BUSINESS ORGANIZATION Atty. Hilario N. Magsino, Jr. CORPORATION LAW (B.P. 68) I.
NATURE AND FORMATION 1. Definition of a corporation – Section 2 of the Corporation Code 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.
2. Tri-Level Existence in the Corporate Setting a)
Relationship between State and the corporation = corporation is a juridical entity or a judicial fiction b) Contractual relationships Corporation and its agent (governed by Law on Agency) Corporation and its shareholders/members Between and among shareholders Corporation and third parties c) Corporation is a going concern = it becomes in its operation, a business economic unit, a business enterprise
A. NATURE OF CORPORATIONS 1. Corporate Attributes a. Theories in the formation of a corporation Tayag v. Benguet Consolidated: "A corporation is not in fact and in reality a person, but the law treats it 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.... It owes its existence to law. It is an artificial person created by law for certain specific purposes, the extent of whose existence, powers and liberties is fixed by its charter." There is thus a rejection of Gierke's genossenchaft theory, the basic theme of which to quote from Friedmann, "is the reality of the group as a social and legal entity, independent of state recognition and concession."21 A corporation as known to Philippine jurisprudence is a creature without any existence until it has received the imprimatur of the state according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher priority than that of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary, whenever called upon to do so.
Ang Pue & Co., vs. Secretary:
To organize a corporation or a partnership 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.
Theories of Concession - This theory looks at a corporation simply as a creature of the State, completely within its control (See Section 2). 1.
Although fiction cannot be created unless there is an enterprise or group upon whom it may be conferred, and in spite of the underlying contract among the persons wanting to form the corporation, the grant is only by virtue of a primary franchise given by the State.
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Theory of Enterprise Entity – The corporate fiction cannot be created unless there is an enterprise or group upon whom it would be conferred. Any State grant must presuppose the existence of consent or common venture among those who will form the corporation. 2.
b. Creature of the Law 1. Constitution - Section
16, Art. XII NATIONAL ECONOMY AND PATRIMONY. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.
NDC v. Phil. Veterans Bank:
Private corporation created pursuant to a special law is unconstitutional for being violative of the Constitution.
2. Civil Code Art. 44. The following are juridical persons: (1) The State and its political subdivisions; (2) Other corporations, institutions and entities for public interest or purpose, created by law; their personality begins as soon as they have been constituted according to law; (3) Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member. (35a) Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are governed by the laws creating or recognizing them. Private corporations are regulated by laws of general application on the subject. Partnerships and associations for private interest or purpose are governed by the provisions of this Code concerning partnerships.
3. Franchise J.R.S. Business Corp. v. Imperial Insurance:
"For practical purposes, franchises, so far as relating to corporations, are divisible into (1) corporate or general franchises; and (2) special or secondary franchises. The former is the franchise to exist as a corporation, while the latter are certain rights and privileges conferred upon existing corporations, such as the right to use the streets of a municipality to lay pipes or tracks, erect poles or string wires."The primary franchise of a corporation that is, the right to exist as such, is vested "in the individuals who compose the corporation and not in the corporation itself" and cannot be conveyed in the absence of a legislative authority so to do, but the special or secondary
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franchises of a corporation are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special or secondary franchises as are charged with a public use
c. Four Attributes of a corporation 1. ARTIFICIAL BEING – by operation of law, it becomes a being with the attributes of an individual with full capacity to enter into contractual relations. It is a legal or juridical person with a personality separate and distinct from its individual members 2. CREATURE OF LAW – a corporation cannot come into being by mere consent of the parties, there must be a law granting it, and once granted, forms the primary franchise of the corporation 3. RIGHT OF SUCCESSION – the capacity for continuous existence despite the death or replacement of its shareholders/members for it has a personality distinct from those who compose it 4. CREATURE OF ENUMERATED POWERS, ATTRIBUTES AND PROPERTIES – allowed only and can legally exercise only such powers granted by law for its creation
d. Advantages and Disadvantages of the Corporate Form ADVANTAGES 1. Strong legal personality 2. Limited liability to investors 3. Free transferability of units of investment 4. Centralized management 5. Granted powers (Sec. 2) not available for unregistered associations
DISADVANTAGES 1. Complicated and costly formation and maintenance 2. Lack of personal element 3. Abuse of Corporate management 4. Limited liability hits innocent victims 5. Double taxation
e. The corporate entity compared with other businesses 1. Sole Proprietorship Sole Proprietorship Less requirements and regulations imposed by law Owner is in command of the whole enterprise Owner is solely Liable for the success or failure of the business For small endeavors only
Corporation More requirements and regulations imposed by law Control belongs to the BOD/BOT limited liability on the part of the shareholders Involves large enterprise
2. Partnership Art. 1768, NCC. The partnership has a judicial personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of Article 1772, first paragraph. Art. 1772, NCC. Every contract of partnership having a capital of three thousand pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commission.
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Art. 1775, NCC. Associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to coownership.
PARTNERSHIP Created by agreement of the parties A partner may not transfer his interest to make assignee as partner without the consent of other partners Managed by all partners except if they appoint a managing partner Death of a general partner dissolves the partnership A general partner is liable for the debts of the partnership beyond his capital investment May exist indefinitely, even beyond 50 years Governed by the Civil Code
CORPORATION Created by and under general law A shareholder may transfer his shares without the consent of his co-shareholders Managed by a board of directors Death of a shareholder does not dissolve the corporation Shareholder is not liable to corporate creditors with his separate property May exist for 50 years subject to extension Governed by the Corporation Code
J.M. Tuason v. Bolanos:
The theory that it is illegal for two corporations to enter into a partnership is without merit, for the true rule is that "though a corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with another where the nature of that venture is in line with the business authorized by its charter."
3.
Joint Venture
Aurbach v. Sanitary Wares: The legal concept of a joint venture is of common law origin. It has no precise legal definition but it has been generally understood to mean an organization formed for some temporary purpose. It is in fact hardly distinguishable from the partnership, since their elements are similar community of interest in the business, sharing of profits and losses, and a mutual right of control. The main distinction cited by most opinions in common law jurisdictions is that the partnership contemplates a general business with some degree of continuity, while the joint venture is formed for the execution of a single transaction, and is thus of a temporary nature. This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a particular partnership may have for its object a specific undertaking. (Art. 1783, Civil Code). It would seem therefore that under Philippine law, a joint venture is a form of partnership and should thus be governed by the law of partnerships. The Supreme Court has however recognized a distinction between these two business forms, and has held that although a corporation cannot enter into a partnership contract, it may however engage in a joint venture with others. (Tuazon v. Bolanos, 95 Phil. 906 [1954])
4. Business Trusts Art. 1441, NCC. Trusts are either express or implied. Express trusts are created by the intention of the trustor or of the parties. Implied trusts come into being by operation of law.
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f. The Corporation and the Bill of Rights 1. Equal Protection Smith Bell v. Natividad:
The SC held that while Smith, Bell & Co Ltd., a corporation having alien stockholders, is entitled to the protection afforded by the-due process of law and equal protection of the laws clause of the Philippine Bill of Rights, nevertheless, Act No. 2761 of the Philippine Legislature, in denying to corporations such as Smith, Bell & Co. Ltd., the right to register vessels in the Philippines coastwise trade, does not belong to that vicious species of class legislation which must always be condemned, but does fall within authorized exceptions, notably, within the purview of the police power, and so does not offend against the constitutional provision.
2. Unreasonable searches and seizure Stonehill v. Diokno: In the Stonehill case, the Court impliedly
recognized the right of a corporation to object against unreasonable searches and seizures, however only the officers of the various corporations in whose offices documents, papers and effects were searched and seized were the petitioners. In the case at bar, the corporation to whom the seized documents belong, and whose rights have thereby been impaired, is itself a petitioner. The SC held petitioners(officers of the corporation) herein have no cause of action to assail the legality of the contested warrants and of the seizures made in pursuance thereof, for the simple reason that said corporations have their respective personalities, separate and distinct from the personality of herein petitioners, regardless of the amount of shares of stock or of the interest of each of them in said corporations, and whatever the offices they hold therein may be. 8 Indeed, it is well settled that the legality of a seizure can be contested only by the party whose rights have been impaired thereby,9 and that the objection to an unlawful search and seizure is purely personal and cannot be availed of by third parties. 10 Consequently, petitioners herein may not validly object to the use in evidence against them of the documents, papers and things seized from the offices and premises of the corporations adverted to above, since the right to object to the admission of said papers in evidence belongs exclusively to the corporations, to whom the seized effects belong, and may not be invoked by the corporate officers in proceedings against them in their individual capacity. 11 Indeed, it has been held: . . . that the Government's action in gaining possession of papers belonging to the corporation did not relate to nor did it affect the personal defendants. If these papers were unlawfully seized and thereby the constitutional rights of or any one were invaded, they were the rights of the corporation and not the rights of the other defendants. Next, it is clear that a question of the lawfulness of a seizure can be raised only by one whose rights have been invaded. Certainly, such a seizure, if unlawful, could not affect the constitutional rights of defendants whose property had not been seized or the privacy of whose homes had not been disturbed; nor could they claim for themselves the benefits of the Fourth Amendment, when its violation, if any, was with reference to the rights of another. It follows, therefore, that the question of the admissibility of the evidence based on an alleged unlawful search and seizure does not
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extend to the personal defendants but embraces only the corporation whose property was taken. . . .
Bache&Co. v. Ruiz:
We are of the opinion that an officer of a corporation which is charged with a violation of a statute of the state of its creation, or of an act of Congress passed in the exercise of its constitutional powers, cannot refuse to produce the books and papers of such corporation, we do not wish to be understood as holding that a corporation is not entitled to immunity, under the 4th Amendment, against unreasonable searches and seizures. A corporation is, after all, but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate to such body. Its property cannot be taken without compensation. It can only be proceeded against by due process of law, and is protected, under the 14th Amendment, against unlawful discrimination . . ." "
3. Self-Incrimination Bataan Shipyard v. PCGG:
It is elementary that the right against self-incrimination has no application to juridical persons. While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special privileges and franchises, may refuse to show its hand when charged with an abuse of such privileges. Relevant jurisprudence is also cited by the Solicitor General. * * corporations are not entitled to all of the constitutional protections which private individuals have. * * They are not at all within the privilege against self-incrimination, although this court more than once has said that the privilege runs very closely with the 4th Amendment's Search and Seizure provisions. It is also settled that an officer of the company cannot refuse to produce its records in its possession upon the plea that they will either incriminate him or may incriminate it." * * The corporation is a creature of the state. It is presumed to be incorporated for the benefit of the public. It received certain special privileges and franchises, and holds them subject to the laws of the state and the limitations of its charter. Its powers are limited by law. It can make no contract not authorized by its charter. Its rights to act as a corporation are only preserved to it so long as it obeys the laws of its creation. There is a reserve right in the legislature to investigate its contracts and find out whether it has exceeded its powers. It would be a strange anomaly to hold that a state, having chartered a corporation to make use of certain franchises, could not, in the exercise of sovereignty, inquire how these franchises had been employed, and whether they had been abused, and demand the production of the corporate books and papers for that purpose. The defense amounts to this, that an officer of the corporation which is charged with a criminal violation of the statute may plead the criminality of such corporation as a refusal to produce its books. To state this proposition is to answer it. While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special privileges and franchises may refuse to show its hand when charged with an abuse of such privileges.
2. Classification of Corporations a. In relation to the State
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-Public – those formed or organized for the government or for a portion of the State (municipal corporations)
-Private National Coal Co., v. CIR: What distinguishes a public corporation from a private corporation owned by the government is not ownership of the controlling interest. The mere fact that the Government happens to the majority stockholder does not make it a public corporation, especially when its charter provides that it is subject to all provisions of the Corporation Law. In this case, National Coal Co., was created by Act. No. 2705 for the purpose of developing the coal industry, with the Government owning almost all of the shareholdings of the company. The company was created with the general powers of a corporation and such other powers as may be necessary to enable it to prosecute the business of the development. The Legislature subsequently passed a law providing for the leasing and development of coal lands and exempted the same from specific taxes. On the basis thereof, National Coal Co., took possession of coal lands belonging to the government and began to extract coal. The Collector levied against the company specific tax coal extracted from coal land. National Coal claimed exemption from specific taxes stating that it is the owner of the land which it has mined the coal in question, being a government corporation. The plaintiff is a private corporation. The mere fact that the Government happens to the majority stockholder does not make it a public corporation. Act No. 2705, as amended by Act No. 2822, makes it subject to all of the provisions of the Corporation Law, in so far as they are not inconsistent with said Act (No. 2705). No provisions of Act No. 2705 are found to be inconsistent with the provisions of the Corporation Law. As a private corporation, it has no greater rights, powers or privileges than any other corporation which might be organized for the same purpose under the Corporation Law, and certainly it was not the intention of the Legislature to give it a preference or right or privilege over other legitimate private corporations in the mining of coal. While it is true that said proclamation No. 39 withdrew "from settlement, entry, sale, or other disposition of coal-bearing public lands within the Province of Zamboanga . . . and the Island of Polillo," it made no provision for the occupation and operation by the plaintiff, to the exclusion of other persons or corporations who might, under proper permission, enter upon the operate coal mines.
-Quasi-Public Davao Water District v. CSC:
Employees of government-owned and controlled corporations, whether created by special law or formed as subsidiaries under the general corporation law are governed by the Civil Service Law and not by the Labor Code, has been supplanted by the 1987 Constitution. The test 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 to its provisions while those incorporated under the general corporation law are not within the coverage, and therefore are governed by the Labor Code.
b.
As to place of incorporation
-Domestic – one incorporated under the laws of the Philippines -Foreign – note: principle of reciprocity (Sec. 123, Corporation Code) 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.
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c.
As to nationality
Sec.140, Corporation Code. Stock Ownership in Certain Corporations. — Pursuant to the duties specified by Article XIV of the Constitution, the National Economic and Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation or by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their prevention or correction. Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section, belonging to individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restraint of trade, or to implement national economic policies declared in laws, rules and regulations designed to promote the general welfare and foster economic development. In recommending to the Batasang Pambansa corporations, businesses or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export potential, as well as other factors which are germane to the realization and promotion of business and industry.
-Tests Place of Incorporation – a corporation is a national of the country under whose laws it has been organized and registered
Principal place of business – the corporation is a national or subject to the jurisdiction of the place where its principal office or center of management is located Investment Test - the nationality of a corporation is determined by the nationality of the majority of the stockholders on whom control is vested
1. Exploitation of Natural Resources Register of Deeds v. Ung Sui Si Temple:
In disqualifying a non-incorporated religious organization, whose trustees and whose members were Chinese nationals from acquiring by donation a piece of land, the SC held that “The purpose of the sixty per centum requirement is obviously to ensure that corporations or associations allowed to acquire agricultural land or to exploit natural resources shall be controlled by Filipinos; and the spirit of the Constitution demands that in the absence of capital stock, the controlling membership should be composed of Filipino citizens.”
2. Public Utilities: (60%)
Sec. 11, Art. XII of the Constitution. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines. People v. Quasha: The doctrine laid in this case is that the Constitution does not prohibit the mere formation of a public utility corporation with the alien capital. What it does prohibit is the granting of a franchise or other form of authorization for the operation of a public utility to
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a corporation already in existence but without the requisite proportion of Filipino capital. This case draws the distinction between the primary franchise of a corporation entity by virtue of which it is constituted as a body politic endowed with separate juridical personality, and the secondary franchise that it may receive during its life for the exercise of a privilege granted by law, such as the operation of a public utility. It is the secondary franchise by which the corporation may be granted special privileges, licenses or benefits not enjoyed by other corporations where the real abuse may be committed.
3. Mass Media: -(100%)
Sec. 11 (1), Art. XVI of the Constitution: The ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations, cooperatives or associations,wholly-owned and managed by such citizens. The Congress shall regulate or prohibit monopolies in commercial mass media when the public interest so requires. No combinations in restraint of trade or unfair competition therein shall be allowed.
4. Advertising Industry- (70%) Sec. 11(2), Art. XVI of the Constitution: The advertising industry is impressed with public interest, and shall be regulated by law for the protection of consumers and the promotion of the general welfare. Only Filipino citizens or corporations or associations at least seventy per centum of the capital of which is owned by such citizens shall be allowed to engage in the advertising industry. The participation of foreign investors in the governing body of entities in such industry shall be limited to their proportionate share in the capital thereof, and all the executive and managing officers of such entities must be citizens of the Philippines.
5. War Time Test Filipinas Compania v. Christern:
In times of war, the nationality of a private corporation is determined by the character or citizenship of its controlling stockholders. The Court considered the juridical entity an enemy based on the fact that the “majority of the stockholders of the respondent corporation were German subjects.” It ruled that the control test was applicable only in war time. It refused the sole application of the place of incorporation test during war-time to determine the nationality of an enemy corporation. 6. Grandfather Rule – method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other nationalization laws, is computed in cases where corporate shareholders are present in the situation, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder. Ex., In case of public utilities, the Constitution requires 60% capital Filipino ownership, said corporation shall be considered as of Philippine nationality. If it has less than 60%, only the number of shares corresponding to such percentage shall be counted as Philippine nationality.
d. As to purpose of incorporation -Municipal –those formed and organized by the State (mini-state); possesses power of eminent domain, police power, & power of taxation
-Religious Sec. 109, Corporation Code. 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. Sec. 116, Corporation Code. Religious societies. Guidelines:
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1. The religious society or religious order, or diocese, synod, or district organization is a religious organization of a religious denomination, sect or church; 2. 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; 3. 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. The 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 must be within the Philippines 6. 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, must not less than five (5) nor more than fifteen
-Educational Sec. 106, Corporation Code. Incorporation. - Educational corporations shall be governed by special laws and by the general provisions of this Code. Sec. 108, Corporation Code 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 by-laws, 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. Sec. 25, Batas Pambansa 232. Establishment of Schools - All schools shall be established in accordance with law. The establishment of new national schools and the conversion of existing schools from elementary to national secondary or tertiary schools shall be by law: Provided, That any private school proposed to be established must incorporate as an non-stock educational corporation in accordance with the provisions of the Corporation Code of the Philippines. This requirement to incorporate may be waived in the case of family-administered pre-school institutions. Government assistance to such schools for educational programs shall be used exclusively for that purpose.
-Charitable, Scientific or Vocational -Business Corporation 10
e. As to number of members -Aggregate Corporation- incorporated by an aggregate of persons -Corporation Sole – special form of corporation formed by one
person being the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church for purposes of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church (Sec. 110, Corporation Code) Section 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 contrary to law for the regulation of the affairs of the corporation. (n) Section 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.
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NOTE: Sec. 112 does not expressly require the approval of the SEC of the AOI unlike in the case of educational corporations (Sec. 107) Section 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 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) Section 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) Section 115. Dissolution. - 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.
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Roman Catholic Administrator v. LRC (1957):
In that case, the Court held that a corporation sole would have no nationality at all to disqualify it from owning land in the Philippines even though its only corporator was Canadian citizen. The Court classified a corporation sole as a special form of corporation usually associated with the clergy designed to facilitate the exercise of the functions of ownership of the church which was regarded as property owner; it is created not only to administer the temporalities of the church or religious society where the corporator belongs, but also to hold and transmit the same to his successor in said office. But the Court went on to say that even if nationality is ascribed to a corporation sole, the nationality of its constituents of the diocese, and not the nationality of the actual incumbent of the parish must be taken into consideration, because the corporation sole ordinarily holds the property in trust for the benefit of the Roman Catholic faithful of their respective locality or diocese. It was therefore, held that a corporation sole was not disqualified under the constitutional provision that only Filipino citizens or corporations of which at least 60% of the capital stock are qualified to hold land in the Philippines. Republic v. Villanueva (1982): corporation sole is disqualified to acquire or hold alienable lands of the public domain, because of the constitutional prohibition qualifying only individuals to acquire land of the public domain which applied only to Filipino citizens or natural persons. Note: In Director of Lands v. IAC (1986), the doctrine in Republic v. Villanueva was abandoned.
f. As to existence of shares -Stock - 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 (Sec. 3, Corporation Code) Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a stock corporation are called stockholders or shareholders.
-Non-stock -
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 (Sec. 87, Corporation Code)
However, 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. Corporators in a non-stock corporation are called members Section 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 non-stock corporations.
CIR v. Club Filipino:
Club Filipino was a civic organization created for recreational purposes, and neither in the AOI nor in the by-laws was there a provision relative to dividends and their distribution, although it was covenanted that upon its dissolution, the club’s
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remaining assets, after paying its debts, shall be donated to a charitable institution. Whatever profits the club had were used to defray its overhead expenses and to improve its golf course. The issue was WON the club is liable to pay business taxes. The Court found that the plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose. Having found that the club was organized to help develop and cultivate sports, that whatever profits it derived were actually used to defray its over head expenses, it stood to reason that the club was not engaged in the business of an operation of a bar and restaurant. WHEN THERE IS NO EXPRESS AUTHORIZATION, NO EXPRESS PROHIBITION AND THE PRACTICE OF THE CORPORAITON SHOWS THAT IT NEVER DECLARED DIVIDENDS IN THE PAST AND THE PURPOSE OF THE CORPORATION IS ELEEMOSYNARY, IT WAS DEEMED A NON-STOCK CORPORATION.
g.
As to relationship of management and control -Holding company one that controls another as a subsidiary or affiliate by the power to elects its management One which holds stocks in other companies for purposes of control rather than mere investment
-Affiliate company Company which is subject to common control of a mother or holding company and operated as part of a system SEC defines an affiliate as a person that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with the person specified, through the ownership of voting shares, by contract or otherwise
-Parent and subsidiary company Parent company – corporation has a controlling financial interest in one or more corporations Subsidiary of a person is an affiliate controlled by such person, directly or indirectly, through one or more intermediaries
h. Close Corporations -Definition (Sec. 96, Corporation Code) -
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. Note: If a corporation which is not a close corporation, owns or control at least two-thirds (2/3) of its voting stock or voting rights of another corporation, such shall not be deemed a close corporation. 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.
-Articles of Incorporation Requirements (Sec. 97,Corporation Code)
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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.
-Pre-emptive Rights (Sec. 102, Corporation Code)
- 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. Note: right of pre-emption is a matter of absolute right on the part of the stockholders except only when limited or curtailed by the AOI
-Amendment (Sec. 103, Corporation Code) Coverage of amendment: Any amendment to the articles of incorporation which seeks to delete or remove any provision required by this Title to be contained in the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of incorporation Requirement: affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose. -Restriction on Transfer of Shares (Secs.98, Corporation Code) 1. 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. 2. 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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Section 99. Effects of issuance or transfer of stock in breach of qualifying conditions. 1. If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder. 2. If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such number, and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact. 3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction. 4. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either (a) that he is a person not eligible to be a holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the transferee.
-Agreements by Stockholder (Sec. 100, Corporation Code) 1. Agreements by and among stockholders executed before the formation and organization of a close corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, except those required by this Title to be embodied in said articles of incorporation. 2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them. 3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves. 4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this Code on directors. 5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders
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shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance.
-No Necessity of Board (Sec. 101, Corporation Code) 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 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing.
-Deadlocks (Sec. 104, Corporation Code) 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) cancelling or altering any provision contained in the articles of incorporation, bylaws, or any stockholder's agreement; (2) cancelling, 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. 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. not a receiver of the corporation and does not have the title and powers of a custodian or receiver. 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.
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-Withdrawal and Dissolution (Sec. 105, Corporation Code) WITHDRAWAL: 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 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 DISSOLUTION: 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.
B. FORMATION OF CORPORATIONS 1. Organizing the Corporation a. Promoters (Sec. 29[r] of the Revised Securities Act {BP 178}) (Secs. 60-61)
- persons who bring about or cause to bring about the formation or organization of a corporation by bringing together the incorporators or the persons interested in the enterprise, procuring subscriptions or capital for the corporation and setting in motion the machinery which leads to the incorporation of the corporation itself
Cagayan Fishing Development v. Sandiko:
(ratification is the key element in upholding the validity and enforceability of promoter’s contract) Here, four parcels of land were sold to a corporation in the process of incorporation, under specific terms whereby the outstanding mortgage loan on the properties would have to be fully paid by the corporation. Later, the corporation was incorporated but the mortgage loan was not paid. However, the corporation sold the parcels of land to Sandiko with the condition that the latter would shoulder the mortgage debts. When Sandiko failed to comply with his obligation, the corporation filed a recovery suit. In dismissing the case, the TC held the contract to be void since it was entered into with a corporation that had no corporate existence at the time the properties were transferred to it. The Court upheld the dismissal of the case holding: "That a corporation should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business, would seem to be self evident. . . . A corporation, until organized, has no being, franchises or faculties. Nor do those engaged in bringing it into being have any power to bind it by contract, unless so authorized by the charter. Until organized as authorized by the charter there is not a corporation, nor does it possess franchises or faculties for it or others to exercise, until it acquires a complete existence." But more importantly, while the Court conceded that there are circumstances where “the acts pf promoters of a corporation be ratified by the corporation if and when subsequently organized. There are, of course, exceptions but under the peculiar facts and circumstances of the present case we decline to extend the doctrine of ratification which would result in the commission of injustice or fraud to the candid and unwary.” The Court elaborated thus: Boiled down to its naked reality, the contract here (Exhibit A) was entered into not only between Manuel Tabora and a non-existent corporation but between Manuel Tabora as owner of four
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parcels of land on the one hand and the same Manuel Tabora, his wife and others, as mere promoters of a corporation on the other hand. For reasons that are self-evident, these promoters could not have acted as agents for a projected corporation since that which had no legal existence could have no agent. A corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere.
Rizal Light & Ice Co. v. Municipality:
A franchise was awarded in favor of a corporation was sought to be annulled on the ground that at the time the application was filed, the corporation was then only in the process of incorporation. In dismissing the action, the Court held that although a franchise may be treated as a contract, the eventual incorporation of the applicant corporation after the grant of the franchise, “and its acceptance of the franchise as shown by its action in prosecuting the application filed with the Commission for the approval of said franchise, not only perfected a contract between the respondent municipality and Morong Electric but also cured the deficiency pointed out by the petitioner in the application of Morong Electric. The Court clarified also in this case that in deciding Cagayan Fishing, “this Court did not say in that case that the rule is absolute or that under no circumstances may the acts of promoters of a corporation be ratified or accepted by the corporation if and when subsequently organized. Of course, there are exceptions. It will be noted that American courts generally hold that a contract made by the promoters of a corporation on its behalf may be adopted, accepted or ratified by the corporation when organized.”
IMPORTANT: CAGAYAN FISHING and RIZAL LIGHT cases: not incompatible The conclusion herein reached regarding the validity of the franchise granted to Morong Electric is not incompatible with the holding of this Court in Cagayan Fishing Development Co., Inc. vs. Teodoro Sandiko upon which the petitioner leans heavily in support of its position. In said case this Court held that a corporation should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business. It should be pointed out, however, that this Court did not say in that case that the rule is absolute or that under no circumstances may the acts of promoters of a corporation be ratified or accepted by the corporation if and when subsequently organized. Of course, there are exceptions. It will be noted that American courts generally hold that a contract made by the promoters of a corporation on its behalf may be adopted, accepted or ratified by the corporation when organized.
Caram, Jr. v. CA: The Court stated that it would not resolve the issue whether it is the promoters or the corporation itself that shall be responsible for the expenses incurred in connection with such organization. Nevertheless it ruled that investors who were not the ‘moving spirit’ behind the organization of the corporation, but who were merely convinced to invest in the proposed corporate venture on the basis of the feasibility study undertaken, are not liable personally with the corporation for the cost of such feasibility study. The above finding bolsters the conclusion that the petitioners were not involved in the initial stages of the organization of the airline, which were being directed by Barretto as the main promoter. It was he who was putting all the pieces together, so to speak. The petitioners were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in the proposed airline. Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation and did not have a separate juridical personality, to justify making the petitioners, as principal stockholders thereof, responsible for its obligations. As a bona fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts as duly authorized by its officers and directors. The most that can be said is that they benefited from such services, but that surely is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the corporation, including those who
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came in later, and regardless of the amount of their share holdings, would be equally and personally liable also with the petitioners for the claims of the private respondent.
b. Subscription Contracts (Secs. 60 and 72) -
any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed
Rights of Unpaid Shares: Holders of subscribed shares which are not fully paid but which are not delinquent shall have all the rights of a stockholder - Such rights commence from the time his subscription is accepted by the corporation, from the time such offer is accepted by the subscriber.
Trillana v. Quezon Colleges b.1. Purchase Agreements Note: Under the former law, if the acquisition of unissued shares from a corporation is made after its corporation, the contract is either a subscription or a purchase of stock depending upon its terms and the intention of the parties
Bayla v. Silang Traffic, Co.:
Here the petitioner bought shares of stock from the corporation on installment basis. The title of the contract was “Agreement for Installment Sale of Shares.” Since the corporation had become insolvent, there was a call on the subscription, and the issue was whether the contract was a subscription contract which rendered the obligation demandable upon insolvency the corporation, or a purchase agreement which would grant the purchaser the legal authority to rescind the contract by reason of insolvency of the seller-corporation. It held that the nature of the contract covering unissued shares made after its incorporation, the contract ws either a subscription contract or a purchase of stock, depending upon the terms of the agreement and the intention of the parties. It held that a subscription is a mutual agreement among the subscribers to take and pay for the stock of a corporation and therefore it was not possible to withdraw from such agreement without the consent of the other subscribers, and even if the corporation should become insolvent because of the enforcement of the trust fund doctrine. In contrast, the Court recognized that a “purchase” of shares of stock is an independent agreement between the individual and the corporation to buy shares of stock from it at a stipulated price, and the insolvency of the corporation makes it incapable of complying with its obligation, which grants to the purchaser the right to rescind the agreement. Purchase Agreement -the promise to issue the shares and the promise to pay the price are considered to create dependent and concurrent duties, and payment is a condition to the right to a certificate for shares and the status of a shareholder
Subscription Contract -the subscriber becomes a stockholder even if he has not paid his subscription
- the purchaser is not a debtor, and according to some courts, the measure of liability of the purchaser if he defaults, is in damages for the difference between the contract price and the market value of his shares
- unpaid subscription is a debt of the subscriber
- bankruptcy or insolvency of the corporation will terminate its claim against the purchaser on the theory that it can no longer perform its side of the executory contract by delivery of a valid certificate and that the consideration has failed - the rule that the corporation has no legal capacity to release an original subscriber to its capital stock from the obligation to pay for his shares is
- insolvency of the corporation makes the unpaid subscription immediately due and demandable
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inapplicable to contract of purchase of shares The Code under Sec. 60, abolished the distinction between subscription and purchase of shares from an existing corporation by making all acquisitions a subscription notwithstanding that the parties denominate it as a purchase or sale or some other contract.
b.2. Pre-Incorporation Subscription (Sec. 61) - applies only to corporations still to be formed General Rule: Pre-incorporation subscription shall be irrevocable for a period of at least 6 months from date of subscription Exception: a.
All other subscribers consent to the revocation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription
- Offer b. TheTheory incorporation
Note that this rule applies only to corporations still to be formed. The irrevocability except for 2 instances is for 6 months. However, if the articles of incorporation of said corporations (still to -beContract formed) is submitted to the SEC, the pre-incorporation subscription may no longer be Theory revoked even after the lapse of 6 months. - irrevocable unless cancelled by the parties before acceptance of the corpo
b.3. Release from Subscription obligation Velasco v. Poizat:
Poizat was a stockholder of the Philippine Chemical Product Co. from the inception of the enterprise; 15 shares subscribed by Poizat and the other 15 shares subscribed by Infante, were not fully paid. The BOD adopted 2 resolutions, the first to make good by new subscriptions in proportion to their respective holdings the 15 shares of Infante which have been surrendered by Infante; the other was to require Poizat to pay the amount of his subscription upon the 15 shares and should Poizat refuse to pay, the company would undertake judicial collection proceedings. When the company went into voluntary insolvency, the assignee, Velasco, filed a complaint against Poizat seeking to recover his deficiency. Poizat contended that the call of the BOD was not made pursuant to the requirements of the Corporation Law and that the action was instituted before the expiration of the 30 days specified in Sec. 38 of the old Corporation Law. The Court held that Poizat continued to be liable on his subscription. When insolvency supervenes upon a corporation and the court assumes jurisdiction to wind it up, unpaid stock subscriptions become payable on demand, and are at once recoverable in an action instituted by the assignee in insolvency. "It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. . . A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary . . ."
PNB v. Bitulok Sawmill, Inc.:
Pres. Roxas organized the Philippine Distributing Agency (PDA) for the purpose of insuring the steady supply of lumber to enable the war sufferers to rehabilitate their devastated homes. Roxas convinced the lumber producers to form a lumber cooperative and to pool their resources together. The President promised and agreed to finance the agency by making the government invest P9.00 for every peso the members would invest. Relying on the assurance, Bitulok and several others
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susbscribed to the stocks of PDA. The Legislature was not able to appropriate the counterpart fund to be put up by the government, hence, Pres. Roxas instructed PNB to grant the loan to the PDA. The loan was not paid, as a consequence, PNB filed a suit on their subscriptions to the PDA. Issue is whether PNB can collect the balance on the subscription in spite of the conditions attached thereto which were not fulfilled. The Court held that it is a well-settled principle that with all the vast powers lodged in the Executive, he is still devoid of the prerogative of suspending the operations of any statute or any of its terms. The power of suspending the laws is lodged with the Legislature, which has indicated that the obligation for the payment of subscription by the defendants shall be governed by the Corporation Law. The President could not suspend the effectivity of the Corporation Law; therefore, the defendants remain liable to the balance of their subscriptions.
2. Formalities in Organizing Government of PI v. Manila Railroad Co.:
AOI is the basic contract document in Corporate Law, defining the charter of the corporation, and the contractual relationships between the State and the corporation, the stockholders and the State and between the corporation and its stockholders.
Rural Bank of Salinas v. CA:
By laws are intended merely for the protection of the corporation, and prescribe regulation, not restriction. Here, the Court held that restrictions affecting the assignment or transfer of shares cannot validly be provided for in the corporation’s by-laws, and any such provisions in the by-laws are void.
A. Generally B. Articles of Incorporation shall substantially contain the following matters EXCEPT as otherwise prescribed by the 1. Procedure and Documentary Requirements Corpo Code or by special law
•
to be filed with the SEC A. Name of the corporation in any official language of the Philippines B. acknowledged Specific purpose(s) which it is being (Sec. incorporated duly signed and by all for of the incorporators 14) if there are more than one purpose, AOI must state which is the primary and secondary purpose
As to contents and forms (Sec. 14 and 15) for non-stock corporation: may not include a purpose which would C. D.
E. F. G.
H.
I.
change or contradict its nature as a non-stock corporation Place of principal office – must be within the Philippines Corporate term/existence Number of directors or trustees – min of 5 but max of 15 Names, nationalities and residences of the persons who shall acts as directors or trustees until the first regular directors or trustees are duly qualified and elected under this Code FOR STOCK CORPORATION 1. Amount of authorized capital stock (in legal tender in Philippines) 2. Number of shares the authorized capital stock was divided 3. As to Shares: With Par Value Shares Par value of each Names, nationalities and residences of the original subscribers Amount subscribed Amount paid by each subscriber Without Par Value Shares: the fact that some or all of the shares are without par value must be stated in the AOI FOR NON-STOCK CORPORATION 1. Amount of capital 2. Names, nationalities and residences of contributors 3. Amount contributed by each contributors 22 SUCH OTHER MATTERS 1. NOT INCONSISTENT WITH LAW AND 2. WHICH THE INCOPORATORS MAY DEEM NECESSARY AND CONVENIENT
SEC shall not accept the AOI of any stock corporation unless accompanied by a Sworn statement of the Treasurer elected by the subscribers showing the following: a. b.
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 fully paid in actual cash or in property (the fair valuation is equal to at least 25% of the said subscription) – paid up capital must not be less than 5K
In case 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 – SEC shall accept AOI or amended AOI of these corporations if accompanied by a favorable recommendation of the appropriate government agency to the effect that such AOI or amendment is in accordance with law (Sec. 17)
•
As to corporate name (Sec. 18) -
Not 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
IN CASE OF CHANGE OF CORPORATE NAME: Note that a corporation may change its name after complying with the formalities prescribed by law, to wit: amendment of AOI and filing of amendment with the SEC. As to the second requirement, under Sec. 18, once the SEC approves of the amendment (as to name), it is required that it must issue an amended certificate of incorporation under the amended name.
Red Line Transit v. Rural Transit:
The incorporators "constitute a body politic and corporate under the name stated in the certificate." (Section 11, Act No. 1459, as amended.) A corporation has the power "of succession
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by its corporate name." (Section 13, ibid.) The name of a corporation is therefore essential to its existence. It cannot change its name except in the manner provided by the statute. By that name alone is it authorized to transact business. The law gives a corporation no express or implied authority to assume another name that is unappropriated; still less that of another corporation, which is expressly set apart for it and protected by the law. If any corporation could assume at pleasure as an unregistered trade name the name of another corporation, this practice would result in confusion and open the door to frauds and evasions and difficulties of administration and supervision. The policy of the law as expressed in our corporation statute and the Code of Commerce is clearly against such a practice.
Philippine First Insurance Co. v. Hartigan:
The changing of the name of a corporation is no more than the creation of a corporation than the changing of the name of a natural person is the begetting of a natural person. The act, in both cases, would seem to be what the language which we use to designate it imports- a change of name and not a change of being.
Universal Mills v. Universal Textiles:
The corporate names in question are not identical, but they are indisputably so similar that even under the test of "reasonable care and observation as the public generally are capable of using and may be expected to exercise" invoked by appellant, We are apprehensive confusion will usually arise, considering that under the second amendment of its articles of incorporation on August 14, 1964, appellant included among its primary purposes the "manufacturing, dyeing, finishing and selling of fabrics of all kinds" in which respondent had been engaged for more than a decade ahead of petitioner. Factually, the Commission found existence of such confusion, and there is evidence to support its conclusion. Since respondent is not claiming damages in this proceeding, it is, of course, immaterial whether or not appellant has acted in good faith, but We cannot perceive why of all names, it had to choose a name already being used by another firm engaged in practically the same business for more than a decade enjoying well earned patronage and goodwill, when there are so many other appropriate names it could possibly adopt without arousing any suspicion as to its motive and, more importantly, any degree of confusion in the mind of the public which could mislead even its own customers, existing or prospective.
2. As to Purpose [Sec. 14(2)] -
-
if there are more than one purpose, AOI must state which is the primary and secondary purpose for non-stock corporation: may not include a purpose which would change or contradict its nature as a non-stock corporation
NOTE: LAWFUL PURPOSE ONLY – Sec. 10; if there are more than one purpose, the • primary and secondary purpose must be capable of being legally combined. PURPOSE for indicating purposes in AOI: to determine whether the acts performed by the corporation are authorized or beyond its powers (ultra vires acts)
Uy Siulong v. Director: Statements of primary purpose is to protect shareholders so they will know the main path of the business of the corporation and they may file derivative suits if the corporation deviate from the primary purpose.
3. As to principal office [Sec. 14(3)]
must be within the Philippines MEANING OF PLACF OF PRINCIPAL OFFICE: does not necessarily mean the place where the business of the corporation is transacted but the place where its books and records are ordinarily kept and its officers usually meet for the purpose of managing the affairs and transacting the business of the corporation. IN CASE OF CHANGE OF CORPORATE ADDRESS: (Sec. 16) a. if change involves a change of city or municipality : amended AOI must be filed with the SEC b. if new address is located within the same city or municipality: no document to be filed with SEC but a notice only regarding the change
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Clavecilla Radio System v. Antillon:
Residence of a corporation is the place where its principal office is established; it can be sued in that place, not in the place where its branch office is located.
4. As to Corporate Term (Sec. 11) Limitations on Corporate Existence: a. Not more than 50 years from date of incorporation UNLESS Sooner dissolved OR Period is extended b. As to Extendible Period Not exceed 50 years IN ANY SINGLE INSTANCE EXTENSION CANNOT BE MADE EARLIER THAN 5 YEARS PRIOR TO THE EXPIRATION DATE unless there are justifiable reasons as may be determined by SEC Note: As to extension, this means that corporation, by filing an amended AOI with SEC may ask for extension of corporate term WITHIN THE 5-YEAR PERIOD BEFORE THE EXPIRATION DATE OF THE EXISTING TERM Note also that while corporate life can be extended by amendment of AOI, it may also be reduced (Sec. 120) Alhambra Cigar and Cigarette v. SEC: Corporation cannot extend its life by amendment of its AOI to be effected during the 3 year statutory period for liquidation when its original term had already expired. The 3 year statutory period for corporate liquidation is not for the purpose of continuing the business for which it was established, but strictly limited to liquidation. The extension of a corporation is deemed to constitute new business and cannot be validly pursued during the liquidation stage.
Benguet Consolidated v. Pineda:
This case discussed the importance of corporate term as it is coterminous with its possession of an independent legal personality, distinct from that of its corporate members: The State and its officers also have an obvious interest in the term of life of associations, since the conferment of juridical capacity upon them during such period is a privilege that is derived from statute. It is obvious that no agreement between associates can result in giving rise to a new and distinct personality, possessing independent rights and obligations, unless the law itself shall decree such result. And the State is naturally interested that this privilege be enjoyed only under the conditions and not beyond the period that it sees fit to grant; and, particularly, that it be not abused in fraud and to the detriment of other parties; and for this reason it has been ruled that "the limitation (of corporate existence) to a definite period is an exercise of control in the interest of the public"
5. As to number and residency of incorporators (Sec. 10) -
Min. of 5 but max of 15 (natural persons not juridical) Legal age Majority must be residents of the Philippines FOR STOCK CORPORATIONS: Incorporators must own or be a subscriber of AT LEAST ONE SHARE of the capital stock of the corporation
6. As to minimum capitalization (Sec. 12) -
FOR STOCK CORPORATIONS: no required minimum authorized capital stock except as otherwise provided by special law AS LONG AS THE PAID UP CAPITAL, as required under Sec. 13 is not less than 5K.
Remember the 25%-25%-5K rule: At least 25% of the authorized capital stock of the corporation has been subscribed and at least 25% of the total subscription has been fully paid in actual cash or in property (the fair valuation is equal to at least 25% of the said subscription) – paid up capital must not be less than 5K -
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7. As to subscription and paid-up requirements (Sec. 13) 25%-25%-5K rule: a. At least 25% of the authorized capital stock of the corporation has been subscribed b. And at least 25% of the total subscription has been fully paid in actual cash or in property (the fair valuation is equal to at least 25% of the said subscription) – paid up capital must not be less than 5K
8. Grounds for disapproval (Sec. 17) a. b. c. d.
AOI or any amendment thereto is not substantially in accordance with the form prescribed therein Purpose(s) of the corporation are patently unconstitutional, illegal, moral or contrary to government rules and regulations Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false Required percentage of ownership of the capital stock owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution Note of Filipino ownership requirement regarding corporate capital: Corpos for exploration, development and utilization of nat res –60%40% Public Service corpos-60%-40% Educational corpos-60%-40% Banking Corpos- 60%-40% Corporations engaged in retail trade – 100% Rural Banks – 60%-40% Corpos engaged in pawnshop business-70%-30% Corpos engaged in mass media- 100% Corpos engaged in advertising industry – 75%-25%
Asuncion v. De Yriate:
The Court held that when on the face of the AOI presented for registration it is shown that it is organized for a purpose contrary to law or public policy, the same may be denied outright registration. The object of the proposed corporation, as appears from the articles offered for registration, is to make of the barrio of Pulo or San Miguel a corporation which will become the owner of and have the right to control and administer any property belonging to the municipality of Pasig found within the limits of that barrio. This clearly cannot be permitted. Otherwise municipalities as now established by law could be derived of the property which they now own and administer. Each barrio of the municipality would become, under the scheme proposed, a separate corporation, would take over the ownership, administration, and control of that portion of the municipal territory within its limits. This would disrupt, in a sense, the municipalities of the Islands by dividing them into a series of smaller municipalities entirely independent of the original municipality.
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What the law does not permit cannot be obtained by indirection. The object of the proposed corporation is clearly repugnant to the provisions of the Municipal Code and the governments of municipalities as they have been organized thereunder. (Act No. 82, Philippine Commission.) This case also held that although the duties of the official concerned happened to be ministerial, it does not necessarily follow that he may not, in the administration of his office, determine questions of law. It is his duty to determine whether the objects of the corporation as expressed in the AOI are lawful pursuant to the then Corporation Law. And just because the AOI are perfect in form, it does not mean that the division of archives must accept and register them and issue the corresponding certificate of incorporation no matter, as what the corporation’s purpose is. It is not only the right but also the duty of the appropriate government agency to determine the lawfulness of the objects and purpose of the corporation before it issues a certificate of incorporation.
9. Commencement of Corporate Existence (Sec. 19) -
Corporation commences to have juridical personality and legal existence only from the moment the SEC issues to the incorporators a CERTIFICATE OF INCORPORATION under its official seal Such certificate is a final determination of the corporation’s right to do business or enter into contracts in its name Once issued, the certificate becomes the charter or corporate franchise from which the authority of the corporation to operate as such flows
Note that the issuance of the certificate calls the corporation into being but it is not ready to do business until it is organized. The corporation must formally organize and commence the transaction of its business or the construction of its works within 2 years from the date of TIME for ADOPTION OF BY-LAWS the incorporation, otherwise, its corporate powers shall cease and it shall be deemed dissolved. (Sec. 22) A. By-laws must adopted within one month after receipt of official notice of the issuance of its certificate of incorporation by the SEC
C.
By laws must not be inconsistent with the Corpo Code Signed by stockholders/members voting for the by-laws By-Laws Shall be kept in the principal office of the corporation 1. Adoption Procedure (Sec.of46) Subject to the inspection the stockholders/.members during office hours A copy of the by-laws (certified by majority of the directors/trustees countersigned by corporate secretary) shall be filed with the SEC (SEC will attach said by-laws to the AOI) VOTE NEEDED FOR ADOPTION OF BY-LAWS STOCK CORPOS: Affirmative vote of stockholders representing at least majority of the OCS (outstanding capital stock) NON-STOCK CORPOS: at least majority of members B.
It may also be adopted and filed prior to incorporation: must be approved and signed by all the incorporators and submitted to the SEC together with the AOI
EFFECTIVITY OF BY-LAWS: Only upon issuance of SEC of a certification that by-laws are not inconsistent with the Corpo Code In case 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 – SEC shall accept By-laws or amended by-laws of these corporations if accompanied by a favorable recommendation of the appropriate government agency to the effect that such AOI or amendment is in accordance with law
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2. Contents (Sec. 47) a. b. c. d. e. f. g. h. i.
Time, place, manner of calling and conducting regular/special meetings of directors/trustees Time, place, manner of calling and conducting regular/special meetings of stockholders/members Required QUOROM in meetings of stockholders/members and the manner of voting them Form of proxies of stockholders/members and the manner of voting them Qualifications, duties and compensation of directors/trustees, officers and employees Time for holding the annual election of directors/trustees and the mode or manner of giving notice thereof Penalties for violation of by-laws For stock corpos: manner of issuing certificates Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs
3. Amendments (Sec. 48) - includes amend, repeal or adoption of new by-laws Requirements (majority affirmative vote of stockholders/members) a. STOCK CORPOS: Affirmative vote of stockholders representing at least majority of the OCS (outstanding capital stock); NON-STOCK CORPOS: at least majority of members b. Voted at a regular or special meeting duly called for the purpose Power to amend MAY BE DELEGATED BY THE STOCKHOLDERS/MEMBERS TO THE BOD/BOT: 2/3 of the OCS or members VOTE REQUIRED TO REVOKE DELEGATION: majority affirmative vote of OCS [stockholders]/members at a regular or special meeting -
The amendment or the new by-laws shall be attached to the original by-laws in the office of the corporation Copy of the amendment or the new-by laws (certified by the corporate secretary and majority of the directors/trustees) shall be filed with the SEC (SEC will attach it to original AOI and original by-laws
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EFFECTIVITY OF AMENDMENT OR NEW BY-LAWS: Only upon issuance of SEC of a certification that by-laws are not inconsistent with the Corpo Code
Loyola Grand Villas v. CA: The Court held that Sec. 46 of the Corporation Code, which provides that the corporation “must” adopt a set of by-laws within one month after receipt of notice of the issuance of the certificate of incorporation by the SEC, reveals the legislative intent to attach a directory, and not mandatory, meaning for the word “must” in the first sentence thereof, since the second paragraph of the section allows the filing of the by-laws even PRIOR to incorporation. It necessarily follows that failure to file the by-laws within that period does not imply the "demise" of the corporation, but merely constitutes a ground by which the SEC may seek forfeiture of the franchise of the corporation as provided in PD 902-A.
PMI Colleges v. NLRC:
In this case, the corporation sought to avoid liability under a contract of service which was not signed by the Chairman of the Board as clearly mandated under the corporation’s by-laws. The Court held that such contract cannot be held as invalid just because the signatory thereon was not the Chairman of the BOD which allegedly violated the corporation’s by-laws, “since by-laws operates merely as internal rules among the stockholders, they cannot affect or prejudice third persons who deal with the corporation unless they have knowledge of the same. Pena v. CA: By-laws of a corporation are its own private laws which substantially have the same effect as the laws of the corporation. They are in effect, written into the charter. In this sense, they become part of the fundamental law of the corporation with which the corporation and its directors and officers must comply.
C. RECOGNITION OR DISREGARD OF CORPORATENESS 1. Separate Juridical Personality Santos v. NLRC:
A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. Nevertheless, being a mere fiction of law, peculiar situations or valid grounds can exist to warrant, albeit done sparingly, the disregard of its independent being and the lifting of the corporate veil. 25 As a rule, this situation might arise when a corporation is used to evade a just and due obligation or to justify a wrong, 26 to shield or perpetrate fraud, to carry out similar other unjustifable aims or intentions, or as a subterfuge to commit injustice and so circumvent the law. 28 In Tramat Mercantile, Inc., vs. Court of Appeals, 29 the Court has collated the settled instances when, without necessarily piercing the veil of corporate fiction, personal civil liability can also be said to lawfully attach to a corporate director, trustee or officer; to wit: 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, or (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
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(4) He is made, by a specific provision of law, to personally answer for his corporate action.
Stockholders of Guanzon v. Register of Deeds:
The distribution of the corporate properties to the stockholders were deemed not in the nature of a partition among co-owners but rather a disposition by the corporation to the stockholders, as opposite parties to a contract. It held that a corporation is a juridical person distinct from the members composing it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property they do not represent property of the corporation. The corporation has property of its own which consists chiefly of real estate. A share of stock only typifies an aliquot part of the corporation's property, or the right to share in its proceeds to that extent when distributed according to law and equity but its holder is not the owner of any part of the capital of the corporation. Nor is he entitled to the possession of any definite portion of its property or assets. The stockholder is not a co-owner or tenant in common of the corporate property.
Manila Gas v. CIR:
It held that a corporation has a personality distinct from that of its stockholders, enabling the taxing power to reach the latter when they receive dividends from the corporation. It must be considered as settled in this jurisdiction that dividends of a domestic corporation, which are paid and delivered in cash to foreign corporations as stockholders, are subject to the payment of the income tax, the exemption clause in the charter of the corporation notwithstanding.
Magsaysay-Labrador v. CA:
This case held that a majority stockholder’s interest in corporate property, “if it exists at all… is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of a corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of corporate debts and obligations. It also held that while a share of stock represents a proportionate or aliquot interest in the property of the corporation, “it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporation property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct legal person.
Saw v. CA:
Here, the Court refused the petition for intervention filed by the stockholders in a collection case covering the loans of the corporation on the ground that the interest of the shareholders in corporate property is purely inchoate interest that will not entitle them to intervene involving corporate property.
Good Earth v. CA:
The Court, in refusing to allow execution of corporate judgment debt against the officer, held that being an officer or stockholder of a corporation does not by itself make one’s property also of the corporation, and vice-versa, for they are separate entities, and the shareholders are in no legal sense the owners of corporate property which is owned by the corporation as a distinct legal person.
2. Defective Corporation 1. De jure – if corporation has fully or substantially complied with the requirements of an existing law permitting organization of such corporation as by proper AOI duly executed and filed Generally, its juridical personality is not subject to attack in the courts from any source If a corporation is a de jure corporation, its due incorporation cannot be successfully attacked even in a quo warranto proceeding by the State
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Therefore if such proceeding is bought against the corporation and the State has a prima facie case, the corporation must show that it is a de jure corporation De facto – if corporation has a bonafide attempt to incorporate and a colorable compliance with the statute and user of corporate powers
2.
Sec. 20, Corporation Code: 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.
i. Rationale for the doctrine Tayko v. Capistrano:
The case discussed the policy of the doctrine as applied to public officers, and it held that “The principle is one founded in policy and convenience, for the right of no one claiming a title or interest under or through the proceedings of an officer having an apparent authority to act would be safe, if it were necessary in every case to examine the legality of the title of such officer up to its original source, and the title or interest of such person were held to be invalidated by some accidental defect or flaw in the appointment, election or qualification of such officer, or in the rights of those from whom his appointment or election emanated; nor could the supremacy of the laws be maintained, or their execution enforced, if the acts of the judge having a colorable, but not a legal title, were to be deemed invalid.”
Gamboa v. CA: It is well-settled that the title to the office of a judge, whether de jure or de facto, can only be determined in a proceeding in the nature of quo warranto and cannot be tested by prohibition. But counsel for the petitioner maintains that the respondent is neither a judge de jure or de facto and that, therefore, prohibition will lie. In this, counsel is undoubtedly mistaken. ... ... (R)espondent Judge must be considered a judge de facto. His term of office may have expired, but his successor has not been appointed, and as good faith is presumed, he must be regarded as holding over in good faith. ... As to the validity of the official acts of a judge de facto, this Court in the aforementioned case Citing the Ruling Case Law 9 held: ... The rightful authority of the judge in the full exercise of his public judicial functions, cannot be questioned by any merely private suitor, or by any other, excepting in the form especially provided by law. A judge de facto assumes the exercise of a part of the prerogative of sovereignty, and the legality of that assumption is open to the attack of the sovereign power alone. Accordingly, it is a well-established principle dating from the earliest period and repeatedly confirmed by an unbroken current of decisions, that the official acts of a de facto judge are just as valid for all purposes as those of a de jure judge, so far as the public or third persons who are interested therein are concerned. The rule is the same in civil and criminal cases. The principle is one founded on public policy and convenience, for the right of no one claiming title or interest under or through the proceedings of an officer having an apparent authority to act would be safe, if it were necessary in every case to examine the legality of the title of such officer up to its original source, and the title or interest of such person were held to be invalidated by some accidental defect or flaw in the appointment, election or qualification of such officer, or in the rights of those from whom his appointment or election emanated: nor could the supremacy of the law be maintained, or their execution enforced, if the acts of the judge having a colorable but not legal title, were to be deemed invalid. As in the case of the courts of record, the acts of a justice de facto cannot be called in question in any suit to which he is not a party the official acts of a de facto
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justice cannot be attacked collaterally ... The title of a de facto officer cannot be indirectly questioned in a proceeding to obtain a writ of prohibition to prevent him from doing an official act, nor in a suit to enjoin the collection of a judgment rendered by him. Having at least colorable right to the office his title can be determined only in a quo warranto proceeding or information in the nature of a quo warranto at suit of the sovereign.
ii. Requisites Hall v. Piccio:
In this case, a corporation was organized from an unregistered partnership among several individuals. Immediately after the execution of the AOI, the corporation proceeded to do business with the adoption of the by-laws and the election of its officers. The AOI were forwarded to the SEC for registration. But before the issuance of the corresponding certificate of incorporation, some of the incorporators filed an action in court to have the unregistered partnership dissolved, and included as defendants some of the officers of the partnership. The defendants filed a motion to dismiss on the ground that the court had no jurisdiction over the dissolution of the company. Since it was a de facto corporation, they argued dissolution thereof could only be ordered in a quo warranto proceeding; and since the plaintiffs signed the AOI, they are now estopped from claiming that it is not a corporation but only a partnership. The Court held that since the certification of incorporation had not been issued by the SEC, the then de facto corporation doctrine did not apply. None of the incorporation directors could claim in GF to be a corporation, being fully aware of the non-issuance of the certificate of incorporation. Likewise, since the suit was not one where the corporation itself was made a party, but was merely a litigation between stockholders of the alleged corporation for the purpose of obtaining its dissolution, “Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without the intervention of the state.”
Fernandez v. Cuerva:
Issue in this case is can there be a de facto corporation organized under an enabling statute that is unconstitutional. Following the “orthodox view” that an “unconstitutional act, whether legislative or executive, is not a law, confers no right, imposes no dues, and affords no protection, the enabling statute being unconstitutional would absolutely be void, and no corporation organized under it can achieve the status of being a defacto corporation. Therefore, the prevailing view is than an unconstitutional enabling law has the same effect as though there is no law under which to organize, and even if the associates organize in GF in reliance upon it, the resulting association cannot claim to be a de facto corporation.
Benguet Consolidated v. Pineda:
"Organize or 'organization,' as used in reference to corporations, has a well-understood meaning, which is 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 it was created. Under a statute providing that, until articles of incorporation should be recorded, the corporation should transact no business except its own organization, it is held that the term "organization" means simply the process of forming and arranging into suitable disposition the parties who are to act together in, and defining the objects of, the compound body, and that this process, even when complete in all its parts, does not confer a franchise either valid or defective, but, on the contrary, it is only the act of the individuals, and something else must be done to secure the corporate franchise.
3. Corporation by estoppel Sec. 21, Corporation Code. 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
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or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.
i. Rationale for the doctrine Asia Banking v. Standard Products: In this case, a collection suit was brought by the bank on a PN issued in behalf of the corporate borrower. At the trial, the bank failed to prove affirmatively the corporate existence of the parties, and so the defendant corporate borrower insisted on appeal that the judgment rendered against it was wrong. In brushing aside the contention of the corporate borrower, the Court held that the “The general rule is that in the absence of fraud a person who has contracted or otherwise dealt with an association in such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny its corporate existence in any action leading out of or involving such contract or dealing, unless its existence is attacked for cause which have arisen since making the contract or other dealing relied on as an estoppel and this applies to foreign as well as to domestic corporations.” Here, the defendant corporate borrower, having recognized the corporate existence of the plaintiff by making a PN in its favor and making partial payments on the same, was estopped to deny plaintiff’s corporate existence, and also from denying its own corporate existence; evidence to establish such facts was unnecessary. (See par. 2 of Sec. 21)
Vda. De Salvatierra v. Garlitos: Salvatierra, as owner of a piece of land, entered into a contract of lease with corporation allegedly “duly organized and existing under the laws of the Philippines,” represented by its president. When the obligations imposed under the contract of lease on corporate lessee were not complied with, Salvatierra brought an action for accounting, rescission and damages. Judgment was rendered against the corporation. When a writ of execution was sought to be enforced, no properties in the name of the corporation could be located, and consequently, properties registered in the name of its president were levied upon. The president sought to have the levy against his properties lifted, since he was not even a party to the case against the corporation. On the other hand, Salvatierra showed that the case was brought against the corporation in the belief that it was duly incorporated and that he found out only after judgment that it had not been duly registered with the SEC. Under those proven facts, the SC held that the president is personally liable on the contract entered into on behalf of the corporation. In resolving the case, the Court refused to apply the corporation by estoppel doctrine: While as a general rule a person who has contracted or dealt with an association in such a way as to recognize its existence as a corporate body is estopped from denying the same in an action arising out of such transaction or dealing, yet this doctrine may not be held to be applicable where fraud takes a part in the said transaction. In the instant case, on plaintiff's charge that she was unaware of the fact that the Philippine Fibers Producers Co., Inc., had no juridical personality, defendant Refuerzo gave no confirmation or denial and the circumstances surrounding the execution of the contract lead to the inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra was really made to believe that such corporation was duly organized in accordance with law. There can be no question that a corporation when registered has a juridical personality separate and distinct from its component members or stockholders and officers such that a corporation cannot be held liable for the personal indebtedness of a stockholder even if he should be its president and conversely, a stockholder or member cannot be held personally liable for any financial obligation by the corporation in excess of his unpaid subscription. But this rule is understood to refer merely to registered corporations and cannot be made applicable to the liability of members of an unincorporated association. The reason behind this doctrine is obvious — since an organization which before the law is non-existent has no personality and would be incompetent to act and appropriate for itself the powers and attribute of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the rights and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence
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assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent. Considering that defendant Refuerzo, as president of the unregistered corporation Philippine Fibers Producers Co., Inc., was the moving spirit behind the consummation of the lease agreement by acting as its representative, his liability cannot be limited or restricted to that imposed upon corporate shareholders. In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk of reaping the consequential damages or resultant rights, if any, arising out of such transaction.
Albert v. University Publishing:
The instant case gave new input to the then version of the estoppel doctrine. Albert sued University Publishing Co., for his share in the publication of a book under a contract entered into by the parties, with the corporation being represented in the contract by its president, Jose M. Aruego. Judgment was rendered in favor of Albert against the corporation. When judgment was sought to be enforced against the corporation, it was discovered that it had never been registered with the SEC. The judgment was then sought to be enforced against Aruego in his personal capacity. Aruego raised the point that the contract was not a personal contract but one with a juridical entity. The Court ruled, “Precisely, however, on account of the non-registration it cannot be considered a corporation, not even a corporation de facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no personality separate from Jose M. Aruego; it cannot be sued independently.” However, the Court also rejected application of the corporation by estoppel doctrine to resolve the issue: The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is inapplicable here. Aruego represented a non-existent entity and induced not only the plaintiff but even the court to believe in such representation. He signed the contract as "President" of "University Publishing Co., Inc.," stating that this was "a corporation duly organized and existing under the laws of the Philippines," and obviously misled plaintiff (Mariano A. Albert) into believing the same. One who has induced another to act upon his wilful misrepresentation that a corporation was duly organized and existing under the law, cannot thereafter set up against his victim the principle of corporation by estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069). However, in Albert, the Court discussed how the then version of the estoppel doctrine could be applied to hold actors behind the purported corporation, personally liable for the contract, at the same time that corporate liability was upheld: Even with regard to corporations duly organized and existing under the law, we have in many a case pierced the veil of corporate fiction to administer the ends of justice. * And in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent." The implication of Albert is clear: even with the then version of the estoppel doctrine, we could uphold the validity and enforceability of a contract by upholding the fiction of the contracting corporation’s existence (although in fact, it does exist); but nonetheless, we can pierce the veil of the recognized corporate party and make the actors liable personally for the obligations arising from the contract.
3. Piercing the veil of corporate fiction Umali v. CA:
This case held that when the piercing doctrine is applied in a case, the consequences would be that the members or stockholders of the corporation will be considered as the corporation, that is, liability will attach directly to the officers and stockholders. Koppel (Phil.) v. Yatco: The application of the piercing doctrine is not a contravention of the principle that the corporate personality of a corporation cannot be collaterally attacked. In this case, it was held that when the piercing doctrine is applied against a corporation in a particular case, the court does not deny legal personality for any and all purposes. The
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application of the piercing doctrine is therefore within the ambit of the principle of res judicata that binds only the parties to the case and only to the matters actually resolved therein. Tantongco v. Kaisahan: Even when a corporation’s legal personality has been pierced in one case, it was held in the instant case, that such corporation still possessed such separate juridical personality in any other case, or with respect to the other issues. Robledo v. NLRC: The doctrine of piercing the veil of corporate entity is used whenever a court finds that the corporate fiction is being used to defeat public convenience, justify wrong, protect fraud, or defend crime, or to confuse legitimate issues, or that a corporation is the mere alter ego or business conduit of a person or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. 5 It is apparent, therefore, that the doctrine has no application to this case where the purpose is not to hold the individual stockholders liable for the obligations of the corporation but, on the contrary, to hold the corporation liable for the obligations of a stockholder or stockholders. Piercing the veil of corporate entity means looking through the corporate form to the individual stockholders composing it. Here there is no reason to pierce the veil of corporate entity because there is no question that petitioners' claims, assuming them to be valid, are the personal liability of the late Felipe Bacani. It is immaterial that he was also a stockholder of BASEC.
a. Fraud cases Gregorio Araneta, Inc., v. Tuazon:
This case held that the piercing doctrine is employed to prevent the commission of fraud and cannot be employed to perpetuate a fraud. In this case, Tuason sold lots to G. Araneta, Inc. Subsequently, the corporation filed a case against Tuason to compel delivery of clean title to said lots. Tuason claimed that the sale was made to her agent, Jose Araneta, president of the buying corporation, and therefore the corporate fiction should be disregarded, the sale being not valid as it was made to an agent of the seller. The Court ruled that the corporate fiction will not be disregarded because the corporate entity was not used to perpetuate fraud not circumvent the law, and the disregard of the technicality would pave the way for the evasion of a legitimate and binding commitment, especially since Tuason was fully aware of the position of Mr. Araneta in the corporation at the time of sale.
Palacio v. Fely Transportation Co.:
Here it was found that an incorporator’s main purpose in forming the corporation was to evade his subsidiary civil liability resulting from the conviction of his driver, the corporation was made liable for such subsidiary liability by denial of the plea that it had a separate juridical personality and could not be held liable for the personal liabilities of its stockholder. The Court took into consideration as part of the attempt to do fraud that the only property of the corporation was the jeep owned by the main stockholder involved in the accident.
Villa Rey Transit v. Ferrer:
The Court held here that when the fiction of legal entity is “urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime,30 the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals.” In this case, the Court pierced the veil of corporate fiction to enforce a non-competition clause entered into by its controlling stockholder in his personal capacity.
Palay, Inc. v. Clave: The general rule laid down in this case is unless sufficient proof exists on record that an officer (here, a President and controlling stockholder) has used the corporation to defraud private respondent, he cannot be made personally liable just because he "appears to be the controlling stockholder". Mere ownership by a single stockholder or by another corporation is not of itself sufficient ground for disregarding the separate corporate personality.
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Pabalan v. NLRC:
In the instant case, the Court ruled that The settled rule is that the corporation is vested by law with a personality separate and distinct from the persons composing it, including its officers as well as from that of any other legal entity to which it may be related. Thus, a company manager acting in good faith within the scope of his authority in terminating the services of certain employees cannot be held personally liable for damages. Pabalan refused to hold the officers of the corporation personally liable for corporate obligations on employees’ wages, since “in this particular case complainants did not allege or show that petitioners, as officers of the corporation deliberately and maliciously designed to evade the financial obligation of the corporation to its employees, or used the transfer of the employees as a means to perpetrate an illegal act or as a vehicle for the evasion of existing obligations, the circumvention of statutes, or to confuse the legitimate issues”
Paradise Sauna v. Ng:
It was held that an officer-stockholder who is a party signing in behalf of the corporation to a fraudulent contract cannot claim the benefit of separate juridical entity.
Del Rosario v. NLRC:
The doctrine laid here is in order for a corporate officer to be held liable for corporate debts, it must be clearly shown that he had participated in the fraudulent or unlawful act.
b. Alter ego cases Arnold v. Willets and Paterson, Ltd.:
In this case the creditors’ committee of the corporation opposed the payment compensation due to the plaintiff,. Arnold, under a contractletter signed by Willits, the controlling stockholder, without board approval. The signing president was the controlling stockholder of the corporation. The Court held the validity of the contract and “although the plaintiff was the president of the local corporation, the testimony is conclusive that both of them were what is known as a one man corporation, and Willits, the owner of all the stocks was the force and dominant power which controlled them. The Court expressed that language of piercing doctrine when applied to alter-ego cases, as follows: "Where the stock of a corporation is owned by one person whereby the corporation functions only for the benefit of such individual owner, the corporation and the individual should be deemed to be the same."
La Campana Coffee v. Kaisahan:
In the instant case, Tan Tong and his family owned and controlled two corporations, one engaged in the sale of coffee and the other in starch. Both corporations had one office, one management and one payroll; and the laborers of both corporations were interchangeable. The 60-member labor association in the coffee and starch factories demanded for higher wages addressed to “La Campana Starch and Coffee Factor.” The La Campana Coffee Factory sought dismissal of the petition on the ground that the starch and coffee factory are two distinct juridical persons. The Court disregarded the fiction of corporate existence and treated the 2 companies as one. Note: It should be remembered that cases like La Campana where the issue was the jurisdiction of the CIR to hear the matter, show that unlike in fraud cases where there must be a pecuniary claim, in alter ego cases, no such pecuniary claim need not be involved to allow the courts to apply the piercing doctrine.
Yutivo Sons Hardware v. CTA:
Yutivo Sons and Hardware Co., imported cars and trucks, which it sold to Southern Motors Inc. Sales taxes were paid by Yutivo on his first sale. Southern Motors sold the vehicles to the public. The Collector of Internal Revenue sought to impose sales tax not on the basis of Yutivo’s sales to Southern Motors but on the latter’s higher sales to the public. To this, the Court agreed. Although it found that Southern Motors was indeed actually owned and controlled by Yutivo as to make it a mere subsidiary or branch of the latter. Yutivo, through common officers and directors exercised full control over Southern Motor’s cash funds, policies, expenditures, and obligations.
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Liddell & Co., v. Collector:
Lidell & Co., was engaged in importing and retailing cars and trucks. Frank Lidell owned 98% of its stocks. Later, Lidell Motors Inc., was organized to do the retailing for Lidell & Co. Frank’s wife owned almost all of its stocks. Since then, Lidell & Co. paid sales tax on the basis of its sales to Lidell Motors. But the Collector of Internal Revenue considered the sales by Lidell Motors to the public as basis for the original sales tax. The Court agreeing with the Collector, held that Frank owned both corporations as his wife could not have had the money to pay her subscriptions. Such fact alone though not sufficient to warrant piercing, but under the proven facts of the case, Lidell Motors was the medium created by Lidell & Co. to reduce its tax liability. A taxpayer has the legal right to decrease, by means which the law permits, the amount of what otherwise would be his taxes or altogether avoid them; but a dummy corporation serving no business purposes other than as a blind, will be disregarded. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted." But, as held in another case,"where a corporation is a dummy, is unreal or a sham and serves no business purpose and is intended only as a blind, the corporate form may be ignored for the law cannot countenance a form that is bald and mischievous fiction." Consistently with this view, the United States Supreme Court held that "a taxpayer may gain advantage of doing business thru a corporation if he pleases, but the revenue officers in proper cases, may disregard the separate corporate entity where it serves but as a shield for tax evasion and treat the person who actually may take the benefits of the transactions as the person accordingly taxable." Thus we repeat: to allow a taxpayer to deny tax liability on the ground that the sales were made through another and distinct corporation when it is proved that the latter is virtually owned by the former or that they are practically one and the same is to sanction a circumvention of our tax laws.
Ramirez Telephone v. Bank of America:
Ramirez had unpaid rents due to Herbosa. The latter sought to garnish Ramirez’s bank account no such personal account existed, and only an account in the name of Ramirez could be found and was garnished. The Court held that the corporate bank account could not be garnished despite the fact that Ramirez himself leased Herbosa’s premises because: although Ramirez was the tenant, the company in truth occupied the premises. Ramirez paid the rents with the checks of the telephone company; and 75% of the shares of the company belonged to Ramirez and his wife.
Guatson International v. NLRC:
In this case, the other affiliated corporations were also made liable by the NLRC for the separation pay and backwages for which a corporateemployer was held liable. In contesting the inclusion of the other corporations to the liability, on the ground that they were separate and distinct legal personalities, the Court took the following proven facts in consideration in piercing the veil of corporate fiction: the three companies were owned by one family, such that majority if the officers of the companies are the same; the companies are located in one building and use the same messengerial services; the terminated employee was not paid separation fee when he was absorbed by the other affiliate company, nor was he made to resign from the first corporation.
Concept Builders, Inc., v. NLRC:
It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. 8 But, this separate and distinct personality of a corporation is merely a fiction created by law for convenience and to promote justice. So, when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation.
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The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and circumstances of each case. No hard and fast rule can be accurately laid down, but certainly, there are some probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, to wit: "1. Stock ownership by one or common ownership of both corporations. 2. Identity of directors and officers. 3. The manner of keeping corporate books and records. 4. Methods of conducting the business." The SEC en banc explained the "instrumentality rule" which the courts have applied in disregarding the separate juridical personality of corporations as follows: "Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the 'instrumentality' may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made." The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows: "1. Control, not mere majority or complete stock control, but complete domination, 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 act 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: The absence of any one of these elements prevents 'piercing the corporate veil'. In applying the 'instrumentality' or 'alter ego' doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant's relationship to that operation." Thus, the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a sham or a subterfuge is purely one of fact.
c. Equity cases TESCO v. WCC: The veil of corporate fiction was not allowed to be availed of, and piercing was allowed when the corporation was made as a scheme to confuse the legitimate issues, such when the defense of separate juridical personality is interposed for the first time on appeal. A.D. Santos v. Vasquez: This case is a suit for workmen’s compensation filed by taxi driver Vasquez against A. D. Santos, Inc. Vasquez testified that Amador Santos was his employer. A.D. Santos, Inc. contended that Amador is the one liable. The Court held that AD Santos, Inc., is liable. Indeed, Amador was at one time, the sole owner and operator of the taxi business that employed Vasquez, which was later transferred to A.D. Santos, Inc. But such testimony should not be allowed to confuse the facts relating to ER-EE relationship, for when the veil of corporate fiction was made to confuse legitimate issues, the same should be pierced.
4. Due Process
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McConnnel v. CA:
In this case, when the judgment debt could not be satisfied from corporate assets, an entirely new case was filed by the judgment creditor against both the corporation and the controlling stockholders, and pleaded therein the application of the piercing doctrine to make the stockholders liable for the judgment debt of the corporation.
Emilio Cano Enterprises v. CIR:
This case involved a suit for reinstatement filed against Emilio Cano and Rodolfo Cano in their capacities as officers of Emilio Cano Enterprises, Inc., which did not include the corporation as defendant. The Court rendered judgment against the two for reinstatement due to the fact that the stockholders belong to a single family. A writ of execution of the judgment debt was issued directed against the properties of the corporation, instead of those of the properties of the respondents officers. The Court denied the action to quash the writ of execution on the ground that judgment sought to be enforced was not rendered against the corporation which is a juridical personality separate and distinct from its officers. The Court held that a factor that should not be overlooked is that the officers were sued, not in their private capacities, but as officers of the corporation, and “having been sued officially, their connection with the case must be deemed to be impressed with the representation of the corporation. A corporation is a fiction, it can only act through its officers, so there would be no denial of due process in this case, even if the corporation was not made a party defendant.
NAMARCO v. Associated Finance Co. Inc.:
In the instant case, where corporate liability was sought to be enforced against the President who fraudulently entered into a contract in the name of the corporation, the piercing of the veil of corporate fiction was sought with the President being merely made a defendant at the onset together with the corporation.
Jacinto v. CA:
Here it was held that the piercing doctrine may be applied by the courts even when the complaint does not seek its enforcement, so long as evidence is adduced during trial as the basis for its application can be had. In other words, there must be evidential basis for application of the piercing doctrine during the trial on the merits.
Arcilla v. CA:
In this case, a judgment rendered against a person “in his capacity as President” of the corporation was enforceable against the assets of such officer when the decision itself found that he merely used the corporation as his alter ego or business conduit.
AC Ransom Labor Union v. NLRC (1984):
Here the corporate officers were sought to be made personally liable for a judgment for backwages rendered against the corporation. In allowing judgment to be executed against the officers who were not parties to the case filed against the corporation, the Court relied upon the provisions on the Labor Code that defined the liable “employer” to “include any person acting in the interest of an employer, directly or indirectly.” The Court held: “Since RANSOM 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" RANSOM. The corporation, only in the technical sense, is the employer. The responsible officer of an employer corporation can be held personally, not to say even criminally, liable for non-payment of back wages. That is the policy of the law.”
Lim v. NLRC (1989):
Here, the Court clarified that the A.C. Ransom doctrine applies only when the corporation no longer exists. “The case of Ransom v. NLRC is not in point because there the debtor corporation actually ceased operations after the decision of the Court of Industrial Relations was promulgated against it, making it necessary to enforce it against its former president. Sweet Lines is still existing and able to satisfy the judgment in favor of the private respondent.”
De Guzman v. NLRC (1992): The Court further clarified in this case that the A.C. Ransom doctrine is not applicable to all types of officers, such as the general manager, even if he is the highest ranking officer, when such officer is neither a stockholder or member of the BOD.
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D. CORPORATE POWERS 1. Sources of Corporate Powers a. Corporate Powers and Capacity 1. Express Powers Sec. 36, Corporation Code. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in 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
2. Implied Powers 3.
(Sec. 36 [11], Corporation Code): 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. Incidental Powers – Sec.2, Corporation Code. - A corporation is an artificial being created by operation of law, having the right of succession and the
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powers, attributes and properties expressly authorized by law or incident to its existence. those that attach to a corporation at the moment of its creation without regard to its express powers or particular primary purpose, and maybe said to be inherent in it as a legal entity or organization
b. Specified Powers 1. Power to extend or shorten corporate term Requirements: (Sec. 37) a) Approval vote of majority of the board of directors or trustees
b)
Ratification vote of 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. c) 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 d) Note: Any dissenting stockholder may exercise his appraisal right under the conditions provided in this code.
2.
Power to increase of decrease capital stock
Requirements (Sec. 38) a) Approval vote of the majority the board of directors and, at a stockholder's meeting duly called for the purpose b) Ratification vote of two-thirds (2/3) of the outstanding capital stock c) 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. d) No appraisal right e) A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased;
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(5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. e) Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. f). One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. g). From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare. Note:
i. Securities and Exchange Commission shall not accept for filing any
ii.
certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription. (25% rule) No decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors.
Madrigal &Co. v. Zamora:
“What clearly emerges from the recorded facts is that the petitioner, awash with profits from its business operations but confronted with the demand of the union for wage increases, decided to evade its responsibility towards the employees by a devised capital reduction. While the reduction in capital stock created an apparent need for retrenchment, it was, by all indications, just a mask for the purge of union members, who, by then, had agitated for wage increases. In the face of the petitioner company's piling profits, the unionists had the right to demand for such salary adjustments.” Power to sell, dispose, lease or encumber assets”
3.
Power to sell, dispose, lease or encumber assets
Requirements: (Sec. 40) a) Majority vote of its board of directors or trustees b) Authorization 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 two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. ***** c) 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
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d) Any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code.
RULES: ****** 1. Ratification vote of at least 2/3 stockholders/members not necessary when: a. If it is necessary in the usual and regular course of the business of such corporation b. If the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of the remaining business In these 2 instances, the dispositions are deemed to be within the business judgment of the BOD and would not require stockholders’ ratification. 2. Ratification vote is necessary when the disposition shall involve OF ALL CORPORATE ASSETS OR PROPERTY This involves a QUANTITATIVE TEST 3. In case of disposition of SUBSTANTIALLY ALL CORPORATE ASSETS OF PROPERTY, the necessity of ratificatory vote will depend on the quality of the property or assets
What is SUBSTANTIALLY ALL CORPORATE ASSETS? Disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of: a. Continuing the business or b. Accomplishing the purpose for which it was incorporated This involves a QUALITATIVE TEST- this means that the sale of one piece of machinery, if it is essential in the continuance of the business, amounts to sale of substantially all assets and thus NEEDS THE RATIFICATORY VOTE If however the sale of substantially all of the assets of the corporation shall not disrupt the business affairs, then there is NO NEED FOR THE RATIFICATORY VOTE (mere board resolution is sufficient)
Pena v. CA:
The sale of the only asset of the corporation made by the board, without the appropriate stockholder’s approval would render the contract void.
Islamic Directorate v. CA:
The SC confirmed that the sale by the BOT of the only property of the corporation without compliance with the provisions of Sec. 40, Corporation Code requiring the ratification of members representing at least 2/3 of the membership, would make the sale null and void.
4. i.
ii. iii.
Power to deny pre-emptive rights (Sec. 39, Corporation Code) Definition: It is the common law right granted to the stockholders of a corporation to be granted the first option to subscribe to any opening of the unissued capital stock or to any increase of the authorized capital stock of the corporation. Coverage: Extends to all issues or dispositions of shares of any class unless denied by the AOI or an amendment thereto Exceptions to the rule: Shares to which right not available
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(1) (2) (3)
iv.
Shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public Shares to be issued in GF with the 2/3 approval of outstanding capital stock in exchange for property needed for corporate purposes Shares to be issued in GF with the 2/3 approval of the outstanding capital stock in payment for previously contracted debts
Rule on remaining unsubscribed shares: If the shares corresponding to one stockholder are not subscribed or purchased by him within the period fixed for the exercise of his pre-emptive right, it does not follow that said shares should be again offered on a pro-rata basis to stockholders who took advantage of their right of pre-emption. *This is because as long as they exercise their pre-emptive rights, their relative and proportionate voting strength will not be affected adversely even if the shares mentioned are purchased by only some of them PRE-EMPTIVE RIGHT IS WAIVEABLE- Waived shares need not be offered again on a pro-rata basis to stockholders who took advantage of their right of pre-emption. Waived shares may be offered to nonstockholders on a first come-first serve basis.
Datu v. SEC: It held that when a corporation at its inception offers its shares, it is presumed to have offered all those which it is authorized to issue. An original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of the authorized shares. When the shares left unsubscribed are later offered, he cannot therefore claim a dilution of interest.
5.
Power to purchase own shares (Sec. 41, Corporation Code)
A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the 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.
Phil. Trust Co. v. Rivera:
It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realized assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary
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Boman Environmental v. CA:
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 corporation are regarded as equity 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. "Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock . . ."(Steinberg vs. Velasco, 52 Phil. 953.)
6. Power to invest corporate funds in another corporation or business or for any other purpose Requirements: (Sec. 42, Corporation Code) 1. Approval vote of the majority of the board of directors or trustees
2.
3.
4.
Ratification 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 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 Any dissenting stockholder shall have appraisal right
RULES:
1. 2.
If the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in its articles of incorporation, the approval of the stockholders or members shall not be necessary. If the investment by the corporation in a business or activity within the secondary purposes of the corporation, ratificatory vote of the stockholders is necessary.
Dela Rama v. Ma-ao Sugar Central:
In the judgment, the lower court ordered the management of the Ma-ao Sugar Central Co., Inc. "to refrain from making investments in Acoje Mining, Mabuhay Printing, and any other company whose purpose is not connected with the sugar central business." This portion of the decision should was reversed by the Court because Sec. 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business, or for any purpose other than the main purpose for which it was organized," provided that its board of directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power.
7.
Power to enter into a management contract
Requirements: (Sec. 44, Corporation Code) 1. Approval vote of the board of directors and
2.
3. 4.
Approval vote of the 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 No management contract shall be entered into for a period longer than five years for any one term. Ratification Requirements when there is Common Control in Involved Corporations:
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a.
b.
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 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
In these 2 cases, an approval vote of 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 is necessary.
Power to make donations – Sec. 36(9), Corporation Code: 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 8.
Power to provide gratuities to employees: Sec. 36(10), Corporation Code: To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees 9.
Lopez Realty v. Fontecha:
The SC held that providing gratuity pay for its employees is one of the express powers of a corporation under the Corporation Code and cannot be considered to be ultra vires to avoid any liability arising from the issuance of resolution granting such gratuity pay. Such resolution does not also require the ratification of the stockholders under Sec. 40 of the Corporation Code because such provision is applicable to the sale, lease, exchange or disposition of all or substantially all of the corporation’s assets, including its good will.
Power to enter into a joint venture – See Sec. 44, Power to enter into management contracts Tuason v. Bolanos: The theory that it is illegal for two corporations to enter into a partnership is without merit, for the true rule is that "though a corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with another where the nature of that venture is in line with the business authorized by its charter." 10.
Rationale: Being for a particular project or undertaking, when the BOD of a corporation evaluate the risks and responsibilities involved, they can more or less exercise their own business judgment in determining the extent by which the corporation would be involved in the project and the likely liabilities to be incurred. Unlike in ordinary partnership arrangement which may expose the corporation to any and various liabilities and risks which cannot be evaluated and anticipated by the Board, the situation in a joint venture arrangement allows the Board to fully bind the corporation to matters essentially within the Board’s business appreciation and anticipation.
2. Ultra Vires Acts Ultra Vires Doctrine:
(Sec. 45, Corporation Code) 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.
a. Types of Ultra Vires Acts i.
Acts done beyond the powers of the corporation as provided for in law and or its AOI
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ii. iii.
Acts or contracts entered into in behalf of the corporation by persons who have no corporate authority Acts or contracts which are per se illegal as being contrary to law
b. Tests to Determine Ultra Vires Montelibano V. Bacolod Murcia Milling Co., Inc:
This case clarified the extent of the application of the ultra vires doctrine. At issue was the validity and binding effect on the corporation of an amended milling contract that granted favorable terms to planters. Although the amended milling contracts were approved by the BOD, it was interposed for the corporation that the resolution was null and void ab initio, being in effect a donation that was ultra vires, beyond the power of the corporate directors to adopt. The SC upheld the authority of the board acting for the corporation to modify the terms of the amended milling contract for the purpose of making its terms more acceptable to the other contracting parties. It gave the formula for determining the applicability of the ultra vires doctrine: "It is a question, therefore, in each case, of the logical relation of the act to the corporate purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, 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 incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not."
c. Cases Piovano v. Dela Rama Steamship:
In this case, the SC held that illegal acts of a corporation contemplate the doing of an act which is contrary to law, morals or public order, or contravenes some rules of public policy or public duty, and are, like similar transactions between individuals, void. Some acts or contracts cannot serve as basis of a court action, nor acquire validity by performance, ratification, or estoppel. On the other hand, ultra vires acts or those which are not illegal and void ab initio but are within the scope of the AOI, are merely voidable and may become binding and enforceable when ratified by stockholders. In other words, the ratification by the stockholders of an ultra vires act which is not illegal, cures the infirmity of the corporate act and makes it perfectly valid and enforceable, specially so if it is not merely executory but executed and consummated, and no creditors are prejudiced.
Luneta Motors v. AD Santos:
When the purpose clause of a corporation’s AOI has unwittingly used limiting words, such as describing its business as “transportation by water,” the Court will hold the corporation to such limited business and will refuse to construe the same to allow the corporation to engage in land transportation business.
Republic v. Acoje Mining:
The term ultra vires should be distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. It being merely voidable, an ultra vires act can be enforced or validated if there are equitable grounds for taking such action. Here it is fair that the resolution be upheld at least on the ground of estoppel.
Crisologo-Jose v. CA:
This case held that accommodation contracts on negotiable instruments executed in behalf of the corporation would not bind the corporation without previous board authorization. The issuance or indorsement of negotiable instruments in the name of the corporation without consideration and for the accommodation of another was deemed to be ultra vires, and the person who takes the instrument without knowledge of the
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accommodation nature thereof, cannot recover against a corporation which is only an accommodation party. This case stands as one of the few contemporary cases where the Court has upheld the defense of ultra vires as validly exempting liability on the part of the corporation for a contract entered into its name by an unauthorized officer. In that case, the payee of the check issued by the corporation as an accommodation party, was fully aware that the corporation was not receiving any benefit form the transaction and that the issuance of the check was not for the benefit of the corporation, and was therefore fully aware that the corporate signatories to the check had not been duly authorized by the BOD. Therefore, the principles of ratification by acceptance of benefits or the doctrine of apparent authority, nor the principle of estoppel espoused by the Court to undermine the defense of ultra vires were inapplicable to favor the payee as against the corporation since in this case, estoppel could not apply being fully aware of the lack of authority.
Harden v. Benguet Consolidated:
Here, the mining company, Benguet Consolidated Mining Company, in violation of the express prohibition of the then Corporation Law, held shares of stock in another mining corporation, the Balatoc Mining Company. The shareholders of the Balatoc Mining Company filed an action against Benguet Mining Company to annul the certificates of stock issued in favor of the latter, and to recover money collected by the latter from the arrangements. In upholding the dismissal of the complaint by the TC, the Court noted that although the contract between the 2 mining companies was illegal for contravening the Corporation Law, the statutory provision in question was adopted by the legislature with the intention that public policy should be controlling in the granting of mining rights. The Court said that the violation of the prohibition is such a nature that it can be proceeded upon only by way of a criminal prosecution, or by action quo warranto, which can be maintained only by the State. The Court observed that insofar are the parties were concerned, no civil wrong had been committed between them, and if public wrong had been committed, then the directors of Balatoc Mining Company and the plaintiff Harden himself, were the active inducers of the commission of that wrong. But more importantly, the Court observed: The contract, supposing it to have been unlawful in fact, has been performed on both sides, by the building of the Balatoc plant by the Benguet Company and the delivery to the latter of the certificate of 600,000 shares of the Balatoc Company. There is no possibility of really undoing what has been done. Nobody would suggest the demolition of the mill. The Balatoc Company is secure in the possession of that improvement, and talk about putting the parties in statu quo ante by restoring the consideration with interest, while the Balatoc Company remains in possession of what it obtained by the use of that money, does not quite meet the case. Also, to mulct the Benguet Company in many millions of dollars in favor of individuals who have not the slightest equitable right to that money is a proposition to which no court can give a ready assent. The lesson from this case therefore is that even when the corporate contracts are illegal per se, when only public or government policy is at stake and no private wrong is committed, the courts will leave the parties as they are, in accordance with their original contractual expectations.
d. Ratification of Ultra Vires Carlos v. Mindoro Sugar:
"When a contract is not on its face necessarily beyond the scope of the power of the corporation by which it was made, it will, in the absence of proof to the contrary, be presumed to be valid. Corporations are presumed to contract within their powers. The doctrine of ultra vires, when invoked for or against a corporation, should not be allowed to prevail where it would defeat the ends of justice or work a legal wrong.
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The defense of the ultra vires doctrine is by some courts regarded as an ungracious and odious one, to be sustained only where the most persuasive considerations of public policy are involved, and there are numerous decisions and dicta to the effect that the plea should not as a general rule prevail whether interposes for or against the corporation, where it will not advance justice but on the contrary will accomplish a legal wrong. The doctrine is that no performance upon either side can validate an ultra vires transaction or authorize an action to be maintained directly upon it. However, the great weight of authority in the state courts is to the effect that a transaction which is merely ultra vires and not malum in se or malum prohibitum although it may be made by the state a basis for the forfeiture of the corporate charter or the dissolution of the corporation, is, if performed by one party, not void as between the parties to all intents and purposes, and that an action may be brought directly upon the transaction and relief had according to its terms."
3.
Liability for Torts or Crimes a. For Torts PNB vs. CA, 83 SCRA 237 (1978)
In this case, it was shown that the PNB through the unreasonableness of its BOD in refusing to timely approve the lease of sugar quota allocation mortgaged with the bank, caused a borrower to lose the lease income it was to earn therefrom, which lease proceeds were more than enough to fully pay the loan obligation of the borrower with the bank. The LC found the bank, through unreasonable intransigence of its directors, as being guilty of torts under Art. 19 of the NCC. A corporation is civilly liable in the same manner as natural persons for torts, because "generally speaking, 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. All of the authorities agree that a principal or master is liable for every tort which he expressly directs or authorizes, and this is just as true of a corporation as of a natural person. A corporation is liable, therefore, whenever a tortious act is committed by an officer or agent under express direction or authority from the stockholders or members acting as a body, or, generally, from the directors as the governing body." Doctrinal pronouncement: A CORPORATION IS LIABLE THEREFORE, WHENEVER A TORTUOUS ACT IS COMMITTED BY AN OFFICER OR AGENT UNDER EXPRESS DIRECTION OR AUTHORITY FROM THE STOCKHOLDERS/MEMBERS ACTING AS A BODY, OR GENERALLY, FROM THE DIRECTORS AS THE GOVERNING BODY. NOTE: NOT EVERY TORTUOUS ACT COMMITTED BY AN OFFICER CAN BE ASCRIBED TO THE CORPORATION AS ITS LIABILITY, for it is unreasonable to presume that in the granting of authority by the corporation to its agent, such a grant did not include a direction to commit tortuous act against 3rd parties. ONLY WHEN THE CORPORATION HAS EXPRESSLY DIRECTED THE COMMISSION OF SUCH TORTUOUS ACTS, WOULD THE DAMAGES RESULTING THEREFROM COULD BE ASCRIBED.
b.
Criminal Liability People vs. Tan Boon Kong, 54 PHIL 607 (1930)
In this case, the TC dismissed an information filed against the general manager of a corporation for violation of the requirement under the provisions of the then Administrative Code, for corporations to make and file true returns of their receipts and sales on the ground that the offense charged must be regarded as committed by the corporation and not of its officials or agents. The TC recognized and applied the separate juridical personality of the corporation in the application of the criminal statute for acts done for and in behalf of the corporation. On appeal, the SC brushed aside the defense of separate juridical personality of a corporation by an officer who seeks to avoid criminal liability arising from a violation of the law for transactions done in behalf of the corporation. The Court’s reasoning was in the line of piercing the doctrine that the veil of corporate fiction cannot be used to avoid penalty imposable for committing a criminal offense.
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Doctrinal pronouncement: THE VEIL OF CORPORATE FICTION CANNOT BE USED TO SHIELD THE INDIVIDUAL ACTORS IN THE CRIMINAL ACT, EVEN THOUGH WHEN THEY DO THE CRIMINAL ACT FOR OR IN BEHALF OF THE CORPORATION THEY REPRESENT. Underlying reasons for doctrine: for SOCIAL ORDER: criminals can hide behind the cloak of corporate fiction IMPOSSIBILITY of imposing penalty Being mere ARTIFICIAL BEING without a mind, the criminal intent as an essential element of a crime would be missing
Sia vs. People, 121 SCRA 655 (1983) Here, the President of the corporation had, on behalf of the corporation, entered into a trust receipt arrangement for the corporation with the bank. When the corporation failed to turn over the merchandise covered by the receipt or the proceeds from the sale thereof, a crime of estafa punishable under the RPC was filed against the President. The SC held that although the President acted in behalf of the corporation, under the circumstances it cannot be held liable for the crime. Doctrinal pronouncement (vis Tan Boon Kong case): A CORPORATE OFFICER CAN ONLY BE HELD LIABLE FOR THE CRIME COMMITTED BY OR IN BEHALF OF A CORPORATION ONLY IN CASES WHEN THE CORPORATION WAS DIRECTLY REQUIRED BY LAW TO DO AN ACT IN A GIVEN MANNER AND THE SAME LAW MAKES THE PERSON WHO FAILS TO PERFORM THE ACT IN THE PRESCRIBED MANNER EXPRESSLY LIABLE CRIMINALLY.
c.
Moral Damages ABS-CBN vs. CA (G.R. No. 128690 [January 1999])
Moral damages are in the category of an award designed to compensate the claimant for actual injury suffered. and not to impose a penalty on the wrongdoer. 62 The award is not meant to enrich the complainant at the expense of the defendant, but to enable the injured party to obtain means, diversion, or amusements that will serve to obviate then moral suffering he has undergone. It is aimed at the restoration, within the limits of the possible, of the spiritual status quo ante, and should be proportionate to the suffering inflicted. The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and having existence only in legal contemplation, it has no feelings, no emotions, no senses, It cannot, therefore, experience physical suffering and mental anguish, which call be experienced only by one having a nervous system. 65 The statement in People v. Manero 66 and Mambulao Lumber Co. v. PNB 67 that a corporation may recover moral damages if it "has a good reputation that is debased, resulting in social humiliation" is an obiter dictum. The claims for moral and exemplary damages can only be based on Articles 19, 20, and 21 of the Civil Code.
Filipinas Broadcasting vs. AMEC-BCCM (GR No. 141994 [2005]) II.
FINANCIAL STRUCTURE - Debt securities- investment -
where the investor places no stake in the corporate operations and his right are based on contract Equity securities – investment where the investor clearly undertook to place their investment to the risk (success or loss) of the operations of the corporations
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DEBT SECURITIES INVESTMENT WITH NO RISK Investor extends loan or debt to the corporation but only looks at the financial conditions and operation of the corporation as a means of gauging the ability of the corporation to pay back the loan at the specified period. NO PARTICIPATION IN INCOME EARNED Investor can only demand the stipulate fixed return of his investment even if by the use of the loan he extended, the enterprise is able to reap huge profits PRIMARY LEGAL PREFERENCE IN PAYMENT OF CORPORATE PROPERTIES Investor’s rights is based on contract, thus the corporate venture must in case of insolvency, devote and prefer all corporate assets towards the payment of its creditors Investor can demand corporation to pay back the loan at the specified period
EQUITY SECURITIES INVESTMENT WITH RISK Investor places his investment ready and willing to take a risk with management’s style of operating the affairs of the corporation (i.e., can receive dividends, has voting rights, etc.) WITH PARTICIPATION IN ALL INCOME EARNED BY THE VENTURE
SECONDARY PREFERENCE Since they took a risk, investors can only receive a return of their investment only from the remaining assets of the venture, if any, after the payment of all liabilities to creditors. Investment in the corporation is generally non-withdrawable for as long as corporation remains a goingconcern (not dissolved)
A. DEBT SECURITIES – Note differences of debt securities and equity securities Generally - Lirag Textile Mills, Inc., vs. SSS (GR No. L-33205 [1987])
1.
Authority to Issue Debt Securities - Power to incur, create or increase bonded indebtedness (Section 38 of the Corporation Code)
Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. – Both express and implied: A business corporation in the absence of restriction may borrow money whenever the necessity of its business so requires and issue security or customary evidence of debt such as bonds, mortgages and or notes. corporations are presumed to incur or create liabilities as part of their normal operations of the business and in pursuit of the purpose of the corporation
REQUIREMENTS: 1. 2.
3.
majority vote of the board of directors/trustees at a stockholder's meeting duly called for the purpose two-thirds (2/3) vote of the outstanding capital stock/members --- the requirement of 2/3 vote of the OCS/Members is to ensure that the BOD/BOT cannot alone bind the corporation in this financial matter
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4.
Written notice: -
Proposal for the increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness the time and place of the stockholder's must be addressed to each stockholder/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
2.
Types of Debt Securities - Unsecured Bonds - Secured Bonds - Income Bonds - Convertible Bonds - Callable Bonds
B.
EQUITY SECURITIES Generally - Garcia vs. Lim Chu Sing, 59 PHIL 562
Garcia v. Lim Chu Sing: A share of stock or certificate is not an indebtedness to the owner or evidence of indebtedness and therefore is not a credit. Stockholders as such are not creditors of the corporation.
1. a.
Issuance of Shares Certificate of Stock (Section 63 of the Corporation Code)
Section 63. Certificate of stock and transfer of shares. – capital stock of stock corporations shall be divided into shares for which certificates shall be issued REQUIREMENTS: 1. 2. 3. 4.
signed by the president or vice president countersigned by the secretary or assistant secretary sealed with the seal of the corporation shall be issued in accordance with the by-laws.
Nature of the Shares of stock so issued: personal property thus may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. RULES AS TO VALIDITY OF TRANSFER:
1. Transfer valid only between parties if not recorded in the books of the corporation 2. Transfer valid as against 3rd persons if recorded in the books of the corporation Records must show: -
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.
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3.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation
b.
Pre-Emptive Rights (Section 39 of the Corporation Code)
Section 39. Power to deny pre-emptive right.
v.
vi. vii.
viii.
Definition: It is the common law right granted to the stockholders of a corporation to be granted the first option to subscribe to any opening of the unissued capital stock or to any increase of the authorized capital stock of the corporation. Coverage: Extends to all issues or dispositions of shares of any class unless denied by the AOI or an amendment thereto Exceptions to the rule: Shares to which right not available (1) Shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public (2) Shares to be issued in GF with the 2/3 approval of outstanding capital stock in exchange for property needed for corporate purposes (3) Shares to be issued in GF with the 2/3 approval of the outstanding capital stock in payment for previously contracted debts Rule on remaining unsubscribed shares: If the shares corresponding to one stockholder are not subscribed or purchased by him within the period fixed for the exercise of his pre-emptive right, it does not follow that said shares should be again offered on a pro-rata basis to stockholders who took advantage of their right of pre-emption. *This is because as long as they exercise their pre-emptive rights, their relative and proportionate voting strength will not be affected adversely even if the shares mentioned are purchased by only some of them PRE-EMPTIVE RIGHT IS WAIVEABLE- Waived shares need not be offered again on a pro-rata basis to stockholders who took advantage of their right of pre-emption. Waived shares may be offered to nonstockholders on a first come-first serve basis.
c.
Consideration (Section 62 of the Corporation Code)
Section 62. Consideration for stocks. Rules:
1. Stocks shall not be issued for a consideration less than the par or issued price thereof.
2. Shares of stock shall not be issued in exchange for promissory notes or future service Consideration for the issuance of stock may be any or a combination of any two or more of the following:
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1. Actual cash paid to the corporation; it is not required that there be actual payment of the cash in order to make the agreement valid and binding; subscription contract is a consensual contract valid and binding upon the meeting of the minds 2. Property, tangible or intangible(patents of copyrights), 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 valuation thereof shall initially be determined by the incorporators or the BOD, subject to approval by the SEC – corporation cannot lawfully issue stock for property which its charter does not authorize it to acquire or for property acquired for an unauthorized purpose 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.
National Exchange vs. Dexter, 51 PHIL 601 National Exchange v. Dexter: No corporation shall issue stock or bonds except in exchange for actual cash paid to the corporation or for property actually received by it at a fair valuation equal to the par value of the stock or bonds so issued. All subscribers- whether has subscribed before incorporation or after incorporation are all bound to pay full par value in cash or its equivalent and any attempt to discriminate in favor of one subscriber by relieving him of this liability wholly or in part is forbidden. If it is unlawful to issue stock otherwise than stated, then it is self-evident that a stipulated as that now under consideration in a stock subscription is illegal for the stipulation obligated the subscriber to pay nothing for the shares except as dividends may accrue upon the stock. In the contingency that dividends are not paid, there is no liability at all. This is a discrimination in favor of the particular subscriber and hence the stipulation is unlawful.
1. Par Value
one with a specific money value fixed in the AOI and appearing in the certificate of stock for each share of stock of the same issue Note: The purpose of par value is to fix the minimum issue price of the shares thus assuring creditors that the corporations would receive a minimum amount for its stock. It is not usually the price at which investors buy or sell the stock
2. No Par Value one without any stated or par value appearing on the face of the certificate of stock Issued price of no par value shares may be fixed in the: (Section 62) 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 the purpose
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Note: A corporation may issue no par value only or together with par value shares. No par value stockholders have the same rights as holders of par value stock.
d. Payment of the Balance of the Subscription (Sections 66 and 67 of the Corporation Code) Section 66. Interest on unpaid subscriptions – Value of the balance + interest on all unpaid subscription from the date of subscription – Rate of interest is either the rate included in the by-laws or at the legal rate (12% per annum) – Interest will reckon from the date of subscription until full payment thereof Section 67. Payment of balance of subscription (1) Date specified in the contract of subscription (2) In the absence of any specified date in the contract of subscription, on the date stated in the CALL* made by the BOD The contract of subscription or call may require the payment of the entire unpaid subscription or only a certain percentage thereof. - BUT! FAILURE TO PAY WITHIN SUCH DATE SHALL (1) RENDER THE ENTIRE BALANCE DUE AND PAYABLE + INTERESTS (2) DELINQUENCY SALE IF WITHIN 30 DAYS FROM SUCH DATE NO PAYMENT IS MADE CALL- a declaration officially made by a corporation usually expressed in the form of a resolution of the BOD requiring payment of all or a certain prescribed portion of a subscriber’s stock subscription. Must be uniform with respect to all holders of the class of shares on which it is made When call not necessary:
(1) When, under the terms of the subscription contract, subscription is payable, not upon call, but immediately or on a specified day, or when it is payable in installments at specified times (2) If the corporation becomes insolvent, which makes the liability on the unpaid subscription due and demandable regardless of any stipulation to the contrary in the subscription agreement
Lingayen Gulf v. Baltazar: The law requires that notice of any call for the payment of unpaid subscription should be made not only personally but also by publication. Exception is if the corporation is insolvent in which case, the payment is immediately demandable.
e.
Liability for Unpaid Subscriptions
*
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Keller v. COB Group:
Stockholder is personally liable for the financial obligations of a corporation to the extent of his unpaid subscription, even when the corporation itself, which was the main creditor for the obligations, was not shown to be insolvent. This presumes that the liability of the stockholders for unpaid subscription to corporate obligations is direct and they can be sued in their personal capacity with the corporation even when the latter is still very much solvent.
f. Delinquency Subscription (Sections 68 to 71 of the Corporation Code) Section 68. Delinquency Sale BOD thru a resolution may order the sale of delinquent stocks Date of sale: 30-60 days from the date the stocks became delinquent Notice of resolution sent to all delinquent stockholders personally or by registered mail Publication of resolution for 2 consecutive weeks in a newspaper of general circulation in the locality where the corporation’s principal office is located Delinquency is achieved if stockholders do not pay within 30 days from the date specified in the contract of subscription or on the date mentioned in the call In the absence of any bidders, the corporation may purchase for itself the delinquent stock. In such case the delinquent subscriber shall also be released from liability with regards to his subscription which is deemed fully paid. Of course, the purchase must be made out of the net earnings in view of the TFD. Section 69. When sale may be questioned (Grounds) (3) Irregularity or defect in the notice of sale (4) Irregularity or defect in the sale itself Requisites: 1. 2.
Plaintiff pays to the party holding the stock the sum for which the same was sold + interest from the date of sale at the legal rate Complaint must be filed within 6 months from the date of sale
Section 70. Court action to recover unpaid subscription –Law does not preclude corporations to institute actions before the court to recover General rule is a corporation may not maintain a suit for the enforcement of unpaid subscription without first making a call as provided by law Note: Judicial remedy is limited to the amount of the unpaid subscription with interest, costs and expenses. Therefore, the corporation cannot recover any other claim against the subscriber. Other remedies 1. Judicial action 2. Extrajudicial sale at public auction (Delinquency sale) 3. Collection from cash dividends and withholding of stock dividends Section 71. Effect of Delinquency (1) Disqualifies the stockholder to be voted for or be entitled to vote or to representation at any stockholder’s meeting (2) Disqualifies the stockholder to exercise any rights of a stockholder except the right to receive dividends until and unless he pays the
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amount due on his subscription with accrued interest, cost and expenses of advertisement if any The only remaining right to a delinquent stockholder is the right to receive dividends. But the cash dividend due shall first be applied to the unpaid balance, while stock dividend shall be withheld until the unpaid balance is fully paid.
Phil. Trust v. Rivera: It is an established doctrine that subscriptions to the capital of
the corporation constitute fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid subscription in order to realize assets for the payment of its debt.
A corporation has no power to release an original stockholder from their obligation to pay his shares. In the case before us, the resolution releasing the stockholder from the obligation to pay 50% of their respective subscriptions was an attempted withdrawal of so much capital from the fund from which the company’s creditors were entitled ultimately to rely and having been effected without statutory requirements was wholly ineffectual. Miranda v. Tarlac Rice Mill: A stock subscription is a contract between the
corporation and the subscriber and the courts will not enforce it for or against either. A corporation has no legal capacity to release a subscriber to its capital stock from the obligation to pay for his shares and any agreement to this effect is invalid.
De Silva v. Aboitiz: The BOD has discretionary power to adopt the provision of the bylaws and or to avail itself, for the same purpose of collecting for payment of the unpaid subscription, of either of 2 remedies under the Corporation Law: (a) To put up and stock for sale and dispose of it for the account of the delinquent subscriber (b) Action in court
Fua Cun v. Summers: In the absence of special agreement to the contrary, a
subscriber for a certain number of shares of stocks does not, upon payment of the ½ of the subscription price become entitled to the issuance of certificates for ½ of the number of shares subscribed for the subscriber’s right consists only in equity entitling him to a certificate for the total number of shares subscribed for by him upon payment of the remaining portion of the subscription price.
Nava v. Peers Marketing: As a rule, the shares which may be alienated are those which are covered by certificates of stock. As prescribed under the Corporation Law, shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. Title may be vested in the transferee by delivery of the certificate with a written assignment or indorsement thereof. There should be compliance with the mode of transfer prescribed by law.
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In this case no stock certificate was issued to Po. Without the certificate, which is the evidence of the ownership of corporate stock, the assignment of corporate shares is effective only between the parties to the transaction. The delivery of the stock certificate which represents the shares to be alienated, is essential for the protection of both the corporation and its stockholders.
Garcia v. Suarez: If the subscription agreement did not mention when the payment of the balance shall be demandable, it is not payable at the moment of the subscription but on a subsequent date which may be fixed by the corporation. In other words, prescriptive period begins to run only from the time the BOD declares that the balance are due and demandable. The BOD of the corporation not having declared due and payable the stock subscribed by Suarez, the prescriptive period of the action for the collection thereof only commenced to run from June 18, 1931 when Garcia, in his capacity as receiver and in the exercise of the power conferred upon him by the corporation law demanded payment from Suarez to pay the balance of his subscription. The present action was filed on Oct. 10, 1935 therefore the defense of prescription does not lie. Moreover, a corporation or its officers have no legal capacity to release a subscriber to its capital stock from the obligation to pay for his shares, and any agreement to this effect is invalid.
g. Trust Fund Doctrine (Sections 43 and 122 of the Corporation Code) Section 43. Power to declare dividends Rule is that dividends shall be paid only out of the unrestricted earnings of the corporation Unrestricted retained earnings is the difference between the total present value of its assets after deducting losses and liabilities and the amount of he capital stock Rationale for the rule is that capital stock of the corporation is a trust fund for the security of creditors and cannot be distributed to their prejudice to the stockholders as dividends. For purposes of the general rule, the capital or capital stock which cannot be impaired or depleted by dividends is not the entire assets of the corporation (assets may include consideration for stocks issued with par value and no par value). Rather it is the capital referring to the net assets directly or indirectly contributed by the stockholders as consideration for stocks issued to them upon the basis of their par or issued value. The Code makes it clear that with respect to no-par value shares, the entire consideration received for the same shall be treated as capital and shall not be available for distribution as dividends. Section 122. Corporate Liquidation Order of Distribution of Assets – Under the law, such distributive shares of the assets of the corporation upon its dissolution are not available for general distribution among the stockholders. The reason for this rule is that upon the dissolution of a corporation, the assets become a trust fund with the title of the
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stockholders becoming an equitable right to a distributive share therein, and that the stockholders, in respect of the liquidating dividend, are not mere creditors, but the money is set apart for them, and is therefore not available for general distribution.
1. 2. 3. 4.
2.
When the corporation is insolvent, the creditors of the corporation are entitled to have all its assets distributed first among them according to their rights and priorities. This is in accordance with the TFD. Stockholders/members, directors/trustees and officers of the corporation who are also creditors of the corporation Stockholders/members in proportion to their shareholdings in absence of any provision to the contrary Creditor or stockholder who is unknown or cannot be found shall be escheated to city or municipality where such assets are located.
Classes of Shares a. Code)
Classification of Shares (Section 6 of the Corporation Preferred Shares –stock which entitles the holder thereof
1.
to certain preferences over the holders of a common stock
-Participating and Non-participating i.
Participating preferred shares- entitles the holders to participate with the holders of common shares in the retained earnings after the amount of stipulated dividend has been paid to the preferred shares This is the share which gives the holder thereof not only the right to receive the stipulated dividends at the preferred rate but also to participate with the holders of common shares in the remaining profits pro rate after the common shares have been paid the amount of the stipulated dividend at the same preferred rate. ii. Non participating preferred shares- entitle holders of preferred shares only t o the stipulated preferred dividends and no more This is the share entitles the holder thereof to receive the stipulated preferred dividend and no more. The balance, if any, is given entirely to the common stocks.
-Cumulative and Non-Cumulative i.
Cumulative – entitle the holders thereof to payment not only of current dividends but also of back dividends not previously paid, when and if dividends are declared, to the extent agreed upon, before the holders of the common shares are paid In other words, if the stipulated dividend is not paid in a given year, it shall be added to the dividend which shall be due the following year and the accumulated dividends must be paid to the holder of
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said preferred share before any dividend may be paid to the holders of the common stock. ii. Non Cumulative- entitle the holders merely to the payment of current dividends that are paid to the extend agreed upon before the holders of common shares are paid In other words, if dividends are not declared in a given year, the right to the dividend for that particular year is extinguished.
2. Redeemable Shares (Section 8 of the Corporation Code)- shares, usually preferred, which by its terms is redeemable at a fixed date or at the option of either the issuing corporation or the stockholder or both at a certain redemption price (a) May only be issued when expressly so provided in the AOI; In the absence of provisions on redemption of preferred shares in the AOI or by laws, it is deemed irredeemable. (Common shares are never redeemed)
(b) Upon the expiration of the redemption period fixed, said shares may be taken up or purchased by the corporation, regardless of the existence of unrestricted retained earnings in the books of the corporation (different from the case under Sec.41) – but redemption may not be made if the corporation is insolvent or if such redemption would cause insolvency or inability of the corporation to meet its debt as they mature. (c) Terms and conditions affecting such shares must be contained in the AOI and certificate of stock. Except as otherwise provided therein, the redemption rests entirely with the corporation, and the stockholder is without any right to either compel or refuse the redemption of his stock
Republic Planters vs. Hon. Agana (GR No. 51765 [1997]): When the certificates of stock recognizes redemption, but the option to do so is clearly vested in the corporation, the redemption is clearly the type known as “optional” and rest entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock.
3.
Founder’s Shares (Section 7 of the Corporation Code)
– shares issued to the organizers and promoters of a corporation in consideration of some supposed right or property (a) Owners have special rights and privileges, i.e., preference in the payment of dividends (b) Has exclusive right to vote and be voted for in the election of directors but such right is limited only for 5 years and must be approved by the SEC, the period to commence from the date of said approval
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4. Treasury Shares (Section 9 of the Corporation Code) – share which has been lawfully issued by the corporation and fully paid for and later reacquired by it thru purchase, redemption, donation, forfeiture or other lawful means. Such shares may again be disposed of for a reasonable price fixed by the BOD. They are regarded as property acquired by the corporation which may be re-issued and resold by it at a price to be fixed by the BOD.
Commissioner v. Manning: Treasury shares are issued shares but being in the treasury, they do not have the status of outstanding shares.
b. Watered Stocks (Section 65 of the Corporation Code) – Stock issued for no value at all or for a value less than its equivalent either in cash, property, shares, stock dividends, or services
The liability of consenting director or officer for the water in the stock is SOLIDARY with the stockholder concerned. This means either of them can be held liable for the whole amount of the difference between the fair value received at the time of the issuance of the stock and the par or issued value of the same.
c. Quasi-Reorganization (Section 38 of the Corporation Code) -Reduction for Capital Stock – where capital stock is impaired and a reduction is made merely to meet that impairment, there will be no distribution of assets among the shareholders.
-Stock Splits – each of the issued and outstanding shares is simply broken up into a greater number of shares, each representing a proportionately smaller interest in the corporation
The usual purpose of a stock split is to lower the price per share to a more marketable price and thus increase the number of potential shareholders. They encourage investment.
C. DIVIDENDS AND OTHER DISTRIBUTIONS Right to Dividends (Sec. 43 of the Corporation Code) BOD shall declare the dividends from the unrestricted retained earnings of the corporation which shall be payable in
1.
cash dividends
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Any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses No ratification vote needed 2. 3.
property dividends stock dividends Stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid Approval vote 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.
General rule: Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock Exceptions: (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.
1. Types of Dividends and Other Distributions Nielson and Co. v. Lepanto Consolidated:
Since the right to receive dividends is peculiar only to stockholders, the dividends may be distributed only to stockholders of the corporation. In this case, Lepanto contended that the payment to Nielson of stock dividends as compensation for its services under their management contract is a violation of the then Corporation Law and that it was no and it could not be, the intention of the parties that the services of Nielson should be paid in shares of stock taken out of stock dividends declared by Lepanto. The Court held that stock dividends cannot be issued to a person who is not a stockholder in payment of services rendered. The remedy was to have Lepanto pay for the value of the shares of stock.
2. Legal Restrictions on Dividends and Other Distributions 3. Declaration and Payment of Dividends CIR v. Court of Appeals: Both common and preferred shares are part of the corporation's capital stock. Both stockholders are no different from ordinary investors who take on the same investment risks. Preferred and common shareholders participate in the same venture, willing to share in the profits and
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losses of the enterprise. Moreover, under the doctrine of equality of shares-- all stocks issued by the corporation are presumed equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent on such differences. Reclassification of shares does not always bring any substantial alteration in the subscriber's proportional interest. But the exchange is different-- there would be a shifting of the balance of stock features, like priority in dividend declarations or absence of voting rights. Yet neither the reclassification nor exchange per se, yields realize income for tax purposes. A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution.
Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange for property, whether or not the acquired stock is cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in business as before. When the corporation redeems shares coming out from those issued upon the original capital subscriptions upon establishment of the corporation or from initial capital investment in an existing enterprise, its redemption to the concurrent value of acquisition would not be subject to tax as it is not income but a mere return of capital. On the contrary, if the redeemed shares are from stock dividend declarations other than as initial capital investment, the proceeds of the redemption is additional wealth, for it is not merely a return of capital but a gain thereon, and therefore taxable. 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.
4. Liability for Improper Dividends and Distributions Steinberg v. Velasco:
In determining the legality of declared dividends, the existence of unrestricted retained earnings alone cannot be the test. In this case, the BOD passed and implemented a resolution authorizing the purchase of a substantial portion of shares of stockholders and the declaration of dividends of P3,000.00. At the time of the adoption of the resolution, the corporation had a “surplus profit” of P3, 314.72 and had assets (account receivables) that far exceeded its liabilities. It turned out that the assets were practically worthless. The evidence indicated that the directors in adopting the resolution were either acting in BF or with the use of ordinary care would have determined the non-existence of surplus profit. In holding the directors of the corporation solidarily liable to corporate creditors to the extent of dividends paid out, the SC held that the existence of a “surplus profit” does not suffice but that the corporation should have an “actual bona fide surplus from which the dividends could be paid, and that the payment of them in full at that time would not affect the financial condition of the corporation. The directors of the corporation were held personally liable for causing the corporation to purchase their own shares of stock and declaring dividends, which because of the failure to take into consideration of worthless receivables, worked to the detriment of the creditors. The SC held that the directors did not act with diligence in taking the word of their chairman and not making an informed decision based on the facts then available to them and on not relying on the other documents available to them.
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Creditors of a corporation have the right to assume that so long as there are debts and liabilities, the BOD of the corporation will not use its assets to purchase its own stock or to declare dividends to its stockholders when the corporation is insolvent. In other words, this case is a clear indication that only dividends declared from a bonafide unrestricted retained earnings is legally permissible. Thus, although a corporation’s balance sheet provides for an unrestricted earnings, if the figure does not register the true value of the assets (such as when worthless assets have not been written off), dividends declared on that basis would be illegal. The remedy therefore available in case of illegal distribution of dividends: the directors who are in BF or are grossly ignorant of their duties shall be held solidarily liable for the reimbursement of the amount declared as dividend.
D. TRANSFER OF INVESTMENT SECURITIES Ownership of Securities Right to Issuance Gen. Rule: (Section 64) full payment of subscription = certificate of stock* Exception: Partial payment = certificate of stock covering only the number of stocks which can be paid by the amount
This is allowed despite Sec. 64 because the subscriber is still not relieved of his obligation thereby causing no prejudice to the corporation or the corporate creditors, which is the evil avoided by Sec. 64. The contrast theory however is the indivisible nature of a subscription
Exception to the Exception: Baltazar v. Lingayen Gulf: Exception cannot be adopted by the corporation if it is prohibited in the by laws. The SC in this case had the occasion to rule upon the old corporate practice that covered procedure of a corporation in issuing certificates of stock to its individual subscribers for unpaid shares of stock. In order to maintain their control of the corporations, defendant, who constituted a majority of the holdover BOD passed a resolution prohibiting unpaid shares of stock from voting. This resolution was held invalid by the TC, which ruled that if the entire subscribed shares of stock were not paid, the paid shares of stock may not be deprived of the right to vote. The SC held that since it was practice and procedure of the corporation to issue certificates of stock to its individual subscribers, it may not take away the right to vote granted by such certificates. Also unless prohibited by its by-laws, certificates of stocks may be issued less than the number of the shares subscribed for, provided that the par value of each of the stocks represented by each of the certificates has been paid. *
For unpaid subscription= payment of the balance + interests + expenses (in case of delinquent shares)
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A. Stockholders of F. Guanzon v. Register: While shares of stock constitute personal property to the stockholder, they do not represent property or claims on the assets of the corporation. A share of stock only typifies an aliquot part of the corporation’s property, or the contingent right to share in its proceeds to that extent when distributed according to law and equity, but its holder is not the owner of any part of the capital of the corporation; nor he is entitled to any possession of any definite portion of its property or assets, and the stockholder cannot be treated as a co-owner of tenant in common of the corporate property.
B.
Joint Ownership – stocks owned by 2 or more persons
Right to vote- an incident of ownership, cannot be deprived of without consent
General Rule: Consent of all co-owners necessary to vote Exception:
1. Written proxy executed by the joint owners authorizing any or some of them or any other person to vote on their behalf
2. Shares are owned in an “and/or capacity” in which case any one of the joint owners can vote or appoint a proxy
Pledgor, Mortgagor, and Administrators Representative voting of Shareholders/Members 1. Executors, administrators, receivers and other legal representatives duly appointed by the court may attend and vote without the need of a written proxy 2. Pledgees or mortgages of stocks can attend meetings and vote provided the true owner of the stocks expressly authorized such right in writing and is recorded in the books
The written authorization is necessary because the pledgor or mortgagor remains the true owner of the shares thus his right to vote still vests in him unless he expressly delegates it.
Pooling Agreements- agreement by which two or more stockholders agree that their shares shall be voted as a unit (usually concerned with election of directors to gain control in management)
The parties thereto remain the owners of their stocks with a right to vote them although they each bound themselves to vote in accordance with the decision of the majority of the pool.
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Enforcement of pooling agreement must be by imposition of hefty liquidated damages for non-compliance since such agreement covers personal obligations (to do) and action for specific performance shall not lie due to the public policy against involuntary servitude.
-Control and Board Discretion Stock and Transfer Book* – best evidence to establish ownership of stocks unless proven otherwise Monserrat v. Ceron:
In this case, the registered owner of shares endorsed and delivered the stock certificated of shares under the terms of a Deed of Transfer conveying to the transferee the usufruct over the shares with express prohibition under the deed, “the sellng, mortgaging, encumbering, alienating or otherwise exercising any act implying absolute ownership of all or any of the shares in question, the transferor having reserved for himself and his heirs the right to vote derived from said shares of stock and to recover ownership thereof at the termination of the usufruct.” A new certificate was issued in the name of the transferee and the deed was noted in the stock and transfer book of the corporation. Subsequently, the transferee, in violation of the prohibition in the deed, mortgaged the shares of stock, without informing the mortgagee of the terms of the deed. When the mortgaged thereupon sought to enforce the mortgage on the shares, the transferor invoked the provisions of the deed as binding upon the mortgagee of the shares, the transferor invoked the provisions of the deed as binding upon the mortgagee of the shares. The Court, in reaching its conclusion, relied upon the provision of the then Corporation Law (now Sec. 63 of the Corporation Code), and noted that the provisions “do not require any entry except of transfers of shares of stock in order that such transfers may be valid as against 3rd persons.” In other words, the Court was of the position that the provisions of Sec. 63 holding as valid transaction involving shares of stock only as between the parties thereo and void as to the other can only refer to “transfers” or dispositions and not to encumberances or security arrangements involving shares of stock. The Court therefore held that the “chattel mortgage is not the transfer referred to in Sec. 63 of the Corporation Code, which transfer should be entered and noted upon the books of the corporation in order to be valid, and which, as has already been said, means the absolute and unconditional conveyance of the title and ownership of a share of stock. It held that when it comes to mortgages and other encumberances covering shares of stock, ”which are not a complete and absolute alienation of the dominion and ownership thereof, its entry and notation upon the books of the corporation is not a necessary requisite to its validity. It clearly therefore implies that a notation in the stock and transfer book covering transfer of ownership or dominion over shares, binds the world even when no actual notice thereof is obtained by 3rd parties dealing with the share, and that the notation of such disposition or transfer must be made in the stock and transfer book, not only for notice, but also validity of the transition. Whereas, when it comes to encumberances of shares of stock, not only is the notation thereof *
Stock and Transfer Book 1. Contents: a. All stocks in the name of the stockholders alphabetically arranged b. Installment paid + date of payment of installment and unpaid subscription c. Annotation on every alienation, sale, transfer or stock made d. Other entries that the by-laws may provide 2. Where kept a. Principal office OR b. Office of its stock transfer agent (licensed by SEC) 3. Open for inspection to any director or stockholder at reasonable hours on business days 4. Corporate secretary- authorized to make transfers if accompanied by a certification from the BIR that the taxes (estate/donor’s) have been paid 5. Books to be set-up and registered with SEC within 30 days after receipt of their certificate of incorporation
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in the stock and transfer book not necessary for its validity, but the notation thereof in the stock and transfer book would not even bind the world or 3rd parties dealing with the shares without actual knowledge.
Rule: Transfers which should only be noted in the books are those which are complete and absolute alienation of dominion or ownership (NOTATION IS NECESSARY TO BE VALID TO 3RD PERSONS) For incomplete transfers: 1. Their entry and notation is not a requisite to their validity 2. Notation would not bind the world or 3rd parties dealing with the shares without actual knowledge C. Chua Guan v. Samahang Magsasaka:
The registered owner mortgaged the shares and the mortgagee not only registered the mortgage with the registry of deeds, but also in the books of the corporation. When the mortgagee foreclosed on the mortgage, the officers of the corporation refused to issue new certificates in the name of the mortgagee as the winner bidder thereof on the auction shale, on the ground that before the mortgagee made his demand upon the corporation, writs of attachment had been served upon and registered in the books of the corporation against the mortgagor, which the mortgagee refused to have annotated in the new certificated to be issued upon him.
To resolve the issue where the mortgage took priority over the writs of attachment, the Court had to determine whether the registration of the chattel mortgage in the registry of chattel mortgages in the officer of the register of deeds was equivalent to constructive notice to the attaching creditors. The Court first settled the issue by affirming the Monserrat doctrine that the registration of the said chattel mortgage in the office of the corporation was not necessary and had no legal effect. Taking its cue from the Chattel Mortgage Law, the Court held: The practical application of the Chattel Mortgage Law to shares of stock of a corporation presents considerable difficulty and we have obtained little aid from the decisions of other jurisdictions because that form of mortgage is ill suited to the hypothecation of shares of stock and has been rarely used elsewhere. In fact, it has been doubted whether shares of stock in a corporation are chattels in the sense in which that word is used chattel mortgage statutes. It is a common but not accurate generalization that the situs of shares of stock is at the domicile of the owner. The term situs is not one of fixed of invariable meaning or usage. Nor should we lose sight of the difference between the situs of the shares and the situs of the certificates of shares. The situs of shares of stock for some purposes may be at the domicile of the owner and for others at the domicile of the corporation; and even elsewhere. It is a general rule that for purposes of execution, attachment and garnishment, it is not the domicile of the owner of a certificate but the domicile of the corporation which is decisive. By analogy with the foregoing and considering the ownership of shares in a corporation as property distinct from the certificates which are merely the evidence of such ownership, it seems to us a reasonable construction of section 4 of Act No. 1508 to hold that the property in the shares may be deemed to be situated in the province in which the corporation has its principal office or place of business. If this province is also the province of the owner's domicile, a single registration sufficient. If not, the chattel mortgage should be registered both at the owner's domicile and in the province where the corporation has its principal office or place of business. In this sense the property mortgaged is not the certificate but the participation and share of the owner in the assets of the corporation.
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General Rule: DOUBLE REGISTRATION to produce legal effect 1. Register of deeds in the province of the owner’s domicile 2. Register of deeds in the province of the corporation’s principal office Exception: Single registration if the domicile and principal office is the same In case of pledges, to affect third parties, it is enough that the date and description of the shares pledged appear in a public instrument (Art. 2096, Civil Code)
Lost and Destroyed Certificates 1. Corporation can still issue new certificates even with noncompliance of requirements in Section 73?* YES, provided that the corporation is certain as to the real owner of the shares to whom the new certificates shall be issued. It would be an internal matter for the corporation to find measures in ascertaining who are the real owners of stock. *
Procedural Requirements for Lost/Destroyed Certificates
1.
2.
3. 4.
Registered owner/legal rep file an affidavit with the corporation + all other information or evidence that may be necessary Contents: a. Circumstances how the certificates were lost/destroyed b. No. of shares represented by each certificate c. Serial nos. of the certificates d. Name of the issuing corporation Corporation shall publish notice Newspaper of general circulation Published in the principal office Once a week for 3 consecutive weeks At the expense of the registered owner Contents: b. Name of registered owner c. Serial nos. d. No. of shares represented by each certificate Period to contest: One year from date of publication. Failure to do so means the right to contest is barred and corporation shall cancel and issue new certificates Issuance of new certificate a. If uncontested, after expiration of one year from date of publication unless registered owner files bond or other security as determined by the BOD b. If contested or an action is pending in court regarding ownership of the certificates, issuance shall be suspended until final decision of the court
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2. What can be the recourse against the corporation or its officers who issued new certificates pursuant to Sec. 73? No action can be brought against them except if it was attended by FRAUD, BAD FAITH, NEGLIGENCE on the part of the corporation or its officers. Transfer of Securities
Right to transfer shares of stock: Because they are personal property thus owner has absolute and inherent right to sell/transfer them
Transfer of Shareholding Uson v. Diosomito:
This case laid down the rule in our jurisdiction that under the language of Sec. 63 of the Corporation code (then Sec. 35), the failure to register a sale or transfer in the book of the corporation would render the sale invalid and not binding to all persons, including attaching creditors of the seller, thus: "We think the true meaning of the language is, and the obvious intention of the legislature in using it was, that all transfers of shares should be entered, as here required, on the books of the corporation. And it is equally clear to us that all transfers of shares not so entered are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to subsequent purchasers in good faith, and, indeed, as to all persons interested, except the parties to such transfers. 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." Here, the SC resolved the issue of whether a bona fide transfer of shares of a corporation, not registered or noted on the books of the corporation, would be valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditors had actual notice of said transfer or not. The Court held that transfer would be void. The Court, through Mr. Justice Bette, held that the language of the then Corporation Law was plain to the effect that the right of the owner of the shares of stock of a corporation to transfer the same by delivery of the certificate, whether it be regarded as statutory or common right, was limited and restricted by the express provision that "No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred."
Escano v. Filipinas Mining:
Escano obtained judgment in his favor against Salvosa, who was ordered to deliver to the former his escrow shares in the Filipinas Mining Corporation. A writ of garnishment was issued. However, before such judgment was rendered, Salvosa sold his escrow shares to Bengzon and then from Bengzon to Standard Investment of the Philippines. These transfers were not recorded. But Standard did manage to have it recorded in the books of Filipinas Mining Corporation 3 years after the writ of garnishment was issued. Later, Filipinas Mining issued the shares to Standard. The issue resolved by the SC was whether the issuance of the new certificates was valid as against the attaching creditor.
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The Court held that the requirements of registration applies to shares in escrow, and saw no valid reason for treating unissued shares held in escrow differently from issued shares insofar as their sale and transfer is concerned. But in holding so, this case seems to have authorized the recording in the stock and transfer book of transactions pertaining to shares over which no certificate of stock has been issued by the corporation, thus: But we see no valid reason for treating unissued shares held in escrow differently from issued shares insofar as their sale and transfer is concerned. In both cases the corporation is entitled to know who the actual owners of the shares are, and to object to the transfer upon any valid ground. Likewise, in both cases the possibility of fictitious or fraudulent transfers exists. The only reason advanced by the appellant for exempting the transfer of unissued shares from recording is that in case of unissued shares there is no certificate number to be recorded. But that is a mere detail which does not affect the reasons behind the rule. The lack of such detail does not make it impossible to record the transfer upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, and the number of shares transferred, which are the most essential data. The rationale for the Uson doctrine was explained here, where the Court enumerated the following reasons for holding sale/transfer of shares of stock valid only when registered in the book of the corporation: 3. To enable the corporation to know at all times who its actual stockholders (because mutual rights and obligations exist between the 2) 4. To afford the corporation an opportunity to object or refuse its consent to the transfer in case it has any claim against the stock sought to be transferred or for any other valid reason 5. To avoid fictitious or fraudulent transfers VALIDITY OF TRANSFERS
1) 2)
As between the parties- mere delivery and indorsement of owner As against 3rd persons – transfer be registered in the books of the corporation
Remedy if Transfer is Refused: MANDAMUS Hager v. Bryan: In this case, the Brya-Landon Company was the registered owner of shares of stock in the Visayan Electric Company. Later, it indorsed its certificates of stock to Hager. Hager brought his certificates to the Visayan Electric Company to transfer upon the company’s books the stocks under his name. The company secretary refused. Hagel files a case for mandamus to compel the registration. The SC held that the remedy of mandamus is unavailable under the facts of the case.
Mere indorsement in blank of certificate does not clearly indicate the registered owner’s wish to have the certificate cancelled and a new one issued in the name of the holder. To compel transfer, indorsement in blank of the certificate must be accompanied by either: 1. Express instructions of the registered owner to make such transfer to the indorsee 2. Power of attorney authorizing the transfer
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Batong Buhay v. CA: WHEN DAMAGES CANNOT BE RECOVERED In case of refusal of the corporation to issue new certificates, the claim for damages pertaining to the value of the shares could have sold at the stock market is considered speculative damage and cannot be recovered. (This only applies for publicly listed shares.) It is easy to say now that had private respondent gained legal title to the shares, it could have sold the same and reaped a profit of P5,624.95 but it could not do so because of petitioner's refusal to transfer the stocks in the former's name at the time demand was made, but then it is also true that human nature, being what it is, private respondent's officials could also have refused to sell and instead wait for expected further increases in value.
Won v. Wack Wack Golf Club: Prescription for Mandamus There is no fixed period for registering an assignment so the complaint cannot be barred by the Statute of Limitations. A stipulation on the stock certificate that the assignment thereof would not be binding on the corporation unless such assignment is registered in the books of the club as required under the by-laws, which does not provide when the registration should be made, this would mean that the cause of action and determination of the prescription would begin only upon demand for registration is made and not at the time of the assignment of the certificate. Validity of Restrictions* 1. Stipulations must not be illegal nor in restraint of trade and offends public policy (Lambert v. Fox) *
Guidelines: 1. Corporation is given power to regulate the transfer of share but not the power to restrict transfer (i.e., adoption of rules/regulations as to formalities and procedures in effecting transfers) 2. Restriction must appear in the AOI, by-laws, and certificate of stock to be valid Types of transfers 1. Right of first refusal: Stockholders who wish to sell/assign his shares must first offer to the corporation or to other existing stockholders of the corporation under reasonable terms and conditions. If corporation or stockholders fails or do not exercise their option, shares can now be offered to 3rd parties. 2. Right of first option: Grants corporation the right to buy the shares at a fixed price 3. Right of prior consent: Stockholder who wish to sell/dispose must obtain first the consent of the BOD or the stockholders = VOID 4. Buy-back agreement: Shares assigned to officers or employees under the condition that upon resignation or termination of their work, the corporation shall buy back the shares
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In 1911, the firm of John R. Edgar and Company found itself in such a financial condition that its creditors, including the defendant and plaintiff, agreed to take over the business, incorporate it and accept shares therein in payment of their respective credits. The plaintiff and defendant, being the 2 largest stockholders of the corporation, entered into an agreement, that neither of them would to sell, transfer or otherwise dispose of any part of their shareholdings till after one year from the date thereof. They further agreed that the party violating such agreement would pay p1,000 to the other party as liquidated damages in breach of contract. In upholding the agreement, the SC held that the stipulation was not illegal nor in restraint of trade and offends no public policy. he suspension of the power to sell has a beneficial purpose, results in the protection of the corporation as well as of the individual parties to the contract, and is reasonable as to the length of time of the suspension. But in holding so, this case made it clear that the doctrine did not mean to cover suspension of the right of alienation of stock, limiting ourselves to the statement that the suspension in this particular case is legal and valid.
2. Stipulations in the by-laws as to restrictions must not take away or abridge substantial rights of stockholders (Fleischer v. Botica Nolasco) Manuel Gonzales was the original owner of the 5 shares of stock of the Botica Nolasco, Inc., which he indorsed and delivered said shares to Henry Fleischer, in consideration of a large sum of money owned by Gonzales to Fleischer. The secretary-treasurer of said corporation, offered buy from Henry, on behalf of the corporation, said shares of stock at their par value of P100 a share, for P500 by virtue of artice 12 of the bylaws giving said corporation the preferential right to buy from Gonzales said shares.
The SC declared void the by-law provision which granted to the stockholders a right of first refusal over shares sought to be disposed by other stockholders. It follows from the foregoing that a corporation has no power to prevent or to restrain transfers of its shares, unless such power is expressly conferred in its charter or governing statute. This conclusion follows from the further consideration that by-laws or other regulations restraining such transfers, unless derived from authority expressly granted by the legislature, would be regarded as impositions in restraint of trade. The foregoing authorities go farther than the stand we are taking on this question. They hold that the power of a corporation to enact by-laws restraining the sale and transfer of shares, should not only be in harmony with the law or charter of the corporation, but such power should be expressly granted in said law or charter. The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred." This restriction is necessary in order that the officers of the corporation may know who are the stockholders, which is essential in conducting elections of officers, in calling meeting of stockholders, and for other purposes. but any restriction of the nature of that imposed in the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade. And moreover, the by-laws now in question cannot have any effect on the appellee. He had no knowledge of such by-law when the shares were assigned to him. He obtained them in good faith and for a valuable consideration. He was not a privy to the contract created by said by-law between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.
3. No absolute prohibition to transfer shares because it is violative of the right of the stockholder to dispose his personal property as incident of his ownership thereof. (Padgett v. Babcock and Templeton) 72
The indication on the face of the stock certificate that it is nontransferable alone does not compel the corporation to buy back the shares from the shareholder. In the absence of a contractual obligation and of a legal provision applicable thereto, it would be unjust to compel the corporation to comply with a non-existent or imaginary obligation.
d. Forged Transfers General Rule: (De los Santos v. Republic) Certificates of stock are only QUASI-NEGOTIABLE (not negotiable) thus: 1. They do not afford the same protection to a holder in GF or for value who receives them in the course of being negotiated 2. Ownership of the true owner is preferred Exception: If the true owner is negligent in causing the loss (Sta. Maria v. Hongkong & Shanghai) In this case, Mrs. Josefa Santamaria brought 10,000 shares of stock of a mining corporation. The certificates were made out in the name of a brokerage firm, duly indorsed in blank and delivered to Mrs. Santamaria for valuable consideration. She delivered it to R.J. Campos and Co., another brokerage firm, to comply with the latter’s requirement that she deposit something on account if she wanted to buy shares of another mining corporation. Campos thereafter delivered to a bank the said certificate duly indorsed to said bank pursuant to a letter of hypothecation executed by Campos in favor of said bank. The said certificate was delivered to the bank in the ordinary course of business together with many other securities and the time it was delivered, the bank had no knowledge that the shares represented by the certificate belonged to Mrs. Santamaria for it was in the form of a street certificate transferable by mere delivery. The Court held that she could not recover the certificates since she could have asked the corporation that issued it to cancel it and issue another in lieu thereof in her name. Her negligence was the immediate cause of the damage, since the certificate was endorsed by her to constitute as a street certificate. Upon its face, the holder was entitled to demand its transfer to his name from the issuing corporation. The bank is not obligated to look beyond the certificate to ascertain the ownership of the stock at the time he received it from Campos, it having been given pursuant to a letter of hypothecation. A bona fide pledge or transferee of a stock from the apparent owner is not chargeable with knowledge of the limitations placed on said certificates by the real owner or of any secret agreement relating to the use which might be made of the stock by the holder. It further held that when a stock certificate is endorsed in blank by the owner thereof, it constitutes what is termed as “street certificate,” so that upon its face, the holder is entitled to demand its transfer into his name from the issuing corporation. Such certification is deemed quasi-negotiable, and as such the transferee thereof is justified in believing that it belongs to the holder and transferor.
e. Non-transferability of Membership in Non-Stock Corporations: Membership and all rights arising therefrom are personal and nontransferable UNLESS otherwise provided in the AOI or by-laws (Why a different rule on non-stock corporations?)
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III. MANAGEMENT STRUCTURE BPI Family v. First Metro: If a corporation knowingly permits its officers, or any other agent to perform acts within the scope of an apparent authority, holding him out to the public as possessing power to do those acts, the corporation will, as against any person who has dealt in GF through such agent, be estopped from denying such authority.
Rationale: Corporate transactions would speedily come to a standstill were every person dealing with a corporation held duty bound to disbelieve every act of its responsible officers, no matter how regular they should appear on their face. A. CORPORATE GOVERNANCE 1. Powers of the Board of Directors or Trustees:* Centralized management of the corporation unless otherwise provided in the Code Gamboa v. Victoriano: (Extent of judicial review): As long as the directors act honestly and the contract does not violate the rights of the minority opposed to it, the courts will not interfere. The well-known rule is that the courts cannot undertake to control the discretion of the BOD about administrative matters as to which they have legitimate power of action. Courts cannot supplant the discretion of the board on administrative matters as to which they have legitimate power of action, and contracts which are intra vires entered into by the board are binding upon the *
Directors and Trustees : Centralized management more efficient in large organizations a. Term of office: One year until their successors are elected and qualified b. Must own at least one share of the capital stock- no share means no directorship. Rationale: A man with a financial interest at stake will devote more attention to the business. c. Majority of the directors/trustees must be residents of the Philippines d. Sources of power: Law and Delegated authority of the stockholders e. Peculiar agent: In corporate setting, although the board is an agent of the corporation, since the corporation is a mere judicial concept, it cannot countermand the determination of the principal corporation itself.
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corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of rights of the minority. THE GENERAL RULE OR STANDARD IS THAT THE DISCRETION OF THE BOARD IS NOT REVIEWABLE BY THE COURTS EXCEPTION IS WHEN THERE IS GRAVE ABUSE OF DISCRETION BECAUSE THE RELATIONSHIP IS FIDUCIARY.
Gokongwei v. SEC: Every corporation has the inherent power to adopt by-laws for its internal government and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs. A corporation may prescribe in its by-laws, the qualifications, duties and compensation of directors, officers and employees. Stockholders have no vested right to be elected as directors. Any person who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act o the incorporation and lawfully enacted by-laws and not forbidden by law. To this extent, therefore, the stockholder may be considered to have parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators.
In summary, the 2 cases explain the BUSINESS JUDGMENT RULE: The BOD hold such office charged with duty to act for the corporation according to their best judgment and in doing so, they cannot be controlled in the reasonable exercise and performance of such duty. Coverage of the Rule: 1) Resolutions and transactions entered into by the BOD within the powers of the corporation cannot be reversed by the courts not even on the behest of the stockholders of the corporation 2) Directors and officers acting within such business judgment cannot be held personally liable for the consequences of such act except if they violated their duties
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a. Must act as a body* General Rule: Grant of power is to the board as a body and not to the individual members thereof, and that the corporation can be bound only by the collective act of the board. Islamic Directorate v. CA: For the sale of the sole property to be valid, the majority vote of the legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bonafide members of the corporation should have been obtained. They must act as a body. Exceptions: Ramirez v. Orientalist: RATIFICATION. Not all corporate actions need formal board approval. The board need not come together and act as body to perform a corporate act. The corporation is also bound by a particular transaction ratified in a subsequent board meeting. In this case, the director-treasurer of the corporation entered into transactions for the leases of films without the prior board authorization. Although the AOI of the company authorized it to manufacture, buy or otherwise obtain all accessories necessary for conducting the business of maintaining and conducting theaters, the Court nevertheless held that a treasurer has no independent authority to bind the corporation by signing its name to the documents; and that under then Sec. 28 of the Corporation Law (now Sec. 23 of the Corporation Code) all corporate powers shall be exercised and all corporate business conducted by the BOD. The by-laws of the corporation even provided that the power to make contracts shall be vested in the BOD. Although the by-laws provided that the president shall have the power, and it shall be his duty, to sign contracts, the Court nevertheless construed the provision to refer to the formality of reducing to proper form the contracts which are authorized by the Board and is not intended to confer an independent power to make contracts binding on the corporation. It is declared under the Corporation Law that corporate powers shall be exercised and all corporate business conducted by the BOD. And this principle is recognized in the by-laws of the corporation in question which contain a provision declaring that the power to make contracts shall be vested in the BOD. However, the fact that the power to make corporate contracts is thus vested in the BOD, does not signify that a formal vote of the board must always be taken before contractual liability can be fixed upon a corporation for the board can create liability like an individual by other means than a formal expression of its will.
The authority of the subordinate agent of a corporation often depends upon the course of dealings which the company or its directors have sanctioned. It may be established sometimes without reference to official record of the proceedings of the board, by proof of the usage which the company had permitted to grow up in business, and of the
*
Rationale: Public policy; It makes better management practice for the board to sit down, to discuss corporate affairs and decide on the basis of their consensus.
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acquiescence of the board charged with the duty of supervising and controlling the company's business.
In dealing with corporations the public at large is bound to rely to a large extent upon outward appearances. If a man is found acting for a corporation with the external indicia of authority, any person, not having notice of want of authority, may usually rely upon those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted. The public is not supposed nor required to know the transactions which happen around the table where the corporate board of directors or the stockholders are from time to time convoked. Whether a particular officer actually possesses the authority which he assumes to exercise is frequently known to very few, and the proof of it usually is not readily accessible to the stranger who deals with the corporation on the faith of the ostensible authority exercised by some of the corporate officers. It is therefore reasonable, in a case where an officer of a corporation has made a contract in its name, that the corporation should be required, if it denies his authority, to state such defense in its answer. By this means the plaintiff is apprised of the fact that the agent's authority is contested; and he is given an opportunity to adduce evidence showing either that the authority existed or that the contract was ratified and approved. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance with law, and we would be sorry to announce a doctrine which would permit the property of a man in the city of Paris to be whisked out of his hands and carried into a remote quarter of the earth without recourse against the corporations whose name and authority had been used in the manner disclosed in this case. As already observed, it is familiar doctrine that if a corporation knowingly permits one of its officer, or any other agent, to do acts within the scope of an apparent authority, and thus hold him out to the public as possessing power to do those acts, the corporation will as against any one who has in good faith dealt with the corporation through such agent, be estopped from denying his authority; and where it is said "if the corporation permits" this means the same as "if the thing is permitted by the directing power of the corporation." Board of Liquidators v. Kalaw: EXPRESS OR IMPLIED CORPORATE AUTHORITY: This case held that it is possible for an express provision of the by-laws to be violated and the Board may, in certain corporate actions, bind the corporation in spite of the fact that it is contrary to the by-law provision. It held that there are 2 ways by which corporate actions may come about through the corporation’s BOD, either the Board may empower or authorize the act or contract, or it can be ratificatory act on the part of the Board. As long as there is corporate approval through the BOD, whether implied or express, it is valid to bind the corporation. 77
RATIFICATION: Relates back to the time of the contract and is equivalent to original authority.
Acuna v. Batac Producers: EXPRESS OR IMPLIED RATIFICATION: Diverse forms of implied ratification: i. ii. iii.
Silence or acquiescence Acts showing approval or adoption of the contract Acceptance and retention of benefits therefrom
In this case, the Court held that between the act of the Board as a body in beforehand affirming, although informally, to the other party the perfection of a contract, on one hand, and a subsequent express resolution formally taken at the board meeting which resolution then proceeds to “disapprove and/or rescind” the said contract, the former must prevail. The Court held that “there is abundant authority in support of the proposition that the ratification may be express or implied, and that implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing approval or adoption of the contract or by acceptance and retention of benefits flowing therefrom. RECAPITULATION: SEC. 23 IS MORE APPLICABLE IN INTERNAL RULES, SEC. 25 ON THE OTHER HAND RELATES HOW A BOARD MAY ACT AS A BODY (i.e., MEETING, QUORUM, BOARD RESOLUTION BY A DISCUSSION OF THE MAJORITY) REMEMBER THE 5 RELATIONS IN CORPORATION LAW, ONE OF WHICH IS THE CONTRACT OF CORPORATIONS WITH 3RD PARTIES, THE CASES OF RAMIREZ, BOARD OF LIQUIDATORS AND ACUNA WERE HELD VALID BECAUSE THEY WERE AGAINST 3RD PERSONS.
b. Executive Committee: - Composed of not less than 3 members of the board to be appointed by the board. General Rule: MATTERS WHICH EXECUTIVE COMMITTEE CAN ACT UPON: Can only act on specific matters within the competence of the board, as may be
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delegated to it by the board or in the by-laws, upon majority vote of all its members Exception: MATTERS WHICH ONLY THE BOARD DULY CALLED AND ASSEMBLED AS SUCH CAN ACT UPON 1) Approval of any action for which shareholders’ approval is also required 2) Filing of vacancies in the board 3) Amendment or repeal of by-laws or the adoption of new laws 4) Amendment or repeal of any resolution of the board which by its express terms is not so amenable or repealable 5) Distribution of cash dividends to the shareholders 2 THEORIES AS TO THE CREATION OF AN EXECUTIVE COMMITTEE- with enabling clause in the by-laws or without? 1) Under the Code, the by-laws may create an executive committee but nothing therein prevents the creation of such by board resolution even in the absence of an enabling clause in the by-laws. 2) SEC however says that an executive committee can only be created by virtue of a provision in the by-law and the BOD cannot simply create or appoint an executive committee to perform such functions WHAT IS THE RELEVANCE/IMPORTANCE OF HAVING AN EXECUTIVE COMMITTEE: TO EXPEDITE ACTION ON IMPORTANT MATTERS WITHOUT THE NEED FOR A BOARDMEETING ESPECIALLY WHEN SUCH MEETING CANNOT BE READILY HELD. (NEED NOT COMPLY WITH SECS. 23 OR 25) NOTE: HAVING AN EXECUTIVE COMMITTEE IS BOARD DISCRETION. HOWEVER, ONCE CREATED UNDER SEC. 23, SUCH CAN ONLY BE ABOLISHED UNDER SEC. 23
B.
ROLE OF SHAREHOLDERS
Right to Vote and Attend Meetings (For non-stock corporations only)
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Rule: Right to vote of any member may be limited, broadened, or denied by the AOI. Unless the AOI or the by laws limits, broadens or denies it, member is entitled to the following: 1. To one vote 2. Vote by proxy- in stock corporation, right to vote by proxy cannot be taken away 3. May cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate 4. Voting by mail or other similar means 5. Cumulative voting – in the absence of provision, straight voting system Price v. Martin : STOCKHOLDER ON RECORD IS THE PARTY ENTITLED TO VOTE
Until challenged in a proper proceeding, a stockholder of record has a right to participate and vote in any meeting of the stockholders of the corporation and in the absence of fraud, the action of the stockholders at that meeting cannot be collaterally attacked on account of such participation. 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 upon the books of the corporation and if the transfer is not duly made upon request he has, as his remedy, to compel it to be made. a. -
Instances Election of Directors and Trustees 1. At any meeting of stockholders/members called for the election, there must be present in person or by representative authorized to act by written proxy, OWNERS of the majority of the capital stock or majority of the members entitled to vote in case of nonstock corporations 2. Election must be by ballot if requested but voting by viva voces or roll call is valid except when there is a request that the election be held by ballot 3. if quorum is present, candidates receiving highest votes shall be declared the winner. 4. In case of failure to hold an election for any reasonable meeting may be adjourned from day to day or from time to time but it cannot be adjourned sine die or indefinitely
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In stock corporations: 1. Stockholders have right to vote in person or by proxy the number of shares standing in his own name at the time fixed by the by-laws or if the bylaws are silent, at the time of the election 2. No delinquent stock shall be voted Non-stock corporations: Right to vote of any member may be limited, broadened, or denied by the AOI. Amendment in the Articles of * Incorporation : 2/3 ratification vote of the outstanding capital stock or members Investment in other business 1. 2/3 vote NECESSARY: Dela Rama v. Maao-Sugar: IF INVESTMENT IS MADE FOR ANY PURPOSE OTHER THAN THE PRIMARY PURPOSE FOR WHICH IT WAS ORGANIZED 2. 2/3 vote NOT NECESSARY: Gokongwei v. SEC: IF INVESTMENT IS REASONABLY NECESSARY OR INCIDENTAL TO ACCOMPLISH ITS PRIMARY PURPOSE THE INSTANCES WHERE THE STOCKHOLDER IS ALLOWED TO VOTE IS WHEN THERE ARE FUNDAMENTAL CHANGES IN THE ORIGINAL RELATIONSHIP INSIDE THE CORPORATION.
Dela Rama v. Ma-ao Sugar Central:
In the judgment, the lower court ordered the management of the Ma-ao Sugar Central Co., Inc. "to refrain from making investments in Acoje Mining, Mabuhay Printing, and any other company whose purpose is not connected with the sugar central business." This portion of the decision should was reversed by the Court because Sec. 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other *
Limitations on the Power to Amend AOI 1. Amendment not allowed if contrary to any provision or requirement prescribed under the Code or any special law 2. For a legitimate purpose 3. Approval vote of the board, stockholders and members 4. The original and amended AOI shall contain all provisions required by law to be set out in the AOI 5. Amendments shall be underscored; must be certified by the corporate secretary and majority of the directors and trustees 6. Amended AOI and original be submitted to SEC 7. Amendments take effect only upon SEC approval 8. If SEC did not act upon the submission within 6 months, it is deemed approved.
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corporation or business, or for any purpose other than the main purpose for which it was organized," provided that its board of directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power.
Merger and Consolidation: 2/3 ratification vote of outstanding capital stock or members of each constituent corporations for plan to be approved a. Plan shall be approved by the majority vote of each of the BOD or trustees of the constituent corporations b. Plan submitted for approval by the stockholders and members of each of such corporations at separate corporate meetings duly called for the purpose with proper notice c. Personal or registered notice: 2 weeks before the meeting d. Appraisal right may be exercised by a dissenting stockholder but if after approval of plan, the BOD decides to abandon the plant, the appraisal right is extinguished e. AMENDMENT: Majority vote of BOD/trustees and ratification vote of outstanding capital stock or members of each constituent corporations
Increase and Decrease in Capital Stock: Majority vote of BOD/Trustee and ratification vote of outstanding capital stock or members Adoption, Amendment and Repeal of By-Laws General rule; Power to amend, repeal and adopt new bylaws lies on the stockholders and members. Majority vote of BOD/Trustee and majority vote of the outstanding capital stock or members Exception: Stockholders and members delegate the power to the BOD thru 2/3 vote of outstanding capital stock or members The delegated power is can be revoked by the majority vote of the outstanding capital stock or members. Declaration of Stock Dividends: 2/3 vote of the outstanding capital stock
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Management Contract:
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General Rule: Approval of BOD and ratification of the majority of the outstanding capital stock or members of both managing and the managed corporation Exception: 2/3 Ratification vote if 1. Majority of the members of BOD in the managed and managing corporation is the same 2. Stockholders owning 1/3 of the capital stock and members in the managed and managing corporation are the same Fixing of Consideration for Par Value Shares 1. May be fixed in the AOI or by-laws 2. In the absence thereof, vote of majority of the shareholders at a meeting duly called for the purpose b. Treasury Shares: NO voting rights as long as they remain in the treasury * In case of resale or re-issue, they regain whatever voting rights and dividends to which they were originally entitled in the hands of the 3rd party buyer. Conduct of Stockholders or Members’
c. Meetings* 1.
Kinds and Requirements REGULAR a. Held annually at a fixed date in the AOI or in the absence thereof, on any date in April of every year as determined by the BOD or trustees
*
Rationale: To give voting rights to treasury shares could enable the directors to prolong their stay in the office against the wishes of the holders of the majority stock. * Notice of meeting may be waived expressly or impliedly by any stockholder or member
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b. Notice sent to all stockholders/members at least 2 weeks prior to the meeting unless a different period is required by the by-laws 2. SPECIAL a. Held anytime deemed necessary or as provided in the by-laws b. 1 week written notice unless a different period is required in the by-laws c. Specific purpose NOTE: NON-SERVICE OF NOTICE TO ANY STOCKHOLDER WITH RESPECT TO A MEETING IS VERY FATAL.
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Place and Time of Meeting*
General rule: City or municipality where the principal office of the corporation is located and if practicable, in the principal office of the corporation in order to be valid Exception: 1. (SEC opinion) When all the stockholders and members are present or duly represented at the meeting 2. In case of non-stock corporations, provided that notice as to time, place and date of meeting is sent to all Quorum General rule: Majority of the stockholders or members Exceptions: 1. Otherwise provided in the by-laws 2. Law determines the necessary concurring votes of stockholders and members to transact business INSTANCES WHEN QUORUM IS MATERIAL IS THOSE CASES IN WHICH THE LAW DETERMINES THE NUMBER OF SHAREHOLDERS OR MEMBERS WHOSE CONCURRING VOTES ARE NECESSARY TO MAKE THEIR ACTIONS BINDING ON THE CORPORATION (i.e., power to extend of shorten term, power to increase or decrease capital, etc.)
*
Postponement of annual stockholders’ meeting may be allowed for justifiable and meritorious reasons provided however that the same be held within a reasonable time from the date it has been postponed
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d. Contracts and Agreements Affecting Stockholders a. Proxy: A special form of agency to vote 1. Requisites for a valid proxy a. Proxy shall be in writing b. Signed by the stockholder/member c. Filed before the scheduled meeting with the corporate secretary 2. Revocation: Revocable any time unless made irrevocable by the giver (i.e., irrevocable when coupled with interest) 3. Period of Effectivity of Proxy: Valid only for the meeting for which it is intended until otherwise provided in the proxy. No proxy shall be valid for a period longer than 5 years at any one time 4. Who may be appointed proxy? Code does not impose limitation 5. Right to appoint proxy- absolute in stock corporations but not in non-stock corporations b. VTA: Stockholder parts with the voting power only but retains the beneficial ownership of the shares* -
It is an agreement whereby a stockholder or more transfer his shares to any person(s) or to a corporation having authority to act as trustee for the purpose of vesting in the latter as trustee voting or other rights for a period not exceeding which is
*
Procedure: 1. Shareholder transfers shares to trustee 2. New certificates issued in name of trustee 3. Voting trustee executes and delivers to stockholder(s) voting trust certificates to show the true ownership of the shares 4. Upon expiration of the period agreed upon, VTC shall be cancelled, new certificates in the name of the owners shall be issued Powers/Rights of Voting Trustees 1. Right to vote and other rights pertaining to the shares so transferred and registered in their names subject to the VTA 2. Vote in person or by proxy unless agreement otherwise provides 3. Right to Inspect Corporate books 4. Trustee is the legal title holder or owner of the shares under the agreement (qualified to be a director therefore)
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prescribed in the Code and upon the terms stated in the agreement
Limitations on VTA: 1) No VTA shall be entered into: General rule: Not exceed 5 years for any one time Exception: VTA as part of a loan agreement but it shall automatically expire upon full payment of the loan. 2) Not be used for purposes of fraud or circumventing the law against monopolies and illegal combinations in restraint of trade 3) Must be in writing and notarized and specify the terms and conditions thereof 4) Certified copy must be filed with the SEC and the corporation to be effective and enforceable 5) Subject to the examination of any stockholder 6) Unless expressly renewed, all rights granted in it shall automatically expire at the end of the agreed period IN CONTRAST,PROXY IS A SIMPLE CASE OF AGENCY WHILE IN VTA, IT MAY INVOLVE OTHER RIGHTS (EQUITABLE RIGHTS SUCH AS INTERESTS, MANAGEMENT AND RESIDUAL RIGHTS) , NOT ONLY THE RIGHT TO VOTE.
Lee v. CA: POWER OF TRUSTEES: Right to vote and other rights pertaining to the shares so transferred and registered as long as not used for purposes of fraud or circumventing the law against monopolies and illegal combinations in restraint of trade By its very nature, a VTA results I the separation of the voting rights of a stockholder from his other rights such as the right to receive dividends, the right to inspect the books of the corporation, the right to sell certain interests in the assets of the corporation and other rights to which a stockholder may be entitled until the liquidation of the corporation. Criteria to distinguish VTA from proxy and pooling agreements:
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a) The voting of rights of the stock are separated from the other attributes of ownership b) The voting rights granted are intended to be irrevocable for a definite period of time c) The principal purpose of the grant of voting rights is to acquire voting control of the corporation
The transactional concept of a VTA primarily intended to single out a stockholder’s right to vote from his other rights as such and made irrevocable for a limited duration may in practice become a legal device whereby a transfer of the stockholder’s share is effected subject to the specific provision of the VTA. The execution of the VTA, therefore, may create a dichotomy between the equitable or beneficial ownership of the corporate shares of a stockholder on the one hand, and the legal title thereto on the other hand. NIDC v. Aquino: Exception to the rule that Trustee must return certificates to shareholder after expiration of the VTA: The acquisition in the present case by PNB-NIDC of the properties in question was not made or effected under the capacity of a trustee but as a foreclosing creditor for the purpose of receiving on a just and valid obligation of the bank.
In that case, a part of the conditions mandated in the Financial Agreement entered into by the borrowing corporation with the PNB and the NIDC, a VTA was executed over 60% of the outstanding and paid up capital stock of the borrowing corporation. The execution of the VTA also facilitated implementation of the condition in the Financing Agreement that allowed PNB-NIDC to appoint members in the 7-man board of the corporation, and the appointment of a comptroller by PNB-NIDC to supervise the financial management of the corporation. During the term of the VTA, the corporation defaulted in the loan which resulted in the foreclosure and sale of the oil mills with PNB-NIDC, ending s the highest bidders thereof. Upon termination of the VTA, the corporation sought to have PNB-NIDC account for all the assets and oil mills of the corporation under the theory that PNBNIDC acquired them as trustees for the corporation. The Court held that it is clear that what was assigned to NIDC was the power to vote the shares of stock of the stockholders of Batjak, representing 60% of Batjak’s outstanding shares, and who are signatories to the agreement. The power entrusted to NIDC also included the authority to execute any agreement or document that may be necessary to express the consent or assent to any matter, by the stockholders. Nowhere in the said provisions or in any other part of the VTA is mention made of any transfer or assignment to NIDC of Batjak’s assets, operations and management. NIDC was constituted as trustee only of the voting rights of the 60% of the paid-up and outstanding shares of stock in Batjak…The acquisition by PNB-NIDC of the properties in question was not made or effected under the capacity of a trustee but as a foreclosing creditor for the purpose of recovering on a just and valid obligation of Batjak.
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c. Pooling agreements- agreement by which two or more stockholders agree that their shares shall be voted as a unit (usually concerned with election of directors to gain control in management)
The parties thereto remain the owners of their stocks with a right to vote them although they each bound themselves to vote in accordance with the decision of the majority of the pool.
Enforcement of pooling agreement must be by imposition of hefty liquidated damages for non-compliance since such agreement covers personal obligations (to do) and action for specific performance shall not lie due to the public policy against involuntary servitude.
C. ENFORCEMENT OF RIGHTS OF SHAREHOLDERS a. Right to Inspect – right to information founded on the stockholders’ beneficial interest through ownership or shares and membership and granted by common law for the purpose of protecting his interests Philpotts v. Phil. Manufacturing: LIMITATIONS ON RIGHT: There are some things which a corporation may undoubtedly keep secret, notwithstanding the right of inspection given to stockholders, as where a corporation, engaged in the business of manufacture, has acquired a formula or process not generally known, which has proved of utility in the manufacture of its products. The corporation or its BOD may properly adopt measures for the protection of such process from publicity. The right does not apply where the corporation is not organized under the Philippine law. The right of the stockholder is governed by the inspection requirements in the jurisdiction where the corporation was organized. PARTY ENTITLED TO EXERCISE RIGHT: Stockholder has the right to exercise his right of inspection of records either in person or by some authorized agent or attorney in conformity with the general rule that what a man may do in person he may do through another.
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D. Pardo v. Hercules: TIME TO AVAIL RIGHT; At reasonable hours on business day. This means that the right of inspection may be exercised at reasonable hours on business day throughout the year and not merely during an arbitrary period of a few days chosen by the directors. The corporate secretary refused to permit petitioner or his agent to inspect the records and business transactions of the company at times desired by the petitioner. The basis for the refusal was the provision in the company’s by-laws which declared that every stockholder may examine the books of the company and other documents pertaining to the same upon the days which the BOD shall annually fix. The Court held that the resolution of the BOD of a corporation limiting the rights of stockholders to inspect its records to a period of 10 days shortly prior to the annual stockholders meeting is an unreasonable restriction given by Sec. 51 of the Corporation Law, which declares that the right to inspection can be exercised “at reasonable hours”. Veraguth v. Isabela Sugar: UNQUALIFIED RIGHT OF STOCKHOLDERS: It cannot be denied on the grounds that the director or stockholders is on unfriendly terms with the officers of the corporation. The court held that directors of a corporation have the unqualified right to inspect the books and records of the corporation at all reasonable times. Pretexts may not be put forward by the officers of the corporation to keep a director or stockholder from inspecting books and minutes of the corporation, and the right of inspection cannot be denied on the grounds that the director or stockholder is on unfriendly terms with the officers of the corporation whose records are sought to be so inspected. Nevertheless, the Court also held that a director or stockholder has no absolute right to secure certified copies of the minutes of a corporation until these minutes have been written up and approved by the directors. Gonzales v. PNB: LIMITATIONS ON THE RIGHT: Stockholder must not have been guilty of using improperly any information secured thru a prior examination and that the person asking for such examination must be acting in GF and for a legitimate purpose in making his demand. He must also setforth the reasons and purposes for which he desires such inspection. In contrasting the present language of Sec. 74 of the Corporation Code to that of Sec. 51 of the old Corporation Law, As may be noted from the above-quoted provisions, among the changes introduced in the new Code with respect to the right of inspection granted to a stockholder are the following the records must be kept at the principal office of the corporation; the inspection must be made on business days; the stockholder may demand a copy of the excerpts of the records or
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minutes; and the refusal to allow such inspection shall subject the erring officer or agent of the corporation to civil and criminal liabilities. However, while seemingly enlarging the right of inspection, the new Code has prescribed limitations to the same. It is now expressly required as a condition for such examination that the one requesting it must not have been guilty of using improperly any information through a prior examination, and that the person asking for such examination must be "acting in good faith and for a legitimate purpose in making his demand." The court held that the “unqualified provision on the right of inspection previously contained in Sec. 51 of the Corporation Law no longer holds true under the present law.” Gonzales held that it is the stockholder seeking to exercise the right of inspection to set forth the reasons and the purposes for which he desires such inspection. In this case, the purpose of the stockholder in seeking inspection of corporate records of the bank to arm himself with materials he can use against the respondent Bank for acts done by the latter when the petitioner was a total stranger to the same, were not deemed proper motives.
Summary: 3 LIMITATIONS ON THE RIGHT TO INSPECT 1. Must be exercised at reasonable hours on business days 2. Person demanding the right has not improperly used any information secured through any previous examination of the records of such corporation 3. Demand is made in GF and for a legitimate purpose 1. Specified Records i. Record of all business transactions ii. Minutes of all meetings of stockholders/members iii. Minutes of all meetings of directors/trustees iv. Stock and transfer book v. Financial Statements – 10 days from receipt of written request of stockholder/member Contents: 1 balance sheet as of the end of the last taxable year Profit and loss statement of said year showing in details its assets and liabilities as a result of its operations vi.
Annual Financial Reports- at every annual regular meeting of stockholders/members when directors/trustees are elected
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General Rule: Must include financial statements signed and certificed by an independent CPA Exception: If paid up capital is less than 50K, only the certification under oath of treasurer or any responsible officer is necessary
2. Remedies a. MANDAMUS- if corporation has not established the impropriety of the shareholders’ request to inspect the books b. DAMAGES (civil)-Against the stockholder/member or directors/trustees c. CRIMINAL SUIT – under Section 144 of the Corporation Code (violation of the code) Fine or imprisonment or both upon discretion of the court * If refusal is pursuant to a resolution or order of the BOD or trustees, liability shall be imposed upon the directors/trustee who voted for such refusal 3. Confidential Nature of SEC Examinations Exceptions a) Law requires the same to be public b) Such interrogatories, answers, results are necessary to be presented as evidence before any court b. Appraisal Right- right to demand payment of the fair value of his shares after dissenting from a proposed corporate action INSTANCES WHEN APPRAISAL RIGHT AVAILABLE (Sec. 81)
*
Section 144 of the Corporation Code a. Fine – 1k –10k b. Imprisonment – 30 days – 5yrs
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1. Amendment of AOI which has the effect of changing/restricting the rights of any stockholders or class of shares or of authorizing preferences in any respect superior to those of outstanding shares of any class 2. Extension/shortening of corporate term 3. Sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially of all the corporate property and assets 4. Investment in another corporation outside of its primary purpose 5. Merger or consolidation HOW RIGHT IS EXERCISED (Sec. 82)- Failure to make demand within such period constitutes waiver of right a. Dissenting stockholder who voted against the proposed action must make a written demand within 30 days after said vote b. If proposed action implemented, corporation shall pay dissenting stockholder within 10 days after demanding payment for his shares upon surrender of the corresponding certificates EFFECTOF DEMAND AND TERMINATION OF RIGHT C. All rights accruing to such shares including voting and dividend rights shall be suspended D. Entitled to receive payment at the agreed FMV or as determined by the appraisers chosen by them E. If stockholder not paid within 30 days after the award his voting and dividend rights shall be restored until payment of his shares. Upon such payment, all his rights are terminated F. If proposed corporate action is abandoned, his rights and status as a stockholder shall thereupon be permanently restored.
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WHEN RIGHT TO PAYMENT CEASES- RIGHT NOT EXERCISABLE (Section 84) 1. Stockholder withdraws his demand and corporation consents thereto 2. Proposed action is abandoned 3. Proposed action is disapproved by SEC where its approval is necessary 4. SEC found stockholder not entitled to appraisal right BEARER OF COST OF APPRAISAL (Sec. 85) a. By corporation i. Price that corporation offered to the dissenting stockholder is lower than the FMV as determined by the appraisers named by them ii. Action is filed by the dissenting stockholder to recover such fair value and the refusal of the stockholder to receive such payment is found by the court to be justified b. By dissenting stockholder i. Price offered by the corporation is the approximately the same as the FMV ascertained by the appraisers ii. Action is filed by the dissenting stockholder to recover such fair value and the refusal of the stockholder to receive such payment is found by the court to be unjustified NOTATION OF CERTIFICATES (Sec. 86): Dissenting stockholder must submit his certificates within 10 days after demanding his payment But the shares can be transferred still by the dissenting stockholder, in such case: a. Transferee shall become a regular stockholder with the right to receive all dividend distributions which would have accrued to such shares
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b. The right of the transferor as a dissenting stockholder to be paid the fair value of the shares shall cease. By transferring his shares, he ceases to be a stock. c. Derivative Suits Richardson v. Arizona: A derivative action must necessarily based on a claim for relief which is owned by the stockholders’ corporation. Indeed, a prerequisite for filing a derivative action is the failure of the corporation to initiate the action in its own name. The stockholder, as a nominal party, has no right, title or interest whatsoever in the claim itself- whether the action is brought by the corporation or by the stockholder in behalf of the corporation. A class action on the other hand is a predicated ownership of the claim for relief sued upon in the representative of the class and all other class members in their capacity as individuals. Shareholders of the corporation may of course have claims for relief directly against their corporation because the corporation itself has violated rights possessed by the shareholders, and a class action would be an appropriate means for enforcing their claims. A recovery in a class action is a recovery which belongs directly to the shareholders. However, in a derivative action, the plaintiff shareholder recovers nothing and the judgment runs in favor of the corporation. Pascual v. Orosco: A minority stockholder of a corporation brought a suit for and in behalf of the corporation against the BOD. The AOI provided that the compensation of the directors comprises a certain percentage of the net income of the corporation. But the director, instead of determining the compensation from the net incomes, used as basis the gross income which resulted in losses to the corporation. But petitioner’s cause of action covered the period when he was not yet a stockholder of the corporation. The SC held that a stockholder of a corporation who was not such at the time when alleged objectionable transaction took place, or whose shares of stock have not since devolved upon him by operation of law, cannot maintain suits of this character, unless such transactions continue and are injurious to such stockholder or affect him especially or specifically in some other way. A close reading of this case would show that the rationale for the rule was that there is in the US jurisdiction, two sets of court system- the federal judicial system and the state judicial system. In order to prevent forum shopping, the rule in the US is such that when a derivative suit is brought, it is essential that the relator should have been a stockholder both at the time the act complained of occurred and at the time the derivative suit is filed. The prevailing rule then was
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that a shareholder who was one at the time of the institution of the action may bring a derivative suit. It was then quite easy and in possible to bring a suit out of state court and bring it to federal court by just making sure that you transfer a share to someone outside of the state, If the suit is filed in California, what can be done is transfer one share to a resident of Florida, to grant federal courts jurisdiction. In order to correct this collusion, the requisite was imposed that the relator must be a shareholder at the time the cause of action accrued. However, in this case, it was held that a stockholder in a corporation who was not such at the time when alleged objectionable transactions took place or whose shares of stock have not since devolved upon him, by operation law, cannot maintain suits of this character, unless such transaction continue and are injurious to such stockholder or affect him especially or specifically in some other way. Evangelista v. Santos: The plaintiffs were minority stockholders who brought a derivative suit against the principal officer for damages resulting from the mismanagement of corporate affairs and misuse of corporate assets. The complaint prayed for judgment requiring defendant, among others, to pay plaintiffs the value of their respective participation in said assets on the basis of the value of the stocks held by each of them. The Court held that the suit would not prosper. The stockholders brought the action not for the benefit of the corporation but for their own benefit since they asked that the defendant make good the losses occasioned by his mismanagement and pay them the value of their respective participation in the corporate assets on the basis of their respective holdings. The Court held that the relief sought could not be done until all corporate debts, if there be ay, are paid and the existence the corporation terminated by the limitation of its character or by lawful dissolution. Since it is the corporation which is the real party in interest, then the reliefs prayed for must be for the benefit or interest of the corporation. When the reliefs prayed for do not pertain to the corporation, then it is an improper derivative suit. Republic v. Cuaderno: The petitioner brought a derivative suit in behalf of the corporation against the officers and the BOD. The complaint alleged that the directors approved a resolution granting excessive compensation to officers of the corporation. The suit was filed in order to prevent dissipation of the corporate funds for the payment of the salary of said officers. The BOD claimed that the action cannot prosper for failure to compel the BOD to file a suit for and in behalf of the corporation. The Court held that such a suit need not be authorized by the corporation where its objective is to nullify the action taken by its manager and the BOD, in which case any demand for intra-corporate remedy would be futile.
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A stockholder in a banking corporation has a right to maintain a suit for and on behalf of the corporation, but the extent of such right depends upon when and for what purpose he acquired the shares of stock of which he is the owner. The complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of Bienvenido Dizon to head the Board of Directors of the Republic Bank, were made only to shield Pablo Roman from criminal prosecution and not to further the interests of the Bank, and avers that both men are Roman's alter egos. There is no denying that the facts thus pleaded in the complaint constitute a cause of action for the bank: if the questioned appointments were made solely to protect Roman from criminal prosecution, by a Board composed by Roman's creatures and nominees, then the moneys disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or diversion of corporate funds, since the Republic Bank would have no interest in shielding Roman, and the directors in approving the appointments would be committing a breach of trust; the Bank, therefore, could sue to nullify the appointments, enjoin disbursement of its funds to pay them, and recover those paid out for the purpose, as prayed for in the complaint in this case
Reyes v. Tan: This case gave a valid basis the violation of laws allowed by the board as basis for a derivative suit. The Court held that where the director of the corporation permitted the fraudulent transaction to go unpunished by allowing importation of finished textile instead of raw cotton for the textile mill, and nothing appears to have been done to remove the erring purchasing managers, the appointment of receiver may have been thought of by the court so that the dollar allocation for raw material may be reviewed and the textile mill placed on an operating basis, because it is possible that a receiver in which the Central Bank may have confidence is appointed, the dollar allocation for raw material may be restored. San Miguel Corp. v. Khan: Requisites for a proper derivative suit, viz: 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, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; 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; In discussing the first requisite, the Court held, “the bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a derivative action for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or
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vindication of his own particular right, or the redress of a wrong committed against him, individually, but in behalf and for the benefit of the corporation. “
Case digests: GAMBOA v. VICTORIANO Lopue group were the owners of 1,328 shares of stocks of Inocentes de la Rama, Inc. Such corporation have an authorized capital stocks of 3k, 2,177 of which were subscribed and issued thus leaving 823 shares unissued. Said 823 shares is the root of this controversy.
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In order to forestall their takeover of the corporation, the Gamboa group, most of which are members of the BOD bought the shares of stock held by the corporation’s president and VP. Then they surreptitiously met and elected Ricardo Gamboa and Honorio de la Rama as president and VP and thereafter passed a resolution authorizing the sale of the 823 unissued shares of the corporation to themselves. Other members of the Gamboa group were later elected as members of the BOD. So the Lopue group filed a case before the CFI to nullify the issuance of the 823 shares of stock of the corporation in favor of the Gamboa group. Lopue group alleges that the sale of the unissured shares of the stocks of the corporation was in violation of their rights and their pre-emptive rights and such was made without the approval of the BOD representing 2/3 of the outstanding capital stock and that the members of the Gamboa group elected to the BOD were not legally elected. After the writ of preliminary injunction restraining the Gamboa group from committing any act tending to prejudice or injure the rights of the Lopue group was granted by the LC, the 2 groups entered into a compromise agreement whereby the contracting parties withdrew their respective claims against each other and the Gamboa group has waived and transferred all their rights and interests over the questioned 823 shares of stocks in favor of the Lopue group. As a result, Gamboa group a MD upon the ground that the Lopue group’s cause of action has been waived or abandoned and that they were estopped from prosecuting the case since they have in effect acknowledged the validity of the issuance of the disputed 823 shares. CFI denied the MD finding that the Lopue group have not waived their cause of action by entering into the CA because of an express provision in the said CA that it shall not in anyway constitute or maybe considered a waiver or abandonment of any claim or cause of action against the Gamboa group. Gamboa group filed an MR for the order denying the MD but was likewise denied. An addendum to the MR showed Gamboa group’s questioning of the CFI’s jurisdiction over the case at bar. As claimed by them, the CFI has no jurisdiction to interfere with the management of the corporation by the BOD and the enactment of a resolution by them, as members of the BOD of the corporation allowing the sale of the 823 shares of stocks unto themselves for this was purely a management concern which the courts could not interfere with. As mentioned, CFI denied the motion so the Gamboa group filed a petition for certiorari for the review of said orders. Issue: WON the CFI has jurisdiction over the present case Held: Has jurisdiction. SC mentioned that firstly, the questioned order denying Gamboa group’s MD is merely interlocutory and cannot be the subject of a petition for certiorari. The proper procedure is to proceed with the trial in the LC and from there make the necessary appeals. Secondly, it agreed with the CFI that the Lopue group has not waived their cause of
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action against the Gamboa group. In fact, the express provision in the CA and the fact that no consideration was mentioned in the agreement for the transfer of rights of said shares of stock to the Lopue group are sufficient to show that the agreement was merely an admission by the Gamboa group of the validity of the claim of the Lopue group. Thirdly, the well-known rule is that courts cannot undertake to control the discretion of the BOD about administrative matters as to which they have legitimate power of action and contracts intra vires entered into by the BOD are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority. In the instant case, Lopue group aver that the Gamboa group have concluded a transaction among themselves as will result serious injury to the interests of the Lopue group so that the TC has jurisdiction over the case. GOKONGWEI v. SEC Gokongwei, a stockholder of SMC filed a petition with the SEC against the majority of the members of the BOD of SMC seeking for the nullity of the by laws which the said majority members of BOD of SMC has amended. Said resolution contained that stockholders who are as well directors in another corporation engaging in the same business with SMC are disqualified to be elected as director of SMC. Gokongwei argues that prior to the questioned amendment, he had all the qualifications to be a director of SMC. That as a stockholder, he had acquired inherent rights in stock ownership, such as the rights to vote and to be voted upon in the election of directors and that in amending the by-laws, the majority members of the BOD purposely provided for his disqualification and deprived him of his vested right hence the said amended by-laws are null and void. At that time, Gokongwei is a stockholder of SMC and president and controlling shareholder of CFC-Robina, a corporation engaged in business competitive to that of SMC. He also alleged that corporations have no inherent power to disqualify a stockholder from being elected as a director and therefore, the questioned act is ultra vires and void. Issue: WON the corporations have no inherent power to disqualify a stockholder from being elected as a director; WON stockholders have vested right to be elected as directors Held: 1) It is recognized by all authorities that every corporation has the inherent power to adopt by-laws for its internal government and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs.
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At common law, the rule was “that the power to make and adopt by laws was inherent in every corporation as one of its necessary and inseparable legal incidents. And it is settled throughout the US that in absence of positive legislative provisions limiting it, every private corporation has the inherent power as one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its charter or in general law, such power of self-government being essential to enable the corporation to accomplish the purposes of its creation.” In this jurisdiction, a corporation may prescribe in its by-laws, the qualifications, duties and compensation of directors, officers and employees. This must necessarily refer to a qualification in addition to that specified under the Corporation Law, that every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director. 2) Stockholders have no vested right to be elected as directors. Any person who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act o the incorporation and lawfully enacted by-laws and not forbidden by law. To this extent, therefore, the stockholder may be considered to have parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators. It cannot therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed by any act of the former which is authorized by the majority. Pursuant to the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least 2/3 of the subscribed capital stock of the corporation. If the amendment changes, diminishes or restricts the rights of the existing shareholders then the dissenting minority has only one right, to object thereto in writing and demand payment for his share. Under also the Corporation Law, the owners of the majority of the subscribed capital may amend or repeal any elected director, in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and modification. 3) An amendment to the corporate by-law which renders a stockholder ineligible to be director, if he be also director in a corporation whose business is in competition with that of the other corporation is valid. Corporations have the power to make by-laws declaring a person employed in the service of a rival company to be ineligible for the corporation’s BOD. An amendment which renders ineligible or if elected, subjects to removal, a director if he be also a director in a 100
corporation whose business is in competition with or is antagonistic to the other corporation is valid. This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. ISLAMIC DIRECTORATE v. CA Islamic Directorate of the Philippines was created. Libyan government donated money for IDP to buy land. Martial law was declared so the original members flew to Middle East to escape political persecution. 2 Muslim groups- Abba and Carpizo group, sprung alleging to be members of IDP. Election for BOT were held but SEC held the election to be null and void. In effect, no members of the BOT were elected. Later, the Carpizo group via a board resolution authorized the sale of their land to INC, the only property of IDP. The original board of trustees of IDP now questioned the said sale before the SEC. SEC: Declared the sale null and void. CA: Set aside the decision of the SEC. Held: The Deed of Absolute Sale executed by the fake Carpizo Board and INC was intrinsically void ab initio. The Tandang Sora property, it appears from the records, constitutes the only property of IDP. Hence, its sale to a 3rd party is a sale or disposition of all the corporate property and assets of IDP falling squarely within the contemplation of the foregoing section. For the sale to be valid, the majority vote of the legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bonafide members of the corporation should have been obtained. These twin requirements were not met as the Carpizo group which voted to sell the Tandang Sora property was a fake BOT, and those whose names and signatures were affixed by Carpizo group together with the sham BR authorizing the negotiation for the sale were, from all indications, not bona fide members of IDP as they were made to appear to be.
RAMIREZ v. ORIENTALIST Orientalists Co. was engaged in the business of manufacturing and conducting a theatre in Manila for the exhibition of films. On the other hand, J.F. Ramirez who is based in Paris, was engaged in the production or distribution of cinematographic material. In this enterprise, J.F. Ramirez, was represented in Manila by his son, Jose Ramirez. Sometime in July 1913, negotiations begun between the 2 parties for the purpose of placing the exclusive agency of Éclair Films and Milano Films in the hands of Orientalist. Ramon J.
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Fernandez, one of the directors of Orientalist and its treasurer, was chiefly active in this matter. Before the end of the July, Jose Ramirez placed in the hands of Fernandez an offer stating in detail the terms upon which his father would undertake to supply from Paris the aforesaid films. Accordingly, Fernandez had an informal conference with all the members of the company’s BOD except one, with the approval of those with whom he had communicated. Then he addressed 2 subsequent letters accepting the offer for the exclusive agency of Éclair and Milano films. In due time the films began to arrive in Manila, a draft for the cost and expenses incident to each shipment being attached to the proper bill of lading. It appears that Orientalist Company was without funds to meet these obligations and the first few drafts were dealt with in the following manner: The drafts, upon presentment thru the bank, were accepted in the name of Orientalist Company by its president B. Hernandez and were taken by the latter with his own funds. As the drafts has thus been paid by B. Hernandez, the films which had been procured by payment of said drafts were treated by him as his own property and they in fact never came into the actual possession of Orientalist, as owner at all, though it is true that Hernandez rented the films to Orientalist and they were exhibited by in the Oriental theatre under an arrangement which was made between him and the theatre’s manager. Later, several other remittances of films from Paris came. Like the same, all of the drafts were drawn on Orientalist but was accepted by Hernandez except the last which the latter accepted individually. The drafts when they fell due were not paid. Ramirez instituted an action against Orientalist and Fernandez. TC: Declared Orientalist as principal debtor and Fernandez is subsidiarily liable as guarantor. From this judgment, both of the Orientalist and Fernandez appealed. No sworn answer denying the genuineness and due execution of the contracts in question or questioning the authority of Fernandez to bind Orientalist was filed in this case, but evidence was admitted without objection from Ramirez tending to show that Fernandez has no such authority. The evidence consisted of extracts from the minutes of the proceedings of the company’s stockholders, showing that the making of this contract had been under consideration in both bodies and that the authority to make the same had been withheld by the stockholders.
Issue: 1) Whether the admission resulting from the failure of Orientalist to deny the due execution of the contracts under oath is binding upon it for all purposes of this lawsuit or such failure should be considered a mere irregularity of procedure
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which was waived when the evidence referred to was admitted without objection from Ramirez. 2) Liability of Orientalist and Fernandez upon the letters of acceptance
Held: TC ruling affirmed. I.
Failure of Orientalist to make any issue in its answer with regard to the authority of Fernandez to bind it, and particularly its failure to deny specifically under oath the genuineness and due execution of the contracts sued upon, have the effect of eliminating the question of his authority from the case, considered as a matter of mere pleading.
II.
SC considered the liability of Orientalist on the merits just as if that liability had been properly put in issue by a specific answer under oath denying the authority of Fernandez to bind it. It must be at the outset premised that Fernandez, as treasurer, had no independent authority to bind the company by signing its name to the letters in question. It is declared under the Corporation Law that corporate powers shall be exercised and all corporate business conducted by the BOD. And this principle is recognized in the by-laws of the corporation in question which contain a provision declaring that the power to make contracts shall be vested in the BOD. However, the fact that the power to make corporate contracts is thus vested in the BOD, does not signify that a formal vote of the board must always be taken before contractual liability can be fixed upon a corporation for the board can create liability like an individual by other means than a formal expression of its will.
In the case at bar, it appears on evidence that on the date upon which the letter accepting the offer of Éclair films was dispatched, the BOD of the Orientalist convened in a special session in the office of Fernandez at the request of the latter. Present there were 4 members, including the president, who under the by-laws is authorized to enter into contracts. All signified their consent to the making of the contracts. It thus appears that the BOD, before the financial inability of the corporation to proceed with the project was revealed, had already recognized the contracts as being in existence and had proceeded to take the necessary steps to utilize the films. BOARD OF LIQUIDATORS v. KALAW
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NACOCO is a non-profit governmental organization which is engaged in the buying, selling or bartering of coconut, copra, dessicated coconut, as well as their by-products or to act as agent or broker of producers, dealers or merchants thereof. After the passage of RA5, NACOCO embarked on copra trading activities. Several contracts were entered into by the General Manager and Board Chairman Maximo Kalaw. However, an unhappy chain of events conspired to deter NACOCO from fulfilling these contracts. 4 devastating typhoons visited the Philippines so coconut tree throughout the country suffered extensive damage thus copra production decreased thereby increasing the prices of copra. Warehouses were also destroyed and others (domino effect). When it became clear that the contracts would be unprofitable, Kalaw submitted them to the board for approval. Kalaw made a full disclosure of the situation, apprised the Board of the impending heavy losses. However, no action was taken on the contracts. Neither did the board vote thereon. Not long after, the board met again. They unanimously approved the contracts entered into by Kalaw. But as expected, NACOCO partially performed the contracts so the buyers threatened damage suits against NACOCO. All were subjected to settlements. After the settlements were made, NACOCO filed a case before the LC against Kalaw and the other directors for the recovery of the total sum of settlements it paid to the buyers. It charges Kalaw with negligence with breach of trust for having approved the new set of contracts without approval of the BOD. LC dismissed the complaint. Since an Executive Order was passed by President Roxas abolishing the BOD of the various corporations. The powers, functions, and duties under existing laws of the BOD of the various corporations were assumed and exercised by the Board of Liquidators. Thus it was them who filed the present appeal to the SC. The Board of Liquidators in imputing negligence to Kalaw rely on the by-laws of the NACOCO which recites the duties of the general manager which is: To perform or execute on behalf of the Corporation upon prior approval of the Board, all contracts necessary and essential to the proper accomplishment for which the Corporation was organized. Issue: WON Kalaw was negligent for having entered into the questioned contracts without prior approval of the BOD Held: Kalaw not negligent. A rule that has gained acceptance through the years is that a corporate officer entrusted with the general management and control of its business has implied authority to make any contract or do any other act which is necessary and appropriate to the conduct of the 104
ordinary business of the corporation. As such officer, he may without special authority from the BOD perform all acts of an ordinary nature, which by usage or necessity are incident to his office and may bind the corporation by contracts in matters arising in the usual course of the business. More so, long before the disputed contracts came into being, Kalaw contracted by himself alone as general manager. In fact, because the BOD of NACOCO were so pleased with him, he was given a special bonus in “recognition of the signal achievement rendered by him in putting the corporation’s business on a self-sufficient basis within a few months after assuming office despite numerous handicaps and difficulties. These previous contracts, it should be stressed, were signed by Kalaw without prior authority from the Board. Said contracts were known all along to the board members. Nothing was said by them. The aforesaid contracts stand to prove one thing: Obviously NACOCO board left the conclusion of the contracts to the sound discretion of Kalaw. In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute contracts for and in NACOCO’s behalf without prior board approval. If the by-laws were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that board itself, by its acts and through acquiescence practically laid aside the by-law requirement of prior approval. Lastly, the board undoubtedly ratified the contracts in dispute. They ratified the contracts despite confirmation from Kalaw that said contracts would cause heavy losses. Indeed, if not for the typhoons, NACOCO could have, with ease, met its contractual obligations. ACUNA v. BATAC PRODUCERS
Emiliano Acuna and Batac Producers Cooperative Marketing Association, Inc. thru its manager, Leon Verano entered into a tentative agreement whereby the Acuna would give 20k to Batac Producers to be utilized by the latter as additional funds for its Virginia tobacco buying operations during the current redrying season. It also included that for Acuna shall be constituted as Batac’s representative in Manila, in charged for the handling and facilitating of tobacco and for these services, Acuna shall receive a remuneration of 50 cents per kilo of tobacco. Said tentative agreement was favorably received by the BOD of Batac Producers. Later, said BOD unanimously authorized Verano to execute any contract on
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behalf of the corporation for the purpose of securing additional funds for the corporation and secure the services of any person or entity to collect the payments due to the corporation. Acuna alleges that he was made to believe that the original agreement between him and Verano except for his remuneration is acceptable to the corporation. Subsequently, the formal agreement was executed, duly authorized by the corporation’s BOD. According to Acuna, he was assured by the BOD, upon his inquiry, that a formal approval of said agreement by the board was no longer necessary, as it was a mere formality appended to its authorizing resolution and all the members of the board had already agreed to the same. Acuna complied with his obligations under the contract. But after doing so, the agreement was disapproved by the BOD. Hence, Acuna filed a case against the corporation but CFI dismissed the complaint on the ground that it states no cause of action. Held: A perusal of the complaint reveals that it contains sufficient allegations indicating such approval or at least subsequent ratification. It must be noted that Acuna met with each and all of the individual BOD members (who constituted the entire BOD) and discussed with them extensively the tentative agreement and he was made to understand that it was acceptable to them, except as to Acuna’s remuneration. But that matter was subsequently settled. More so, after the agreement was formally executed, he was assured by said directors that there would be no need of formal approval by the board. It should be noted that although the contract required such approval it did not specify just in what manner the same should be given. There is abundant authority in support of the proposition that ratification may be express or implied and that implied may take diverse forms, such as by silence or acquiescence, by acts showing approval or adoption of the contract, or by acceptance and retention of benefits flowing therefrom. PRICE v. MARTIN Sulu Development Company held its stockholders meeting on Nov. 1925 where they elected new officers of the corporation and at which the proposed mortgage of the corporation in favor of another corporation was approved. One of the stockholders of the corporation was Mr. Dean Worcester, in whose name the 97 shares of stocks at that time stood upon the books of the corporation. But since he was already deceased at that time, her 97 shares of stock were voted by his proxy, Mrs. Worcester. Here now comes Martin 106
with all the pertinent documents, claiming to be the owner of the said shares. According to him, he delivered in trust the shares of stocks to the late Dean Worcester to be held and used for his (Martin’s) benefit. Copies of the documents relied upon by Martin were made a part of the record but apparently no action was taken by the stockholders or by the directors and at the meantime, Mrs. Worcester’s proxy apparently voted the stock without protest on the part of Martin or any other stockholder. Martin filed a case before the CFI to question the voting made by the proxy. TC: Held the voting of Mrs. Worcester legal. Held: TC decision affirmed. Martin contends that the transference of the books of the company of the 95 shares of stocks in the name of Mrs. Worcester was fraudulent and illegal. The evidence of record, however, under all the circumstances of the case, fails to demonstrate the allegation of fraud. Mrs. Worcester acted in GF and in the honest belief that she had not only a legal right but a duty to participate in the stockholders meeting. Until challenged in a proper proceeding, a stockholder according to the books of the company has a right to participate in that meeting and in the absence of fraud the action of the stockholders’ meeting cannot be collaterally attacked on account of such participation. A person who has purchased stock and who desires to be recognized as a stockholder, for the purpose of voting, must secure a standing by having the transfer recorded upon the books. If the transfer is not duly made upon request, he has, as remedy, to compel it to be made. DELA RAMA v. MA-AO SUGAR CENTRAL CO. INC. In 1950, Ma-ao Sugar Central Co. Inc thru its president, subscribed for 300k worth of capital stock of Philippine Fiber Processing Co. 4 majority stockholders commenced a representative suit against the corporation and 3 other directors saying that the investments made by Ma-ao are unauthorized not having been approved by a board resolution and no ratification from the stockholders. LC: enjoined Ma-ao from investing with any other corporation whose purpose is not connected with the sugar central business. But as to the investments made to Philippine Fiber Processing, the LC ruled that since Philippine Fiber was engaged in the manufacture of sugar bags it was perfectly legitimate for Ma-ao Sugar, a company engaged in the manufacturing of sugar, to invest in it. Held: Affirmed the ruling of the LC
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If the investment is made in the corporation whose business is important to the investing corporation and would aid in its purpose, to require authority of the stockholders would be to unduly curtail the power of the BOD. Under the law, if the investment by the corporation is necessary to accomplish its primary purpose as stated in the AOI, ratification is not necessary. However, ratification is necessary is investment is to accomplish or in pursuance to a secondary purpose GOKONGWEI v. CA In another petition filed by Gokongwei before the SEC, it raised that SMC invested corporate funds in Hongkong Brewery & Distellery, Ltd., a foreign corporation, without prior authority of the stockholders thus violating the Corporation Law. SEC however allowed the said investment made to Hongkong Brewery since the stockholders ratified the same. Held: The Corporation Law allows a corporation to ‘invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized’ provided that its BOD has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least 2/3 of the voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least 2/3 of the voting power is necessary. As stated by SMC, the purchase of beer manufacturing facilities by SMC was an investment in the same business stated as its main purpose in its AOI, which is to manufacture and market beer. It appears that the original investment was made by SMC when they purchased a beer brewery in Hongkong for the manufacture and marketing of San Miguel beer thereat. And assuming that the BOD of SMC had no authority to make the assailed investment, there is no question that a corporation, like an individual, may ratify and thereby render binding upon it the originally unauthorized acts of its officers or other agents. This is true because the questioned investment is neither contrary to law, morals, public order nor public policy. It is a corporate transaction or contract which is within the corporate powers, but which is defective from a purported failure to observe in its execution the requirement of the law that the investment and its ratification by said stockholders obliterates any defect which it may have had at the outset. Mere ultra vires acts of those 108
which are not illegal and void ab initio but are not merely within the scope of the AOI, are merely voidable and may become binding and enforceable when ratified by the stockholders. Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is apparently relevant to the corporate purpose. The mere fact that SMC submitted the assailed investment to the stockholders for ratification cannot be construed as an admission that SMC had committed an ultra vires act, considering the common practice of corporations of periodically submitting for ratification of their stockholders the acts of their directors, officers and managers. LEE v. CA A complaint for a sum of money was filed by International Corporate Bank against Lee and the other directors of Alfa Integrated Textile Mills. Lee and the other directors in turn filed a 3rd party complaint against ALFA. In the case, the TC issued an order requiring the issuance of an alias summon to ALFA thru DBP after Lee informed the court that the summons for ALFA have been erroneously served considering that the management of ALFA has been transferred to DBP. In a manifestation, DBP informed the court that it was not authorized to receive the summons for ALFA since DBP has not taken over the said company which has a separate and distinct personality. In view of this manifestation, the TC ordered DBP to serve summon to ALFA. DBP again in a manifestation suggested that service of summons can be had to Lee and his group, being directors of ALFA. Lee and his group filed for MR on the ground that they were no longer officers of ALFA based on the VTA executed between all the stockholders of ALFA and DBP hence it could no longer receive summons or any court processes for or on behalf of ALFA. But TC upheld the validity of the service of summons on ALFA thru Lee and the other directors. Lee and his group filed another MR. TC reversed itself and held that Lee and his group were no longer corporate officers of ALFA thus the service of summons on them for ALFA is not proper. CA reversed the decision so Lee and his group appealed to the SC. Lee and his group maintain that with the execution of the VTA between them and the other stockholders of ALFA, as one party and the DBP as the other party, where they assigned and transferred all their shares in ALFA to DBP as trustee, they can no longer be considered directors of ALFA since under the corporation law, a director must in his own right hold at least one share. Issue: WON Lee and the other directors are no longer directors of ALFA due to the execution of the VTA
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Held: No longer directors. Considering that the VTA between ALFA and the DBP transferred legal ownership of the stock covered by the agreement to the DBP as trustee, the latter became the stockholder of record with respect to the said shares of stocks. In the absence of a showing that DBP had caused to be transferred in their names one share of stock for the purpose of qualifying as directors of ALFA, Lee and his group can no longer be deemed to have retained their status as officers of ALFA which was the case before the execution of the VTA. Not being directors of ALFA, service of summons upon them is not proper. It would have been proper if made upon DBP since there appears to be no dispute from the records that DBP has indeed taken over the full management and control of ALFA. Notes: VTA is an agreement in writing whereby one or more shareholders of a corporation consent to transfer his or her shares to a trustee in order to vest in the latter voting or other rights pertaining to said shares for a period of 5 years upon the fulfillment of statutory conditions and such other terms and conditions specified in the agreement. The 5 year-period may be extended in cases where the voting trust is executed pursuant to a loan agreement whereby the period is made contingent upon full payment of the loan. Criteria to distinguish VTA from proxy and pooling agreements: d) The voting of rights of the stock are separated from the other attributes of ownership e) The voting rights granted are intended to be irrevocable for a definite period of time f) The principal purpose of the grant of voting rights is to acquire voting control of the corporation NIDC v. AQUINO Batjak Inc. is a corporation primarily engaged in the manufacture of coconut oil and copra cake for export. Batjak’s financial condition deteriorated to the point of bankruptcy. As of that year, Batjaks’s indebtedness to private banks and the PNB amounted to 11.9 M. As security for payment of its obligations and advances against shipments, Batjak mortgaged its 3 coco-processing oil mills to 3 banks. In need for additional operating capital to place the 3 coco processing mills at their optimum capacity and maximum efficiency and to settle, pay or otherwise liquidate pending financial
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obligations with the different private banks, Batjak applied to PNB for additional financial assistance. A financial agreement was concluded. Under said agreement, NIDC (wholly-owned subsidiary of PNB) would invest in Batjak (in the form of preferred shares of stocks convertible within 5 years to common stock) to liquidate the latter’s obligation with the 3 private banks and the balance of the investment would be applied to Batjak’s due account of 5M with PNB. The terms of the FA were complied with by both parties. One of the terms of the FA mentioned of an execution of a VTA in favor of NIDC by the stockholders representing 60% of its outstanding paid-up and subscribed shares of Batjak. The VTA was for a period of 5 years and upon its expiration, was to be the subject of negotiation between Batjak and PNB-NIDC. Later however, forced by the insolvency of Batjak, PNB instituted a extrajudicial foreclosure proceedings against the 2 oil mills of Batjak. The properties were sold to PNB as highest bidder. Final certificates of sales were issued in favor of PNB after Batjak failed to exercise its right to redeem the foreclosed properties within the allowable 1year period of redemption. Subsequently, PNB transferred the ownership of the 2 oil mills to NIDC. Thereafter, NIDC similarly foreclosed extrajudicially the last oil mill of Batjak. It was sold to NIDC as the highest bidder. After Batjak failed to redeem the property, NIDC consolidated its ownership of the oil mill. 3 years thereafter, Batjak thru their counsel wrote NIDC inquiring if the same is still interested in negotiating with the renewal of the VTA. No reply was received by Batjak so counsel again wrote to NIDC that they are now assuming that NIDC was no longer interested with the renewal of said VTA and in view thereof, requested for the turnover and transfer of all Batjak’s assets, properties, management and operations. NIDC replied confirming the fact that it had no intention whatsoever to comply with the demands of Batjak. Batjak then filed before the CFI a special civil action for mandamus with PI against NIDC to enjoin the latter from disposing other equipment in Batjak’s factory. Before the court could act on the motion to grant PI, a petition for receivership as alternative for the writ of PI was filed by Batjak. NIDC filed a MD which the CFI denied. CFI also appointed 3 receivers. NIDC appealed. Batjak claims its right of possession of the 3 oil mills from the VTA. According to Batjak, under the agreement, NIDC was constituted as trustee for the assets, management and operations of Batjak. And that due to the expiration of the VTA, NIDC should now turn over the assets of the 3 oil mills. Held: Reversed decision of the CFI; MD granted and petition for receivership denied. It is true that under the VTA, NIDC was constituted as trustee only of the voting rights of 60% of the paid-up and outstanding shares of stock in Batjak. It is provided in the VTA that upon the termination of the agreement, NIDC was to return the certificates of stocks
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belonging to Batjak’s stockholders which were delivered in the first place to NIDC under the terms of the VTA. HOWEVER, the acquisition in the present case by PNB-NIDC of the properties in question was not made or effected under the capacity of a trustee but as a foreclosing creditor for the purpose of receiving on a just and valid obligation of the bank. More so, the prevention of imminent danger is the guiding principle that governs courts in the matter of appointing receivers. In the case at bar, Batjak in its petition for receivership failed to present any evidence to establish the requisite condition that the property is in danger of being lost, removed, or materially injured unless a receiver is appointed to guard and preserve it. PHILPOTTS v. PHIL MANUFACTURING W.G. Philpotts, a stockholder in the Phil. Manufacturing Co. filed a case before the CFI which seeks to obtain a writ of mandamus to compel the corporation and its officers to permit him in person or by some authorized agent or attorney to inspect and examine the records of the business transacted by the company within a certain period of time. The defendants interposed a demurrer which the court granted. W.G. Philpotts desires to exercise the right to inspect the books of the corporation through an agent or an attorney. However, the corporation maintains that the right of examination in the stockholder granted under the Corporation Law must be exercised in person. Held: Demurrer is overruled. Writ of mandamus issued
The right of inspection given to a stockholder under the Corporation Law can be exercised either by himself or by any proper representative or attorney in fact and either or without the attendance of the stockholder. This is in conformity with the general rule that what a man may do in person he may do through another. There is nothing in the stature that would justify the qualification of the right in the manner suggested by the defendants. The right may be regarded as person, in the sense that only the stockholder may enjoy it, but the inspection and examination may be
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made by another. Otherwise, it would be unavailing in many instances. PARDO v. HERCULES Antonio Pardo, a stockholder of Hercules Lumber Company Inc. seeks by this original proceeding in the SC to obtain a writ of mandamus to compel the officers of the corporation (corporate secretary) to permit him and his duly authorized agent and representative to examine the records and business transactions of said company. The corporate secretary has refused to permit Pardo or his agent to inspect the records of the company at times desired by Pardo because under a board resolution, the right of examination can be exercised from the 15th to the 25th of March on that year. The officers of the corporation maintained that this resolution of the board constitutes a lawful restriction on the right conferred by the statute and it is insisted that as Pardo has not availed himself of the permission to inspect the books and transactions of the company within the 10 days thus defined, his right to inspection and examination is lost, at least for that year. Held: Mandamus will lie The general right given by the statute may not be lawfully abridged to the extent attempted in the resolution. It may be admitted that the officials in charge of a corporation may deny inspection when sought at unusual hours or under improper conditions. But neither the executive officers nor the BOD have the power to deprive a stockholder the right of inspection altogether. A by-law unduly restricting the right of inspection is undoubtedly invalid. It will be noted that our statute declares that the right of inspection can be exercised at a reasonable hour. This means at reasonable hours on business days throughout the year and not merely during some arbitrary period of a few days chosen by the directors. VERAGUTH v. ISABELA SUGAR An extraordinary meeting of the directors of Isabela Sugar was held. A notice of meeting was sent to Eugenio Veraguth thru registered mail but the notice was not received by Veraguth because the letter was sent to his address in Isabela when his post-office address is at Negros Occidental, and this fact was known by the officers of the corporation because previous notices of meetings were sent to Negros Occidental. As a result, Veraguth received the notice several days after the meeting was had. For this reason, Veraguth telegraphed the corporate secretary asking the latter to forward in shortest possible time a certified copy of the resolution of the BOD passed on said
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meeting. To this the secretary made answer by letter stating that since the minutes of the meeting in question had not been signed by the directors present, a certified copy could not be furnished and that as to other proceedings of the stockholders, a request should be made to the president. It further appears that the BOD on that meeting adopted a resolution providing for inspection of books and the taking of copies by authority of the president previously obtained in each case. Veraguth filed for special action for mandamus to compel the officers of the corporation to give him a copy or record of the said board resolution as this right to inspect is well vested upon him as director of the corporation. Held: Mandamus will not lie As a general rule, directors of a corporation have the unqualified right to inspect the books and records of the corporation at all reasonable times. (Incident thereto, a director or stockholder can of course make copies of the books of the corporation but cannot without an order of a court, be permitted to take the books from the office of the corporation.) However, the SC held that there was nothing improper occurred when the corporate secretary declined to furnish certified copies of minutes which had not been approved by the BOD. And that while so much of the last resolution of the BOD as provides fro the prior approval of the president of the corporation before the books of the corporation can be inspected puts an illegal obstacle in the way of a stockholder or director, that resolution so far as we are aware, had not been enforced to the detriment of anyone. Dissenting: In any event the directors had adopted the resolution and whether it was signed or not, Veraguth as a director of the corporation had a right to see. GONZALES v. PNB Ramon A. Gonzales, purchaser and owner of one share of stock of PNB filed a special civil action for mandamus before the CFI against PNB praying that the latter be ordered to allow him to look into the books and records of the banking corporation. It was found that Gonzales’ motive in filing the mandamus action is to be able to satisfy himself as to the truth of the published reports regarding certain transactions entered into by the bank and to inquire the validity of the certain transactions entered into by PNB. The CFI denied his prayer on the grounds that the right to inspection granted under the Corporation Law is not absolute, but is limited to purposes reasonably related to the interest of the stockholder, must be asked for in GF for a specific and honest purpose and not gratify curiosity or for speculative or vicious purposes. And that such examination would violate the confidentiality of the records of the bank as provided in its charter.
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Held: Although Gonzales has claimed that he has justifiable motives in seeking the inspection of the books of the bank, he has not set forth the reasons and purposes for which he desires such inspection, except to satisfy himself as to the truth of the published reports regarding certain transactions entered into by the bank and to inquire in their validity. The circumstances under which he acquired one share of stock in the bank purposely to exercise the right of inspection do not argue in favor of his GF and proper motivation. Admittedly, he sought to be a stockholder in order to pry into the transactions entered into by the bank even before he became a stockholder. His obvious purpose was to arm himself with materials he can use against the bank for acts done by the latter when he was a total stranger to the same. He could have been impelled by a laudable sense of civic consciousness, but it could not be said that his purpose is germane to his interest as a stockholder. More so, PNB is not an ordinary corporation. Having a charter of its own, it is not governed as a rule by the Corporation Code. To allow Gonzales to look into the records of PNB, that inspection sought to be exercised by him would be violative of PNB’s charter especially as to the provisions which relates to the confidentiality of information regarding PNB’s affairs. RICHARDSON v. ARIZONA FUELS Plaintiffs Richardson and his group are stockholders of Major Oil Corporation. Defendants are Arizona Fuels, Eugene Dalton and Deanna Dalton. Eugene Dalton is alleged to be a controlling stockholder and director of Arizona and Major. Arizona Fuels alleges to be the legal or beneficial owner of 47% of the issued and outstanding shares of stocks of Major. The amended complaint filed with the district court of Salt Lake City by the plaintiffs described the action filed therein as one brought as a class action. Plaintiffs in the district court moved for an order certifying the said suit as a class action and for the appointment of a receiver for Major. Both motions were granted by the district court. Arizona Fuels attack the said orders. The amended complaint states 12 causes of action, the first 8 of which allege some fraudulent appropriation of or scheme to appropriate Major’s assets by defendants. These causes of action seek to require the defendants to disgorge and return to Major the assets wrongfully obtained. Of the remaining 4 causes, 3 seek compensatory or punitive damages for injury attributable to alleged breaches of fiduciary duty implicit in the fraudulent acts enumerated in the first 8 causes. The final cause of action seeks appointment of a receiver.
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There is no that the first of the 8 causes of action allege injury to the corporation only. The injury alleged can be asserted by plaintiffs only derivatively as stockholders on behalf of the corporation. This leaves the 9th, 10th, and 11th causes of action to be analyzed to determine if they state claims which may be pursued by the stockholders as a class to redress injuries to the stockholders as individuals. Issue: WON the district court erred in certifying the suit as a class action Held: Reversed the decision of the district court The 9th cause of action alleges initially that the defendants breached their fiduciary duties to Major Oil and its stockholders. As a general rule, directors and other officers of a corporation stand in a fiduciary to the corporation. But while the statement is made that directors and officers stand in like relation to stockholders of the corporation, it is clear that the relation is to stockholders collectively. The distinction between a fiduciary duty owed to the corporation as a whole as opposed to the stockholders collectively does not appear to be one in substance in this case. Although plaintiffs frames this claim, as one belonging to the shareholders, the claim for relief belongs to the corporation. The 10th cause of action alleges that the defendants defrauded the stockholders of Major. The fraud is premised on defendants’ fiduciary duty owed to the shareholders of the corporation. However, in nor regard can the 10th cause of action be interpreted as stating a claim belonging to the stockholders individually and therefore that claim for relief will not support a class action. The 11th cause of action alleges the possibility of other conversion of Major’s assets and alleges that defendants should be required to account to the stockholders for all the assets of Major and disgorge themselves of any assets so converted. This claim also clearly belongs to the corporation. The class action device, if used inappropriately and in lieu of derivative action is likely to result in grave injustices, not the least of which is the diversion of assets recovered in a lawsuit from creditors of a corporation to stockholders, thereby reversing long established substantive rules of law as to the relative priorities of the claims of creditors and stockholders to the assets of an insolvent corporation. Notes: A derivative action must necessarily based on a claim for relief which is owned by the stockholders’ corporation. Indeed, a prerequisite for filing a derivative action is the 116
failure of the corporation to initiate the action in its own name. The stockholder, as a nominal party, has no right, title or interest whatsoever in the claim itself- whether the action is brought by the corporation or by the stockholder in behalf of the corporation. A class action on the other hand is a predicated ownership of the claim for relief sued upon in the representative of the class and all other class members in their capacity as individuals. Shareholders of the corporation may of course have claims for relief directly against their corporation because the corporation itself has violated rights possessed by the shareholders, and a class action would be an appropriate means for enforcing their claims. A recovery in a class action is a recovery which belongs directly to the shareholders. However, in a derivative action, the plaintiff shareholder recovers nothing and the judgment runs in favor of the corporation. PASCUAL v. DEL SAZ OROSCO This is an appeal by Pascual, a stockholder of Banco Espanol-Filipino, from a judgment of the LC sustaining a demurrer to the first and second causes of action in its amended complaint against said banking corporation. It is alleged in such complaint that during the years 1903, 1904, 1905, and 1907, defendants (constitute the majority of the present BOD of the bank) without the knowledge, consent or acquiescence of the stockholders, deducted their respective compensation from the gross income instead of getting it from the net profits of the bank thereby defrauding the bank and the stockholders. Despite demands defendants refused to refund to the bank the sums so misappropriated or any part thereof. Noteworthy to remember is that Pascual only become a stockholder on Nov. 13, 1903. The action was brought by Pascual, in his own right as a stockholder of the bank, for the benefit of the bank, and all the other stockholders. Held: Pascual sues on behalf of the corporation which even though nominally a defendant is to all intents and purposes the real plaintiff in this case. It affirmatively appears from the complaint that Pascual was not a stockholder during any of the time in question in this second cause of action. It is self-evident that Pascual in the case at bar was not, before he acquired in September 1903, the shares which he owns now, injured or affected in any manner by the transactions set forth in the second cause of action. His vendor could have complained of these transactions, but he did not choose to do so. The discretion whether to sue to set them aside, or to acquiesce in and agree to them, is incapable of transfer. If the Pascual himself had been injured by the acts of defendant’s predecessors that is another matter. He ought to take things as he found them when he voluntarily acquired his ten shares. If he was defrauded in the purchase of these shares he should sue his vendor.
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It is a settled rule that if the party himself, who is the victim of the fraud or usury, chooses to waive his remedy and release the party, it does not belong to a subsequent purchaser under him to recall and assume the remedy for him. A stockholder in a corporation who was not such at the time of the transactions complained of, of whose shares, had not devolved upon him since by operation of law, cannot maintain suits of this character, unless such transactions continue and are injuries to the stockholder, or affect him especially and specifically in some other way. Note: In derivative suits, the corporation itself and not shareholder is the RPI. EVANGELISTA v. SANTOS This is an action by the minority stockholders of a corporation against its principal officer for damages resulting from him mismanagement of its affairs and misuse of its assets. The complaint alleges that are minority stockholders of Vitali Lumber Company Inc., a corporation organized for the exploitation of a lumber concession. Defendant is the president, manager and treasurer of the corporation. It is alleged that said defendant in such triple capacity, through fault, neglect and abandonment allowed its lumber concession to lapse and its properties and assets to disappear, thus causing the complete ruin of the corporation and total depreciation of its stocks. The complaint prays that the defendant make good the losses occasioned by his mismanagement and pay to them the value of their respective participation in the corporate assets on the basis of their respective holdings. After hearing, the LC rendered its order granting the motion for dismissal upon the 2 grounds alleged by defendant to wit, (a) improper venue and (b) questionable right of the plaintiffs to bring this action for their benefit. Reconsideration of this order having denied, plaintiffs appealed to the SC. Held: The complaint shows that the action is for damages resulting from mismanagement of the affairs and assets of the corporation by its principal officer, it being alleged that defendant’s maladministration has brought about the ruin of the corporation and the consequent loss of its stocks. The injury complained of is thus primarily to the corporation so that the suit for damages claimed should be by the corporation rather than by the stockholders. The stockholders may not directly claim those damages for themselves for that would result in the appropriation by and the distribution among them 118
of part of the corporate assets before the dissolution of the corporation and the liquidation of its debts and liabilities, something which cannot be legally done under the Corporation Law. But while it is to the corporation that the action should pertain in cases of this nature, however, if the officers of the corporation who are the ones called upon to protect their rights, refuse to sue or where a demand upon them to file the necessary suit would be futile because they are the very ones to be sued or because they hold the controlling interest in the corporation, there in that case any one of the stockholders is allowed to bring suit. But in that case, the corporation itself and not the plaintiff stockholder is the RPI, so that such damages as may be recovered shall pertain to the corporation. In other words, it is a derivative suit brought by a stockholder as the nominal party plaintiff for the benefit of the corporation, which is the RPI. In the present case, the plaintiff stockholders have brought the action not for the benefit of the corporation but for their own benefit, since they ask that the defendant make good the losses occasioned by his mismanagement and pay to them the value of their respective participation in the corporate assets on the basis of their respective holdings. Clearly, this cannot be done until all corporate debts, if there be any, are paid and the existence of the corporation terminated by the limitation of its charter or by lawful dissolution in view of the provisions of the Corporation Law. It results that plaintiffs’complaint shows no cause of action in their favor so that the LC did not err in dismissing the complaint on that ground. While plaintiffs asks for a remedy to which they are not entitled unless the requirement of the Corporation Law be first complied with, SC noted that the action stated in the complaint is susceptible of being converted into a derivative suit for the benefit of the corporation by a mere change in the prayer. Such amendment, however is not possible already since the SC upheld the finding of the LC that the complaint has been filed in the wrong court, so that the same has to be dismissed if that will be the case. REPUBLIC BANK v. CUADERNO Direct appeal from an order of the CFI dismissing Republic Bank’s complaint on the ground of failure to state cause of action. In the CFI, Damaso Perez, a stockholder of Republic Bank, instituted a derivative suit for and in behalf of said bank against Miguel Cuaderno (CB Governor), Bienvenido Dizon, Monetary Board of CB, Pablo Roman (chairman of the BOD of Republic Bank and Executive Loan Committee) and the other BOD members. For a cause of action, Perez alleged that he had complained to the Monetary Board of the CB about certain frauds allegedly committed by Roman in grave abuse of his fiduciary duty and taking advantage of his said positions and in connivance with the other officials of the bank. Roman, primarily was accused to have fraudulently
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granted or caused to be granted loans to fictitious and non-existing persons and to their close friends, relatives and/or employees, who were in reality their dummies, on the basis of fictitious and inflated values of real estate properties. When investigated, other similar frauds were subsequently discovered. But before the criminal case is filed, Roman hired the services of Cuaderno as technical consultant and selected Dizon as chairman of the BOD with the consent of the other BOD members. The complaint therefore prayed that a writ of PI against the Monetary Board to prevent its confirmation of the appointments of Cuaderno and Dizon and against Roman for appointing or selecting the officers or directors of the bank and against the recognition of such appointees until final determination. Defendants filed a MD which the court granted. Perez thereupon appealed to the SC. Held: The Court held that such a suit need not be authorized by the corporation where its objective is to nullify the action taken by its manager and the BOD, in which case any demand for intra-corporate remedy would be futile. A stockholder in a banking corporation has a right to maintain a suit for and on behalf of the corporation, but the extent of such right depends upon when and for what purpose he acquired the shares of stock of which he is the owner. The complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of Bienvenido Dizon to head the Board of Directors of the Republic Bank, were made only to shield Pablo Roman from criminal prosecution and not to further the interests of the Bank, and avers that both men are Roman's alter egos. There is no denying that the facts thus pleaded in the complaint constitute a cause of action for the bank: if the questioned appointments were made solely to protect Roman from criminal prosecution, by a Board composed by Roman's creatures and nominees, then the moneys disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or diversion of corporate funds, since the Republic Bank would have no interest in shielding Roman, and the directors in approving the appointments would be committing a breach of trust; the Bank, therefore, could sue to nullify the appointments, enjoin disbursement of its funds to pay them, and recover those paid out for the purpose, as prayed for in the complaint in this case
IV. FUNDAMENTAL CHANGES a) CHARTER AMENDMENTS a. Articles of Incorporation Amendment of Articles of Incorporation (Sec. 16, Corporation Code) Requisites (unless otherwise prescribed by this Code or by special law) 1. majority vote of the board of directors or trustees 2. and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or the vote or written assent of two-thirds (2/3) of the members if it be a non-stock corporation 120
3. without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code 4. amendment must be for legitimate purposes 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 amendment shall take effect: 1. upon its approval by the Securities and Exchange Commission 2. or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation. b. By Laws Amendments to By-Laws (Sec. 48, Corporation Code) Requisites: 1. Majority vote of the board of directors or trustees 2. Approval vote of 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. 3. DELEGATION OF POWER. 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 Delegated power 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.
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Whenever any amendment or new by-laws is 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. b) COMBINATIONS a. Concept of Merger and Consolidation -
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Consolidation – union of two or more existing corporations to form a new corporation called the consolidated corporation o It is the combination by agreement between 2 or more corporations by which their rights, franchises, privileges and properties are united and become those of a single, new corporation, composed generally, although not necessarily, of the stockholders of the original corporations o In consolidation, all the constituent corporations are dissolved and absorbed by the new consolidated enterprise Merger –union whereby one or more existing corporations are absorbed by another corporation which survives and continues the combined business o In merger, all constituent corporations, except the surviving corporation, are dissolved. 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 (Sec. 76, Corporation Code)
b. Procedure - Plan or Merger or Consolidation (Sec. 76, Corporation Code) 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:
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1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; 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. -
Stockholders’ or Members’ Approval (Sec. 77, Corporation Code) 1. Approval vote of the majority of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation 2. Plan of merger or consolidation shall be submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose. 3. Notice of such 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, as the case may be. 4. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in case of stock corporations or at least two-thirds (2/3) of the members in case of nonstock corporations, shall be necessary for the approval of such plan. 5. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with this Code However, if after the approval by the stockholders of such plan, the board of directors should decide to abandon the plan, the appraisal right shall be extinguished.
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6. 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. -
Articles of Merger or Consolidation (Sec. 78, Corporation Code) 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: 1. The plan of the merger or the plan of consolidation; 2. As to stock corporations, the number of shares outstanding, or in 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.
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Approval by the SEC (Sec. 79, Corporation Code) 1. The articles of merger or of consolidation, signed and certified as hereinabove required, shall be submitted to the Securities and Exchange Commission in quadruplicate for its approval 2. In the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained. 3. Where the Commission is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, as the case may be, at which time the merger or consolidation shall be effective.
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4. If, upon investigation, the Securities and Exchange Commission has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard. Written notice of the date, time and place of said hearing shall be given to each constituent corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed as provided in this Code. c. Effects of Merger and Consolidation (Sec. 80, Corporation Code) The merger or consolidation, as provided in the preceding sections 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 all and every other interest of, or belonging to, or due to each constituent corporation, shall be taken and deemed to be transferred to and vested in such surviving or consolidated corporation without further act or deed; and 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 claim, action or proceeding pending by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation, as the case may be. Neither the rights of creditors nor any lien upon the property of any of such constituent corporations shall be impaired by such merger or consolidation.
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c) DISSOLUTION a. Dissolution (Sec. 117, Corporation Code) — A corporation formed or organized under the provisions of this Code may be dissolved voluntarily or involuntarily. Dissolution- signifies the extinguishment of its franchise and the termination of its corporate existence for business purpose. The mere fact that the corporation has ceased to do business does not necessarily constitute a dissolution, if it is still solvent and has not gone into liquidation. Liquidation – settlement of the affairs of a corporation consisting of adjusting of debts and claims, that is, collecting all that is due to the corporation, the settlement and adjustment of claims against it and the payment of its just debts. Dissolution always precedes liquidation and there is no legal basis to proceed with liquidation without the corporation first having been dissolved. This is in accordance with the trust fund doctrine. 1. Voluntary - No creditors are affected (Sec. 118) In case dissolution of a corporation does not prejudice the rights of any creditor having a claim against such corporation, then such dissolution may be effected by: 1. Majority vote of the board of directors or trustees 2. 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 at a meeting to be held on the call of the directors or trustees 3. Notice to meeting Publication of notice of the 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 Sending of such notice to each stockholder or member either by registered mail or personal delivery at least thirty (30) days prior to said meeting. 4. 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. 5. The Securities and Exchange Commission shall thereupon issue the certificate of dissolution.
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Creditors are affected (Sec. 119)
Where the dissolution of a corporation may prejudice the rights of any creditor, the following shall be done: 1. A petition for dissolution of a corporation 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. 2. If the petition is sufficient in form and substance, the Commission, by an order reciting the purpose of the petition, shall 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 2. Upon five (5) days 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; 3. 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 requires, and may appoint a receiver to collect such assets and pay the debts of the corporation. 2. Involuntary Dissolution (Sec. 121)- A corporation may be dissolved by the Securities and Exchange Commission upon filing of a verified complaint and after proper notice and hearing on grounds provided by existing laws, rules and regulations.
QUO WARRANTO, RULE 66 of the Rules of Court
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Section 1. Action by Government against individuals. An action for the usurpation of a public office, position or franchise may be commenced by a verified petition brought in the name of the Republic of the Philippines against: a. A person who usurps, intrudes into, or unlawfully holds or exercises a public office, position or franchise; b. A public officer who does or suffers an act which, by the provision of law, constitutes a ground for the forfeiture of his office; or c. An association which acts as a corporation within the Philippines without being legally incorporated or without lawful authority so to act. Sec. 2. When Solicitor General or public prosecutor must commence action. The Solicitor General or a public prosecutor, when directed by the President of the Philippines, or when upon complaint or otherwise he has good reason to believe that any case specified in the preceding section can be established by proof, must commence such action. 3. Expiration of Term (Sec. 122, Corporation Code) 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, said 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.
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Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. 4. Shortening of Corporate Term (Sec. 120) a) A voluntary dissolution may be effected by amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this Code. b) A copy of the amended articles of incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. c) Upon approval of the amended articles of incorporation or 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. 5. Non-use of Corporate Charter and Continuous Inoperation (Sec. 22, Corporation Code) Rules: a. 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 date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. b. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. This provision shall not apply if the failure to organize, commence the transaction of its business 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.
Republic v. Bisaya Land Transportaton Co.: This case describes the solicitous attitude of the courts in remedying violations committed by corporations before resorting to the extreme punishment of forfeiture of franchise and dissolution Bisaya Land Transportation was engaged in the business of land and water transportation. The SolGen filed a petition for quo warranto for the dissolution of Bisaya alleging that it had violated and offended the provisions of the Corporation Law and other statutes of the Philippines by having committed acts amounting to a forfeiture of its franchise, rights,
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and privileges and through various means misused and abused the terms of its franchise, some of which were as follows: 1. falsely reconstituted its articles of incorporation by adding new purposes not originally included 2. acquiring public lands and timber concessions 3. leasing of a pasture land 4. operating a general merchandise store which is neither necessary for nor accomplishment of its principal purpose 5. engaging in mining operations After a very careful and deliberate consideration of the evidence presented, the Solgen came to the conclusion that the same did not warrant a quo warranto that could justify to terminate corporate life and that the corporate acts or omissions complained of had not resulted in substantial injury to the public. Hence, the Solgen withdrew the quo warranto proceedings filed against Bisaya. The issue before the SC was whether the Solgen is vested with full power to discontinue such litigation if and in his opinion this could be done. The Court held that the general rule is that the Solgen may do so with the approval of the court. The purpose of the motion for the dismissal of the quo warranto is to take the State out of an unnecessary court litigation. According to the Court, dissolution is a serious remedy granted to the courts against offending corporations. Courts, as a general rule, should not resort to dissolution when the prejudice is not a prejudice against the public or not an outright abuse of, or violation of the corporate charter. Even if the prejudice is public in nature, the remedy is to enjoin or correct the mistake. Only when it cannot be remedied anymore then that dissolution can come in.
Government v. Phil. Sugar Estates Co.: In this case, the SC refused to order right away the forfeiture of a franchise by a corporation seriously offending its charter, but first directed the ousting of the corporation from the unlawful act. Philippine Sugar Estates Co. (PSEC) entered into a contract with the Tayabas Land Company for the purpose of engaging in the business of purchasing lands along the right of way of the Manila Railroad Company through the province of Tayabas with a view of reselling the same to the Manila Railroad Company. PSEC by its charter was authorized to engage in any mercantile or industrial enterprise. For a period of 18 months, it had misused its corporate authority, franchises and privileges and had assumed privileges and
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franchises not granted. PSEC contended that the money given to Tayabas Land Company was in a form of a loan. The Court found that the purpose of the intervention of PSEC was for profit, to enrich itself at the expense of the taxpayers. The franchise granted to PSEC should be withdrawn and annulled and that it be disallowed to do and to continue doing business in the Philippine Islands, unless it shall within a period of 6 months after final decision, liquidate and dissolve and separate absolutely in every respect and in all of its relations with Tayabas Land Company.
Republic v. Security Credit & Acceptance Corp.: The Court directed immediately the forfeiture of the franchise of an offending corporation since the damage to the public was imminent. The Security Credit & Acceptance Corp. did not have authority to engage in banking corporations as required by the General Banking Act. Security Credit nevertheless received deposits from the public regularly. Such deposits were treated in the Corporation’s financial statements as conditional subscriptions to capital stock. Out of the funds obtained from the public through the receipt of deposits or the sale of securities, loans are made regularly to any person by Security Credit. The legal counsel of the Central Bank of the Philippines rendered an opinion stating that Security Credit was engaged innthe business of banking within the purview of RA 337. A resolution was passed by the CB declaring that Security Credit should first comply with the provisions of RA 337. Notwithstanding the resolution passed by the CB, Security Credit still continued the functions and activities which had been declared to constitute illegal banking operations. The Court found the illegal transactions thus undertaken by Security Credit warranted its dissolution. It was apparent from the fact proven that the misuse of the corporate funds and franchise affects the essence of its business, that it is willful and has been repeated 59,643 times, and that its continuance inflicts injury upon the public, owing to the number of persons affected.
b. Liquidation of Corporate Assets (Sec. 122, Corporation Code) Liquidation is the process by which all the assets of the corporation are converted in liquid assets (cash) in order to pay for all claims of corporate creditors and the remaining balance, if any, is to be distributed to the stockholders or members of the corporation. A liquidation proceeding is a proceeding in rem so that all other interested persons whether known to the parties or not may be bound by such proceedings. Every corporation whose
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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.
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At any time during said three (3) years, said 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.
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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 except upon lawful dissolution and after payment of all its debts and liabilities.
Buenaflor v. Camarines Sur Industry: Camarines Sur Industry Corp is a former grantee of a certificate of public convenience to operate an ice plant. However, its corporate life expired. Despite expiration, Camarines Sur continued selling ice and wanted to apply for a new certificated for the new Camarines Corporation. At this point, Buenaflor also applied. Buenaflor claims it is more qualified to erect a 5-ton ice plant. The Public Service Commission denied the application of Buenaflor claiming Camarines Sur to be pioneer in the ice industry. Buenaflor questions the decision of the Commission. A corporate grantee of certificate of public convenience to operate an ice plant cannot lawfully continue to sell ice after the expiration of its corporate life. And neither can it apply for a new certificate for it is incapable of receiving a grant. At the point of 132
dissolution, the doctrines of corporation by estoppel or de facto corporations are not made to apply to save the transaction. The general rule is that there is no juridical personality after dissolution. If there is, it is only juridical personality to serve but one purpose- for all transactions pertaining to liquidation. Any matter entered into that is not for the purpose of liquidation will be void transaction because of the non-existence of the corporate party.
National Abaca Corp. v. Pore: This case held that in the absence of statutory provision to the contrary, pending actions by or against a corporation are abated upon the expiration of the 3-year period allowed by law for the liquidation of its affairs. National Abaca filed for a collection suit against Apolonia Pore before the MTC. The lower court on Nov. 18, 1953 ordered Pore to pay P272.49. National Abaca filed an MR because what they are claiming is P1,213.64. The MR was denied. National Abaca appealed to the CFI. Pore then filed MD upon the ground that National Abaca no longer has legal capacity to sue it having been abolished by EO 372 (Nov. 24, 1950) and created a Board of Liquidators which would settle National Abaca’s affairs. The MD was granted and the subsequent MR by National Abaca was as well denied. CA certified the case to the SC. The issue is WON an action commenced within 3 years after the abolition of National Abaca as a corporation may be continued by the same after the expiration of said period. The Court held that suits by or against a corporation abate when it ceases to be an entity capable of suing or being sued but trustees to whom corporate assets have been conveyed pursuant to the authority of Sec. 78 may sue and be sued as such in all matters connected with liquidation. The then Corporation Law contained no provision authorizing a corporation, after 3 years from the expiration of its lifetime, to continue in its corporate name, actions instituted by it within said period of 3 years. The Court noted that it is precisely for this reason that the reason that the Corporation Law also authorized the corporation, “at any time during said 3 years…to convey all its property to trustees for the benefit of its members, stockholders, creditors and others in interest” evidently for the purpose among other, of enabling said trustees to prosecute and defend suits by or against the corporation before the expiration of said period. The complete loss of National Abaca’s corporate existence after the expiration of the period of 3 years for the settlement of its affairs is what impelled the President to create a Board of Liquidators to continue the management of such matter as may then be pending.
Tan Tiong Bio v. Commissioner: This case would imply that even after the 3 –year period of liquidation, corporate creditors can still pursue their claims against corporate assets against the officers or stockholders who have taken over the properties of the corporation.
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In this case, the Commissioner wrote the corporation that the investigations made by the Bureau revealed that it was the corporation, not Dee Hong Lu, who was asking for a refund, that had actually purchased the surplus goods from Foreign Liquidation Commission and that the properties were invoiced in the name of Dee, in trust for the corporation. The corporation was therefore assessed a deficiency sales tax by the Collector. When the corporation appealed the assessment of the CTA, the Solgen moved for the dismissal of the appeal on the ground that the corporation no longer had the capacity to sue because the 3 year term of liquidation had expired. The Court held that the State cannot insist on making tax assessment against a corporation that no longer exists and then turn around and oppose the appeal questioning the legality of the assessment precisely on the ground that the corporation is non-existent and has no longer capacity to sue. The State cannot adopt inconsistent stand and thereby deprive the officers and directors of a defunct corporation of the remedy to question the validity and correctness of the assessment for which, if sustained, they would be held personally liable as successors in interest to the corporate property. The Court observed that it may be true that in so far as the corporation is concerned, it no longer exists and therefore no suits can be maintained for and against it. In cases of taxes, the law specifically says that responsible corporate officers shall be personally liable for deficiencies. When a corporation has distributed its properties, those who have received the properties are in fact liable for corporate taxes. The answer therefore as what remedy of the corporate assets have gone, wherever they rested, be he a stockholder or a nonstockholder. The cause of action is to file an action against that person who has control of the corporate assets.
Gelano v. Court of Appeals: Insular Sawmill had a corporate life of 50 years (Sept. 17,1945-1995). Gelano leased the paraphernal property of his wife to Insular and received cash advances therefore. Gelano in turn made credit purchases of lumber materials for Insular and did not pay. Collection suit was thus file by Insular thru Atty. German Lee on May 29, 1959. In the meantime, Insular amended its AOI to shorten its term to Dec. 31, 1960. The amendment was approved by the SEC but the trial court was notified of such shortening of term so after four years from dissolution of Insular, it rendered a decision in favor of Insular. The issue brought before the SC is can the suit be abated absent a compliance of Insular of the requisites of Sec. 78 which pertains to the giving of corporate properties to a trustee or receiver. It was held that a corporation with a pending court action may still continue prosecuting or defending the same even after the lapse of the 3 years of liquidation, and the counsel of record can be considered as the trustee in such case, with full authority to continue prosecuting or defending the suit.
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The term “trustee” under the Corporation Code should be understood in its general concept which would include the counsel to whom was entrusted in a pending case, the prosecution of the suit filed by the corporation. The Court held: The purpose in the transfer of the assets of the corporation to a trustee upon its dissolution is more for the protection of its creditor and stockholders. Debtors like the petitioners herein may not take advantage of the failure of the corporation to transfer its assets to a trustee, assuming it has any to transfer which petitioner has failed to show in the first place. To sustain petitioner’s contention would be to allow them to enrich themselves at the expense of another, which all enlightened legal systems condemn. Although Insular did not appoint any trustee of the corporation, yet the counsel who prosecuted and defended the interest of the corporation in the instant case and who in fact appeared in behalf of the corporation may be considered a trustee of the corporation at least with respect to the matter in litigation only. Said counsel had been handling the case when the same was pending before the TC until it was appealed before the CA and finally to the SC, so the highest court therefore held that there was substantial compliance of Sec. 78. c. Methods of Liquidation
Board of Liquidators v. Kalaw: Pursuant to EO 272, NACOCO was abolished and placed under the hands of the Board of Liquidators for the settlement of its affairs. From the time NACOCO was placed under the hands of the liquidators, the 3 year period provided by the Corporation Law has already lapse. The question is whether NACOCO can still continue with the liquidation process even after the lapse of 3 years. The Court held that the placing of the affairs and assets of the NACOCO in the hands of a Board of Liquidators upon dissolution, did not terminate the power of the Board to continue with the liquidation process of NACOCO even after the lapse of the 3 year period, because the Board of Liquidators became the trustees; the Board took the place of the corporation after the expiration of its affairs. Since no time limit has been tacked to the existence of the Board and its functions of closing the affairs of the corporation, it was held that the Board can still cases pending even after the lapse of the 3 year period. NACOCO has the government as its sole stockholder. The Board of Liquidators became the trustee on behalf of the government by virtue of EO 272. EO 272 was an express trust. The legal interest became vested in the trustee (Board of Liquidators). However, the beneficial interest remained with the sole stockholder – the government. At no time had the government withdrawn the property or the authority to continue the present suit from the BOL.
China Banking Corp. v. Michelin & Cie: The appointment of a receiver by the court to wind up the affairs of the corporation upon petition of voluntary dissolution does 135
not empower the court to hear and pass on the claims of the creditors of the corporation at first hand. In such cases the receiver does not act as a receiver of an insolvent corporation. Since "liquidation" as applied to the settlement of the affairs of a corporation consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts, all claims must be presented for allowance to the receiver or trustee or other proper persons during the winding up proceedings which in this jurisdiction would be within the three years provided by sections 77 and 78 of the Corporation Law as the term for the corporate existence of the corporation, and if a claim is disputed or unliquidated so that the receiver cannot safely allow the same, it should be transferred to the proper court for trial and allowance, and the amount so allowed then presented to the receiver or trustee for payment. The rulings of the receiver on the validity of claims submitted are subject to review by the court appointing such receiver though no appeal is taken to the latter's ruling and during the winding up proceedings after dissolution, no creditor will be permitted by legal process or otherwise to acquire priority, or to enforce his claim against the property held for distribution as against the rights of other creditors. A receiver in liquidation stands on a different legal basis from a trustee in liquidation. A trusteeship is basically a contractual relationship governed by the Law on Trust and generally centered upon the property, such that the trustee assumed naked title to the property placed in trust. It is therefore a relationship that can be created by a corporation through its BOD, without the need of judicial authorization. The trustee in liquidation is not appointed by any court but he is actually a transferee who holds legal title o the corporate assets and he is accountable under the terms of the trust agreement. The trustee’s fiduciary obligations are provided in the trust instrument and by applicable legal provisions. A receivership is created by means of judicial or quasi judicial appointment of the receiver. The receiver is actually an officer of the court and must therefore be accountable to the court.
Republic v. Marsman Development Company: Marsman Development Company was dissolved and under liquidation. The liquidator holds the assets of the corporation for the benefit of the corporation’s creditors. The Republic demands payment of tax assessment made within the 3 year period from the liquidator. However, the present action filed by Republic was filed after the expiration of the 3 year period. The Court held that Sec. 77 of the Corporation Law (now Sec. 122) provides for a 3 year period for the continuation of the corporate existence of the corporation for purposes of liquidation, there is nothing in said provision which bars an action for the recovery of debts of the corporation against the liquidator thereof, after the lapse of the said 3 year period. The Court held: It is immaterial that the present action was filed after the expiration of three years after April 23, 1954, for at the very least, and assuming that judicial enforcement of taxes may not be initiated after said three years despite the fact that the actual liquidation has not been terminated and the one in charge thereof is still
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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.
Alhambra Cigar and Cigarette Manufacturing Corp v. SEC: It was held that a corporation cannot extend its life by amendment of its AOI to be effected during the 3 year statutory period for liquidation when its original terms had already expired. The 3 year statutory period for corporate liquidation is not for the purpose of continuing the business for which is was established but strictly limited to liquidation. The extension of corporate life of a corporation is deemed to constitute new business and cannot be validly pursued during liquidation stage. d. Rules for Non-stock corporations Distribution of Assets in Non-Stock Corporations (Sec. 94) 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefor; 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; 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 pursuant to a plan of distribution adopted as provided in this Chapter; 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 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 as provided in this Chapter. Plan of Distribution of Assets (Sec. 95) — A plan providing for the distribution of assets, not inconsistent with the provisions of this Title,
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may be adopted by a non-stock corporation in the process of dissolution in the following manner: 1. The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. 2. Written notice setting forth the proposed plan of distribution or a summary thereof; and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in this Code for the giving of notice of meetings to members. 3. Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the members having voting rights present or represented by proxy at such meeting. e. Right to Proportionate Share of Remaining Assets upon Dissolution
D. ROLE OF DIRECTORS AND OFFICERS 1. Functions of the Board of Directors a. Role of Directors, officers and trustees Generally Benguet Electric v. NLRC: The general rule
is that the members of the Board and officers of a corporation who purport to act for and in behalf of the corporation, keep within the lawful scope of their authority in so acting, and in GF, do not become liable, whether civilly or otherwise, for the consequences of their acts. Those acts, when they are such a nature and are done under such circumstances, are properly attributed to the corporation alone and no personal liability is incurred by such officers and Board members.
Banque Generale v. Walter Bull & Co.:
Even in a situation where a contract was entered into with the corporation and it specified that it was signed in consideration of the President of the corporation and that if the latter should cease to be the manager of the corporation that the contract would terminate, did not make the President liable personally under the contract since the SC considered it as “elementary that a corporation has a personality separate and distinct from the persons composing it,” and nothing in the contract provided that the President would be bound in his personal capacity.
Western Agro v. CA:
A corporate officer cannot be held personally liable for a corporate debt simply because he had executed the contract for and in behalf of the corporation: when a corporate officer acts in behalf of a corporation pursuant to his authority, is “a corporate act for which only the corporation should be held liable for any obligations arising from them.”
2. Election and Tenure of Directors/Trustees a. Qualifications of directors/trustees Sec. 23, Corporation Code. 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
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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.
Lee v. Court of Appeals:
It was held in this case that under the old law, “the eligibility of a director, strictly speaking, cannot be adversely affected by the simple act of such director being a party to a VTA inasmuch as he remains the owner (although beneficial or equitable only) of the shares subject of the VTA pursuant to which a transfer of the stockholder’s shares in favor of the trustee is required…No disqualification arises by virtue of the phrase ‘in his own right’ provided under the old Corporation Code.: With the omission of the phrase ‘in his own right’ under the present Code, the election of trustees and other persons who are in fact not the beneficial owners of the shares registered in their names on the books of the corporations becomes formally legalized and therefore, is a clear indication that in order to be eligible as director, what is material is the legal title to, not the beneficial ownership of , the stock as appearing on the books of the corporation. The disposition by a director of all of the shares in the corporation, through a VTA, had the legal effect of him ceasing to be a director of the corporation and creating a vacancy in the Board, since as a consequence of the execution of the VTA, such director ceased to own at least one share standing in his name in the books of the corporation.
Gokongwei v. SEC: A stockholder have no vested right to be elected to the BOD. Any person who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act o the incorporation and lawfully enacted by-laws and not forbidden by law. To this extent, therefore, the stockholder may be considered to have parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators. It cannot therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed by any act of the corporation which is authorized by a majority.
Detective & Protective Bureau v. Cloribel Directors Sec. 24, Corporation Code. Election of Directors or Trustees. — 1. 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.
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2. The election must be by ballot if requested by any voting stockholder or member. 3. 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; 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. For non-stock corporations: Unless otherwise provided in the articles of incorporation or in the bylaws, 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. 4. Candidates receiving the highest number of votes shall be declared elected. 5. 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 are 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, Corporation Code.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.
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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.
Grace Christian HS v. CA:
The SC has already held unlawful any attempt to grant to any person a permanent seat in the Board of a corporation, thus: Any provision in the by-laws or the practice of the corporation giving a stockholder a permanent seat in the BOD of the corporation would be against the provisions of Sec. 28-29 of the Corporation Code which requires member of the Board of corporations to be elected. In addition, Sec. 23 of the Corporation Code which provides for the powers of the BOD/BOT expressly requires them “to be elected from among the holders of stock, or when there is no stock, from among the members of the corporation.
Trustees Sec.92, Corporation Code. Election and Term of Trustees. — Unless otherwise provided in the articles of incorporation or the by-laws, 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 onethird (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. Sec. 138, Corporation Code. Designation of Governing Boards. — The provisions of specific provisions of this Code to the contrary notwithstanding, non-stock or special corporations may, through their articles of incorporation or their by-laws, designate their governing boards by any name other than as board of trustees.
b. Cumulative Voting 1. Cole Formula 2. Glassner Formula 3. D’Hondt Remainders Table
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c. Vacancy in the Board Sec. 29, Corporation Code. Vacancies in the Office of Director or Trustee.
1.
For any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum 2. For vacancies due to removal or expiration of term, said vacancies must be filled by the stockholders or members in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office.
d. Term of office; Hold-Over principle Sec. 23, Corporation Code. 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.
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HOLD OVER PRINCIPLE: In the event no new board is elected and qualified after the original one year term of the BOD/BOT, then under this principle, the existing board, if still constituting a quorum is still a legitimate board with full authority to bind the corporation.
Ponce v. Encarnacion:
The Court held that where no meeting is called by the Board for the stockholders to elect a new set of directors, one may be called by the stockholders by a petition filed in the courts and the remedy for calling a stockholders’ meeting is similar to a preliminary injunction—it is possible for the court to set it as an ex-parte hearing for granting it and there is no denial of due process.
e. Removal of directors/trustees Sec. 28, Corporation Code. Removal of Directors or Trustees. — Any director or trustee of a corporation may be removed from office by 1. Vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock or if the corporation be a non-stock corporation, by a vote of at least twothirds (2/3) of the members entitled to vote 2. Such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. 3. Written notice and to stockholders or members of the corporation of the intention to propose such removal at the meeting. 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 as prescribed in this Code.
4.
The vacancy resulting from removal pursuant to this section may be filled by election at the same meeting without further notice, or at any regular or at any special meeting called for the purpose, after giving notice as prescribed by this Code. Removal may be with or without cause That removal without cause may not be used to deprive minority stockholders or members of the right of
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representation to which they may be entitled under Section 24 of this Code.
Roxas v. Dela Rosa: When the corporation Code says that a certain action has to be done either by the Board of stockholders, and it says that notice has to be given, it is more than directory, it is mandatory. So that in the removal of members of the Board, it cannot be done in any meeting whether special or regular. It can only be done in a meeting where previously notice has been given and such notice must specify that one of the things that will be discussed is the removal of director. Even if it is within the competence of those who attend the meetings, the resolution for the removal of the director would not be voidable, it will be void, in spite of compliance of the 2/3 required by law.
Rules in Removal of Directors General Rule: Any directors may be removed from office by the 2/3 vote of the OCS 1. WITH CAUSE – Roxas case. Notice is necessary, as to time, place and purpose. 2/3 vote is the minimum requirement to remove a director. 2. WITHOUT CAUSE – 2/3 vote of the OCS except if voted thru CUMULATIVE VOTING in which case he may not be removed without cause even if there is 2/3 vote.
3. Exercise of Directors’ Functions a. Meetings of Directors/trustees Sec. 49, Corporation Code. Kinds of Meetings. — Meetings of directors, trustees, stockholders, or members may be regular or special. Sec. 53, Corporation Code. Regular and Special Meetings of Directors or Trustees. 1. Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise. 2. 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. 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.
b. Compensation for directors/trustees Sec. 30, Corporation Code. Compensation of Directors.
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General Rule: directors shall not receive any compensation, as such directors (they will only receive reasonable per diems) Exceptions 1. When there is a any provision in the by-laws fixing their compensation 2. Absent any provision, 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.
4. Officers Sec. 25, Corporation Code. Corporate Officers, Quorum. —Immediately after their election, the directors of a corporation must formally organize by the election of a: 1. President, who shall be a director 2. Treasurer who may or may not be a director 3. Secretary who shall be a resident and citizen of the Philippines 4. 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 Important: 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. Thus: 1. In case of passing resolutions and corporate acts other than election of officers, vote of at least majority of the directors/trustees present at the meeting (there must be quorum) is enough to make such acts valid 2. In case of election of officers, vote of the majority of ALL the members of the board is necessary
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Directors or trustees cannot attend or vote by proxy at board meetings. Ongkingco v. NLRC:
It was held that the dismissal or non-appointment of a corporate officer is clearly an intra-corporate matter and jurisdiction properly belonged to the SEC (now RTC). Section 5(c) of PD 902-A expressly covers both election and appointment of corporate directors, trustees, officers and managers, and that jurisdiction pertains to the SEC (now RTC) even if the complaint by a corporate officer includes money claims since such claims are actually part of the perquisites of his position, and therefore interlinked with his relations with the corporations.
Tabang v. NLRC:
The president, VP, secretary, treasurer are commonly regarded as the principal of executive officers of a corporation, and modern corporation statutes usually designate them as the officers of the corporation. However, the other officers are sometimes created by the charter or by laws of the corporation, or the BOD may be empowered under the by-laws of a corporation to create additional offices as may be necessary.
Gurrea v. Lezama:
It was held by the SC that the term “corporate officer” refers only to officers of a corporation who are given that character either by the then Corporation Law or by the corporation’s by-laws
PSBA v. Leano: The Court, in holding that the SEC (now the RTC) has jurisdiction over the ouster of the Executive VP, took note that said position was provided for in the corporate by-laws. However, in that same case, it was also held by Justice Melencio-Herrera that: The matter of whom to elect is a prerogative that belongs to the Board, and involves the exercise of deliberate choice and the faculty of discriminative selection. Generally speaking, the relationship of a person to a corporation, whether as officers or as agent or employee, is not determined by the nature of the services performed, but by the incidents of the relationship as they actually exists. The ponente cited the American case of Bruce v. Travelers Ins., Co. which reiterated the doctrine in common law jurisdiction that the distinction between an agent or employee and an officer is not determined by the nature of the work performed but by the nature of the relationship of the particular individual to the corporation. One distinction between officers and agents of employees of a corporation lies in the manner of their creation. An Office is usually created by the charter of by-laws of the corporation, while an agency or employment is created usually by the officers. A further distinction may thus be drawn between an officer and an employee of a private corporation in that the latter is subordinate to the officers and under their control and discretion… it is clear that the two terms officers and agents are by no means interchangeable.
Pearson & George, Inc. v. NLRC:
Any question relating or incident to the election of a new Board of Directors, the non-reelection of Llorente as Director, his loss of the position of Managing Director, or the abolition of said office are intracorporate matters. Disputes arising therefrom are intra-corporate disputes which, if unresolved within the corporate structure of the corporation, may be resolved in an appropriate action only the SEC (now the RTC) pursuant to its authority under PD 902-A.
Reahs Corporation v. NLRC: As a general rule established by legal fiction, the corporation has a personality separate and distinct from its officers, stockholders and members. Hence, officers of a corporation are not personally liable for their official acts unless it is shown that they have exceeded their authority. This fictional veil, however, can be pierced by the very same law which created it when "the notion of the legal entity is used as a means to perpetrate fraud, an illegal act, as a vehicle for the evasion of an existing obligation, and to confuse legitimate issues". Under the Labor Code, for instance, when a corporation violates a provision declared to be penal in nature, the penalty shall be imposed upon the guilty officer or officers of the corporation. At the very least, as what we held in Pabalan v. NLRC, 12 to justify solidary liability, "there must be an allegation or showing that the officers of the corporation deliberately or maliciously designed to evade the financial obligation of the corporation to its employees", or a showing that the officers indiscriminately stopped its business to perpetrate an illegal act, as a vehicle for the evasion of existing obligations, in circumvention of statutes, and to confuse legitimate issues.
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While there is no sufficient evidence to conclude that petitioners have indiscriminately stopped the entity's business, at the same time, petitioners have opted to abstain from presenting sufficient evidence to establish the serious and adverse financial condition of the company. This uncaring attitude on the part of the officers of Reah's gives credence to the supposition that they simply ignored the side of the workers who, more or less, were only demanding what is due them in accordance with law. In fine, these officers were conscious that the corporation was violating labor standard provisions but they did not act to correct these violations; instead, they abruptly closed business. Neither did they offer separation pay to the employees as they conveniently resorted to a lame excuse that they suffered serious business losses, knowing fully well that they had no substantial proof in their hands to prove such losses. FROM THESE LINES OF CASES WE CAN INFER THAT WE CAN ONLY REGARD AS OFFICER OF A CORPORATION THOSE WHO ARE GIVEN THE CHARACTER EITHER BY: a) CORPORATION LAW OR b) THE CORPORATION’S BY-LAWS A CORPORATE OFFICER’S DISMISSAL IS ALWAYS A CORPORATE ACT OR AN INTRACORPORATE CONTROVERSY WITHIN THE SEC’S JURISDICTION (NOW THE RTC).
Nacpil v. IBC: Intra corporate controversy is now within the RTC’s jurisdiction.
5. Duties of Directors and Officers a. Duty of Obedience elected directors/trustees/officers shall perform duties enjoined on them by law and by the by-laws of the corporation they will direct the affairs of the corporation in accordance only with the purposes for which it was organized b. Duty of Diligence; Business Judgment Rule – the basis for the liability is negligence. Sec. 31, Corporation Code. Liability of Directors, Trustees or Officers. SOLIDARY LIABILITY OF Directors or trustees or officers who: a) willfully and knowingly vote for or assent to patently unlawful acts of the corporation or b) 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 c) 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
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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. Smith v. Van Gorkom:
Gauge to determine if a corporate act is within the BJR: It must be an INFORMED BUSINESS JUDGMENT. That is, WON the directors informed themselves prior to making a business decision of all material information reasonably available to them.
Montelibano v. Bacolod-Murcia:
When a principle is passed in GF by the BOD, it is valid and binding, and WON it will cause losses or decrease the profits of the corporation, the court has no authority to review them. It is a well known rule of law that questions of policy or management are left solely to the honest decision of officers and directors of a corporation and the court is without authority to substitute its judgment for that of the BOD; the board is the business manager of the corporation and so long as it acts in GF its orders are not reviewable by the courts.
Board of Liquidators v. Kalaw:
Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru some motive or interest or ill will; it partakes of the nature of fraud. 34 Applying this precept to the given facts herein, we find that there was no "dishonest purpose," or "some moral obliquity," or "conscious doing of wrong," or "breach of a known duty," or "some motive or interest or ill will" that "partakes of the nature of fraud." Nor was it even intimated here that the NACOCO directors acted for personal reasons, or to serve their own private interests, or to pocket money at the expense of the corporation. 35 We have had occasion to affirm that bad faith contemplates a "state of mind affirmatively operating with furtive design or with some motive of self-interest or ill will or for ulterior purpose." "Upon a close examination of all the reported cases, although there are many dicta not easily reconcilable, yet I have found no judgment or decree which has held directors to account, except when they have themselves been personally guilty of some fraud on the corporation, or have known and connived at some fraud in others, or where such fraud might have been prevented had they given ordinary attention to their duties . . ." Plaintiff did not even dare charge its defendant-directors with any of these malevolent acts.
c. Duty of Loyalty; Doctrine of Corporate Opportunity Sec. 31, Corporation Code. 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. Sec. 34, Corporation Code. 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.
Comparison/ Summarization of rules under Sec. 31 and 34 Sec. 31
Sec. 34
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(Directors/Trustees/Officers)
(Directors/Trustees)
- acquisition or attempts to acquire personal or pecuniary interest in conflict with his duty
- acquisition of business opportunity which belongs to the corporation
LIABILITY a. jointly and severally liable for all damages b. accountable for the profits which would otherwise have accrued to the corporation
LIABILITY Gen. Rule: Refund to the corporation all the profits acquired therefrom Exception: if the act was ratified by 2/3 vote of the OCS/members Rationale for the ratification: delegation of powers. Stockholders gave power to directors/trustees by direct election. Thus they have also the power to waive any cause of action against their delegates.
d. Corporate Dealings General Rule: A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation Exception: Unless all the following conditions are present (which means contract is valid) 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; 3. That the contract is fair and reasonable under the circumstances; and 4. That in the case of an officer, the contract with the officer has been previously authorized by the Board of Directors. Remedy if any of the first two conditions set forth above is absent
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1. Ratification vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members in a meeting called for the purpose 2. There is full disclosure of the adverse interest of the directors or trustees involved is made at such meeting 3. The contract is fair and reasonable under the circumstances. Mead v. McCullough: It was held that while a corporation remains solvent, there is no reason “why a director or officer, by the authority of a majority of the stockholders or board of managers, may not deal with the corporation, loan it money or buy property from it, in like manner as a stranger. So long as a purely private corporation remains solvent, its directors are agents or trustees for the stockholders. They owe no duties or obligations to others. But the moment such a corporation becomes insolvent, its directors are trustees of all the creditors, whether they are members of the corporation or not, and must manage its property and assets with strict regard to their interest; and if they are themselves creditors while the insolvent corporation is under their management, they will not be permitted to secure to themselves by purchasing the corporate property or otherwise any personal advantage over the other creditors. Nevertheless, a director or officer may in good faith and for an adequate consideration purchase from a majority of the directors or stockholders the property even of an insolvent corporation, and a sale thus made to him is valid and binding upon the minority. It also held that where a director in a corporation accepts a position in which his duties are incompatible with those as such director, it is presumed that he has abandoned his office as director of the corporation.
Prime White Cement V. IAC:
In this case the Court recognized that the provisions of Sec. 31 of the Corporation Code on self-dealing merely incorporated well-established principles in Corporate Law, applied the procedure required therein for determining the validity of a contract entered into by the corporation with its director. The facts of this case showed that a director entered into a Dealership Agreement with the corporation, signed by its chairman and president, for the corporation to supply 20,000 bags of white cement per month for 5 years at a fixed price of P9.70 per bag. Subsequently, the Board refused to abide by the contract unless new conditions are accepted providing for new price formula. The dealing director sued fro specific performance on the contract. The Court held that although the general rule when it comes to President entering into a contract for the corporation is that when the contract is in the ordinary course of the business, provided the same is reasonable under the circumstances, the contract binds the corporation, nevertheless, the rule does not apply when the contract is entered into with a director or officer of the corporation itself. A director holds a position of trust and as such, he owes a duty of loyalty to his corporation and his contracts with the corporation must always be at reasonable terms otherwise the contract is void nor voidable at the option of the corporation. The Court found that the terms of the Dealership Agreement were unreasonable for the corporation. It held that the dealing director was a businessman himself and must have known or at least must have presumed to know that at that time, prices of commodities in general and white cement in particular, were not stable and were expected to rise. At the time of the contract, petitioner corporation had not even commenced the manufacture of white cement, the reason why delivery was not to begin until 14 months later…no provision was made in the dealership agreement to allow for an increase in price mutually acceptable to the parties. It held that the unfairness in the contract is also a basis which renders a contract entered into by the President, without authority from the BOD, void voidable, although it may have been in the ordinary course of business. Finally, it noted that there was no showing that the stockholders had ratified the agreement or that they were fully aware of its provisions.
e. Contracts between corporations with interlocking directors Sec. 33, Corporation Code. Contracts Between Corporations with Interlocking Directors.
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Interlocking Directors—one or some of all of the directors of one corporation is/are director(s) in another corporation General rule: Valid if not attended by fraud and if the contract is fair and reasonable under the circumstances Exception: Voidable if stockholdings of interlocking director exceed 20% of the OCS Sec. 32 (Self-dealing director/trustee) shall apply if the interest of the interlocking director in a corporation is SUBSTANTIAL which means his stockholdings exceed 20% of the OCS
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