such corporations may be classified into corporations sole and religious societies. Religious corporations shall be governed by this Chapter and by the general provisions on non-stock corporations insofar as they may be applicable. (n) Sec. 110. Corporation sole For the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. (154a) Sec. 111. Articles of incorporation In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file with the Securities and Exchange Commission articles of incorporation setting forth the following: 1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious denomination, sect or church and that he desires to become a corporation sole; 2. That the rules, regulations and discipline of his religious denomination, sect or church are not inconsistent with his becoming a corporation sole and

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do not forbid it; 3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with the administration of the temporalities and the management of the affairs, estate and properties of his religious denomination, sect or church within his territorial jurisdiction, describing such territorial jurisdiction; 4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi of presiding elder is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect or church to which he belongs; and 5. The place where the principal office of the corporation sole is to be established and located, which place must be within the Philippines. The articles of incorporation may include any other provision not contrary to law for the regulation of the affairs of the corporation. (n) Sec. 112. Submission of the articles of incorporation The articles of incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public. From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof. (n) Sec. 113. Acquisition and alienation of property


ARIS S. MANGUERA Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the Court of First Instance of the province where the property is situated upon proof made to the satisfaction of the court that notice of the application for leave to sell or mortgage has been given by publication or otherwise in such manner and for such time as said court may have directed, and that it is to the interest of the corporation that leave to sell or mortgage should be granted. The application for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination, sect or church represented by the corporation sole: Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary. (159a) Sec. 114. Filling of vacancies The successors in office of any chief archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation sole shall become the corporation sole on their accession to office and shall be permitted to transact business as such on the filing with the Securities and Exchange Commission of a copy of their commission, certificate of election, or letters of appointment, duly certified by any notary public. During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church incorporated as a corporation sole, the person or persons authorized and empowered by the rules, regulations or discipline of the religious denomination, sect or church represented by the corporation sole to administer the temporalities and manage the affairs, estate and properties of the corporation sole during the vacancy shall exercise all the powers and authority of the corporation sole during such vacancy. (158a) Sec. 115. Dissolution

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A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Securities and Exchange Commission a verified declaration of dissolution. The declaration of dissolution shall set forth: 1. The name of the corporation; 2. The reason for dissolution and winding up; 3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or church; 4. The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation. Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs. (n) Sec. 116. Religious societies Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least twothirds (2/3) of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties and estate by filing with the Securities and Exchange Commission, articles of incorporation verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious society or religious order, or diocese, synod, or district organization of the religious denomination, sect or church, setting forth the following: 1. That the religious society or religious order, or diocese, synod, or district organization is a religious organization of a religious denomination, sect or church; 2. That at least two-thirds (2/3) of its membership have given their written consent or have voted to incorporate, at a duly convened meeting of the body;


ARIS S. MANGUERA 3. That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious denomination, sect, or church of which it forms a part; 4. That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate; 5. The place where the principal office of the corporation is to be established and located, which place must be within the Philippines; and 6. The names, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese, synod, or district organization to serve for the first year or such other period as may be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district organization, the board of trustees to be not less than five (5) nor more than fifteen (15). (160a)

•

See page 918 of CLV’ Commercial Law Reviewer (2007).

(h) Special charter Sec. 4. Corporations created by special laws or charters Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable.

(i) Foreign Sec. 123. Definition and rights of foreign corporations For the purposes of this Code, a foreign corporation is 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. It shall have the right to transact business in the Philippines after it shall have obtained a

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ARIS S. MANGUERA artificial bodies of its own creation, are in the same category as ordinary persons. Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001).

license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency. (n)

•

See page 799 of CLV’s textbook or page 946 of CLV’s Commercial Law Reviewer.

•

Although Boy Scouts of the Philippines does not receive any monetary or financial subsidy from the Government, and its funds and assets are not considered government in nature and not subject to audit by the COA, the fact that it received a special charter from the government, that its governing board are appointed by the Government, and that its purpose are of public character, for they pertain to the educational, civic and social development of the youth which constitute a very substantial and important part of the nation, it is not a public corporation in the same sense that municipal corporation or local governments are public corporation since its does not govern a portion of the state, but it also does not have proprietary functions in the same sense that the functions or activities of government-owned or controlled corporations, is may still be considered as such, or under the 1987 Administrative Code as an instrumentality of the Government, and it employees are subject to the Civil Service Law. Boy Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991).

•

But being a GOCC makes it liable for laws and provisions applicable to the Government or its entities and subject to the control of the Government. Cervantes v. Auditor General, 91 Phil. 359 (1952).

•

Beyond cavil, a GOCC has a personality of its own, distinct and separate from that of the government, and the intervention in a transaction of the Office of the President through the Executive Secretary does not change the independent existence of a government entity as it deals with another government entity. PUP v. Court of Appeals, 368 SCRA 691 (2001).

•

The doctrine that employees of GOCCs, whether created by special law or formed as subsidiaries under the general

(j) GOCC • Government’s majority shares does not make an entity a public corporation. National Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 (1924).

•

A corporation is created by operation of law under the Corporation Code while a government corporation is normally created by special law referred to often as a charter. Bliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 (1994).

•

The test to determine whether a corporation is government owned or controlled, or private in nature is simple. Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation law? Those with special charters are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members of the GSIS. Camparedondo v. NLRC, 312 SCRA 47 (1999)

•

While public benefit and public welfare may be attributable to the operation of the Bases Conversion and Development Authority (BCDA), yet it is certain that the functions it performs are basically proprietary in nature—the promotion of economic and social development of Central Luzon, particularly, and the country’s goal for enhancement. Therefore, the rule that prescription does not run against the State will not apply to BCDA, it being said that when title of the Republic has been divested, its grantees, although


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corporation law are governed by the Civil Service Law and not by the Labor Code, has been supplanted by the 1987 Constitution. The present doctrine in determining whether a GOCC is subject to the Civil Service Law is the manner of its creation, such that government corporations created by special charter are subject the Civil Service Law, while those incorporated under the general corporation law are governed by the Labor Code. PNOC-Energy Development Corp. v. NLRC, 201 SCRA 487 (1991); Davao City Water District v. Civil Service Commission, 201 SCRA 593 (1991).

•

•

Section 31 of Corporation Code (Liability of Directors and Officers) is applicable to corporations which have been organized by special charters since Sec. 4 of Corporation Code renders the provisions supplementarily applicable to all corporations, including those with special or individual charters, such as cooperatives organized under P.D. 269, so long as those provisions are not inconsistent with such charters. Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992). Water districts can validly exists as corporate entities under PD 198, and provided they are government-owned or controlled, and their board of directors and other personnel are government employees subject to civil service laws and anti-graft laws. Feliciano v. Commission on Audit, 419 SCRA 363 (2004).

(k) Homeowner’s Associations (Section 4 and 26 of RA 8763, March 7, 2000) Republic Act No. 8763 (March 7, 2000) Section 4. Home Guarantee Corporation. The Home Insurance and Guarantee Corporation is hereby renamed as the Home Guarantee Corporation, hereinafter refereed to as the Corporation, which shall have its principal office in Metropolitan Manila and shall exist for a period of 50 years from December 15, 2000. The Corporation may


ARIS S. MANGUERA establish such offices, agencies, subsidiaries, or branches anywhere in the Philippines as its operations would require and its Board of Directors would determine. Section 26. Powers over Homeowners Associations. The powers, authorities and responsibilities vested in the Corporation with respect to homeowners association under Republic Act No. 580, as amended by Executive Order No. 535 is hereby transferred to the Housing and Land Use Regulatory Board (HLURB). Subject to existing laws, the HLURB is hereby authorized to create additional positions and augment its present budget as may be needed for the operation and maintenance of the newly created unit or office as a consequence of the transfer of functions and powers. Pending the approval of the HLURB Revised Staffing Organizational Plan and release of budgetary allocations thereof, the Corporation shall extend technical, operational, and administrative assistance to the HLURB as may be mutually deemed necessary to ensure smooth turnover of functions. However, such assistance shall not extend beyond a period of 1 year from the date of effectivity of this Act.

•

Registration is made before the HLURB.

1.6 Cases Lozano v. delos Angeles and Anda (June 19, 1997) • The doctrine of corporation by estoppel cannot override jurisdictional requirements- jurisdiction is fixed by law and cannot be acquired through or waived, enlarged or diminished by, any act or omission of the parties, and neither can it be conferred by the acquiescence of the court. • Corporation by estoppel is founded on principles of equity and is designed to prevent injustice and unfairness, and where there is no third person involved and the conflict arises only among those assuming the form of a corporation, who know that it has not been registered, there is no corporation by estoppel.

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International Express Travel v. CA (October 19, 2000) (1) The Federation has no juridical personality. Indeed, R.A. 3135 and P.D. No. 604 recognized the juridical existence of national sports association. This may even be gleaned from the powers and functions granted to these association. However, these laws only provided the manner by which these entities may acquire juridical personality. The corporate status of these associations does not automatically take place. These laws actually requires that before an entity be considered as a national sports association such must recognized by the accrediting organization (i.e. PAAF). This fact of recognition, however the President of the Federation failed to substantiate. (2) The President must be held liable in accordance with the principle that any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and become personally liable for contracts entered into or for other acts performed as such agent. (3) The doctrine of corporate estoppel is not applicable. It is only applied to a third party when he tries to escape liability on a contract from which he has benefited. In the case at bar, the petitioner is not trying to escape liability but rather is the one claiming it.


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2. FORMATION AND ORGANIZATION OF CORPORATIONS

must be able to determine who is the promoter. He must be the one who takes initiative on the founding and organization of the business venture which eventually ends up as the corporation being organized. Q: At the promoter’s stage there is no juridical personality until SEC issues the certificate of Incorporation. Until the certificate is issued, the stage of the de facto corporation has not yet been reached. Prior to the de facto corporation stage, what then is the status of the contract entered into by a promoter for and in behalf of the person or agent who had undertaken the transaction? A: Unenforceable. It is not binding upon the corporation because it has not given consent to the authority of the person or agent who had undertaken the transaction.

(Page 617 of CLV’s Commercial Law Reviewer)

2.1 Who may form a corporation? Sec. 10. Number and qualifications of incorporators Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation.

Q: How can ratification be done? A: Ratification can be done in two ways: (1)express ratification- a mere board resolution making the corporation liable by accepting the contract and (2) implied ratification- by accepting of benefits.

2.2 Steps in formation of a corporation

Q: What is the effect of promoter’s contract on the corp and other contracting parties? A: As to the corp, it is voidable, as to other contracting parties, it is valid and enforceable

(a) Promotion CLV Class Notes PROMOTER’S CONTRACT CORP BY ESTOPPELDE FACTO or DE JUREDISSOLUTION Q: In order to reach the level of corporation by estoppel, what is the essential ingredient of such doctrine? A: Where there is a representation that a corporation exists when in fact there is none and at least one party thought there was a corporation.

Who are promoters? • “Promoter” is a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. (Sec. 3.10, Securities Regulation Code [R.A. 8799]) CLV Class Notes Q: Differentiate a promoter from an incorporator. A: A promoter begins or initiates the formation of a corporation while an incorporator is one of the initial members of the SH’s CLV: The definition of promoter is important to determine the liability for promoter’s contract. Before you can make a promoter liable, you


Catindig: Promotion is not a necessary stage!

Nature of Pre-incorporation Agreements • Under Sec 60 any contract for the acquisition of unissued stock in a corporation still to be formed shall be deemed a subscription within the meaning of the Corporation Code. •

Under Sec 61, a subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of 6 mos. from the date of subscription, unless all of the other subscriber consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription. However, no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to SEC.

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•

Secs 60 and 61 have effectively adopted in our jurisdiction a fused version of both “contract theory” and the “offer theory” in defining the nature of pre-incorporation subscription agreements.

o Offer Theory- construes subscription agreement as only continuing offers to proposed corporations, which offer does not ripen into a contract until accepted by the corporation when organized. The obvious result of the offer theory is that it allows withdrawal of subscriber at least before the corporation comes into existence and accepts the offer.

o Contract Theory- A subscription agreement among several persons to take shares in a proposed corporation becomes a binding contract and is irrevocable from time of subscription, unless cancelled by all parties before acceptance by the corporation. •

Subscription agreements are “special contracts” in the sense that they go beyond what we would term as ordinary contracts. Although subscription agreements are contracts between the subscriber and the corporation, they are at the same time deemed to be contracts among the stockholders of the corporation.

Theories on Liabilities for Promoter’s Contracts • Without ratification by a corporation after its due incorporation, a contract entered into in behalf of a corporation yet to be organized or still in the process of incorporation is void as against the corporation (Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223 [1937])

(b) Drafting of Articles of Incorporation What should be contained in the Articles of Incorporation?


ARIS S. MANGUERA (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l)

Corporate Name Primary Purpose Secondary Purpose or purposes Principal Office Term Incorporators Incorporating directors Capital Classification of shares Subscribers Treasurer-in-trust Special provisions

(a) Corporate Name Sec. 18. Corporate name No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is 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. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. SEC MEMO CIRCULAR NO. 14-2000 To:

All Concerned

Subject: Revised Guidelines in the Approval of Corporate and Partnership Names In implementing Section 18 of the Corporation Code of the Philippines (BP 68), the following revised guidelines in the approval of corporate and partnership names are hereby adopted for the information and guidelines of all concerned: 1.

The corporation name shall contain the word “Corporation” or its abbreviation “Corp.” or “Incorporated” or “Inc.” The partnership name shall contain the word “Company” or “Co.”. For limited partnerships, the word “Limited” or “Ltd.” shall be

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included. In case of professional partnerships, the word “Company” need not be used. 2.

3.

Terms descriptive of a business in the name shall be indicative of the primary purpose. If there are two (2) descriptive terms, the first shall refer to the primary purpose and the second shall refer to one of the secondary purposes. The name shall not be identical, misleading or confusingly similar to one already registered by another corporation or partnership with the Commission or a sole proprietorship registered with the Department of Trade and Industry. If the proposed name is similar to the name of a registered firm, the proposed name must contain at least one distinctive word different from the name of the company already registered.

4.

Business or trade name of any firm which is different from its corporate or partnership name shall be indicated in the articles of incorporation or partnership of the said firm

5.

Trade name or trademark duly registered with the Intellectual Property Office cannot be used as part of a corporate or partnership name without the consent of the owner of such trademark or trade name

ARIS S. MANGUERA the different words in the proposed name, unless there is consent from the registered firm or this firm is one of the stockholders of partners of the entity to be registered 11. The name of an internationally known foreign corporation, or one similar to it may not be used by a domestic corporation without the consent of the former 12. The term “Philippines” when used as part of the name of a subsidiary corporation shall be in parenthesis: i.e. “(Philippines)” or “(Phil.)” 13. The following names shall not be used as part of a corporate or partnership name: a.

As provided by special laws: i. ii.

6.

7.

iii.

If the name or surname of a person is used as part of a corporate or partnership name, the consent of the said person or his heirs must be submitted, except if that person is a stockholder, member, or partner of a declared national hero. If such person cannot be identified or is non-existent, an explanation for the use of such name shall be required The meaning of the initials in the name shall be disclosed in writing by the registrant

iv. v. b.

“Finance”, “Financing”, of “Finance and Investment” by corporations or partnerships not engaged in the financing business (R.A. No. 5980, as amended) “Engineer”, “Engineering”, or “Architects” as part of the corporate name (R.A. No. 546 and R.A. No. 1582) “Bank”, “Banking”, “Banker”, “Building and Loan Association”, “Trust Corporation”, “Trust Company”, or words of similar import by corporations or associations not engaged in a banking business (R.A. No. 337, as amended) “United Nations” in its full or abbreviated form cannot be part of a corporate or partnership name (R.A. No. 226 “Bonded” for corporations or partnerships with unlicensed warehouse (R.A. No. 245)

As a matter or policy:

8.

The name containing a term descriptive of a business different from the business or a registered company whose name also bears similar terms(s) used by the former may be allowed

i.

“Investments” by corporations or partnerships not organized as investment house company or holding company

9.

The name should not be patently deceptive, confusing, or contrary to existing laws

ii.

“National” by all stock corporations and partnerships

iii.

“Asean”, “Calabarzon”, and “Philippines 2000”

10. The name which contains a word identical to a word in a registered name shall not be allowed if such word is coined or has already been appropriated by a registered firm, regardless of the number of


14. The name of a dissolved firm shall not be allowed to be used by other firms within three (3) years after the approval of the dissolution

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of the corporation by the Commission, unless allowed by the last stockholders representing at least a majority of the outstanding capital stock of the dissolved firm 15. Registrant corporations or partnerships shall submit al letter of undertaking to change their corporate or partnership name in case another person of firm has acquired a prior right to the use of the said name or the name is deceptively or confusingly similar to the one already registered, unless his undertaking is already included as one of the provisions of the articles of incorporation or partnership of the registrant

•

•

These guidelines hall take effect fifteen (15) days after publication in a newspaper of general circulation

•

•

•

•

See page 293 of CLV’s book for Guidelines in Corporate Name (SEC Memorandum No. 14, series of 2000.) Parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to injure the exercise of its corporate functions, regardless of intent, may be prevented by the corporation having a prior right. Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus v. Iglesia ng Dios Kay Dristo Jesus, 372 SCRA 171 (2001). Similarity in corporate names between two corporations would cause confusion to the public especially when the purposes stated in their charter are also the same type of business. Universal Mills Corp. v. Universal Textile Mills Inc., 78 SCRA 62 (1977). Section 18 of Corporation Code expressly prohibits the use of a corporate name which is “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.” The policy behind the foregoing prohibition is to avoid fraud upon the public that will occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over


•

•

corporations. Industrial Refractories Corp. v. Court of Appeals, 390 SCRA 252 (2002); Lyceum of the Philippines v. Court of Appeals, 219 SCRA 610, 615 (1993). A corporation has no right to intervene in a suit using a name, not even its acronym, other than its registered name, as the law requires and not another name which it had not registered. Laureano Investment and Dev. Corp. v. Court of Appeals, 272 SCRA 253 (1997). There would be no denial of due process when a corporation is sued and judgment is rendered against it under its unregistered trade name, holding that “[a] corporation may be sued under the name by which it makes itself known to its workers.” Pison-Arceo Agricultural Dev. Corp. v. NLRC, 279 SCRA 312 (1997). A corporation may change its name by the amendment of its articles of incorporation, but the same is not effective until approved by the SEC. Philippine First Insurance Co. v. Hartigan, 34 SCRA 252 (1970). A change in the corporate name does not make a new corporation, and has no effect on the identity of the corporation, or on its property, rights, or liabilities. Republic Planters Bank v. Court of Appeals, 216 SCRA 738 (1992). Jack’s Lecture CORPORATE NAME No corporation name may be allowed if it is identical or deceptively or confusingly similar to that of any existing corp. And that the way the jurisprudence has developed, the name will not be allowed if it uses a dominant word in the name of another corporation, and they are engaged in the same line of business. Well, you have, for example, the case of UNIVERSAL TEXTILE MILLS and somebody formed another corporation: UNIVERSAL MILLS. The dominant word is universal, and they both engage in the same line of business. You know, the Telephone Directory is not owned by PLDT. That is prepared by the General Telephone Directory Corporation. PLDT is the one which merely collects the payment from the advertisers

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in the yellow pages. But they don't own/publish that directory. Now, there was this bunch of swindlers who formed a corporation: GENERAL DIRECTORY. They would start contacting advertisers in the yellow pages: "Ay, binago na ho 'yung set-up. Ngayon ho, we will collect the payment directly. So, we will send our collector…" You file a crim case against them for estafa, and they'll say: "NO! We are printing or own directory." And they will show it… and it is a thin directory. We filed a complaint with the SEC and the SEC ordered them to change their name because it is confusingly similar with General Telephone Directory. There was this Philippine corporation that wanted the name "Standard Phillips Corporation". Court said: that is part of the name of Phillips Electrical Lamps, Phillips export. Phillips is the dominant word… and both of them manufacture electrical appliances. On the other hand, the Court has said that Lyceum of the Phils. cannot prevent other schools from using LYCEUM because lyceum is a generic name. It means a school. Like UNIVERSITY, UE cannot prevent others from using university as part of their name because it's a generic name. So Lyceum of the Phils. cannot have an exclusive right to use lyceum because it is a generic term for schools. The same way Ateneo is a spanish word which means school. But I think what has happened is the reverse… it is a generic term that has acquired secondary meaning. You can prevent another school from using that. Well, you have this case of Carlos Valdes, the accountant, a very controversial character (Jack's side-story omitted ). His son left his company and formed the VALDES CONSULTANTS. Valdes objected to that, because it was a confusingly similar name. But the SEC said: "Eh, magkaiba naman kayo ng line of business… you are in accounting, your son set up a consultancy firm. And your clients are sophisticated big men. They know that the two are different." So the SEC allowed that. Now, the existence of a corporation begins at the time when you get your certification, issued by the SEC. That is when existence begins.

ARIS S. MANGUERA Warehouse Act says, if you are not a bonded warehouse, you cannot use that as part of your name. The SEC issued a memo circular in 1987, it was updated 2002, which says, you cannot use certain name as part of your… like engineering, architecture… as part of the corporate name because you cannot practice a profession. Or, it says there you cannot use calabarzon or national as part of your corporate name. Also you cannot use Philippines 2000 as part of your corporate name. Or any which consists of similar words… 'coz you know the records are computerized, when you apply, they will check. And the one who verifies will list down all the names which are similar to what you have. Now, you could be allowed to use that if you add your line of business, and you add another word which signifies that you are engaged in a different line of business. Like for example, you have a Golden Pawnshop Incorporated, and you have somebody running a restaurant… so, Golden Restaurants Incorporated. The SEC will allow that.

(b) Primary Purpose Sec. 14. Contents of the articles of incorporation All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are he secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such;

There are many limitations found in the law. As for example, you are not a bank, you cannot use bank as part of your name; you are not a financing company, you cannot use financing. And the law prohibits the use of United Nations as part of the business name of any company. The general Bonded


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•

The best proof of the purpose of a corporation is its articles of incorporation and by-laws. The articles of incorporation must state the primary and secondary purposes of the corporation, while the by-laws outline the administrative organization of the corporation, which, in turn, is supposed to insure or facilitate the accomplishment of said purpose.” Therefore, the Court brushed aside the contention that the corporations were organized to illegally avoid the provisions on land reform and to avoid the payment of estate taxes, as being prohibited collateral attack. Gala v. Ellice AgroIndustrial Corp., 418 SCRA 431 (2003).

ARIS S. MANGUERA articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission.

•

•

(c) Secondary Purpose Sec. 14. Contents of the articles of incorporation xxx The place where the principal office of the corporation is to be located, which must be within the Philippines; xxx

•

Place of residence of the corporation is the place of its principal office. Clavecilla Radio System v. Antillon, 19 SCRA 379 (1967) The residence of its president is not the residence of the corporation because a corporation has a personality separate and distinct from that of its officers and stockholders. Sy v. Tyson Enterprises, Inc., 119 SCRA 367 (1982). UP Class Notes Must be within RP so that service of summons may be easily made; establishes the residence of the corporation which is important in determining the venue of actions by or against the corporation (SEC Circular No. 3 dated February 16, 2006)

(e) Term Sec. 11. Corporate term A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the


No extension of term can be effected once dissolution stage has been reached, as it constitutes new business. Alhambra Cigar v. SEC, 24 SCRA 269 (1968). UP Class Notes Shall exist for a period not exceeding 50 years from the date of incorporation; may be extended for period not exceeding 50 years by an indefinite number of amendments (meaning that the corporation can virtually live forever); no extension can be made earlier than 5 years before the expiry date unless there are justifiable reasons for the earlier extension

(d) Principal Office

•

Not exceeding 50 years

(f) Incorporators Sec. 10. Number and qualifications of incorporators. Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation.

•

Therefore, a member can no longer exist as incorporator in a stock corporation.

(g) Incorporating Directors Sec. 14. Contents of the articles of incorporation xxx 7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are

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ARIS S. MANGUERA the subscription must be paid. You can form a subsidiary where 5 individuals will subscribe to 1 share each to qualify for the board —you must own at least 1 share to be an incorporator, the rest of the shares will be subscribed by the holding corporation and that will satisfy the 25-25 rule, because that holding corporation paid for the subscription. In computing 25-25 rule, subscriptions made by a corporation will be included. Corporations can be subscribers, only that they can not be incorporators.

duly elected and qualified in accordance with this Code; xxx

(h) Capital (i) (ii) (iii) (iv) (v) (vi)

Authorized (Sec. 12) Subscribed (Sec. 13) Paid-up (Sec. 13) Paid-in surplus Outstanding Issued

(i) Authorized Sec. 12. Minimum capital stock required of stock corporations Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law, and subject to the provisions of the following section. •

(ii) Subscribed Contractually enforceable. Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. Jack’s Lecture 25-25 RULE When you form a corporation, at least 25% of the authorized capital stock must be subscribed and at least 25% of


(iii) (iv) (v) (vi)

Paid-up (Sec. 13) Paid-in surplus • Paid in excess of par value Outstanding • Owned by parties other than the corporation itself Issued • Legally, it is synonymous with outstanding shares.

(i) Classification of Shares (i) (ii) (iii) (iv) (v) (vi) (vii) (viii)

Common (Sec. 6) Preferred (Sec. 6) Par Value and No par value shares (Sec. 6) Founder’s shares (Sec. 7) Redeemable (Sec. 8) Treasury (Sec. 9) Convertible Participating

Sec. 6. Classification of shares The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public

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ARIS S. MANGUERA

utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock.

6. Merger or consolidation of the corporation with another corporation or other corporations;

Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission.

7. Investment of corporate funds in another corporation or business in accordance with this Code; and

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock;


8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.

(i)

(ii)

Common (Sec. 6) • One which entitles the holder thereof to a pro rata division of the profits, if there are any, and in its assets upon dissolution, without any preference or advantage in that respect over other stockholder or class of stockholders except preferred stockholders. (Page 84 of De Leon (2006) Preferred (Sec. 6) • One with a stated par value which entitles the holder to certain preferences over the holders of common stock. Page 84 of De Leon (2006)

UP Class Notes Shares that carry a preferential claim either to dividend or assets but usually carries no voting rights; only shares that can be deprived of voting rights Jack’s Lecture PREFFERED SHARES Preferences given to preferred shares should not violate the law. You can not provide that holder of preferred shares will be paid ahead of the creditors of the corporation, and you can not issue preferred shares with no par value shares. It must be noted that preferred shares must have par value. The preferred shares may be given preference in the distribution of dividends. If the profits are not enough to give everybody dividends, the holders of preferred shares get a first crack before the holders of the common shares get anything. Or they may have preference in the distribution of the assets in case of liquidation.

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ARIS S. MANGUERA P10,000.00 each. So pwedeng magbago-bago ang stated value. And those shares would be equal irrespective of the difference in the stated value. So, if you hold a stockholder's meeting, the one whose no par value share with stated value of P10,000 will have one(1) vote, same as the one who has a stated value of P5.00. If the corporation declares a dividend and says, `we will pay P100.00 per share---the one with stated value of P10,000 will get P100, and the one with P5.00 will get the same. They are all equal irrespective of the stated value. (jack said this is useful for estate planning. Here's a father, he forms a corporation where his children will subscribe to no par value with stated value of P5 each, after that, he transfers all the properties to the corporation the children who subscribed with a stated value of P5 each, they probably own P20,000 each with a stated value of P5. Then , the father would transfer his properties there and get - say, 10,000 shares with a stated value of P10,000 each. Suppose you now dissolve the corporation and distribute the properties by way of liquidating dividends. The children will get the bulk of the properties. You could keep the properties there. This is the way the father could dilute his transfer of properties.)

NO PAR VALUE SHARES There are limitations on the power to classify shares of stocks. Banks, trust companies, insurance companies, public utilities, building and loan associations are not allowed to issue no par value shares. When a corporation has no par value shares, no amount will be mentioned. Unlike corporations with par value shares, for ex., the Authorized Capital Stock (ACS) of the corporation shall be P1M consisting of 10,000 shares with a par value of P100 each, if you have a corporation with no par value shares, it will simply be, the ACS of the corporation consists of 10,000 no par value shares---no amount is mentioned. That's why these banks, trust companies, etc. are not allowed to have no par value shares because these are enterprises which are required by law to have a minimum paid-up capital - so that you can easily see right away - has it met the minimum paid-up capital, because if its shares have no par value - you cannot see if it has satisfied the required minimum paid-up capital.

(iii)

Par Value and No par value shares (Sec. 6) • Par value share is one with a specific money value fixed in the articles of incorporation and appearing in the certificate stock. • No par value share is one without any stated value appearing on the face of the certificate of stock. In other words, it is a stock which does not state how much money it represents. Jack’s Lecture STATED VALUE (NO PAR VALUE SHARE) No par value shares must also have a stated value. When you form a corporation with no par value shares, the articles of incorporation states, the authorized capital stock shall consist of, for example, 10,000 no par value shares. Those shares will also be given a stated value, so the director says, `ok, the stated value we will issue initially upon incorporation, will be P5.00. We will have 3,000 shares and that will be subscribed with a stated value of P5.00. Now, the business was good, they are raking in the money, so the director decided to declare a stock dividend---`we will have a stock dividend with a stated value of P300.00 each. Business was again good---the director again declared stock dividend, this time with a stated value of


(iv)

Founder’s shares (Sec. 7)

Sec. 7. Founders' shares Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. Jack’s Lecture FOUNDER'S SHARES They may be given certain rights not enjoyed by the owner of other stocks but if they are given the exclusive right to vote, that will be valid for 5 years only. Like this Baguio Country Club, they used to have only 100 shares. They said we should broaden our membership in order to raise more money to improve the facilities and to expand. The articles were amended and those 100 shares were converted to founder's shares. They created 2,000 common shares which were then sold to the public. But this was the scheme: Each owner of 1 founder share subscribed to 20 shares, 20 common shares at par value, and

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then he turned around and sold the 5 shares at P60,000 each. The price was computed in such a way that what you will get from selling 5 shares would be enough to pay for the 20 shares that you have subscribed. So, at the end of exercise, you will have 15 shares without shelling out any money because the price you will get from selling 5 shares will cover everything. These founder's shares, for 5 years, they have exclusive voting rights. After 5 years, everybody has the same rights.

•

ARIS S. MANGUERA to be stated on the certificate o stock. Upon maturity of redeemable shares, they should be paid by the corporation even if the latter has no unrestricted retained earnings.

•

Founders’ shares have been defined as “shares issued to the organizers and promoters of a corporation in consideration of some supposed right or property. Such shares usually share in the profits only after a certain percentage has been paid upon the common stock, but are often given special privileges over other stocks as to voting and as to division of profits in excess of a minimum dividend on the common stock.

Catindig Class Notes Q: Pedro needs 1M. Juan has 1M. Juan wants to invest with conditions.(a) 5 year period (b) Dividends 10% annually What do you do? A: (a) Issue redeemable shares (b) Provide that it will be given at a rate 10% per annum

UP Class Notes Shares given to the original incorporators; may be given certain rights and privileges not enjoyed by owners of other classes of shares; where the exclusive right to vote and be voted for in the election of directors is granted, such right to vote shall be for a limited period not exceeding 5 years subject to the SEC approval

(v)

Q: What if Juan wish to be a holder of common stock: A: Give him with convertability feature. Tip: Always indicate conversion ratio. Q: What are the special advantages of redeemable shares? A: (1) Redeemability; (2)They should be paid by the corporation even if there is no unrestricted retained earnings; (3) If the corporation is not liquid, it can borrow for the purpose.

Redeemable (Sec. 8)

Sec. 8. Redeemable shares Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares. Jack’s Lecture REDEEMABLE SHARES Redeemable shares may be issued by the corporation when it is expressly provided in the articles of incorporation. Terms and conditions affecting redeemable shares are required to be provided for in the articles of incorporation and


Redeemable or callable shares, usually preferred, which by their terms are redeemable at a fixed date or at the option of either the issuing corporation or the stockholder or both at a certain redemption price.

(vi)

Treasury (Sec. 9)

Sec. 9. Treasury shares Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors.

•

Treasury shares are share which have been lawfully issued by the corporation and fully paid for and later reacquired by either purchase, redemption, donation, forfeiture and other lawful means. Jack’s Lecture

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TREASURY SHARES

include stock dividends that may be declared. So these shares of Reese which were acquired by the corporation had these 2 features: they could vote and they could receive stock dividends. These are inconsistent with the nature of treasury shares… because a treasury share is not outstanding although it is not cancelled for it can be re-issued. The only thing you can do with it is to re-issue it. Now, when the Board re-issued it, they can sell it at any reasonable price… because you don't have to sell it for its par value as its minimum, because remember, it is unissued… remember, when you're going to sell or offer for subscription, part of the authorized but unissued share, the corporation must sell at least at par value. Otherwise that would be watered stock. But in the case of treasury shares, that has already been paid for by the original SH, so the corporation already got the money equivalent to the par value. So when the corporation re-issues that, suppose they offer it for sale, they can fix any price. It can even be less than par value, let's say the book value is less than the par value. Now if the corporation decides to declare that as dividend it will not be declared as stock dividend, it will be declared as property dividend. Because that is property owned by the corporation you declare stock dividends from the authorized but unissued shares… but these are shares (treasury) which have already been issued but acquired by the corp. So they are properties belonging to the corporation. So if the corporation distributes them, as dividends, they will be property dividend, not stock dividend.

Then you have these treasury shares. These are shares which have been fully issued and fully paid for but subsequently re-acquired by the issuing corporation by purchase, redemption, donation, or some other lawful means. Like for instance if a stockholder (SH) defaulted when a call was made for SH to pay their unpaid subscription, and SH failed to pay… and so shares sold at public auction and the corporation acquired it. Now the SC has said that treasury shares are in limbo… they are not outstanding, but neither are they cancelled. They have already been issued. Now when the corporation reacquires them, they are not cancelled, but they are not outstanding… so in the meantime, they are frozen.. they are in limbo. They cannot vote, they cannot receive dividends. The only thing you can do with them is to re-issue them. That is the only thing you can do. Well, you have this case (sorry! can't understand the case title)… There is this law office: Rossell Carascosso Anda (RCA), used to be the biggest law firm in Asia… it was the retained counsel of all the big companies like Shell, Caltex, SMC, Bank of America, Citibank… Now, Reese (I spell it as I hear it ) one of the controlling stockholders of the Manila Trading and Supply Company, wanted to transfer the shares to his friends without any tax consequence. So what was the bright scheme concocted by this RCA? Reese executed a Trust Agreement (TA). He appointed the Law Office (RCA) as trustee and transferred to the law office his shares of stocks. The TA included stock dividends. Upon the death of Reese the corporation was supposed to buy the shares... but in the meanwhile, the trustees would have the right to vote the shares of stocks… and as I said stock dividends are also covered by that. So what happened? Reese died. The corporation bought the shares. The remaining SH were the friends of Reese. Then the corporation now turns around and declares the shares as stock dividends of existing SH… stock dividends have no tax consequence…. So the remaining SH, all friends of Reese would acquire the shares without paying a single centavo… because the corporation bought the shares, and they said: "treasury shares yan eh!" So the corporation now declared it as a stock dividend, and so the remaining SH got it — they got the shares of Reese without paying anything… Now the Court said: "NO! These are not treasury shares!" why? Because the TA provided that the trustees would vote the shares and that it also provided that the trust would


(vii) Convertible • Convertible share is share which is convertible or changeable by the stockholder form one class to another class (such as from preferred to common) at a certain price and within a certain period. (Page 86 of De Leon, 2006) (viii) Participating Catindig Class Notes Participating shares impinges upon the rights of the common shares to the residual corporate assets—hence, participating shares not usually issued.

(j) Subscribers Sec. 14. Contents of the articles of incorporation

xxx 8. If it be a stock corporation, the amount of its authorized

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capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; xxx

ARIS S. MANGUERA (iii)

High quorum and/ or high voting requirements

Documents accompanying the Articles (See page 733 of CLV’s Commercial Law Review Book, 2007) Sec. 15. Forms of Articles of Incorporation Unless otherwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the following form:

(k) Treasurer in Trust • The person elected by the subscribers as Treasurer of the corporation at the time of the incorporation who is named as such in the AoI and who has been authorized to receive for and in the name of the corporation, all subscriptions, fees, contributions or donations paid of given by the subscribers or members. (UP Reviewer) • Not a regular treasurer • The treasurer who signs the treasurer’s affidavit in Section 15 (l) Special Provisions (i)

(ii)

Expanded pre-emptive rights • Pre-emptive right is the stockholder’s right to SUBSCRIBE to all issues or disposition of shares of any class in proportion of his stockholdings. • See Section 39 Pre-emptive right includes reissuance of TS. • See page 832 of CLR (2007) Right of First Refusal • See page 673 of CLV’s Commercial Law Reviewer Old Edition

Catindig Class Notes Tip: Right to first refusal should be accompanied by: (1) time to get approval and (2) Right to assign.


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ARTICLES OF INCORPORATION

.

OF __________________________ (Name of Corporation) KNOW ALL MEN BY THESE PRESENTS: The undersigned incorporators, all of legal age and a majority of whom are residents of the Philippines, have this day voluntarily agreed to form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines; AND WE HEREBY CERTIFY: FIRST: That the name of said corporation shall be ".............................................., INC. or CORPORATION"; SECOND: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one purpose, indicate primary and secondary purposes); THIRD: That the principal office of the corporation is located in the City/Municipality of ............................................., Province of .................................................., Philippines; FOURTH: That the term for which said corporation is to exist is ................ years from and after the date of issuance of the certificate of incorporation; FIFTH: That the names, nationalities and residences of the incorporators of the corporation are as follows: NAME

NATIONALITY

RESIDENCE

xxx SIXTH: That the number of directors or trustees of the corporation shall be .............; and the names, nationalities and residences of the first directors or trustees of the corporation are as follows: NAME

NATIONALITY

xxx

RESIDENCE

NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of the total subscription as follows: Name of Subscriber

Amount Subscribed

Total Paid-In

xxx (Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock, Nos. 7, 8 and 9 of the above articles may be modified accordingly, and it is sufficient if the articles state the amount of capital or money contributed or donated by specified persons, stating the names, nationalities and residences of the contributors or donors and the respective amount given by each.) TENTH: That ............ has been elected by the subscribers as Treasurer of the Corporation to act as such until his successor is duly elected and qualified in accordance with the by-laws, and that as such Treasurer, he has been authorized to receive for and in the name and for the benefit of the corporation, all subscription (or fees) or contributions or donations paid or given by the subscribers or members. ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following): "No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to recorded in the proper books of the corporation and this restriction shall be indicated in all stock certificates issued by the corporation." IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this ................... day of .............................., 19 ........... in the City/Municipality of ........................................, Province of ................................................., Republic of the Philippines. ............................................ ............................................. ............................................ .............................................

xxx

................................................

SEVENTH: That the authorized capital stock of the corporation is ............ (P......................) PESOS in lawful money of the Philippines, divided into ............... shares with the par value of ................................... (P.......................) Pesos per share.

(Names and signatures of the incorporators)

(In case all the share are without par value):

............................................ .............................................

That the capital stock of the corporation is ........................... shares without par value. (In case some shares have par value and some are without par value): That the capital stock of said corporation consists of ........................ shares of which ....................... shares are of the par value of .............................. (P.....................) PESOS each, and of which ................................ shares are without par value.

(Notarial Acknowledgment)

SIGNED IN THE PRESENCE OF:

EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated has been subscribed as follows: Name of Subscriber Nationality No of Shares Amount Subscribed

Subscribed


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ARIS S. MANGUERA TREASURER'S AFFIDAVIT

3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if false;

REPUBLIC OF THE PHILIPPINES ) CITY/MUNICIPALITY OF ) S.S. PROVINCE OF )

4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution.

I, ...................................., being duly sworn, depose and say: That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as such until my successor has been duly elected and qualified in accordance with the by-laws of the corporation, and that as such Treasurer, I hereby certify under oath that at least 25% of the authorized capital stock of the corporation has been subscribed and at least 25% of the total subscription has been paid, and received by me, in cash or property, in the amount of not less than P5,000.00, in accordance with the Corporation Code. ....................................... (Signature of Treasurer) SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality of .................................. Province of .........................................., this ............. day of ........................., 19 ........; by ............................................ with Res. Cert. No. ..................... issued at ................. on ......................, 19 ..........

NOTARY PUBLIC My commission expires on ..........................., 19 ........ Doc. No. ...............; Page No. ...............; Book No. ..............; Series of 19..... (7a)

Sec. 17. Grounds when articles of incorporation or amendment may be rejected or disapproved The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval: 1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations;


No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law.

(c) Filing of Articles of Incorporation and payment of fees UP Class Notes AOI and required attachments must be filed with the SEC; filing fees required here are 10% of 1% of the authorized capital stock

(d) Examination and Approval or rejection of AoI by SEC (Sec. 17) • When the proposed articles show that the object is to organize a barrio into a separate corporation for the purpose of taking possession and having control of all municipal property within the incorporated barrio and administer it exclusively for the benefit of the residents, the object is unlawful and the articles can be denied registration. Asuncion v. De Yriarte, 28 Phil. 67 (1914).

•

It is well to note that, if a corporation’s purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no authority to inquire whether the corporation has purposes other than those stated, and mandamus will lie to compel it to

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issue the certificate of incorporation.” Gala v. Ellice AgroIndustrial Corp., 418 SCRA 431 (2003). UP Class Notes Rejection is not preferred; a defective AOI may be returned by the SEC which shall give the incorporators a reasonable time to correct or modify the objectionable portions without the necessity of filing the same again; Grounds for rejection or disapproval: --Not substantially in the form prescribed by the Code -- Purposes are patently unconstitutional or are contrary to law, morals, etc. --Treasurer’s affidavit is false --Percentage of ownership of capital stock has not been complied with -- AOI of banks and other financial institutions must be filed together with a recommendation of the appropriate government agency (i.e. BSP) to the effect that such AOI is in accordance with the law

(e) Issuance of Certificate of Incorporation When does corporate existence commence? Sec. 19. Commencement of corporate existence A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law.

2.3 Cases Castillo v. Balinghasay • Section 6 of the Corp Code expressly prohibits the deprivation of voting rights, except as to “preferred” and “redeemable” shares. • Section 148 of the Corp Code expressly provides that it shall apply to corporation in existence at the time of the effectivity of the Code.


ARIS S. MANGUERA

J.G. Summit Holdings v. CA • The agreement of co-shareholders to mutually grant the right of first refusal to each other, by itself, does not constitute a violation of the provisions of the Constitution limiting land ownership to Filipinos and Filipino corporations; • If the foreign shareholdings of a landholding corporation exceeds 40%, it is not the foreign stockholder’s ownership of the shares which is adversely affected but the capacity of the corporation to own land—that is, the corporation becomes disqualified to own land. • See page 833 of CLV’s CLR, 2007 P.C. Javier & Sons v. CA • A change in the corporate name does not make a new corporation, whether effected by a special act or under a general law. Catindig Class Notes Catindig: This case (PC Javier) is not entirely correct insofar as it says that there is no law or rule requiring notice for change of name. A change in corporate name is reflected in the General Information Sheet.

Hyatt v. Goldstar • The residence or domicile of a juridical person is fixed by “law creating or recognizing” it.

2.4 Internal Organization of the corporation (a) Adoption and Approval of By-laws Sec. 46. Adoption of by-laws Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding

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capital stock, or of at least a majority of the members in case of nonstock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation.

trustees, officers and employees;

Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation.

10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. (21a)

In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the bylaws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. (20a) Sec. 47. Contents of by-laws Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or


6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and

Sec. 48. Amendments to by-laws The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. (22a and 23a)

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BY-LAWS • Intramural contract for intra-corporate relationship • Is not binding on extra-corporate parties (except if third parties have prior notice of the by laws) • Intended to regulate internal matters • Cannot contravene the charter or the laws • See page 745 of CLV’s CLR, 2007. Nature and Functions of By-Laws • As the “rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it,” by-laws are indispensable to corporations. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997). Common law Limitations on By-Laws (1) By-Laws cannot be contrary to law and charter (2) By-Laws cannot be unreasonable or contrary to the nature of ByLaws (3) By-Laws cannot discriminate By-Laws cannot be contrary to law and charter • A by-law provision granting to a stockholder permanent seat in the Board of Directors is contrary to the provision in Corporation Code requiring all members of the Board to be elected by the stockholders. Even when the members of the association may have formally adopted the provision, their action would be of no avail because no provision of the bylaws can be adopted if it is contrary to law. Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997). By-Laws cannot be unreasonable or contrary to the nature of ByLaws


ARIS S. MANGUERA

•

Authority granted to a corporation to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998).

•

By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restriction; they are always subject to the charter of the corporation. Rural Bank of Salinas, Inc. v. CA, 210 SCRA 510 (1992).

(b) Election of Directors Sec. 24. Election of directors or trustees At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from

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time to time but not sine die or indefinitely if, for any reason, no election is held, or if there not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote. Sec. 26. Report of election of directors, trustees and officers Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees, and officers elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the Securities and Exchange Commission.

•

The SEC has issued the rule requiring the filing of the General Information Sheet. (Monfort Hermanos Agricultural Dev. Corp v. Monfort III) • When the names of some of the directors who signed the board resolution does not appear in the General Information Sheet filed with the SEC, then there is doubt whether they were indeed duly elected members of the Board legally constituted to bring suit in behalf of the Corporation. (Monfort Hermanos Agricultural Dev. Corp v. Monfort III)

(c) Commencement of businesss Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a corporation If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. This provision shall not apply if the failure to organize, commence the


ARIS S. MANGUERA transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission Catindig Class Notes Upon issuance of the certificate of incorporation, the corporation must begin operation by holding organization meeting of the Board. In such meeting the following will be done: (1) (2) (3) (4)

Election of officers Adoption of resolution closing “the account” Adoption of resolution opening a new account Designating the authorized representative (signatories)

Continuous operation General Information Sheet must be file to SEC continuously for five years and Audited Financial Statements Reconciling par. 1 and par. 2: Catindig: Deemed dissolved but can be revived if the parties (incorporators) in good faith ask the SEC to confirm the status of the corporation as not de-registered or in good standing. The parties must have a good explanation.

•

“Organize” involves the election of officers, providing for the subscription and payment of the capital stock, the adoption of by-laws, and such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which the corporation was created. “Organization” relates merely to the systematization and orderly arrangement of the internal and managerial affairs and organs of the corporation. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711.

2.5 Cases Loyola Grand Villas Homeowners v. CA • By-laws may be necessary for the “government” of the corporation but these are subordinate to the Articles of Incorporation as well as the Corporation Code and related statutes.

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•

Failure to file the by-laws within the period required by law by no means tolls the automatic dissolution of a corporation. Catindig Class Notes The remedy should have been the inclusion of the word “preferred”

Sawadjaan v. CA • A corporation which has failed to file its by-laws within the prescribed period does not ipso facto lose its powers as such. • Obiter: By its failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation whose right to exercise corporate powers may not be inquired into collaterally in any private suit to which such corporations may be a party.

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


ARIS S. MANGUERA date of filing for a cause not attributable to the corporation. Sec. 17. Grounds when articles of incorporation or amendment may be rejected or disapproved The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval: 1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; 3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if false; 4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. Sec. 48. Amendments to by-laws The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or

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repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. (22a and 23a)


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ARIS S. MANGUERA composing it as well as from any other legal entity to which it may be related. This separate and distinct personality is, however, merely a fiction created by law for conveyance and to promote the ends of justice. LBP v. Court of Appeals, 364 SCRA 375 (2001).

3. THE CORPORATE ENTITY 3.1 Distinct Personality (a) Doctrine of separate juridical personality (Page 677

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of CLV’s Commercial Law Review Book, 2007) Catindig Class Notes: Q: What are the implications of the doctrine? A: (1) Limited Liability (2) Contractual Obligation (3) Non-liability for crime committed by officers (4) Liability for Torts (5) Entitlement for damages (in general) (6)Exercise of corporate powers (e.g. power to sue, to acquire properties etc) etc.

MAIN DOCTRINE: A CORPORATION HAS A PERSONALITY SEPARATE FROM ITS STOCKHOLDERS OR MEMBERS

AND

DISTINCT

A. Sources: Sec. 2 of Corp Code; Article 44, Civil Code B. Purpose: To effectively pursue business endeavors

D. Applications: (a)

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The separate juridical personality of the corporation, has features that has made it most attractive to businessmen; right of succession, limited liability, centralized management, and generally free-transferability of shares of stock. The strong juridical personality of the corporation facilitates and preserves the “going concern value” of the underlying business enterprise, saves transaction costs, and prevents disruption of the value because of investors who withdraw or who are deceased. Undermining the separate juridical personality of the corporation, necessarily dilutes any or all of its attributes. A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those persons


Majority Equity Directorship:

Ownership

and

Interlocking

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Ownership of a majority of capital stock and the fact that majority of directors of a corporation are the directors of another corporation creates no employer-employee relationship with the latter's employees. aDBP v. NLRC, 186 SCRA 841 (1990)

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Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Sunio v. NLRC , 127 SCRA 390 (1984); Asionics Philippines, Inc. v. NLRC, 290 SCRA 164 (1998); Francisco v. Mejia, 362 SCRA 738 (2001); Matutina Integrated Wood Products, Inc. v. CA, 263 SCRA 490 (1996); Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000).

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Mere substantial identity of incorporators of two corporations does not necessarily imply fraud, nor warrant the piercing of

C. Importance of Protecting Main Doctrine:

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One of the advantages of a corporate form of business organization is the limitation of an investor’s liability to the amount of the investment. This feature flows from the legal theory that a corporate entity is separate and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may be used only for legitimate purposes. On equitable considerations, the veil can be disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another corporation. aSan Juan Structural v. Court of Appeals, 296 SCRA 631 (1998).

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the veil of corporate fiction. In the absence of clear and convincing evidence to show that the corporate personalities were used to perpetuate fraud, or circumvent the law, the corporations are to be rightly treated as distinct and separate from each other. Laguio v. NLRC, 262 SCRA 715 (1996).

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Being an officer or stockholder of a corporation does not by itself make one's property also of the corporation, and viceversa, for they are separate entities, and that shareholders are in no legal sense the owners of corporate property which is owned by the corporation as a distinct legal person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991). (The Shareholders and members are covered by the main doctrine but the actors (officers) are not. They are covered by agency)

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The mere fact that one is president of the corporation does not render the property he owns or possesses the property of the corporation, since that president, as an individual, and the corporation are separate entities. Cruz v. Dalisay, 152 SCRA 487 (1987); Booc v. Bantuas, 354 SCRA 279 (2001). It is hornbook law that corporate personality is a shield against personal liability of its officers—a corporate officer and his spouse cannot be made personally liable under a trust receipt where he entered into and signed the contract clearly in his official capacity. Intestate Estate of Alexander T. Ty v. Court of Appeals, 356 SCRA 61 (2001); Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001). (c) Dealings Between Corporation and Stockholders:

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stakes in the said corporation are secured.” LBP v. Court of Appeals, 364 SCRA 375 (2001).

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Use of a controlling stockholder’s initials in the corporate name is not sufficient reason to pierce the corporate veil, since by that practice alone does it mean that the said corporation is merely a dummy of the individual stockholder. A corporation may assume any name provided it is lawful, and there is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its shareholders. LBP v. Court of Appeals, 364 SCRA 375 (2001).

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The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a collection case against the corporation, does not make such stockholder personally liable for the corporate debt, since the disposing stockholder has no personal obligation to the creditor, and it is the inherent right of the stockholder to dispose of his shares of stock anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).

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Just because two foreign companies came from the same country and closely worked together on certain projects would the conclusion arise that one was the conduit of the other, thus piercing the veil of corporate fiction. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001).

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The creation by DBP as the mother company of the three mining corporations to manage and operate the assets acquired in the foreclosure sale lest they deteriorate from nonuse and lose their value, does not indicate fraud or wrongdoing and will not constitute application of the piercing doctrine. DBP v. Court of Appeals, 363 SCRA 307 (2001).

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The facts that two corporations may be sister companies, and that they may be sharing personnel and resources, without more, is insufficient to prove that their separate corporate personalities are being used to defeat public convenience, justify wrong, protect fraud, or defend crime. Padilla v. Court of Appeals, 370 SCRA 208 (2001). [CLV: In past decisions, such situation would generally warrant alter-ego piercing.]

Having interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations. Velarde v. Lopez, 419 SCRA 422 (2004); Sesbreno v. Court of Appeals, 222 SCRA 466 (1993). (b) Being Corporate Officer:

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The fact that the majority stockholder had used his own money to pay part of the loan of the corporation cannot be used as the basis to pierce. “It is understandable that a shareholder would want to help his corporation and in the process, assure that his


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(d) On Privileges Enjoyed:

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The tax exemption clause in the charter of a corporation cannot be extended to nor enjoyed by even its controlling stockholders. Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895 (1936). (e) Obligations and Debts:

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-

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Corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's debt or credit that of the corporation. Traders Royal Bank v. Court of Appeals, 177 SCRA 789 (1989). A corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its members in their individual capacity, even when the corporation is organized for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 (1976). Stockholders have no personality to intervene in a collection case covering the loans of the corporation since the interest of shareholders in corporate property is purely inchoate. Saw v. CA, 195 SCRA 740 (1991); and vice-versa Francisco Motors Corp. v. Court of Appeals, 309 SCRA 72 (1999).

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The majority stockholder cannot be held personality liable for the attorney’s fees charged by a lawyer for representing the corporation. Laperal Dev. Corp. v. Court of Appeals, 223 SCRA 261 (1993).

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Even when the foreclosure on the corporate assets was wrongful done, stockholders have no standing to recover for themselves moral damages; otherwise, it would amount to the appropriation by, and the distribution to, such stockholders of part of the corporation’s assets before the dissolution of the corporation and the liquidation of its debts and liabilities. APT v. Court of Appeals, 300 SCRA 579 (1998).

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The obligations of a stockholder in one corporation cannot be offset from the obligation of the stockholder in a second corporation, since the corporation has a separate juridical


personality. CKH Industrial and Dev. Corp v. Court of Appeals, 272 SCRA 333 (1997). Catindig Class Notes Q: Do SHs have insurable interest over corporate assets? A: None, because corp assets are owned by the corp and not by the SHs.

(b) Piercing the veil of corporate fiction (Page 682 of CLV’s Commercial Law Review Book, 2007) Jack’s Lecture Whenever the law creates a legal device, the objective of the law is justice and fairness—if you use that device to perpetrate fraud---the law will not allow that---so you have the doctrine of piercing the veil of corporate fiction When the separate juridical personality of a corporation is used to defeat public convenience, to justify wrong, to protect fraud, to commit a crime, its separate juridical personality will be disregarded.

A. Source of Incantation The notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated as identical if the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. Gochan v. Young, 354 SCRA 207 (2001); DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001). B. Nature of Doctrine (aTraders Royal Bank v. Court of Appeals, 269 SCRA 15 [1997]) -

Piercing does not mean that corporation is absolved of liabilities. Corporation continues to be liable but piercing just includes the officers/actors liable.

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When the legal fiction of separate corporate personality is abused, such as when the same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001).

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Piercing the veil of corporation fiction is warranted only in cases when the separate legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, such that in the case of two corporations, the law will regard the corporation as merged into one. Velarde v. Lopez, 419 SCRA 422 (2004). The legal fiction of separate corporate existence is not at all times invincible and the same may be pierced when employed as a means to perpetrate a fraud, confuse legitimate issues, or used as a vehicle to promote unfair objectives or to shield an otherwise blatant violation of the prohibition against forumshopping. While it is settled that the piercing of the corporate veil has to be done with caution, this corporate fiction may be disregarded when necessary in the interest of justice. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002).

ARIS S. MANGUERA aIndophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992). (Umali is a fraud case, Indophil is an alter ego case)

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Piercing is not available when personal obligations of an individual are to be enforced against the corporation (?) Robledo v. NLRC, 238 SCRA 52 (1994).

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“The rationale behind piercing a corporation’s identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar, instead of holding certain individuals or person responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation.” aFrancisco Motors Corp. v Court of Appeals, 309 SCRA 72 (1999).

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Piercing doctrine is meant to prevent fraud, and cannot be employed when the net result would be to perpetrate fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal, 91 Phil. 786 (1952).

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The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor to shield them. Villanueva v. Adre, 172 SCRA 876 (1989).

(a) Equitable Remedy:

-

The doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. aPNB v. Ritratto Group, Inc., 362 SCRA 216 (2001). (b) Remedy of Last Resort:

-

Piercing the corporate veil is remedy of last resort and is not available when other remedies are still available. aUmali v. Court of Appeals, 189 SCRA 529 (1990).

Umali Doctrines: (1) Piercing remedy is a last resort (2) Intention must to make the corp officers personally liable (c) Purpose of Piercing:

-

Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniarily liable for corporate debts (?). Umali v. CA, 189 SCRA 529 (1990);


(d) Basis Must Be Clear Evidence:

-

To disregard the separate juridical personality of a corporation, it is elementary that the wrongdoing cannot be presumed and must be clearly and convincingly established. The organization of the corporation at the time when the relationship between the landowner and the developer were still cordial cannot be used as a basis to hold the corporation liable later on for the obligations of the landowner to the developer under the mere allegation that the corporation is being used to evade the

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performance of obligation by one of its major stockholders. Luxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999).

-

The mere assertion by a Filipino litigant against the existence of a “tandem” between two Japanese corporations cannot be the basis for piercing, which can only be applied by showing wrongdoing by clear and convincing evidence. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001).

-

To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed. In this case, the Court finds that the Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining and its transferees in the mortgage and foreclosure of the subject properties to justify the piercing of the corporate veil. DBP v. Court of Appeals, 363 SCRA 307 (2001).

-

The party seeking for the piercing of the corporate veil has the burden of presenting clear and convincing evidence to justify the setting aside of the separate corporate personality rule. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).

-

Application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002). (e) Not Applicable to Theorizing:

-

Piercing of the veil of corporate fiction is not allowed when it is resorted under a theory of co-ownership to justify continued use and possession by stockholders of corporate properties. aBoyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992).


ARIS S. MANGUERA

-

The piercing doctrine cannot be availed of to dislodge from SEC’s jurisdiction a petition for suspension of payments filed under P.D. 902-A, on the ground that the petitioning individuals should be treated as the real petitioners to the exclusion of the petitioning corporate debtor. “The doctrine of piercing the veil of corporate fiction heavily relied upon by the petitioner is entirely misplaced, as said doctrine only applies when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.” Union Bank v. Court of Appeals, 290 SCRA 198 (1998). (f) Applicable to “Third-Parties”:

-

That respondents are not stockholders of the sister corporations does not make them non-parties to this case, since it is alleged that the sister corporations are mere alter egos of the directors-petitioners, and that the sister corporations acquired the properties sought to be reconveyed to FGSRC in violation of directors-petitioners’ fiduciary duty to FGSRC. The notion of corporate entity will be pierced and the individuals composing it will be treated as identical if the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. aGochan v. Young, 354 SCRA 207 (2001). (g) Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff (?). Cruz v. Dalisay, 152 SCRA 482 (1987).

(i) When applied Instances when doctrine applied. ((Page 28 of De Leon, 2006) (1) Where a corporation functions for the benefit of a single person who has complete control over the funds and the said person is the sole owner thereof. (2) Where the corporation is merely an instrumentality, an adjunct, business conduit or alter ego of another corporation.

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(3) Where a subsidiary company is created by a parent company merely as an agency of the latter. (4) Where it appears that a corporation is merely a business conduit of its president. (5) Where a domestic corporation is controlled by aliens.* (6) Where a corporation is dissolved and its assets are transferred to another corporation to avoid a financial liability of the first corporation to its employees, both firms being owned and controlled by the same persons with the result that the second corporation should be considered a continuation and successor of the first. (7) Where all the stockholders or members of a corporation acting as individuals instead of formal corporate action, enter into an illegal, act. (8) Where a corporation is formed by a seller of a certificate of public convenience for the purpose of evading his individual contract. (Villa Rey) (9) Where a corporation is organized by an insolvent debtor to defraud his creditors (10)Where a corporation is organized as a device in order to evade an outstanding legal or equitable obligation. (11)When corporate fiction is used to shield a violation of the prohibition against forum shopping or to avoid a judgment credit, or to avoid payment of higher taxes, or to avoid inclusion of corporate asserts as part of the estate of the decedent, or to confuse legitimate issues.

ARIS S. MANGUERA

(1) Control, not mere majority or complete stock control, but complete dominion, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust acts in contravention of plaintiff’s legal rights; and (3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. (Heirs of Ramon Durano v. Uy) (See Child Learning Center v. Tagario, 2005) Catindig Class Notes: You don’t apply the control test in all cases. Normally, you would apply the control test… (di nia tinuloy yung statement) (Dean Sundiang implies that the control test is used in piercing the veil of corp fiction on the ground that the corp is a mere alter ego. (See page 240 of JRS) Q: Here are the facts: (1) (2) (3) (4)

100% ownership Same BoD Same officers Same accounting department

Is there basis for piercing? A: None. Facts are insufficient to apply piercing because no misuse of corporate fiction for fraud, crime or injustice.

Factors that will justify the application of the treatment of the doctrine of the piercing of the corporate veil: (Page 696 of CLV’s Commercial Law Review Book, 2007) (1) The parent corporation owns all or most of the capital stock of the subsidiary. (2) The parent and subsidiary corporations have common directors or officers.

Test: (Page 695 of CLV’s Commercial Law Review Book, 2007)


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ARIS S. MANGUERA

(3) The parent corporation finances the subsidiary. (4) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation. (5) The subsidiary has grossly inadequate capital. (6) The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation. (7) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department of division of the parent corporation, or its business of financial responsibility is referred to as the present corporation’s own. (8) The parent corporation uses the property of the subsidiary as its own. (9) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders form parent corporation. (10)The formal legal requirements of the subsidiary are not observed.

wrong. Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal, 91 Phil. 786 (1952).

Piercing is not available when personal obligations of an individual are to be enforced against the corporation (?) Robledo v. NLRC, 238 SCRA 52 (1994).

-

Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniarily liable for corporate debts

-

Piercing doctrine is meant to prevent fraud, and cannot be employed when the net result would be to perpetrate fraud or a


Piercing of the veil of corporate fiction is not allowed when it is resorted under a theory of co-ownership to justify continued use and possession by stockholders of corporate properties. aBoyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992).

-

The piercing doctrine cannot be availed of to dislodge from SEC’s jurisdiction a petition for suspension of payments filed under P.D. 902-A, on the ground that the petitioning individuals should be treated as the real petitioners to the exclusion of the petitioning corporate debtor. “The doctrine of piercing the veil of corporate fiction heavily relied upon by the petitioner is entirely misplaced, as said doctrine only applies when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.” Union Bank v. Court of Appeals, 290 SCRA 198 (1998).

-

Piercing is unavailable to those within the intra-corporate relationship Piercing is unavailable to a non-victim See Page 579 of CLV’s Commercial Law Review Book, Old edition)

-

Catindig Class Notes Tip: If the question is a piercing problem, be guided by the following: (1) Is there injury? (2) Is there fraud, injustice? (3) Pay attention if it is a labor case. In labor cases, courts are more lenient in applying the doctrine of piercing the corporate veil because of the policy in favor of labor.

(ii) When not applied

-

-

(iii) Consequences when veil is pierced

•

Application of the 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, or the particular obligation for which the doctrine was applied. Koppel (Phil.) Inc. v. Yatco, 77 Phil. 496 (1946); Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil. 198 (1959); Francisco v. Mejia, 362 SCRA 738 (2001).

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ARIS S. MANGUERA o

AREAS where piercing is allowed a. Fraud Piercing b. Alter-ego Piercing c. Equity cases Rundown on Piercing Application: This Court pierced the corporate veil to ward off a judgment credit, to avoid inclusion of corporate assets as part of the estate of the decedent, to escape liability arising for a debt, or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives to cover up an otherwise blatant violation of the prohibition against forum shopping. Only is these and similar instances may the veil be pierced and disregarded. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002). (i) Fraud Piercing: o

When corporate entity used to commit fraud or do a wrong

o

Most restricted one because the SC has required that allegations of fraud must clearly be proven to make a stockholder or officer liable for corporate debts and that piercing is available only when there is a claim for recovery against such stockholders or officers.

(ii) Alter-ego Piercing: o

When corporate entity merely a farce since the corporation is merely the alter ego, business conduit, or instrumentality of a person or another entity.

o

This tend to have a wider leeway in their applications and even without intending to do malice or just by being practical in costing by taking shortcuts such as housing together under closely inter-related operations two or more corporate businesses.

(iii) Equity Cases:


When piercing the corporate fiction is necessary to achieve justice or equity.

Rules in Piercing on the ground of: Fraud Alter Ego Equity (1) There must be (1) Even if the -When no fraud or fraud or evil controlling alter ego motive. stockholder of circumstances can be (2) The main action managing officer culled by the Court to must seek intends to do no warrant piercing enforcement of evil, the use of -When the corp fiction pecuniary claims the corporation as is used to confuse pertaining to the an alter ego is in legitimate issues corporations direct violation of -When the corp fiction against the central is used to raise corporate doctrine. Those technicalities officers or whose acts and (-To warrant stockholders or actuations directly application of piercing vice versa violate this central to make corporate (3) The corporate doctrine, make officer or stockholder entity has been themselves liable for the corp used in the personally liable debts or obligations, perpetration of for having evidence must be the fraud or in themselves cast shown that such offer the justification away the or stockholder was of wrong, or to protective responsible for the escape personal characteristic of corporate act, and the liability limited liability of stage can only cone (* Piercing must be separate juridical during the hearing of the remedy of last personality. the merits) resort)) (2) Others who deal with the corp may (Corporations which treat the interest have been used as of both the instruments for controlling acquisition or as stockholder and being depositaries of the corp as the products, of ill-gotten same wealth, need not be

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ARIS S. MANGUERA (3) Piercing in alter ego may prevail even no monetary claims are sought against the stockholders or officers of the corporation. (4) When the underlying business enterprise does not really change and only the medium is changed.

impleaded a separate parties to cases for they are res of the action.)

3.2 Cases De Leon v. NLRC (May 30, 2001) • When the concept of separate legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime the law will regard the corporation as an association of persons, or in cases of two corporations, merge them into one. • In this case, the Labor Arbiter was correct in applying the piercing doctrine to hold the all respondents liable for unfair labor practice and illegal termination of employment. • (Case digest at page 707 of CLV’s Commercial Law Review Book) Lipat v. Pacific Banking (April 30, 2003) • This is a case of alter ego doctrine or instrumentality rule. Catindig Class Notes Transfer per se is not illegal. IF the transfer is for the purpose of defrauding creditors… Fraudulent transfer of assets refers to the transfer of substantial assets.


Pamplona Plantation v. Tinghil (Feb 3, 2005) • In this case, the corporations have basically the same incorporators and directors and headed by the same official. Both use only one office and one payroll and are under one management. Mobilia Products Inc. v. Umezawa (March 4, 2005) • The bare fact that the respondent was the president and general manager of the petitioner corporation when the crimes charged were allegedly committed and was then a stockholder thereof does not itself deprive the court a quo of its exclusive jurisdiction over the crimes charged. The property of the corporation is not the property of the stockholders or members or of its officers who are stockholders. Jardine Davies v. JRB Realty Inc. (July 15, 2005) • The existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction, in the absence of fraud and other public policy considerations. Mendoza v. Banco Real Development Bank (September 16, 2005) • The veil will be lifted when the corporation is used by any of the directors, officers or employees as a cloak or cover for fraud or illegality or injustice. (Gala v. Ellice Corp) • Here, it is found that TVI is Mendoza and Yotoko’s mere alter ego or business conduit. They control the affairs of TVI. They transferred the assets to TVI to FGT. • Here, the fraud was committed by petitioners to the prejudice of respondent bank. Child Learning Center Inc. v. Tagario (November 25, 2005)

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•

The absence of the following elements prevents piercing the corporate veil: (1) Control/Complete dominion (2) Such control must have been used by the defendant to commit fraud or wrong in contravention of the plaintiff’s legal right (3) Control and breach of duty must proximately cause the injury or unjust loss complained of. D.R. CATV Services v. Ramos (December 9, 2005) • Here, the sheriff overstepped his authority when he attaches the property of a corporation which had not been adjudged a debtor. (Even if the judgment-debtor is a stockholder and president of the corporation.) Apex Mining Corporation Inc v. Southeast Mindanao Gold Mining Corp (June 23, 2006) • The doctrine of piercing the veil cannot be used as a vehicle to commit prohibited acts because these acts are the ones which the doctrine seeks to prevent. • In this case, the assignment of the permit in favor of SEM is utilized to circumvent the condition of non-transferability of the exploration permit. To allow SEM to avail itself of this doctrine and to approve the validity of the assignment is tantamount to sanctioning illegal act which is what the doctrine precisely seeks to forestall.

3.3 Is a corporation entitled to moral damages? It depends. Generally, NO. If arising from libel, slander, or moral defamation, then a claim for damages may be made. -

A corporation, being an artificial person, cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are the basis for moral damages under Art 2217 of the Civil Code. However, a corporation may have good reputation which, if besmirched, may be a ground for the award of moral damages. (Mambulao vs. PNB, APT vs. CA)


ARIS S. MANGUERA

-

-

-

A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, emotions nor senses, therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and grief of life- all of which cannot be suffered by an artificial person. (Prime White Cement vs. IAC,1993) The statement in People vs. Manero and Mambulao vs. PNB, that a corporation may recover moral damages if it “has a good reputation that is debased, resulting in social humiliation” is an obiter dictum. Recovery of a corporation would be under Articles 19, 20, 21 of the Civil Code, but which requires a clear proof of malice or bad faith. (ABS-CBN vs. CA,1999) An educational corporation’s claim for moral damages arising from libel falls under Article 2219(7) of the Civil Code, which expressly authorizes the recovery of moral damages in cases of libel, slander or nay other form of defamation, and does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person can validly complain for libel or any other form of defamation and claim for moral damages. ( Filipinas Broadcasting Network v. Ago Medical and Educational Center, 448 SCRA 413, 2005)

3.4 Corporate Liabilites A Corporation as a person is: Entitled to: Equal Protection Clauses Unreasonable Searches and Seizure Damages under Arts. 19, 20. 21 Not entitled to: Privilege against Self-incrimination - Moral Damages (except in cases of liblel, slander etc) Liable for: Torts Civil wrongs Not liable for: Criminal liability

(a) Contractual

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•

ARIS S. MANGUERA

The general rule is that obligations incurred by a corporation, acting through its authorized agents are its sole liabilities. (Page 15 of De Leon, 2006)

-

Not every tortuous act committed by an officer can be ascribed to the corporation as its liability. Only when the corporation has expressly directed the commission of such tortuous act, would the damages resulting therefrom be imputable to the corporation. Direction by the corporation is manifested either by the BoD adopting a resolution to such effect, or ratification or estoppel.

-

PNB vs. CA A corporation is civilly liable in the same manner as natural person for torts, because the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial person.

(b) For Torts YES!!! CLV Class Notes Q: When is a corporation liable for tort? A: When: (a) the act committed by an officer or agent (b)under express direction of authority from the stockholders or members acting as a body or through the BoD. Q: How can authority given to the agent of the corporation be determined? A: Either by: (a) such direction by the corporation is manifested, by its BoD adopting a resolution to such effect (b) by having taken advantage of such tortuous act, the corporation through its board, has expressly or impliedly ratifies such an act or estopped from impugning the same.

CLV Class Notes CLV: It is clear from the ruling of the Court in this case that not every tortuous act committed by an officer can be ascribed to the corporation as its liability, for it is reasonable to presume that in granting of authority by the corporation to its agent, such a grant did not include a direction to commit tortuous acts against third parties. Only when the corporation has expressly directed the commission of such tortuous act would the damages resulting therfrom be ascribable to the corporation. And such a direction by the corporation, is manifested either by its board adopting a resolution to such effect, as in this case, or having taken advantage of such a tortuous act the corporation, through its board, expressly or impliedly ratifies an act or is estopped from impugning such an act.

Q: What is a derivative suit? A: Since, the act of the board is essentially that of the corporation and therefore corporate assets cannot escape enforcement of the award of damage to the tort victim. As a remedy, the stockholders may institute a derivative suit against the responsible members and officers for the damages suffered by the corporation as a result of the tort suit. Catindig Class Notes Q: Pedro uses corp vehicle. He did not go straight home but went to Marikina to visit friends. On the way home, he collided with another vehicle. Is the corporation liable? A: Corporation cannot be held liable. (under the principle of agency, an agent acting outside the scope of authority…) Tip: Minor deviation  Corp liable Major Deviation Corp not liable Pag happy happy hour not essential need

-

The act of the board is essentially that of the corporation since the board is the embodiment of the very power and prerogatives of a corporation.


-

Our jurisprudence is wanting to the definite scope of “corporate tort”. Essentially, “tort” consists in the violation of a right given or the omission of a duty imposed by law; a breach of legal duty. The failure of the corporate employer to comply with the law-imposed duty under the Labor Code to grant separation pay to employees in case of cessation of operations constitutes tort and its stockholder who was actively engaged in the management or operation of the business should be held personally liable. (Naguiat vs. NLRC)

(c) For Crimes NO!!!

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-

-

-

-

The trust receipts law recognizes the impossibility of imposing the penalty of imprisonment on a corporation, hence, if the entrustee is a corporation, the law makes the officers or employees or other persons responsible for the offense liable to suffer the penalty of imprisonment. (Ong vs. CA) No criminal suit can lie against an accused that is a corporation. (Times vs. Reyes) When a criminal statue forbids the corporation itself from doing an act, the prohibition extends to the board of directors, and each director separately and individually (People vs. Concepcion) While it is true that a criminal case can only be filed against the officers and not against the corporation itself, it does not follow that the corporation cannot be a real party-in-interest for the purpose of bringing a civil action for malicious prosecution for the damages incurred by the corporation for the criminal proceedings brought against its officer. (Cometa vs. CA) It has been held that the existence of the corporate entity does not shield from prosecution the corporate agent who knowingly and intentionally causes the corporation to commit the crime. The corporation engaged in unlawful business naturally aids and abets in the carrying on of such business and will be prosecuted as principal if, with knowledge of the business, its purpose and effect, he consciously contributes his efforts to its conduct and promotion (illegal recruitment in this case), however slight his contribution may be. (Exec. Sec. vs. CA)

ARIS S. MANGUERA CLV Class Notes Q: Why be liable for torts but not on crimes? A: Because in tort, negligence is the basis. And as humans, we are not perfect; it is reasonable to believe that negligence may probably happen but it is reasonable to believe that malice is [not] committed.

Catindig Class Notes If a particular offense is not made applicable to a corporation, then the corporation cannot be made liable. ASM: Parang I remember in CLV class, that this should not be the reason for non-liability of corporation for crimes. CLV Class Notes Corporations cannot be held criminally liable because: (1) The veil of corporate fiction cannot be used to avoid penalty imposable for committing an offense (2) Difficulty if not impossibility of imposing penal sanctions. (3) Criminal intent as an essential ingredient of a crime would be missing.


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ARIS S. MANGUERA o Articles of Incorporation (2) Those that are necessary to the exercise of the express or incidental powers (Section 236(110, 45) (or implied) (3) Those incidental to its existence (Sections 2, 45) (or inherent) • Implied powers are those powers which are reasonably necessary to execute the express powers and to accomplish or carry our the purposes for which the corporation was formed. [These implied powers are expressly recognized by Section 36(11).] (Nakakalito na ba? Hahaha) • The purpose or purposes for which for which the corporation was created, as stated in its articles of incorporation, by defining the scope of corporate business or enterprise, in effect, delimit its implied powers. (De Leon 2006 at 313) • Classification of implied powers: (1) Acts in the usual course of business2 (2) Acts to protect dents owing to a corporation3 (3) Embarking in different business (4) Acts in part or wholly to protect or aid employees4 (5) Acts to increase business5

4. POWERS OF CORPORATIONS (Page 793 of CLV’s Commercial Law Review Book, 2007)

•

Underlying Theory on Power of Corporation. Precisely because the corporation is such a prevalent and dominant factor in the business life of the country, the law has to look carefully into the exercise of powers by these artificial persons it has created. (Reynoso v. CA, 2000)

•

Meaning of powers of a corporation. The term powers of corporation has reference to the corporation’s capacity or right under its charter and laws to do certain things (De Leon 2006 at 310 citing 6 Fletcher 230)

•

Distinguished from its “franchise”. Primary franchise is the right to exist as an entity for the purpose of doing the things embraced within its powers and from its secondary franchise. Secondary franchise is the right granted to an existing corporation to use public property for a public use, with private profit. (De Leon 2006 at 310 citing 6-A Fletcher 431)

•

Distinguished from “objects” of a corp. A corporation exercises its powers for the purpose of attaining its objects. Thus, the power to issue promissory notes is a power and not an object of a corporation. (De Leon 2006 at 310 citing 6-A Fletcher 431)

• Classification of corporate powers: (1) Expressed (2) Implied (3) Inherent (1) Expressly granted or authorized by law o Corporation Code (Secs 36, 37-44; see 11,37,16,4648,62 and 76-81)


Express v. Implied Powers Expressed Implied Have to do largely with the main Have to do largely with the 2

Examples: Borrowing money, making ordinary contracts, executing promissory notes, acquiring personal property for use in connection with the business etc. Key: All acts necessary to run a business under ordinary circumstances. 3 It is generally held that a corporation may temporarily conduct an outside business to collect a debt out of its profits. See Section 36(11). 4 See Section 36(10). 5 A corporation may conduct contests or sponsor radio or television programs, or promote fairs and other gatherings to advertise and increase its business.

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business, objects and purposes of the corporation. Determined by the language of the corporate charter and the applicable law. The test is whether the powers are found in the words of the charter of the law

ARIS S. MANGUERA means and methods of attaining those objects and purposes. May change according to time, place, and surrounding circumstances. The test is whether they are fairly incidental to the (former) and reasonably necessary to carry them out in the furtherance of the corporation’s business.

Incidental or inherent power • Powers which a corporation can exercise by the mere fact of its being a corporation or powers which are necessary to corporate existence and are, therefore impliedly granted. (See Section 36 (11)). • As powers inherent in the corporation as legal entity, they exist independently of the express powers. (See Section 45) • These incidental powers are expressly recognized by Sections 2 and 45. • Some of the powers enumerated in Section 36 are incidental powers which can be exercised by a corporation even in the absence of an express grant. • Examples of incidental powers are: the power of succession; to sue and be sued; to have a corporate name; to purchase and hold real and personal property; to adopt and use a corporate seal; to contract; to make by-laws; etc. • Every corporation has implied or incidental power to establish branch offices here or abroad as the need or exigency of the business of the corporation may require. (SEC Opinion, May 17, 1990)

Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into merger or consolidation with other corporations as provided in this Code; 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and

4.1 In General Sec. 36. Corporate powers and capacity


11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation.

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•

Section 36 of the Corporation Code enumerates some of the express powers of corporations (many of which even if not expressly provided for by law would constitute implied powers of every entity. (Page 794 of CLV’s CLR, 2007)

•

Section 36 enumerates 10 powers that a corporation enjoys in addition to the special powers that may be provided for in the purpose clause of the articles of incorporation, which would also constitute express powers. (Page 795 of CLV’s CLR, 2007)

•

Sources of powers of express powers of a corporation: (Page 795 of CLV’s CLR, 2007)

ARIS S. MANGUERA To sue and be sued in its corporate name • This power (Section 36(1)) is an incident to corporate existence. . (De Leon 2006 at 319) •

As a rule, suits are to be brought by or against the corporation in his own name.

•

Corporation de facto may sue or be sued but a corporation which has been dissolved after the expiration of 3-year winding-up period ceases to exist de jure or de facto.

•

Under Sec. 36 of Corporation Code, in relation to Sec. 23, where a corporation is an injured party, its power to sue is lodged with its Board of Directors. A minority stockholder who is a member of the Board has no such power or authority to sue on the corporation’s behalf. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001); Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002); United Paragon Mining Corp v. CA, 2006)

•

Where the corporation is real party-in-interest, neither administrator or a project manager could sign the certificate against forum-shopping without being duly authorized by resolution of the Board of Directors (Esteban, Jr. v. Vda. de Onorio, 360 SCRA 230 [2001]), nor the General Manager who has no authority to institute a suit on behalf of the corporation even when the purpose is to protect corporate assets. (Central Cooperative Exchange Inc. v. Enciso, 162 SCRA 706 [1988]).

•

When the power to sue is delegated by the by-laws to a particular officer, such officer may appoint counsel to represent the corporation in a pre-trial hearing without need of a formal board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993).

•

For counsel to sign the certification for the corporation, he must specifically be authorized by the Board of Directors. BPI

(1) Those provided in the law (Corporation Code) (2) The Purpose clause of the AoI.

•

Section 45 recognizes also implied powers of every corporate entity emanating from its express powers.6

•

The rule is that in each case it is a question of the logical relation of the act to the corporate purpose expressed in the charter. IF the act is one which lawful in itself, and not otherwise, and is reasonably tributary to the promotion of those end, in a substantial and not in a remote and fanciful sense, it may fairly be considered within charter powers. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation’s business, fairly incidental to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it, otherwise, no. (Montelibano v. Bacolod Murcia Milling Co, 1962 cited in (Page 795 of CLV’s CLR, 2007)

6

No corporation…shall possess or exercise any corporate powers except those conferred by this Code or by its Articles of Incorporation and except such as necessary or incidental to the exercise of the powers so conferred.”


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Leasing Corp. v. CA, 416 SCRA 4 (2003); Mariveles Shipyard Corp. v. CA, 415 SCRA 573 (2003). Metro Drug Distribution Inc. v. Narciso, (2006).

•

Power to adopt and use a corporate seal • A seal is a device (as an emblem, symbol, or word) used to identify or replace the signature of an individual or organization and to authenticate (as under common law) written matter purportedly emanating from such individual or organization. It may refer also to the impression of such a device on documents like certificates of stocks. . (De Leon 2006 at 323) • Any seal adopted and used by the corporation may be altered by it at pleasure. Where a corporation adopts a seal for a special occasion, different from its corporate seal, the seal adopted is the corporate seal only for that time or occasion. . (De Leon 2006 at 323) • A seal is not required for the validity of any corporate act. Under Section 63, certificates of stock issued by corporations are required to be sealed with the seal of the corporation. Nevertheless, the use of a corporate seal in certificates of stock must be deemed merely directory rather than mandatory. • A corporation may exist even without a seal. • The presence of a seal establishes, prima facie, that the instrument to which it is affixed is the act of the corporation. (18 Am Jur 2d)

•

Power to acquire and convey property • This power (Section 36(7)) which is also expressly conferred under the law has always been regarded as an incident to every corporation. A corporation need properties or assets to carry on its business. (De Leon 2006 at 323) • The power under Section 36(7) is qualified by the phrase “as the transaction of the lawful business of the corporation may reasonably and necessary require.” (De Leon 2006 at 324)


•

Property obtained by a corporation which is foreign to the purposes for which it was organized is an unlawful acquisition. (De Leon 2006 at 324) The transfer or sale of shares owned by a corporation in another corporation requires approval by the board of directors of the seller corporation and while a corporation is expressly empowered by Section 36(&) to dispose corporate assets, such power is subject to the provisions of Section 40. (De Leon 2006 at 325) The right or power of private corporations to deal in real as well as personal property is also subject to limitations or restrictions prescribed by special laws and the Constitution. (De Leon 2006 at 325)

Power to acquire shares or securities • Section 36(7) authorizes a private corporation to acquire shares or securities of other corporations. Such an act does not need the approval of the stockholders if done in pursuance of the purpose or purposes of the corporation as stated in its articles of incorporation. But when the purpose is done solely for investment, the approval of the stockholders as required by Section 42 is necessary. (De Leon 2006 at 326) • Power to acquire shares in other corporation is subject to specific limitations established by the Code, special laws and the Constitution. (De Leon 2006 at 326) • When a corporation subscribes to the capital stock of another corporation, it is required, as a rule, to pay its subscription in full. This is based upon the fact that while a corporation has an unlimited capacity to contract obligations, it has only a limited capacity to pay. (SEC Opinion, July 13, 1961) • A corporation may purchase its own stock, however, only when it has “unrestricted retained earnings” to cover the shares to be purchased or acquired. (De Leon 2006 at 327)

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Sell Land and Other Properties • When the corporation’s primary purpose is to market, distribute, export and import merchandise, the sale of land is not within the actual or apparent authority of the corporation acting through its officers, much less when acting through the treasurer. Likewise Articles 1874 and 1878 of Civil Code requires that when land is sold through an agent, the agent’s authority must be in writing, otherwise the sale is void. San Juan Structural v. CA, 296 SCRA 631 (1998); AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003). Power to contribute to charity • Section 36(9) expressly vests in business corporations the authority to contribute for purely charitable purposes. • Basis: Section 36(9) gives recognition to the growing tendency to regard charitable gifts as within the scope of corporate authority. It is based on the modern view that business corporations are not organized solely as profitmaking enterprises but also as economic and social institutions with corresponding public responsibility to aid in the betterment of economic and social conditions in the community in which such corporation are doing business. • Limitations: The limitation under the code is that the donations are: (a) the amount thereof must be reasonable; and (b) the donations must not be in aid of any political party or candidate or for purposes of partisan political activity. Provide Gratuity Pay for Employees • Such powers are expressly permitted by the Code on the theory that such activities promote better relations between the corporation and its employees. (19 Am Jur 2d) • Providing gratuity pay for employees is an express power of a corporation under the Corporation Code, and cannot be


ARIS S. MANGUERA considered to be ultra vires to avoid any liability arising from the issuance of resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247 SCRA 183, 192 (1995). Borrow Funds • The power to borrow money is one of those cases where even a special power of attorney is required under Art. 1878 of Civil Code. There is invariably a need of an enabling act of the corporation to be approved by its Board of Directors. • The argument that the obtaining of loan was in accordance with the ordinary course of business usages and practices of the corporation is devoid of merit because the prevailing practice in the corporation was to explicitly authorize an officer to contract loans in behalf of the corporation. China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997). Catindig Class Notes Q: What is the catch-all provision as regards powers of corporations? A: Si Cris vinerbatim yung Section 36(11), haha. Yeah, that’s the right answer.

4.2 Specific Powers (a) To extend or shorten corporate term (Section 37 compare with Section 81) Sec. 37. Power to extend or shorten corporate term A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this

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code. (n) Sec. 81. Instances of appraisal right Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; 2. 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 3. In case of merger or consolidation. (n)

Requirements for extending or shortening corporate life: (1) Majority vote of the BoD/T (2) Ratification in a meeting by 2/3 of outstanding capital stock or 2/3 of the members, as the case may be. • The extension or shortening of corporate life actually requires the amendment of the articles of incorporation. But whereas, in general amendments of the articles can be made by written assent of the stockholder or members, without need of meeting, in the case provided for under Section 37, a meeting must be duly called for the purpose. (Page 816 of CLV’s CLR, 2007) • De Leon: Section 37 grants appraisal right to a dissenting stockholder (right of the stockholder in the cases provided by law to demand payment of the fair value of his shares) “in case of extension of corporate term.” Such right should also be available to a dissenting stockholder if the corporate term is shortened as it is expressly recognized in Section 81(1). (Page 333 of De Leon, 2006) But wait, CLV has a different opinion.


ARIS S. MANGUERA

•

CLV: The appraisal right should not be triggered when it comes to shortening of corporate life, because there is really no violation of the original contractual intent since. Therefore, the inclusion of the case of shortening of corporate life under Section 81 should not prevail over the specific provision under Section 37. (Page 237 of CLV’s Textbook) • CLV: The exercise of appraisal rights rightly belongs to a case of extension of corporate term because extension actually novates the corporate contract with each shareholder, which now seeks to extend the corporate relationship beyond the original term provided for in the articles of incorporation. (Page 237 of CLV’s Textbook) • Note that the appraisal right applies only to a stockholder of a stock corporation. (Page 333 of De Leon, 2006) • In case of extension of corporate term, any dissenting stockholder may exercise his appraisal right to have his shares bought back at fair value by the corporation. (Page 236 of CLV’s Textbook)

(b) To increase or decrease capital stock (Section 38) Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally.

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•

Nature of Power. The power to increase or decrease capital stock is not an inherent of the corporation, not only because it touches item expressly required to be provided for in the articles of incorporation, but also the capital stock of a corporation is governed by common law doctrines, such as the trust fund doctrine and pre-emptive rights. Limitations on the power • As a general rule, a corporation cannot lawfully decrease its capital stock if such decrease will have the effect of relieving existing subscribers from the obligation of paying for their unpaid subscriptions without a valuable consideration for such release, as such an act of the corporation constitutes an attempted withdrawal of so much capital upon which corporate directors are entitled to rely. (Phil Trust Co. v. Rivera, 1923) • Requirements: (1) Majority vote of the members of the BoD (2) Ratification by 2/vote of the outstanding capital stock, in a meeting duly called for that purpose with notice previously given (3) Certificate of said corporate act shall be signed by majority of the members of the Board and the Chairman and Secretary of the stockholders’ meeting (4) Certificate must be accompanied by the Treasurer’s Affidavit certifying compliance with the 25%-25% requirements as to stock corporation. (Page 817 of CLV’s CLR, 2007) • The corporation must submit proof to the SEC that such decrease will not prejudice the rights of creditors. (SEC Opinion no. 05-10, July 12, 2005) • A corporation cannot issue stock in excess of the amount limited by its articles of incorporation; such issue is ulra vires and the stock so issued is void even in the hands of a bona fide purchaser for value


ARIS S. MANGUERA •

A reduction or increase of the capital stock can take place only in the manner and under the conditions prescribed by law.

•

An over-issued stock is also known as spurious stock. An issue of stock by a corporation in excess of the amount prescribed or limited by its articles of incorporation is ultra vires and the stock so issued Is void even in the hands of a bona fide purchaser for value. (18 Am Jur 2d 757) • Unauthorized increase of capital stock. An attempted unauthorized increase of capital stock amounts to an overissue and such stock is absolutely void and cannot be validated by application of the doctrine of estoppel. • No appraisal right in Decrease in Capital Stock. The decrease to of the capital stock of a corporation should not trigger the exercise of the appraisal right for precisely, the decrease of capital stock would result in returning part of the investments of the stockholders who dissented. (Page 241 of CLV’s Textbook) • The non-granting of appraisal right to dissenting stockholders in case of increase of capital stock may be rationalized on two grounds: (1) The increase in capital stock does not prevent any stockholder, including a dissenting stockholder from opting out of the contractual relationship by simply selling his shares in the corporation to any interested buyer. (2) The grant of appraisal right in case of increase of capital stock would defeat the very purpose for which the power is exercised, i.e., to raise funds for the operation or even survival of the corporate business. (Page 241 of CLV’s Textbook) • Implied Policy under Section 38. The policy embodied in Section 38 of the Corporation Code therefore, although it recognizes that an increase in authorized capital stock redefines the contractual relations in the corporate setting as

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it requires the approval of stockholders owning or representing two-thirds (2/3) of the OCS, does not include the appraisal right on the part of dissenting stockholders, in the sense that every stockholder should come into the corporate setting fully aware that the expediencies of corporate life may require that eventually, the corporation may need to increase capitalization to fund its operations or expansions, and needs to look primarily into its equity investors to fund the same. (Page 243 of CLV’s Textbook) • Despite the board resolution approving the increase in capital stock and the receipt of payment on the future issues of the shares from the increased capital stock, such funds do not constitute part of the capital stock of the corporation until approval of the increase by SEC. Central Textile Mills, Inc. v. National Wages and Productivity Commission, 260 SCRA368 (1996). • A reduction of capital to justify the mass layoff of employees, especially of union members, amounts to nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital through the years, and would constitute unfair labor practice. Madrigal & Co. v. Zamora, 151 SCRA 355 (1987). • The Corporation Code contains no prohibition for a corporation to increase its authorized capital stock even if the same has not yet been fully subscribed. (Page 336 of De Leon, 2006) • Necessity of new subscription for increase. An increase in the authorized capital stock cannot be lawfully accomplished without an actual increase in the assets of the corporation and additional subscriptions except when such increase is for the purpose of effecting a stock dividend previously authorized. (Page 337 of De Leon, 2006) • Subscriptions and payments based on additional amount by which capital is increased. The SEC has construed the


ARIS S. MANGUERA phrase to mean the additional amount by which the capital stock is increased. • Of such increased capital. It is opined that this refers to the total subscription (not to individual subscriptions) and regardless of class. Thus, when the corporation has several classes of shares, the 25% subscription requirement may be applied only to one class of shares or it may be applied only to one class of shares or it may distribute it to all classes of shares, equally or unevenly. (SEC Opinon, April 11, 1995) • No treasurer’s affidavit is required to be attached in case of decrease of capital stock. (Page 341 of De Leon, 2006) • Ways of increasing (decreasing) authorized capital stock: (1) Increasing the number of shares authorized to be issued without increasing the par value thereof. (2) By increasing the par value of each share without increasing the number thereof (3) By increasing both number of shares authorized to be issued and the par value thereof. (Page 341 of De Leon, 2006) Increase by way of stock dividends. • (Stock dividends are ordinarily declared out of the authorized but unissued shares of the corporation.) (Page 342 of De Leon, 2006) • A corporation may increase its capital stock by way of stock dividends without touching its unissued shares as long as there as long as there are sufficient retained earnings to cover the increase. • (If the proposed stock dividend would result in the issuance of shares of stock in excess of the corporation’s authorized capital stock, the over-all issue is null and void. Such dividend declaration may be validly done provided that the corporation simultaneously increases its capital stock and applies the proposed stock dividends as full payment of the subscriptions to the capital stock increase.) (SEC Opinion, July 30, 1969) Catindig Class Notes Q: Can the SHs in one meeting do all of these three, done sequentially?

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Item 1: Increase the authorized capital stock? 1M 5M Item 2: Decrease ? 5M 2M Item 3: Then Increase again? 2M 5M A: Yes. There is nothing in the Code which prohibits such action. There is this decision by Justice Campos, the Citibank case. (1) It must be done sequentially; (2) File 3 amended AoI with the SEC and SEC will approved it sequentially. (Alam na nila yun.) (3) BoD delegated approval of certain transaction to an Executive Committee (Deins ko lam relevance nito-ASM) This process is called RECAPITALIZATION; when the corp is in a deficit situation.

(c) To incur, create or increase bonded indebtedness (Section 38) • “Bond” is a security representing denominated units of indebtedness issued by a corporation to raise money or capital obliging the issuer to pay the maturity value at the end of a specified period which should not less than 360 days, where applicable, payment of interest on stipulated dates. (SEC Interim Guidelines for the Registration of Bonds) (Page 243 of CLV’s Textbook) • SEC has limited the term “bonded indebtedness” to cover only indebtedness of the corporation which are secured by mortgage on real or personal property. Debentures are issued on the basis of the general credit of the corporation and are not secured by collaterals, and therefore do not constitute bonded indebtedness and will not require approval of the stockholders. (Page 243 of CLV’s Textbook) • A corporate bond is an obligation to pay a definite sum of money at a future time at a fixed rate of interest. (Page 347 of De Leon, 2006) • Nature of Power: The power to incur or create liabilities is an inherent power on the part of business corporations, since it is presumed that they would need to incur or create liabilities as part of the normal operations of the business and the pursuit of the purpose of the corporation.


ARIS S. MANGUERA

•

Particular Requirements of SEC. Under the SEC Interim Guidelines, an application for registration and issuance of bonds can only be filed by the issuing corporation which has a minimum net worth of P25M at the time of the filing of the application, and must have been in operation for 3 years. In addition, it must fulfill the financial ratios mandated by the SEC in the Interim Guidelines. An issuing corporation must also execute and submit a Trust Indenture with a trustee bank and an Underwriting Agreement, together with the printed prospectus and titles covering the securities for the bonded indebtedness. (Page 244 of CLV’s Textbook) • Note that no appraisal right is granted to dissenting stockholders when the corporation either validly incurs, creates or increases bonded indebtedness since, the granting of such appraisal right under such circumstances would drains the corporation of financial resources contrary to the purpose for which the power is exercised to raise funds for corporate affairs. (Page 245 of CLV’s Textbook)

•

Note: (1) Where a corporation increases capital stock, stockholders are entitled to a pre-emptive right to subscribe to a sufficient number of shares in order to maintain their previous relative voting power. (2) Dissenting stockholders cannot exercise the right of appraisal in this case. (Page 818 of CLV’s CLR, 2007) Catindig Class Notes Q: What are subordinated debts? A: Debts used as capital

(d) To deny pre-emptive rights (Section 39) Sec. 39. Power to deny pre-emptive right All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto:

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Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing twothirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.

•

•

•

A pre-emptive right is the shareholder’s right to subscribe to all issues or disposition of shares or any class in proportion to his present stockholdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the retained earnings and also in the net assets in the event of dissolution. (Page 832 of CLV’s CLR, 2007) Whenever a capital stock of a corporation is increased and new shares of stocks are issued, the new issue must be offered first to the stockholders who are such at the rime the increase was made in proportion to their existing shareholdings and on equal terms with other holders of the original stocks before subscriptions are received from the general public. For example, if a stockholder with pre-emptive right owns 20% of the outstanding shares of the corporation, he may subscribe 20% of any shares of stock issued by the corporation. This principle is known as the right of preemption or pre-emptive right of stockholders (Page 355 of De Leon, 2006) The rule [on pre-emption] aims to safeguard the right of stockholder to preserve unaltered and unimpaired his proportionate influence and interest in the corporation and the relative value of his holdings. (Page 356 of De Leon, 2006)

(e) To sell or otherwise dispose of corporate assets (Section 40) Sec. 40. Sale or other disposition of assets Subject to the provisions of existing laws on illegal combinations and


ARIS S. MANGUERA monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to twothirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any

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transaction authorized by this section. (28 1/2a) Jack’s Lecture In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. In the sale, lease, exchange, mortgage or disposition of all or substantially all of the properties or assets of the corpration, you need approval not only of the majority of the Board but also of at least 2/3 of the stockholders. According to the law, the test of whether the sale covers all or substantially all of the assets of the corporation is this: will the corporation be capable of continuing its business or accomplishing its purpose. For example, Jollibee must have more than 400 stores all over the country. If they sell 5 stores, you don’t have to get stockholder approval. You have a case where the assets of a corporation were foreclosed and the only remaining asset of the corporation was the right of redemption and they sold it. The Court said you need stockholder approval. I don’t know whatever happened to this but you have that property in Commonwealth Avenue owned by the Islamic Directorate. The Muslim countries in the Middle East donated money for the Muslims to acquire that property. When Martial Law was declared, the Board of Trustees fled to the Middle East and a bunch of people who were not directors sold that property to Iglesia Ni Cristo. The Supreme Court said the sale was not valid because the people who sold it were not the elected directors and secondly, that was the only property of that corporation and therefore, stockholder approval was required. A corporation can acquire its own shares but it is required that it should have unrestricted retained earnings, as a rule. Remember that we said the assets of a corporation constitute a trust fund to answer for its obligations to its creditors. If you allow a corporation when it has no retained earnings, in effect, it is returning the investment of its stockholders. Thus, that will prejudice the creditors.

• The property of the corporation is not the property of the stockholders or members, and as such, may not be sold without the express authority from the board of directors. (Litonjua v. Eternity Corp, 2006)


ARIS S. MANGUERA

•

Disposition of properties in the regular course of the business does not need approval by or authority of stockholders or members. (Page 819 of CLV’s CLR, 2007)

•

Any disposition of corporate asset or property, which is not in the usual course of business of the corporate, would be within the covered transactions under Section 40 which would require stockholders’ or members’ approval, even when practically, the corporation is an entity is till capable of pursuing its charter purpose. (Page 250 of CLV’s Textbook) Catindig Class Notes Q: (2 Kats were asked here, hehe) ABC Corp is a Property Devt Corp. It sells property (100 lots) to a manufacturing corporation. Tell whether approval of the following will be enough: (a)BoD only’(b)Stockholders only (c) Both. A:

(a)

BoD only Yes, if the corporation after the sale decides or has the intention to continue its business.

(b) (c)

SHs only No, because the corp acts thru its BoD Both Yes, if there is no intention to continue business.

Note: If the sale is in accordance with the primary purpose of the corporation then only BoD approval is needed. Otherwise, SH approval is necessary. Conisder also the intention to continue the corp business.

Nature of Power • The exercise of the power to sell or dispose of all or substantially all of the assets of the corporation is deemed to undermine the contractual relationship of the corporation and its stockholders. (Page 246 of CLV’s Textbook) • The exercise of such a power really affects the business enterprise level of corporate set-up. (Page 246 of CLV’s Textbook)

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•

•

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable if: (1) Continuing the business; (2) Accomplishing the purpose for which it was incorporated. A corporation by the action of its board of directors or trustees supported by the vote of shareholders or members may sell, lease exchange, mortgage, pledge, or otherwise dispose of all or substantially all of all of its property, and assets including its good will. The requisites for the validity of such sale, etc. are as follows: (2) The sale etc. must be approved by the board of directors or trustees; (3) The action of the board of directors or trustees must be authorized by the vote of stockholding representing 2/3 of the outstanding capital stock including holders of non-voting shares or 2/3 of the members as the case may be; and (4) The authorization must be done at a stockholders’ or members’ meeting duly called for that purpose after written notice. • Aside form the requirements of Section 40 , the sale of all or substantially all of the corporate assets of property may require compliance with the Bulk Sales Law. (Page 251 of CLV’s Textbook)

•

Effect of non-compliance. Sale by Board of Trustees of the only corporate property without compliance with Sec. 40 of Corporation Code requiring ratification of members representing at least two-thirds of the membership, would make the sale null and void. Islamic Directorate v. Court of Appeals, 272 SCRA 454 (1997); Peña v. CA, 193 SCRA 717 (1991). • The disposition of the assets of a corporation shall be deemed to cover substantially all the corporate property


ARIS S. MANGUERA and assets, if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purposes for which it was incorporated. Such a sale or disposition must be understood as valid only if it does not prejudice the creditors of the assignor, which necessarily implies that the assignee assumes the debts of the assignor. (Caltex Inc. v. PNOC, 2006) Appraisal Right. • Any dissenting stockholder may exercise his appraisal right in case of sale of all or substantially all of the corporate assets or property. (Page 252 of CLV’s Textbook) • The appraisal right is accorded to dissenting stockholders as a matter of equity and fairness since they should be allowed to plough their investments into ventures they feel they could get a better return rather with a corporation that is no longer capable of pursuing the business. (Page 252 of CLV’s Textbook) • It should be noted that the exercise of the appraisal right of any stockholder is predicate on the “sale or other disposition of all or substantially all” of the corporate assets. Any disposition which does not involve all or substantially all of the corporate assets, does not require the approval of the stockholders or members and would not entitle any dissenting stockholder to exercise his appraisal right. (Page 366 of De Leon, 2006)

(f) To acquire own shares (Section 41) Sec. 41. Power to acquire own shares A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends;

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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; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (n)

•

The enumeration is by no means exclusive since other purposes, which have legitimate business objectives, are acceptable to justify a stock corporation purchasing or acquiring its own shares. (Page 253 of CLV’s Textbook) • A corporation’s right to purchase its shares is subject to the following limitations: (1) That its capital is not thereby impaired (2) That it be for a legitimate and proper corporate purpose (3) That thee shall be unrestricted retained earnings to purchase the same and its capital is not thereby impaired (4) That the corporation acts in good faith and without prejudice to the rights of creditors and stockholders (5) That the conditions of corporate affairs warrant it. (SEC Opinions) Catindig Class Notes Q: Can a corporation acquire its own share? A: No. the general rule is that the corporation has no right to acquire its own share unless permitted by legitimate corporate purposes. Q: Is acquisition of own shares the only way to eliminate fractional shares? A: No. The BoD may allow the SH to round-up or to pay the corporation to get 1 whole share. If the SH refuses to buy, the BoD may provide that the corporation shall buy the fractional part of the SH. Q: Can redeemable shares once redeemed be revived? A: No. Same is true with regard to convertible shares (e.g. preferred to common, preferred disappears) Example: There are 5 incorporators. 1 died and survived by his widow. Can the corp buy the shares from the widow? For what good corporate purpose?


ARIS S. MANGUERA (1) The corp can exercise its right of first refusal (applies to transferors thru succession) (2) In the Minutes, to help the widow to liquidate her shares of stock. (good reputation of the corporation). If all signed the Minutes, no one can complain afterwards.

(g) To invest corporate funds in another corporation or business (Section 42) Sec. 42. Power to invest corporate funds in another corporation or business or for any other purpose Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a) Jack’s Lecture Under Section 42, the corporation can invest its funds in another corporation but it is with the same purpose, you only need approval by the Board, you don’t need stockholder approval. This is why the Court has said SMC can buy a brewery in Hong Kong without need of getting stockholder approval because that is consistent with the primary purpose of the corporation. In the same way that the Court has said that Mau Sugar Central could buy a company that manufactures sugar bags. It doesn’t have to get SH approval because that is related to its

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primary purpose. Because you need sugar bags to pack the sugar that it is selling.

•

Rationale of Rule. The law presumes that when stockholders invest, or members join a corporation, it is with the primary expectation that the corporation, through its board, will only pursue the primary purpose indicated in the articles of incorporation, and if the board feels that it is propitious to pursue a secondary purpose, then it would do so only if the stockholders or members have had a chance to evaluate an decide upon such diversion of corporate funds from the primary business of the corporation. ((Page 256 of CLV’s Textbook) • The term “funds” in Section 42 includes any corporate property to be used in furtherance of the business. Thus, idle corporate property may be temporarily leased to make it productive in the absence of express restrictions in the articles of incorporation or by-laws and the leasing is not used as a scheme to prejudice corporate directors, subject to the requirements of Section 42. • A non-stock, non-profit foundation may invest its funds in or subscribe to shares of another domestic corporation. The term “funds” as used in Section 42 include “donations” received by the corporation from other entities. However, its power to invest is limited by its articles of incorporation. (SEC Opinion No. 54, Nov. 3 , 2003) • A secondary purpose. The other purposes for which funds may be invested without amending the article of incorporation must be among those enumerated in the articles of incorporation. In order to legally engage in any of its secondary purposes, the corporation must comply with Section 42. • Not among the secondary purposes. A corporation is not allowed to engage in a business distinct form those enumerated in the articles of incorporation without amending


ARIS S. MANGUERA the purpose clause of said articles to include the desired business activity among its secondary purposes. • Incident to primary purpose. A corporation may invest its funds in another business which is incident or auxiliary to its primary purpose as stated in its articles of incorporation without the approval of the stockholders or members as required under Section 42. Even holders of no-voting members, as the case may be, are entitled to vote on the matter. In such a case, a dissenting stockholder shall have no appraisal right. (Page 376-378 of De Leon, 2006) • All corporations, whatever may be their primary purposes, are deemed to have the power to invest corporate funds in another corporation or business, as a means of obtaining the best returns of their investible funds. (Page 257 of CLV’s Textbook) Catindig Class Notes Q: Can a cement corporation with excess cash put up a power plant/generator? Build a road? A: Yes, if there is insufficient power in the cement factory for that will further the primary business. C: Business means your own business. (Can be your secondary purpose) Q: A corporation is engaged in mining. It makes no much money and decides to engage in commercial fishing. What kinds of approval needed? A: If within the secondary purpose BoD + SHs If outside secondary purpose BoD+SHs+ SEC

(h) To declare dividends (Section 43) Sec. 43. Power to declare dividends The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends

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shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) 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 (3) 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. (n)

•

•

•

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A stock corporation exists to make profit and to distribute a portion of the profits to its stockholders. A dividend is that part or portion of the profits of a corporation set aside, declared and order by the directors to be paid ratably to the stockholders on demand or at a fixed time. It is a payment to the stockholders of a corporation as a return upon their investment. It is a characteristic of a dividend that all stockholders of the same class share in it in proportion to the respective amounts of stock which they hold. Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can loosely be termed as the “trust fund” of the corporation. NTC v. CA, 311 SCRA 508 (1999). The power granted to stockholders to demand from the Board the declaration of dividends under Section 43 is one for the few instances under the Code where the stockholders themselves exercise a primary power, instead of the usual ratificatory vote on action taken primarily by the board of directors. (Page 260 of CLV’s Textbook)


ARIS S. MANGUERA

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Dividends payable out of unrestricted retained earnings. Under the law, dividends other than liquidating dividends (which are not really dividends as they are from caoital) may be declared and paid out “the unrestricted retained earnings” of the corporation. • The capital or capital stock which may not be impaired or depleted by the dividends is not the entire net assets of the corporation; rather, it is the legal capital of the corporation in the strict sense, referring to that portion of the net assets directly or indirectly contributed by the stockholders as consideration for the stocks issued to them upon the basis of their par or issued value. Jack’s Lecture Most common types; cash, property, stock dividends. Only the board approval is needed to declare cash dividends but the corporation must have retained earnings. Now when the corporation declares cash dividends and it has no retained earnings this is illegal and SH must return what they received and in fact directors will be made liable. You have that Philbanking Corporation case before which became bankrupt because it kept declaring dividends at the time it was incurring losses and the justification: “Eh you see we have always been declaring dividends regularly and if we stop now there might be a bank run.” Well you tell me now, katwiran ba yan ng taong matino? They attacked the CB for closing Philbanking. Assuming it has retained earnings, once cash dividends have been declared they cannot be revoked because you can use that to manipulate the price. For example they declare that 25% cash dividend so the price moves up. The directors sell their shares then they revoke the declaration so the price goes down they buy back the shares. In the case of property dividends you only need board approval but in the case of stock dividends you need the approval of the stockholders. Now, a stock dividend has no taxable consequence because it is the same pie but you are slicing it into more pieces. For instance, here is somebody whose shares represent 10% of the net worth of the corp. The corp declared a 100% stock dividend. What will happen? He will still own 10 % of the net worth of the corporation. The book value of his original

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share plus his stock dividend will be the same. It is only when he sells and makes a profit will there be a taxable consequence. And because of that even if a stock dividend has been declared it can still be revoked because it’s the same pie only your slicing it in more pieces so even if you declare it you can revoke as long as the stock certificates have not yet been distributed. The SEC has said that paid-in surplus cannot be declared as dividends whether stock or cash. For instance, here is a corp that made a public offering. The par value of the shares is 10 pesos per share but they offer to the public for 16 pesos so the buyers will be paying 6 pesos more. Now, that paid in surplus cannot be declared as a stock or cash dividend because according to the SEC you can only declare dividends from earnings from operations. That paid in surplus was not from operations Itong si Agbayani sabi it cannot be declared but the SEC said it can be declared, subject to certain qualifications. One of the tricks for window dressing the financial statement is when the value of the corp is negative you have your real property reappraised. Now, the appraisal will increase the value of the property and that wipes out your negative value that’s why normally your external auditor will put a footnote in your financial statement for several years indicating that there has been a reevaluation. Now, according to Agbayani it cannot be declared but the SEC says it can be declared subject to certain conditions. The property must be subject to depreciation so if it is land you cannot declare a dividend. It must be subject to depreciation and then you charge depreciation allowance and you have retained earnings then you can declare that as dividends.

1.

Treasury shares, if they are declared, should be considered property, not stock dividends. Now the law provides (taken from a decree issued before) that if the surplus profits exceed 100% of the paid-in capital, you must declare dividends whether cash or stock otherwise you will be fined by the SEC. That is one of the rackets of SGV. “O, mataas na yung retained earnings nyo, lagpas ng 100% mumultahan kayo ng SEC, you have to declare dividends.” So at the end of the year in your financial statement wala na yan and of course because of that, they will have to prepare a long-form report kasi hindi na kasali sa fiscal year and siyempre tatagain ka for the long-form report.\ Justified by definite corporate expansion projects approved by the board. For instance you get a franchise from abroad there will be a


ARIS S. MANGUERA development schedule. For instance they will tell you to open so many outlets within 5 years so when Dunkin Donuts first opened they were required to open 5 outlets within 5 years so the company was not declaring any dividends. Whatever retained earnings they were accruing were being used to put up other outlets. We have this client who owned a heavy mix (?) plant and said that the present plant cannot cope with our volume of business. We have to put up a bigger plant so they purchased a parcel of land in the CALABARZON and they will need 100 million to put up the new plant so they are not declaring any dividends. But it has to be definite in fact, the SEC will ask for copies of the Board Resolution showing the definite expansion plans. The Board Resolution is sufficient of course, you can’t be showing the same resolution for 5 years in a row. Kung hindi gumagalaw yung financial statement or hindi gumagalaw yung assets, ano ba yan? In this case, the SEC must look in. Like this fellow Henry Ng of Unimart, he doesn’t declare dividends and he’s always saying “expansion” I don’t know how he’s getting away with it! 2. If the corporation is prohibited by a loan agreement from declaring dividends without the consent of the creditors or when the consent has not been obtained. Well, usually if it’s a big loan the creditor will require that as a condition and they will make sure the corp has enough funds to pay 3. Special circumstances there is a need to build up reserves for contingencies (ex. There is a strike and the union filed a case for unfair labor practice because many employees were terminated so they said if we lose we will be made to pay backwages and that will amount to a hefty amount so we better start building reserves Now the dividends will be given to the Stockholder (SH) of record. If the SH sells his shares but the transfer has not been recorded in the books of the corporation, it goes to the seller but he will have to deliver that to the buyer. That is between him and the buyer because remember it is the books that are controlling. Usually when the corporation declares a dividend it will say “resolve that the corporation declare a cash div of 25% on Feb 25 to SH of record as of Feb 15 2002 and for this purpose the books of the corporation be closed at the end of business hours on Feb 15 and will be open again at 8:00 am of Feb 26 2002”.

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(i) Cash • Dividend payable in cash • As soon as cash dividends are publicly declared, the stockholders have the right to their pro rata shares. • It is the declaration of the dividends which creates both the dividends itself and the right of the stockholders to demand and receive it. (Page 406, De Leon, 2006 citing SEC Opinion, October 9, 1992) • Can be declared by mere Board resolution from unrestricted earnings. (Page 246 of CLV’s CLR, 2007) • Revocable before announcement to the shareholders. (Page 836 of CLV’s CLR, 2007) Catindig Class Notes Q: IN 2006, X Corp has URE of 100T. The amount is not enough to cover cash dividends to all SHs. Here, no declaration of dividends during the 1st quarter. Only in June, the corp acquired 4 M. So 4M+100T income in URE. Could the corp declare a cash dividend of 3.1 M. A: No. 3.1 M is stil part of capital or it is not yet par of URE. To issue cash dividends of 3.1M might violate the trust fund doctrine.

(ii) Stock • It is dividend payable in unissued or increased or additional shares of the corporation instead of in cash or in property out of the unrestricted retained earnings of the corporation. A stock dividend may be declared only to the extent of the maximum number of shares authorized in the articles of incorporation. • Declaration may be revoked prior to actual issuance. (Page 836 of CLV’s CLR, 2007) Catindig Class Notes Q: What are dividends? A: It refers to return of investment. It is what a SH would want their Board to declare. Q: if a corp has treasury shares, can it decide to give the shares to SHs? A: Yep, it could be property dividends being assets of a corporation. (Si Ina yata nagrecit nito)


ARIS S. MANGUERA

(iii) Property • It is dividend distributed to the stockholders in the form of property, real or personal, such as warehouse receipts, or shares of stock of another corporation. (iv) Interim Catindig Class Notes Q: Is this your first time to hear “interim” What do you mean by interim? A: It means “temporary” di ba. Declaration of interim dividends is not prohibited by law.

(v) Record Date • Record date is fixed by the board of directors for determination of stockholders entitled to vote; if it does not do so, such date shall be the date of the notice of meeting. (Page 484 of De Leon, 2006) • There is no hard and fast rule describing the interval of time between the date of the declaration of dividends, the date of record of stockholders entitled thereto, and the date of payment, the same being left to the sound and judicious discretion of the directors. (SEC Opinion, April 11, 1962) • It is customary for the directors to fix the time for payment of a dividend. But a corporation cannot discriminate among the shareholders as to the time of payment of dividends. • If no time is fixed by the resolution declaring a dividend, it is payable on demand, and if the resolution declares that it shall be payable at such time as the board of directors may direct and the board fixes no time, the law implies that it shall be paid within a reasonable time. Catindig Class Notes Record date must be a current or prospective date, never a past date. Q: Why not a past date for record date? A: Because of the problem of asymmetric information. In sales of stock, price is the primary consideration. And price is determined by information. If record date is ante-dated, the seller might be prejudiced because in setting the price it did not consider the benefit of dividends.

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(vi) Limitation on retention of surplus profits • Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock except when justified by any of the reasons mentioned. (Section 43(2)) Of the requirement which is mandatory is violated, the corporation may be compelled by the SEC to declare dividends to its stockholders. • The prohibition on retention of profits provided in Section 43 is applicable to all stock corporations. • There may be some question as to whether or not the retention of profits is justified by the “reasonable needs of the business”. Suffice it to say that the policy of the law to encourage and force the distribution of dividends curtails the discretionary power of directors to retain corporate earnings. • Section 29 of the Tax Code imposes a 10% surtax on corporations improperly accumulating profits or surplus, in addition to other income taxes imposed on corporations. The purpose is to prevent individual taxpayer from avoiding the progressive rates of income tax by employing the corporate form for the accumulation of taxable income. (Page 397, De Leon, 2006) • Note: No dividends can be declared out of capital, except liquidating dividends distributed at dissolution. (Section 122) • Note: Dividends (whether cash or stock) can be declared only out of the unrestricted retained earnings, although stock dividends may be issued out of premium surplus (since in the latter case, it is nothing but a book-entry procedure). (Page 837 of CLV’s CLR, 2007) Catindig Class Notes Q: How does a corporation prove that the exceptions apply to them as regards retained profits in excess of 100%? A: BoD issues a RESOLUTION approving corporation expansion (for example). BoD creates a reserve. Excerpts of MINUTES of the Board Resolution may be shown to the SEC. Q: What are those legal provisions as regards retention of surplus profits? A:


ARIS S. MANGUERA (1) Section 43 (2) Tax Code, Section 29

(i) To enter into management contracts (Section 44) Sec. 44. Power to enter into management contract No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. (n) Jack’s Lecture A corporation can enter into a management contract. What the law really does here is to regulate management contracts. Mgt contracts can be necessary at times. Like here is a mining company whose directors and officers don’t know

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ARIS S. MANGUERA

anything about mining. They can enter into a contract with a corporation which has technical expertise to manage its mines.

be approved by at least 2/3 of the stockholders of the managed corporation.

You have that case of Nielson & Co. vs. Lepanto where Lepanto entered into a managment contract with Nielson & Co. to manage its mines. When the war broke out, the Japs took over the mines of Lepanto. (Yamashita must have been there.) After the war, Nielson wanted to continue the contract because there was a stipulation there that if the contract is interrupted, it will be extended. Lepanto did not agree. Nielson & Co. sued. The contract provided that they would be provided a certain percentage of the gross income as their management fee. In addition, Nielson & Co. would get a certain percentage of the stock dividends that will be declared. Lepanto lost in the SC in December 1966. The award reached about 30 Million pesos. (That case was handled by Ike Bello (for Lepanto) who was devastated by the decision.) Lepanto went to our office which drafted a motion for reconsideration. One of the arguments raised was that a management contract is a contract of agency. Therefore, it can be terminated at any time. But the Court rejected that argument. The Court said that a management contract is a contract for lease of services. It does not involve a representation so you cannot terminate it at any time. The Court, however, eliminated the award for stock dividend. It said that Nielson & Co. was not a stockholder and only a stockholder can be given stock dividends.

A management contract should not be valid for more than 5 years for any one term. You can just keep renewing it provided, that it is not for more than 5 years at any one time.

The law tries to regulate management contracts because it has been used too often to _______ money for the corporation. When Soriano was still managing PAL, he was a minority stockholder but he had this compania which had a management contract. So Soriano & Co. was getting a percentage of the gross income of PAL. Everytime PAL would buy or sell anything, it had a commission. When Toda(?) took over PAL, he did the same thing with his Rubicon which had a management contract. That’s why when Mr. Fred Ramos of National Bookstore was questioning this/ was waging a proxy fight against Soriano III in Atlas Mines, that was an issue he raised. He said that Atlas Mining had a management contract with Soriano Compania which was charging a fee based on the gross income. This was a time when Atlas was incurring losses. In fact, later, Atlas Mining closed. This is why the laws says that a management contract should be approved by majority of the Board, by majority of the stockholders, of both the managed and managing corporation. And if a stockholder of the managed corporation owns more than 1/3 of the managing corporation, the management contract must


•

Management Contract is an agreement which a corporation delegates the management of its affairs to another corporation for a certain period of time. (Page 423 of De Leon, 2006) • Rationale for Ratification Requirements on Part of Managed Corporation. The rationale for the ratificatory requirement under Section 44 of the managed corporation is that such a management contract is a deviation form the principle under Section 23 that the corporate affairs shall be managed by the board of directors, and thereby a departure from such an agreement would require the approval of the stockholders under the principle that it would vary the contractual corporate arrangements, by allowing basically an outsider to involve itself in the management of corporate affairs. (Page 263 of CLV’s Textbook) • Rationale for Ratification Requirements on Part of Managing Corporation. That the management arrangement is a deviation form the principle also that the board of directors in the managing corporation assumed office with the understanding that they would devote their time and resources for the affairs of the corporation. (Page 263 of CLV’s Textbook) • The ratificatory procedure should not therefore be applicable to a corporation that is organized primarily as a management company, and its entering into a management contract is clearly within the primary purpose of the corporation and in accordance with the contractual understanding with the stockholders of such managing corporation. (Page 263 of CLV’s Textbook)

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Corporation Code. However, in the case of issuance of stock dividends, the same may be sourced from the corporation’s paid-in surplus because that would only involve a reclassification of one capital account to another.

Cases not covered by Section 44. When it comes to a management contract entered into by the managed corporation under the definition of Section 44, not with another corporation but with a partnership or an individual, the same would not be covered by and thereby need not comply with the ratificatory requirements of Section 44. (Page 263 of CLV’s Textbook) • A management contract cannot delegate entire supervision and control over the officers and business of a corporation to another as this will contravene Section 23. The board cannot surrender or abdicate its power and duty of supervision and control for otherwise, it becomes a mere instrumentality of the management company. (Ballantine, page 136)

(The declaration of stock dividends from paid-in surplus was allowed taking into consideration that when a corporation converts the premium or contributed surplus into capital by issuing to its stockholders shares of stock representing their respective participation, it actually parts with nothing but merely transfers the surplus capital account and issues shares of stock to represent the same. It would be different when the property dividend is declared out of additional paid-in capital. Under this situation, the capital of the corporation represented by the additional paid-in capital is reduced to the extent of the property dividend declared. This is not allowable since this will involve return of capital to stockholders.) Rule: The capital surplus or additional paid-in capital can only be declared as stock dividends but not as cash or property dividends.

Catindig Class Notes Tip: Large corporation use SPA system of ExeCom for efficiency. Other modes: (1) (2) (3) (4)

SPA system Exe Com Combination of both Management Contract

4.4 Implied Powers

4.3 Additional material: SEC Opinion No. 51, series of 2003 addressed to Atty. Liezl Z. Paras re issuance of stock dividends out of paid-in surplus SEC Opinion No. 51 Q: May a corporation issue stock dividends to be paid from its paid-in surplus? A: Yes. As a rule in corporate practice, additional paid-in surplus has two general uses—to wipe off deficits during re-organization and as payment for issuance of stock dividends. Basic in corporate law is the rule that paid-in surplus cannot be issued as cash or property dividends because it would, in effect, result in a return of capital which is prohibited under Section 43 of the

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Section 45 recognizes also implied powers of every corporate entity emanating from its express powers.7

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Implied powers are those powers which are reasonably necessary to execute the express powers and to accomplish

7

No corporation…shall possess or exercise any corporate powers except those conferred by this Code or by its Articles of Incorporation and except such as necessary or incidental to the exercise of the powers so conferred.”


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or carry our the purposes for which the corporation was formed. [These implied powers are expressly recognized by Section 36(11).] (Nakakalito na ba? Hahaha) • The purpose or purposes for which for which the corporation was created, as stated in its articles of incorporation, by defining the scope of corporate business or enterprise, in effect, delimit its implied powers. (De Leon 2006 at 313) • Classification of implied powers: (6) Acts in the usual course of business8 (7) Acts to protect dents owing to a corporation9 (8) Embarking in different business (9) Acts in part or wholly to protect or aid employees10 (10) Acts to increase business11 Express v. Implied Powers Expressed Implied Have to do largely with the main Have to do largely with the business, objects and purposes means and methods of attaining of the corporation. those objects and purposes. Determined by the language of May change according to time, the corporate charter and the place, and surrounding applicable law. circumstances. The test is whether the powers The test is whether they are fairly are found in the words of the incidental to the (former) and charter of the law reasonably necessary to carry 8

Examples: Borrowing money, making ordinary contracts, executing promissory notes, acquiring personal property for use in connection with the business etc. Key: All acts necessary to run a business under ordinary circumstances. 9 It is generally held that a corporation may temporarily conduct an outside business to collect a debt out of its profits. See Section 36(11). 10 See Section 36(10). 11 A corporation may conduct contests or sponsor radio or television programs, or promote fairs and other gatherings to advertise and increase its business.


ARIS S. MANGUERA them out in the furtherance of the corporation’s business.

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When the articles expressly provide that the purpose of the corporation was to “engage in the transportation of person by water,” such corporation cannot engage in the business of land transportation, which is an entirely different line of business, and, for which reason, may not acquire any certificate of public convenience to operate a taxicab service. Luneta Motor Co. v. A.D. Santos, Inc., 5 SCRA 809 (1962).

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A corporation whose primary purpose is to generate electric power has no authority to undertake stevedoring services to unload coal into its pier since it is not reasonably necessary for the operation of its power plant. NPC v. Vera, 170 SCRA 721 (1989).

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A corporation organized to engage as a lending investor cannot engage in pawbroker. Philipinas Loan Co. v. SEC, 356 SCRA 193 (2001).

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A mining company has no power to engage in real estate development. Heirs of Antonio Pael v. Court of Appeals, 372 SCRA 587 (2001).

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An officer who is authorized to purchase the stock of another corporation has implied power to perform all other obligations arising therefrom such as payment of the shares of stock. Inter-Asia Investments Industries v. Court of Appeals, 403 SCRA 452 (2003).

4.5 Ultra Vires Acts Sec. 45. Ultra vires acts of corporations No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (n) Ultra vires refers to an act outside or beyond corporate powers, including those that may ostensibly be within such powers but are, by general or

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special laws, prohibited or declared illegal. (Twin Towers Condo v. CA, 2003 cited in CLV’s CLR, 2007) Note: If the contract is ultra vires but has been completely performed by both parties, it can no longer be set aside. If it has been performed by one party and the other party doesn’t comply, if he is sued, he cannot raise the defense that the contract is ultra vires because having benefited from the performance of that contract, he will be in estoppel to raise that defense. ULTRA VIRES ACTS: (1) Acts done beyond the powers of the corporation as provided for in the law or its articles of incorporation; (2) Acts or contracts entered into in behalf of the corporation by persons who have no corporate authority; and (3) Acts or contracts which are per se illegal as being contrary to law. (1) Acts done beyond the powers of the corporation as provided for in the law or its articles of incorporation; Montelibano Test: o If the act is one which is lawful in itself o The act in question is not in direct and immediate furtherance of the corporation’s business, and is not fairly incident to the express powers and reasonably necessary to their exercise. (2) Acts or contracts entered into in behalf of the corporation by persons who have no corporate authority; and (3) Acts or contracts which are per se illegal as being contrary to law. The act is illegal per se - Harden Test: o Even when acts are illegal per se, when only public or government policy is at stake and no private wrong is committed, the courts will the parties as they are, in accordance with their original contractual expectations.


ARIS S. MANGUERA

For Acts or contracts which are not per se illegal: General Rule: In the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation. Exceptions: (1) Doctrine of Ratification or Estoppel- Acts of contracts which are not per se illegal can be validated. Even when the contract entered into in behalf of the corporation is outside the usual powers of the corporate officer, the corporation’s ratification of the contract and acceptance of the benefits have made such contract binding upon the corporation. Note: Ratification that would bind the corporation would have to come from the board of directors or a properly authorized representative. Ratification can never be made on the part of the corporation by the same persons who wrongfully assume the power to make the contract, but the ratification must be by the officers as governing body having authority to make such contract. (2) Doctrine of Apparent Authority- 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 possessing the power to do so those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority. Note: Existence of apparent authority must be ascertained through: (a) general manner in which the corporation holds out an officer or agent as having the power to act or in, other words, the apparent authority to act in general, with which it clothes him; or (b) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond of his ordinary powers. If the corporation desires to set up the defense that the contract was executed by one not authorized as agent, it must plead such fact. (Ramirez Doctrine) However, once the corporation has discharged its burden under the Ramirez Doctrine, then the burden of proof now shifts to the contracting party to show that indeed by previous acts and actuations, the acting officer had been clothed by the corporation with apparent authority for the public to take such authority at face value. (Yao Ka Sin-Timely Repudiation Doctrine) CLV Class Notes

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Q: Can two corporations form a partnership? A: No. If two corporations try to form a partnership, none would be created thereby. (Tuason v. Bolanos) The reason behind the rule that corps cannot validly enter into a partnership is because in the partnership all the other partner can bind the partners under the “mutual agency” principle which would be violative of the principle of of “centralized management” under Section 23 of Corp Code which provides that only the BoD can bind the corporation. (Page 801 of CLV’s CLR,2007)

ARIS S. MANGUERA A: YES. (Such guarantee will improve the morale of the employees. Employees with high-morale are good for the business.)

Q: Can 2 corporations enter in a joint venture? A: Yes. Corporations have legal capacity to form a joint venture, i.e., one with a limited purpose and duration. Q: What makes a project or undertaking a “joint venture”? A: What makes a project or undertaking a joint venture to authorize the corporation to be a co-venturer therein is the very nature and essence of the undertaking that limits it to a particular project which allows the board of directors of the participating corporation to properly evaluate all the consequences and likely liabilities to which the corporation would be held liable for.( Page 267 of CLV’s Textbook) Q: Bakit pede sa joint venture and hindi sa partnership? A: In a joint venture, being for a particular project undertaking, when the BoD of a corp evaluate the risks and responsibilities involved, they can more or less exercise their own business judgment in determining the extent by which the corp would be involved in the project and the likely liabilities incurred. Unlike in an ordinary partnership arrangement which may expose the corporation to any and various liabilities and risks which cannot be evaluated and anticipated by the board. (Page 267 of CLV’s Textbook) Catindig Class Notes Q: X corp has several VPs. BoD approved issuance of corporate credit card to VPs. The credit company required X Corp to guarantee the card obligation of the VPs. X corp is not in the business of issuing guaranties or sureties. Can X Corp without violating Section 45 guarantee the card obligations? Tip: Consider the primary purpose of the corporation. (Try to relate to the primary purpose of the corp, if you could then there is no ultra vires) Q: Employees applied for limited credit facilities with a grocery store nearby the corp. Can the corp guarantee 50% of the obligations?


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5. STOCKHOLDERS 5.1 Subscription to shares (a) How do you acquire shares in a company? In a corporation, a person may become a shareholder: (1) By subscription contract with an existing corporation for the acquisition of unissued shares. (2) By purchase from the corporation of treasury shares. (3) By transfer from a previous stockholder of the outstanding shares or existing subscription. (De Leon p. 510, 2006) • (I’m not sure if isasama dito yung “making a stock dividend” and assignment -ASM (p528 of De Leon,2006)) • Catindig: Remember the modes of acquiring ownership like succession. What is a share? • Shares of stock issued by the corporation “are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer.” (Section 63) • Shares of Stock therefore are properties and have intrinsic pecuniary value. (page 362 of CLV’s Textbook) Jack’s Lecture § 60 [Subscription contract] simply defines what is a subscription agreement and § 61[Pre-incorporation subscription] says a subscription for shares of stock of a corporation still to be formed shall be irrevocable for at least 6 months unless all the subscribers agree or the incorporation fails to materialize. §62 [Consideration for stocks] mentions that consideration may be paid… It says here that stock should not be issued for a consideration less than the par value, or if it is a no-par value share, less than the stated value and the consideration possible may be actual cash which is the most common consideration. Or property. Payment made in the form of property, the SEC will require an appraisal. Usually, the property given will be land so they will require an appraisal. And then, labor actually rendered


ARIS S. MANGUERA already, in other words, past services. Then, previous debt. So when debt has been converted into equity. Then amount transferred from unrestricted retained earnings to capital. That is what happens when the corporation declares a stock dividend. A bookkeeping entry will be made and the amount corresponding to the stock dividend will be debited from unrestricted retained earnings and transferred to capital. Then outstanding shares exchanged for stocks in the event of reclassification or conversion. For instance, a preferred share is given the option to be exchanged for common shares. When you surrender, you’ll be given common shares. Or say, the corporation decided to change the par value from P100 to P10. So they say, you know, it’s very hard to sell the shares in the stock market because the price is too high. P100! Stockholders will be asked to surrender their stock certificates. In return, they will be given new stock certificates with the par value of P10. Or when you have a merger, stockholders of the absorbed corporation will surrender their shares and in exchange they will be given shares in the surviving corporation. And also, it is illegal to issue shares where the consideration is a promissory note. A promise to pay for future services. Now the stock certificate will be signed by the President, or in his absence the Vice-President, and countersigned by the Secretary (§63; Certificate of stock and transfer of shares). That’s why in one case…you have this Torres case… a retired Judge who was the controlling stockholder in a corporation. And his nephew to whom he had given shares of stock turned out to be recalcitrant and rambunctious so he decided to regain control of the corporation by giving shares to other nephews. And what did he do? He was the president of the corporation and he simply posted entries in the stock and transfer book. O, one share to this fellow, another share to that… The court said that that is not valid. That is not the way to…and besides, he is the president, not the corporate secretary. He is not supposed to handle the stock and transfer book. Catindig Class Notes Q: How to become a SH? A: (1) Subscribing to new shares (2) Purchase of previously issued shares; (3) Succession Q: What are the advantages to the corp pf having subscription agreements? A: The corp can set a date for payment of balance. No need for a call in this case.

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Catindig: 99% of the time, subscription does not have subscription agreement.

ARIS S. MANGUERA

•

Tip: For incorporation, it is advisable to pay in cash to avoid delay due to valuation. C: In case of additional issuance of shares (after incorporation), the SEC would take the word of the corporation, anyway the transaction will appear on the Balance Sheet.

(b) What is subscription? (Section 60)

•

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 within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. (n) 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. (n)

•

Subscription is an offer to acquire a specified number of unissued shares of an existing corporation or one still to be formed. (Page 512 of De Leon, 2006) • Subject Matter. There can be a subscription only with reference to stock which has never been issued. (Page 511 of De Leon, 2006) • The Code prohibits the distinction between the sale unissued stock or subscription of such stock; all contracts for the subscription or sale of unissued stock shall be governed solely by the rules pertaining to subscription agreement. (Page 859 of CLV’s CLR, 2007) • However, (a) Transfer for consideration of treasury shares is a sale by the corporation; (b) A transfer of fully paid shares by a shareholder to a third person is a sale. (Page 860 of CLV’s CLR, 2007)


Note: The purpose of removing all contracts dealing with unissued shares form the coverage of “sale” is to exclude them from the operations of ordinary contract principles, such as rescission by reason of breach, waiver, condonation or mutual withdrawal and the effects of the happening and nonhappening of conditions, to ensure that subscription due thereon will be paid for the protection of corporate creditors under the trust fund doctrine. (Page 860 of CLV’s CLR, 2007) Nevertheless, a subscription agreement is a species of the genus sale in that it involved the transfer of ownership to a property right (share) for a valuable consideration. (Page 862 of CLV’s CLR, 2007)

(c) What are (Section 61)

pre-incorporation

subscriptions?

Sec. 61. Pre-incorporation subscription A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no preincorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission. (n)

•

When properties were assigned pursuant to a preincorporation subscription agreement, but the corporation fails to issue the covered shares, the return of such properties to the subscriber is a direct consequence of rescission and does not amount to corporate distribution of assets prior to dissolution.  On Yong v. Tiu, 375 SCRA 614 (2002).

(d) What could be the consideration for stocks? Sec. 62. Considering for stocks

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ARIS S. MANGUERA

Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following:

the purpose. (5 and 16)

1. Actual cash paid to the corporation; 2. 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;

•

The word issue as used in Section 62 refers to the original issue, that is, when the stock first passes from the corporation to the hands of stockholder. (Page 528 of De Leon, 2006) • A treasury stock therefore may be sold for reasonable price fixed by the BoD even for less than the par or issued value thereof. (Section 9) • When consideration is agreed upon is either cash or property, it is not necessary for the subscription agreement to be valid that the same must be delivered at perfection, for a subscription agreement is a consensual (not real) contract, being a species of genus sale. (Page 863 of CLV’s CLR, 2007) • The terms “actually…paid” and “actually received” in Section 62 is meant to indicate that eventually the consideration must be paid and cannot be given as a discount or amount to watered stock. (Page 863 of CLV’s CLR, 2007) • Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings converted into equity in the corporation’s books. Lincoln Phil. Life v. Court of Appeals, 293 SCRA 92 (1998).12

3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for

(i) How is the issue price of no-par shares fixed? (Section 62) 12

The basis for determining the documentary stamps due on stock dividends declared would be their book value as indicated in the latest audited financial statements of the corporation, and not the par value thereof. Commissioner of Internal Revenue v. Lincoln Phil. Life Insurance Co., 379 SCRA 423 (2002).


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The issued price of no-par value shares may be fixed: (1) In the AoI (2) By the BoD pursuant to authority conferred upon it by the AoI or the by-laws; (3) In the absence thereof by the stockholders at a meeting duly called for the purpose representing at least a majority of the outstanding capital stock. • Change in the value of issued shares. The stated value of the issued no par value shares cannot be changed anymore in view of Section 6 (par 3).(De Leon, p 536, 2006) • Change in the value of unissued shares. Any change in value of no par value shares shall apply only to unissued portion of the capital stock of the corporation. (SEC Opinion, July 31, 1979) • See Page 294 of JRS Catindig Class Notes Q: Difference of Par value and no par value shares Par Value Share No Par Value Floor Price Par Value Not less than P5 Ceiling No Ceiling No Ceiling The corp normally sells them at par value and not at book value In both cases, the Bod has discretion to sell at prices higher than floor price. Book Value [Paid up capital + Paid in Surplus + Retained Earnings] / [total number of Outstanding shares] Book Value ≠ Fair Value Book value fluctuates because Retained Earnings also changes Q: What is the disadvantage of No-par? A: Its in the record keeping. There are different price for each shares.


ARIS S. MANGUERA

(ii) If the consideration for shares is other than cash, how is the value thereof determined? (Section 62) •

Where consideration is other than actual cash, or consists of intangible property such as patents or copyrights, the valuation thereof shall initially be determined by the incorporators or the BoD, subject to the final approval of the SEC. (Page 864 of CLV’s CLR, 2007) • If the consideration is other than actual cash, its value must be worth the value of the stocks issued. (True Value Rule) Hence, the need of the approval of the valuation by the commission.(Page 531 of De Leon, 2006) Receivables. • They may be accepted as payment for shares subject to the following conditions: (1) The SEC is able to verify the existence and collectibility of the receivables; (2) The shares to be issued will be held in escrow until actual payment or collection of the receivables. (SEC Opinion No. 05-11, July 14, 2005) Property (1) Necessary or proper in carrying pm the corporate business. The property which a corporation may accept in exchange for its stock must be of a kind which the corporation may lawfully acquire and hold in carrying out the purposes of its incorporation, and which is necessary or proper for it to own in carrying on its business. (2) Possesses ascertainable pecuniary value. The property must be of substantial nature, having pecuniary value capable of ascertainment (at a fair valuation equal to the par or issued value of the stock issued), and must be something real and tangible as distinguished from something constructive and speculative. (3) Capable of being transferred and applied to payment of debts. It must be of such character that it can be delivered to the corporation, instead of being merely communicated to its

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officers or employees, and it must be actually transferred to the corporation and capable of being transferred by the corporation. It must also be such as is capable of being applied to the payment of debts and of distribution among the stockholders. (Page 532 of De Leon, 2006) Services • A corporation is allowed to receive as payment for its stocks labor performed for or services actually rendered to the corporation provided the transaction is in good faith and no fraud is perpetrated upon other stockholders and creditors. Satisfaction of Previously incurred indebtedness • Section 62(4) expressly allows the set-off or satisfaction of previously incurred indebtedness of a corporation by the issuance of its shares of stock where conflicting rights of creditors are not involved. Profits • If stocks are issued in consideration of profits earned by the corporation, but not distributed among the stockholders, such issue is called stock dividends. (Page 536 of De Leon, 2006)

(e) Preemptive right of stockholders • A pre-emptive right is the shareholder’s right to subscribe to

•

all issues or disposition of shares or any class in proportion to his present stockholdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the retained earnings and also in the net assets in the event of dissolution. (Page 832 of CLV’s CLR, 2007) Stock Transactions covered by right. Section 39 has widened the coverage of pre-emptive right which now includes re-issuance of treasury shares because of the use of the words “disposition of shares”, which would cover the following instances: (1) Increase in the Authorized Capital Stock; (2) Opening for subscription the unissued portion of existing capital stock; and


ARIS S. MANGUERA (3) Disposition of treasury shares (Page 832 of CLV’s CLR, 2007) • Pre-emptive right not available: (1) Shares to be issued to comply with laws requiring stock offering or minimum stock ownership by the public; (2) Shares issued in good faith in exchange for property needed for corporate purposes; (3) Shares issued in payment of previously contracted debts; (4) IN case the right is denied in the AoI. (Section 39; (Page 832 of CLV’s CLR, 2007)) • Whenever a capital stock of a corporation is increased and new shares of stocks are issued, the new issue must be offered first to the stockholders who are such at the rime the increase was made in proportion to their existing shareholdings and on equal terms with other holders of the original stocks before subscriptions are received from the general public. For example, if a stockholder with pre-emptive right owns 20% of the outstanding shares of the corporation, he may subscribe 20% of any shares of stock issued by the corporation. This principle is known as the right of preemption or pre-emptive right of stockholders (Page 355 of De Leon, 2006) • The rule [on pre-emption] aims to safeguard the right of stockholder to preserve unaltered and unimpaired his proportionate influence and interest in the corporation and the relative value of his holdings. (Page 356 of De Leon, 2006)

5.2 Trust Fund Doctrine TRUST FUND DOCTRINE Nature of Doctrine: Ong Yong v. Tiu, 401 SCRA 1 (2003).

-

“The assets of the Corporation to the extent of its capital stock represent a Trust Fund for the protection of the creditor’s claim”

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ARIS S. MANGUERA

o

During the life of the corporation, no assets may be returned to the stockholders when there are outstanding obligations

o

Dividends can only be declared out of __restricted retained earnings

o

The corporation is without authority to repurchase its own shares of stock, except in instances mandated by law

o

The corporation cannot subscriptions receivables

o

The corporation cannot reduce its capital stock to the prejudice of the creditors. (there are exceptions)

o

Upon insolvency, all subscriptions automatically become due and payable

o

Upon dissolution, all assets of the corporation shall first be applied for the payment of all its obligations

waive

or

condone

receivables

corporation are regarded as equtiy in trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void. Boman Environmental Dev. Corp. v. CA, 167 SCRA 540 (1988).

5.3 Case Philippine Trust Co. v. Rivera (1923) • The resolution releasing the shareholders from their obligation to pay 50 per centum of their respective subscriptions was an attempted withdrawal of so much capital from the fund upon which the company’s creditors were entitled ultimately to rely and, having been effected without compliance with the statutory requirements, was wholly ineffectual. Catindig Class Notes Q: A corporation has 5M Unrestricted Retained Earnings, it then donated 3M to typhoon victims with BoD approval. “A”, a stockholder filed a suit seeking to enjoin or annul the donation. Is the suit valid? A: Yes. The donation is unreasonable.

Under the trust fund doctrine, the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Comm. of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999). The “trust fund” doctrine considers the subscribed capital stock as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital stock may be turned over or released to the stockholder (except in the redemption of the redeemable shares) without violating this principle. Thus dividends must never impair the subscribed capital stock; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the consideration therefore. NTC v. Court of Appeals, 311 SCRA 508 (1999). The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock, property and other assets of a


5.4 Issuance of Certificate of Stock (Section 64) Sec. 64. Issuance of stock certificates No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid. (37)

•

Certificate of stock is a written evidence of the shares of stock but it is not the share itself. (Lincoln Philippines Life v. CA) • See page 864 of CLV’s CLR Jack’s Lecture It says here (§64; Issuance of stock certificates) that no stock certificate shall be issued until the full amount of the

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subscription has been paid because, it said, a subscription contract is indivisible. So until the entire consideration is paid, the stockholder shall not be entitled to a stock certificate. That’s why that old Baltazar case is wrong. Where Justice Paredes said that… let’s say you subscribed to 1000 shares and you paid only 25% of the price, the stockholder has the option. He can either spread out that partial payment equally among the 1000 shares so each share will be partially paid or he can apply that as full payment for 250 shares and then ask the corporation to issue stock certificates to him for 250 shares. That is wrong because the subscription agreement is indivisible. Catindig Class Notes Q: Is the issuance of Certificate of Stock, in case of transfer MINISTERIAL? A: Yes. Catindig: Not exactly true.

ARIS S. MANGUERA

•

corporation upon demand, as soon as he has complied with the conditions under Section 64 of the Corp Code (CLV’s Textbook 404) A subscriber must first totally pay his subscription before a certificate of stock covering shares subscribed and paid for could be issued to him. (CLV’s Textbook 400)

•

(c) Additional material: SEC Opinion No. 05-02 dated January 31, 2005 re Bearer Certificates. SEC Opinion

(1)

Tax Code on capital gains tax Payment thereof is necessary. The Corp Sec must be shown the certificate authorizing the transfer as issued by the BIR. (Except in case of nominee (1share; usually, no capital gains tax realized)) (2) Payment of tax due on the transfer of shares Note: Upon issuance of Certificate of Stock to a NOMINEE always make a DEED OF TRUST. Prepare Minute first and have it signed before issuing a Secretary’s Certificate

(3) (4) (5)

Section 15, 11th paragraph Right of First Refusal Payment of Documentary stamps

Q: Where can you a get a stock certificate? A: From the National Bookstore. (Haha)

(a) Formalities for Issuance •

The certificate of stock must be signed by the President or Vice-President and countersigned by the corporate secretary or the assistant secretary otherwise it is not deemed issued. (Bitong v. CA) • Pay attention to Section 15(11).

(b) Right of a stockholder to a certificate •

Under Section 63 of the Corp Code, every stockholder has a right to have a proper certificate issued to him by the


(d) Lost or Stolen Certificates (Section 73) Sec. 73. Lost or destroyed certificates The following procedure shall be followed for the issuance by a corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed: 1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares represented by such certificate, the serial number of the certificate and the name of the corporation which issued the

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same. He shall also submit such other information and evidence which he may deem necessary; 2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for three (3) consecutive weeks at the expense of the registered owner of the certificate of stock which has been lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner and the serial number of said certificate, and the number of shares represented by such certificate, and that after the expiration of one (1) year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock, unless the registered owner files a bond or other security in lieu thereof as may be required, effective for a period of one (1) year, for such amount and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one (1) year period provided herein: Provided, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed. Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described. (R. A. 201a)

•

While Sec. 73 of Corporation Code appears to be mandatory, the same admits exceptions, such that a corporation may voluntarily issue a new certificate in lieu of the original certificate of stock which has been lost without complying with the requirements under said section. It would


ARIS S. MANGUERA be an internal matter for the corporation to find measures in ascertaining who are the real owners of stock for purposes of liquidation. It is well-settled that unless proven otherwise, the “stock and transfer book” is the best evidence to establish stock ownership. (SEC Opinion, dated 28 January 1999, addressed to Ms. Ma. Cecilia Salazar-Santos). • A corporation may actually not heed the procedure under Section 73 of the Corp Code in accordance with SEC Opinion but by doing so, it cannot avail of the “free and harmless” clause provided in Section 73. (CLV’s textbook at 410) Jack’s Lecture Now if a stock certificate was lost, to get a new one, the stockholder must execute an affidavit explaining the circumstances under which the stock certificate was lost. (§73; Lost or destroyed certificates). And then, notice of the loss will be published once a week for 3 consecutive weeks in a paper of general circulation. And then after 1 year from the date of the last publication, he can get a new stock certificate. But the stockholder might want to get the stock certificate right away. For instance, he might be applying for a loan and intends to use the shares of stock as collateral for the loan. So he cannot wait for a year. He will be allowed to get the stock certificate but he will be required to post an indemnity bond equal to the value of the shares listed in the stock market. The stock and transfer agent will say, “Ok, you just give a bond equal to the value of the shares in the stock market.” If it is not listed in the stock market, well you can use the book value which appears on the latest audited financial statement. Catindig Notes Section 73 Q: Is the corporation required to verify the accuracy of all the facts in the affidavit? A: No. What is verified is that the SH is indeed a SH and not an impostor. Check the signature cards. Section 73(2) (1) Verify if the affiant is really the stockholder of record. Use the signature card. (2) Form: Notarial requirements; CTC+ Government issued ID with picture (3) Address (4) Prepare the notice. Newspaper of G.C.

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(5)

Original copy of the publisher’s affidavit.


See page 876 of CLV’s CLR, 2007 Jack’s Lecture

Replacement Certificate (1) (2)

Indicate that it is a replacement certificate; Same stock number

5.5 Transfer of shares (Section 63) Sec. 63. Certificate of stock and transfer of shares The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. (35)

How are shares of stocks transferred? • If represented by a certificate, the following must be complied with: (1) Delivery of the certificate (2) Indorsement by the owner or his agent (3) To be valid to third parties, the transfer must be recorded in the books of the corporation. • If not represented by the certificate (such as when the certificate has not yet been issued or where for some reason is not in the possession of the stockholder. (1) By means of a deed of assignment (2) Such is duly recorded in the books of corporation. (See page 297 of JRS for illustrative problems)


Now the stock certificate will be signed by the President, or in his absence the Vice-President, and countersigned by the Secretary (§63; Certificate of stock and transfer of shares). That’s why in one case…you have this Torres case… a retired Judge who was the controlling stockholder in a corporation. And his nephew to whom he had given shares of stock turned out to be recalcitrant and rambunctious so he decided to regain control of the corporation by giving shares to other nephews. And what did he do? He was the president of the corporation and he simply posted entries in the stock and transfer book. O, one share to this fellow, another share to that… The court said that that is not valid. That is not the way to…and besides, he is the president, not the corporate secretary. He is not supposed to handle the stock and transfer book. TRANSFER OF SHARES OF STOCK It says here, shares of stock are personal property and they may be transferred by delivery of stock certificates endorsed by the owner or his attorney in fact. So you need two things: an indorsement of the stock certificate plus delivery. That’s why you have that case of Razon where Mr. Vicente Chuidian wanted to regain shares of stock which he claimed belonged to his father in E. Razon. And Razon said “No, this does not belong to your father. It actually belongs to me.” Well, the stock certificates were actually in his possession. The court said there was no indorsement so he cannot claim that the stock certificate belonged to him. On the other hand, the court said that where the stock certificate was endorsed but it was not delivered, then the shares of stock represented by the stock certificates had not been transferred to the buyer. And the court says it is a ministerial obligation of the corporation to transfer the shares of stock to the name of the buyer. So even if a case has been filed for the rescission of the sale, the corporation still has to transfer the stock certificates. There was a case where the seller sold the shares of stock and he was paid. And a new stock certificate was issued to the buyer. And then the corporate secretary says that, “Well, the old stock certificate has not been endorsed.” So the buyer returned it to the seller and told him, “Will you please endorse it so that it can be cancelled.” But the seller did not and refused to return the stock certificate. So the corporation declared it as cancelled. The court said that the cancellation was valid because actually he has sold and it and he has been paid. It was just delivered to him for him to

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endorse and he unjustifiably refused to return the stock certificate. And therefore the corporation can consider it as cancelled.

that a subscription contract is an indivisible contract. And therefore the stockholder, if he subscribed to 1000 shares cannot say, “I will sell 500 and then retain 500.” No. The contract is indivisible. So it must be all or nothing. If he wants to sell, he must sell the entire 1000 shares. Now if he does that, he must get the approval of the board because remember he still owes the corporation for his unpaid subscription and therefore if he will sell the shares, in effect he will be substituting somebody for him as debtor for the unpaid subscription. And when there is substitution of debtors, that is novation and you need the consent of the creditor- the corporation. Now you have this case of China Bank which I mentioned earlier where China Bank foreclosed the pledge on the proprietary shares of Valley Golf Club. When it asked Valley Golf Club to register the shares in its name, Valley Golf Club refused. It said that this stockholder has unpaid obligations. He has not paid his monthly dues, he has not paid his bills and under the by-laws, Valley Golf Club has a lien on the stock certificate for his proprietary share for his unpaid claim. And Valley Golf Club argued under §63 that it can’t be transferred in the books in the name of China Bank because we have these claims which are not paid. The Court said no. The unpaid claim mentioned here refers to the subscription price. It does not refer to amounts due the corporation arising from other transactions. It only refers to payment due under the subscription agreement.

Now, no transfer shall be valid except as between the parties until the transfer is recorded in the books of the corporation. Why? If the selling stockholder has a creditor and in the books of the corporation the shares are still in his name, the creditor can attach and levy on the shares. Now, although it has been said that shares of stock are personal property and are quasi-negotiable because to transfer them, the seller can simply sign at the back and deliver it they’re not like negotiable instruments. That’s why if the indorsement of the stockholder was forged even if it was an indorsement in blank, the buyer shall not acquire any right to the share of stock. Now if the one who forged it was an employee or officer of the corporation who was precisely in charge of the stock, the records or the stock certificates, then the corporation will be responsible for his act. Like you know, you are required to be a stockholder of PLDT to get a telephone line. Many people do not claim their stock certificates so they are there in the vault of PLDT. I have one case where an employee there who was in charge of their custody forged the indorsement of some stock and sold them in the stock market. So the buyer would get good title, the corporation will be liable. So what will happen? The buyer will get good title and the seller will also have to be recognized. And it would be PLDT who would bear the loss. But remember whenever there will be an over-issuance of the shares, irrespective of good faith, the buyer cannot acquire title. If there is over-issuance, the owner of the shares of stock whose signature was forged must be recognized as still the owner and the remedy of the buyer would simply be to sue PLDT for damages. Likewise if the indorsement was forged… somebody stole the stock certificate, forged the indorsement and because of that, the corporation issued a stock certificate to that forger so he now has a stock certificate in his name and he goes around and sells that to somebody who bought that in good faith, he will be protected because he has the right to rely on that stock certificate in the name of the seller. So what will happen, both the original owner whose stock was stolen and that buyer, para ‘tong Torens title, will be recognized. But again if this will result in over-issuance, it is the original owner who will be recognized and the remedy of that buyer will be to simply sue the corporation for damages. Now the law says no shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. In other words, if there is an unpaid subscription and there’s a call (?). So first of all, the SEC has said


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Under Sec. 63 of Corporation Code, the sale of stocks shall not be recognized as valid unless registered in the books of the corporation insofar as third persons, including the corporation, are concerned—as between the parties to the sale, the transfer shall be valid even if not recorded in the books of the corporation. Batangas Laguna Tayabas Bus Co. v. Bitanga, 362 SCRA 635 (2001).

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A transferee has no right to intervene as a stockholder in corporate issue on the strength of the transfer of shares allegedly executed by a registered stockholder. It is explicit under Sec. 63 that the transfer must be registered to affect the corporation and third persons. Magsaysay-Labrador v. CA, 180 SCRA 266 (1989).

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The purpose of registration is two-fold: to enable the transferee to exercise all the rights of a stockholder, including

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the right to vote and to be voted for, and to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine whether a stockholders’ resolution was approved, despite the claim of the alleged transferee. On the other hand, a person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the corporate books. Until the transfer is registered, the transferee is not a stockholder but an outsider. Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 362 SCRA 635 (2001).

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A bona fide transfer of shares, not registered in the corporate books, is not valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not. All transfers not so entered on the books of the corporation are absolutely void; not because they are without notice or fraudulent in law or fact, but because they are made so void by statute. Garcia v. Jomouad, 323 SCRA 424 (2000).

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Pursuant to Sec. 63, a transfer of shares of stock not recorded in the stock and transfer book is non-existent as far as the corporation is concerned. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only into its books for the purpose of determining who its shareholders are. Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).

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Section 63 contemplates no restriction as to whom the stocks may be transferred. It does not suggest that any discrimination may be created by the corporation in favor of, or against a certain purchaser. The owner of shares, as owner of personal property, is at liberty, under said section to dispose them in favor of whomever he pleases, without


ARIS S. MANGUERA limitation in this respect, than the general provisions of law. Fleishcher v. Botica Nolasco, 47 Phil. 583 (1925).

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The only limitation imposed by Sec. 63 is when the corporation holds any unpaid claim against the shares intended to be transferred. A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers, because “Restrictions in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. By-laws are intended merely for the protection of the corporation, and prescribe relation, not restriction; they are always subject to the charter of the corporation.” Rural Bank of Salinas v. CA, 210 SCRA 510 (1992).

5.6 Cases Sunset View Condominium Corporation v. Campos (1981) • Ownership of a unit is a sine qua non to being a shareholder in the condominium corporation. It follows that a purchaser of a unit who is not yet the owner thereof for not having fully paid the full purchase price is not a shareholder. • By necessary implication, the “separate interest” in a condominium, which entitles the holder to become automatically a shareholder in the condominium corporation, as provided in Section of the Condominium Act, can be no other than ownership of a unit. This is so because nobody can be a shareholder unless he is the owner of a unit and when he ceases to be the owner, he also ceases automatically to be a shareholder. • (The subject matter of this case are under the jurisdiction of the regular courts because the private respondents are “not shareholders” of the condominium corporation. Razon v. IAC (1992)

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The indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. • The assertion that the petitioner did not require an indorsement of the certificate of stock in view of his intimate friendship with Chuidian cannot overcome the failure to follow the procedure required by law. • Catindig. This question was asked in the bar. But for me this is not a good case because.. Rural Bank of Salinas v. CA (1992) • Section 5(b) of PD NO. 902-A grants to the SEC the original and exclusive jurisdiction to hear and decide cases involving intracorporate controversies. • An intra-corporate controversy has been defined as one which arises between a stockholder and the corporation. There is no distinction, qualification, nor any exception whatsoever. • A corporation cannot create restrictions in stock transfer • The right of a transferee/assignee to have stocks transferred to his name is an inherent right. • Corporation’s obligation to register is ministerial. BLTB v. Bitanga, 2001 • A transfer of shares is not valid unless recorded in the books of the corporation. • A person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the corporate books-until the transfer is registered, the transferee is not a stockholder but an outsider. • Dissenting Opinion by Panganiban: Under Section 63 of the Corp Code, the sale of the stocks shall not be recognized as valid unless registered in the books of the corporation, but only insofar as third persons, including the corporation are concerned- as between the parties to the sale, the transfer shall be valid even if not recorded in the books of the


ARIS S. MANGUERA corporation…Therefore, that as between the parties to the sale, the transfer shall be valid even if not recorded in the books of corporation. • CLV: I agree with the dissenting opinion of Justice Puno: “The rule [Section 63] is intended to protect the interest of the corporation and theird persons who may be prejudiced by the transfer of the shares of stocks. It follows therefore that as between the parties to the sale, the transfer shall be valid even if not recorded in the books of corporation.” • Catindig: I’m not satisfied with the decision because… • Catindig: to know who are the SH, only look at the STB. Rural Bank of Lipa v. CA (2001) • The rule is that the delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the transferee. • Requirements to have a valid transfer of stocks: (1) There must be a delivery of stock certificate (2) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer, and (3) To be valid against third parties, the transfer must be recorded in the books of the corporation. Ponce v. Alsons Cement (2002) • Pursuant to the Corporation Code, a transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. • A corporate secretary may not be compelled to issue stock certificates without registration. Republic v. Estate of Hans Menzi (2005) • A stock certificate is merely a tangible evidence of ownership of shares of stock-its presence or absence does not affect the right of the registered owner to dispose of the shares covered by the stock certificate

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The delivery of a duly indorsed stock certificate is sufficient to transfer ownership of shares of stock in stock corporations; The absence of a deed of assignment is not a fatal flaw which renders the transfer invalid.

5.7 Could the transfer of shares be restricted (Section 98) Sec. 98. Validity of restrictions on transfer of shares Restrictions on the right to transfer shares must appear in the articles of incorporation 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. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person.

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(Atty. Catindig talks of right to purchase shares instead of option to purchase shares) Catindig Class Notes Section 98 Tag-along provision e.g. Class A and B shares One holder of Class A shares wants to sell his shares. All holders of Class A shares must also sell for the transaction to push through. Mutual Fund Shares (1) Transferability of shares; (2) Right of holder to sell back the shares to the company at any time. Settlement Account -where proceeds, investments are deposited

5.8 Cases Lim Tay v. CA (1998)



The registration of shares in a stockholder’s name, the issuance of stock certificates, and the right to receive dividends fall within the jurisdiction of the SEC. • The controversy “among stockholders, partners, associates themselves” is intracorporate in nature and falls within the jurisdiction of SEC. • Petitioner’s status as a mere pledge does not, under civil law, entitle him to ownership of the subject shares • Petitioner’s possession of the stock certificates came about because they were delivered to him pursuant to the contracts of pledge. His possession as a pledge cannot ripen into ownership by prescription. Roxas v. CA (1992) • An officers’ power as an agent of the corporation must be sought from the statute, charter, the by-laws or in a delegation of authority of such officer, from the acts of the board of directors, formally expressed or implied from a habit or custom of doing business. Garcia v. Jomouad (2000) • All transfer of shares should be entered on the books of the corporation , and all transfers of shares not so entered are invalid as to attaching or execution creditors of the assignors, as well as the corporation and to subsequent purchasers in good fait, and indeed, as to all persons interested, except the parties to such transfer. • The entry in the minutes of the meeting of the Club’s BoD noting the resignation of a proprietary member does not constitute compliance with Section 63 of the Corporation Code.

5.9 Unpaid Subscriptions Jack’s Lecture Now, the unpaid portion of the subscription, as a rule, does not earn interest unless the by-laws provide for interest

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(§66; Interest on unpaid subscription). And if the by-laws specify what is the interest, that is what will apply. But if it does not state what will be the interest, then it will be the legal rate. Now, so long as the stockholder is not delinquent, he is entitled to exercise all the rights of a stockholder so he can vote his shares and if there are dividends declared, he will receive the dividends. (§72; Rights of unpaid shares). Now when will the payment of the balance fall due? (§67; Payment of balance of subscription). In two cases. First, if the subscription agreement stipulates that he should pay for the balance of the subscription on certain dates. Secondly, if a call was made. If the director said, “We need more working capital” and so it made a call. Now a call must be uniform. You must make a call on everybody. Otherwise, if you will allow the board to single out some stockholders and they want to get rid of some stockholder who is questioning so many actions of the board, then they will make a call for his share only. And then if he does not pay, they will sell his shares and get rid of him. It has to be uniform. Now, so if a call is made and a stockholder fails to pay, let’s say the directors say, “Ok, we are making a call on 25% of the subscription” and he fails to pay, the law says the entire balance of his subscription will become due. Although the call was only for 25%, if he fails to pay, the entire balance including the 75% will fall due. And so if within 30 days from the date payment should have been made, he has still not paid, that is now delinquent. And once the shares are delinquent, he will lose the rights of a stockholder. (§71; Effect of delinquency) He cannot vote his shares, he cannot receive any dividends and if there is any stock dividend, the delivery of the stock certificate will be withheld and any cash dividend will be applied in payment of his subscription. So once the stocks are delinquent, then the corporation will now pass… the board will now pass a new resolution ordering that the shares be sold, which should not be less than 30 days or more than 60 days from the date the shares became delinquent. (§68; Delinquency sale) And notice of the sale should be sent to the stockholder and that should be published once a week for 2 weeks in a newspaper of general circulation. So if the stockholder still fails to pay, well, the shares will be sold at public auction. The auction will be the Dutch method of auction, In other words, the price is fixed. The auctioneer will say, “Gentlemen, we have here 1000 shares which are delinquent and the balance of the subscription is P75,000. How many shares am I offered for P75,000?” Somebody says, “7,500”. Somebody else says, “6000.” “5500.” The one who is willing to get the least number of shares


ARIS S. MANGUERA for that price will be the one who will win the bid. And as a result of that, the subscription will now be fully paid and the rest will be given to the delinquent stockholder because he is now fully paid. If there is no bidder, the corporation can bid. Now, until the corporation makes a call, the payment of the subscription is not due unless the subscription agreement contains a stipulation as to when it is to be paid. That’s why in one case, an employee of a corporation filed a case and got a judgment against the employer but he was also a stockholder. And the employer argued that it should not be ordered to satisfy the judgment because…since this employee has an unpaid subscription, the balance of the subscription should be set-off against the judgment in his favor. The court said, “No, for compensation to take place, both debts must be due.” And the payment for the subscription is not yet due because no call has been made. Now that unpaid portion of the subscription is an asset because it is a receivable. And creditors can sue the stockholders for the unpaid subscription if the corporation has no assets. Now normally, the plaintiff will sue first the corporation and then if the corporation… and if he gets a judgment and it cannot be satisfied…there is a sheriff’s return…unsatisfied…then he can now sue the stockholders for the unpaid amount of their subscription. Now if, at the time the case was being filed against the corporation, the corporation is already insolvent and cannot pay, then the creditor can already include the stockholders as defendants in that action. Well, I had a case before, when Miriam Defensor was still a judge. Our client was a foreign company which sold chemicals to a company here. It was a good project but the problem was they put in too little capital and instead the borrowed massively and so it was the interest payments that was killing them. Now, our client filed a case and they compromised and agreed to pay in installments over a period of 2 years but then they failed to pay. So now I sued the stockholders for their unpaid subscription and the case was assigned to then Judge Miriam Defensor Santiago. Defense of stockholders: payment. They said we have already paid for our subscription. And they submitted receipts to prove that they had paid for their subscriptions. But you see, when the printing press prints the receipts, it must first get approval from the Bureau of Internal Revenue. So they will get approval and say we are printing these official receipts with these serial numbers and it is only after you get approval that you can print and the number of the permit and the date of its issuance will be printed at the bottom of the receipts. Now these receipts were obviously forged because they were dated something like February but the date of the issuance of the permit by the BIR for printing was dated June. So they were

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obviously fabricated. That’s why in a moment of lucidity, Judge Miriam Defensor Santiago held the defendants liable. Now if the owner of the shares want to question the sale, the law requires he must first pay the party who paid for his shares of stock with legal interest. And he must file the case within 6 months from the date of the sale. (§69; When sale may be questioned). Now the corporation can decide to sue instead on the unpaid subscription. (§70; Court action to recover unpaid subscription). Why? Because if, for example, a corporation is incurring losses, if you sell that at public auction, nobody will buy. Because the value of the corporation is negative. So if the corporation decides to buy it also, it won’t (?) make sense. So they would probably, in such a case, choose to sue instead the stockholder for payment of the balance of his subscription.

(a) Is interest due on unpaid subscriptions? (Section 66) Sec. 66. Interest on unpaid subscriptions Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. (37)

(b) Do unpaid shares have rights? (Section 72) 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. (n)

(c) How do you collect unpaid subscriptions? What are the remedies of corporations to enforce payment of stocks? (1) Extra-judicial sale at public auction. (2) Judicial Action


ARIS S. MANGUERA (3) Collection from cash dividends and withholding of stock dividends.(See page 304 of JRS) What does the term unpaid claim mean (for purposes of declaring the shareholder delinquent)? It refers to any unpaid subscription, and not to any indebtedness which a subscriber of stockholder may owe the corporation arising from any other transaction.

(i) When is a call necessary? (Section 67) Sec. 67. Payment of balance of subscription Subject to the provisions of the contract of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. (38)

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Call is a declaration by the board of directors that the unpaid subscriptions are due and payable to the corporation. (JRS at 305) • The word “call” is capable of three meanings, namely: (a) a resolution of the BoD for the payment of unpaid subscriptions; (b) notification of such resolution made on the stockholders; or (c) the time when subscriptions become payable. (CLV’s Textbook 392)

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A call is necessary if no time to make payment is stated in the subscription agreement. (JRS at 305) • A call is not necessary if: (1) there is a time fixed in the agreement for payment (2) if the corporation becomes insolvent (JRS at 305) • Notice of call is necessary to bind the stockholders. (JRS at 305)

(ii) Could the corporation resort to court action? (Section 70) Sec. 70. Court action to recover unpaid subscription Nothing in this Code shall prevent the corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and expenses. (49a)

(d) How do shares become delinquent? (Section 67)

ARIS S. MANGUERA

(e) What is the effect of delinquency? (Section 71) Sec. 71. Effect of delinquency No delinquent stock shall be voted for be entitled to vote or to representation at any stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any. (50a)

Effect of Deliquency: (1) Deprives the stockholder the right: a) To be voted for; or b) To be entitled to vote; or c) To representation at any stockholders’ meeting (2) Deliquent stockholder shall not be entitled to any of the rights of a stockholder but he shall still be entitled to receive dividends. (3) Deliquent stocks shall be subject to delinquency sale Note: If the delinquent stockholder is a director, he shall continue to be a director but he cannot run for re-election. (JRS at 307)

Sec. 67. Payment of balance of subscription Subject to the provisions of the contract of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. (38)


(f) What is a delinquency sale and how is it conducted? (Section 68) Sec. 68. Delinquency sale The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the

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balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code.

Procedure for collection and delinquency sale: (1) Call whenever required must be made by the Board (2) Notice of call- the stockholders are given notice of the board resolution by the corporate secretary, either personally or by registered mail. (3) If the stockholders concerned do not pay within thirty (30) days from the date specified in the contract of subscription or in the call, all the stocks covered by the subscription shall be declared delinquent and shall be subject to sale under Section 68. (4) Notice of delinquency served on the subscribers either personally or registered mail and publication in a newspaper of general circulation in the province or the city where principal office is located once a week for two consecutive weeks. Notice shall state the amount due on each subscription plus accrued interest, and the date, time and place of the sale


ARIS S. MANGUERA which shall not be less than 30 days nor more than 60 days form the date the stocks become delinquent. (5) Sale—such number of shares as may be necessary to pay the amount due on subscription, plus interest and other amounts due, will be sold at public auction. The highest bidder is the person offering to pay the full amount of the balance on the subscription and other amount that are due for the smallest number of shares or fraction of a share. Catindig Class Notes The Certificate of Stock representing the stock dividends are considered civil fruits of the delinquent shares. Hence, the buyer of the Dshares shall own the certificate of stocks representing the stock dividends.

(g) Could a sale of delinquent shares be questioned? (Section 69) Sec. 69. When sale may be questioned No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders 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; and no such action shall be maintained unless it is commenced by the filing of a complaint within six (6) months from the date of sale. (47a) Catindig Class Notes Yes, a sale of delinquent shares may be questioned provided there is tender…

5.10 Case Apodaca v. NLRC (1989) • Unpaid subscriptions are not due and payable until a call is made by the corporation for payment through a board resolution. • An obligation arising from non-payment of stock subscriptions to a corporation cannot be offset against a money claim of an employee against the employer.

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5.11 Voting Rights What are the basic rights of shareholders? (1) Direct or indirect participation in management; (2) Voting rights (Section 6) (3) Right to remove directors (Section 28) (4) Proprietary rights: (i) right to dividends (ii) appraisal right (Section 81) (iii) right to issuance of stock certificate for fully paid shares (Section 64) (iv) Proportionate participation in distribution of assets in liquidation (Section 188-119) (v) Right to transfer of stocks in corporate books (Section 63) (vi) Pre-emptive right (Section 39)

(5) Right to inspect books and records (Section 74) (6) Right to be furnished with the most recent financial statement/financial report (Section 74,75) (7) Right to recover stocks unlawfully sold for delinquent payment of subscription; (8) Right to file individual suit, representative suit, and derivative suits.(Page 298 of JRS) Manner of Voting (1) Directly (in person) (2) Indirectly, through a representative (a) by means of proxy (Sections 55, 56, 58 and 89 par. 2) (b) by a trustee under a voting trust agreement (Sec 59) (c) by executors, administrators, receivers, or other legal representatives duly appointed by the court. (Section 55(2)) *Voting may be either straight or cumulative (See Section 24)

(a) Pledgors and Mortgagors (Section 55) Sec. 55. Right to vote of pledgors, mortgagors, and administrators


ARIS S. MANGUERA In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. (n)

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When shares are pledged by means of endorsement in blank and delivery of the covering certificates to a loan, the pledgee does not become the owner thereof simply by the failure of the registered stockholder to pay his loan. Consequently, without proper foreclosure, the lender cannot demand that the shares be registered in his name. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998).

(b) Executors, receivers and administrators (Section 55) Sec. 55. Right to vote of pledgors, mortgagors, and administrators Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy. (27a)

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Although the Rules of Court, while permitting an executor or administrator to represent or to bring suits on behalf of the deceased, do no prohibit the heirs from representing the deceased. When no administrator has been appointed, there is all the more reason to recognize the heirs as the proper representatives of the deceased. Gochan v. Young, 354 SCRA 207 (2001).

(c) Joint owners of stock (Section 56) Sec. 56. Voting in case of joint ownership of stock In case of shares of stock owned jointly by two or more persons, in order to vote the same, the consent of all the co-owners shall be necessary, unless there is a written proxy, signed by all the coowners, authorizing one or some of them or any other person to vote such share or shares: Provided, That when the shares are owned in an "and/or" capacity by the holders thereof, any one of the joint

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owners can vote said shares or appoint a proxy therefor. (n)

Catindig Class Notes Q: In “AND shares”, can each joined owners vote for half of the total shares? A: No. Gen. Rule: Consent of all needed is needed in joint ownership.

(d) ITF shares • •

“In trust for” Even when it is shown that the registered owner of shares of stock holds the share in trust for the benefit of the principal, it is necessary nevertheless that the trustee must still endorse the stock certificate to validate the cancellation of her share and to have the transfer recorded in the books of the corporation in favor of the principal or another trustee. (Bitong v. CA)

(e) And/or shares •

Anyone of the joint owners can vote said shares or appoint a proxy therefore.

(f) Treasury shares (Section 57) Sec. 57. Voting right for treasury shares Treasury shares shall have no voting right as long as such shares remain in the Treasury. (n)

(g) Non-voting shares (Section 6) Sec. 6. Classification of shares The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be


ARIS S. MANGUERA deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock. xxx Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.

(h) Proxies (Section 58) Sec. 58. Proxies Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy,

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it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. (n) Jack’s Lecture Now, as I said before, a stockholder can vote by proxy. But if he gave a later proxy, the later proxy will prevail over the earlier proxy. If you cannot tell which one is later because they don’t have dates, well, neither can vote. Or if the stockholder personally showed up at the stockholders’ meeting, then he is personally present, then the proxy will lose the right to vote because the proxy is just an agent and agency can be revoked at any time. However if the proxy is coupled with an interest, then it cannot be revoked. For instance, if you have a bank which loaned a substantial amount of money and it required this borrower to pledge his shares of stock as collateral and to give a proxy until the loan is fully paid, then he cannot revoke the proxy because it is coupled with an interest.

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Proxy refers to the formal written authority given by the owner or holder of the stock, who has a right to vote it, or by a member, as principal to another person, as agent, to exercise the voting rights of the former. (Page 490 of De Leon, 2006) • The term also refers to the holder of authority or the person authorized by an absent stockholder or member to vote for him at a stockholders’ or members’ meeting. (Page 490 of De Leon, 2006) •

Purpose of use of proxy: (1) Presence of quorum in meetings (2) Exercise of right to vote though absent (3) Voting and management control Catindig Class Notes Q: Can the Corporate Secretary refuse to recognize a proxy sent thru email? A: Yes, unless the corporation adopts a policy to receive proxy email thru internet.

(i) Voting Trust (Section 59) Sec. 59. Voting trusts


ARIS S. MANGUERA One or more stockholders of a stock corporation may create a voting trust 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: Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be canceled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of this Code. Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed canceled and new certificates of stock shall be reissued in the name of the

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ARIS S. MANGUERA

transferors. The voting trustee or trustees may vote by proxy unless the agreement provides otherwise. (36a) Jack’s Lecture A stockholder can create a voting trust. What will happen is that the share of stock under his name will be cancelled and will be issued in the name of the trustee. The VTA is valid only for 5 years. But, if this was imposed as a condition in a loan, it will be valid for a longer period because the lender imposed that condition to protect his interest especially if it is a big exposure. The bank will want to know what is happening so they will insist that a bank officer should be given a voting trust and sit in the Board to find out what’s happening. If the loan is for 10 years it can be for 10 years but if the loan is paid, automatically the VTA will lapse even if the 10 year period has not yet expired because the voting trust is merely to protect the interest of the bank. These are different devices to accumulate votes, the proxies, the trusts. You can also have a pooling agreement where 2 or more SH sign an agreement that they will vote their shares together, in the same way.

(j) Pooling agreement • Pooling agreement refers to agreement between 2 or more shareholders to vote their shares in the same way or as a unit. (Page 502 of De Leon, 2006) • See Section 100 UP Class Notes Para 1: SH agreements in general. Pre-incorporation agreements among SHs remain effective even after incorporation if so intended and even if not reflected in AOI, except for matter required by the Code to appear in the AOI Para 2: Refers to pooling and voting agreements in particular. There is no reason for denying the SHs other than those in close corporations the right to enter into voting or pooling agreements to protect their interests, as long as no wrong or fraud is committed or is intended to be committed on other SHs or parties Para 3: gives close corporations freedom to operate as a partnership between and among the SHs, but remaining as a corporation insofar as third persons are concerned. Note: SHS who are parties assume liabilities of directors


Catindig Class Notes Q: A,B,C,D, and E entered in pooling agreement so as to elect A,B, and C as directors. Those elected as directors would then vote for A as President of the corporation. A,B, and C were elected. A was not elected President because C voted for another person. Can A or B or other members of the pool file a suit against C for breach of contract? A: No. The direction of business belongs to the Board of Directors and not to the SHs. The stipulation is void if it is meant to control the discretion of the Directors.

Distinction between proxy and voting trust Legal Title Revocability

Proxy No legal title Revocable unless coupled with interest.

Extent of Power When to vote

Can only act at a specified SHs’ or members; meeting Absence of the owner

Capacity to be a director

Cannot be voted as a director unless he is also a SH of record (owns other shares)

Subject Matter Duration

Voting rights Usually shorter but cannot exceed 5 years

VTA Acquires legal title Irrevocable if validly executed BUT such SH can revoke if there’s a breach of fiduciary obligation Not limited to any particular meeting Even when the owner is present Can be voted as a director. Considered as the SH of record in the books of the corp Shares+Voting rights Usually longer but cannot exceed 5 years except in loan agreeements

Proxy v. Trustee v. Pooling and Agreements Proxy Based on law on agency Principal-agent Proxy cannot exceed

Trustee

Pooling Agreements

Based on law on trust

Based on Contract law

Trustee-beneficiary The only limit to this

Consensual Merely an agreement to

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delegated authority Must be in writing Copy must be filed with the corp secretary Regular voting rights. Another penson exercise voting rights only for a specific meeting (unless otherwise provided) Proxy cannot be a director Revocable at will, in any manner Except when coupled with an interest Maximum of 5 years at a time

ARIS S. MANGUERA authority: must be for benefit of trustee (fiduciary obligation) Must be in writing and notatrized Copy must be file with the SEC Transfer of legal title to trustee Absolute voting rights, subject only to fiduciary duty. Another person exercises voting rights continuously. Trustee can be a director Irrevocable as long as no misconduct or fraud

vote in the same way No formalities required Merely a contract between SH’s Owner still exercises voting rights

Q: How about via e-mail? A: As it is, voting by e-mail alone is not adequate because a userparticipant’s role in such cases is passive considering that his access to the entire proceedings is limited to the information in print transmitted through the internet.

(b) SEC Memo Circular No. 4 series of 2004, March 17, 2004 Revocable by consent or mutual termination. If unilateral termination, liable for damages

Maximum 5 years at a time (unless coterminous with loan)

SEC can pass on validity

5.12 Additional Materials (a) SEC Opinion No. 26 to Ms. Jaycel Sato re Voting by Trustees through the internet, March 22, 2003 SEC Opinion No. 26 Q: May a trustee vote through the internet? A: Yes, provided that the internet medium to be used is akin or similar (i.e., video streaming with voice packet or video over the internet) to the one being used in video-conferencing or teleconferencing, where a participant can see or hear the actual proceedings of a board meeting and actively participate in the deliberation of the board. However, it should be emphasized that participation of directors in


meetings through teleconferencing and video conferencing may be deemed acceptable only when adequate safeguards have been accordingly set in place. Meetings of this nature should be properly recorded and the appropriate tapes and discs properly stored for safekeeping.

SEC Memo Circ No. 4 Series of 2004 xxx (b) Stockholders shall have the right to vote at all stockholders’ meetings in person or by proxy. The stockholder may deliver, in person or by mail, his proxy vote directly to the corporation. xxx (g) If the stockholder intends to designate several proxies, the number of shares of stock to be represented by each proxy shall be specifically indicated in the proxy form. If some of the proxy forms do not indicate the number of shares, the total shareholding of the stockholder shall be tallied and the balance thereof, if any, shall be allotted to the holder of the proxy form without the number of shares. If all are in blank, the stocks shall be distributed equally among the proxies. The number of persons to be designate as proxies may be limited by the By-laws.

5.13 Appraisal right • Appraisal right refers to the right to withdraw form the corporation and demand payment of the fair value of his

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shares after dissenting from certain corporate acts involving fundamental changes in corporate structure. (Section 81) • Upon demand, all rights accruing to the shares shall be suspended. (Section 83)

(a) Instances of appraisal right (Section 81 & Section 37) Sec. 81. Instances of appraisal right Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances:

ARIS S. MANGUERA (2) Change in the rights of stockholders, authorize preferences superior to those stockholders, or restrict the right of any stockholder (Sections 37 and 81) (3) Corporation authorized the board to invest corporate funds in another business or purpose. (4) Corporation decides to sell or dispose of all or substantially all assets of corporation (Section 81) (5) Merger or consolidation (Section 81)

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1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; 2. 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

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3. In case of merger or consolidation. (n) Sec. 37. Power to extend or shorten corporate term A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n)

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De Leon: Section 37 grants appraisal right to a dissenting stockholder (right of the stockholder in the cases provided by law to demand payment of the fair value of his shares) “in case of extension of corporate term.” Such right should also be available to a dissenting stockholder if the corporate term is shortened as it is expressly recognized in Section 81(1). (Page 333 of De Leon, 2006) But wait, CLV has a different opinion. CLV: The appraisal right should not be triggered when it comes to shortening of corporate life, because there is really no violation of the original contractual intent. Therefore, the inclusion of the case of shortening of corporate life under Section 81 should not prevail over the specific provision under Section 37. (Page 237 of CLV’s Textbook) CLV: The exercise of appraisal rights rightly belongs to a case of extension of corporate term because extension actually novates the corporate contract with each shareholder, which now seeks to extend the corporate relationship beyond the original term provided for in the articles of incorporation. (Page 237 of CLV’s Textbook) Catindig: if the shortening of the corporate term is not intended to dissolving a corporation, Section 81 governs. Otherwise, Section 37 governs because the SH will get more if he remains a SH until liquidation. Catindig Class Notes

Instances where it may be exercised: (Sundiang) (1) Extension or reduction of corporate term (Section 37 and 81)*


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Q: X corporation decided to shorten its corporate term (from 50 to 10 years). One of the SHs voted against the reduction of the corporate term. Can the dissenting SH exercise appraisal right? A: Yes under Section 81. Q: X corporation decided to shorten its corporate term (from 50 to 3months). One of the SHs voted against the reduction of the corporate term. Can the dissenting SH exercise appraisal right? A: No, Section 37 governs because the SH will get more if he remains a SH until liquidation. Catindig: Shortening of corporate term is a way of dissolving a corporation. When the corporation is dissolved and shares are common, the said shares have residual rights. After payment of debts, everything left goes to the SHs. The liquidating dividends may be greater than the fair value.

(b) Requirements for a successful exercise of appraisal right (Section 82 and 86) Sec. 82. How right is exercised The appraisal right may be exercised by any stockholder who shall have voted against the proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares: Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (30) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment: and Provided, further, That upon


ARIS S. MANGUERA payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation. (n) Sec. 86. Notation on certificates; rights of transferee Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently canceled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee. (n)

Rules for exercise of appraisal right (1) The stockholder must be a dissenting stockholder- he voted against the proposed action. (2) The stockholder must make a written demand on the corporation within 30 days after the vote was taken. (3) The proposed action is any one of the instances enumerated above (b) (4) The price to be paid is the fair value of the shares on the date before the vote was taken (5) The fair value shall be agreed upon but in case there is no agreement within 60 days from the date the vote was taken, the fair value shall be determined by a majority of the 3 disinterested persons one of whom shall be named by the stockholder another by the corporation and the third by the two who were chosen. (6) The right of appraisal is extinguished when: a) He withdraws the demand with corporation’s consent (consent of the corporation is necessary) b) The proposal action is abandoned c) The SEC disapproves the action (Section 84) (JRS at 304) Catindig Class Notes Appraisal Q: Can the corp and SH just appoint one appraiser?

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A: Yep, the Code does not prohibit this. Notation Q: Why is there a need for notation? A: To avoid a moral hazard… that the SH might sell shares already subject to exercise of appraisal rigts. Q: Is one share sufficient to file a derivative suit? A: Yes provided the other requisites are present.

ARIS S. MANGUERA such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently canceled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee. (n)

(c) Effect of demand (Section 83) Sec. 83. Effect of demand and termination of right From the time of demand for payment of the fair value of a stockholder's shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this Code, except the right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored. (n)

5.14 Derivative Suits (a) Definition • A derivative suit is an action brought by minority

(d) Cost of appraisal (Section 85) Sec. 85. Who bears costs of appraisal The costs and expenses of appraisal shall be borne by the corporation, unless the fair value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the stockholder, in which case they shall be borne by the latter. In the case of an action to recover such fair value, all costs and expenses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was unjustified. (n)

(e) Notation on stock certificate(s) of dissenting stockholder (Section 86) Sec. 86. Notation on certificates; rights of transferee Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that


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shareholders in the name of the corporation to redress wrongs committed against the corporation, for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority.  Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997). Derivative action- those brought by one or more stockholders/members in the name and on behalf of the corporation to redress wrongs committed against it, or protect/vindicate corporate rights whenever the officials of the corporation refuse to sue, or the ones to be sued has control of the corporation.

Requisites of Derivative Actions: (1) The party bringing suit should be a shareholder as of the time of the act or transaction complained of; (2) He has exhausted intra-corporate remedies; and (3) The cause of action actually devolves on the corporation, the wrongdoing or harm having been caused to the corporation and not to the particular stockholder bringing the suit. (JRS at 300)

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(4) Acts must be brought in the name of the corporation. (Jack) (But wait, just make use of the Requisites provided by the Supreme Court, in 5.14(b) of this reviewer) Jack’s Lecture Now the stockholders are also allowed to file a derivative suit for redress of wrongs committed by the management. There are four requisites for the filing of a derivative suit. First, there must exist a cause of action which calls for this remedy. Example, the directors are mismanaging the affairs of the corporation. On the other hand, remember you have the business judgment rule. The court will not set aside the decisions and actions of the board unless they have acted in bad faith, illegally or with gross negligence. Even if the decisions may have resulted in losses, the court will not second-guess the board. So they must have committed mismanagement, or fraudulently disposed of their properties…Like in one case, you have two families who were stockholders of this corporation. One family was the one managing it and this family was siphoning the funds and transferring it to their own bank account. A derivative suit can be filed. Or the example given in your book is like that Republic Bank case. Republic Bank was being investigated by the Monetary Board, so what did it do? It got Caderno, the former governor of Central Bank as consultant. It was obvious that the purpose was to take advantage of his influence. So this is a case of influence peddling and so that contract could be assailed. Or in the old days, when you still have this import control. You cannot import unless you have a dollar allocation. One company sold its dollar allocation. You sell your dollar allocation, that’s illegal. You won’t get another dollar allocation again. So that could be the basis of a derivative suit. Then the stockholder must exhaust all remedies within the corporation by applying for redress from the board or from the stockholders unless this is excused. Well, the court has said, well, if the directors are mismanaging, to appeal to them would be useless since they are the very ones committing the wrong you are complaining about. Or the case of San Miguel, where you have probably around 20,000 stockholders around the world. It would be too unrealistic and too cumbersome to require a stockholder to appeal first to the stockholders and ask for a stockholders’ meeting. Third, the plaintiff must have been such at the time of the act complained of. If he was not yet a stockholder at the time of the act complained of, he cannot sue unless they are still being continued after he became a stockholder. That’s why you have this case of Nora Bitong, she filed a derivative suit against Apostol and these other people in the Philippine Daily


ARIS S. MANGUERA Inquirer but actually she was just a dummy of Juan Ponce Enrile who was the actual owner of the shares. Now the court said that since she was not really the owner of the shares, she could not file a derivative suit. And moreover, the shares issued in her name were antedated to make it appear that she became a stockholder before the action she was questioning occurred. The court said she cannot file a derivative suit questioning those transactions. Then the action must be brought in the name and for the benefit of the corporation because the cause of action you are asserting belongs to the corporation, that’s why the plaintiff will be the corporation. Well there was this recent case of Atty. Hilda Lim. Where she…they had a family corporation and the board passed a resolution saying that to pay for her legal services to the corporation, she should be given shares of stock from the authorized but unissued as payment for her legal services. Another stockholder questioned that and claimed that this violated his right to pre-emption. Well, that was his claim. Well, Hilda Lim argued that he could not file that case because…the SC had issued a TRO restraining him from acting in behalf of the corporation and he was filing a derivative suit. The court said no, the cause of action he is enforcing is his own right because he claims that he had a right of pre-emption. So this was not a right belonging to the corporation so this was not a derivative suit. Now, this derivative suit is allowed precisely to enable a minority to protect its rights against a majority. That’s why the majority cannot dismiss a derivative suit filed by the minority. In the case of San Miguel Corporation, the court said it is not the mere fact… that former dean Eduardo de los Angeles owned only a few shares of San Miguel is not a ground to dismiss the case that he filed because the cause of action he is ascertaining pertains to San Miguel Corporation, not to himself. Therefore the fact that he only owned a few shares, which are insignificant, is not relevant. What happened was that Mr. Andres Soriano III bought 2 corporations. He bought them for himself and he used the funds of San Miguel Corporation. And since the cause of action a stockholder is ascertaining in a derivative suit pertains to the corporation, the proceeds of the case should accrue to the corporation. If a court awards damages, that should go to the corporation, not to the stockholder who filed the derivative suit. And whatever judgment is rendered in that case will be binding on the corporation. You cannot have another stockholder filing another derivative suit. That’s why the court has to be careful if it approves any compromise. And if the stockholder wins, he is entitled to be reimbursed for the expenses and attorney’s fees he incurred in prosecuting that case for the benefit of the corporation.

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ARIS S. MANGUERA

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Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. But an individual stockholder may be permitted to institute a derivative suit in behalf of the corporation in order to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or when a demand upon them to file the necessary action would be futile because they are the ones to be sued, or because they hold control of the corporation. In such actions, the corporation is the real-party-in-interest while the suing stockholder, in behalf of the corporation, is only a nominal party. (Filipinas Port Services, Inc. v. Go (2007) • The whole purpose of the law authorizing a derivative suit is to allow the stockholders/member to enforce rights which are derivative (secondary) in nature, i.e., to enforce a corporate cause of action. (R.N. Symaco Trading Corp. v. Santos (2005) • Where corporate directors have committed a breach of trust either by their fraud, ultra vires acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a stockholder may sue on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to the stockholders. It is a settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the stockholder filing suit for the corporation’s behalf is only nominal party. The corporation should be included as a party in the suit. Hornilla v. Salunat, 405 SCRA 220 (2003). Who may bring the suit • Since the ones to be sued are the directors/officers of the corporation itself, a stockholder, like petitioner Cruz, may validly institute a derivative suit to vindicate the alleged corporate injury, in which case Cruz is only a nominal party


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while Filport is the real-party-in-interest. (Filipinas Port Services, Inc. v. Go (2007) Under Section 36 of the Corporation Code, read in relation to Section 23, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. An individual stockholder is permitted to institute a derivative suit in behalf of the corporation wherein he holds stocks in order to protect to vindicate corporate rights, whenever officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. (Chua v. CA, 2004) In the absence of a special authority from the Board of Directors to institute a derivative suit for and in behalf of the corporation, the president or managing director is disqualified by law to sue in her own name. The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the Board that exercises its corporate powers and not in the president or officer thereof. Bitong v. Court of Appeals, 292 SCRA 503 (1998). A minority stockholder and member of the board has no power or authority to sue on the corporation’s behalf. Nor can we uphold this as a derivative suit, since it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. There is no showing that petitioner has complied with the foregoing requisites. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001). The relators must be stockholders both at time of occurrence of the events constituting the cause of action and at the time of the filing of the derivative suit. Gochan v. Young, 354 SCRA 207 (2001); Pascual v. Orozco, 19 Phil. 83 (1911). A minority stockholder can file a derivative suit against the president for diverting corporate income to his personal

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accounts. Commart (Phils.) Inc. v. SEC, 198 SCRA 73 (1991). • A lawyer engaged as counsel for a corporation cannot represent members of the same corporation’s board of directors in a derivative suit brought against them. To do so would be tantamount to representing conflicting interests, which is prohibited by the Code of Professional Responsibility.” Hornilla v. Salunat, 405 SCRA 220 (2003). Exhaustion of Intra-corporate remedies. • A derivative suit to question the validity of the foreclosure of the mortgage on corporate assets can be filed without prior demand upon the Board of Directors where the legality of the constitution of the Board lies at the center of the issues. DBP v. Pundogar, 218 SCRA 118 (1993). Nature of Relief • In a derivative suit, any monetary benefits under the decision of the court shall pertain to the corporation and not to the stockholders or members. (R.N. Symaco Trading Corp. v. Santos, 2005) • The allegations of injury to the relators can co-exist with those pertaining to the corporation, and does not disqualify them from filing a derivative suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring directors. Gochan v. Young, 354 SCRA 207 (2001). • In a derivative action, the real party in interest is the corporation itself, not the shareholders who actually instituted it. A suit to enforce preemptive rights in a corporation is not a derivative suit, and therefore a temporary restraining order enjoining a person from representing the corporation will not bar such action, because it is instituted on behalf and for the benefit of the shareholder, not the corporation. Lim v. LimYu, 352 SCRA 216 (2001). • Appointment of receiver can be an ancillary remedy in a derivative suit. Chase v. CFI of Manila, 18 SCRA 602 (1966)


ARIS S. MANGUERA

•

Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts or negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a stockholder may sue on behalf of himself and other stockholders and for the benefit of the corporation , to bring about a redress of the wrong done directly to the corporation and indirectly to the stockholders. This is what is known as a derivative suit, and settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the stockholder filing for the corporation’s behalf is only nominal party. The corporation should be included as a party in the suit. (Hornilla v. Salunat, 2003)

• (b) Requisites (See Rule 8, Section 1, SC Interim Rules of Procedure for Intra-Corporate Controversies effective April 1, 2002) Rule 8, Section 1. Derivative Action A stockholder or member may bring an action in the name of a corporation or association , as the case may be provided, that: (1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and the time the action was filed; (2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The suit[s] is not a nuisance or harassment suit. In case of nuisance of harassment suit, the court shall forthwith dismiss the case. Catindig Class Notes Q: Is Requisite # 3 a good policy? C: No.

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ARIS S. MANGUERA

5.15 Case Francis Chua v. Ca (2004) • A derivative action is a suit by a shareholder to enforce a corporate cause of action; the corporation is necessary party to the suit. • Not every suit filed in behalf of the corporation is a derivative suit.


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6. BOARD OF DIRECTORS 6.1 Board of Directors (Section 23 et seq) Sec. 23. The board of directors or trustees Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. a majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.

•

“Board of Directors” is the body which (1) exercises all powers provided for under the Corporation Code; (2) conducts all business of the corporation; and (3) controls and holds all property of the corporation. Its members have been characterized as trustees or directors clothed with a fiduciary character. It is clearly separate and distinct from the corporate entity itself. Hornilla v. Salunat, 405 SCRA 220 (2003). • A corporation is an artificial being and can only exercise its powers and transact its business through the instrumentalities of its Board of Directors, and through its officers and agents, when authorized by resolution or by its by-laws. Consequently, when legal counsel was clothed with authority through formal board resolution, his acts bind the corporation which must be held bound the actuations of its counsel of


ARIS S. MANGUERA record. De Liano v. Court of Appeals, 370 SCRA 349 (2001). • “The physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a special act of the board of directors.” Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003); Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001). • Rationale for Centralized Management Doctrine. The concentration in the board of the powers of control of corporate business and appointment of corporate officers and managers is necessary for efficiency in large organization. (Filipinasl Port Service v. Go, 2007) • Board Must Act as a Body. A corporation, through its Board of Directors, should act in the manner and within the formalities prescribed by its charter or by the general law. Thus, directors must act as a body in a meeting called pursuant, otherwise, any action taken therein may be questioned by any objecting director or shareholder. Be that as it may, jurisprudence tells us that an action of the board of directors during a meeting, which was illegal for lack of notice, may be ratified either expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the corporation's subsequent course of conduct. Lopez Realty v. Fontecha, 247 SCRA 183 (1995). • Effect of “Bogus” Board.The acts or contracts effected by a bogus board would be void pursuant to Art. 1318 of Civil Code because of the lack of “consent”. Islamic Directorate of the Philippines v. Court of Appeals, 272 SCRA 454 (1997). • As can be gleaned form Section 23 of Corporation Code, “it is the board of directors or trustees which exercises almost all the corporate powers in a corporation” (Firme v. Bukal, 2003) Consequently under the doctrine of centralized management, it cannot be said that the Board act as agents of the stockholders, since their source of power is originally vested

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ARIS S. MANGUERA

by law and not delegated by the stockholders. (Page 754 of CLV’s CLR, 2007) • The exercise of the corporate powers of the corporation rests in the BoD save in those instances where the Corporation Code requires stockholders’ approval for certain specific acts. (Great Asian Sales Center v. CA, 2002) Consequently, there can be no valid contract that can be enforced on behalf of the corporation over an alleged sale of a parcel land, when there is no showing that there was approval of the purchase by the Board of Directors, which exercise almost all the corporate powers in a corporation. Firme v. Bukal, 2003) (Page 754 of CLV’s CLR, 2007) • Principle on delegation of Board Power. Under Section 23 of the Corporation Code, the power and the responsibility to decide whether the corporation should enter into a contract is lodged in the Board, subject to the articles of incorporation, by laws, or relevant provisions of law. However, just as a natural person may authorize another to do certain acts for and on his behalf, the BoD may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bring the corporations is generally derived form law, corporate by-laws or authorization form the board, either expressly or impliedly by habit, custom or acquisence in the general course of business. (People’s Aircargo v. CA, 1998) (Page 757 of CLV’s CLR, 2007) Duties in General: (UP Reviewer) DUTY VIOLATION UNDER Section 31 Obedience Willfully and knowingly vote for or assent patently unlawful acts of the corporation Diligence Guilty of gross negligence or bad faith directing the affairs of the corporation Loyalty Acquire any personal or pecuniary interest conflict with their duty as such directors trustees


to in in or

Director Responsibilities (Corp Gov Reviewer***) Duties of Directors • Duty of Obedience (Section 26/31 of Corp Code) • Duty of Diligence (Section 31 of Corp Code) • Duty of Loyalty (Section 31 of Corp Code) • Duty of Care • Duty of Disclosure • Duty of “extra care” Specific Duties and Responsibilities of a Director (Corp Gov Reviewer) (SEC Code of CG)*** (1) To conduct fair business transactions with the corporation (2) To devote time and attention necessary (3) To act judiciously (4) To exercise judgment (5) To have a working knowledge of the law, corp rules and industry developments. (6) To observe confidentiality (7) To keep the company’s control environment *** (SEC Code of CG is applicable only to __________)

(a) Authority (Section 24) Sec. 24. Election of directors or trustees At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his

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shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote. •

See Page 240 of De Leon for Illustration and computation.

(b) Requirements for election of director Qualifications of Directors: (JRS p. 276) (1) Stock Corp.-must own at least one (1) share capital stock of the corporation in his own name; Non-stock Corp.-must be a member. He must be a stockholder in his own right. It must be a legal title and not beneficial title. Example: the stockholder-trustor in a voting trust agreement cannot be a director because he has beneficial title; the trustee can be elected as director because he has legal title. (2) A majority of the directors/trustees must be residents of the Philippines. (Sec. 23) (3) He must not have been convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years or a violation of the Corporation Code, committed within five (5) years before the date of his election (Section 27) (4) He must be of legal age.


ARIS S. MANGUERA (5) He must possess other qualifications as may be prescribed in the by-laws of the corporation. For example, the percentage of equity participation of foreigners with respect to nationalized activities must be complied with or he must not be a director in a competing corporation.

•

Peña v. CA, 193 SCRA 717 (1991) - a purported director whose name did not appear in the General Information sheet filed on behalf of the corporation in the SEC was deemed not qualified to act as a member of the Board. • Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979) - The bylaws of the corporation can provide other qualifications and disqualifications in addition to those provided in the Corporation Code. • The Board may provide for additional qualifications of a director (SEC Code of CG) *** (SEC Code of CG is applicable only to __________)

•

It is clearly deducible from Section 23 that only natural persons can be elected as directors or trustees and they must be elected from among the stockholders or members. However, a corporation which owns shares of stock or is a corporate member in another corporation can designate by board resolution its officer or representative to sit in the latter’s board and thus qualifying him to be elected as director or trustee. A contrary rule would create a situation where there would be no board as where all the stockholders or members are corporation or juridical persons. The appointment must be recorded in the corporate books. (SEC Opinion No. 05-06, June 8, 2005)

Director Independence (Corp Gov Reviewer) • It is vitally important that a number of board be independent from management (SEC Code of CG, Section II)***

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• •

Listed and public companies shall have at least 2 independent directors or 20% of the board which ever is lesser. (SRC Section 38)*** Independent director shall mean a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would intervene with the exercise of independent judgment in carrying out the responsibility of a director. (SRC Section 38)***

Degrees of Removal (Corp Gov Reviewer) • Not related by blood or marriage to the controlling shareholder • Not related as a fiend or social relation of the controlling shareholder • Not a supplier nor engaged in any business transaction with the company • Does not derive an income as a board director that constitutes the majority of his or her income. (see SRC Rule 38.1)***

(i) Qualifying share (Section 24) •

•

A director must own at least one share of stock. Peña v. CA, 193 SCRA 717 (1991); Detective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 (1969). Beneficial ownership under voting trust arrangement no longer qualifies ( Lee v. CA, 205 SCRA 752 [1992]).

(ii) Residence (Section 24) •

A majority of the directors/trustees must be residents of the Philippines. (Sec. 23)

(iii) Nationality



There is no citizenship requirement demanded of the members of BoD. (1) In corporations not organized under the Code, citizenship requirements are established. o Thus, in case of domestic banks, the General Banking Act requires that at least two-thirds of the members of the BoD must be citizens of the Philippines. (Section 13 of RA No. 337). o For rural banks, registered investment companies and private development banks, all the members of the BoD must be citizens of the Philippines. (Section 4 of RA 720, as amended by RA 1097; Section 4 of RA 4093) (2) Under the Constitution, aliens may not be elected as directors of corporation engaged in business or industries which are totally or partially nationalized business or industries.

(iv) Disqualifications (Section 27) Sec. 27. Disqualification of directors, trustees or officers No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.

Disqualifications: Corporation Code • must not have been convicted of a crime punishable by imprisonment of exceeding six (6) years • must not have committed any violation of the Corporation code within five (5) years prior to his election General Banking Law of 2000 • Except in rural banks, no appointive or elective public official, whether fulltime or part-time shall at the same time serve as officer of any private bank, save in cases where such service is incident to financial assistance provided by the government or GOCCs to the bank or unless otherwise provided under

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existing laws SEC Code of CG*** (a) Any person who has been finally convicted by a competent judicial or administrative body of the following crimes: (i) Involving purchase or sale of securities; (ii) Arising out of the person’s conduct as an underwriter, broker, dealer, investment adviser, principal distributor. Mutual fund dealer, principal distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, floor broker; and (iii) Arising out of his relationship with a bank, quasi-bank, trust company, investment house or as an affiliated person of any one of them (b) Any person who, by reason of any misconduct, is permanently or temporarily enjoined by order, judgment or decree by the SEC or any court or other administrative body from: (i) acting as underwriter, broker, dealer, investment adviser, principal distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, or a floor broker; (ii) acting as a director or officer of a bank, quasi-bank, trust company, investment house, investment company or an affiliated person of any of them; (iii) engaging in or continuing any conduct or practice in connection with any such activity or willfully violating laws governing securities, and banking activities (but also includes when covered by an effective interim order); such person is also disqualified when he is currently subject to an effective order of a self-regulatory organization suspending or expelling him from membership or participation or from associating with a member or participant of the organization (c) Any person finally convicted judicially or administratively of an offense involving moral turpitude, fraud, embezzlement, theft, estafa, counterfeiting, misappropriation, forgery,


ARIS S. MANGUERA bribery, false oath, perjury or other fraudulent act of transgressions. (d) Any person finally found by SEC or a court or other administrative body to have willfully violated, or willfully aided, abetted, counseled, induced or procured the violation of, any provision of the Securities and Regulation Code, or any other law administered by SEC or Corporation Code, or any rule, regulation or order of SEC or BSP, or by a foreign court or equivalent financial regulatory of similar acts. (e) Any person judicially declared to be insolvent. (f) Any person finally found guilty by a foreign court or equivalent regulatory authority of acts, violations or misconduct similar to any of the acts, violations or misconduct listed in paragraphs (a) to (e) hereof. (g) Any affiliated person who is ineligible, by reason of paragraphs (a) to (e) hereof to serve or act in the capacities listed in those paragraphs. (h) Conviction by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of Corporation Code, committed within five (5) years prior to the date of his election or approval.

(c) How elected (Section 24) Stockholders have the option to adopt any of the following: (1) Straight voting- every stockholder “may vote such number of shares for as many persons as there are directors” to be elected; (2) 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”; (3) Cumulative Voting by Distribution- a stockholder may cumulate his shares by multiplying also the number of directors to be elected and distribute the same among as many candidates as he shall see fit.

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Note: Cumulative voting is not available in non-stock corporations. (JRS) Manner of Election: (1) In any form; or (2) By ballot when requested by any voting stockholder or member; (3) Voting may be in person or by proxy. (Page 764 of CLV’s CLR, 2007) Catindig Class Notes Q: When is the BoD elected? A: The general rule is the BoD is elected in an annual meeting except if the cause of vacancy is due to removal or if there is no more quorum in the BoD to be able to fill in the vacancy in which case a director may be lected in a special meeting. Q: Can the number of the BoD be less than 5? A: Yep. C: According to the SEC, there can be rounding up. I think there should be no rounding up because election of foreign BoD is merely a privilege.

(d) How removed (Section 28) Sec. 28. Removal of directors or trustees Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least twothirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary,


ARIS S. MANGUERA the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code.

Requisites for Removal: (Page 278 of JRS) (1) It must be take place either at a regular meeting or special meeting of the stockholders or members called for the purpose; (2) There must be previous notice to the stockholders or members of the intention to remove; (3) The removal must be by a vote of the stockholders representing 2/3 of Outstanding Capital Stock or 2/3 members. (4) The director may be removed with or without cause unless he was elected by the minority, in which case, it is required that there is cause for removal. (Section 28) Catindig Class Notes Q: Can directors be removed at anytime? A: Yes if with cause and even without cause if the director does not represent the minority… Q: Can the SH who owns 40% and has 2 nominees get rid of the 2 nominees without action from the Board? A: Yes, because of agency. Q: How? A: Cause the shares to be transferred. Q: Are directors entitled to compensation? A: General rule is they are not entitled to compensation except when provided by bylaw or by a vote of SHs representing majority of OCS.

(e) How vacancy filled (Section 29) Sec. 29. Vacancies in the office of director or trustee Any vacancy occurring in the board of directors or trustees other than

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by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in office. A directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting

Filling of vacancies in the Board: (Page 279 of JRS) (1) By stockholders or members – if vacancy results because of: (i) removal; (ii) expirations of term; (iii) the ground is other than removal or expiration of term (e.g., death, resignation, abandonment) where the remaining directors do not constitute a quorum; (iv) increase in the number of directors. (2) By board if remaining directors constitute a quorum—case not reserved to stockholders or members.

(f) How compensated (Section 30) Sec. 30. Compensation of directors In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year.


ARIS S. MANGUERA Director Compensation • Corp Code: Section 30 • Compensation must be sufficient to attract and retain directors needed to run the company successfully. (SEC Code of CG)*** • Corporations may establish a formal and transparent procedure for developing a policy on executive remuneration and for fixing the remuneration packages of individual directors, if any. (SEC Code of CG)*** • No director should be involved in deciding his or her own remuneration (SEC Code of CG)*** • Compensation may be linked with corporation and individual performance.

(g) Matters requiring Board of Directors’ action • As can be gleaned from Section 23 of Corporation Code, “it is the board of directors or trustees which exercises almost all the corporate powers in a corporation” (Firme v. Bukal, 2003)

(h) Liability (i) In General (Section 31) Sec. 31. Liability of directors, trustees or officers Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.

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A director is liable if he: (1) Willfully and knowingly vote for and assent to patently unlawful, acts of the corporation; (2) Is guilty of gross negligence or bad faith in directing the affairs of the corporation; or (3) Will acquire any personal or pecuniary interest in conflict of duty. (Secs 31 and 34)


Directors and officers who purport to act for the corporation, keep within the lawful scope of their authority and act in good faith, do not become liable, whether civilly or otherwise, for the consequences of their acts, which are properly attributed to the corporation alone. Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992). • See also Page 774 of CLV’s CLR, 2007 UP Class Notes Reason for this tile is that nobody would want to be a director if he is liable for a wrong decision. Not liable for mistakes and errors provided they acted in good faith and with due care and prudence. (UP-Elective Class Reviewer at 36)

(ii) Business Judgment rule •

•

BJR: Unless otherwise provided in the Code, all corporate powers and prerogatives are vested directly in the BoD. Consequently, the rule has two consequences: (1) The resolution, contracts, and transactions of the Board, cannot be overturned or set aside by the stockholders or members and not even by the courts under the principle that business of the corporation has been left to the hands of the Board; and (2) Directors and duly authorized officers cannot be held personally liable for acts or contracts done with the exercise of their business judgment. Exceptions: (a) When the Corporation Code expressly provides otherwise; (b) When the Directors or officers acted with fraud, gross negligence or in bad faith; and (c) When Directors or officers act against the corporation in conflict of interest situation. (Page 759 of CLV’s CLR, 2007) No court can, as an integral part of resolving the issues between squabbling stockholders, order the corporation to undertake certain corporate acts, since it would be in violation of the business judgment rule. Ong Yong v. Tiu, 401 SCRA 1 (2003).


Catindig Class Notes-Ateneo Q: What matters require BoD action? What are the exceptions? A: All corporate powers except such delegated to Executive Committee, SPAs etc. Q: Are directors liable for wrong decision resulting to losses to the corporation? A: No unless…

(iii) 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 corporation’s business and is of practically 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 seize the opportunity even if he will use his own funds in the venture. If he seizes the opportunity thereby obtaining profits to the expense of the corporation, he must account all the profits by refunding the same to the corporation unless the act has been ratified by a vote of the stockholders owning or

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representing at least two-thirds (2/3) of the outstanding capital stock. (Page 279 of JRS’ RCL, 2006) •

Sections 31 and 34 contain the doctrine of corporate opportunity. In case of such conflict-of-interests , and the director acts against the good of the corporation, he shall be accountable for the profits he obtained, even if he had risked his own funds. (Page 783 of CLV’s CLR, 2007) Class Notes Pedro is a director of X Corporation which is engaged in hog business. Pedro was sent on a convention abroad. On that trip, Pedro knew about a new breed of hogs available abroad which is more profitable. Pedro proposed to the BoD to buy the new breed of hogs. After one and a half year, the BoD have not made any decision yet because of the financial condition of the corp. Pedro told Hans about this and Hands said they would create a new hog corp and import the hogs. Could Pedro engage in the same business as the corporation? Could this business import the new breed of hogs? What would be your advice to avoid trouble? Ans: Pedro could not engage in the business of importing the hogs because of his position and he came across the information because the corporation sent him to the convention. Alternative Answer: One and a half year is a very long time. You could tell Pedro to write a letter to the corporation and disclose that he would engage in hog business.

Sec. 32. Dealings of directors, trustees or officers with the corporation A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract; That

the

contract

is

fair


and

reasonable

under

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances. Class Notes

(iv) Dealings with the corporation (Section 32)

3.

circumstances; and 4. That in case of an officer, the contract has been previously authorized by the board of directors.

the

Q: Pedro owns ABC Corp (Manpower services). He proposed to supply janitors, security guards and clerks at 5% below market charges to X Corp of which he is a director. Could X Corp. enter into such contract? Ans: Yes, Pedro is a self-dealing director. To ensure that the contract is not voided, the following requirements must concur: (1) The contract must be fair and reasonable; (2) BoD quorum even without the presence of Pedro; (3) Vote of Pedro is not needed for approval; (4) If X Corp is a bank, there must be a minutes on the meeting and a copy of the minutes must be sent to the BSP. Note: There should also be full disclosure of the adverse interest. Catindig: Actually, you could enter into it but risk that a BoD or stockholder will contest it. (UP-Elective Class Reviewer at 36)

(v) Contracts between corporation with interlocking directors (Section 33) Sec. 33. Contracts between corporations with interlocking directors Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to

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the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors.

•

The rule under Sec. 33 of Corporation Code allowing annulment of contracts between corporations with interlocking directors resulting in the prejudice to one of the corporation, has no application to cases where fraud is alleged to have been committed to third parties.  DBP v. Court of Appeals, 363 SCRA 307 (2001).

(vi) Disloyalty (Section 34) Sec. 34. Disloyalty of a director 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 to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture.

•

•

Relate with Section 31 Section 34 applies only to a director and not to a trustee or officer as in the case of Section 31, and the implication is that only a ratificatory vote of the stockholders would allow a director who violates his duty of loyalty to keep the profits form the venture; while for trustees or officers who violate such duties, it is within the business judgment of the Board to ratify the act.

The following are more common situations involving such conflict of interest: (1) Self-dealing director (Section 32) (2) Fixing compensation of directors and officers (Section 30)


ARIS S. MANGUERA (3) Interlocking directors (Section 33) (4) Seizing corporate opportunity; Disloyalty (31,34) (5) Using inside information (SRC Sections 3.8, 23.2, 61, 71.2)

(vii) Watered Stocks (Section 65) Sec. 65. Liability of directors for watered stocks Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, 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 between the fair value received at the time of issuance of the stock and the par or issued value of the same. (n) Jack’s Lecture Now under §65 [Liability of directors for watered stocks], we’ve mentioned this before, an officer or director who agrees to the issuance of watered stock or such officer who, having knowledge of it, does not file with the corporate secretary his written objection, will be liable if a stock is watered. In other words, the stockholder paid less than the par value or the stated value for the shares of stock and then he was issued a stock certificate. When the corporation receives less consideration than the par value of a par value share or the stated value if it is a nopar value share… that is called watered stock. Because remember, cattle is called stock. And in the old days of the wild, wild west, when the cowboys would bring their cattle to the market to be sold, they will make the cattle eat salt so the cattle will be very thirsty. And then along the way, they will pass by a stream. And so the cattle are very thirsty and so they will drink a lot of water. So when they arrive at the market, the cattle will be very heavy because of the water. So when the cattle is weighed by the buyer, the cattle is heavy and he will pay the price for that weight but what he is paying for - water. He is not getting his money’s worth. That cattle which is full of water which is being sold for a heavier weight – watered stock. That’s why shares of stock where the corporation did not get its money’s worth came to be called watered stock.

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•

Watered stocks are shares issued and fully-paid when in fact the consideration agreed to and accepted by the directors of the corporation was something known to be much less than the par value or issued value of the shares. (Page 882 of CLV’s CLR, 2007) • The term has also been defined as stocks issued by a corporation for which it has in fact intentionally or knowingly received or agreed to receive nothing at all from them or less thatn their par value either in money, or in property or in service. (Page 882 of CLV’s CLR, 2007) • Note that the “water” in the stock refers to the difference between the fair market value at the same time of the issuance of the stock (not at the time of discovery of the inadequate consideration or at the time of demand for payment) and the par or issued value of said stock. Subsequent in increase in the value of the property used in paying the stock does not do away with the “water” in the stock. The existence of such “water” is determined at the time of the issuance of the stock. (Page 882 of CLV’s CLR, 2007) UP Class Notes All directors are liable for issuance of watered stocks unless the director files a written objection with the corporate secretary.

(i) Executive Committee (Section 35) Sec. 35. Executive committee The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders' approval is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to


ARIS S. MANGUERA the shareholders.

•

Excutive Committee is a “governing body” which functions as the board itself. Thus, membership therein shall be governed by the same law/ rules applicable to the board of directors as provided in Section 35. (SEC Opinion, June 3, 1998) • Section 35 recognizes an already existing corporate practice in the Philipoines dictated by necessity owing to the growing complexities of modern business, whereby the board of directors delegates to an executive committee composed of some members of the board corporate powers to assure prompt and speedy action and solution to important matters without the need for a board meeting, especially where such meetings cannot be readily be held. Thus, the committee directly manages the operations of the corporation between meetings of the board, thereby reducing the work load of the latter. (Page 305 of De Leon, 2006)

6.3 Cases Lee v. CA (1992) • Every director must own at least one share of the capital of the corporation of which he is a director which share shall stand in his name on the books of the corporation. • Any director which ceases to be the owner of at least one share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. • A voting trust agreemen results in the separation of the voting rights of a stockholder from his other rights such as the right to receive dividends and other rights to which a stockholder may be entitled until the liquidation of the corporation. Uichico v. NLRC (1997)

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•

In labor cases, particularly, corporate directors and officers are solidary liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith.

Western Institute of Technology v. Salas (1997) • Members of the board may receive compensation, in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors/trustees. • 2 ways by which members of the board can be granted compensation apart from reasonable per diems: (1) When there is a provision in the by-laws fixing their compensation; and (2) When the stockholders representing a majority of the outstanding capital stock at a regular or special stockholders’ meeting agree to give it to them. Catindig Class Notes Q: Normally, what are the functions of the Chairman of the Board? A: He presides over board meetings. Q: Does he perform functions outside the context of a board meeting? What are those functions? A: No, except when the Board ask him to perform other functions. C: Western case has a failure of analysis. Chairman and ViceChairman performs functions related to that of the BoD hence should not ___________.

Litonjua v. Eternity Corp (2006) • The general principles of agency govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, by-laws, or relevant provisions of law. • Any sale of real property of a corporation by a person purporting to be an agent thereof but without written authority form the corporation is null and void.


ARIS S. MANGUERA

6.3 Additional Material: SEC Opinion No/ 31, series of 2003, dated May 26, 2003 to Mr.Jose Oscar M. Salazar re who would be elected director in a condominium corporation. SEC Opinion Summary: Only those persons under whose names the Condominium certificate of Titles are issued are considered as members of the condominium corporation. As a general rule, members of the BoD in a condominium corporation must be elected form the general stockholders of the said corporation, who are comprised of unit owners. An exception to this rule is in the case of corporate unit owner/member of a condominium corporation. An officer or a duly authorized agent or trustee who has been designated by the corporate unit owner/member of the corporation as its representative for the express purpose of qualifying him as director may be eligible to be elected as director.

SEC Opinion Whole Document 05-26-2003 Mr. Jose Oscar M. Salazar May 26, 2003 SEC OPINION NO. 31-03 Mr. Jose Oscar M. Salazar Bormaheco Condominium Metropolitan Avenue, 1205 Makati City Dear Mr. Salazar, This pertains to your letter dated May 19, 2003 requesting opinion on the following queries:

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1.Whether an attorney-in-fact or representative of a unit owner in a condominium corporation qualifies as a director therein especially if such attorney-in-fact is unanimously elected as director of the corporation; 2. Whether the surviving spouse of a deceased member of a condominium corporation qualifies as a director therein where there were no judicial proceedings to settle the estate of the deceased and neither was there an extra-judicial partition awarding the unit to the surviving spouse; and, 3. What remedy/ies is/are available to prevent the aforementioned persons from acting as director if the aforementioned persons are not qualified if the Board of Directors/Officers of the condominium corporation continue to recognize said persons to perform the duties of a director?" [1] Anent your first query, please take note that in this jurisdiction, the qualifications of directors/trustees, pursuant to the Corporation Code, are as follows. (1) He must own at least one (1) share of the capital stock of the corporation in his own name, and if he ceases to own at least one share in his own name, he automatically ceases to be a director. For non-stock corporations, only members of the corporation can be elected to sit in the board of trustees. (Section 23); (2) A majority of the directors/trustees must be residents of the Philippines. (Section 23); (3) He must not have been convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of the Corporation Code, committed within five (5) years prior to the date of his election. (Section 27); (4) He must not have substantial interest in a competing corporation. (Gokongwei vs. SEC, SCRA 336); (5) Only natural persons can be elected directors/trustees; and, (6) Other qualifications as may be prescribed in the by-laws of the corporation. (Section 47[5]). From the foregoing, it is unequivocally required that board members, whether as directors or trustees, must be elected from among the holders of stock or from the general membership of the corporation in cases of non-stock corporation. Ownership in a condominium corporation is conferred only upon full payment of the purchase price of the unit. We quote the pertinent portion of the decision of the Supreme Court, in the case entitled Sunset View Condominium vs. Campos, Jr. , which reads as follows: "The private respondents, therefore, who have not fully paid the purchase price of their units and consequently not owners of their units are not members or shareholders of the petitioner condominium corporation."


ARIS S. MANGUERA Similarly, Presidential Decree No. 957 (Regulating the Sale of Subdivision Lots and Condominiums, Providing Penalties For Violations Thereof), provides: "SECTION 25. Issuance of Title — The owner or developer shall deliver the title of the lot or unit to the buyer upon full payment of the lot or unit . . . "(emphasis supplied) Verily, membership in a condominium corporation is evidenced by the Certificate of Title issued upon full payment of the unit. Accordingly, only those persons under whose names the Condominium Certificate of Titles (CCTs) are issued are considered as members of the condominium corporation. The foregoing is even strengthened by Section 10 of Republic Act No. 4726, otherwise known as the Condominium Act, which provides that: ". . . Membership in a condominium corporation, regardless of whether it is a stock corporation or non-stock corporation, shall not be transferable separately from the condominium unit of which it is appurtenance . . ." Therefore, as a general rule, members of a board of directors in a condominium corporation must be elected from the general stockholders of the said corporation, who are comprised of unit owners. In the same light, the by-laws cannot validly provide that even third parties or non-stockholder or non-members of the corporation can be elected to the board of directors/trustees. By-laws cannot prevail over the express provision of law requiring members of the board to be stockholders or members of the corporation. Nevertheless, the aforementioned general rule admits of certain exceptions, as in the case of corporate unit owner/member of a condominium corporation. In one Opinion , the Commission stated that, "in the case of a condominium corporation where all the members thereof are corporate members or juridical persons, an officer or duly authorized agent or trustee who has been designated by a corporate unit owner/member of a condominium corporation as its representative for the express purpose of qualifying him as director, may be eligible to be elected as director. While a corporation cannot act by itself, being a juridical person, it can act through its officers or authorized agent or representative who has been duly designated in a Board Resolution. [2] Relative to your second query, this Commission previously opined that under Articles 74 and 75 of the Family Code, spouses are given the freedom to choose which property regime may govern them during the marriage. The Law provides: "Article 74.The property relations between husband and wife shall be governed in the following order: 1. By marriage settlements executed before the marriage; 2. By the provisions of this Code; and, 3. By the local customs. Article 75.The future spouse may, in the marriage settlements, agree upon the regime of absolute community, conjugal partnership of gains, complete

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separation of property, or any other regime. In the absence of marriage settlements, or when the regime agreed upon is void, the system of absolute community of property as established in this Code shall govern." Thus, unless the spouses agree upon a different system of property relations, the property relations between the husband and the wife shall be governed by the system of absolute community of property. Assuming therefore, that the husband and wife failed to agree on what property regime to adopt, the condominium unit may be deemed as a community property and shall be governed by the rules on "co-ownership" pursuant to Article 90 of the Family Code, which provides: "Section 90. The provisions on co-ownership shall apply to the absolute community property between the spouses in all matters not provided for in this Chapter." (emphasis supplied) Accordingly, the spouses, who are co-owners of a condominium unit, shall be recorded as one member. However, if the condominium unit is, among the excluded properties under Section 92 of the Family Code or where the spouses have chosen a different marriage settlement other than the system of absolute community property, the law on co-ownership shall not apply. Therefore, when doubtful and in order to determine true ownership of the condominium unit, the corporation may inquire into the property regime governing marriage.

ARIS S. MANGUERA Very truly yours, (SGD.) VERNETTE UMALI-PACO General Counsel

[3] With regard your last query, it should be stressed that most modern statutes allow the removal of directors by the shareholders/members of a corporation, with or without cause and irrespective of tenure. Such is the mandate contained in Section 28 of the Corporation Code when it provides that "any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing two-thirds (2/3) of the outstanding capital stock, or if a corporation be a non-stock corporation, by a vote of two-thirds (2/3) of the members entitled to vote: . . ." Section 23 incorporates the so-called inherent power of "amotion" by a corporation. "Amotion" is the power to remove directors, officers and trustees prior to the expiration of their term. The underlying reason for such provision is that the stockholders/members shall be the ultimate masters, not the directors to make the corporate government responsible to the owners. Moreover, the stockholders should feel free to remove directors at anytime that they have lost their trust and confidence in them, whether or not they can prove cause of such loss. Hence, the Corporation Code explicitly allows removal of directors/trustees without cause, except a removal that would effectively deprive minority stockholders/members of the right of representation to which they may be entitled by virtue of the rule on cumulative voting. However, please be advised that the foregoing cited authorities do not restrain or preclude judicial interpretation and application of the law on the actual facts, should the issue raised herein be litigated in the proper court. Please be guided accordingly.


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ARIS S. MANGUERA

7. OFFICERS 7.1 Corporate Officers Who are the corporate officers of a corporation? • The Corporate Officers are: o The President (who shall be and director) o Treasurer (who may not be a director) o Corporate Secretary (who shall be a resident and citizen of the Philippines o And such other officers as may be provided in the bylaws. (page 283 of JRS, 2006)

•

An officer’s removal is a corporate act, and if such removal occasions an intra-corporate controversy, its nature is not altered by the reason or wisdom, or lack thereof, with which the Board of Directors might have in taking such action. Perforce, the matter would come within the area of corporate affairs and management, and such a corporate controversy would call for SEC adjudicative expertise, not that of NLRC. De Rossi v. NLRC, 314 SCRA 245 (1999). • When the by-laws provide for the position of “Superintendent/ Administrator,” it is clearly a corporate officer position and issues of reinstatement would be within the jurisdiction of the SEC and not the NLRC. Ongkingco v. NLRC, 270 SCRA 613 (1997). • When the by-laws provides that one of the powers of the Board is “[t]o appoint a Medical Director, Comptroller/Administrator, Chiefs of Services and such other officers as it may deem necessary and prescribe their powers and duties,” then such specifically designated positions should be considered “corporate officers”. The determination of the rights and the concomitant liability arising from any ouster from such positions, would be intra-corporate controversy subject to SEC’s jurisdiction. Tabang v. NLRC, 266 SCRA 462 (1997).


•

The fact that “Comptroller” is not mentioned in the by-laws does not undermine the appointment to such position since under Sec. 25 of Corporation Code, the Board of Directors is authorized to appoint such other officers as it may deem necessary. In this case the by-laws provided “and such other officers as the Board of Directors may from time to time does fit to provide for. Said officers shall be elected by majority vote of the Board of Directors.” By-laws may and usually do provide for such other officers, and that where a corporate office is not specifically indicated in the roster of corporate offices in the by-laws of a corporation, the Board of Directors may also be empowered under the by-laws to create additional officers as may be necessary. Nacpil v. International Broadcasting Corp., 379 SCRA 653 (2002).

Coverage of “Corporate Officer” for purpose of determining extent of business judgment of the Board to fire or hire: • For purposes of determining who is a corporate “officer” falling within the business judgment power of the Board of Directors to determine whom to hire and to fire, it should cover only: (1) The officers provided by the corporation law, namely the president, treasurer and secretary; and (2) Those provided for in the by-laws of the corporation. Catindig Class Notes Q: Who are the basic set of officers? A: President, Secretary and Treasurer Q: Who are the by-laws officers of a corporation? A: If the by-laws provides that the BoD may create positions and provide for their function. The officers elected to such positions are bylaws officers. But the by-laws should be amended to reflect the office created. Q: Why is the determination whether an officer is a bylaw officer or a management officer important? A: As regards intracorporate dispute. Bylaws officers are under the SEC while non-by-laws officers are under the NLRC Q: Who are management officers?

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A: Those not mentioned in the by-laws and not elected by the BoD. Their positions are created by the management.

ARIS S. MANGUERA

(b) Qualifications (Section 25) •

UP Class Notes How do you elect Chairman and Vice-Chairman if the bylaws does not provide for it? (1) By laws must give power to the BoD to create other positions and provide for their functions; (2) Amend the Bylaws if there is no such provision; What to do if you want to hire a foreigner? Working Visa and Understudy is more expensive, so you make them officers. Catindig: If you want get rid of your President, do not elect him as director or take away his nominal share.

(a) Minimum set of officers (Section 25) Sec. 25. Corporate officers, quorum Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings.


• •

The Corporate Officers are: o The President (who shall be a director) o Treasurer (who may not be a director) o Corporate Secretary (who shall be a resident and citizen of the Philippines o And such other officers as may be provided in the bylaws. (page 283 of JRS, 2006) Note: Any two (2) or more positions may be held concurrently by the same person. Except: No one shall act as President and Secretary or as President and Treasurer, at the same time.

(c) Disqualifications (Section 27) Sec. 27. Disqualification of directors, trustees or officers No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.

7.2 Authority Rule on Corporate Officer’s Power to Bind Corporation •

An officer’s power as an agent of the corporation must be sought from the statute, charter, the by-laws or in a delegation of authority to such officer, from the acts of the board of directors formally expressed or implied from a habit or custom of doing business. Vicente v. Geraldez, 52 SCRA 210 (1973); Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992). President.

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•

People’s Aircargo v. Court of Appeals, 297 SCRA 170 (1998). • It is the Board of Directors, not the President, that exercises corporate powers. It must be emphasized that the basis for agency is representation and a person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. Safic Alcan & Cie v. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001). • A corporation may not distance itself from the acts of a senior officer: "the dual roles of Romulo F. Sugay should not be allowed to confuse the facts." R.F. Sugay v. Reyes, 12 SCRA 700 (1961). • The President is considered as the corporation’s agent, and as such, his knowledge of the repeal of a resolution in another juridical person in which his corporation has an interest, is ascribed to his principal under the theory of imputed knowledge. Rovels Enterprises, Inc. v. Ocampo, 392 SCRA 176 (2002). Corporate Secretary • In the absence of provisions to the contrary, the corporate secretary is the custodian of corporate records—he keeps the stock and transfer book and makes proper and necessary entries therein. It is his duty and obligation to register valid transfers of stock in the books of the corporation; and in the event he refuses to comply with such duty, the transferorstockholder may rightfully bring suit to compel performance. Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997). • Although the corporate secretary’s duty to record transfers of stock is ministerial, he cannot be compelled to do so when the transferee’s title to said shares has no prima facie validity or is uncertain. More specifically, a pledgor, prior to foreclosure and sale, does not acquire ownership rights over the pledged shares and thus cannot compel the corporate secretary to record his alleged ownership of such shares on the basis merely of the contract of pledge. Mandamus will not issue to establish a right, but only to enforce one that is


ARIS S. MANGUERA already established. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998); TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001). • A sale that fails to comply with Sec. 40 of Corporation Code, cannot be invalidated when the buyer relies upon a Secretary’s Certificate confirming authority. A secretary’s certificate which is regular on its face can be relied upon by a third party who does not have to investigate the truths of the facts contained in such certification; otherwise business transactions of corporations would become tortuously slow and unnecessarily hampered. Esguerra v. Court of Appeals, 267 SCRA 380 (1997). Corporate Treasurer • A corporate treasurer’s function have generally been described as “to receive and keeps funds of the corporation, and to disburse them in accordance with the authority given him by the board or the properly authorized officers.” Unless duly authorized, a treasurer, whose power are limited, cannot bind the corporation in a sale of its assets, which obviously is foreign to a corporate treasurer’s function. San Juan Structural v. Court of Appeals, 296 SCRA 631, 645 (1998). • A corporate treasurer whose negligence in signing a confirmation letter for rediscounting of crossed checks, knowing fully well that the checks were strictly endorsed for deposit only to the payee’s account and not to be further negotiated, may be personally liable for the damaged caused the corporation. Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).

Service of Summons on Corporations Prevailing Rule: • Section 11, Rule 14 of the 1997 Rules of Civil Procedure uses the term “general manager” and unlike the old provision in the Rules of Court, it does not include the term “agent”. Consequently, the enumeration of persons to whom summons may be served is “restricted, limited and exclusive”

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following the rule on statutory construction expressio unios est exclusion alterius. Therefore, the earlier cases that uphold service of summons upon a construction project manager;13 a corporation’s assistant manager;14 ordinary clerk of a corporation;15 private secretary of corporate executives;16 retained counsel;17 officials who had charge or control of the operations of the corporation, like the assistant general manager;18 or the corporation’s Chief Finance and Administrative Officer;19 no longer apply since they were decided under the old rule that allows service of summons upon an agent20 of the corporation. E.B. Villarosa & Partners Co., Ltd. v. Benito, 312 SCRA 65 (1999). Catindig Class Notes Q: What are the sources of the powers of officers? A: (1) (2) (3) (4) (5) (6)

As provided in the by-laws Those which the BoD may assign or delegate Provided by laws Those inherent in the position Customary (with respect to the corporation/industry) Incidental

(a) Actual, express or implied • Inherent authority or power of an officer or agent is taken to mean that authority to act and bind the corporation which the

13

Kanlaon Construction Enterprises Co., Inc. v. NLRC, 279 SCRA 337 (1997). Gesulgon v. NLRC, 219 SCRA 561 (1993). 15 Golden Country Farms, Inc. v. Sanvar Development Corp., 214 SCRA 295 (1992); G & G Trading Corp. v. Court of Appeals, 158 SCRA 466 (1988). 16 Summit Trading and Dev. Corp. v. Avendaño, 135 SCRA 397 (1985); also Vlason Enterprises Corp. v. Court of Appeals, 310 SCRA 26 (1999). 17 Republic v. Ker & Co., Ltd., 18 SCRA 207 (1966). 18 Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 (1978). 19 Far Corporation v. Francisco, 146 SCRA 197 (1986). 20 Filoil Marketing Corp. v. Marine Dev. Corp. of the Philippines, 177 SCRA 86 (1982). 14


ARIS S. MANGUERA

• •

officer has by reason of his office, although it may not be sanctioned by express authority. Express authority of an officer or agent includes every power or authority expressly conferred upon him by law and the by-laws of the corporation. Implied authority of an officer or agent of a corporation includes all such incidental authority as is necessary, usual, and proper to effectuate the main authority expressly conferred.

(b) Apparent or ostensible • Apparent authority is naturally the same as and based upon the same principle as authority by estoppel.

In the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation. Exceptions: (1) Doctrine of Ratification or Estoppel- Acts of contracts which are not per se illegal can be validated. Even when the contract entered into in behalf of the corporation is outside the usual powers of the corporate officer, the corporation’s ratification of the contract and acceptance of the benefits have made such contract binding upon the corporation. Note: Ratification that would bind the corporation would have to come from the board of directors or a properly authorized representative. Ratification can never be made on the part of the corporation by the same persons who wrongfully assume the power to make the contract, but the ratification must be by the officers as governing body having authority to make such contract. (2) Doctrine of Apparent Authority- 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 possessing the power to do so those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority. Note:

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Existence of apparent authority must be ascertained through: (a) general manner in which the corporation holds out an officer or agent as having the power to act or in, other words, the apparent authority to act in general, with which it clothes him; or (b) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond of his ordinary powers. If the corporation desires to set up the defense that the contract was executed by one not authorized as agent, it must plead such fact. (Ramirez Doctrine) However, once the corporation has discharged its burden under the Ramirez Doctrine, then the burden of proof now shifts to the contracting party to show that indeed by previous acts and actuations, the acting officer had been clothed by the corporation with apparent authority for the public to take such authority at face value. (Yao Ka Sin-Timely Repudiation Doctrine) UP Class Notes: Pedro went to bank. Ana is the manager of the bank. Ana told Pedro that BSP required higher collateral and told him to increase his collateral for his loan. SMC shares were given by Pedro to Ana. Ana was about to go to Canada, and before she left, she sold Pedro’s SMC shares. Could Pedro sue the bank? Ans: Yes. Ana is clothed with authority as officer to act in behalf of the bank. (UP-Elective Class Reviewer at 39) Q: If teller? A: Agency case. (Id.)

7.3 Liability

ARIS S. MANGUERA for the profits which otherwise would have accrued to the corporation.

•

•

•

•

(a) Liability in general (Section 31) Sec. 31. Liability of directors, trustees or officers Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account


•

Generally, officers or directors under the old corporate name bear no personal liability for acts done or contracts entered into for the corporation, if duly authorized. Republic Planters Bank v. Court of Appeals, 216 SCRA 738 (1992). Corporate officers who entered into and signed contracts on behalf of the corporation in their official capacities cannot be made personally liable thereunder in the absence of stipulation to that effect, due to the personality of the corporation being separate and distinct from the persons composing it. Western Agro Industrial Corp. v. Court of Appeals, 188 SCRA 709 (1990); Rustan Pulp & Paper Mills, Inc. v. IAC, 214 SCRA 665 (1992); Banque Generale Belge v. Walter Bull and Co., 84 Phil. 164 (1949). A president cannot be held solidarily liable personally with the corporation absent evidence of showing that he acted maliciously or in bad faith. EPG Constructions Co. v. CA, 210 SCRA 230 (1992). The finding of solidary liability among the corporation, its officers and directors would patently be baseless when the decision contains no allegation, finding or conclusion regarding particular acts committed by said officers and director that show them to have been individually guilty of unmistakable malice, bad faith, or ill-motive in their personal dealings with third parties. When corporate officers and directors are sued merely as nominal parties in their official capacities as such, they cannot be held liable personal for the judgment rendered against the corporation. NPC. v. Court of Appeals, 273 SCRA 419 (1997); Emilio Cano Enterprises, Inc. v. CIR, 13 SCRA 291 (1965); Arcilla v. Court of Appeals, 215 SCRA 120 (1992). An officer-stockholder who signs in behalf of the corporation to a fraudulent contract cannot claim the benefit of separate juridical entity: “Thus, being a party to a simulated contract of management, petitioner Uy cannot be permitted to escape

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liability under the said contract by using the corporate entity theory. This is one instance when the veil of corporate entity has to be pierced to avoid injustice and inequity.” Paradise Sauna Massage Corporation v. Ng, 181 SCRA 719 (1990). • While the limited liability doctrine is intended to protect the stockholder by immunizing him from personal liability for the corporate debts, a corporate officer may nevertheless divest himself of this protection by voluntarily binding himself to the payment of the corporate debts. Toh v. Solid Bank Corp., 408 SCRA 544 (2003). • Labor. Corporate officers cannot be held personally liable for damages on account of the employees dismissal because the employer corporation has a personality separate and distinct from its officers who merely acted as its agents. Malayang Samahan ng mga Mangagagawa sa M. Greenfields v. Ramos, 357 SCRA 77 (2001). • Only the responsible officer of a corporation who had a hand in illegally dismissing an employee should be held personally liable for the corporate obligations arising from such act. Maglutac v. NLRC, 189 SCRA 767 (1990); reiterated in Gudez v. NLRC, 183 SCRA 644 (1990); Chua v. NLRC, 182 SCRA 353 (1990);  Reahs Corp. v. NLRC, 271 SCRA 247 (1997); and for the separate juridical personality of a corporation to be disregarded as to make the highest corporate officer personally liable on labor claims, the wrongdoing must be clearly and convincingly established. Del Rosario v. NLRC, 187 SCRA 777 (1990). • Corporate officers are not personally liable for money claims of discharged employees unless they acted with evident malice and bad faith in terminating their employment. AHS/Philippines v. Court of Appeals, 257 SCRA 319 (1996); Nicario v. NLRC, 295 SCRA 619 (1998). • A corporation, being a juridical entity, may act only through its directors, officers and employees and obligations incurred by them, acting as corporate agents, are not theirs but the


ARIS S. MANGUERA direct accountabilities of the corporation they represent. Brent Hospital, Inc. v. NLRC, 292 SCRA 304 (1998). • In labor cases, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. In this case, it is undisputed that the corporate officers have a direct hand in the illegal dismissal of the employees. They were the one, who as high-ranking officers and directors of the corporation, signed the Board Resolution retrenching the employees on the feigned ground of serious business losses that had no basis apart from an unsigned and unaudited Profit and Loss Statement which, to repeat, had no evidentiary value whatsoever. Uichico v. NLRC, 273 SCRA 35 (1997). • Since a corporation is an artificial person, it must have an officer who can be presumed to be the employer, being the “person acting in the interest of the employer”—the corporation, in the technical sense only, is the employer. The manager of the corporation falls within the meaning of an “employer” as contemplated by the Labor code, who may be held jointly and severally liable for the obligation of the corporation to its dismissed employees. NYK International Knitwear Corp. Phil. V. NLRC, 397 SCRA 607 (2003).

(b) Dealings with the corporation (Section 32) Sec. 32. Dealings of directors, trustees or officers with the corporation A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract;

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3. That the contract is circumstances; and

ARIS S. MANGUERA fair

and reasonable under

the

4. That in case of an officer, the contract has been previously authorized by the board of directors. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances. Catindig Class Notes Q: Pedro owns ABC Corp (Manpower services). He proposed to supply janitors, security guards and clerks at 10% below market charges to X Corp of which he is a director. Could X Corp. enter into such contract? Ans: Yes, Pedro is a self-dealing director. To ensure that the contract is not voided, the following requirements must concur: (1) The contract must be fair and reasonable; (2) BoD quorum even without the presence of Pedro; (3) Vote of Pedro is not needed for approval; (4) If X Corp is a bank, there must be a minutes on the meeting and a copy of the minutes must be sent to the BSP. Note: There should also be full disclosure of the adverse interest. Catindig: Actually, you could enter into it but risk that a BoD or stockholder will contest it

7.4 Cases Tramat Mercantile v. CA (1994) • It should only be the corporation, not the person acting for and its behalf, that property could be made liable under the questioned transaction.


•

Personal liability of a corporate director, trustee or officer along (although no necessarily) with the corporation may so validly attach, as a rule, only when: (1) He assents: (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; (2) 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; (3) He agrees to hold himself personally and solidarily liable with the corporation; or (4) He is made, by specific provision of law to personally answer for his corporate action. People’s Aircargo v. CA (1998) • Apparent authority is derived not merely from practice. Its existence may be ascertained through: (1) The general manner in which the corporation holds out an officer or agent as having the power to act or, other words, the apparent authority to act in general, with which it clothes him; or (2) The acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties. It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation. • Even if a certain contract is outside the usual power of the president, the corporation’s ratification of the same and acceptance of benefits make it binding.

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ARIS S. MANGUERA

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(Private respondent should not be faulted for believing that Punsalan’s conformity to the contract in dispute was also binding on the corporation. • Catindig: Quantity does not determine if there is apparent authority. (UP-Elective Class Reviewer at 40) Rural Bank of Milaor v. Ocfemia (2000) • A bank is liable to innocent third parties where representation is made in the course of its normal business by an agent even though such agent is abusing her authority. • Concurring opinion by J Vitug: A corporation may be held in estoppel from denying as against innocent third persons the authority of its officers or agents who have been clothed by it with ostensible or apparent authority.


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ARIS S. MANGUERA

8. MEETINGS 8.1 Meetings of the stockholders and the Board of Directors (a) Kinds (Section 49) Sec. 49. Kinds of meetings Meetings of directors, trustees, stockholders, or members may be regular or special. (n)

Kinds of stockholders’/members’ meeting: (1) Regular or those held annually on a date fixed in the by-laws, or if not fixed, on any dare in April of every year as determined by the BoD or trustees. It is held principally for the purpose of electing another set of directors or trustees; or (2) Special or those held at any time deemed necessary or as provided in the by-laws. Kinds of directors’/trustees’ meeting: (1) Regular or those held by the board monthly, unless the bylaws provide otherwise; or (2) Special or those held by the board at any time upon the call of the president or as provided in the by-laws. Requisites for a valid meeting of stockholders or members: (1) It must be held at a proper place (Section 51) (2) It must be held at the stated date and at the appointed time or at a reasonable time thereafter; (Section 51) (3) It must be called by the proper person (Section 50) (4) There must be a previous notice. (Secs 50,51) (5) There must be a quorum (Section 52) Requisites for board meeting:


Under Section 25, the validity of a corporate act is predicated on the presence of the following requisites: (1) Meeting of the directors or trustees duly assembled as a board, i.e., as a body in a lawful meeting; (2) Presence of the required quorum; (3) Decision of the majority of the quorum or, in other cases, a majority of the entire board; and (4) Meeting at the place, time, and manner provided in the bylaws. (Page 266 De Leon, 2006) Catindig Class Notes Q: Where should SH meeting be held? A: In the place where the principal office of the corp is located unless where all the SHs agree to hold the meeting elsewhere. SEC New Rule Principal Office=Principal Place of Business Q: Why do the SHs hold their meeting at the principal office? A: (1) (2)

For Convenience To prevent mischief by management.

Q: Can the SHs not meet at all? A: No. They are required to meet for the purpose of electing the BoD. Tip: In making by-laws, do not put specific date for the meeting. You can place “last Friday of May” and place that if the last Friday is a holiday, then the meeting shall be held at the next working day. Q: What is the quorum required? A: As what the By-laws provide. (Pede nga less than majority) Q: Who presides? A: Whoever is authorized by the By-laws. If the person authorized is absent, the SH present may designate any one of them to preside.

(b) When and where held (Sections 50, 51 and 53) Sec. 50. Regular and special meetings of stockholders or members 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: Provided, That written notice of regular meetings shall be sent to all

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stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. Whenever, for any cause, there is no person authorized to call a meeting, the Secretaries and Exchange Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have been chosen one of their number as presiding officer. (24, 26) Sec. 51. Place and time of meetings of stockholders or members

ARIS S. MANGUERA Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. 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. A director or trustee may waive this requirement, either expressly or impliedly. (n)

•

See page 468 of De Leon for illustration • If the meeting is held at an unauthorized place or without proper notice and not all the stockholders or members are present, those who have a right to complain may take steps to set aside any action taken at such meetings even though majority of the stockholders or members were present in the absence of waiver, estoppel, or ratification. (Page 468 of De Leon, 2006) • The proper place of the holding of stockholders’ or members’ meeting is that provided in Section 51. This is mandatory. (Page 467of De Leon, 2006)

Stockholders' or members' meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality.

Catindig Class Notes Q: “Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise.” Is monthly mandatory? A: No, its directory.

Notice of meetings shall be in writing, and the time and place thereof stated therein.

(c) Notice required (Sections 50 and 53) • Notice is the writing informing the stockholders or members

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. (24 and 25) Sec. 53. Regular and special meetings of directors or trustees Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise.

of the meeting. (Page 469of De Leon, 2006)

Requisites of notice of meeting: (1) It must be issued by one who has authority to issue it; (2) It must be in writing; (3) It must state the date, time and place of the meeting, unless otherwise provided in the by-laws (4) It must state the business to be transacted thereat;

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 by-laws.


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(5) It must be sent at a certain time before the scheduled meeting as fixed by law, unless a different period is required by the by-laws. (6) Further, the notice must comply with any of the other requirements prescribed by the law of the by-laws of the corporation. (See Section 77, 118)

•

The CALL for a meeting is exercised by the person who has the power to call the meeting. It may consist of direction to the secretary of the corporation to notify the stockholders or members of the meeting.

(d) Quorum required (Sections 25 and 52) Sec. 25. Corporate officers, quorum Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings. Sec. 52. Quorum in meetings Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of


ARIS S. MANGUERA the outstanding capital stock or a majority of the members in the case of non-stock corporations. (n)

•

Quorum is such a number of the membership of a collective body as is competent to transact its business or do any other corporate act. (Page 268 of De Leon, 2006) • See page 476 of De Leon for matters in which the law requires minimum number of votes.

(e) Who presides (Section 54) Sec. 54. Who shall preside at meetings The president shall preside at all meetings of the directors or trustee as well as of the stockholders or members, unless the by-laws provide otherwise. (n)

(f) Who could attend and vote (Section 25 and 58) Sec. 25. Corporate officers, quorum Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board

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meetings. Sec. 58. Proxies Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. (n)

•

In a board meeting, an abstention is presumed to be counted as an affirmative vote insofar as it may be construed as an acquiescence in the action of those who voted affirmatively; but such presumption, being merely prima facie would not hold in the face of clear evidence to the contrary. Lopez v. Ericta, 45 SCRA 539 (1972). • Until challenged successfully in proper proceedings, a registered stockholder has a right to participate in any meeting, and in the absence of fraud the action of the stockholders’ meeting cannot be collaterally attacked on account of such participation, even if it be shown later on that the shares had been previously sold (but not recorded). Price and Sulu Dev. Co. v. Martin, 58 Phil. 707 (1933). • The sequestration of shares does not entitle the government to exercise acts of ownership over the shares; even sequestered shares may be voted upon by the registered stockholder. Cojuangco Jr. v. Roxas, 195 SCRA 797 (1991). • The right to vote sequestered shares of stock registered in the names of private individuals or entities and alleged to have been acquired with ill-gotten wealth shall, as a rule, be exercised by the registered owner. The PCGG may, however, be granted such voting right provided it can (1) show prima facie evidence that the wealth and/or the shares are indeed ill-gotten; and (2) demonstrate imminent danger of dissipation of the assets, thus necessitating their continued sequestration and voting by the government until a decision, ruling with finality on their ownership, is promulgated by the proper court.


ARIS S. MANGUERA Nevertheless, the foregoing "two-tiered" test does not apply when the funds that are prima facie public in character or, at least, are affected with public interest. Inasmuch as the subject UCPB shares in the present case were undisputably acquired with coco levy funds which are public in character, then the right to vote them shall be exercised by the PCGG. In sum, the "public character" test, not the "two-tiered" one, applies. Republic v. Cocofed, 372 SCRA 462 (2001). Instances When Stockholders Entitled to Vote: - Election of directors and trustees (Sec. 24). - Amendment of articles of incorporation (Sec. 16). - Investment in another business or corporation (Secs. 36 and 42). - Merger and consolidation (Sec. 72). - Increase and Decrease of capital stock (Sec. 38). - Adoption, amendment and repeal of by-laws (Sec. 48). - Declaration of stock dividends (Sec. 43). - Management contracts (Sec. 44). - Fixing of consideration of no par value shares (Sec. 62).

(g) Agenda • There are certain matters of importance which the law requires to be taken up at meetings of stockholders or members called expressly for the purpose. It is, therefore, necessary that the notice should state the purpose for which the meeting is called. • See page 470 of De Leon. Catindig Class Notes If not a regular item in the Agenda, then must specify the matter or item in the notice

When Board Meeting is Unnecessary

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ARIS S. MANGUERA

Unless the bylaws 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 (2) All the stockholders have actual or implied knowledge of the action and made no prompt objection thereto in writing; or (3) The directors are accustomed to take informal action with the express or implied acquiescence of al the stockholders; or (4) All the directors have express or implied knowledge of the action in question, and none of them makes prompt objection thereto in writing. Note: if a directors’ meeting is held without a 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. (Page 915 of CLV’s CLR, 2007)


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8.2 Additional material: SEC Memo Circ. No. 15 series 2001, Nov. 20, 2001 re: Board meetings through teleconferencing or videoconferencing SEC MEMORANDUM CIRCULAR NO. 15-01 TO SUBJECT

All Concerned Board Meeting Through Teleconferencing or Videoconferencing (Tele/Video Conferencing) In relation to Section 16 of the Electronic Commerce Act (R.A. 8792) and Section 25 of the Corporation Code of the Philippines (BP68) the following are the guidelines for the conduct of teleconferencing and videoconferencing (i.e. conferences or meetings through electronic medium or telecommunications where the participants who are not physically present are located at different local or international places) of the Board of Directors for the information and guidance of all concerned: 1.The Secretary of the meeting shall assume the following responsibilities: a. to safeguard the integrity of the meeting via tele/videoconferencing b. to find good tele/videoconference equipment/facilities c. to record the proceedings and prepare the minutes of the meeting d. to store for safekeeping and mark the tape recording/s and/or other electronic recording mechanism as part of the records of the corporation 2.The Secretary shall send out the notices of the meeting to all directors in accordance with the manner of giving notice as stated in the corporate bylaws. 3. The notice shall include the following: a. Inquiry on whether the director will attend physically or through tele/videoconferencing; b. Contact number/s of the Secretary and office staff whom the director may call to notify and state whether he shall be physically present or attend through tele/videoconferencing; c. Agenda of the meeting; d. All documents to be discussed in the meeting, including attachments, shall be numbered and duly marked by the Secretary in such a way that all the directors, physically or electronically present, can easily follow, refer to the documents and participate in the meeting. 4. If the director chooses tele/videoconferencing, he shall give notice of at least five days prior to the scheduled meeting to the Secretary. The latter shall be informed of his contact number/s. In the same way, the Secretary shall


ARIS S. MANGUERA inform the director concerned of the contact number/s he will call to join the meeting. The Secretary shall keep the records of the details, and on the date of the scheduled meeting, confirm and note such details as part of the minutes of the meeting. 5. In the absence of an arrangement, it is presumed that the director will physically attend the Board meeting. 6. At the start of the scheduled meeting, a roll call shall be made by the Secretary. Every director and participant shall state, for the record, the following: a. Full Name b. Location c.For those attending through tele/videoconferencing, he shall confirm that: i. he can completely and clearly hear the others who can clearly hear him at the end of the line Ii state whether he has received the agenda and all the materials for the meeting iii. specify type of device used Thereafter, the Secretary shall confirm and note the contact numbers being used by the directors and participants not physically present. After the roll call, the Secretary may certify the existence of a quorum. 7. All participants shall identify themselves for the record, before speaking and must clearly hear and/or see each other in the course of the meeting. If a person fails to identify himself, the Secretary shall quickly state the identity of the last speaker. If the person speaking is not physically present and the Secretary is not certain of the identity of the speaker, the Secretary must inquire to elicit a confirmation or correction. If a motion is objected to and there is a need to vote and divide the Board, the Secretary should call the roll and note the vote of each director who should identify himself. If a statement of a director/participant in the meeting via tele/videoconferencing is interrupted or garbled, the Secretary shall request for a repeat or reiteration, and if need be, the Secretary shall repeat what he heard the director/participant was saying for confirmation or correction. 8. The Secretary shall require all the directors who attended the meeting, whether personally or through tele/videoconferencing, to sign the minutes of the meeting to dispel all doubts on matters taken up during the meeting. These guidelines shall take effect fifteen (15) days after publication in two (2) newspapers of general circulation. Mandaluyong City, Philippines. November 20, 2001.

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ARIS S. MANGUERA

(SGD.) LILIA R. BAUTISTA Chairperson

•

It should be emphasized that participation of directors in meetings through teleconferencing and video conferencing may be deemed acceptable only when adequate safeguards have been accordingly set in place. Meetings of this nature should be properly recorded and the appropriate tapes and discs properly stored for safekeeping. (SEC Opinion No. 26, March 22, 2003)

•

In the Philippines, teleconferencing and video-conferencing of members of the BoD of private corporations is a reality in light of RA 8792. The SEC Memorandum Circular No. 15, providing the guidelines to be complied with related to such conferences. (Expertravel & Tours v. CA, 2005)


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9. BOOKS AND RECORDS 9.1 What books and records must a corporation keep? (Section 74) Sec. 74. Books to be kept; stock transfer agent Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any


ARIS S. MANGUERA information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. (51a and 32a; B. P. No. 268.) Jack’s Lecture Section 74 - Books to be kept; stock transfer agent. Corporations are required to keep records of all business transactions and minutes of the meetings of the stockholders and directors and upon demand, any stockholder or director can inspect the corporate records and obtain copies at their own expense. So stockholders are given this right of inspection so that they will be properly informed and will be able to exercise their right as stockholders intelligently. The right of directors to inspect the corporate records is broader than that of stockholders because they are the ones involved in the management of the corporation so they would need information to be able to make decisions wisely. The directors and stockholders have the right to examine the records at reasonable hours on business days. The corporation cannot limit the right to inspect on specific days only. If the right of inspection is denied, the officers responsible for the withholding of the records are criminally liable under section 144

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and will also be liable for damages. There are reasons given in the code for not allowing inspection, but the right exists as concurred by law; therefore, the burden is on the corporation to show that a stockholder or director is not entitled to be allowed to inspect the records of the corporation. Case of Gokongwei vs. SEC The Court said Gokongwei had the right to examine the record of San Miguel International. San Miguel Corporation was arguing that that is a separate corporation. But the court said it is a wholly-owned subsidiary corporation so its capital gained from San Miguel Corporation, and therefore Gokongwei as stockholder of San Miguel Corporation had the right to examine the records of San Miguel International. What are the grounds for not allowing inspection? 1. If the person demanding to examine the records has improperly used any information secured for prior examination For example, a stockholder who was earlier allowed to examine the records made use of insider trading. So he was able to buy shares because of information that became available to him which was not available to others. 2. If he is not acting in good faith. For example, a stockholder who wants to get information on the business plans of the corp. because he's a stockholder of another competing corp., and so he will pass on the info. to that other corp. Or for example a stockholder would want to know the formula of Coca-Cola. 3.

It is not being exercised for a legitimate purpose.

Case of Ramon Gonzales - He filed a petition for mandamus to examine the records of certain transactions entered into by the Philippine National Bank. He filed it as a taxpayer. His petition was denied. So what he did was he bought one share. He said that since he is now a stockholder, he has the right to examine the records of those transactions which he earlier wanted to see. The Court denied his petition because it said he was not exercising his right of inspection properly. This right is given to stockholders in order to protect their investment of the corp. But that is not the situation here. He earlier tried to see the records and when that wasn't allowed he bought one share, and he's using that as justification for looking into the records. He bought the one share to be able to look and pry into the records, because he was earlier denied access to the records. So he's not exercising the right to protect his investment.


ARIS S. MANGUERA

Catindig Class Notes Q: What are the 2 corporate books? A: STB and Minutes Book Q: What are the other books? A: Those required by the Tax Code Q: Who keeps the STB? A: The Corporate Secretary. Tip: If you are a corp sec, do not leave it in the corp. Keep it with you to exercise lawyer’s lien.

What books are required to be maintained by the corporation? (1) Books of minutes of stockholders meetings; (2) Book of minutes of board meetings; (3) Record or Book of all business transactions; (4) Stock and transfer book. What are the contents of the stock and transfer book? (1) All stocks in the name of the stockholders alphabetically arranged; (2) Amount paid and unpaid on all stocks and the date of payment of any installment; (3) Alienation, sale or transfer of stocks; (4) Other entries as the by-laws may prescribe; STB • A stock and transfer book is which records the names and addresses of all stockholders arranged alphabetically, the installments paid and unpaid on all stock for which subscription has been made, and the date of payment thereof, a statement of every alienation, sale or transfer of stock made the date thereof and by and to whom made, and such other entries as may be prescribed by law. A stock and transfer book, like other corporate books and record, is not in any sense a public record, and thus is not exclusive evidence of the matters and things which ordinarily are or should be written therein. (Lanuza v. CA, 2005)

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•

•

You buy and register STB with SEC What is the probative value of the stock and transfer book? The stock and transfer book is the best evidence of the transactions that must be entered or stated therein. However, the entries are considered prima facie evidence only and may be subject to proof to the contrary. (Bitong v. CA)


•

•

9.2 Case Torres v. CA (1997) Who are authorized to make entries in the stock and transfer book? • The corporate secretary is the officer who is duly authorized to make entries on the stock and transfer book. Hence, entries made by the Chairman or President are invalid. (Torres Jr. v. CA)

9.3 Who may inspect corporate books and records and what is the extent of this right? (Section 74) Persons given right to inspect corporate books: (1) Any director, trustee, or stockholder or member; (2) Voting trust certificate holder; (3) Stockholder of a sequestered company (4) Beneficial owner of shares. (Page 621 of De Leon, 2006) What are the requirements for the exercise of the right of inspection? (1) It must be exercised at reasonable hours on business days; (2) The stockholder has not improperly used any information he secured through any previous examination; (3) Demand is made in good faith or for legitimate purpose The right to inspect corporate books and records:


• •

•

Is exercisable through agents and representatives, otherwise it would often be useless to the stockholder who does not know corporate intricacies. W.G. Philpotts v. Philippine Manufacturing Co., 40 Phil. 471 (1919). Cannot be denied on the ground that the director is on unfriendly terms with the officers of the corporation whose records are sought to be inspected. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932). Although it includes the right to make copies, does not authorize bringing the books or records outside of corporate premises. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932). Does not include the right of access to minutes until such minutes have been written up and approved by the directors. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932). Cannot be limited to a period of ten days shortly prior to the annual stockholders’ meeting, as such would be an unreasonable restriction and violates the legal provision granting the exercise of such right “at reasonable hours.” Pardo v. Hercules Lumber Co., 47 Phil. 964 (1924). Limitation: The only express limitations on the right of inspection under Sec. 74 of Corporation Code are: (a) it should be exercised at reasonable hours on business days; (b) the person demanding the right to examine and copy excerpts from the corporate records and minutes has not improperly used any information secured through any previous examination of records; and (c) the demand is made in good faith or for a legitimate purpose. Africa v. PCGG, 205 SCRA 39 (1992). UP CLASS NOTES SH’s right to copy of the minutes does not come into effect until they ask for a copy. Financial records must be furnished to the SH: an audited financial statements which must be audited by the auditor, signed by the BoD, secretary and treasurer; 2. annual report- report on overall condition, plans and programs of the corporation. The two reports can be merged in a single document but the legal requirement is only to furnish financial statement.

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Catindig Class Notes Q: Who are allowed to inspect corporate books? A: (1) (2)

Stockholders or members Their Agents

ARIS S. MANGUERA Gokongwei v. SEC (1979) • A stockholder has the power to inspect the corporate books of a controlled subsidiary of the mother corporation of which he is the stockholder.

Tip: If the SEC requires you to submit Minutes, only give them the excerpts thru the Sec Certificate and not the Minutes.

9.4 What is a stock transfer agent? (Section 74) •

A stock and transfer agent is one who is engaged in the business of registering transfers of stocks in behalf of a stock corporation. He must be licensed by the SEC and must pay the required fees.

9.5 What is a stockholder’s right to financial statements and reports? (Section 75) Sec. 75. Right to financial statements Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members 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 certified public accountant. However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. (n)

9.6 Case


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10. MERGERS AND CONSOLIDATIONS •

Page 896 of CLV’s CLR. Merger is one where a corporation absorbs the other and remains in existence whole the others are dissolved. • Consolidation is one where a new corporation is created, and consolidating corporations are extinguished. • Note: Approval of the SEC is required (JRS at 308) • A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on the other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the combined business. Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express provision of law authorizing them. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).

•

Jack’s Lecture Section 76 deals with mergers and consolidations. In merger, one corp. is absorbed by another as the surviving corporation. In consolidation, a new corp. is formed which will absorb two or more existing corporations. In case of merger or consolidation, the directors of all the corporations involved must approve a plan of merger or consolidation. They state there what is the name of the corp., who will be the constituents, what are the terms of the consolidation or merger. Example, when Philippine Guaranty Company used to be an insurance company owned by the Ayalas, it was merged with FGU Insurance Corporation. Recently, FGU Insurance Corporation was merged with this Mitsubishi Mitomo then changed them to BPI and S Insurance Corporation. For example, when FGU Corp. was merged with Phil. Guaranty, they drew up a plan of merger. They said this is what will happen: the authorized capital stock of FGU will be increased and stockholders of Phil. Guaranty will surrender the shares of stock in Phil. Guaranty in return for shares of stock of FGU. It could then probably be provided in the merger how the directors will be distributed between the two constituent companies and how the officers will be distributed; or regarding


ARIS S. MANGUERA retrenchment, for example if there are two heads of the legal dept., one will have to go; what you will pay to those who will not be maintained, etc.; what will be the interim arrangement while the merger has not yet been approved by the SEC; and if for some reason the merger is disapproved by the SEC, how will you unwind the transaction. The merger or consolidation will have to be approved by majority of .the directors of the corporation involved and at least two thirds (2/3) of the stockholders. And the merger of consolidation will take effect upon the approval by the SEC. If it involves a corp. engaged in a line of business regulated by another agency like banks, insurance companies, then SEC will refer that to the regulatory agency for comment. And upon merger or consolidation, there will be only one surviving corporation, the existence of the separate will cease, the surviving corp. will acquire all the rights, portfolio of business, properties, privileges, and powers of the constituent corporations; at the same time it will also assume the liabilities and obligations of the absorbed corporations. There was a case where this Associated Bank and I think this Philman Bank which were merged. They were probably still using the old forms. One borrower obtained a loan and the promissory note he signed was still in the name of the bank which was absorbed and which has ceased to exist. When he was being sued, he invoked that as his defense. He said that the promissory note is in the name of the absorbed bank. The one suing him, he said, is another bank. The Court said that is the surviving bank, and sine the two banks were merged, it is entitled to sue to recover the payment even if the promissory note was issued in the name of the bank which was absorbed.

10.1 What is a “constituent corporation”? “consolidated corporation”? (Section 76)

A

Sec. 76. Plan or merger of consolidation Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation. The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: 1. The names of the corporations proposing to merge or

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consolidate, hereinafter corporations;

ARIS S. MANGUERA referred

to

as

the

constituent

2. The terms of the merger or consolidation and the mode of carrying the same into effect; 3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and 4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. (n)

•

A constituent corporation refers to a party to a merger or consolidation. (UP-Elective Class Reviewer at 44) • A consolidated corporation is the outcome of the union of two or more existing corporation to form a new corporation. (Id.) • Q:What corporate approvals are required? • A: Plan of merger or consolidation shall contain the following: (1) Names of the corporation involved; (2) Terms and mode of carrying it; (3) Statement of changes, if any, in the present AoI of the surviving corporation or the AoI of the new corp to be formed in case of consolidation.

meetings shall be given to all stockholders or members of the respective corporations, at least two (2) weeks prior to the date of the meeting, either personally or by registered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for the approval of such plan. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code: Provided, That if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished. Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation. (n)

•

10.2 What corporate approvals are required? (Section 77) Sec. 77. Stockholder's or member's approval Upon approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation, the same shall be submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose. Notice of such


Submission of Financial Statements Requirements: For applications of merger, the audited financial statements of the constituent corporations (surviving and absorbed) as of the date not earlier than 120 days prior to the date of filing of the application and the long-form audit report for absorbed corporation(s) are always required. Long form audit report for the surviving corporation is required if it is insolvent. (SEC Opinion 14, s. of 2002, 15 November 2002).

10.3 What is a plan of merger or consolidation (Section 76) •

They state there what is the name of the corp., who will be the constituents, what are the terms of the consolidation or merger. (Jack)

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ARIS S. MANGUERA

10.4 What are articles of merger or consolidation (Section 78)

all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and

Sec. 78. Articles of merger or consolidation After the approval by the stockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation setting forth:

5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation. (n)

1. The plan of the merger or the plan of consolidation; 2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members; and 3. As to each corporation, the number of shares or members voting for and against such plan, respectively. (n)

10.5 What are the effects consolidation (Section 80)

of

a

merger

Sec. 80. Effects or merger or consolidation The merger or consolidation shall have the following effects: 1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; 2. The separate existence of the constituent corporations 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 organized under this Code; 4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and


•

Effects. (See codal or page 308 of JRS) UP Class Notes Due diligence work-know your husband/wife before marrying her. Date of effectivity of merger or consolidation is the issuance of the certificate of merger or consolidation by the SEC.

or •

When the procedure for merger/consolidation prescribed under the Corporation Code are not followed, there can be no merger or consolidation, and corporate separateness between the constituent corporations remains, and the liabilities of one entity cannot be enforced against another entity. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002). • It is settled that in the merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation. The surviving corporation therefore has a right to institute a collection suit on accounts of one of one of the constituent corporations. Babst v. Court of Appeals, 350 SCRA 341 (2001).

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11. NON-STOCK CORPORATIONS •

Definition: A non-stock corporation is one organized for an eleemosynary purpose and where no part of its income is distributable to its members, trustees, or officers, subject to the provisions on dissolution. (Page 902 of CLV’s CLR) (See page 302 of JRS) • A non-stock corporation may only be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic or other similar purposes. It may not engage in undertakings such as the investment business where profit is the main or underlying purpose. Although the non-stock corporation may obtain profits as an incident to its operation such profits are not to be distributed among its members but must be used for the furtherance of its purposes. People v. Menil, G.R. 11505466, 12 September 1999 [unrep.]) • The incurring of profit or losses does not determine whether an activity is for profit or non-profit, and the courts will consider whether dividends have been declared or its members or that is property, effects or profit was ever used for personal or individual gain, and not for the purpose of carrying out the objectives of the enterprise. Manila Sanitarium and Hospital v. Gabuco, 7 SCRA 14 (1963). • Non-Applicability of the Nationalization Laws. A foreigner may be member or an officer of a non-stock corporation. Save for the position of the Secretary, who must be a Filipino citizen and a resident of the Philippines, the prohibition of foreign citizens becoming officers in corporations engaged in business does not apply to the activities of a non-stock corporation which do not fall within the coverage of a nationalized industry or area of business reserved by law exclusively to Filipino citizens. (SEC Opinion No. 12, series of 2002, 21 November 2002).


ARIS S. MANGUERA Conversion of Non-Stock Corporation to Stock Corporation • The conversion of a non-stock educational institution into a stock corporation is not legally feasible, as it violates Sec. 87 of Corporation Code that no part of the income of a non-stock corporation may be distributable as dividends to its members, trustees or officers. “Thus, the Commission has previously ruled that a non-stock corporation cannot be converted into a stock corporation by a mere amendment of the Articles of Incorporation. For purposes of transformation, it is fundamental that the non-stock corporation be dissolved first under any of the methods specified Title XIV of the Corporation Code. Thereafter, the members may organize as a stock corporation directed to bring profits or pecuniary gains to themselves. (SEC Opinion dated 24 February 2003; SEC Opinion dated 10 December 1992). • In the event of dissolution of a non-stock corporation, its assets shall be distributed in accordance with the rules as provided for under Secs. 94 and 95 of Corporation Code. Unless, it is so provided in the Articles of Incorporation or ByLaws, the members are not entitled to any beneficial or vested interest over the assets of the non-stock corporation. In other words, non-stock, non-profit corporations hold their funds in trust for the carrying out of the objectives and purposes expressed in its charter. (SEC Opinion dated 24 February 2003; SEC Opinion dated 13 May 1992). JACK’S LECTURE NON-STOCK CORPORATIONS For a corporation to be non-stock, it must have no shares of stock and it must not be authorized to declare dividends. The law mentions the different purposes for which a non-stock corp. may be organized: 1. They may be organized for charitable purposes (Suspicio de San Jose, Tahanang Walang Hagdanan). 2. A religious order can incorporate as a non-stock corp. for the management of its properties.

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3. Educational: many of the religious sectarian schools are organized as non-stock corporations (Ateneo de Manila, La Salle) 4. Others: Professional (bar associations, accountants, engineers), Cultural, Fraternal, Literary, Scientific, Social, Civic Service, or similar purposes ( Chambers of Commerce). The right to vote may be limited, broadened, or denied in the articles or the by-laws, but unless the right is limited, broadened or denied, each member will be entitled to vote. A member may vote by proxy unless that is prohibited in the by-laws. For instance, the country clubs. Usually they will have different kinds of members. They will usually provide that whoever is the President of the Phils. and the mayor of the place are honorary members, and they can use the Philippines. After the honorary members, there are the regular members, and these are those who own a proprietary share. But it's expensive to run and maintain a country club. So to broaden the base of people to whom they can collect monthly dues, they sometimes create these associate members. These are members who do not have a proprietary share but they will be allowed to make use of the playing rights of one who owns a proprietary share provided they pay also monthly dues. And usually the by-laws will provide that only those who own proprietary shares can vote. So the honorary members and these associate members are given only playing rights and are not allowed to vote. Voting by mail or others means like by fax may be allowed. But membership is nontransferrable. If somebody owns a proprietary share in a country club, if he dies and his share is inherited by his son, the son does not automatically become a member. He has to apply for membership. If he's disapproved, he cannot make use of the facilities. If he has a reputation for not getting along with others, quarrelsome, they wouldn't want to have such person as member. The only thing he can do to that share is that he can sell it, mortgage it, but he cannot be a member if he's not accepted. Membership shall be terminated in the manner and for causes provided in the articles or by-laws. For example, a case of loyalty to the organization. Like for instance, a member of the Manila Yacht Club, organizes a competing regatta in Subic to compete with the regatta there, so that's his loyalty. Or where a member playing golf would make a game terrible for everybody: they use their temper, they throw the club, etc. The country club could suspend him as what was done in the case of Norberto Quisumbing for picking a fight with a caddy. He sued for moral damages in the RTC, but the RTC dismissed it because it's an intra-corporate dispute and should be filed in the SEC, which he did. The country club filed a motion to dismiss because they said the complaint does not state a cause of


ARIS S. MANGUERA action because under the by-laws, if a member wants to question his suspension by the board, he must appeal to the members. He has not exhausted the intra-corporate remedy provided by the by-laws. So it was premature. But the SEC dismissed on the ground that it has no jurisdiction, that it should be filed in the RTC. Motion for Reconsideration in the RTC granted. Petition for prohibition by the club in the CA was granted. Eventually Quisumbing just sold his share. Non-stock corporations may have more than fifteen (15) directors. You may even have 21. Ex. In alumni associations if you want to broaden representation in the board. You can provide that only one third (1/3) of the directors would be elected every year so the terms every three years would be staggered, to allow for continuity in policies. But you can provide that everybody will be elected every year. If you do not provide for such, then 1/3 will be elected every year.

11.1 Distinguish non-stock corporations from stock corporations as to: Purpose Distribution of Income

Scope of Right to Vote

Non-Stock Eleemosynary Purposes No part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution

Stock Any legal purpose Stock Corporation distribute dividends;

may

Each member entitled to one vote unless limited, denied or broadened by AoI or BL.

No share may be deprived of voting rights except those classified as preferred or redeemable shares. (Section 6)

Voting by Proxy

AoI or bylaws may prohibit the voting by proxy

Voting by proxy is a right of a stockholder. (Section 24)

Voting by mail

Voting by mail or other similar means may be authorized by the by-laws of the non-stock corporation with the approval of and under

Voting by allowed

mail

is

not

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ARIS S. MANGUERA such conditions which may be prescribed by the SEC.

Transferability interest

of

Governing Board Number and Term

Non-transferable, unless the articles of incorporation or the bylaws otherwise provide.

Number: May be more than 15 Term: 3 years.

Place of meetings

Distribution of Assets

At any place within the Philippines

See Section 94 below The members are not entitled to any beneficial


In a stock corp, rights and shares are transferable. The right to vote may be transferred by proxy or voting trusts. Shares of stock are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner or his attorneyin-fact or other person legally authorized to make the transfer. Note: No transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation. (Sec 63) In stock corporation, the number of directors shall not be less than five nor more than 15. As to term. BoD shall hold office for 1 year until their successors are elected and qualified. (Section 23) Must be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation. Note: Metro Manila shall be considered a city of municipality. (Section 51) Assets are distributed to the stockholders of the corporation after claims of the creditors are

or vested interest over the assets of the non-stock corporation unless it is so provided in the AoI or BL. (SEC Opinion, Feb 23, 2003)

satisfied.

(a) Purposes (Section 88) Sec. 88. Purposes Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of nonstock corporations. (n)

•

Stock corporations may be formed or organized for any purpose as long as it is not contrary to law. (UP-Elective Class Reviewer at 44)

(b) Distribution of Income (Section 87) Sec. 87. Definition For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. (n)

•

Stock Corporation may distribute dividends; the BoD may declare dividends out of the unrestricted retained earnings

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which shall be payable in cash, property or stock. (UPElective Class Reviewer at 44)

(c) Scope of right to vote (Section 89) Sec. 89. Right to vote The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote. Unless otherwise provided in the articles of incorporation or the bylaws, a member may vote by proxy in accordance with the provisions of this Code. (n) Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission.

•

Stock corporation- No share may be deprived of voting rights except those classified as preferred or redeemable shares. (Section 6)

(d) Voting by proxy (Section 89) • Non-stock Corp- AoI or bylaws may prohibit the voting by •

proxy Stock Corp- Voting by proxy is a right o f a stockholder. (Section 24)

(e) Voting by mail (Section 89) • Non-stock corporation- Voting by mail or other similar

•

means may be authorized by the by-laws of the non-stock corporation with the approval of and under such conditions which may be prescribed by the SEC. Stock corp- Voting by mail is not allowed (UP-Elective Class Reviewer at 44)


ARIS S. MANGUERA

(f) Transferability of interest or membership (Section 90) Sec. 90. Non-transferability of membership Membership in a non-stock corporation and all rights arising therefrom are personal and non-transferable, unless the articles of incorporation or the by-laws otherwise provide. (n)

•

In a stock corp, rights and shares are transferable. The right to vote may be transferred by proxy or voting trusts. Shares of stock are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. Note: No transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation. (Sec 63) (UPElective Class Reviewer at 45)

(g) Governing board number and term (Section 92) Sec. 92. Election and term of trustees Unless otherwise provided in the articles of incorporation or the bylaws, the board of trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period. No person shall be elected as trustee unless he is a member of the corporation. Unless otherwise provided in the articles of incorporation or the bylaws, officers of a non-stock corporation may be directly elected by the members. (n)

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•

In stock corporation, the number of directors shall not be less than five nor more than 15. As to term. BoD shall hold office for 1 year until their successors are elected and qualified. (Section 23) (UP-Elective Class Reviewer at 45)

(h) Election of officers (Section 92) • Non-stock corp- Officers may be directly elected by the

ARIS S. MANGUERA satisfied and discharged, or adequate provision shall be made therefore; 2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements;

Sec. 93. Place of meetings

3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter;

The by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines. (n)

4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the by-laws, determine the distributive rights of members, or any class or classes of members, or provide for distribution; and

•

members unless otherwise provided in the AoI or bylaws. Stock Corp- Only the BoD elect the corporate officers (UPElective Class Reviewer at 45)

(i) Place of meetings (Section 93)

•

Stock corp- Must be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation. Note: Metro Manila shall be considered a city of municipality. (Section 51) (UP-Elective Class Reviewer at 45)

(j) Distribution of assets in case of dissolution (Section 94) Sec. 94. Rules of distribution In case dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 1. All liabilities and obligations of the corporation shall be paid,


5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter. (n)

•

Stock Corp- Assets are distributed to the stockholders of the corporation after claims of the creditors are satisfied.

11.2 Additional material: SEC Opinion letter, dated February 24, 2003 to Ms. Benedicta Bello re Conversion of non-stock educational institution into a stock corporation. SEC Opinion dated February 24, 2003

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ARIS S. MANGUERA

Firstly, the conversion of a non-stock educational institution into a stock corporation is not legally feasible. Pursuant to Section 87 of the Corporation Code, no part of the income of a non-stock corporation may be distributable as dividends to its members, trustees or officers. Thus, the Commission has previously ruled that a non-stock corporation cannot be converted in to a stock corporation by a mere amendment of the Articles of Incorporation. For purposes of transformation, it is fundamental that the non-stock corporation be dissolved first under any of the methods specified under Titled XIV of the Corporation Code. Thereafter, the members may organize as a stock corporation directed to bring profits or pecuniary gains to themselves. Secondly, in the event of dissolution of a non-stock corporation such as your school, its assets shall be distributed in accordance with the rules as provided for under Sections 94 and 95 of the Corporation Code. Unless, it is so provided in the Articles of Incorporation or ByLaws, the members are not entitled to any beneficial or vested interest over the assets of the non-stock corporation. In other words, non-stock, non-profit corporations hold their funds in trust for the carrying out of the objectives and purposes expressed in its charter.


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12. CLOSE CORPORATIONS Jack’s Lecture This is a new title, made in recognition of the fact that the overwhelming majority of the corporations are family corps. In many family corporations here, the set-up is such that the husband is the president, the wife is the treasurer, but it is the wife who is actually running the corp. The husband is just the nominal figurehead. Ex. Tesoro Handicraft. A close corp. Has a technical meaning in the law. For it to be a close corp., the articles must provide that it cannot have more than 20 stockholders. There should be restrictions on the transfer of the shares, like usually it will be provided that if a stockholder wants to sell his share, he must first offer it to the other stockholders. Only if they are not willing to buy can he offer it to an outsider. Or it may also provide that if no stockholder is willing to buy the shares, then he must offer it to the corporation before offering to an outsider. The corporation shall not be listed in any stock exchange. The law says that the mere fact that a corp. is controlled by another corp. does not make it a close corp. The articles must contain the features mentioned in the law. But corps. engaged in mining, oil companies, stock exchanges, banks, insurance companies, public utilities, schools, and corps. vested with public interest are not allowed to be close corps. Because they're engaged in lines of business vested with public interest and so they should be subject to regulation and close scrutiny. The law says the articles may provide for classification of shares and qualifications for owning them. For example, you have three brothers who form a close corp. So they may provide: a) we will classify these shares into class a, class b, class c. Only the members of the family of the first brother can own class a shares. Only members of 2nd brother can own class b shares, and class c shares can be owned only by members of the 3rd brother; b) we will have nine (9) directors, and 3 will be elected by holders of class a shares; c) can provide for a greater quorum or voting requirements. It can be provided that you will need three fourths (3/4) majority to approve any action by the board, any action by the stockholder. Why? Because each group would want to be protected for otherwise if the two groups combine they can get anything approved, like there would be two thirds. And so the third group would want to be protected;


ARIS S. MANGUERA d) the articles may provide that if it's the stockholders and not the board who will manage the affairs and that there is no need for formal meetings, if the stockholders will be the directors, then they will be subject to the same liabilities as directors. For restrictions for the transfer of shares to be binding on third parties, they have to appear in the articles of incorporation, in the by-laws, and must be printed at the back of the stock certificate. So you can just put there for example, subject to the restrictions in article 10 of the articles of incorporation. It is up to the prospective buyer to look into the articles to find out what are those restrictions. The laws says that the stockholders may enter into pre-incorporation agreement before they incorporate, and that pre-incorporation agreement will remain binding even after they have incorporated because that agreement will lay down the modus vivendi after they have incorporated. Example, it could be agreed that each family will have 3 directors, the president can come from one family, the general manager from another family, the treasurer from the 3rd family, and then every year they will rotate the position. They may also agree on how the shares will be voted. Like 3 directors may be elected only by class a shares, 3 by class b, and 3 by class c shares. And unless the by-laws provide otherwise, action of the directors without need of a meeting will be valid if all the directors sign a written consent. Or if the stockholders have actual or implied knowledge but do not object in writing. Or if the directors are used to taking informal action, or the directors all have express or implied knowledge of the action taken and none of them objects. The law says that in close corps., there is right of pre-emption to call issuances of shares even if the shares have been issued for property or payment for past services or payment to convert debt to equity. When you have these close corporations with everybody having a veto power, like you are required 3/4 majority a the quorum of the board, 3/4 majority for quorum in a stockholders meeting, you could be paralyzed by inaction. And so the law provides for remedies for that. The SEC can arbitrate. It can cancel or alter any provision in the articles or by-law. They can cancel for example the greater quorum requirement. Or they may alter, prohibit or cancel any resolution or action of the corporation, directors, stockholders, or officers. They may direct or prohibit the action taken by any one of those mentioned . Or it may require the purchase of the shares of any stockholder by the corporation or by other stockholders even if there are no retained earnings. In fact usually in a corporation like this, it's advisable that you put a buy-out provision. You anticipate. Everybody has a right to veto. You''ll be paralyzed inaction, and such is intolerable, then you'll have to put there a buy-out provision, that in case you have this

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continuing deadlock then a stockholder can demand to buy out the shares of another stockholder. And you can put there a formula on what would be the valuation, like regarding the book value of something. Suppose they cannot agree who will buy whom, they can provide that the one who's willing to pay the higher price will be the one who will prevail. Or dissolving the corporation, that will be an extreme case; granting other reliefs as the circumstances may warrant, or appointing a provisional director. The law says that the provisional director is supposed to be an impartial person, an outsider who is not a stockholder or a creditor. He will have the rights of a duly elected director. He can vote. He's the tiebreaker.

• •

•

•

Concept. Convergence of ownership and management. Superiority of contractual intent on proprietary matters pursued in juridical vehicle. (CLV) The concept of a close corporation organized for the purpose of running a family business or managing family property has formed the backbone of Philippine commerce and industry. Through this device, Filipino families have been able to turn their humble, hard-earned life savings into going concerns capable of providing them and their families with a modicum of material comfort and financial security as a reward for years of hard work. A family corporation should serve as a reward for years of hard work. A family corporation should serve as a rallying point for family unity and prosperity, not as a flashpoint for familial strife. It is hoped that people reacquaint themselves with the concepts of mutual aid and security that are the original driving forces behind the formation of family corporations and use these tenets in order to facilitate more civil, if not more amicable, settlements of family corporate disputes.  Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003). Rationale. Implementing vehicle of contractual understanding on sharing of control, risks and benefits in the business enterprise. (CLV) (It’s like an incorporated partnership) Jack Tip: Provide for a buy-out provision with valuation.


ARIS S. MANGUERA

12.1 What are the requirements for the formation of a close corporation? (Section 96) Sec. 96. Definition and applicability of Title A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.

Requirements for close corporations: (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 stock (which must appear in the AoI, By-laws and Certificate of Stock) o Restriction on the transfer must not be more onerous than granting the existing SH or corporation the option to purchase shares; (3) The stocks cannot be listed in the stock exchange nor publicly offered.

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Note:

•

The corporation is not a close corporation even if the shares belong to less than twenty if not all the requisites are present. The three requisites must concur. (JRS at 318) • A corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation. (UP Class Notes at 46)

Meetings

12.2 What entities may not be organized as a close corporation? (Section 96)

Close Corporation

The SHs shall be deemed to be directors for the purpose of applying the provisions of the Code.

SHs are separate and distinct from directors


There are no classification of BoD.

3.

Regular Corporation BoD

The AoI may provide that all officers of employees shall be elected by the SHs No meeting of stockholders need be called to elect directors; unless the by-laws provide otherwise, any action by the director of the close corporation without a meeting shall nevertheless be deemed valid if :

The directors or trustees shall not act individually nor separately but as a body in a lawful meeting. See Sections 50,51

2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or

12.3 Distinguish a close corporation from a regular corporation as to: AoI of close corporation may provide that the business of the corporation shall be managed by the SHs rather than by a board of directors; unless the context clearly requires otherwise.

There are no classification of BoD.

1. Before or after such action is taken, written consent thereto is signed by all the directors; or

The following cannot be a close corporation: (1) Mining companies; (2) Oil companies; (3) Stock exchanges; (4) Banks; (5) Insurance companies; (6) Public Utility; (7) Educational institutions; (8) Other corporation declared to be vested with public interest.

Management

There can be classification of directors into one or more classes.

The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or

4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing

Voting

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.

No share may be deprived of voting rights, except preferred and redeemable shares. There shall always be a class/series of shares which

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AoI may provide for greater voting requirements in meetings of SHs or directors than those provided by the Code.

Quorum

Board Authority

Restrictions on transfer of shares

AoI may provide for a greater quorum requirement in meetings than those provided in the Code.

AoI may provide for a classification of directors into one or more classes, each of whom may be voted for an elected solely by a particular class of stock, business of corporation maybe managed by the SHs rather than the BoD. AOI may provide for a classification of shares or rights and the qualifications for owning or holding the same and restriction on their transfers as they may be stated therein; restrictions must appear in the AOI and the by-laws as well as the certificates of stock, otherwise, the same shall not be binding on a purchaser in good faith; restrictions shall not be more onerous than granting the existing SHS or the corporation the option to purchase the shares of the transferring SH with such reasonable terms, conditions, or period stated. At the end of the period, without the SH or corporation exercising the option to purchase, the transferring SH may sell his shares to pay third persons


ARIS S. MANGUERA have COMPLETE VOTING RIGHTS Each share shall be EQUAL in all respects to every share unless otherwise prvided by AoI For BoD, the AoI or By-laws can provide for a greater majority in quorum.

Pre-emptive right

Extends to all stocks to be issued, including re-issuance of treasury shares, whether for money, property, or personal services, or in payment of corporate debts, unless the AOI otherwise provides

For stockholders, the AoI can provide for a different percentage in quorum. See Section 52 There are no classification of BoD. See Section 23,24

Resolution deadlocks

of

Withdrawal right Arbitration When, as a result of such deadlock the business and the affairs of the corporation can no longer be conducted to the advantage of the SHs generally, the SEC, upon written petition of any SH, shall have the power to arbitrate the dispute. (Other remedies: appointment of a provisional director by the SEC, the SEC can compel the purchase or sale of shares, SEC can dissolve the corporation, SEC can cancel or alter any provision in the AOI or by-laws; SEC can cancel, alter, or enjoin or prohibit any act or acts or resolution of the BOD, SHs, or officers)

Limitations on the exercise of the pre-emptive right: 1. Such pre-emptive right shall not extend to shares to be issued on compliance with laws requiring stock offerings or minimum stock ownership by the public. 2. Shall not extend to shares to be issued in good faith with the SHs approval in exchange or in payment of previously contracted debt. 3. Shall not take effect if denied in the AoI or amendment thereto. See Section 39 Appraisal right

See Section 104

(a) Management (Section 97) Sec. 97. Articles of incorporation

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The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a 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 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. 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: 1. No meeting of stockholders need be called to elect directors; 2. 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; and 3. 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.

(b) Meetings (Section 101) Sec. 101. When board meeting is unnecessary or improperly held 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

ARIS S. MANGUERA 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 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. 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.

(c) Voting (Section 97) Sec. 97. Articles of incorporation The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a 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 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. xxx 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.

(d) Quorum (Section 97) Sec. 97. Articles of incorporation The articles of incorporation of a close corporation may provide:

2. All the stockholders have actual or implied knowledge of the


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xxx 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code.

(e) Board Authority (Section 97) Sec. 97. Articles of incorporation xxx 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: 1. No meeting of stockholders need be called to elect directors; 2. 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; and 3. 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.

(f) Restrictions on transfer of shares (Section 98) Sec. 98. Validity of restrictions on transfer of shares Restrictions on the right to transfer shares must appear in the articles of incorporation 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. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person.


ARIS S. MANGUERA

(g) Pre-emptive Right (Section 102) Sec. 102. Pre-emptive right in close corporations 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.

(h) Resolution of deadlocks (Section 104) Sec. 104. Deadlocks Notwithstanding any contrary provision in the articles of incorporation or by-laws or agreement of stockholders of a close corporation, if the directors or stockholders are so divided respecting the management of the corporation's business and affairs that the votes required for any corporate action cannot be obtained, with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally, the Securities and Exchange Commission, upon written petition by any stockholder, shall have the power to arbitrate the dispute. In the exercise of such power, the Commission shall have authority to make such order as it deems appropriate, including an order: (1) canceling or altering any provision contained in the articles of incorporation, bylaws, or any stockholder's agreement; (2) canceling, altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or officers; (3) directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action; (4) requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders; (5) appointing a provisional director; (6) dissolving the corporation; or (7) granting such other relief as the circumstances may warrant. A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the Commission. A provisional director is not a receiver of the corporation and does not have the title and powers of

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ARIS S. MANGUERA

a custodian or receiver. A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the Commission or by all the stockholders. His compensation shall be determined by agreement between him and the corporation subject to approval of the Commission, which may fix his compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation.

•

In case of irreconcilable disputes among the directors or shareholders, the SEC may be asked to intervene and the SEC may perform such action that may be necessary under the circumstances including the appointment of a provisional director who, as an impartial person will have all the powers of a duly elected director (not a receiver). (JRS at 319)

12.4 What is a provisional director? (Section 104) • A provisional director is an impartial person who is

neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, whose further qualifications, if any maybe determined by the SEC; he is not a receiver and does not have the title and powers of a custodian or receiver but rather has all the powers of a duly elected director. • He’s a tie-breaker. (Jack)

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: Provided, That any stockholder of a close corporation may, by written petition to the Securities and Exchange Commission, 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 whenever corporate assets are being misapplied or wasted. UP Class Notes Appraisal right in regular corporations can be opted by the dissenting stockholder only in cases where the fundamental change in the corporate structure or operations is involved, whereas a SH of a close corporation may, for any reason, compel the said corporation to purchase his shares at their par value, when the corporation has sufficient assets in its books to cover his debts and liabilities exclusive of capital stock. (In Appraisal Right, fair value of shares is given but in Withdrawal Right, the fair value given cannot be less than the par or issued value of the shares; In Appraisal Right, there must be present unrestricted retained earnings in the books of the corporation)

12.6 Case San Juan Structural and Steel Fabricators v. CA (1998) • The corporation is not a close corporation even if the shares belong to less than twenty if not all the requisites are present.

12.5 Compare the appraisal right of a stockholder of a regular corporation with the withdrawal right of a stockholder of a close corporation (Section 105) Sec. 105. Withdrawal corporation

of

stockholder

or

dissolution

of

In addition and without prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to


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13 . EDUCATIONAL CORPORATIONS Jack’s Lecture For educational corporations, where the trustees should be divided into multiples of five. So you should have five, ten, or fifteen trustees if they are organized as nonstock corporation. And unless otherwise provided in the articles of incorporation or by-laws, the terms of the trustees should be five years, and every year only one fifth (1/5) is elected, again to provide for continuity in policies. But you can provide that they will all be elected instead for a term of one year, so every year, everybody has to be elected.

ARIS S. MANGUERA Unless otherwise provided in the articles of incorporation on the bylaws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority of trustees shall be defined in the by-laws. For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations. (169a)

13.1 Incorporation (Section 106) Sec. 106. Incorporation Educational corporations shall be governed by special laws and by the general provisions of this Code. (n)

13.2 Pre-requisites to incorporation (Section 107) Sec. 107. Pre-requisites to incorporation Except upon favorable recommendation of the Ministry of Education and Culture, the Securities and Exchange Commission shall not accept or approve the articles of incorporation and by-laws of any educational institution. (168a)

13.3 Board of Trustees (Section 108) Sec. 108. Board of trustees Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5).


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14. RELIGIOUS CORPORATIONS Jack’s Lecture There are three (3) ways by which a religious organization can provide for the administration of its properties: 1. by forming a non-stock corporation 2. by corporation sole 3. by religious aggregate or society Corporation sole may constitute of one person only so the head of a religious sect would incorporate himself for the purpose of administering the properties of a religious sect. To incorporate what you will file with the SEC is an affidavit. The affidavit will state that the affiant is the head of a religious denomination or sect and would want to become a corporation sole. and the rules of his religion allow him to incorporate as a corporation sole and that he is charged with the administration of its properties and in fact he will be required to submit an inventory and the manner in which the successor will be chosen and the place where he will hold his office. The Roman Catholic Archbishop of Manila is a corporation sole so if Cardinal Sin dies the new archbishop will simply submit his appointment and he need not incorporate again because the corporation is different from the occupant of the position. The Iglesia ni Kristo is incorporated as a corporation sole. The court has held in Roman Catholic Apostolic Adm. of Davao, Inc. v. Land Registration Commission that although the Bishop was a foreigner, he could register a parcel of land in his name because he is a mere administrator the property really belongs to the faithful and since they are Filipinos they could register the land in the administrator’s name. Under the law if a corporation sole wants to dispose of or mortgage real property, he has to get authorization from the Regional Trial Court unless the rules of the religious sect allow him to dispose of or mortgage real property and that is usually the case. The last is the religious aggregate or religious society. It can incorporate for the purpose of managing its properties and the articles would indicate that the members constitute a religious


ARIS S. MANGUERA order or society and that at least 2/3 of the members have agreed to incorporate, that the rules allow them to incorporate they desire to incorporate to manage their properties in the place where located. The recollects are incorporated to manage their properties, they are the single biggest bloc of stockholder of San Miguel Corporation.

14.1 Classes of religious corporations (Section 109) Sec. 109. Classes of religious corporations Religious corporations may be incorporated by one or more persons. Such corporations may be classified into corporations sole and religious societies. Religious corporations shall be governed by this Chapter and by the general provisions on non-stock corporations insofar as they may be applicable. (n)

(a) Corporation Sole • Corporation sole is a special form of corporation

•

•

•

usually associated with the clergy and consists of one person only and his successors, who are incorporated by law to give some legal capacities and advantages; Nationality A corporation sole does not have any nationality but for purposes of applying our nationalization laws, nationality is determined not by the nationality of its head but by the nationality of the members constituting the sect in the Philippines even if it is headed by the Pope. (Roman Catholic Apostolic Church v. LRC, 1957) Effect of Separation of Members. Members of the sect who left and who formed a separate religious group are not entitled to any right to vote over the properties of their former sect. (Canete v. CA, 1989) Dissolution. By filing a verified declaration of dissolution. (JRS at 323)

•

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(i) Who may form and for what purpose (Section 110) Sec. 110. Corporation sole For the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. (154a)

(ii) How formed (Section 111 and Section 112) Sec. 111. Articles of incorporation In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file with the Securities and Exchange Commission articles of incorporation setting forth the following: 1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious denomination, sect or church and that he desires to become a corporation sole; 2. That the rules, regulations and discipline of his religious denomination, sect or church are not inconsistent with his becoming a corporation sole and do not forbid it; 3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with the administration of the temporalities and the management of the affairs, estate and properties of his religious denomination, sect or church within his territorial jurisdiction, describing such territorial jurisdiction; 4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi of presiding elder is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect or church to which he belongs; and 5. The place where the principal office of the corporation sole is to be established and located, which place must be within the Philippines. The articles of incorporation may include any other provision not


ARIS S. MANGUERA contrary to law for the regulation of the affairs of the corporation. (n) Sec. 112. Submission of the articles of incorporation The articles of incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public. From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof. (n)

(iii) Need for by-laws •

No need for by-laws since the business is conducted by only one man.

(iv) Power to acquire and alienate property (Section 113) Sec. 113. Acquisition and alienation of property Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the Court of First Instance of the province where the property is situated upon proof made to the satisfaction of the court that notice of the application for leave to sell or mortgage has been given by publication or otherwise in such

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manner and for such time as said court may have directed, and that it is to the interest of the corporation that leave to sell or mortgage should be granted. The application for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination, sect or church represented by the corporation sole: Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary. (159a)

(v) Filling of vacancies (Section 114)

ARIS S. MANGUERA declaration of dissolution. The declaration of dissolution shall set forth: 1. The name of the corporation; 2. The reason for dissolution and winding up; 3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or church; 4. The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation. Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs. (n)

Sec. 114. Filling of vacancies The successors in office of any chief archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation sole shall become the corporation sole on their accession to office and shall be permitted to transact business as such on the filing with the Securities and Exchange Commission of a copy of their commission, certificate of election, or letters of appointment, duly certified by any notary public. During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church incorporated as a corporation sole, the person or persons authorized and empowered by the rules, regulations or discipline of the religious denomination, sect or church represented by the corporation sole to administer the temporalities and manage the affairs, estate and properties of the corporation sole during the vacancy shall exercise all the powers and authority of the corporation sole during such vacancy. (158a)

(b) Religious societies or corporations aggregate (Section 116) Sec. 116. Religious societies Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least twothirds (2/3) of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties and estate by filing with the Securities and Exchange Commission, articles of incorporation verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious society or religious order, or diocese, synod, or district organization of the religious denomination, sect or church, setting forth the following:

Sec. 115. Dissolution

1. That the religious society or religious order, or diocese, synod, or district organization is a religious organization of a religious denomination, sect or church;

A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Securities and Exchange Commission a verified

2. That at least two-thirds (2/3) of its membership have given their written consent or have voted to incorporate, at a duly convened

(vi) Dissolution (Section 115)


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meeting of the body; 3. That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious denomination, sect, or church of which it forms a part;

ARIS S. MANGUERA Section 116 (as well as Sec. 160 of the former Corporation Law) does not provide for a term of existence of religious corporations, whether classified as a corporation sole or a corporation aggregate. As such, the law intends that religious organizations may exist perpetually (SEC Opinion dated Dec. 10, 1981). Moreover, where the Articles of Incorporation does not provide for a term of existence, it shall be understood that the intention is for the corporation to exist for an indefinite period (SEC Opinion dated Oct. 23, 1995)

4. That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate; 5. The place where the principal office of the corporation is to be established and located, which place must be within the Philippines; and 6. The names, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese, synod, or district organization to serve for the first year or such other period as may be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district organization, the board of trustees to be not less than five (5) nor more than fifteen (15). (160a)

14.2 Case Long v. Basa (2001) • Since in matters purely ecclesiastical the decisions of the proper church tribunals are conclusive upon the civil tribunals, then a church member who is expelled from the membership by the church authorities, or a priest or minister who is by them deprived of his sacred office, is without remedy in the civil courts. Long v. Basa, 366 SCRA 113 (2001).

14.3 Additional Material: SEC Opinion No. 04-45, Nov. 28, 2004 to Ferrer and Ferrer Law Office re term of existence of religious corporation. SEC Opinion No. 04-45, (Nov. 28, 2004) Re: Term of Existence of Religious Corporations


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15. DISSOLUTION Dissolution of a corporation is the extinguishment of the franchise of a corporation and termination of its corporate existence. Modes of Dissolution: (1) Voluntary Dissolution (2) Involuntary Dissolution (3) Shortening of term; and (4) Expiration of term (JRS at 311) (5) Failure to organize and commence business within two years from the date of issuance of certificate of incorporation; (6) Legislative Dissolution (CLV’s CLR at 936)

A board resolution to dissolve the corporation does not operate to so dissolve the juridical entity. For dissolution to be effective “[t]he requirements mandated by the Corporation Code should have been strictly complied with.” Vesagas v. Court of Appeals, 371 SCRA 509, 516 (2002). • A corporation cannot extend its life by amendment of its articles of incorporation effected during the three-year statutory period for liquidation when its original term of existence had already expired, as the same would constitute new business. Alhambra Cigar & Cigarette Manufacturing Company, Inc. v. SEC, 24 SCRA 269 (1968). • When the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of continuing the business for which it was organized. PNB v. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294 (1992). Jack’s Lecture DISSOLUTION

Effects of Dissolution: (1) Transfer of Legal title to corporate property; (2) The corporation ceases as a body corporate to continue the business for which it was established; (3) Continuation of a body corporation (the corporation continues as a body corporate for 3 years for purposes of winding up or liquidation) (4) After the expiration of the 3 year winding up period, the corporation ceases to exist for all purposes. (JRS at 314). • The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liability of such entity, since it is allowed to continue as a juridical entity for 3 years for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property, and to distribute its assets. Republic v. Tancinco, 394 SCRA 386 (2002).


There are different ways to dissolve a corporation one is voluntarily and the other involuntarily, under the law there are three provisions governing voluntary dissolution. The first one is if no creditors are affected. In all the methods of voluntary dissolution, you need a resolution approved by a majority of directors and a resolution approved by at least 2/3 of the stockholders In Section 118, where no creditors are affected the directors and the stockholders pass the resolution dissolving the corporation and that will be filed in the SEC for approval. In a case where a suit was filed and the corporation said, we have already been dissolved and they submitted a board resolution, the SC held that it is not enough to dissolve a corporation. The Second one, is under Section 119 where creditors are affected. Here the board and the stockholders will approve the dissolution but a petition will be filed signed by the majority of the directors and verified by the president, secretary or one of the directors which will indicate the claims of creditors. That will be set for hearing and not less than thirty (30) days nor more than sixty (60) days after the entry of the issuance of the order and a copy of the order will be published once a week for three consecutive weeks in a newspaper of general circulation and that will also be posted for three weeks in three public places like the bulletin board of a municipal hall, post office, the plaza and then

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the SEC will set that for hearing and determine w/n the corporation should be dissolved. The third one you will just shorten the corporate life and this is the simplest and fastest way of dissolving the corporation voluntarily like when Ford Philippines decided to close its subsidiary they simply amended the articles of corporation that the corporation will exist until December 31, 1978. The SEC will require to get a tax clearance from the BIR and the stockholders will be required to sign an undertaking that they will answer for the claim of the creditors to the extent of the liquidating dividends they will receive. Then you can have a involuntary dissolution. This could be done by filing a quo warranto case under rule 66 of the ROC on the ground mentioned there or a corporation can be dissolved for certain violation of the corporation code as mentioned in the Corporation Code or PD 902-A and also a minority stockholder may file a petition to dissolve the corporation where the majority is mismanaging the assets of the corporation, dissipating its assets, and fraudulently disposing of its properties and a receiver may be appointed in an action for involuntary dissolution. The SC held in the leading case of El Hogar Filipino, 50 Phil. 399(1927) the first corporation organized under the Corporation Act, the government filed a case to dissolve that corporation and invoked 17 grounds, the SC denied the petition. Building and loans association like banks are required to dispose of within 5 years of any properties they foreclosed they disposed of the properties after 6 years but they exerted their best efforts, they hired real estate brokers, they advertised in newspapers but they just could not find buyers, they acquired this land and building, the SC held that it is not illegal, that they leased the space that they did not need for their office, that is not illegal they are maximizing their property, that they provide a provision in the by-laws that stockholders can be compelled to surrender their shares, to be bought out well the court said that that is void but that is not sufficient ground to dissolve the corporation. In other words the court is saying that you do not dissolve a corporation for every infraction, the infraction must be serious, because dissolution is imposing the death penalty upon the corporation. The Court said the employees of a railroad are required to wear uniform indicating their positions in their nameplate, now tell me if one employee did not have such a nameplate you are going to dissolve a corporation because that is a legal requirement? It has to be a serious violation!


ARIS S. MANGUERA But in one case, the SC dissolved a corporation which was engaging in banking without authorization from the monetary board, it was accepting deposits from the public, the court considered that as a serious violation. When a minority stockholder files a case and asks to dissolve the corporation, the court said that that is a harsh remedy unless the situation is really beyond redemption you should not impose that remedy. The corporation has three years after it should have been dissolved for the purpose of winding up its affairs. The SEC has said the three year period should be counted from the time the dissolution was approved by the SEC even if the directors and stockholders pass a resolution dissolving the corporation that is not effective until it has been approved by the SEC. For three years , the corporation will continue to exist it will no longer be a going concern but only for the purpose of winding up that is why the SC has said that the corporation cannot for example renew its contract of lease because it is no longer a going concern. During the three year period, it should devote its time prosecuting and defending law suits, winding up its affairs disposing its properties so they can be used to pay off its creditors and to distribute balance to the stockholders. There are two ways of providing for the winding up of its affairs under the law. This is voluntary either the directors themselves may take care of winding up the affairs of the corporation or they may appoint a trustee like when Ford Philippines decided to close its subsidiary here one of the last acts of the BOD was to pass a resolution appointing Ricardo Romulo as trustee vesting upon him legal title to all the assets of Ford Philippines to be used to pay off its creditors and to dispose of its properties of Ford Philippines. to distribute the balance as liquidating dividends. Supposed to be, this was the rule before if any case is not finished within the three year period, the case will be abated whether the corporation is plaintiff or whether it is defendant but recent jurisprudence has rendered that obsolete. That rule is applicable if it is the directors winding up the corporation. if the corporation is under receivership, it is the receiver who may wind up the affair of the corporation. But if it is the trustee, that will not apply, the trust will subsist until the affairs of the corporation are wound up and until any creditor can sue the trustee provided that the applicable prescriptive period has not yet lapsed. So if his

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cause of action is based on a written contract he has ten (10) years to sue the trustee. The Court has said that the remedy there if the three years will end and there are still pending cases, is for the board to appoint a trustee but more recent jurisprudence has fashioned a practicable solution to that the lawyer handling the cases may be considered as trustee of the corporation and therefore the cases will not be abated but should continue. In one case, the SC held that the directors may be considered as trustees after three years so that they can continue to wind up the affairs of the corporation and in effect the three year period has become ineffectual.

15.1 What are the various methods of dissolving corporations? (a) Voluntary (i) Requirements where no creditors are affected (Section 118) Sec. 118. Voluntary dissolution where no creditors are affected If dissolution of a corporation does not prejudice the rights of any creditor having a claim against it, the dissolution may be effected by majority vote of the board of directors or trustees, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members of a meeting to be held upon call of the directors or trustees after publication of the notice of time, place and object of the meeting for three (3) consecutive weeks in a newspaper published in the place where the principal office of said corporation is located; and if no newspaper is published in such place, then in a newspaper of general circulation in the Philippines, after sending such notice to each stockholder or member either by registered mail or by personal delivery at least thirty (30) days prior to said meeting. A copy of the resolution authorizing the dissolution shall be certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation. The Securities and Exchange Commission shall thereupon issue the certificate of dissolution. (62a)



When a corporation is contemplating dissolution, it must submit tax return on the income earned by it from the beginning of the year up to the date of its dissolution and pay the corresponding tax due. BPI v. Court of Appeals, 363 SCRA 840 (2001).

(ii) Requirements (Section 119)

where

creditors

are

affected

Sec. 119. Voluntary dissolution where creditors are affected Where the dissolution of a corporation may prejudice the rights of any creditor, the petition for dissolution shall be filed with the Securities and Exchange Commission. The petition shall be signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon by the affirmative vote of 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 at a meeting of its stockholders or members called for that purpose. If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition, fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or city. Upon five (5) day's notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice

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requires, and may appoint a receiver to collect such assets and pay the debts of the corporation. (Rule 104, RCa)

(b) Involuntary (Section 121) Sec. 121. Involuntary Dissolution A corporation may be dissolved by the Securities and Exchange Commission upon filing of a verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulations. (n)

Grounds for Involuntary Dissolution: (1) Failure to organize and commence business within 2 years from incorporation; (2) Continuously inoperative for 5 years (3) Continuance of business not feasible as found by the management committee or rehabilitation receiver; (4) Fraud in procuring Certificate of Registration/ (5) Serious Misrepresentation (6) Failure to file reports (JRS at 313) (7) Refusal to adopt or approve by laws (PD 902-A) (8) Ultra vires- mala prohibita, but too numerous infractions, which are persistent despite SEC warnings. (CLV’s CLR at 939) (a) Quo Warranto (Republic v. Bisaya Land Transportation Co., 81 SCRA 9 [1978]; Republic v. Security Credit & Acceptance Corp., 19 SCRA 58 [1967]; Government v. El Hogar Filipino, 50 Phil. 399 [1927]). (b) Expiration of Term (c) Shortening of Corporate Term (Sec. 120) UP Class Notes Dissolution takes effect upon its approval of the SEC. However, if the petition contains a date of dissolution earlier than the date of SEC approval, dissolution takes effect on this date since SEC approves of it anyway.


ARIS S. MANGUERA (d) Non-user of Charter and Continuous Inoperation (Sec. 22) • “Organize” involves the election of officers, providing for the subscription and payment of the capital stock, the adoption of by-laws, and such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which the corporation was created. “Organization” relates merely to the systematization and orderly arrangement of the internal and managerial affairs and organs of the corporation. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711. • The failure to file the by-laws does not automatically operate to dissolve a corporation but is now considered only a ground for such dissolution. Chung Ka Bio v. Intermediate Appellate Court, 163 SCRA 534 (1988). (f) Demand of Minority Stockholders for Dissolution. Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 (1953). • Corporate dissolution due to mismanagement of majority stockholder is too drastic a remedy, especially when the situation can be remedied such as giving minority stockholders a veto power to any decision. Chase v. Buencamino, 136 SCRA 365 (1985).

(c) Shortening of corporate term (Section 120) Sec. 120. Dissolution by shortening corporate term A voluntary dissolution may be effected by amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this Code. A copy of the amended articles of incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon approval of the amended articles of incorporation of the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings, subject to the provisions of this Code on liquidation. (n)

• SEC Internal rules require the following: (1) Notice of the dissolution to be published in a newspaper of general circulation for 3 consecutive weeks;

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(2) List of corporate creditors, with their consent to the shortening of corporate term; (3) Submission by majority stockholders/principal officers an Undertaking to personally answer for any outstanding corporate obligations of the corporation; and (4) Latest financial statements which must not be earlier than the date of the stockholders’ meeting approving amendment to the articles of incorporation, and a BIR clearance on the tax liabilities of the corporation.(SEC Opinion, July 5, 1979)

15.2 What is liquidation? (Section 122) Sec. 122. Corporate liquidation Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property


ARIS S. MANGUERA except upon lawful dissolution and after payment of all its debts and liabilities. (77a, 89a, 16a)

Liquidation is a 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. UP Class Notes What is liquidation? Process of converting corporate assets / properties into cash for proper distribution to persons entitled thereto. It begins on the day after the approval of the SEC of the dissolution. In the meantime, where a petition for dissolution has already been submitted, but the SEC has not yet approved, the BOD may make advances to the SHs and other persons-in-interest.

Methods of Liquidation • Liquidation, in corporation law, connotes a winding up or settling with creditors and debtors. It 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. PVB Employees Union-N.U.B.E. v. Vega, 360 SCRA 33 (2001). • There can be no doubt that under Secs. 77 and 78 of Corporation Law, the Legislature intended to let the shareholders have the control of the assets of the corporation upon dissolution in winding up its affairs. The normal method of procedure is for the directors and executive officers to have charge of the winding up operations, though there is the alternative method of assigning the property of the corporation to the trustees for the benefit of its creditors and shareholders. “While the appointment of a receiver rests within the sound judicial discretion of the court, such discretion must, however, always be exercised with caution and governed by legal and equitable principles, the violation of which will amount to its abuse, and in making such appointment the court should take into consideration all the facts and weigh the relative advantages and disadvantages of

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•

ARIS S. MANGUERA

appointing a receiver to wind up the corporate business.” China Banking Corp. v. M. Michelin & Cie, 58 Phil. 261 (1933) There is nothing in Sec. 122 which bars an action for the recovery of the debts of the corporation against the liquidator thereof, after the lapse of the said three-year period. “Is immaterial that the present action was filed after the expiration of the three years . . . for at the very least, and assuming that judicial enforcement of taxes may not be initiated after said three years despite the fact that actual liquidation has not terminated and the one in charge thereof is still holding the assets of the corporation, obviously for the benefit of all the creditors thereof, the assessment aforementioned, made within the three years, definitely established the Government as a creditor of the corporation for whom the liquidator is supposed to hold assets of the corporation.” Republic v. Marsman Dev. Co., 44 SCRA 418 (1972).

(a) Who may corporation?

undertake

the

liquidation

of

a

Jack’s Lecture The Court has said that the remedy there if the three years will end and there are still pending cases, is for the board to appoint a trustee but more recent jurisprudence has fashioned a practicable solution to that the lawyer handling the cases may be considered as trustee of the corporation and therefore the cases will not be abated but should continue. In one case, the SC held that the directors may be considered as trustees after three years so that they can continue to wind up the affairs of the corporation and in effect the three year period has become ineffectual.

(c) What could and should be done during the period of liquidation? • Prosecuting and defending suits by or against it and

enabling it to settled and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established; anytime during the 3 year period, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of SHs and other persons in interest.

(1) The BoD; (2) The chosen liquidator who acts as a trustee (3 year winding up period not applicable) (3) Creditors (acting as receiver) who petitioned for the declaration of bankruptcy of the corporation. (3 year winding up period not applicable.) (UP Class notes at 49) (4) By management committee or rehabilitation receiver. (JRS at 314)

(d) What happens if an asset cannot be distributed? • Any asset distributable to any creditor or stockholder or

(b) For how long may the liquidation of a corporation may be undertaken?

obligations, such as claims for wages, however, when such corporate officer [ceases] corporate property to apply to his own claims against the corporation, he shall be liable to the extent thereof to corporate liabilities, since knowing fully well that certain creditors had similarly valid claims, he took advantage of his position as general manager and applied the

•

Every corporation whose corporate existence has been terminated in any manner shall nevertheless be continued as a body corporate for 3 years after its dissolution. (UP Class Notes at 49)


member who is unknown or cannot be found shall be escheated to the city or municipality where such asset is located. (UP Class Notes at 49)

Who are liable after dissolution and winding up? • Although a corporate officer is not liable for corporate

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corporation's assets in payment exclusively to his own claims. De Guzman v. NLRC, 211 SCRA 723 (1992). • If the 3-year extended life has expired without a trustee or receiver having been designated, the Board of Directors itself, following the rationale of the decision in Gelano, may be permitted to so continue as “trustees” to complete liquidation; and in the absence of a Board, those having pecuniary interest in the assets, including the shareholders and the creditors of the corporation, acting for and in its behalf, might make proper representations with the appropriate body for working out a final settlement of the corporate concerns. Clemente v. Court of Appeals, 242 SCRA 717 (1995). • In Gelano case, the counsel of the dissolved corporation was considered a trustee. In the later case of Clemente v. Court of Appeals, the Board of Directors was permitted to complete the corporate liquidation by continuing as “trustees”. Under Sec. 145 “No right of remedy in favor or against any corporation . . . shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof.” This provision safeguards the rights of a corporation which is dissolved pending litigation. Reburiano v. Court of Appeals, 301 SCRA 342 (1999); Knecht v. United Cigarette Corp., 384 SCRA 48 (2002).

ARIS S. MANGUERA Reburiano v. CA (1999) • The board of directors may be permitted to complete the corporate liquidation by continuing as “trustees” by legal implication. • Since the law specifically allows a trustee to manage the affairs of the corporation in liquidation, any supervening fact, such as the dissolution of the corporation, repeal of a law, or any other fact of similar nature would not serve as an effective bar to the enforcement of such right.

15. 3 Cases Clemente v. CA (1995) • Corporation continues to be a body corporate for 3 years after its dissolution for purposes of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs. • The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity nor those of its owners and creditors.


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16. FOREIGN CORPORATIONS Foreign corporation- corporation formed, organized or existing under any law other than those of the Philippines, and whose laws allow Filipino citizens and corporations to do business in its own country or state. (Section 123) Jack’s Lecture Section 123 defines what is a 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. Note the element of reciprocity is included in the definition of a foreign corporation as an ingredient of a foreign corporation. We said that a corporation is an artificial person, it has a juridical personality by legal fiction. So it has personality because of the law under which it was incorporated and since it exists only because of the law under which it was incorporated, if it wishes to participate in the economic processes of another country, it must get permission from that other country also and it will get permission by getting a license to do business and our code now requires reciprocity so normally like if it is an American corporation it will submit a certification from the Secretary of State of that particular state under which it was incorporated like New York, California because the Secretary of State is the custodian of the laws and he will certify that under the laws of New York, Filipinos are allowed to do business in New York. There are different ways by which a foreign corporation can establish its presence here. one is by setting a branch office, another is by setting up subsidiary, for tax purposes there are no trade-offs because a branch and a subsidiary are taxed in the same way but a subsidiary may be beneficial in the sense that it limits the exposure of the mother company to its subscription instead of risking all the assets of the mother company. Another is the regional headquarters which does not do business, it is just a coordinating and communication center. Foreign companies are setting up regional headquarters here because it has subsidiaries in Southeast Asia or licensees and franchisees and its function is to supervise and coordinate with those subsidiaries or franchisees so normally a regional headquarter would have a one room office here probably with country manager and secretary, a telephone, computer and fax machine.


ARIS S. MANGUERA If a foreign corporation wants to do business here it has to appoint a resident agent who may be a corporation, partnership or individual, if individual he must be of good moral character, sound financial standing, although his only function is to receive summonses in behalf of the corporation.

16.1 What constitutes doing business in the Philippines (See Section 3(d) RA 7042 as amended) RA 7042, Section 3[d] The phrase “doing business” shall include soliciting orders, services contracts, opening offices, whether called “liaison” offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, that the phrase “doing business” shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interest in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account; When is a foreign corporation doing business? American jurisprudence makes a distinction. When you talk of foreign corporation doing business you will ask for what purpose are we trying to determine whether or not a foreign corporation is doing business. Is it for the purpose of determining whether or not it can be sued? If that is the purpose, to determine its amenability to the jurisdiction of the courts they apply a liberal interpretation, the USSC says minimal contact that would satisfy the requirements of due process is sufficient. In fact the different states have these long-arm statutes by which state the instances when a foreign

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corporation may be sued. There is one state Georgia has this provision that if a foreign corporation commits a tort, it will be considered to be doing business and can be sued. The USSC has said times have changed now the means of communications are very rapid so that if you have a representative here he can quickly communicate with the home office so it can take steps to defend itself. On the other hand, if you are talking of determining whether a foreign corporation is doing business for the purpose of prosecuting officers criminally, that is penal, it must be strictly construed. In the middle is the question of whether or not the foreign corporation is doing business and therefore is taxable as a resident foreign corporation. So many decisions have been handed down to determine whether the foreign corporations are doing business but there are three principal guidelines.

1.

Transactions must not be isolated. Transactions must be habitual like in the Mentholatum case. In the Amsterdam case where a foreign shipping company it has a vessel which roam around going to places where they can find cargo and they just pass by here in 1963, the court said that it is an isolated transaction and not doing business here. In one case, a foreign corporation bought copra, seller failed to deliver and they negotiated and they agreed to give him more time still he failed to deliver then they negotiated again and he was given more time still he failed to deliver and finally the foreign corporation filed suit, the seller claimed doing business without a license, the SC said no that is an isolated transaction. The better rule(according to Jack) is that that is buying that is not doing business you do not make profit from buying that is settled in American jurisprudence. You make profit from selling not from buying. In the Hang lung bank case, the SC said that it is not doing business here so it can sue. However, an isolated transaction which indicates an intention to habitually do business may constitute doing business. If the foreign corporation leased space for example at the Luneta Hotel and they sent their officers here. There was indication of their intention to do business.


ARIS S. MANGUERA

2.

It must involve a substantial portion of the business of the primary purpose of the corporation. In one case, there was a foreign shipping company which pass by here and hired a Filipino a cook in one of its vessels, the SC held that that is not doing business hiring a cook is not a substantial portion of its business its business is transporting passengers and cargo.

3.

If the contract is consummated abroad then the foreign corporation is not doing business here. In the case of Columbia Pictures vs. CA, Columbia Pictures filed a case because its films were being pirated here and it was argued that it was doing business without a license, the SC said no because the contracts are consummated abroad. In the Avon Plc case, the Court said that a foreign insurance company which accepted reinsurance is not doing business here because the contract is executed abroad.

What constitutes doing business in the Philippines for foreign corporations? • Under the continuity test, doing business implies a continuity of commercial dealings and arrangements, and contemplates 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. • 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. (JRS at 315) How do we determine whether a foreign corp is doing business in the Philippines? (Based on Justice Aquino’s outline) • There is no general rule or governing principle that holds for the determination of whether or not a foreign juridical entity is doing business in the Philippines to enable our court to acquire jurisdiction over it. When such foreign corporation however participates in a bidding process, its mere participation manifests an intention to engage in business in

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the Philippines, therefore participating in the bidding process is “doing business” in this jurisdiction. More directly put, when a foreign corporation performs acts for which it was created, regardless of volume, it is doing business. (European Resources v. Ingenieuburo Birkahn, 2004)

ARIS S. MANGUERA under oath and, unless already stated in its articles of incorporation, shall specifically set forth the following: 1. The date and term of incorporation; 2. The address, including the street number, of the principal office of the corporation in the country or state of incorporation;

Does an “isolated transaction” by a foreign corporation qualify as “doing business” in the Philippines? • It depends. If a single or isolated transaction is incidental and casual transaction, it cannot qualify as “doing business” since it lacks the element of CONTINUITY. However, where a single or isolated transaction is not merely incidental or casual but indicates the foreign corporation’s intention to do other business in the Philippines, said single act or transaction constitutes “doing business” in the Philippines. (JRS at 315)

3. The name and address of its resident agent authorized to accept summons and process in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation;

16.2 Requirements for the establishment of a branch (Section 123)

6. The names and addresses of the present directors and officers of the corporation;

Sec. 123. Definition and rights of foreign corporations For the purposes of this Code, a foreign corporation is 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. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency. (n)

(a) Documentary Requirements (Section 125) Sec. 125. Application for a license A foreign corporation applying for a license to transact business in the Philippines shall submit to the Securities and Exchange Commission a copy of its articles of incorporation and by-laws, certified in accordance with law, and their translation to an official language of the Philippines, if necessary. The application shall be


4. The place in the Philippines where the corporation intends to operate; 5. The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of authority issued by the appropriate government agency;

7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to issue, itemized by classes, par value of shares, shares without par value, and series, if any; 8. A statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued, itemized by classes, par value of shares, shares without par value, and series, if any; 9. A statement of the amount actually paid in; and 10. Such additional information as may be necessary or appropriate in order to enable the Securities and Exchange Commission to determine whether such corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable. Attached to the application for license shall be a duly executed certificate under oath by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of

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the country or state of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing. If such certificate is in a foreign language, a translation thereof in English under oath of the translator shall be attached thereto. The application for a license to transact business in the Philippines shall likewise be accompanied by a statement under oath of the president or any other person authorized by the corporation, showing to the satisfaction of the Securities and Exchange Commission and other governmental agency in the proper cases that the applicant is solvent and in sound financial condition, and setting forth the assets and liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the application. Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply with the provisions of existing laws applicable to them. In the case of all other foreign corporations, no application for license to transact business in the Philippines shall be accepted by the Securities and Exchange Commission without previous authority from the appropriate government agency, whenever required by law. (68a)

(b) Deposit Requirement (Section 126) Sec. 126. Issuance of a license If the Securities and Exchange Commission is satisfied that the applicant has complied with all the requirements of this Code and other special laws, rules and regulations, the Commission shall issue a license to the applicant to transact business in the Philippines for the purpose or purposes specified in such license. Upon issuance of the license, such foreign corporation may commence to transact business in the Philippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revoked, suspended or annulled in accordance with this Code or other special laws. Within sixty (60) days after the issuance of the license to transact business in the Philippines, the license, except foreign banking or insurance corporation, shall deposit with the Securities and Exchange


ARIS S. MANGUERA Commission for the benefit of present and future creditors of the licensee in the Philippines, securities satisfactory to the Securities and Exchange Commission, consisting of bonds or other evidence of indebtedness of the Government of the Philippines, its political subdivisions and instrumentalities, or of government-owned or controlled corporations and entities, shares of stock in "registered enterprises" as this term is defined in Republic Act No. 5186, shares of stock in domestic corporations registered in the stock exchange, or shares of stock in domestic insurance companies and banks, or any combination of these kinds of securities, with an actual market value of at least one hundred thousand (P100,000.) pesos; Provided, however, That within six (6) months after each fiscal year of the licensee, the Securities and Exchange Commission shall require the licensee to deposit additional securities equivalent in actual market value to two (2%) percent of the amount by which the licensee's gross income for that fiscal year exceeds five million (P5,000,000.00) pesos. The Securities and Exchange Commission shall also require deposit of additional securities if the actual market value of the securities on deposit has decreased by at least ten (10%) percent of their actual market value at the time they were deposited. The Securities and Exchange Commission may at its discretion release part of the additional securities deposited with it if the gross income of the licensee has decreased, or if the actual market value of the total securities on deposit has increased, by more than ten (10%) percent of the actual market value of the securities at the time they were deposited. The Securities and Exchange Commission may, from time to time, allow the licensee to substitute other securities for those already on deposit as long as the licensee is solvent. Such licensee shall be entitled to collect the interest or dividends on the securities deposited. In the event the licensee ceases to do business in the Philippines, the securities deposited as aforesaid shall be returned, upon the licensee's application therefor and upon proof to the satisfaction of the Securities and Exchange Commission that the licensee has no liability to Philippine residents, including the Government of the Republic of the Philippines. (n)

(c) Appointment of resident agent (Section 128) Sec. 128. Resident agent; service of process The Securities and Exchange Commission shall require as a

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condition precedent to the issuance of the license to transact business in the Philippines by any foreign corporation that such corporation file with the Securities and Exchange Commission a written power of attorney designating some person who must be a resident of the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and consenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office. Any such foreign corporation shall likewise execute and file with the Securities and Exchange Commission an agreement or stipulation, executed by the proper authorities of said corporation, in form and substance as follows: "The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being granted by the Securities and Exchange Commission a license to transact business in the Philippines, that if at any time said corporation shall cease to transact business in the Philippines, or shall be without any resident agent in the Philippines on whom any summons or other legal processes may be served, then in any action or proceeding arising out of any business or transaction which occurred in the Philippines, service of any summons or other legal process may be made upon the Securities and Exchange Commission and that such service shall have the same force and effect as if made upon the duly-authorized officers of the corporation at its home office." Whenever such service of summons or other process shall be made upon the Securities and Exchange Commission, the Commission shall, within ten (10) days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home or principal office. The sending of such copy by the Commission shall be necessary part of and shall complete such service. All expenses incurred by the Commission for such service shall be paid in advance by the party at whose instance the service is made. In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing the Securities and Exchange Commission of the new address. (72a; and n)


ARIS S. MANGUERA

16.3 Permitted areas of investment (see Sixth Regular Foreign Investment Negative List (Lists A and B) annexed to EO No. 389 dates Nov. 30, 2004) The 6th Regular Foreign Investment Negative List took effect in January 8, 2005. The list does not include banking and other financial institutions, which are governed and regulated by the General Banking Law of 2000, and other laws administered by the BSP. List A List A. Foreign ownership is limited by mandate of the Constitution and specific laws. No foreign equity

1.

Mass Media Except recording (Art. XVI, Sec. 11 of the Constitution; Presidential Memorandum dated May 4, 1994)

2.Practice of all professions a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q. r. s. t. u.

Engineering Medicine and allied professions Accountancy Architecture Criminology Chemistry Customs Brokerage Environmental Planning Forestry Geology Interior Design Landscape Architecture Law Librarianship Marine Deck Officers Marine Engine Officers Master Plumbing Sugar Technology Social Work Teaching Agriculture

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v.

ARIS S. MANGUERA Fisheries a. Infrastructure / development projects covered in RA 7718, and

(Art. XII, Section 14 of the Constitution, Sec. 1 of R.A. No. 5181)

b. Projects which are foreign funded or assisted or required to undergo international competitive bidding (Sec. 2 [a] of RA 7718)

3.Retail Trade Enterprises w/ a paid up capital of less than US $ 2,500,00; Sec. 5 of RA 8762 4. Cooperatives (Ch III, Art. 26, RA 6938)

15.

Contracts for construction of defense-related structures (Sec. 1 of CA 541)

5.Private Security Agencies (Sec. 4, RA 5487) 6.Small Scale Mining (Sec. 3, RA 7076)

7.

Up to 30% Foreign Equity 16.

Utilization of Marine Resources in archipelagic waters, territorial sea, and exclusive economic zone as well as small scale utilization of natural resources in rivers, lakes, bays, and lagoons (Art. XII, Sec.2 Constitution

8.Ownership, operation, and management of cockpits (Sec. 5 of PD 499) 9.Manufacture, repair, stockpiling and/or distribution of nuclear weapons (Art. II Sec 8 of the Constitution) 10. Manufacture, repair, stockpiling, and/or distribution of biological, radiological, chemical weapons and anti-personnel mines (various treaties to which the Philippines is signatory, and conventions supported by the Philippines) 11. Manufacture of firecrackers and other pyrotechnic devices (Sec. 5 of RA 7183)

Advertising (Art. XVI, Sec. 11 Constitution)

Up to 40% Foreign Equity 17. Exploration, development, utilization of natural resources (Art. XII, Sec. of the Constitution) 18.

Ownership of Private Lands (Art. XII Sec. 7 Constitution, Ch. 5 Sec. 22 of CA 141, Sec. 4 of RA 9182)

19. Operation and management of public utilities (Art. XII Sec. 11 Constitution, Sec. 16 of CA 146) 20. Ownership / establishment and administration of educational institutions (Art. XIV Sec. 4 of the Constitution) 21. Culture, production, milling, processing, trading, except retailing or rice and corn and acquiring, by barter, purchase, or otherwise, rice and corn and the by-products thereof (Sec. 5 of PD 194; Sec. 15 of RA 8762)


Private radio communications network (RA 3846)


Private recruitment, whether for local or overseas employment (Art. 27 of PD 442)

14.

Contracts for the construction and repair of locally funded public works (Sec. 1 of Commonwealth Act No. 541, LOI No. 630, except:


22. Contracts for the supply of materials, goods, and commodities to government owned or controlled corporation, company, agency, or municipal corporations (sec. 1 of RA 5183) 23. Project proponent and facility operator of a BOT Project requiring a public utilities franchise (Art. XII Sec. 11 Constitution, Sec. 2[a] of RA 7718) 24. Operation of deep-sea commercial fishing vessels (Sec. 27 of RA 8550) 25. Adjustment Companies (Sec. 323 of PD 612 as amended by PD

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1814) 26. Ownership of condominium units where the common areas in the condominium project are co-owned by the owners of the separate units or owned by a corporation (Sec. 5 of RA 4726) Up to 60% Foreign Equity 27.

Financing Companies regulated by the SEC (Sec. 6 RA 5980 as amended by RA 8556)

28. Investment houses regulated by the SEC (Sec. 5 of PD 129 as amended by RA 8366)

List B List B: Foreign ownership is limited for reasons of security, defense, risk of health, and morals, and protection of small and medium scale enterprises Up to 40% Foreign Equity 1.Manufacture, repair, storage, and/or distribution of products and/or ingredients requiring PNP clearance Telescopic sights, sniper scope, and other similar devices. However, the manufacture or repair of these items may be authorized by the Chief of the PNP to non-Philippine nationals; provided that a substantial percentage of the output as determined by the said agency is exported. Provided further that the extent of foreign equity ownership allowed shall be specified in the said authority / clearance (RA 7042 as amended by RA 8179) 2.Manufacture, repair, storage, and/or distribution of products requiring Department of National Defense (DND) clearance: a. b. c. d. e. f.

Guns and ammunition for warfare Military ordinance and parts thereof (torpedoes, depth charges, bombs, grenades, missiles) Gunnery, bombing, and fire control systems and components Guided missiles systems and components Tactical aircraft (fixed and rotary winged), parts and components thereof Space vehicles and component systems


ARIS S. MANGUERA g. h. i. j. k. l. m.

Combat vessels (air, land, naval) and auxiliaries Weapons repair and maintenance equipment Military communications and equipment Night vision and equipment Simulated content radiation devices, components, and accessories Armament training devices Others as may be determined by the Secretary of the DND However, the manufacture or repair of these items may be authorized by the Secretary of the DND to nonPhilippine nationals; provided that a substantial percentage of the output, as determined by the said agency, is exported. Provided further that the extent of the foreign equity ownership allowed shall be specified in the said authority/clearance (RA 7042 as amended by RA 8179)

3.Manufacture and distribution of dangerous drugs (RA 7042 as amended by RA 8179) 4.Sauna and steam bathhouses, massage clinics and other like activities regulated by law because of risks posed to the public health and morals (RA 7042 as amended by RA 8179) 5.All forms of gambling, i.e. race track operation (RA 7042 as amended by RA 8179) 6.Domestic market enterprises with paid in equity capital of less than the equivalent of US $ 200,000 (RA 7042 as amended by RA 8179) 7.Domestic market enterprises which involve advanced technology or employ at least 50 direct employees with paid in equity capital of less than the equivalent of US $ 100,000 (RA 7042 as amended by RA 8179)

16.4 Laws applicable to foreign corporations licensed to transact business in the Philippines (Section 129) Sec. 129. Law applicable

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ARIS S. MANGUERA

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, except such only as provide for the creation, formation, organization or dissolution of corporations or those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of corporations to each other or to the corporation. (73a) UP Class Notes 1. This is limited to Filipino citizens save in cases prescribed by law 2. Full foreign participation is allowed for retail trade enterprises: (a) with paid-up capital of US $ 2,500,000 or more provided that investments for establishing a store is not less than US $ 830,000; or (b) specializing in high end or luxury products, provided that the paidup capital per store is not less than US $ 250,000 (Sec. 5 of RA 8762)

Section 133 says that if the foreign corporation will be doing business without a license it cannot sue or intervene in any action in court or administrative agency.

5. Full foreign participation is allowed provided that within the 30 year period from start of operation, the foreign investor shall divest a minimum of 60% of their equity to Filipino citizens (Sec. 5 PD 194; NFA Council Resolution No. 193 s. 1998) 6. No foreign national may be allowed to own stock financing companies or investment houses unless the country of which he is a national accords the same reciprocal rights to Filipinos (Sec. 6 of RA 5980 as amended by RA 8556; PD 129 as amended by RA 8366)

the

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


May sue and can be sued in the Philippines Cannot sue, but may be sued in the Philippines May sue May be sued (Facilities Mgt v. dela Osa, 1979)

If a foreign corporation is being sued, the summons must be served on the resident agent. The corporation is also required to file with the SEC a power of attorney or resolution which says that if it has no resident agent it agrees that the summons be served with the SEC which will forward the summons and the complaint to the foreign corporation. If no resident agent and any officer who will be in the Philippines may be served with summons.

4. Full foreign participation is allowed through financial or technical assistance agreement w/ the President (Art. XII Sec. 2 Constitution)

in

Suability of Foreign Corporations: (CLV’s CLR at 947) Doing business in the Philippines with a license Doing business in the Philippines without license Not doing business in the Philippines, on isolated transactions Jack’s Lecture

3. Domestic investments are also prohibited (Art. II Sec. 8 Constitution; Conventions & Treaties to w/c the Philippines is signatory

16.5 Consequences of doing business Philippines without a license (Section 133)

laws. (69a)

The SC had said that if a foreign corporation is doing business here without a license, a contract it entered into is valid, it is not rendered void so the court said the legislature made a judgment call that imposing penal sanctions and denying access to the courts are sufficient penalties for doing business without a license. The legislature did not provide that the contract it entered into is void. Although the foreign corporation did not have license to do business when it entered into in that contract, it could sue if later on it acquired a license to do business. If a foreign corporation is not doing business it can sue because it is not required to get a license but it can not be sued because it has no presence here it will violate due process. In the farm machinery case, the court made an obiter dictum that a foreign corporation not doing business can be sued, the reasoning of Justice Makasiar, if the foreign corporation not doing business can sue, then it should also be allowed to be sued is wrong because that will violate due process because it has no presence here. Our courts cannot acquire jurisdiction over it. The

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remedy is to make the action an action quasi in rem you attach its property serve it summons. If the corporation is doing business whether or not it is licensed it can be sued, the law says that if it is doing business but it has no license it cannot sue. If a foreign corporation is suing it must alleged either that it is not doing business or it is doing business but it is licensed because a plaintiff must indicate in the complaint that it has the legal capacity to sue. In the case of a foreign corporation it must show it is either not doing business or it doing business and it is licensed. However, in the Merrill Lynch case, the court said that if a foreign corporation is doing business without a license, it the other party was aware of it, it can not claim that the plaintiff cannot sue, he will be in estoppel having benefited from the contract. Except in two cases, the SC has followed this most of the subsequent cases.

Other than in cases of isolated transactions, may a foreign corporation not doing business in the Philippines sue? Yes • To protect its reputation, corporate name and goodwill (Sec 3 of RA 8293) • For infringement of trademark or trade-name, unfair competition or false description of products and infringement of patent. (Section 160 RA 8293) (Handbook of Conflict of Laws at 148)

16.6 Merger or consolidation involving licensed foreign corporation (Section 132) Sec. 132. Merger or consolidation involving a foreign corporation licensed in the Philippines One or more foreign corporations authorized to transact business in the Philippines may merge or consolidate with any domestic corporation or corporations if such is permitted under Philippine laws and by the law of its incorporation: Provided, That the requirements on merger or consolidation as provided in this Code are followed.


ARIS S. MANGUERA Whenever a foreign corporation authorized to transact business in the Philippines shall be a party to a merger or consolidation in its home country or state as permitted by the law of its incorporation, such foreign corporation shall, within sixty (60) days after such merger or consolidation becomes effective, file with the Securities and Exchange Commission, and in proper cases with the appropriate government agency, a copy of the articles of merger or consolidation duly authenticated by the proper official or officials of the country or state under the laws of which merger or consolidation was effected: Provided, however, That if the absorbed corporation is the foreign corporation doing business in the Philippines, the latter shall at the same time file a petition for withdrawal of it license in accordance with this Title. (n)

16.7 Revocation of license and issuance of certificate of revocation (Section 134 and 135) Sec. 134. Revocation of license Without prejudice to other grounds provided by special laws, the license of a foreign corporation to transact business in the Philippines may be revoked or suspended by the Securities and Exchange Commission upon any of the following grounds: 1. Failure to file its annual report or pay any fees as required by this Code; 2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title; 3. Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a statement of such change as required by this Title; 4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by this Title; 5. A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to this Title;

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6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions;

ARIS S. MANGUERA 3. The petition for withdrawal of license has been published once a week for three (3) consecutive weeks in a newspaper of general circulation in the Philippines.

7. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license; 8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or 9. Any other ground as would render it unfit to transact business in the Philippines. (n) Sec. 135. Issuance of certificate of revocation Upon the revocation of any such license to transact business in the Philippines, the Securities and Exchange Commission shall issue a corresponding certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases.

We are what we repeatedly do. Excellence then, is not an act, but a habit. -Aristotle

The Securities and Exchange Commission shall also mail to the corporation at its registered office in the Philippines a notice of such revocation accompanied by a copy of the certificate of revocation. (n)

16.8 Withdrawal of foreign corporation (Section 136) Sec. 136. Withdrawal of foreign corporations

The secret of living a life of excellence is merely a matter of thinking thoughts of excellence -Living Above Mediocrity

Subject to existing laws and regulations, a foreign corporation licensed to transact business in the Philippines may be allowed to withdraw from the Philippines by filing a petition for withdrawal of license. No certificate of withdrawal shall be issued by the Securities and Exchange Commission unless all the following requirements are met; 1. All claims which have accrued in the Philippines have been paid, compromised or settled; 2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions have been paid; and


Excellence is Being -Marsius Tigris

A-171

FRATERNAL ORDER

OF

UTOPIA



ARIS S. MANGUERA

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15906340 Utopia Corporation Law Reviewer 2008

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