PART FOUR CORPORATION LAWS
CHAPTER IX LAW ON PRIVATE CORPORATIONS CORPORATIONS
I.
Effectivity and Effect on Prior Laws
A. The New Corporation Code of the Philippines
The New Corporation Code was approved on May 1,1980 and under its Sec. 149, took effect also on the said date, as Batas Pambansa Blg. 68. B. Effect on Existing Corporations
Corporations lawfully existing and doing business in the Philippines on May 1, 1980 (date of effectivity of the Code), and therefore authorized, licensed or registered with the SEC, are deemed to have been authorized, licensed or registered with the SEC. However, if an existing e xisting corporation is affected by the new requirements of the Code, it is given a period up to May 1, 1982 within which to comply. (Sec. 148, N.C.C.) II.
New and/or Modified Concepts, Introduced by the Code
The Code has created and/or modified certain existing concepts of the old law (Act 1459), important and substantial among them being the following: 1. New statutory classes of corporations, the close corporation, de facto corporation, and corporation by estoppels, are created (Secs. 96-105, 20 and 21); 2. Three new statutory classes of corporations, the close corporation, de facto corporation, and corporation by estoppel, are created (Secs. 7, 8 and 9); 3. The initial initial corporate life of 50 years may be extended extended by amendment of the articles done not earlier earlier than 5 years prior to the expiry of the original or extended period (Sec. 11); 4. For incorporation incorporation purposes, purposes, subscription requirement is at least 25% of of the authorized capital stock, and paid in requirement is at least 25% of the subscription; paid in capital for incorporation purposes, shall not be less than P5,000 (Sec 13); 5.
The purpose purpose clause should separate the primary primary from the secondary purposes. (Sec. 14)
6. The grounds, grounds, on the basis of any of which, which, the SEC may may reject or disapprove registration of the articles or its amendments are enumerated as follow: (1) Improper form; (2) Illegal purpose; (3) ownership percentage limitations violated (Sec. 17); Treasurer’s certificate false, and (4) Filipino ownership 7. The corporate name adopted must not be identical, or deceptively deceptively or confusingly confusingly similar to the name name of another another corporation, corporation, or other protected protected name. (Sec. 25);
8. The statutory statutory officers of a corporation now are the president, the treasurer, and the secretary. secretary. (Sec. 25); 9. Directors may now be paid salaries by the vote of stockholders provided said total salaries shall shall not not exceed 10% of the net income of the immediately preceding year before income tax, of the corporation (Sec. 30); 10. A director’s liability for voting voting for patently patently unlawful acts, for disloyalty, for unfair dealings by him with his corporation, and for fraudulent dealings with another corporation where he also is a director, is expressly provided for (Secs. 31, 32, 33 and 34). Bar Question: (A) What is the so-called “doctrine of corporate opportunity”? What is the underlying philosophy upon which which such doctrine rests (1985 Bar, 17-A).
Answer: (A) The doctrine of corporate opportunity is a rule expressly expressly provided for by the Corporation Corporation Code making a director account to his corporation, gains and profits from any transaction entered into him or by another competing corporation or entity where he has a substantial interest, which should have been a transaction undertaken by by his corporation. The doctrine rests fundamentally on the unfairness occasioned by the said director or officer taking personal advantage of a business opportunity, which properly appertains to the corporation, in breach therefore of the fiduciary posture he is supposed to observe in relation to his corporation and its stockholders. He cannot possibly serve two masters. 11. The by-laws may create an executive committee composed composed of not not less than three directors, to act on matters within the competence of not less than three directors, to act on matters within the competence of the board except the following: (1) matters needing stockholders’ approval, (2) filling up of board vacancies, (3) amendment, repeal or adoption of by-laws (4) amendment of an irrepealable board resolution, and (5) cash dividend declaration. (Sec. 35); 12. The number and kind of incidental powers powers under the law, have have been modified modified by the the deletion of four powers, and the inclusion of of five new specific powers (Sec. 36); 13. The preemptive right of stockholders stockholders to stock issues issues has been expanded to include all issues, unless unless denied by the articles. (Sec. 39); 14. Dividend declaration declaration is made of compulsory compulsory retained surplus profit profit exceeds 100% of paid in capital stock (Sec. 43) 15. A management management contract with another corporation, corporation, may be entered into for the management management of the corporation (Sec. 44); 16.
By laws may be adopted adopted and filed simultaneously with the original articles incorporation (Sec. 46);
17. Meetings of stockholders of a coporation within any Metro Manila specified town or city as principal place of business, business, may be held in any town or city in Metro Manila (Sec. 51); 18. Stockholder’s proxies in stock corporations are valid for periods not exceeding five years at any one time (Sec. 68); 19.
Pre-incoporation subscriptions are irrevocable irrevocable for a period period of at least least 6 months (Sec. 61);
8. The statutory statutory officers of a corporation now are the president, the treasurer, and the secretary. secretary. (Sec. 25); 9. Directors may now be paid salaries by the vote of stockholders provided said total salaries shall shall not not exceed 10% of the net income of the immediately preceding year before income tax, of the corporation (Sec. 30); 10. A director’s liability for voting voting for patently patently unlawful acts, for disloyalty, for unfair dealings by him with his corporation, and for fraudulent dealings with another corporation where he also is a director, is expressly provided for (Secs. 31, 32, 33 and 34). Bar Question: (A) What is the so-called “doctrine of corporate opportunity”? What is the underlying philosophy upon which which such doctrine rests (1985 Bar, 17-A).
Answer: (A) The doctrine of corporate opportunity is a rule expressly expressly provided for by the Corporation Corporation Code making a director account to his corporation, gains and profits from any transaction entered into him or by another competing corporation or entity where he has a substantial interest, which should have been a transaction undertaken by by his corporation. The doctrine rests fundamentally on the unfairness occasioned by the said director or officer taking personal advantage of a business opportunity, which properly appertains to the corporation, in breach therefore of the fiduciary posture he is supposed to observe in relation to his corporation and its stockholders. He cannot possibly serve two masters. 11. The by-laws may create an executive committee composed composed of not not less than three directors, to act on matters within the competence of not less than three directors, to act on matters within the competence of the board except the following: (1) matters needing stockholders’ approval, (2) filling up of board vacancies, (3) amendment, repeal or adoption of by-laws (4) amendment of an irrepealable board resolution, and (5) cash dividend declaration. (Sec. 35); 12. The number and kind of incidental powers powers under the law, have have been modified modified by the the deletion of four powers, and the inclusion of of five new specific powers (Sec. 36); 13. The preemptive right of stockholders stockholders to stock issues issues has been expanded to include all issues, unless unless denied by the articles. (Sec. 39); 14. Dividend declaration declaration is made of compulsory compulsory retained surplus profit profit exceeds 100% of paid in capital stock (Sec. 43) 15. A management management contract with another corporation, corporation, may be entered into for the management management of the corporation (Sec. 44); 16.
By laws may be adopted adopted and filed simultaneously with the original articles incorporation (Sec. 46);
17. Meetings of stockholders of a coporation within any Metro Manila specified town or city as principal place of business, business, may be held in any town or city in Metro Manila (Sec. 51); 18. Stockholder’s proxies in stock corporations are valid for periods not exceeding five years at any one time (Sec. 68); 19.
Pre-incoporation subscriptions are irrevocable irrevocable for a period period of at least least 6 months (Sec. 61);
20. Consideration for the the issues issues of the stocks stocks has been been increased increased in number from three to six, the six six now being; (1) cash, (2) property, (3) labor or services rendered, (4) prior corporate obligations, (5) stock dividends and (6) outstanding shares exchanged in reclassification or conversion (Sec. 62); 21. A modified version of of R.A. 201 201 on reconstitution of lost or destroyed destroyed certificates certificates is now now included in the Code (Sec. 73); 22. New stockholder’s stockholder’s rights are created: created: (a) right right to financial statements statements (Sec. (Sec. 75; (b) appraisal appraisal right right (Secs. 81-86);
24. Proxy voting in non-stock corporations may be be outlawed; voting may be be by mail or similar means means (Sec. 89); its board of directors or trustees may consist of mor ethan 15 members; they may have 3 year terms, and the annual elections may be held at least to elect 1/3 only of the total number of directors; the officers may be elected directly directly by the members (Sec. 92); annual meetings of members may be held anywhee in the Philippines, not necessarily its principal place of business (Sec. 93); 25. How the assets of a dissolving non-stock corporation are distributed is subject to express rules (Secs. 94 and 95); 26. The methods of dissolving dissolving a corporation are reduced to two: voluntary and involuntary involuntary (Sec. 117 to 122); 27. Foreign corporations corporations issued a license to transact transact business business in the Philippines Philippines , are requires to deposit initially P100,000 worth of securities, and ad annually 2% computed on its net income exceeding P5 million, for the benefit of present and future creditors of said corporation in the Philippines (Sec. 126); 28. Nine grounds for revoking the license of a foreign corporation operating in the Philippines are expressly provided for by the Code (Sec. (S ec. 134); and 29. Reservation is made for the legislature to declare certain corporationsas vested with a public interest, and maximum limits to stock ownership therein by close relatives, or close business interests may be set (Sec. 140);
III.
Nature of Private Corporation A. Defined
Bar Question Question: Define corporation. (1952 Bar, Va., 1954 Bar, Ixa). Answer : It is an artificial being created by operation of law having the right of succession, and th epowers, attributes and properties expressly authorized by law and incident to its existence. Author’s note:
This is the statuatoru definition of a corporation even under the code. (Sec. 2)
B. Advantages of Incorporation
1. Easier to raise capital; 2. Easier to attract stockholders because of limited liability; 3. Easier to organize for big scale endeavors;
4. Attribute of succession; 5. Facility in stock transfers; 6. Management by a board of directors. C. Differentiated:
1. From Partnerships Bar Question: Give the differences between a corporation and a partnership. (1953 Bar, Va). Answer : The four differences betweeb a corporation and a partnership are:
1. How created: corporations — by law; partnerships — by agreement. 2. Powers: corporations can exercise only those in powers expressly granted, or fairly inferrable from those granted to them; partnerships can exercise any power except thos prohibited by law, morals, good customs and public policy. 3. How Managed: corporations, though a board of directors; partnership — by all partners, or though a managing partner. 4. Number of partners of incoporators: corporations – 5 to 15 persons; partnerships – 2 or more persons. 5. Extent of liability: corporations- stockholders’ liability up to unpaid subscription; partnerships-liability of general partners up to private properties. 6. Effect of death, withdrawal or resignation of stockholder or partner: corporations-no effect; partnerships-dissolved. 7. Duration: corporations- 50 years renewable for periods of 50 years; partnerships-indefinite period. 8. Transfer of interest: corporations-transferable without consent of others; partnershipsconsent of other partners required 2. From SociedadesAnonimas
Bar question: Five Spanish residents of Manila decide to go into business together want legal advice on whether they should from a corporation or a partnership. They want to have a limited personal liability, and being more familiar with “sociedadesaninimas” (anonymous associations) under the Code of Commerce, they express preference for that form of organization and are disposed to adopt it if they can legally do so.
What legal advice should be given them? Give your reasons. (1959 Bar, Ib). Answer : I will inform them that they can no longer form a “sociodadanonima” under our laws because of the provisions of the Corporation law prohibiting the creation of “sociedadanonima.”
I will advise them to form instead a private stock corporation because they are five in number, and because on corporations, the stockholders are limited in their liability up to their stock subscriptions, which fits into their plans. Author’s note: Answer
still valid under N.C.C
3. From Other Business Organizations
a. Sole Proprietorship
Bar Question: Jose Abello wishes to invest P100,000 in the business of buying and selling sugar but does not want to risk his properties in the said business. (1) What kind of legal entity should be created to suit Jose Abello’ s plans? (2). If he does not care to manage the business, and wishes to leave the management to his nephew; (3) If he insists in keeping for himself the management and control of the business. (1949 Bar, VIIc). Answer: (1) As he does not want to risk his other properties, he can organize a private stock corporation where his liability will be limited to his stock subscription.
(2) If he does not want to manage the business, and wants his new nephew to manage, he can form a partnership with his new nephew, with himself as capitalist partner, and his nephew, as industrial partner or he can form a stock corporation, make his nephew a director and President or General Manager, and let the latter run the business with the board. (3.) If he wants to manage and control the business, then he should from a sole proprietorship. Author’s note:
Answer still valid under N.C.C.
Bar Question: (1) A, B, C, D & E decided to form Alphabet, Inc., a corporation dealing with the manufacture and sale of school supplies, with an authorized capital stock of P1M. The five equally subscribed to 25% of the authorized capital stock or P50,000.00 each. Even before they could pay the 25% of their total subscription, however, they entered into a contract with Manila College to deliver desks worth P2M. For lack of funds, however, they failed to fulfill the contract with Manila College. Determine the liability of A, B, C, D & E and Alphabet, Inc. vis-à-vis Manila College. (1989 Bar, VI). Answer : A, B, C, D and E have not in effect organized a corporation, although they had that intention. They will be governed in their relations towards each other and towards the third persons by the rules on partnership.
If they have incurred any liability at all to Manila College, that liability will be equally divided between them - their obvious intention even in the contemplated corporation being to equally share in capitalization, and consequently also equally sharing in liabilities. b. Different Business Purposes
Bar Question: Jose Santos owns and operates a fleet of ten buses plying a route extending from Manila to Tarlac. He also owns a store dealing in clothing materials, shoes, etc., situated in Makati, Rizal. About P250,000 is invested in the transportation business and P100,000 in the store. He now seeks your counsel as to whether or not it is advisable for him to incorporate these businesses or to continue operating them as single proprietorships.
(1) What factors or information would you consider relevant in dealing with the problem? (2) What advice would you give? State your reasons. (1970 Bar, IV-c) Answer: (1) The factors or information I would consider as relevant in dealing with the problem are:
a. The speculative nature of each or both of the businesses;
b. c. d. e.
The amount of additional capital intended to be invested in each or in both of the businesses; The tax angle; The proximity of the places of operation of the businesses; Whether existing laws would allow the joinder of the diverse purposes of the proposed corporation;
(2) I will advise against the joining of the two businesses the transportation business, and the clothing business, for the following reasons: a.
Under the law, a corporation engaged in transportation cannot engage in any other business alien to transportation; b. The operation of a transportation business opens the operator to the risk of liability to passengers injured or killed in accidents. This liability might encroach on the investment in the clothing business if joined with the transportation business. It will therefore be advisable to incorporate the transportation business separately from the clothing business. The latter can remain as a sole proprietorshipbusiness, as the minimal capital will not give much benefit to the owner eve if he incorporates. The Problem: Some businessmen with an available starting capital totaling only P100 000.00 ask you to help organize a business firm. Subject to legal limitations, they have future plans to invite alien investors who are agreeable t rendering financial assistance by way of direct investments and/or loans. Your professional assistance is solicited on the following various questions that may arise: Bar Question: Considering the above problem, state the form of business organization which you recommend should be created for the purpose, explaining specifically and briefly;
(a) Its advantages and disadvantages; Answer: I will recommend that they organize a corporation to engage in an industry which is not nationlalized under the constitution or existing laws.
(a) The advantages of a corporation over the other forms o business organizations (sole proprietorship and partnerships) are the following: 1) It is easier to rise capital and to attract other persons as investors. 2) It has the attribute of perpetual succession and a juridical personality independent from its stockholders. 3) It is managed by a group of persons call the board of directors. 4) Transfer of interest is easier and will not dissolve the enterprise. The disadvantages are: 1) It takes time to organize; 2) Business decisions may be stalemated by differences of opinion among the board members. c. Cooperatives Cooperatives exercise some rights given to corporations, but are different from corporations in the following: 1) Coop members run the cooperative. The employees of a corporation run it.
2) Coop members are entitled to one vote each. Stockholders vote according to the number of shares they hold. 3) A coop member employee cannot assert collective bargaining. The employees of corporation can. (Benguet Electric Coop. vs. Calleja, 180 SCRA 740). d. Joint Ventures A joint venture is a business organization between two corporations where the participants deviate from traditional matters of corporate management in the following manner: 1) The required vote may be greater than a mere majority; 2) A group of stockholders may be given the power to elect a specified number of directors; 3) The stockholders control the selection and selection of employees; 4) The venture may set up a procedure for settling disputes by arbitration. A corporation may enter into a joint venture with another, but not a partnership, although the two are governed in their joint venture relation by the rules on partnership. (Aurbachvs Sanitary Wares, 180 SCRA 130).
D. Attributes 1. In General
a. Personality distinct from the persons composing it; b. Perpetual succession; c. Acquisition of property, contraction obligations, bringing of suits; d. Receipt and enjoyment in common of privileges and immunities. 2. Particular Attributes
a. Distinct Personality – A corporation as known to Philippine jurisprudence is a creature without any existence until it has received the imprimatur of the state acting according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher priority than 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. 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. (Tayong vs. Benguet Consolidated, Inc., 26 SCRA 243) Shareholders are not owners of corporate property which are owned by the corporation. (Magsaysay-Labrador Company vs. CA 180 SCRA 266) Being an officer or a stockholder does not make one’s property, the propertyalso of the corporation, for they are separate entities. (Traders R oyal Bank vs. CA 177 SCRA788)
Bar Question: In the complaint filed by XYZ Corporation, its President alleged that he suffered mental anguish, fright, social humiliation and serious anxiety as a result of the tortious acts of ABC Corporation. In its counterclaim, ABC Corporation claimed to have suffered moral damages due to besmirched reputation or goodwill.
(1) May XYZ Corporation recover moral damages based on the allegations in the complaint? (2) May ABC Corporation recover moral damages? Give reasons for your answer. (1978 Bar, 7b) Answer: (1) XYZ Corporation, by reason of its being a juridical person, cannot possibly experience a physical suffering, mental anguish, fright, serious anxiety, wounded feelings, moral shock damages, because the above consequences can be suffered , inflicted or experienced by natural persons only. Hence, XYZ Corporation cannot recover moral damages for the sufferings of its President. This is without prejudice to the President of XYZ Corporation filing a suit in his own right and behalf, for recovery of moral damages against ABC Corporation for the latter’s tortious acts. (3) On the other hand, a corporation may have established a reputation of its own, and created goodwill in the course of its business operations over the years. These are its assets, accruing to it as a juridical person. Hence, if they get besmirched, the corporation has a cause of action against the offender. I submit therefore, that ABC Corporation may file a counterclaim for moral damages, due to its besmirched reputation and goodwill. Note: Answer still valid under N.C.C. Bar Question: In a complaint for damages, Zebra Corporation alleged that its President, Anton Molina, suffered mental anguish, social humiliation and serious anxiety as a result of the tortious acts of Omega Corporation. In its answer with counterclaim, Omega Corporation alleged that it suffered besmirched reupation because of the unfounded suit of Zebra Corporation and accordingly claimed for the award of moral damages.
(A) May Zebra Corporation recover moral damages based on its allegation in the complaint? Discuss. (B) May Omega Corporation recover moral damages on its counterclaim?Reasons.(1955 Bar, 9). Answer: (A) Zebra corporation cannot claim damages for the mental anguish, social humiliation, and serious anxiety of its President. Assuming that this can be proved, the moral damages are personal to Zebra’s President, which cannot be the basis for a cause of action by Zebra corporation— the personality of the corporation being distinct and separate from that of its President. (B) Omega corporation, on the allegation that its reputation (as a corporation) has been besmirched because of the unfounded suit filed against it by Zebra corporation, has a cause of action for damages. A corporation may have established a reputation of its own, and created goodwill in the course of its business operations over the years. These are its assets accruing to it as a juridical person. If they get besmirched, the corporation has a cause of action against the offender. I submit therefore that Omega corporation has a cause of action for moral damages against Zebra corporation. 1) Doctrine of Piercing the Veil of Corporate Fiction a) When Applied:
The veil of corporate fiction may be pierced in the following cases: 1) When used as a cloak to cover fraud, illegality, or results in injustice (Soriano vs. CA, 174 SCRA 195); where necessary to achieve equity or to protect creditors; 2) Where two factories are made to appear as one and used as a device to defeat the ends of law, or as a shield to confuse legitimate issues (Reynolds vs. CA, 169 SCRA 220); 3) Where the parent corporation assumes complete control of its subsidiary’s business (Phil. Veterans Integrated Investments vs. CA, 181 SCRA 178). b) When not Applied:
The veil cannot be pierced when a director has no participation to a representation made by the President, and the execution of a promissory note with “we” as maker, has a reference to the corporation and not to the directors. (Remo vs. IAC, 127 SCRA 403). The mere fact that the businesses of two or more corporations are interrelated is not a justification for disregarding their separate personalities, absent a sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons of their rights. (Umali et al vs. CA, et al, G.R. 89561, Sept. 13, 1990). Bar question: (B) What is the doctrine of “piercing the veil of corporate entity” and in what cases did the Supreme Court apply the said doctrine? (1985 Bar, 10 B). Answer : (B) The doctrine of piercing the veil of corporate fiction allows the state to disregard for certain justifiable reasons, the fiction of a juridical personality for the corporation, separate and distinct from the persons composing it.
The Supreme Court applied this doctrine in the following cases and instances: (1) When the corporation was used as an alter ego or business conduit for the sole benefit of the stockholders; (2) When one corporation is a mere subsidiary, instrumentality or department of another corporation; (3) When the corporation is used as a shield to an end subversive to justice; (4) When the corporation is used to perpetuate fraud or confuse legitimate issues; (5) When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. Bar question: What facts and circumstances must be proved in order that the stockholders may be held liable for the obligations contracted by the corporation. (1962 Bar, VIIa). Answer : While a corporation has a personality separate and distinct from the stockholders composing it, this veil of corporate fiction may be disregarded, and the stockholders and the corporation considered as one person, in the following instances:
1. When the stockholders created the corporation to evade taxes, violate laws, commit fraud, evade just obligations; and
2. When the corporation is owned by the stockholder and his dummies, and/or the immediate members of his family. Bar Question: What is a “one -man” corporation? Do such corporations enjoy the attributes of corporations? What should be done to assure this? (1970 Bar, V-a). Answer : A one man corporation is a corporate entity where one person holds directly or indirectly all or substantially all of the stocks of the corporation.
This form of corporation enjoys all of the attributes of a corporation, although it always faces the risk of its corporate existence being attacked if the said corporate fiction is utilized for unlawful purposes under the doctrine of “Piercing the Veil of Corporate Fiction.” To assure that the corporation will continue to enjoy the attributes, the corporation should have a duly constituted board which should meet regularly to pass upon the problems of the corporation. The stockholder who holds substantial stocks should consider his holdings as merely investment purposes. Where a second corporation was created as a means to prevent a first corporation from paying obligations to employee, the veil of corporate fiction must be pierced (NUAFLU vs. Ople 143 SCRA 124).
Bar Question: C, a Steel and Neil Company, Inc., owned by X had financial obligations to its employees. C ceased operations and was immediately succeeded on the next day by, and all its assets turned over to, the E Steel Corporation, 90% of the subscribed shares of which were also owned by X. May the E Steel Corporation be held liable for the financial obligation of the C Steel and Neil Company, Inc. to its employees?
Decide. Give reasons. (1978 Bar, 8a). Answer : Yes, E Steel Corporation can be held liable for the financial obligation of C Steel and Neil Company, Inc. to its employees.
Under the doctrine of piercing the veil of the corporation fiction, when the stockholders create a corporation for the purpose of evading just obligations, the State may disregard the separate personality of the corporation and regard the corporation and the stockholder(s) as one person. In the problem, X, who is the owner of C. Steel & Neil Company, Inc. stopped its operations, and created another one, E Steel Corporation, for the purpose of evading the obligation of C corporation to its employees. As E Steel Corporation is also substantially owned by X, both C and E corporations will be considered as one in so far as C’s liability to its employees is concerned. Bar Question: Tantalus Corporation, of which 97% of the issued and outstanding shares of stock were owned by Roger Mano, had financial obligation to its employees by way of unpaid wages and allowances. Tantalus Corporation was dissolved by shortening its corporate life and all its assets turned over to Suceso Corporation, of which 95% of the subscribed shares were held by Roger Mano and his wife. Then, Tantalus Corporation created to operate.
(A) May theemployees of Tantalus Corporation proceed against the Suceso Corporation to recover unpaid claims? Discuss. (1985 Bar, 10 A). Answer: (A) The employees if Tantalus Corporation may proceed against Suceso Corporation to recover unpaid claims.
The grant of judicial personality to a group of persons is an act of magnanimity by the state, which should not be abused by the grantee. Hence, the privilege should not be used by the grantee to evade payment of taxes, to further an end subversive to justice, perpetuation of frauds or confuse legitimate issues. In these cases, the state may withdraw such privilege and consider the corporation and its principal stockholders as one and the same person. In the case at bar, Tantalus Corporation was dissolved, and in its place, Suceso Corporation was created by almost the same stockholders. Obvious therefore is the objective of Tantalus Corporation of preventing its employees from proceeding with their claim for unpaid wages against the dissolved corporation. The state will pierce the doctrine of corporate fiction, consider Tantalus and Suceso Corporation as one and the same, and allow the unpaid employees of Tantalus Corporation to proceed with their claim against Suceso Corporation. The doctrine can only come into play if summons is served on the corporation through any one of the persons named in Sec. 13, Rule 14 of the Rules of the Court. (Filmerco vs. IAC, 149 SCRA 193). c.) Consequences if Veil is Pierced
The consequences where the veil is pierced are: (1) if only one corporation is involved to disregard its existence as an association of persons; and (2) if two corporations participate to merge them and consider them only as one entity. (Remo vs. IAC, 172 SCRA 405). b. Perpetual Succession 1) Defined: A continued corporate existence irrespective of death or withdrawal of its component members, limited in duration to the period stated in its charter. The maximum period the articles of incorporatiob may provide is 50 years, but under Rep. Act 3531, the period may be extended for durations not exceeding 50 years per extension by amendment of the articles made before the lapse of the original period. The amendment of the articles to effect this extension cannot be made after the lapse of the three-year period although the amendment is still during the three-year statutory period for liquidation. (Alhambra Cigar vs. SEC, 24 SCRA 269). Bar Question: A corporation is organized for a period of 25 years. Stockholders holding more than twothirds of the voting stock desire to extend this period for another 25-year term in a special meeting of stockholders to be called for the purpose. As a lawyer, what would you inform your client? Explain fully. (1953 Bar, Vb). Answer: As a lawyer, I would inform my client that the move by the stockholders is allowable under the provision of Rep. Act 3531, by amendment of the articles of incorporation before the lapse of the existing period, the extension being for durations not exceeding 50 years each. Bar Question: "A", a corporation, was organized for a term of 50 years, expiring December, 1969. Outline the steps to be taken in order that it may extend its corporate life. (1968 Bar IIa). Author's Note: This question was asked in October 1968. Answer: The steps to be taken, all of which should be completed before the end of December 1969, are as follows: 1. The board by majority vote, should approve the amendment to extend the life of the corporation.
2. The stockholders by a vote of at least 2/3 of the subscribed capital stock must approve said amendment. 3. A copy of the amended articles must be certified by the President, secretary and a majority of the board. 4. The certified copy of the amended articles should be filled with the SEC, paying the proper fees.
E. Nationality of Corporations Bar Question: What determines the nationality of a corporation? For what matters are foreign corporations doing business in the Philippines subject to the laws, rules and regulations of the country of their creation? (1957 Bar, Ib). Answer: The country where the corporation was incorporated determines the nationality of a corporation. This is called as the domiciliary test. In times of war or national emergency, another test is used -- the control test. Under this test, if the controlling stock of a corporation is owned by citizens of a particular country which is at war with the Philippines, then that corporation, although organized in the Philippines, is a foreign corporation. Foreign corporations classifed under the domiciliary test are subject to the laws of the countryoc their creation on the following matters: 1. Creation, formation, organization or dissolution of corporations; 2. Relations, liabilities, responsibilities and duties of members, stockholders, or officers of corporations to each other or to the corporation. Bar Question: May a domestic corporation organized and registered in the Philippines be composed entirely of aliens? (1950 Bar, Ia). Answer: Except in the nationalized corporations where citizenship of all or som
2) Rural banks except that Filipino-controlled domestic banks and corporations organized primarily to invest in rural banks may now become rural bank investors (Sec. 4, R.A. 720, as amended by .P. 651); 3) Mass media ownership and operation (1986 Constitution); 4) Rice and Corn Industry (P.D. 194). Under the Security Agency Law (R.A. 5487), security agencies must be 100% Filipino-owned. (American president Lines vs. Clave, 114 SCRA 826) b. 75% Filipino Owned
1) Awardees of government supplies purchases (C.A. 138); 2) Contract awardees for repair of public works and national defense projects (R.A.76); 3) Coastwise Trade (P.D. 761) c. 70% Filipino Owned
1) Domestic banks except rural banks (R.A. 337); 2) Awardees of government public works contracts (R.A. 76) d. 60% Filipino Owned
1) Public utility corporations (C.A. 146); 2) Corporations to utilize, develop or exploit natural resources (1986 Constitution); fishing licenses (P.D. 704); geothermal energy permits (R.A. 5092); 3) Beneficiaries of Philippine Overseas Shipping Act (R.A. 1407); domestic air commerce (R.A. 776); financing companies (R.A. 5980); awardees of supplies contracts for government owned or controlled corporations (R.A. 5183); 4) Educational institutions (1986) Constitution)
e. Majority Owned by Filipinos
1) Investment houses (P.D. 129 as amended by P.D. 590) Bar Question: Can a corporation engaged in the lumber business elect an American or a Chinese as a member of its board of directors? (1969 Bar, Vc). Answer : Yes, an American or a Chinese citizen may become a member of the Board of Directors of a corporation engaged in the lumber business. These is no law prohibiting a foreigner from becoming a stockholder, and consequently from becoming a director of a corporation engaged in the lumber business, irrespective of whether the lumber utilized is taken from private forest lands or from timber lands of the public domain, provided that in the latter case at least 60% of the capital of said corporation is owned by Filipinos.
The corporation cannot however engage in the retailing of lumber. Author’s note:
Answer still valid under N.C.C.
Bar Question: May a corporation composed entirely of aliens be organized and incorporated in the Philippines? Explain. (1970 Bar, Vla). Answer : Yes, a corporation composed entirely of aliens may be organized in the Philippines. The Corporation Law, in general, only requires a majority of the incorporators to be residents, not necessarily citizens, of the Philippines.
However, in the nationalized corporations (retail trade, agriculture, mining, transportation, shipping), no aliens or some but not all, can form the corporation depending on whether it is totally or partially nationalized. Author’s note:
Answer still valid under N.C.C.
Answer : Yes, a Japanese corporation engaged in steel manufacturing may, within certain limits, purchase stock in Philippine mining corporations.
Under a 1967 amendment to the Corporation Law, a foreign or domestic corporation organized for any purpose other than mining may acquire and hold not more than 30% of the capital stock of not
more than three corporations organized for the purpose of engaging in mining in the Philippines. The stock however, should be held by the corporation solely for investment, and not for the purpose of bringing about a combination to exercise control of such corporation, or to violate the mining and public land laws. F. Classes of Corporation
Bar Question: What are the classes of corporations? Differentiate (1954 Bar, IXa). Answer: The first general classification of corporations is into Public and Private. Public corporations are organized by the state to perform functions to govern portions of the state, and functions properly belonging to the state but are non-governmental in nature. Private corporations, on the other hand, are corporations organized by private persons or by the government or by both for private ends, aims, benefit or purpose. The two are differentiated from each other as follows:
a.
As to organizers; a. Public – by the state; b. Private – private, usually profit making functions b. As to functions; a. Public – governmental and other public functions; b. Private – private, usually profit making functions c. As to governing law; a. Public – special laws; b. Private – Law on Private Corporations. The N.C.C. classifies corporations into stock and non-stock (Sec. 3), and into those created by special laws and those incorporated under the N.C.C. (Sec. 4). Author’s note:
The N.C.C. in scattered sections also provides for close corporations (Secs. 96-105); special corporations of which there are two: educational corporations (Secs. 106 to 108), and religious corporations (Secs. 109 to 116); foreign corporations (Secs. 123 to 136); de facto corporations (Sec. 20); and corporations by estoppel (Sec. 21). No mention is made by the N.C.C. of public corporations. 1. Government owned and/or Controlled Corporations
Government owned and/or controlled corporations with original charters refer to corporations chartered by special laws, as distinguished from corporations organized under the Corporation Code. (Lumanta vs. NLRC, 170 SCRA 79). A private corporation, which is not owned nor controlled by the government, is entirely private, and cannot be organized by special Presidential Decree (P.D. 1717), but under the provisions of the Corporation Law (now Corporation Code). (National Dev. Company and New Agrix, Inc. vs. Phil Veterans Bank, et al, G.R. 84132-33, Dec. 10, 1990). When the government enters into commercial business, it abandons its sovereign capacity and is to be treated like any other corporation. (PNRR vs. Union de Maquinistas, 84 SCRA 223). By engaging in a particular business through the instrumentality of a corporation, the government divests itself pro hac vice of its sovereign character, so as to render the corporation subject to the rules of law governing private corporations. (PNB vs. Pabalan, 83 SCRA 595).
When the government enters into a commercial business, it abandons its sovereign capacity and is to be treated like any private corporation, so as to render the corporation subject to the rules of law governing private corporations. It therefore cannot invoke immunity from suits brought against it. (Malong vs. PNRR, 138 SCRA 63). Government owned and controlled corporations have a personality of their own, separate and distinct from the government, and their funds, therefore, although considered to be public in character, are not exempt from garnishment. (PNB vs. Pabalan, 83 SCRA 595; PNB vs. Court of Industrial Relations, 81 SCRA 314). Bar Question; Bar Question: Distinguish between a corporation that is “going public” and a corporation that is “going private.” What provisions would you expect to find in the articles of incorporation of a corporation that organizes itself under the narrow concept of “going private”? (1986 Bar, 1). Answer: The following are the distinctions between a corporation “going public” and a corporation “going private”:
1.
2.
A corporation “going public” allows its stocks to be issued to persons other than its registered stockholders; a corporation “going private” restricts the issue of its stocks to its registered stockholders only, and prevents the transfers by stockholders of their stocks without first giving the corporation and/or its registered stockholders the first opportunity of acquiring the same; A corporation “going public” may allow its stocks to be sold in stock exchanges; a corporation “going private” may not allow its stocks already issued to be traded in stock exchanges;
3. The articles of incorporation and/or bylaws of a corporation “going private” usually contains the “right of first refusal” clause giving the corporation and/or its registered stockhol ders, preference, as against non-stockholders in the acquisition of stocks. The articles and/or bylaws of a corporation “going public” would not contain the “right of first refusal clause”. If a corporation is organized under the concept of “going private”, the usual provision which will be found in its articles and/or bylaws will be the “right of first refusal” clause.
2. PUBLIC AND PRIVATE a. Public Corporation are divided into:
1) Municipal corporations – corporations organized by the State for the purpose of governing portions of the state. Examples: City of Manila, Province of Rizal, and Municipality of Makati. 2) Public- quasi corporations – corporations organized by the State to perform functions admittedly governmental, but which have nothing to do with the government of portions of the state. Example: National Development Company. b. Private Corporations are divided into:
1) Stock Corporations, which are corporations which have capital stock divided into shares, and are authorized to distribute profits on the basis of the shares thus held.
Stock corporations are in turn divided into: a) Par value stock corporations where the par value of shares issued is stated in the articles and which value remains generally unchangeable. b) No par value stock corporations, which have stocks where the issue value, which changes from time to time, is left to the discretion of the corporation to determine. Bar Question: May “no par value” shared in the same corporation be issued at different prices? How? How would such a circumstance affect the rights of stockholders? (1970 Bar, V-b) Answer : Yes, no par value shares in the same corporation may be issued at different prices. The Corporation Law does not require the articles to state the issue value of the no par value stocks, hence, they may be issued from time to time at different prices.
A holder of one share of no par value stock is entitled to the same rights (voting, dividend, etc.) as another holder of one share of no par value stock irrespective of the difference in issue values of the two shares. Author’s note:
Answer still valid under N.C.C
3. Aggregate and Sole
a. Aggregate – a corporation, with incorporators not less than five (5) nor more than fifteen (15), in stock corporations, or up to more than 15 in non-stock corporations. b. Sole By its incorporation, a corporation sole is vested with the right to purchase and hold real and personal property. (Republic vs. IAC, 168 SCRA 155) Bar Question: Define corporation sole? (1954 Bar, IXa) Answer : It is a special form of corporation, associated with the clergy, consisting of one person only and his successors to give him legal capacities and advantages for and in behalf of the church represented by him. Author’s note:
Answer still valid under N.C.C
4. Ecclesiastical and Lay
a. Ecclesiastical where the members are spiritual persons like bishops and priests. b. Lay includes all non-ecclesiastical corporations and may be: 1. Eleemosynary corporations which are charitable institutions; and 2. Civil corporations which are organized for profit.
Bar Question: Explain briefly (1) Eleemosynary corporation. (1967 Bar, VIIIa-1) Answer : An eleemosynary corporation is a non-religious corporation organized for charitable purposes. Author’s note:
Answer still valid under N.C.C
5. Domestic and Foreign a. Domestic – a corporation organized according to Philippine laws.
GABITO, Ma. Patrice Garlade 12
b. Foreign – A corporation formed, organized, or existing under laws other than those of the Philippines and where the laws of said country allow Filipino citizens and corporations to do business in its own country or state. They are granted licenses to transact business in the Philippines. (Sec 123, N.C.C.). 6. De Jure, De Facto, By Estoppel, by Prescription. a. De jure Corporation – a corporation formed with all of the requirements of law. b. De facto Corporation – a corporation defectively formed from a bona fide attempt to incorporate under existing laws, and which exercise corporate powers. (Sec. 20, N.C.C.). Where a person convinces others to form a corporation, which however was not formed at all, the parties are partners inter se and are governed by the Law on Partnerships. The relationship is not that of a de facto corporation. (Pioneer Insurance vs. CA, 175 SCRA 668). Bar Question: Mamuhunan was invited by his friends to invest in Adelantado Corporation, a newly organized firm engaged in money market and financing operations. Because of his heavy investments, Mamuhunan became the firm’s President and, as such, purchased a big number of computers, typewriters, and other equipment from Taktak Corporation on installment basis. Adelantado Corporation paid the downpayment and Taktak Corporation issued the corresponding receipt. To his chagrin, Mamuhunan discovered that the articles of incorporation had not been filed by his friends at that late date so he hurriedly attended to the matter. No sooner had the certificate of incorporation been
issued by the Securities and Exchange Commission when three months later, Adelantado Corporation became bankrupt. Upon being sued by Taktak Corporation in his personal capacity, Mamuhunan raised among his defenses the doctrines of de facto corporation and corporation by estoppel. Can the two defenses be validly raised by Mamuhunan? Explain. (1986 Bar,10). Answer : The doctrine of defacto corporation cannot be validly raised by Mamuhunan because at no insurance in the life of Adelantado Corporation was it a de facto corporation.
For a corporation to be considered as a de facto corporation, it is necessary that the corporation should be defectively formed from a bonafide attempt to incorporate under existing laws, and which body exercises corporate powers. Adelantado corporation could not be said to have been defectively formed because at the time it purchased the office equipment, it was not at all formed; neither could it be said that there was a bonafide attempt to incorporate at the time the purchase was made because no attempt was at all made even to file the required documents with the Securities and Exchange Commission. However, it was a corporation by estoppel at that time it made purchases with Taktakcorporation. Adelantadocorporation held itself as a corporation when it entered into a purchase contract with Taktak corporation, and it was on the strength of that appearance that Taktak corporation entered into a contract with Adelantado corporation. The principle (corporation by estoppel) cannot however be invoked by Mamuhunan, who in effect misrepresented the corporation as duly organized because only the victim (Taktak corporation in the problem) not the one who made the misrepresentation (Adelantado corporation) can invoke the principle. Hence, Mamuhunan can be made personally liable for the obligations of Adelantadocorporation. Bar Question: Seven persons form a corporation by registering their articles of incorporation with the Securities and Exchange Commission. But after the certificate of incorporation has been issued, it is discovered that only five of the seven incorporators have acknowledged the articles of incorporation before a notary public.
Is the corporation legally formed? Reason out your answer. Answer : The corporation is a de facto corporation. Although defectively formed as not to be de jure, it may nevertheless exercise corporate powers validly until the state dissolves it by quo warranto proceedings. Author’s note:
Answer still valid under N.C.C.
The Problem: Some businessmen with an available starting capital totaling only P100,000.00 ask you to help organize a business firm. Subject to legal limitations, they have future plans to invite alien investors who are agreeable to rendering financial assistance by way of direct investments and/or loans. Your professional assistance is solicited on the following various questions that may arise:
Bar Question: Considering the above problem, state the form of business organization which you recommend should be created for the purpose explaining specifically and briefly. (a) X xx (b) X xx (c) Whatever be the form of organization chosen, give instances when it may be sued as a legal person even if irregularly organized. Give legal reasons (1973 Bar. I-c) Answer: (a) X xx (b) X xx (c) A corporation, although irregularly organized, may be sued as a legal person, under the principle of estoppel. A group of persons representing themselves to have been organized as a corporation, and third persons,believing in said representation, transact with said group, can be sued as a corporation, and cannot later on deny that the group is not a corporation. This is a corporation by estoppel. A defectively formed corporation organized in good faith under a valid law under which it could have validly incorporated and proceeds to do business for the purpose for chich it was organized may sue and be sued. This is called as a de facto corporation. The reason in both cases allowing these defectively formed corporations to be sued is to give protection to innocent third persons transacting business with these entities. Author’s note: Answer still valid under N.C.C. See also Secs.
20 and 21, N.C.C.
Corporation by Estoppel – a corporation by estoppel is a group of persons which holds itself out as a corporation and enters into a contract with third persons on the strength of such appearance. It cannot be permitted to deny its existence in an action under said contract. Conversely, a person who contracts with a group of persons in such a way as to recognize and in effect admit the legal existence of the group as a corporation, cannot be permitted to deny its corporate existence in any action from solid dealing. The principle can be invoked by the victim but not by one who misrepresented the corporation as duly organized as against the victim of said misrepresentation. (Albert vs. University Publishing, 13 SCRA 84) The person making such misrepresentation as to the valid incorporation of a corporation assumes the obligation and becomes personally liable for contracts entered into, performed as such agent. (Albert vs. University Publishing, supra). Where a third person enters into a contract with an association which represented itself to be a corporation, the association is estopped from denying its corporate capacity. (Christian Children’s Fund vs. NLRC, 174 SCRA 681) Bar Question: Give examples illustrating the distinction between de facto corporations, and corporations by estoppel. (1955 Bar, Via) Answer: Fiver persons including one minor filed articles of incorporation with the SEC and were issued a certificate of incorporation, the minor eventually finding out that he lacked the requisite ageon
information furnished by his parents. This is a de facto corporation and it can continue performing corporate functions until stopped by the state by quo warranto proceedings. A person, believing a group of persons to be a duly organized corporation because of representations the group made, entered into a contract with said group. The group cannot invoke noncorporate status in a suit to enforce the contract. This is a corporation by estoppel. Author’s Note: Answer still valid under N.C.C .
Corporation by Prescription Bar Question: What is a corporation by prescription? Give an example of such corporation. (1964, Bar VIIb) Answer: A corporation by prescription is a body which though not lawfully organized as a corporation, has been recognized by immemorial usage as a corporation, with rights and duties maintainable at law. Example: The Roman Catholic Archbishop of Manila before the law on corporation sole took effect was considered as a corporation by prescription, it having antedated the state. Author’s note: Answer
still valid under N.C.C.
A corporation is authorized to prescribe qualifications for its directors. (Gokongwei vs. SEC, 89 SCRA 336). A director stands in a fiduciary relation to the corporation and its stockholders. The disqualification of a competitor from being elected to the board is a reasonable exercise of corporate authority. (Gokongwei vs SEC, supra). Bar Question: The Board of Directors of “C” Corporation, engaged in the manufacture and sale of food products, acting on standing authority of the stockholders to amend the By-Laws, amended its By-Laws so as to disqualify any stockholder, who is also a stockholder and director of a competitor, from being elected to its Board of Directors. “S”, a stockholder holding sufficie nt shares to ensure him a seat in the Board. Filed a petition with the Securities & Exchange Commission for a declaration of nullity of the amended By-Laws and the cancellation of the Certificate of Filing Amended ByLaws. He alleged, among others, that as a stockholder, he had acquired rights inherent in stock ownership, such as the right to vote and be voted upon in the election of directors. Reason out the merits of the stockholder’s petition. (5%) (1961 Bar, 10). Answer: The petition of S should be denied.
It is within the authority of the stockholders of a corporation to enact by-laws which would disqualify as a candidate for director, any of its stockholders who holds a substantial equity in a competing corporation. Matters taken up in board meeting could involve trade secrets which ought not to go out of the board room for the protection of the corporation’s business interests. The presence as a member of the Board of Directors of a person, who holds a substantial interest in competing corporation, can destroy that secrecy on many business matters. b. Number of Directors
Bar Question: How many directors may ordinary stock corporations have? (1948 Bar, II-a) Answer: A stock corporation may have not less than five nor more than fifteen directors. Note: Answered under provision of the N.C.C. c. Liability of Directors
Bar Question: What liability, if any, may a director of a corporation incur for the misconduct or dishonesty of his co-directors or other officers of the corporation? (1968 Bar, Ia). Answer: Generally, a director is not liable for the misconduct or dishonesty of his co-directors or other officers of the corporation, because a director is not an insurer of the fidelity of agents of the corporation.
He may be held liable if it is shown that he neglected his duty to supervise the business with attention or to use proper care in the appointment of agents.
6. The Executive Committee
The by-laws may create an executive committee composed of not less than three directors, appointed by the board. By majority vote, the committee can act on matters within the competence of the board of as may be delegated to it by the by-laws or by the board. It cannot however act on the following: (1) matter needing stockholder’s approval, (2) filling up of board vacancies, (3) amendment, repeal, or adoption of by-laws, (4) amendment of an irrepealable board resolution, and (5) cash dividend declaration. 7. Officers of the Corporation
The statutory officers of the corporation are the president, the treasurer and the secretary. The corporation, in its by-laws, may provide for the corporate officers. A suit for damages for illegal ouster of a corporate officer prescribes in four years. An officer appointed at the pleasure of the Board, per the corporate by-laws, may be terminated at any time (Tavera vs. Phil. Tuberculosis, 112 SCRA 243) A stockholder or officer of a corporation is not personally liable for the consequences of the termination of services of its employees. (Sunio vs. NLRC, 127 SCRA 89) unless tainted with malice or bad faith (Garcia vs. NLRC, 153 SCRA 639) Where a loan was procured for the corporate purposes, and an official signed for and in behalf of the corporation, solidarily with himself in his personal capacity, both the corporation and the official are solidarily liable. (de Asis and Co., Inc., et al, vs, CA, et al., 136 SCRA 599) There is no law which prohibits a corporate officer from binding himself personally to answer for a corporate debt. While the limited liability doctrine is intended to protect a stockholder by immunizing him from personal liability for corporate debts, he may nevertheless divest himself of this protection by voluntarily binding himself to the payment of corporate debts. (Garcia et al vs. CA, et al, G.R. 80201, Nov. 20, 1990)
a. The President
-
The President must be a director and his function primarily involves the implementation of board resolution and policies.
b. The Treasurer
-
The Treasurer may or may not be a director of the corporation. His principal function involves the custody of funds and other properties of the corporation.
c. The Secretary
-
The secretary need not be a director but must be a resident and a citizen of the Philippines.
Without the signature of the corporate secretary, the minutes allegedly taken by a mere clerk have neither probative value nor credibility. (NATU vs. Sec. of Labor, 109 SCRA 139). Bar Question: Can a Spanish citizen be (1) President, (2) director, (3) secretary, (4) manager of a corporation? Can an American citizen occupy any of the above positions? (1946 Bar, VIIb).
(1) A Spanish citizen can be President of a corporation provided he is a director thereof. In Answer : the 100% nationalized corporations like those engaged in retail trade, and rural banking, a Spanish citizen cannot be a stockholder, hence, cannot be a director and/or President thereof. (2) A Spanish citizen can be a director of a corporation, except in 100% (3) A Spanish citizen cannot be a secretary of a corporation, as the Corporation Law requires a corporate secretary not only to be a resident, but also to be citizen of the Philippines. (4) He can be a manager of a corporation, except in the nationalized corporations.
An American citizen can be president, director or manager of a corporation except in the nationalized corporations. He cannot be corporate secretary, as Filipino citizenship is a requirement for that position. IV. Capital Structure of Stock Corporations A. Important Concepts Defined 1. Capital Stock
- Capital stock is the amount stated in the articles of incorporation of a corporation, divided into shares of stock, and made available for subscription. The capital stock of a par value stock corporation is called “authorized capital stock”, while that of a no par value stock corporation is called “stated capital”. 2. Capital
- Capital is the actual property or estate of a corporation, whether in property or in money, including surplus and undivided profits.
Bar Question: Distinguish capital stock from capital of a corporation. (1946 Bar VIIIa; 1957 Bar, Ia-2). Answer : Capital stock is distinguished from capital as follows:
(a) Capital stock is the amount of money stated in the articles of incorporation to be subscribed and paid in; capital represents the actual property of a corporation; (b) Capital stock remains fixed unless changed by proper amendment of articles; capital varies according to the results of the business operations of a corporation. Author’s note:
Answer still valid under N.C.C.
3. Share of Stock
A share of stock is a unit of capital stock representing the proportionate interest of its owner in the management, dividends, and assets on liquidation of the corporation. B. Prerequisites to Incorporation 1. Capital Stock
The capital stock of a corporation is stated in its articles of incorporation. This capital stock is divided into shares, with par value indicated, if the corporation is a par value stock corporation; and with no mention of the par value per share if the corporation is a no par value stock corporation. While no-par value stocks have no fixed value per share for all the number of shares stated in the articles, the corporation fixes th e issue for a consideration which shall not be less than five pesos (₱5.00) per share. These issued shares shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto. The entire consideration received by the corporation for these shares shall be treated as capital and shall not be available for distribution as dividends. (Sec. 6, 3rd par. N.C.C.) Bar question: The articles of incorporation to be registered in the Securities and Commission contained the following provision -
(a) "First Article. The name of the corporation shall
Exchange
be
Toho Marketing Corporation." (b) "Third Article. The principal office of the corporation shall be located in Region III, in such municipality therein as its Board of Directors may designate." (c) "Seventh Article. The capital stock of the corporation is One Million Pesos (₱1,000,000.00) Philippine Currency." What are your comments, and suggested changes to
the proposed articles? (1990
Bar, I). Answer: My comments to the provisions stated above are:
(a) The name of the corporation should contain the word "Corporation."
"Incorporated"
or
The suggested change is: "First Article: The name of the corporation shall be TOHO MARKETING CORPORATION." (b) The principle office of the corporation should mention city where it is located.
the town and province, or the
The board by resolution cannot designate the principal office of the corporation, or change the same from time to time. The suggested change is: "Third Article: The principal office of the corporation shall be located in Cabanatuan City." (c) The Seventh Article should not only mention the amount of capital stock, but also the number of shares into which said capital stock, but also the number of shares into which said capital stock is divided, and the par value for each share, if the shares are of the par value type. The suggested change is: "Seventh Article: The capital stock of the corporation is One Million Pesos (₱1,000,000), Philippine currency, divided into ten thousand (10,000) common shares, each with par value of One Hundred Pesos (₱100.00). Bar Question: A client asks you what is the difference between "no par value" shares of stock. Explain it as simply as you can. (1980 Bar, IIa).
"par
value'
and
Answer: A par value share is one where the subscription or issue value of the share is fixed by the articles of incorporation, at which amount all such shares are issued by the corporation.
A no-par value share is one which gives to the corporation a leeway to fix different issue values every time the shares are allowed to be issued. The issue value shares of the corporation may therefore vary at every issue of the stock by the corporation. Author's note: Answer is still valid under N.C.C. Bar Question: The same client now tells you that he and his associates have ₱500,000 which they wish to invest in a factory for the manufacture of shoes. He asks for your opinion as to whether they should organize a corporation with "par value" stock. What will you tell him? (1950 Bar, IIb). Answer: I will first ask my client whether he and his associates have intentions to invite other investors after incorporation. If he says yes, then I will advise him to organize a no-par value stock corporation, otherwise, I will suggest a par value stock corporation. Reason: If the corporation is a no par value stock corporation, and it succeeds, subsequent issues of stock may be at book value, to give protection to the pioneer incorporators; if it fails, then subsequent issues may be at values less than the original issue value, to attract outsiders. This reason will not hold if my client and his associates intend to limit stock ownership to themselves, in which case shares with par value would be the ideal set-up.
val ue sh are s of Bar Question: W h a t p r i v a te c o r p o r at i o n s m a y n o t i s s u e n o - p a r s to c k a n d w ha t s ha r es o f st o c k ma y no t be Issued without a stated par value? (1959 Bar, IIIb; 1958 Bar, IXb-2).
Answer : The following private corporations may not issue no par-value shares: (1) banks, (2) insurance companies, (3) building and loan associations, and (4) public utility companies without approval of any of the appropriate boards created to replace the PSC.
The following shares of stock may not be issued without a stated par value (1) preferred shares of any corporation, (2) shares issued by the above-stated corporations. Under Sec. 6, 1st par. Of the N.C.C., trust companies also cannot issue no par-value shares. Public utilities also cannot issue said shares even with the approval of the appropriate supervisory boards.
Author’s note:
Bar Question: Explain the nature, and reason for no par value shares of stock. (1958 Bar, IXb). Answer : No par value shares are shares issued by a corporation at issue values varying with every issue.
No par value shares are issued to allow flexibility in the price at which they may be issued, the issue value being usually, pegged to their book value. 2. Subscribed Capital
Subscribed capital stock means the capital stock or a portion of it which has been issued or subscribed and paid for, in part or in whole. For purposed of corporation, the law requires that at least twenty five per centum of the authorized shares of capital stock has been subscribed. (Sec. 14, 2nd par., N.C.C) a. Trust Fund Doctrine The trust fund doctrine considers the subscribed capital stock as a trust fund for the payment of the debts to look up to, for the satisfaction of their credits. Hence, the corporation cannot dissipate it to prejudice its creditors. It is an established doctrine that subscriptions to the capital stock of a corporation constitute a fund to which creditors have a right to look up to 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. (PNB vs. Bitulok Sawmill, 23 SCRA 1366). A corporation has no power to release a subscription to its capital stock, without 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. (PNB vs. Bitulok, supra). A stockholder may be sued directly by creditors to the extent of their unpaid subscriptions to the corporation. (Keller vs. COB Marketing. 141 SCRA 861) Bar Question: A subscribed to 100 shares of stock of corporation X with par value of P100.00 each, paying P1,500.00 on his subscription. Subsequently, A asked B, the president of the corporation, to release him from his subscription. B consented provided that A forfeits to the company what he has already paid. A agreed and B gave him a certificate of release. Not long afterwards, Y went into insolvency and an assignee was appointed. The assignee now seeks to collect from A the unpaid balance of his subscription. Decide the dispute with reasons. (1979 Bar, VIIA).
Answer: Yes, the assignee of the insolvent corporation may collect from A the unpaid balance of his corporation.
Under the trust fund doctrine, subscriptions to the capital stock of a corporation constitute a fund to which creditors have a right to look up to, for satisfaction of their claims. The corporation, whether through its board, or any of its officers, like the President, in the problem, cannot in any manner dissipate said fund, or condone the stockholder’s obligations, or release A from the payment of his subscription, all of which are illegal, violating the trust fund doctrine. A therefore can be made to pay by the assignee of the insolvent corporation for the unpaid balance of his subscription. Author’s note:
Under the New Corporation Code, the trust fund doctrine is maintained.
Bar Question: After five years of operation, “P. INC.” became insolvent Corporate creditors bought suit against both the corporation and its stockholders. Against the latter, on the ground that all of them ha daccounts remained unpaid on their subscriptions to the capital stock. Will a cause of action in their favor of corporate creditors lie as against stockholders for their unpaid subscriptions? Give reasons for your answer. (1960 Bar, Vb). Answer : Yes, a cause of action will lie against the stockholders for their unpaid subscriptions. Under the trust fund doctrine, the subscribed capital stock of a corporation is considered as a trust fund for the payment of its debts, and to which the creditors have a right to look up to, for the satisfaction of their credits. Author’s note:
Answer still valid under N.C.C.
Bar Question: X corporation was organized by five individual incorporators, who subscribed to the whole authorized capital stock of ₱1 million and who paid in ₱500,000.00. The incorporators, all members of the board of directors, agreed among themselves that the unpaid balance of their subscription will be paid out of expected cash dividends. However, no dividends were declared. The board of directors decided to condone and cancel the unpaid subscriptions. This action of the Board was ratified by the stockholders by unanimous vote of the stockholders at a proper meeting.
The creditors of the corporation sued the subscribers for their unpaid subscription. Can the creditors recover? Reason (1971 Bar, IV-1). Answer : Yes, the creditors of the corporation can recover from the subscribers their unpaid subscription, which the board condoned at which the stockholders unanimously ratified.
Under the trust fund doctrine, subscribed capital stock is a trust fund for the payment of debts by the corporation and to which the creditors have the right to look up to, for the satisfaction of their credits. The corporation, through its board or stockholders, cannot dissipate, must less condone, unpaid subscriptions to said subscribed capital stock. Author’s note:
Answer still valid under N.C.C.
Bar Question: The “Manila Cigar Company” was organized with a capital stock of ₱50,000, divided into 500 shares of ₱100 a share. “X” subscribed for 20 shares and paid ₱500 upon his subscription leaving unpaid account thereof the sum of ₱1,500. Five years later, the company was declared insolvent and “A” was duly appointed assignee, who upon assuming his position, found that “X” has an unpaid subscription in the amount of ₱1,500. Prior to the
company’s declaration of insolvency, its board of directors, by resolution, released “W” (another subscriber) from the payment of his (W’s) remaining unpaid subscription. The assignee brought action to recover from “X” the amount representing his unpaid subscription.
(a) Is the action properly filed although there was no prior call made Questions pursuant to sections 37 and 38 of the Corporation Law? (b) Has X been released from his obligation to pay because the board of directors had previously released another stockholder (W) from the payment of his unpaid subscription? Reason out your answer: (1961 Bar, III). (a) Yes, the action to recover the unpaid subscription of A is proper, inspite Answer : of the lack of a prior call. Reason: In case a corporation is insolvent, no call is necessary to collect the unpaid subscriptions. (b) X is not released from his obligation for unpaid subscription just because another stockholder (W) was released by board resolution from the payment of his unpaid subscription. The release of W by the board is null and void hence, X could not use it as an argument for excusing himself from paying his unpaid subscription. Author’s note:
Answer still valid under N.C.C.
The trust fund doctrine is also applicable in case the appraisal right of a withdrawing stockholder is involved. The corporation is prohibited from paying the withdrawing stockholder if the rights of creditors are affected. Only unrestricted retained earnings of the corporation are available for said payment. (Boman Environmental vs. CA, 167 SCRA 540). 3. Paid-up Capital Paid-up capital is the amount actually paid in money or property on account of the subscribed capital stock.
For purposes of incorporation, at least 25% of the subscribed capital stock must be paid in by incorporators. The paid-in amount should however not be less than ₱ 5,000.00 (Sec. 14, 2nd par., N.C.C.) Bar Question: Explain the difference between “authorized capital,” “subscribed capital” and “paid up capital” of a corporation. (1964 Bar, VIIa). Answer : Authorized capital is a stated amount in the articles of incorporation of a corporation representing the maximum amount the corporation can collect from its stockholders on account of the stocks issued to them.
Subscribed capital is the capital stock or a portion of it, issued by the corporation to its stockholders, paid for, or promised to be paid by the latter. Paid-up capital is the actual amount of money paid, or property delivered to the corporation on account of the subscription of the stockholder. For purposes of the incorporation, the law requires at least 20% of the capital stock to be subscribed, and at least 25% of such subscription to be paid up by the incorporators.
Subscription requirement for purposes of incorporation is now 25% of the authorized capital. (Sec. 14, 2nd par. N.C.C.).
Author’s note:
Bar Question: While the incorporation papers of XYZ, Inc. Were pending before the Securities and Exchange Commission (SEC) for approval, A, the designated Treasurer in the Articles of Incorporation held real estate property worth P20,000.00 which E turned over for shares he (E) purchased in XYZ, Inc. Before the certificate of incorporation for XYZ, Inc. could be issued, H, who claims to be the owner of the said real estate property, filed an action against XYZ, Inc. for recovery or possession of the same. Will H’s suit prosper? Give reasons. (1978 Bar, 6 -b). Answer: The action of H will not prosper. Properties turned over by an incorporator to the Treasurer of a corporation to pay a subscription pending issuance of its certificate of incorporation by the Securities and Exchange Commission, are received and held in trust by said Treasurer for the benefit of the corporation pending issue of its certificate of incorporation; hence, being trust property, the treasurer of the corporation cannot dispose of the same in any manner. Author’s Note: Answer
still valid under N.C.C.
The Problem: Some businessmen with an available starting capital totalling only P100,000.00 ask you to help organize a business firm. Subject to legal limitations, they have future plans to invite alien investors who are agreeable to rendering financial assistance by way of direct investments and/or loans. Your professional assistance is solicited on the following various questions that may arise. Bar Question: Assume that you want to be a participant in the business independently of your being its legal counsel, and that more investors are expected after the firm is formally organized. Explain briefly with legal reasons:
(a) Citing the proper law or laws, how may you lawfully charge your fees and apply them to the payment of your share in the capital if the firm? (b) x x x (c) x x x (1973 Bar, Ila)
Answer: (a) Under the Corporation Law, stocks are paid in actual cash or in exchange for property in an amount equal to the par value of the shares issued.
A lawyer who has already rendered service to the corporation is entitled to be paid for such service which credit is considered as property the value of which is ascertainable. Stocks may be issued for this purpose. (b) x x x (c) x x x Under Sec. 62, N.C.C, services actually rendered to the corporation is a lawful consideration for the issuance of stocks.
Author’s note:
C. Increase or Decrease of Capital Stock 1. Required Vote
The capital stock of a corporation may be increased or dec reased at a stockholder’s meeting called for the purpose wherein two thirds of the outstanding capital stock shall favour such increase or decrease, after prior approval by a majority vote of the board of directors. (Sec. 39, N.C.C.) 2. Procedure
Bar Question: Explain the steps to be taken for increasing the capital stock of a corporation. (1947 Bar, VIII) Answer: The following steps are taken for increasing the capital stock of a corporation:
1. Notice to stockholders specifying the purpose of the meeting, 2. Affirmative vote of 2/3 of the entire corporate capital stock. 3. Certificate signed by a majority of the directors and countersigned by the chairman and secretary of the stockholders’ meeting. 4. Treasurer’s certificate that 20% of the increase has been subscrib ed and 25% of such subscription paid-up. Under the N.C.C. prior board approval is required. Also, subscription requirement is at least 25% of the authorized capital stock.
Author’s note:
Bar Question: “X” Realty, Inc., a corporation engaged in the subdivis ion business, has an authorized capital of P800,000.00, all of which has been fully subscribed. At a special meeting of the board of directors, the majority vote decided, on the basis of the recommendation of its Executive Committee, that the cor2) The Non-voting Shares
No share shall be deprived of voting rights except those classified and issued as “preferred” or redeemable (Ibid). Treasury shares also are non-voting (Sec. 9). a) Preferred Shares
Preferred shares, issued only with a par value, may be given preference in the distribution of assets in liquidation and in the payment of dividends, or such other preferences as may be stated in the articles of incorporation. If authorized by the corporate articles, the board may fix the terms and conditions of the preferred shares or any series thereof, which take effect upon the fitting of a certificate thereof, with the SEC (Sec. 6, 2nd par., N.C.C.). b) Redeemable Shares
Redeemable shares, issuable only if expressly provided for in the corporate articles, have to be purchased or taken up by the corporation on the expiration of the period specified in said shares. The purchase takes place whether or not the corporation has unrestricted retained earnings when the expiration date arrives (Sec. 8, N.C.C.). c) Treasury Stocks
Treasury shares are stocks previously issued by the corporation, fully paid for, and reacquired by it by lawful means. The board, after fixing a reasonable price for them, may dispose of these shares (Sec. 9, N.C.C.).
Treasury shares are stocks issued and fully paid for and reacquired by the corporation either by purchase, donation, forfeiture or other means. They are therefore issued shares. But being in the treasury they do not have the status of outstanding shares (Com. of Int. Rev. vs. Manning et al., 66 SCRA 14). d) Voting Rights Exercisable by Owners of Non-Voting Shares
Except for treasury stocks which cannot be voted upon on any corporate matter (Sec. 57, N.C.C.) holders of other non-voting Shares shall nevertheless be entitled to vote on the following corporate matters: (1) amendment of the articles, (2) adoption and amendment of the by-laws, (3) sale or other disposition of all or substantially all of the corporate property, (4) incurring , creating or increasing bonded indebtedness, (5) increase or decrease of capital stock, (6) merger or consolidation with other corporations, (7) investment of funds in another corporation or for a different purpose, and (8) corporate dissolution (Sec. 6, par. 6, N.C.C.)
b. The Par Value and No-Par Value Shares
All shares of a corporation may have a par value or have no par value, as stated in the corporate articles, except that banks, trust companies, insurance companies, public utilities, and building and loan associations cannot issue no-par value shares. Shares issued without par value are deemed fully paid and non-assessable, and their holders are not liable to the corporation or to its creditors in respect thereto. They cannot be issued for a consideration less than P5.00 per share, and payments thereon, are treated as capital and are therefore not available for dividend distribution (Sec. 6, par. 3, N.C.C.). The price at which no-par value shares may be issued may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the bylaws, or in the absence thereof, by the stockholders at a meeting duly called for the purpose representing at least a majority of the outstanding capital stock (Sec. 62, 4 th par., N.C.C.) Bar Question: Name the different classes of shares of stock and briefly discuss at least two classes (1961 Bar, IIIa).
of said
Answer : Shares of stocks may be common, preferred or deferred; no par value and par value shares; watered stock, over-issued stock.
A common stock is stock entitling the holder to proportionate rights in voting, dividends and assets in liquidation, along with other common stockholders. A preferred stock is stock issued entitling the holder to a preference in (1) dividends up to a stated percentage, and/or (2) assets in liquidation, with generally no voting rights. Author’s note:
The principal N.C.C. classification of stocks is into the voting and the non-voting. (See
supra) . Bar Question: Mention two kinds of preferences that may be given to preferred shares. (1949 Bar, Via). Answer: The preferences may be (1) on dividends up to a stated percentage, and/or (2) on assets in liquidation.
Preferred stockholders with preference on dividend declarations are paid first before common stockholders are paid their dividends, if there are surplus profits left for the purpose. On liquidation, preferred stockholders are refunded their investments, after the creditors are paid, but ahead of refunds, if any, to common stockholders. Author’s note: Answer
still valid under N.C.C.
Bar Question: What is meant by preferred cumulative participating share of stock? (1950 Bar, Ic). Answer: A preferred cumulative participating share of stock is a share entitling its holder to preference in the payment of dividends ahead of the common stockholders,, to be paid the specified rate of dividends for prior years, if unpaid, and to participate with the common stockholders in further dividend declarations in excess of the rate stated in the preferred stock certificates. Author’s note: Answer
still valid under N.C.C.
2. Other Classifications a. Promotion Stock
Promotion stock is stock issued by the corporation usually a mining company to (1) owners of the mining ground deeded to the corporation, (2) promoters and the other persons for services rendered before incorporation. b. Escrow Stock
Escrow stock is stock deposited with a third person to be delivered to the stockholder or his assigns after complying with certain conditions, usually the payment of the full subscription price. c. Over-issued Stock
Over-issued stock is stock issued in excess of the authorized amount or number of shares of the capital stock, hence, null and void. d. Watered Stock
Watered stocks are stocks issued by a corporation (1) gratuitously, (2) for money or property less than par value, (3) services less than par value, (4) in the form of dividends, when no surplus profit exists. (See also Sec. 64, N.C.C.)
E. Issues and Transfer of Shares 1. Issue of Stocks
Stocks are deemed issued from the moment subscription is accepted whether the subscriber has paid in part or in full for his subscription. a. Mode of Issue
There are several modes of issuing stocks: (1) by subscription, (2) by sale or exchange of unissued stock, (3) in payment of obligations, (4) stock dividends. b. Consideration Stocks shall not be issued for a consideration less than the par or issued value. The consideration may take any of the following forms: (1) cash paid, (2) property delivered at fair value to the corporation, (3) labor or services actually rendered to the corporation, (4) prior corporate obligations, (5) amounts transferred from unrestricted retained earnings to stated capital, and (6) outstanding shares exchanged for stocks in the event of reclassification or conversion. (Sec. 62, 1 st par., N.C.C.) The use of stocks by a corporation to pay for real property purchased by it does not make the sale simulated or fictitious. (Cordero vs. CA, 126 SCRA 109) Where shares of the unissued stock are issued to some stockholders before the exemption resolution or certificate is issued by the SEC to the corporation, the stock issues are null and void, and cannot be utilized to avail of stockholders’ rights including the right to vote for directors in the annual stockholders’ meeting. (Motoomul et al, vs. de la Paz et al., G.R. L -45303, July 24, 1990). Bar Question: May shares of stock be issued for services rendered to the corporation? Explain and give reasons for your answer. (1952 Bar, VIb) Answer : Yes, shares of stock may be issued for services rendered. Services rendered are compensable in money; and money in a valid consideration for the issuance of stocks. Author’s Note:
Under the N.C.C, services rendered is expressly a consideration for the issue of stocks
Bar Question: On January 1, 1972, Cruz signed a written subscription to the corporate stock of Santos & Company, in the following terms: “I hereby subscribe for 100 shares of the capital stock of Santos & Company, payable from the first dividends declared any or all shares of said company owned by me at the time dividends are declared, until the full amount of this subscription has been paid.”
The question is whether this stipulation to the first dividends declared on the shares has the effect of relieving the subscriber (Cruz) from personal liability in an action to recover the value of the shares? Explain and give reasons for your answer (1952 Bar, Vb). Answer: No, the subscriber is not relieved from liability for the payment of his subscription. The stipulation to have the subscription payable from the first dividends is null and void as the only dividends which can be the considerationn for the issue of stocks are those coming from a validly existing surplus profit from operations at the time the stocks are issued. The dividends contemplated in the problem have no right to exist yet. Author’s note:
Under N.C.C., the source of the fund for dividends is the unrestricted retained earnings.
Bar question: S bought shares of stock from a stock broker who delivered a street certificate to S. As security for a loan, S delivered the certificate to R, who in turn pledged the certificate to a bank to secure
his loan. After S paid R, S demaded the return of the certificate from R and from the bank. Can S recover the certificate? Explain fully. (1971 Bar, V-2) Answer: S can no longer recover the certificate in the possession of the bank
A street certificate is a stock certificate endorsed by the registered holder in blank and upon its face, the transferee is entitled to demand its transfer into his name from the issuing corporation. When so endorsed in blank, the certificate is transferable by mere delivery. When delivered by R to the bank still with the blank endorsement, the latter had a perfect right to assume that R was its holder. Hence, until the bank returns said certificate to R after R has paid in full his loan to the bank, S cannot recover the certificate from the bank. The certificate, however, if in the possession of R, can be recovered by S because of their contract. Author’s note: Answer still valid under N.C.C.
2. Pre-emptive Right of Stockholders
The stockholders’ pre-emptive right is the right of stockholders at the time of the issue of capital stock, in preference to other persons, and as between themselves, to subscribe for, or purchase, the unissued stocks in proportion to the number of shares of the original stock held by them respectively.
The right applies to all issues or disposition of shares of any class, unless such right is denied by the corporate articles or its amendmets. Excluded from the rule are stock offerings to the public in compliance with laws requiring needed for corporate purposes , or stocks to pay a previously contracted debt. (Sec. 39, N.C.C.). Bar Question: “X” Really, Inc., a corporati o engaged in the subdivision business, has an authorized capital of Php 80,000.00, all of which has been fully subscribed. At a special meeting of the board of directors, the majority vote decided, on the basis of the recommendation of its Executive Committee that the corporation purchase a 5-hectare property offered to it because it was ideal for its subdvision business, the price offered was lower than the prevailing market price and John Roque, the owner of the property, was willing to accept Php 200,000 worth of shares of the corporation in exchange of, or as payment for, his property. No chas was involved in the transaction. Thus, the Board approved a resolution increasing the authorized capital stock from Php 800,000 to Php 1M, stipulating that the additional Php 200,000 worth of shares be issued in exchange for the 5-hectare property and that the existing stockholders would have no pre-emptive right to subscribe to the additional shares as the same were being issued to pay for the property.
Was the action of the Board correct and sufficient? Explain your answer. (5%), (1982, Bar, 1) Answer: The action of the board is not correct and sufficient?
The act to increase capital stock from Php 800,000 to Php 1M is in effect an ammendment to the Seventh Article of the Articles of Incorporation. The approval of the board of this increase of capital stock, requires the further approval by the stockholders representing 2/3 of the outstanding capital stock, in a meeting called for the purpose.
Furthermore, the setting aside by the board of ₱200,000 worth of shares (the whole of the increase) in exchange for a 5-hectare property, at the same time stipulating that existing stockholders would have no pre-emptive right to said increase, requires again the vote of approval of stockholders, representing at least 2/3 of the outstanding capital stock, in a meeting called for said purpose. The board of directors of X Reality, Inc. did not have its approved resolution go through these requirements. The resolution approved by the board therefore is not correct and is very deficient?. Bar Question: XYZ Corporation has an authorized capital stock of ₱100,000.00 divided into 10,000 shares, each with par value of ₱10.00. The subscribed capital stock is ₱50,000.00, or 5,000 shares. At the time of incorporation, S subscribed to 1,000 shares or ₱10,000.0 0.
In need of additional funds, XYZ Corporation proposes to offer the unsubscribed 5,000 shares to new stockholders at ₱15.00 per share or an aggregate amount of ₱75,000.00. Explain whether or not S has a right to subscribe to any of the 5,000 shares and, if so, at what price? (1984 Bar, 12). Answer: S, as a stockholder, has the pre-emptive right to subscribe to 1/5 of the number of unissued shares intended for issue by the corporation. As the corporation intends to issue all of the 5,000 unissued shares, the 1/5 portion over which S can exercise pre-emptive right is 1,000 shares. The subscription price of stock to S is the par value of ₱10.00 per share. Bar Question: X Corporation is in need of land on which to construct an additional factory to be used in the expansion of its business. Jose Cruz owns a piece of land in Tagaytay, Rizal, which is ideal for the purpose, and the corporation offers to buy it at a fair price. Jose is willing to part with the land on condition that he be paid in shares of stocks of the corporation. The Board of Directiors decides to accept the terms of Jose, but since the authorized capital stock of the corporation has been fully subscribed, it poses to increase the capital stock so that it can consummate the sale of the land. The proposal, including the purchase of Jose’s land in exchange for the new sha res, was submitted to the stockholders in a meeting called for the purpose.
Pedro Reyes, who has 100 shares in the corporation, alleging that he and all other stockholders have a preemptive right to the new shares, insists that the corporation issue to him his proportionate quota of the new shares which he offers to buy in favor of the proposal to increase the capital stock, including the exchange of Jose’s land for his new shares of stock. Is Pedro Reyes, within his rights in claiming a preemptive right? Explain. (1983 Bar, 2). Answer: No, Pedro Reyes will not be within his rights in claiming a preemptive right.
While it is true that a stockholder is entitled to preemptive right to all stock issues of a corporation, that rule is subject to objections. One of them is where the stocks are used to exchange for property needed for corporate purposes by the corporation. The approval of stockholders holding 2/3 of the outstanding capital stock of the corporation is sufficient for the exception to operate and the approval of the stockholders holding 80% of the outstanding stock of the corporation, which is more than the requirement validates the exchange. Bar Question: The stockholders of People Power Inc., (PPI) approved the following two resolutions in a special stockholders’ meeting: ( i ) Resolution increasing the authorizing the Board of Directors of PPI
and ( ii ) resolution authorizing the Board of Directors to issue cash payment the new shares from the proposed capital stock increase in favor of outside investors who are non-stockholders. The foregoing resolutions were approved by stockholders representing 99% of the total outstanding capital stock. The sole dissenter was Jose Estrada who owned the rest (1%) of the stock. (a) Are the resolutions binding on the corporation and its stockholders including Estrada, the dissenting stockholder? (b) What remedies, if any, are available to Estrada? (1987 Bar, 12) Answer: (a) With respect to however to the resolution authorizing the board to issue for cash to nonstockholders the new shares from the capital stock increase, the resolution cannot bind Estrada. The resolution, in effect amounts to a waiver by the voting stockholders of their preemptive right to the new stocks. This preemptive right is personal to the stockholder and must be personally waived by the stockholder. The waiver by the rest of the stockholders cannot bind the stockholder who did not vote for the said waiver resolution.
(b) Estrada, however, with respect to the resolution to issue to new stockholders for cash the new shares from the capital stock increase, can prevent the resolution from taking effect as against the 1% of the increase, which he can insist, should be issued to him pursuant to his preemptive right which he has not waived.
3. Issuance of Certificate of Stock a. Nature of a Certificate of Stock
A certificate of stock is the written acknowledgement by the corporation of the stockholder’s interest in the corporation. It is personal property and may be mortgaged or pledged. It is however not necessary that a person should hold a certificate of stock for that person to be a stockholder. It is the quasi-negotiable in that title can be transferred by indorsement but is non-negotiable in that the holder takes it subject to the defenses of the registered owner. It binds the corporation when the transfer is recorded in the corporate books. b. Formalities of Issuance
The certificate should be signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the corporate seal. c. Right of Stockholder to a Certificate As soon as the stockholder fully pays for the subscription, he is entitled to the issuance of a certificate of stock. Where stock certificates prepared by the corporation in the name of a registered stockholder are claimed by another person who alleges that they are merely held in trust by said registered stockholder, an interpleader action filed by the issuing corporation against the two claimants is a proper remedy. (Lim vs. Continental Development Corporation, 69 SCRA 349). Bar question: After subscribing to 3,000 shares of corporate stock with a par value of P100 each, a stockholder paid for 1,000 shares or a total sum of P100,000. He then asked for the issuance to him of certificates of stock for the 1,000 paid-up shares so that he may have voting rights but the corporation
refused. In the trial court, the judge resolved the case against the stockholder, ruling that- “In the absence of a special agreement to the contrary, a subscriber for a certain number of shares of stock does not, upon payment of one-third of the subscription price, become entitled to the issuance of certificates for one-third of the number of shares subscribed fo r; the subscriber’s right consists only in equity entitling him to a certificate upon payment of the remaining portion of the subscription price.” Comment on said ruling, with reasons. (1975 Bar, 12). Answer: The ruling is in accordance with law and applicable jurisprudence.
As a general rule, a stockholder who pays partially his subscription is not entitled to the issue of a stock certificate to him, the requirement being that the total par value of stocks subscribed by him should first be paid. The Lingayen Gulf case, which is the exception to the general rule, prescribes two conditions under which a corporation may issue a stock certificate for that number, equivalent in par value to the payment made by said stockholder. These conditions are: (1) the by-laws of the corporation does not prohibit the act, and (2) the corporate board allows it. These two requisites are not present in the problem, hence, the stockholder cannot invoke the doctrine in the Lingayen Gulf case. Author’s Note: The
rule under the Corporation Code is the general rule stated above. The exception allowed by the Supreme Court in the Lingayen Gulf case can no longer be applied because if would violate the code. Bar Question: Pedro Santos, married to Maria de le Cruz, is planning to invest P10,000.00 in a corporation and comes to you for advice as to whether he should have the certificate of stock issued to “Pedro Santos and/or Maria de la Cruz” or to “Pedro Santos and Maria de la Cruz, joint tenants.” What would be your advice? State your reasons briefly. (1951 Bar, III). Answer: I will advise Pedro Santos to forego with his desire to have the certificate issued to him and his wife jointly or in the alternative as any of these modes would subject the spouses to inconvenience and unwanted legal complications in the exercise of their rights as stockholders, and in the transfer by them of their shares to others in the future.
I would suggest to Pedro Santos the issue of the certificate either totally in his name, or one certificate each for him and his wife for that number of shares corresponding to P5,000 each. Author's note: Under the N.C.C., stock certificates issued in an “and/or” capacity may be voted any of its joint owners, who can also appoint a proxy to vote for the stocks (Sec 56, N.C.C.)
upon by
d. Lost and Stolen Certificates A finder of a lost certificate, or one who steals a stock certificate, does not become owner of the same and cannot vest in his transferee valid title, even if the latter acquires it in good faith and for value. The lost certificate may be reconstituted in accordance with the provisions of the Sec. 73, N.C.C., which restates with slight modifications the provisions of R.A. 201, the old law on the matter. Bar Question: What steps must be taken in order that a new certificate may be issued to a stockholder of a private corporation who reports the loss of his stock certificate? (1969 Bar. VIIa)
Answer : The procedure for reconstituting a lost, stolen, or destroyed stock certificate consists of the following steps:
(1) The stockholder executes an affidavit in triplicate stating the circumstances of the loss, destruction, or stealing, and submits the same to the corporation;
(2) The corporation shall publish in a newspaper of general circulation a notice of such loss, stealing or destruction, once a week for three weeks;
(3) If after the lapse of one year from the last publication, no contest is made by any third person, the corporation shall cancel from its books the said lost, stolen or destroyed certificate and issue a new one to the stockholder, who however, may file a bond acceptable to the board, in which case the certificate mat be issued even before the expiration of said period.
(4) If a contest is presented to the corporation or a case is pending in court, issuance shall be suspended until final decision is rendered. Author's note: Answer still valid N.C.C.
4. Transfer of Shares a. Nature of Right
A stockholder has an absolute and inherent right as an incident of ownership, to sell and transfer his stocks at will, except as may be restricted by the articles, the general law, the by-;laws, or the agreement between him and the corporation. (Remo vs. IAC, 172 SCRA 405) There is no law requiring a stockholder who said his stock to report the same to the Securities and Exchange Commission. (Trieste vs. Sandigan Bayan, 145 SCRA 508) The transfer however is not valid against the corporation unless recorded in the stock and transfer book, although valid as between the parties. (Labrador vs. CA, 180 SCRA 266). Bar Question: One of the provisions of the by- laws of “Standard Corporation” provides that no stockholder shall transfer any share of the corporation to any other person without first notifying the secretary-treasurer in writing, and under the same itself the shares intended to be transferred. Is this provision of the by-law valid? Explain fully, and give reasons. (1953 Bar, VIIb). Answer : No, the provision is invalid as it constitutes an undue and unreasonable restriction on the right of a stockholder to transfer or dispose of his shares, and as such is ultras vires, violative of the right of stockholders and in restraint of trade, there being no period of time within which the corporation is obliged to act. (Ref. Fleischer vs. Botica Nolasco, 47 Phil. 583). Author's note : Under lately decided cases, the right of first refusal is recognized by the Supreme Court, under certain conditions, which are: (1) besides, the right appearing in the Articles or By laws, it should be stated in the stock certificate, (2) There should be reasonable time limit to the exercise of said right: and (3) The terms and conditions for its exercise should be reasonable.
A stock claimant cannot ask for lucrum cessans or profits earned if the stocks are sold because these are speculative in nature. (Batang Buhay Gold Mines vs. CA, 147 SCRA 4). Even if corporations can provide that when stockholders want tot transfer their shares, the corporation or other stockholders shall have the right of first refusal, the exercise of such right should appear in the articles, in the by laws as well as in the certificate of stock,and can only be subject to reasonable terms and conditions stated there. Limiting the price to be paid, when the right of first refusal is exercised to not more than 25% of par value, without any qualification whatsoever, is not in the Articles, nor is it reasonable. (Go Soc etc. vs. IAC et al, G.R. 72342). Where unissued stocks are exchanged for real property, there is no transfer of ownership, but merely a change of form of ownership in the same hands. The right of first refusal is not violated. (Delpher Trades vs. IAC, 157 SCRA 349). b. Manner of Transfer Absolute transfer may be effected by (1) indorsement of the certificate followed by delivery and (2) sale or assignment evidenced by a notarial document. To bind the corporation, these transfers should be registered in the stock and transfer book upon surrender of the old certificates, and the subsequent issuance of a new certificate to the transferee.
Transfers of shares under subscriptions not yet fully paid to the corporation are valid only if accepted by the corporation. A transferee of 20 shares out of the 80 shares subscribed by his transferor who has paid P2,000 or one fourth only of the par value of said subscription cannot compel the corporation to record said sale in the corporate stock and transfer book. Only transfers evidenced by indorsements by the stockholder at the back of duly issued stock certificate may be thus recorded, the indorsed stock certificates cancelled, and a new one issued to said transferee. (Nava vs. Peers Marketing Corporation, 74 SCRA 65). Bar Question: Mr. Cruz purchased from Mr. Guzman shares of stock of a mining
corporation, which shares were covered by several certificates indorsed in bank by Mr. Virgilio Malic in whose name the same were registered in the books of the corporation. It was later discovered that the said shares had never been sold or otherwise disposed of by Mr. Virgilio Malic, but had been stolen from where they were kept. Who is entitled to said shares, Mr. Cruz or Mr. Malic? Reason.(5%),(1982 Bar, 3) Answer: Mr. Malic is entitled to said shares, being the registered stockholder of the
certificates of stock in the books of the corporation. As said certificate of shares of Mr. Malic were stolen from him, the transferee of the stolen certificate better than the one who stole the certificate. As the thief holds no right at all to the stolen certificates, the transferee of these certificates -- Mr. Guzman, and the eventually Mr. Cruz, acquired nothing at all from the transfer to them of the stolen certificates.
The concept of “holder in due course” in negotiable instruments, is not recognized in the relation to certificates of stock.
5. Pledge of Mortgage of Shares a. Pledge of Shares It is not enough that the pledge to affect third persons must be in a public instrument containing among others a description of the thing pledged and the date of the pledge. Registration either with the Register of deeds or with the books of the corporation is unnecessary.
A pledgee or chattel mortgagee does not have voting rights in stockholders’ meetings unless such right is expressly given in the contract and recorded in the books of the corporation. (Sec. 55, N.C.C.) b. Chattel Mortgeage of Shares Bar Question: A resident of Manila who owns shares of stock or a Zamboanga
corporation mortgages those shares to a resident of Naga City. Where should the mortgage be registered? Would the mortgage be valid if it is not registered in the books of the corporation? Explain your answer. (1959 Bar, Va). Answer: The mortgage should be registered with the Register of Deeds of Zamboanga,
the corporate domicile. the mortgage will still be valid and can affect third persons even though not registered in the books of the corporation. Reason: A corporation, although required to keep a book to record absolute transfers does not keep any book at all and hence, does not register, conditional or non-absolute transfers like pledges and chattel mortgages. Bar Question: Is it necessary to register in the books of a corporation a chattel mortgage on its shares? (Nov. 1946 Bar, VIIIa). Answer: No, it is not necessary to register in the books of a corporation a chattel mortgage of corporate shares, because a chattel mortgage is not an absolute transfer, and only absolute transfers can be recorded in the stock and transfer of books of the corporation. Author’s note: Answer
still valid under N.C.C
Bar Question: What is the best procedure to protect the rights of the mortgagee? (Nov. 1946 Bar, VIIIb) . Answer: To protect the mortgagee, the chattel mortgage of the certificate of stock should be registered with the Register of Deeds of the province of the corporate domicile; the corporation should be notified of said mortgage and/or furnished a copy of the contract. Author’s note:
Answer still valid under N.C.C.
6.Collection of Unpaid Subscription a. Methods
1. Call, delinquency and sale at auction of delinquent shares 2. Ordinary court action; 3. Collection from cash dividends and other amounts due to the stockholder, if allowed by the by-laws, or agreed by him. b. Call, Delinquency and Sale of Auction
Bar Question: State briefly the extrajudicial remedy whereby a corporation may collect unpaid subscriptions to the capital stock. (1969 Bar, VIIIc) . Answer: The extrajudicial remedy for collecting unpaid subscriptions contains the following steps:
(1) Call –– subject to the provisions of the subscription contract, if any, a declaration is made by the board as to the percentage of the subscription due, and when it is to be paid; (2) If no payment is made within 30 days from said date, the whole subscription is declared delinquent and subject to sale; (3) The board shall fix the date, time and place of sale which shall not be less than 30 nor more than 60 days from the date the stocks became delinquent; (4) Notice is sent to all delinquent stockholders and publication of the declaration of delinquency and fixing the date, time and place of sale, is made in a newspaper of general circulation, once a week for two weeks; (5) Sale at auction and award to highest bidder. (6) Issue of certificate of stock to highest bidder. Author’s note: Answered
under the provision of Secs. 67 and 68, N.C.C.
Unpaid subscriptions are not due and payable unless there is a call pursuant to a board resolution. (Apodaca vs. NLRC, 172 SCRA 443) Bar Question: Mr. Balimbing signed a written subscription for 100 shares of the stock of Laban and Company, paying 25% of the amount thereof. The corporation subsequently became insolvent due to a series of financial reverses. Mr. Balimbing demanded from the Corporate Secretary the stock certificates corresponding to 25 shares, which he claimed was already paid. Since the corporation was insolvent, Mr. Balimbing refused to pay for his remaining unpaid subscriptions.
(a) Can the Corporate Secretary validly refuse to issue stock certificates in the name of Mr. Balimbing for 25 shares despite the payment of 25% of the subscription of 100 shares? Reasons. (b) Is Mr. Balimbing correct in refusing to pay for the remaining shares, the Company being already insolvent? Reasons. (1988 Bar, 9) Answer: (a) The Corporate Secretary can validly refuse to issue a stock certificate for 25 shares to allegedly correspond to the 25% he (Balimbing) paid on his subscription for 100 shares. When a
subscriber makes a partial payment on his subscription, the amount is applied proportionally to all of the number of shares subscribed by him. In then above example, his 25% payment is applied to all of the 100 shares subscribed by him. Hence, none of the 100 shares subscribed is deemed fully paid to entitle Mr. Balimbing to be issued a stock certificate. (b) No, Mr. Balimbing is not correct I refusing to pay for the balance of his subscribed shares. The unpaid subscription is a trust fund the creditors of a corporation many look up to, for the payment of their credits, should anything adversely affect the corporation. As a matter of fact, the law allows a creditor to directly sue the stockholder for his unpaid subscription if the corporation becomes insolvent.
7. Reacquisition by Corporation of its Stock
Bar Question: When can a corporation purchase its own stock? (1949 Bar, VIc). Answer: A corporation can purchase its own stock in the following cases:
1. When a dissenting stockholder withdraws in the following cases: (a) amendment of articles to lengthen corporate life, (b) amendment of articles creating new stockholder’s rights and preferences, or diminishing said rights, (c) engaging in purposes different from those in the articles, (d) investing in another corporation, and (e) sale or other disposition of all or substantially all of its assets, the corporation may be compelled to buy the stock at an agreed or arbitrated price. 2. Purchase at auction of stock of a delinquent stockholder, in the absence of other bidders; 3. Voluntary sale by a stockholder of his stocks to the corporation. Under the Code, the corporation can reacquire its stocks in the following cases: (1) to eliminate fractional shares, (2) to compromise an indebtedness arising out of unpaid subscriptions. (3) to purchase delinquent shares, and (4) to exercise its right of appraisal. (Sec. 41, N.C.C.)
Author’s note:
The N.C.C. has created a new right called as “appraisal right” for a dissenting stockholder, and gives to him the right to demand payment of the fair value of his shares in the following cases:
(1) (2) (3) (4)
amendments to the articles changing, restricting, or enlarging stockholder’s rights; or extending or shortening the corporate life; sale or other disposition of all or substantially all of the corporate assets; and merger and consolidation; (Sec. 81, N.C.C.). Investment of funds in another corporation or for a different purpose. (Sec, 42 N.C.C.).
V. Incorporation and Organization
A. Contents of the Articles of Incorporation 1. Stock Corporation a. Name of the corporation;
b. Purpose or purposes, indicating the primary and secondary purposes; c.
Place of principal office;
d. Duration; e. Names, citizenship and residences of incorporators; f. Number, names, citizenship and residences of directors; g. If stock corporation, amount of capital stock, number of shares, and in case of par value stock corporations, the par value of each share; h. Names, residences, number of shares, and amounts of subscription of the subscribers which shall not be less than 25% of the authorized capital stock; i. Names, residences, and amounts paid by each subscriber on their subscriptions, which shall not be less than 25% of the total subscription; j. Name of treasurer elected by subscribers; k. If the corporation engages in a nationalized industry, a statement that no transfer of stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal minimum. 2. Non-stock Corporations a. Items a to f above, and in lieu of stock subscriptions and payments, the names of donors, their citizenship, residences and amounts contributed or donated should be indicated. b.
d. Non-compliance of required percentage of Filipino stock ownership in nationalized corporations (Sec. 17 1 st par., N.C.C.).
C. Issues of certificate of Incorporation
The issuance by the Securities and Exchange Commission of the Certificate of Incorporation is the last act needed to give the corporation a de jure existence. It is from the date of issuance of the certificate that corporate life begins, to last for the duration provided for in the articles, unless sooner legally dissolved. (Sec. 19, N.C.C.). Bar Question: When does the corporate life of a corporation begin? (1965 Bar, IIIa). Answer : The corporate life of a corporation begins from the moment a certificate of
incorporations is issued by the Securities and Exchange Commission to the corporation. Author’s note:
Answer still valid under N.C.C.
1. Visitorial Power
As the grant of juridical personality to a corporation is a privilege, the exercise of the same is regulated by the state in the exercise of its visitorial power. Thus, the law empowers the SEC to require corporations to submit an annual report of its operations, financial statements, and other documents, and to make rules and regulations necessary to perform its duties, particularly in the prevention of fraud and abuses. Bar Questions: Where corporate existence is properly put in issue, mention the
various ways proof of such corporate existence may be made. (1968 Bar, Ib). Answer : The various ways of proving corporate existence where this is put in
issue are by producing: (1) The original of the Certificate of Incorporation with the seal of the SEC, or a copy of the same certificate by the SEC; (2) A copy of the Articles of Incorporation certified by the SEC; (3) A copy of the Articles of Incorporation filed with some government office like the Register of Deeds, and certified by the custodian of that document. Author’s note:
Answer still valid under N.C.C.
D. Election of the Board and Adoption of the By-laws
Within thirty (30) days from the issuance of the certificate of incorporation, the corporation is required to adopt the by-laws (Sec.46). By-laws however may be adopted and filed prior to incorporation and submitted together with the articles of incorporation for registration and filing. (Sec. 46, N.C.C.). Immediately after the first election of directors (no deadline is set by the N.C.C. for this), the elected directors must organize by electing a presidents, a treasurer, a secretary and such other officers as may be provided for in the by-laws (Sec. 25). The corporate secretary is required to submit to SEC a report of the election of the board and of the officers within 30 days after said election (Sec. 26, N.C.C.). Failure to submit the By-Laws within 30 thirty days from incorporation is not a ground to automatically dissolve the corporation or to revoke its certificate of incorporation. It may however, be a ground for suspension or revocation after proper notice and hearing. (Chung vs. IAC, 163 SCRA 534). Where a provision in the by-laws of a corporation is one where reasonableness may be subject to different interpretations, courts cannot substitute their judgment for those authorized to make the by-laws. (Gokongwei vs. SEC, 89 SCRA 336). Bar Question: According to the Corporation Law, if a corporation fails to organize
within two years it shall be ipso facto dissolved. (a) When is a corporation considered “organized”? (b) How is the two-year period to be gauged? (1963 Bar, III). Answer :
(a) A corporation is considered “organized” when after issuance to it of its
certificate of incorporation, it proceeds to adopt its by-laws, elect its board, which in turn elects its President, secretary, treasurer and other officers and occupies an office for the transaction of business allowed it by its articles. (b) The two-year period starts to run from the date the certificate of incorporation is issued to the corporation; if the corporation within two years from said date fails to perform the organizational acts above-indicated, then it is ground for involuntary dissolution. Bar Question: In the suit brought as above indicated, the construction company claims that it may not be sued, as it has not yet registered its by-laws. May not this fact be set up bynit as a defense in its answer? Reasons. (1957 Bar, IIb). Answer : No, the failure of a corporation to register or even to adopt its by-laws will not prevent it from acquiring juridicial personally with the right to sue and be sued. A corporation exists as such frok the moment a certifixate of incorporation is issued to it. Author's note: Answer still valud under N.C.C. Bar Question: In the articles of incorporation of T. Corporation, eleven members were named to constitute the board of directors. These eleven elected from among themselves a secretary-treasurer but did nit elect a president. The board used to hold meetings to transact business which was done through the secretary-treasurer. In a proceeding to forfeit its charter, the question was posed as to whether the corporation may be considered to have formally organized. Resolve the question. (1979 Bar, VII b). Answer : Yes, I will consider the corporation to have formally organized itself, so that proceedings instituted to forfeit its corporate charter will not prosper.
From the date of its formation, the corporation had a governing board, which directed its affairs, as well as a secretary-treasurer. The corporation actually functioned and engaged in the business for which it was organized. Its charter cannot be forfeited on the ground alone of its failure to elect a President. Author's note: Answer still valid under N.C.C. The Problem: Some businessmen with an available starting capital totalling only P100,000.00 ask you to help organize a business firm. Subject to legal limitations, they have future plans to invite alien investors who are agreeable to rendering financial assistace by way of direct investments and/or loans. Your professional assistance is solicited on the following various questions that may arise: Bar Question: Considering the above problem, state the form of business organization which you recommend should be created for the purpose, explaiming specifically and briefly.
(a) x x x (b) The procedure for such organization and the documents to be prepared by you; (c) x x x Answer:
(a) x x x
(b) The procedure for organizing a corporation involves the following: 1) Execution of the Articles of Incorporation and accompanying documents and filing them whether or not together with the by-laws, with the Securities and Exchange Commission. The accompanying documents consist of the treasurer's certificate, statement of assets and liabilities, bank statement of deposit of paid-up capital, letter authorizing SEC to examine said deposit, and other required documents. 2) Issue by the SEC of the certificate of incorporation. 3) Election of the board and corporate officers and adoption of the by-laws within 30 days from the issue of the certificate of incorporation if the by-laws was not filed together with the articles of incorporation. Author's note: Answered under the provisions of the Corporation Code.
As the court was evenly divided, or the necessary either votes cannot be haf on the issue of validity of the provision of the by-laws, disqualifying frommthe directorship of any stockholder who holds substantial interests in a competing corporation, the petition was dismissed on said issue, in effect authorizing SEC to proceed with the hearing before it on the disputed by-laws, and to resolve the issue of its legality. (Gokongwei vs. SEC, 89 SCRA 336). Bar Question: The Board of Directors of "C" Corporation engaged in the manufacture and sale of food products, acting on a standing authority of the stockholders to amend the By-Laws, amended its ByLaws so as to disqualify any stockholder, who is also a stockholder and director of a competitor, from being elected to its Board of Directors.
"S", a stockholder holding sufficient shares to assure him a seat in the Board, filed a petition with the Securities & Exchange Commission for a declaration of nullity of the amended By-Laws and the cancellation of the Certificate of Filing of Amended By-Laws. He alleged, among others, that as stockholder, he had acquired rights inherent in stock ownership, such holder, he had acquired rights inherent in stock ownership, such as the right to vote and be voted upon in the election of directors. Reason out of the merits of the stockholder's petition, 6%. (1961 Bar, 10). Answer : The petition of S should be denied.
It is within the authority of the stockholders of a corporation to enact by-laws which would disqualifynasna candidate for director, any of its stockholders who holds a substantial equity in a competing corporation.
YU, Justin Edison D. 35
Matters taken up in board meetings could involve trade secrets which ought not to go out of the board room for the protection of the corporation’s business interests. The presence as a member of the Board of Directors of a person, who holds a substantial interest in a competing corporation, can destroy that secrecy on many business matters. Bar Question: (A) What is the so- called “doctrine of corporate opportunity”? What is the underlying philosophy upon which such doctrine rests? (1965 Bar, 17-A). Answer : (A) The doctrine of corporate opportunity is a rule expressly provided for by the Corporation Code making a director account to his corporation, gains and profits from any transaction or entity where he has a substantial interest, which should have been a transaction undertaken by his corporation
The doctrine rests fundamentally on the unfairness occasioned by the said director or officer taking personal advantages of a business opportunity, which properly appertains to the corporation, in breach therefore of the fiduciary posture he is supposed to observe in relation to his corporation and its stockholders. He cannot possibly serve two masters.
E. Amendment of Articles and By-laws 1. Procedure
Bar Question: Explain the procedure to be followed by the stockholders of a corporation to amend: (a) the articles of incorporation, (b) the by laws. (1946 Bar, VII) Answer : (a) The following is the procedure to amend the Articles of Incorporation of a corporation:
(1) The board by majority vote approves the amendment; (2) Stockholders representing at least 2/3 of the outstanding capital stock on proper notice, approve the amendment without prejudice to the appraisal right of a dissenting stockholder; (3) A copy of the amended articles certified by the President, the Corporate Secretary and a majority of the Board is filed with the SEC. Author’s note:
Answered under the provision of Sec. 12, N.C.C.
(b) The following is the procedure for amendment of the by-laws: (1) By majority vote of the board and approval of a majority of the outstanding capital stock at a meeting called for the purpose. In the stockholders’ meeting, those representing a majority of the outstanding capital stock approve the amendment to the by-laws. The amended by-laws duly certified to by the secretary and a majority of the directors is then filed with the SEC.
(2) By the Board of Directors:
In a stockholders’ meeting, those representing at least 2/3 of the outstanding capital stock approve a resolution delegating the power to amend or a dopt new by-laws to the board.
The board by majority vote then approves the amendments to the by-laws. The amendments duly certified by a majority of the directors and countersigned by the Secretary are then filed with the SEC. In the case of banks and other special corporations, the amendments should be accompanied by a certificate of the appropriate government agency. The amended or new by-laws become effective upon issuance by SEC of a certificate of filing. 2. Legal Effect of Change of Corporate Name
A corporation may change its name by merely amending its Articles of the Incorporation in the manner prescribed by law. A change of name of a corporation has no more effect upon the identity of the corporation than a change of name by a natural person has upon the identity of such person. It is a change of name, not a change of being. The corporation, upon such change in its name, is in no sense a new corporation nor the successor of an original one, but remains and continues to be the original corporation. It does not affect the rights of a corporation or lessen or add to its obligations. (Phil. First Ins. Vs Hartigan, 34 SCRA 252) 3. Date of Effectivity of Amendment
The approval by the stockholders of the amendment of its Articles changing its name did not automatically change the name of said corporation on that date. To the effective, Sec. 18 of the Corporation Law requires a copy of the Articles as amended, duly certified to be correct by the secretary, president and majority of its board, to be filed with SEC,
YU, Sharmayne Eileen T. 35
and it is only from the time of such filing that the corporation shall have the same powers, and it and the members and stockholders thereof shall thereafter be subject to the same liabilities as if such amendment has been embraced in the original articles of incorporation. (Phil. First Ins. vs. Hartigan, 34 SCRA 252).
Under the N.C.C., the rule is that the amendments to the articles take effect upon approval by the SEC, or from the date of filing with the SEC if not acted upon within six months from the date of filing for a cause not attributed to the corporation (Sec 16, 3 rd par., N.C.C.). Bar Question: Can a corporation validly change its corporate name under its general power to amend its articles of incorporation?
Does a change in the name of a corporation result in its dissolution? Explain your answer. (1976 Bar, Ia). Answer : A corporation under its general power to amend its Articles of Incorporation can validly change its corporate name.
The change of name however takes effect on issue by the SEC of the certificate of filing of the amended articles including the change of the corporate name. A change of name of the corporation does not result in the dissolution of the corporation. The causes for dissolution are provided for by law, and a change of name is not one of them. The corporation, under its new name, absorbs all assets, liabilities, rights and obligations of the same corporation before it changed its name. Author’s note: Answer
still valid under N.C.C.
Bar Question: The proposed Amended By-Laws of CXT Inc., a corporation listed in the Makati Stock Exchange, contain the following provisions:
(a) That the holders of a majority of the outstanding capital stock may elect all the members of the Board of Directors; (b) That no officer of the corporation shall be required to be a stockholder; (c) That the directors’ bonuses shall be equivalent to 10% of gross revenues in any given year; (d) That a candidate for director must own at least 1,000 shares; (e) That meetings of the Board of Directors need not be held in the principal office and may even be held outside the country. As Corporate Secretary of the CXT, you are asked to comment on the validity of the above proposed amendments. What will be your comments? (1987 Bar, 13) Answer: My comment to the proposed amendments are:
(a) the proposal to restrict the election of all directors to holders of a majority of the outstanding capital stock is invalid because it deprives the minority stockholders of their right to elect a director(s) from their own group to represent them in the board. This is on the assumption that their cumulative vote is big enough to elect at least one director. Moreover, if the stocks of the minority are voting shares, their right to vote during stockholders’ meetings cannot be curtailed. (b) the proposal to allow even a non-stockholder to occupy any officership in the corporation violates the provision of the Corporation Code requiring the President to be elected from
among the directors elected by the stockholders. Other officers need not be stockholders or directors. (c) the proposal to give bonuses to directors equivalent to 10% gross revenues in any given year, violates the provision of the code restricting the total directors’ salaries to not more than 10% of the net income of the corporation before income tax; (d) the proposal that a candidate for director must have at least 1,000 shares is valid – it being within the prerogative of the corporation to prescribe additional reasonable qualifications for stockholders wanting to become a director. (e) the proposal to hold directors meetings not necessarily in the corporate office, or even outside the Philippines, is valid. It is only in stockholders’ meetings where venue is restricted to the principal place of business mentioned in the articles of incorporation.
F. Merger and Consolidation of Corporations 1. Defined In a “merger”, one corporation absorbs the other and remains in existence while the other is dissolved; in “consolidation”, a new corporation is created, and the consolidating corporations are extinguished. (1968 e d., Black’s Law Dictionary, 382).
Atilano 2. Procedure for Merger or Consolidation a. Approval of a plan of merger by the boards of directors or trustees of the constituent corporation, setting forth the terms of the merger or consolidation, a statement of changes in the articles of incorporation of the surviving or consolidating corporation. (Sec. 76, N.C.C.) b. Approval of the plan by stockholders by each of the constituent corporations by a vote of at least ⅔ of the outstanding capital stock of each in stock corporation, or ⅔ of the members in a non -stock corporation in meetings separately held on at least two weeks advance notice stating the purpose of said meeting. (Sec. 77, N.C.C.) c. Execution of the articles of merger/consolidation by each of the constituent corporations, signed by the President/Vice President of each and certified by their respective secretaries/assistant secretaries. (Sec. 78, N.C.C.) d. Submission of 4 copies of the duly executed Articles of Merger/Consolidation to the SEC, and issuance by the SEC of the certificate of merger/consolidation in the proper cases. If the SEC believes that the proposed merger or consolidation is contrary to, or inconsistent with law, a hearing thereof will be conducted. (Sec. 79, N.C.C.) 3. Effects of Merger or Consolidation a. In merger, the constituent corporations shall become one corporation; in consolidation, the new consolidated corporation shall be the remaining corporation; b. The separate existence of the constituent corporations shall cease; c. The surviving or consolidated corporation shall possess all rights and liabilities of a corporation organized under N.C.C.; d. All rights, privileges, immunities, and franchises of each of the constituent corporations are transferred to the surviving/consolidated corporation. e. The surviving/consolidated corporation shall absorb and be liable for liabilities and obligations of each of the constituent corporations. (Sec. 89, N.C.C.).
G. Corporate Books and Records 1. Books Required to be Kept a. Book of Minutes The book of minutes contains a record of proceedings in meetings of the board of the members, and of the stockholders (Sec. 74, 1st par., N.C.C.). Without the signature of the corporate secretary, the minutes taken by a mere clerk has no probative value. (NATU vs. Sec of Labor, 109 SCRA 139) b. Books of Accounts This may consist of the books required to be kept of merchants by the Code of Commerce such as the book of inventories and balances, the journal and the ledgers. (Sec. c. Stock and Transfer Book This book records all stocks, the name of the stockholders, installment paid on subscription, dates of such payments, statement or every sale, transfer or alienation of stock, by and to whom made, and the stock certificate sued and cancelled and the dates when done. (Sec. 74, 4th par., N.C.C.). 2. Probative Value of Corporate Records and Books Corporate books and records prove prima facie the contents stated therein and may be utilized against the corporation, its directors or officers, its members and stockholders, and against third persons, subject to the rules on evidence. 3. Inspection of Books Corporate books and records are open to the inspection of any director, stockholder or member of a corporation, at reasonable hours during any business day, including the right to copy excerpts of th e same. It may be refused if shown that a prior right granted was improperly used, or that he was not acting in good faith or for a legitimate purpose. (Sec. 74, 3rd par., N.C.C.). The right may be exercised by the stockholder personally or through his representative, and if refused without justification, the corporate officers may be criminally liable under Sec. 144 of the law: A stockholder’s right of inspection of corporate books is not absolute, and the corporation may deny said right on the basis of propriety of motive and purpose: (Gonzales vs. PNB, 122 SCRA 489)
Bar Question: (b) What are the limitations on a stockholder’s right to inspect corporate books and records? (1988 Bar, 2b). Answer: A stockholder’s right to inspect books and recor ds of the corporation is subject to the following limitations. a. It must be done during reasonable hours on a business day; b. The right has not been used in the past by the stockholder improperly; c. He should act in good faith and for a legitimate purpose. Bar Question: A owns 100 out of 10,000 shares in the Manufacturer’s Bank. He filed a suit against B for damages due to an alleged breach of contract. A secures a favorable judgment against B but fails to obtain full satisfaction thereof.
A receives a tip t hat B has a big time deposit with Manufacturer’s Bank. B is not aware that A is a stockholder
in the said bank. A goes to the bank and demands the right to inspect the records of the bank to find out whether B has indeed such a time deposit and how much. The bank manager refuses to accede to his demand. A threatens to sue him on the ground that as a stockholder of the corporation, he is given by the Corporation Code the right to inspect all the books of the corporation. Is A entitled to look at such records? Explain. (1983 Bar, 4) Answer: A is not entitled to look at the records. A’s right, as a stockholder of Manufacturer’s Bank, to inspect the books of the bank, will have to bow to the requirement of Non Disclosure of Deposits law that the deposits of a person in a bank shall not be disclosed to any person, except in the instances allowed by said law. The right invoked by A as stockholder to go over the deposit accounts of B does not fall under any one of the exceptions allowed by said Non Disclosure of Deposit Law.
A stockholder, availing of his right of inspection can compel the corporation to produce all books and records of a foreign subsidiary in its possession within the Philippines. (Gokongwei vs. SEC. 29 SCRA 336). Bar Question: Petitioner who is a stockholder of Bilmoko Corporation wanted to examine the books and records of a foreign subsidiary wholly owned by Bilmoko Corporation. The books and records of the foreign subsidiary were in the possession of Bilmoko Corporation. The latter’ s board of directors refused to allow the petitioner to examine the said books and records, contending that the foreign industry is a separate and distinct corporation domiciled in another country; hence, the petitioner was not within the class of persons having an interest in the operations of the foreign industry. a. Decide the case. Answer: The books of the foreign subsidiary of a corporation may be the subject of examination by a stockholder utilizing his right to inspect the books and records of the corporation.
The right of inspection of stockholders springs from his ownership of stock in the corporation. As the foreign subsidiary is wholly owned by the corporation, and therefore under its control, it is more in accord with equity, good faith and fair dealing to extend the stockholder’s right of inspection to the books and records of the subsidiary, in the possession of the corporation, where he is a stockholder of. Bar Question: Section 51 of Act No. 1459 (Old Corporation Law) in part provides as follows: “ The record of all business transactions of the corporation and minutes of any meeting shall be open to the inspection of any director, member, or stockholder of the corporation at reasonable hours.”
Discuss the scope of this right (of a stockholder, to inspect and examine the books and records of the corporation) under Batas Pambansa Bilang 68 otherwise known as the Corporation Code of the Philippines. (1985 Bar, 1). Answer: Unlike the right of a stockholder under Act 1459 to inspect the records of business transaction and minutes of any meeting, during office hours on any business day, which was absolute in that the right was exercisable for whatever purpose he may want it, the present code allows the corporation to reject the request if it is shown that in the past, the stockholder improperly used the information he got from said inspection, or that he was not acting in good faith or for a legitimate purpose in making the demand.
Blanco (432-435) The unjustified refusal by the corporation or any of its officers or agents to allow a stockholder the right of inspection opens up the corporate officers or agents responsible for said unjustified refusal to a suit for damages, and to a possible criminal action for violation of the Code. If committed by the corporation itself, it could spawn an action for the dissolution of the corporation. Bar Question: Don Mariano was able to secure a favorable judgment against Nestor Pe for recovery of a sum of money and the said judgment had become final and executory. Don Mariano was informed by someone that Nestor Pe might have a sizeable savings deposit with Xena Commercial Bank, of which Don Mariano is a stockholder, with one (1) share registered in his name. Immediately, he rushed to the Bank and demanded from the Bank manager that he be shown the Bank records to see if Nestor Pe really had such savings deposit. When the Bank Manager refused and invoked Republic Act No. 1405, Don Mariano cited his right as a stockholder to inspect corporate records.
(A) Is the stand of the Bank Manager legally tenable? Explain. (B) What remedy is available to Don Mariano? Explain. (1985 Bar, 14). Answer: (A) The stand of the bank manager is legally tenable. A stockholder’s right to inspection of corporate books will have to bow to the provisions of the Law on Non-Disclosure of Deposits, which provides as a general rule that the deposit account of a depositor in a bank cannot be inquired into, by any person, even including the government.
While that general rule admits of seven exceptions, the case of Don Mariano does not fall under any one of the exceptions. (B) The remedy of Don Mariano is to secure a writ of execution from the court to be served on the bank. The remedy is not an inquiry into the bank deposit but merely an order to the bank to inform the court whether or not the defendant has a deposit therein. The disclosure of the deposit is purely incidental to the execution process, and it is certainly inconceivable for the law to be used as a shield by debtors to evade payment of just obligations. 4. Right to Financial Statements Within 10 days from request of a stockholder or member, the corporation shall furnish him a c opy of its most recent financial statement including a balance sheet and profit and loss statement. At regular meetings of stockholders and members, the corporation should furnish them a financial report of operations including certified financial statements (Sec. 75, N.C.C.).
V. Corporate Powers and Liabilities A. Theories on Corporate Powers There are two theories on corporate powers: the theory of general capacities and the theory of special capacities.
Under the theory of general capacities, a corporation is said to hold such powers as are not prohibited or withheld from it by general laws. The theory of special capacities, on the other hand, advances the view that the corporation cannot exercise powers except those expressly or impliedly given to it. In the Philippines, the second view applies. B. Classes of Corporate Powers Bar Question: What are the general powers of a corporation organized in accordance with our laws? (1949 Bar, VIII).
Bar Question: Enumerate the powers of the Board of Directors. (1949 Bar, IIIb). Answer: Corporate powers exercisable through the Board of Directors f all under three classifications: express, implied and incidental powers.
Express powers are those expressly vested in the corporation by the purpose clause of its articles of incorporation, the Corporation Law, and by special laws. Implied powers are those which can be fairly inferred from the express powers, and fall under five classifications, to wit: a. b. c. d. e.
Acts in the usual course of business; Acts to protect debts owing to the corporation; Embarking in a different business; Acts to aid employees; Acts to increase business.
Incidental powers are powers inherent in all corporations as legal entities such as perpetual succession. Author’s note: Answer still valid under N.C.C. Bar Question: In the creation of corporations, what juristic principle is followed in the Philippines, the gennossenschaft theory or the concession theory? (1972 Bar, 1-d) Answer: The concession theory is followed in the Philippines in the creation of corporations. Under this theory, a group of persons wanting to create a corporation, will have to execute documents and comply with requirements set by the state before the latter gives to the group corporate personality. The grant being a privilege, the state provides for the causes and r easons by which such privilege may later on be withdrawn by it. Author’s note: Answer
still valid under N.C.C.
The powers of a corporation are limited. It can make no contract not authorized by its charter. Its rights to act as a corporation are only reserved to it so long as it obeys the law of its creation. There is
reserved a right in the legislature to investigate its contracts to find out whether it has exceeded its powers. (Bataan Shipyards vs. PCGG, 150 SCRA 181): The opening of a post office to service its employees in remote areas, and the establishment of a stevedoring service by the National Power Corporation are exercises by the said corporation of its implied powers. (NPC vs. Vera. 170 SCRA 721). Bar Question: A was general manager of X Inc. for thirty years during which time the corporation made great progress. After the death of A, the Board of Directors of X Inc., resolved to give the children of A P500,000.00 out of the proceeds of the insurance policy taken by X Inc. on A’s life. The don ation was approved by the stockholders and accepted by the donees. Later on, the stockholders voted to revoke the donation. Can the donees recover? Explain fully. (1971 Bar, V-1). Answer: T he donation in the problem, having become irrevocable by its acceptance by the donee, the donor corporation can no longer withdraw it.
The act of the board in giving the donation is an exercise by it of the implied power of the corporation to protect or aid employees and the stockholder’s subsequent approval of it erase d all taints of being ultra vires, if it was so. The later act of the stockholders to revoke the donation is invalid, and the donees who have not yet received the donation from the corporation can recover the amount from the corporation. Author’s note: Under
Sec. 36, par. 10, N.C.C., the corporation may establish a pension, retirement and other plans benefiting officers, directors and employees.
Bar Question: Pursuant to the request contained in a resolution of the Board of Directors of a corporation a post office branch was opened within the mining camp of the corporation. If the opening of such post office branch is outside the scope of the powers expressly conferred upon the corporation, is such an act of the Board of Directors valid? Reason. (1972 Bar, VI-a). Answer: The act of the board of requesting by resolution, the opening of a post office in its mining camp, although outside the scope of the express powers of the corporation is valid. No doubt, the opening of a post office in the corporation’s mining camp, not only will provide facilities needed by the corporation in the usual course of its business, but also will aid its personnel and employees. They are implied powers of a corporation which it can exercise under the law. Author’s note: Answer
still valid under N.C.C.
Bar Question: ABC Corporation is engaged in the business of manufacturing soft drinks. For the past 10 years, it has bought all its bottles from XYZ Corporation. Considering the volume of its production, it now finds that it will be more economical to manufacture its own bottles.
The Board of Directors, after studying and discussing the matter thoroughly, decides to set aside the amount of P1,000,000 for this project. Most of this amount will go to the cost of equipment and materials. M is a stockholder of ABC Corporation and is against this investment in the bottling project and would like to withdraw from the corporation by exercising his appraisal right if the project goes through. He therefore demands that the project be submitted to the stockholders for approval, but the
Board refuses to do so on the ground that there is no need for such approval and that the calling of a special stockholder’s meeting would entail too much expenses. M thus cannot have the opportunity to exercise his appraisal right. He wants to sue the Board to compel it to submit the matter to the stockholders and to enjoin it from pursuing the project until the stockholders shall have approved it. Chua (436-437 COMMERCIAL LAW (a) Before whom should M file his suit? (b) Do you think the matter needs the stockholders’ approval or is the action of the Board of Directors sufficient? Explain. (1983 Bar, 1). Answer: (a) M should file the suit with the Securities and Exchange Commission. The matter, being intra-corporate in nature, falls within the exclusive jurisdiction of the said commission under P.D. 902 A as amended, better known as the SEC Reorganization Decree. (b) I submit that the matter needs no approval by the stockholders. The corporation, being engaged in the soft drinks business, the manufacture by it of bottles to contain the soft drinks manufactured by it, is merely an exercise by it of an implied corporate power, and this implied corporate power is exercisable by the board of directors alone, without need of stockholders’ approval. A corporation to which an imperfect title has been assigned may apply for the judicial confirmation of the title to the same if the assignor had already become owner of the same by the lapse of thirty years continuous, open, and notorious possession — the land having become private land by operation of law. (Director of Lands vs. IAC, 150 SCRA 181). C. How Corporate Powers Exercised The management of a corporation is vested in the Board. The Board acts always by majority vote of that number present during regular or special meetings constituting a quorum. For acts of the board to be valid, it is necessary in general that the board should meet in a regular or special meeting validity called (Sec. 25, N.C.C.). Courts cannot undertake to control the discretion of the board of directors about administrative matters as to which they have legitimate power of action, and contracts entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so oppressive and unconscionable as to the amount to a wanton destruction of the rights of the minority (Gamboa vs. Victoriano, 90 SCRA 669; Sales vs. SEC, 169 SCRA 109). CORPORATION LAW (p.437) Bar Question: A group of stockholders of Sesame Corporation filed a court suit against the members of the Board of Directors to make good to the shareholders, in proportion to their shareholders, the losses incurred by the corporation because of the defendant Board of Directors’ mismanagement. (a) Will the action prosper? Reasons. (b) X x x Answers: (a) No, the action will not prosper. It is not enough to show that losses were incurred due to mismanagement. It is necessary that the stockholders who brought the suit should show that the losses were incurred due to the fraud and malice of the defendant directors. If the cause for the loss is mere error of business judgment, the directors could not be held liable for the loss. The remedy in the situation is to remove the errant directors by resolution of the stockholders representing 2/3 of the outstanding capital stock, in a meeting duly called for the purpose.
Bar Question: Where the board of directors of a corporation consists of nine members, two having died during their term of office, one being abroad, what would be the quorum? How many affirmative votes would be necessary to pass a resolution? Explain. (1970 Bar, VIc). Answer: In a board of nine members, the quorum would be five. And it remains at five inspite of the death of two and the absence of one, who is abroad. The majority of that number present and constituting a quorum voting affirmatively for a resolution can validly pass the said resolution.
In the above example if all six of the remaining members of the board are present in a duly called for meeting, the affirmative vote of four can validly pass a resolution. Author’s note: Answer still valid under N.C.C. Bar Question: Can the president of a corporation or the chairman of its board of directors bind the corporation? Explain. (1960 Bar, VIIa). Answer: No, the President of a corporation or the chairman of its board of directors cannot bind the corporation because the powers of a corporation generally reside in the board of directors unless the board delegates specific powers to the president. Resolutions passed by the board in a duly constituted meeting bind the corporation. COMMERCIAL LAW (p.438) Author’s note: Answer still valid under N.C.C. Bar Question: Alpha corporation’s board of directors, for a reasonabl e annual fee, enters into a 20-year management contract with Beta Company, a top-rate corporation. The contract affairs in Beta, through vests the control and management of Alpha’s business and the latter’s president or another qualified executive the president may designate. The contract also provides that it may be terminated at any time upon final judicial adjudication that the management supplied is dishonest or grossly incompetent. Is this management contract valid? Answer: No, the delegation by the board of directors of Alpha of control and management of its business and affairs, without limitations, in Beta through the latter’s president is invalid.
The total delegation of corporate powers by its board is not only unnecessary but contrary to law. That the exercise of said delegated powers cannot be terminated except by a court order, all the more, emphasizes on the abdication,without reservation, by the board of its power to supervise and manage the business of the corporation. Hence, I submit that the management contract is invalid. Author’s note: Under Sec.44, N.C.C. a corporation may conclude a management contract with another corporation for a period not exceeding five years, which contract should be approved by the board of both corporations, and by stockholders holding a majority of the outstanding capital stock or by a majority of the members of both corporations. The majority requirement is increased to 2.3 in case of interlocking directors or ownership by the same persons of at least 1/3 of the stocks in both corporations. : At an annual meeting of stockholders, a resolution was approved empowering the Bar Question president of the corporation to enter into a contract with a New York firm. Can the President validly act by virtue of said resolution? Why? (1948 Bar, IIIb). Answer: No, the president cannot validly act by virtue of a resolution passed by stockholders in their annual meeting. The powers of a corporation, especially the execution of contracts, are exercised
through resolutions passed by the board of directors in a regular or special meeting lawfully called. Author’s note: Answer still valid under N.C.C. Bar Question: If a corporate lawyer, who is at the same time the administrative manger of the corporation, enters into a compromise agreement in court so that a case involving the corporation could be settled, would the corporation itself be bound by such compromise agreement? Reason. (1975 bar, 14). CORPORATION LAW (p.439) Answer: No, the corporation will not be bound by the compromise agreement in a court case entered by its corporate lawyer and administrative manager.
Only the board or a person delegated by said board to enter into the compromise agreement can bind the corporation. Author’s note: Answer still valid under N.C.C. Bar Question: By a resolution of the Board of Directors of a corporation, its general manager is directed to purchase a quantity of rice at P12 a cavan. To implement the resolution, the general manager buys rice at that price. But the treasurer of the corporation refuses to take the delivery of the rice bought, explaining that the stockholders considered the price too high and in a meeting duly called for the purpose, have approved a resolution repudiating the purchase. May the seller of the rice compel the corporation to respect the sale and pay the price thereon? Explain your answer. (1958 Bar, IIIc). Answer: Yes, the seller of the rice can compel the corporation to respect the sale and pay the price thereof. A resolution passed by the board of directors of a corporation binds the corporation, and where the general manager of the corporation acts under authority of that resolution, his actuation is the actuation of the board. The stockholders by their collective act cannot countermand a resolution validly passed by the board. Hence, the corporation in the problem can be compelled to respect the sale and pay the price. Author’s note: Answer still valid under N.C.C. Bar Question: The president of a domestic corporation hired a private secretary at a salary of P300 a month to assist him in his office. The by-laws of his company were silent as to whether he had authority to engage employees. Actually the other employees of the company were engaged by the general manager with the approval of the board. After working a month, said private secretary tired to collect her salary but the company cashier refused to pay her alleging that there was no item in the budget for that purpose. The said employee thereupon filed suit against the corporation for the collection of her salary. Is she entitled to this judgment? (1950 bar, III). Answer: No, the secretary is not entitled to collect her salary, Although normally the hiring of employees is within the apDee (440-441) COMMERCIAL LAW parent scope of the authority of the President, in the problem at bar, however, the board has expressed its policy as to hiring of employees, by providing for a budget within which, its agent, the President, may operate. This is without prejudice to the secretary collecting her salary from the President personally. Author’s note: Answer still valid under N.C.C.
If a person acts for a corporation and deals with another not having notice of the want of authority, if it is shown that the board of directors had permitted the agent to exercise that authority, or acquiesced in a contract entered into by said agent, and retained the benefits consequent thereto, the corporation is bound, notwithstanding the fact that actual authority may not have been issued. (Bank of the Phil. Islands vs. IAC, 164 SCRA 630). Where the by-laws of a corporation reserve to the stockholders the power to determine the compensation of the directors, it is not within the power of the board to enact a resolution providing themselves with compensation for additional duties. (Central Cooperative Exchange vs. Tibe, 33 SCRA 593). Directors, however, are entitled to reasonable per diems for attendance of board meetings. Compensation, other than per diems may be granted to directors by resolution of stockholders representing at least a majority of the outstanding capital, which total amount, however, shall not exceed 10% of net income before income tax during the preceding year. (Sec. 30, N.C.C.) 2. Acts Needing Stockholders’ Vote or Intervention a. Vote of Stockholders Holding Majority of Outstanding Capital Stock 1. Fixing of issue value of no par value stocks (Sec. 62, N.C.C.) 2. Adoption, amendment or repeal of by-laws (Sec. 30, N.C.C.) 3. Compensation, other than per diems, for directors (Sec. 30, N.C.C.) b. Vote of Stockholders Holding ⅔ of Subscribed Capital Stock (441) CORPORATION LAW 1. Extension or shortening of corporate term. (Sec. 37, N.C.C.) 2. Amendment of articles to increase or decrease capital stock. (Sec. 38, N.C.C.) 3. Incurring, creation or increase of bonded indebtedness (Sec. 38, N.C.C.) Bar Question: Define bond and give its essential functions. (1956 Bar, IVa) Answer: A bond, as used in the Corporation Law, is a certificate of indebtedness issued by the corporation for money borrowed from public in general. It is used by the corporation where the corporation needs capital in big amounts but does not have any desire to increase its capitalization. Author’s Note: Answer still valid under N.C.C. Bar Question: Is registered bond transferrable? Is it negotiable? How? (1956, IVc) Answer: A registered bond, which by its nature is registered in the books of the corporation in the name of the bondholder, can be transferred but only by assignment. It is not negotiable because it is made payable in the name of a specified person only. Author’s Note: Answer still valid under N.C.C. Bar Question: Define coupon bond and convertible bond, and explain briefly their utilities and negotiabilities. (1956 Bar, IVc) Answer: A coupon bond is one with detachable coupons bearing dates and amounts, which on surrender to the corporation on the dates stated, entitles the holder to receive cash which represents interest on the bond up to that date. A coupon bond is payable to bearer, and therefore negotiable by delivery. A convertible bond is one entitling the holder to exchange it with other types of bonds. Author’s Note: Answer still valid under N.C.C. 4. Approval of issue of shares in exchange for property needed for corporate purposes or payment of prior debts. (Sec. 39, N.C.C.) 5. Sale or disposition of all or substantially all of the corporate assets. (Sec. 40, N.C.C.) 6. Investment of funds in another corporation. (Sec. 42, N.C.C.)
(442) COMMERCIAL LAW 7. Investment of funds for purposes different from those stated in the articles of incorporation. (Sec. 42, N.C.C.) 8. Stock dividend declaration. (Sec. 44, N.C.C.) 9. Execution of management contracts. (Sec. 44-4b, N.C.C.) 10. Delegation to the board of directors of the power to amend the by-laws, or adopt new by-laws. (Sec. 48, N.C.C.) 11. Other amendments to the articles of incorporation. (Sec. 16, N.C.C.) 12. Ratification of certain corporate contracts with a director or officer. (Sec. 32, N.C.C.) 13. Ratification of acquisition of business opportunity by a director or officer. (Sec. 34, N.C.C.) 14. Approval of merger or consolidation. (Sec. 77, N.C.C.) 15. Removal of directors (Sec. 28, N.C.C.), and 16. Voluntary dissolution of corporation. (Secs. 118 and 119, N.C.C.) 3.
The Executive Committee The by-laws may create an executive committee composed of not less than three directors to be appointed by the board. By majority vote of said committee, it may act on specific matters within the competence of the board, as may be delegated to it by the by-laws, or by the board. The following matters, however, cannot be acted upon by this committee: (1) approval of any act which requires stockholders’ approval also, (2) filling up of vacancies in the board, (3) amendment, repeal or adoption of new by-laws, (4) amendment or repeal of an irrepealable board resolution, and (5) cash dividend declaration. (Sec. 35, N.C.C.) D. Special Corporate Powers 1. Eminent Domain a. Use of Private Property (443) CORPORATION LAW No private corporation may occupy or use private property without the consent of the owners or prior condemnation proceedings and paying or tendering just compensation. 2. Franchises There are two classes of franchises in corporations- the general or corporate franchise, also called the primary franchise, which is the franchise to exist as a corporation; and the secondary franchise which is the right granted by the state to use public property for public use but with a private profit. The special corporate power referred to here is the secondary franchise. The right to operate a messenger and delivery service by virtue of a legislative enactment is a secondary franchise. (JRS Business Corp. vs. Imperial 11 SCRA 634). 3. Investment in Other Corporations for Purposes Other Than These Stated in Articles Plaintiffs-appellants contend that the investment of corporate funds by defendants-appellants in another corporation constitutes a violation of Section 17 ½ of the Corporation Law. The Supreme Court held that “such an act, if done in pursuance of the corporate purpose, does not need the approval of the stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the
vote of approval of the stockholders is necessary,” and further states that “when the purpose or purposes are stated in its articles of incorporation, the approval of the stockholders is not necessary.” (De la Rama vs. Ma-ao Sugar Central Co., 27 SCRA 247-248). The lower court’s order restraining the appellant corporation from making investments in other companies whose purpose is not connected with the sugar central business should be reversed. This is because Section 17 ½ of the Corporation Law allows a corporation or business, or for any purpose other than the main purpose for which it was organized,” provided Francisco (pages 444-447)
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. (De la Rama vs. Ma-ao Sugar Central Company, 27 SCRA 248). Purely ultra vires acts of corporate officers in investing corporate funds in another corporation may be ratified by stockholders holding at least 2/3 of the voting power. (Gokongwei vs. SEC, 80 SCRA 784). Bar Question: Explain the steps to be taken to enable a corporation to invest its funds in any other corporation. (1947 Bar, IXa). Answer : The steps to be taken to enable a corporation to invest its funds in any other corporation are: 1. Resolution by stockholders holding at least 2/3 of the voting power authorizing the board to make such investment; 2. Majority vote of the board under such authority to invest its funds in another corporation; 3. Investment of such funds in another corporation as authorized. Author’s note: Answer still valid under N.C.C. Bar Question: M Corporation is a Philippine Corporation engaged in deep sea fishing. Its operations resulted in losses. Because of the unprofitable operations in deep sea fishing, the Corporation wants to engage in general construction business, one of its secondary purposes. 1. Discuss briefly how the corporation may validly engage in the construction business; 2. What are the rights of the minority stockholders who do not want to divert the corporate funds into a secondary purpose? (1977 Bar, XII) Answer : 1. In order that M corporation may engage in the construction business, one of the secondary purposes for which it was organized, the following must be done. a. All stockholders of record must be called to a meeting and notified that such meeting is for the purpose of passing upon a proposal for the corporation to engage in the construction business, one of its secondary purposes; b. In said meeting, stockholders representing at least 2/3 of the voting power, should approve a resolution, empowering the board of director to enter into transactions generally performed by corporations engaged in the construction business; and
c. The board of directors performs said acts pursuant to said authority. 2. A stockholder who did not vote to allow the board such authority may, within 40 days from the date of such action, object in writing and demand payment of his shares for an amount agreed by him and the corporation; if no agreement is reached, then for any amount determined by three disinterested persons, one of whom shall be named by the stockholder concerned, a second, by the corporation, and a third by the two thus chosen. Within 30 days from said ascertainment of the price, the corporation shall pay the amount to the stockholder. Author’s note: Under Sec. 42, N.C.C. if the investment is reasonably necessary to accomplish its primary purpose, stockholders’ approval is not necessary. The withdrawal right under the old law is now called the right of appraisal. The periods of demand (now 30 days), and to refer the matter to a committee of three disinterested persons (now 60 days), have been modified. (Sec. 82, N.C.C.). E. Special Limitations on Corporate Powers Bar Question: What particular corporations are prohibited from having any interest in other corporations? (1947 Bar, IXb). Answer : Corporations engaged in agriculture are prohibited from having any interest in any other corporation organized for the purpose of engaging in agriculture. The same limitation extends to mining corporations. Author’s note: Answer still valid under N.C.C. Bar Question: Extent and limitations of the power of Philippine corporations to own real estate. (1958 Bar, Xia). Answer : A Philippine corporation not a realty corporation, can acquire real estate only up to the extent that the purpose for which the corporation was formed may permit; and up to the extent that the lawful business of the corporation may require/ It cannot engage in the buying and selling of public lands. Author’s note: Answer still valid in the N.C.C. F. Ultra Vires Acts 1. By Corporation Itself An ultra vires contract is one outside of the express or implied powers of a corporation as fixed by its charter or by the law. (Sec. 45, N.C.C.) It is not necessarily an illegal act. a. Settled Rules 1) A wholly executor ultra vires contract cannot be enforced; 2) A wholly executed ultra vires contract on both sides will not be set aside nor interfered with by the courts; 3) In ultra vires contracts executed by one party but executor on the other, recovery may be had under the principle of unjust enrichment. “x x contracts ultra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so oppressive and unconscionable as to amount to a wanton destruction of the rights of the minority. (Gamboa vs. Victoriano, 90 SCRA 669). Bar Question: What is an ultra vires act? Give an example. (1949 Bar, IIc). Answer : An ultra vires act is an act done by a corporation outside of the express and implied powers vested in it by its charter and by the law. Example: a merchandise corporation engaging in the buying and selling of real estate. Author’s note: Answer still valid under N.C.C. Bar Question: Distinguish between ultra vires acts and illegal acts of private corporations. Illustrate the distinction. (1970 Bar, VI-b). Answer : An ultra vires act of a privatecorporation may be differentiated from an illegal act, in the following manner: 1. An ultra vires act is an act, not necessarily unlawful, but outside the purposes
and authority of the corporation to perform; an illegal act is an act which goes against the law, morals, public policy and public order and therefore unlawful for any corporation to perform; 2. An ultra vires act may be ratified; an illegal act cannot be ratified; 3. An ultra vires act if fully or partly executed, can bind the partied to it; an illegal act can never be binding. Illustration: 1. Ultra vires act – a corporation principally formed for general merchandising, engaging in the real estate business, although that purpose is not included in the purpose clause of its articled. 2. Illegal act – a bank acting as an insurer for another person. Author’s note: Answer still valid under N.C.C. 2. By Corporate Officers Where similar acts have been approved by the directors as a matter of general practice, custom, and policy, the general manager may bind the company without formal authorization of the board of directors. In varying language, existence of such authority is established by proof of the course of business, the usages and practices of the company and by the knowledge which the board of directors has, or must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. Where the practice of the corporation has been to allow its general managers to negotiate and execute contracts in its copra trading activities for and in NACOCO’s behalf without prior board approval, and the board itself, by its acts and through acquiescence, practically laid aside the by-law requirement of prior approval, the contracts of the general managers, under the given circumstances, are valid corporate acts. (Board of Liquidation vs. Heirs of Maximo Kalaw, 20 SCRA 989). 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 or appropriate to the conduct of the ordinary business of the corporation. As such officer, he may, without any special authority from the board of directors, 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 business. (Board of Liquidation vs. Heirs of Maximo Kalaw, 20 SCRA 989). Ratification by a corporation of an unauthorized act or contract by its officers or others relates back to the time of the act or contract ratified and is equivalent to the original authority. The corporation and the other party to the transaction are in precisely the same position as if the act or conGUEVARRA
COMMERCIAL LAW (pp. 448-451) tract had been authorized at this time. The adaption or ratification of a contract by a corporation is nothing more or less than the making of an original contract. The theory of corporate ratification is predicated on the right of a corporation to contract, and ratification or adoption is equivalent to a grant of prior and original authority. (Board of Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 989). Bar Questions: X, a domestic corporation, owns and operates a sugar central. In 1965, the president of X invested P1 million of company funds in shares of A, a domestic corporation engaged in the manufacture of sugar out of bagasse as basic raw material. X became the biggest consumer of the bags produced by A. In 1967, A shut down its operations due to high cost of productions and huge losses already suffered. Stockholder B of X assailed the investment as violative of the Corporation Law. The Board of Directors of X then met and ratified the investment made by the President. a. What is the effect of ratification by the Board? Reason. b. Is B’s claim valid? Reason. (1971 Bar. IV -2). Answer: (a) The ratification by the board of the act of the president investing the funds of the corporation did not operate to validate the president’s act.
The investment of funds of a corporation in the equity of another corporation is an extraordinary corporate power which can be exercised by its board only on authority from stockholders holding at least 2/3 of the outstanding capital stock of the corporation, the decision being made in a regular or special meeting of said stockholders. (b) The claim of B that the investment is violative of the Corporation Law is not valid. Corporations are expressly authorized by the Corporation law to invest in the equity of other corporations. However, before either boards can do so, they should be authorized by stockholders holding at least two thirds of the outstanding corporate capital stock. This authority from the stockholders is what is missing in the problem: Answer still still valid under under N.C.C. N.C.C. Author’s note: G. Constitutional Rights of of Corporations A corporation is entitled to immunity against unreasonable searches and seizures. A corporation is, after all, but an association of individuals under an assumed name and 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 just compensation. It can only be proceeded against by due process of law, and is protected against unlawful discrimination. (Bache and Company vs. Ruiz, 37 SCRA 823). While and 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 hands when charged with an abuse of the privilege. Corporations are not entitled to all the constitutional protections which private individuals have. They are not at all within the privilege against self-incrimination although that privilege runs very closely with the search and seizure provisions. (BASECO vs. PCGG, P CGG, 150 SCRA 181). H. Corporate Liabilities 1. Contractual A corporation is bound by contracts entered into, or authorized to be entered into, by its board. As between the estate of Buan and the corporation formed during the pendency of estate proceedings to handle the transportation business of the estate, the corporation would be liable for past and pending obligations of the estate, as the transportation business itself was being transferred to and placed in the name of the corporation. That liability of the corporation should continue to remain with it even after the percentage of the estate’s shares of stocks in the corporation should be diluted. (Buan vs. Alcantara, 127 SCRA 835). The entrustor in a trust receipt is not the owner of the goods but merely a holder of a security title. If in the trust receipt, the entrustor bank is made to appear as the owner, it was an artificial expedient, more of fiction that fact. The entrustee merchant is the owner of the goods and its return because of inability to sell the goods, does not relieve it of its obligation to pay for the money borrowed. (Vintola vs. IBAA, 150 SCRA 578). a. Venue The 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. (Clavecilla Radio System vs. Antillom, 19 SCRA 379). The principal place of business of the suing corporation, not the place of residence of its President, determined vanue for suits by the corporation. (Sy vs. Tyson, 119 SCRA 367). b. Jurisdiction For a court to acquire jurisdiction over a corporation, summons should be served on the president, manager, secretary, cashier, agaent, or any of its directors. Service on the wife of the secretary did not confer jurisdiction over the corporation. (Delta Motor Sales vs. Judge M angosing, 70 SCRA 598). Jurisdiction over a corporation is acquired by the service of summons on it. The mere appearance of its president in another case before the court, without the requisite summons does not confer jurisdiction over over the corporation. (Trimica vs. Polaris, 60 60 SCRA 321).
Service of summons on an Asst. General Manager for operations of a transportation corporation, is a valid service on the corporation. (Villa Rey vs. Far East Motor Corporation, 81 SCRA 298). Service of summons to a corporation upon counsel who previously appeared to argue on a motion to dismiss, and who thus became an agent of the corporation, is a valid service. (Filbil Marketing vs. Marine Dev. Corp., 117 SCRA 63). Service of summons to a house counsel of a corporation or to the Chief, Administrative and Finance Section, is service through an agent, to bring the corporation within the jurisdiction of the court. (Far Corporation vs. Francisco 146 SCRA 197). Summons served on a mere clerk of a corporation is not a valid service on the corporation. (ATM Trucking vs. Buencamino, 124 SCRA 434). Summons served on the secretary of a corporate president is a valid service on the corporation. (Summit Trading vs. Avendano, 135 SCRA 347). 2. For Torts A corporation is liable for torts committed by its agents or subordinates in the performance of their duties under the principle of its negligence in the selection or supervision of its employees. (Art. 2180, Civil Code). (See also Bahia vs. Litonjua, 30 Phil. 624). 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 a natural natural person. (PNB vs. CA, 83 SCRA 237). 3. For Crimes Generally, a corporation cannot be held liable for a crime because being capable of performing only those acts expressly or impliedly conferred on it, cannot possibly commit a crime under any of said powers. IV. Right of Stockholders A. In General Bar Question: Question: Enumerate the powers of stickholders. (1949, Bar IIIa). Answer: They fall under three categories: (a) Direct or indirect participation in management, (b) p ropriety rights, and (c) remedial rights. B. Management Rights The management rights of a stockholder may be indirect or direct. His indirect management rights include two important rights: to vote for directors, and to remove directors. His direct management rights include his right to give his vote of approval to certain corporate actions where he acts in conjunction with other stockholders to give the required majority or 2/3 vote to validate actuations of the board.
GUILAS I.
Voting Rights a. Nature of right A court will not deprive a stockholder of his right to vote except upon a clear showing of its denial under the Articles or By-Laws, as it is an inherent right in stock ownership. (Sales vs. SEC, 169 SCRA 109) b. Meetings – Meetings – How How Called Stockholders have two classes of meetings the regular or annual meetings, and the special meetings. Unless provided otherwise in the by-laws, annual meetings are held at the town or city place of principal office on any date in April, fixed by the Board, and notice of the same shall be sent two weeks prior to the meeting unless the by-laws provide otherwise.
Special meetings may be called when necessary or as provided in the by-laws, on one week prior notice unless the by-laws provide otherwise. If no person is authorized to call a meeting, the SEC, on petition of a stockholder, for good cause shown, may allow him to call a meeting by giving the required notice, and for him to preside thereat, until a majority chose another one for said purpose. (Sec. 50 N.C.C.). Bar questions: At least 2/3 of the stockholders of Solar Corporation, meeting upon the recommendation of the Board of Directors declared a 50% stock dividend during their annual meeting. The notice of the annual stockholders’ meeting did not mention anything about a stock dividend declaration. The matter was taken up only under the item “Other Business” in the agenda of the meeting. C.K. Senna, S enna, a stockholder, who received his copy of the notice but did not attend the meeting, subsequently learned about the 50% stock dividend declaration. He desires to have the stock dividend declaration cancelled and set aside, and wishes to retain your services as a lawyer for the purpose. Will you accept the case? Discuss with reasons (1990 Bar, 2) Answer: No, I will not accept the case. Although under ordinary circumstances, a matter not normally taken up in the annual stockholders meetings, should be included as part of the agenda stated in the notice of the meeting; however, in the case at bar, the matter taken up was only the approval by stockholders of a stock dividend declaration previously made by the board. The vote needed here is two thirds of the outstanding outstanding capital stock stock of the corporation. There is no necessity for this resolution to be approved by all of the stockholders representing the outstanding capital stock. Unless therefore, the vote of Senna is determinative of whether or not the 2/3 vote is secured, Senna cannot attack the validity of the stockholders resolution approving the stock dividend declaration previously made by the board. This is the weight of authority in the United States. c. How voting Rights Exercised
Each stockholder has as much votes as his number of shares, and he may exercise his voting rights in the following manner: 1) Personal voting voting by the stockholder stockholder himself , including the pledger or or chattel mortgagor or 2) Representative voting, which may be by: a) Proxy A proxy is a person who votes for and thus represents the corporate member or stockholder. Its life cannot exceed 5 years. (Sec. 58, N.C.C.) b) Legal Representatives Through guardians, executors, administrators, receivers, or other court appointed legal representative. c) Ordinary Voting Amendment An ordinary voting agreement is an agreement authorizing another person to vote for him in the stockholders’ meetings. The purpos e is not to control voting. 3) Voting trust agreements Bar question: Voting trust: (a) Define the nature and explain briefly the purposes of a voting trust. (1951 Bar, IIa). Bar question: question: What is a voting trust? When is it illegal? (1949 Bar, IIIc). Answer: A voting trust agreement is defined as an agreement between a group of stockholders and a trustee, wherein for a term not exceeding exceeding five years, control over the stocks owned by such stockholders is lodged in the trustee. A voting trust is executed for the purpose of controlling voting either to maintain board majority or to have assurance of representation in the board.
It is illegal when created for the following purposes: (1) to lessen competition, (2) to control two or more mining or agricultural corporations, (3) to place in one corporation the functions of two corporations which cannot be joined. Author’s note: Answer still valid under N.C.C. Bar question: Is there any limitation as to the length of the period of time a voting trust can be legally binding? Is it revocable for any cause within the time agreed upon? State reasons briefly. (1951 Bar IIb). Answer: There is a limitation as to the duration a voting trust is binding – 5 years. Generally, a voting trust is irrevocable. However, if the agreement is subject to conditions which are violated by the trustee, then the agreement may be revoked by the stockholders. Author’s note: The voting trust also automatically expires when the loan for which the trust was created is fully paid. (Sec. 59, N.C.C.). Bar question: A, as owner of a certain number of shares of stock in X Corporation, entered into a voting trust agreement with B. On the basis of the voting trust agreement, B announced his desire to run for the seat in the Board of Directors of X Corporation. C, another stockholder, objected and questioned the eligibility of b to be a director of X Corporation. Is C’s contention correct? Why? (1977 Bar, XIV) Answer: The contention of C is not correct. Under the Corporation Law, a trustee under a voting trust agreement, becomes registered as a stockholder in the corporate books. Unless therefore the voting trust agreement prohibits him from becoming a candidate for director, he is entitled to voting rights and this includes the right to vote and be voted upon. Author’s note: Under the N.C.C., the trustee may designate a proxy to vote for him (Sec. 59, N.C.C.). Bar question: (B) What is a “voting trust” and what are the legal limitations of the “voting trust agreement”) (1985 Bar, 17 -B). Answer: (B) A voting trust agreement is a contract entered into by a group of stockholders and a trustee wherein the stockholders, for a specified period not exceeding five years, transfer their stocks to a trustee and vest in him voting and other specified rights in return for the issue by the trustee of voting trust certificates to the involved stockholders. The legal limitations to a voting trust agreement are: 1. It must be in writing, notarized and filed with the corporation and with the SEC; 2. It shall be for a period not exceeding five years; and 3. It cannot be entered into for the purpose of circumventing the law on monopolies, illegal combination in restraint of trade, or used for the purposes of fraud. 4) Voting or pooling agreement This is an agreement among stockholders to vote as a unit. This right is exercisable not only in close corporations but also in ordinary corporations. (Aurbach vs. Sanitary Wares, 180 SCRA 130). d. Shares Entitled to be Voted Upon The right to vote is acquired only when the shares are registered in the stock and transfer book. Any unregistered transferee is not entitled to vote, to dividends, and other stockholder’s rights. (Labrador vs. CA, 180 SCRA 266). Bar question: X subscribed to 700 share of stock in a single subscription to a corporation but paid only for 400 shares, for which he was issued fully paid certificates for 400 shares. Is he entitled to vote the paid up shares notwithstanding the fact that he has not paid up the remaining 300 shares? Explain (1977 Bar, XIII). Answer: Yes, X is entitled to vote for all his subscribed shares, including not only the 400 shares he has paid but also the 300 shares he has not yet paid. A person becomes a stockholder and entitled to exercise all his rights including the right to vote for from the moment he subscribes to stocks of the corporation irrespective of whether or not any portion of said subscription had been paid by him to the corporation. He enjoys voting rights to
those subscribed shares, until he is declared delinquent in his subscription payments to the corporation. Author’s note: See also Sec. 72 N.C.C. Bar question: Mercy subscribed to 1,000 shares of stock of Rosario Corporation. She paid 25% of said subscription. During the stockholder’s meeting, can Mercy vote all her subscribed shares? Explain your answer. (1990 Bar,14). INVENCION COMMERCIAL LAW|CORPORATION LAW (p456-57) Answer: Yes, Mercy can vote for all of the 1,000 shares subscribed by her. Voting rights by stockholders are based on the number of shares registered in the name of stockholders, and are not based on shares fully paid for by stockholders. The reason here is that the unpaid subscription of stockholder, is an asset of the corporation, and is listed as such in the corporate books. Hence, she can vote for all the 1,000 shares subscribed by her inspired of the fact that she was paid only 25% of said subscription. d. Election of Directors The first set of directors are elected after corporation is incorporated. Subsequent elections are done during the annual stockholders’ meeting on th e date stated in the by-laws, and in its absence, on any date in April as set by the Board, with proper notice and at the town or city of the principal place of business of the corporation stated in the articles of incorporation in stock corporations. (Sec. 51, N.C.C.) and any place in the Philippines as provided by the by-laws, in non-stock corporation (Sec. 93, N.C.C.). Bar Question: Explain cumulative voting. (1951 Bar, VIIa). Answer: A stockholder, being entitled to that number of votes that his number of shares multiplied by the number of directors to be elected will bring, may give all said votes to one candidate or he may distribute them among to as many candidates as he sees fit. This is cumulative voting. Cumulative voting is a matter of right in stock corporations. In non-stock corporations, it cannot be utilized unless expressly allowed by the by-laws or by the articles of incorporation. Author’s note: Answer still valid under N.C.C. Bar Question: “A” was one of the directors of” X” corporation. “B” obtained a judgement against “A” and had all of “A’s” shares of stock in “X” corporation attached and sold at public auction. “B” bought all the shares at the public auction sale. Subsequently a meeting of the board of directors of “X” corporation was held and both “A” and “B” appeared in said meeting, each claiming the right to participate in the deliberations of the board. “A” contended that he had the right to continue as director until the stockholders could elect his successo r. “B”, on the other hand contended that having purchased all of “A’s” shares he had the right to take the latter’s place in the board. Who of the two claimants is entitled to sit in the board? Explain. (1965 Bar, IIIc) Answer: Neither A nor B is entitled to a seat as director in the corporation. A ceases to be director automatically from the time that he ceased to hold at least on share of stock. B cannot be a director, because to be one, he must be voted upon as such by the stockholders, or if allowed by the by-laws, selected by the remaining directors to the position. nd Author’s note: Answer still valid under Sec. 23, 2 par., N.C.C. A stockholder, supposedly disqualified to become a candidate for director under the by-laws of the corporation on the ground of alleged substantial interest in a competing corporation, can continue to run as such candidate until and after he shall have been given due process and hearing by said board as the matter of his disqualification. (Gokongwei vs. SEC, 89 SCRA 334). 2. Right to Remove Directors Corollary to the stockholder’s right to elect with his vote the directors who will manage the corporation as a body, is the stockholder’s right to remove with his vote any of the elected direc tors.
Removal may be had in any stockholder’s meeting whether regular or special, provided, special notice of said proposed removal is given to the stockholders ahead of the meeting. The removal may be effected by a vote of stockholders holding at least two thirds of the outstanding capital stock of the corporation generally for any cause. Where, however, the subject of the removal is a director representing minority, there must be a good cause for the removal. (Sec. 28, N.C.C.) Bar Question: If the minority stockholders in a stock corporation cumulate their votes so that they could be assured of being represented in the Board of Directors, what assurances do they have that the director or directors representing them would not be removed, con sidering that under the corporation code, a JAVIER
COMMERCIAL LAW CORPORATION LAW (p. 458-459) director may be removed from office (with or without cause) by the vote of the stockholders holding or representing at least 2/3 of the outstanding capital stock? (1983, Bar, 3). Answer: The assurance is the Corporation Code itself. While removal of a director, with or without cause, is a power exercisable by stockholders holding at least 2/3 of the outstanding capital stock of a corporation, as a general rule, the same power cannot be utilized to oust a director representing the minority, unless there is a good cause for removing that minority director. C. Proprietary Rights of Stockholders The proprietary rights of a stockholder are varied and many. Most important of course is his right to dividends. Besides this, his other proprietary rights are: (1) appraisal right (2) issue of stock certificate for fully paid shares (3) proportionate participation in the distribution of assets on liquidation, (4) trans fer of stocks, (5) pre-emptive right, (6) right to inspect books and records, (7) right to financial statements, and (8) right to recover stocks unlawfully sold for delinquent payment of subscriptions. 1. Right to Dividends a. Defined Dividend is defined as unrestricted retained earnings set apart from the general mass of the funds of the corporation and distributed among the stockholders in proportion to their shares or interest in the corporation, in the form of cash, property or stocks (Sec. 43, 1st par., N.C.C.). Payment by a corporation of dividends to a wrong party, will not absolve the corporation from paying the party adjudged by the court to be lawful owner of the stocks. (Arañas vs. Tutaan, 127 SCRA 828). If a company receives dividends as a stockholder of another corporation, the money thus received is income of the corporation which can be reached by its creditors. If on the other hand, said company distributed dividends to its stockholders, such dividends would be the absolute property of its stockholders and are out of the reach by creditors of the corporation. (Madrigal & Company, vs. Zamora 151 SCRA 355). b. Distinguished from Profits Bar Question: Distinguish divided from profit. (1957 Bar, 1a-1). Answer: A dividend has no existence until declared, profits are part of the assets of a corporation, and do not belong to the stockholders individually. c. Declaring Authority Bar Question: Who may authorize payments of such dividends. (1953 Bar, Via). Answer: Dividends are declared by the board, but in the case of stock dividends, approval by stockholders representing 2/3 of the outstanding capital stock is necessary, and in a ll cases only if unrestricted retained earnings exist. Bar Question: “X”, “Y” and “Z” are stockholders in San tos Company, Inc. For the past three years, no dividends, cash or stock, were ever declared by the corporation. Upon examining its books, however they found that the corporation had amassed vast net profits. May they bring suit to compel the board of directors to declare dividends from said net profits? Why? (1967 Bar, VIIIb).
Answer: Authority to declare dividends is in the board of directors of a corporation. In the absence of bad faith, abuse of discretion or dishonesty, courts will not question the discretion of the board. There is nothing in the problem which would indicate that the failure of the board to declare dividends is due to bad faith, abuse of discretion, or dishonesty. Besides, the stockholders have not yet exhausted intracorporate remedies toentitle them to bring a suit in court. Hence, I submit that an action will not lie to compel the board to declare dividends. Author’s note: Answer still valid under N.C.C.
All corporations having surplus profit in excess of requirements shall declare same as dividends. The declaration is compulsory if the surplus is equal to or more than the paid up capital, except in the following instances: (1)when justified by approved expansion projects, (2) when prohibited to declare dividends by creditors, and (3) when retention is necessary under existing special circumstances. (Sec. 43, 2 nd par., N.C.C.) d. Fund Available for Dividends Bar Question: When and from what funds may a corporation pay? (a) cash dividends, (b) stock dividends. (1953 Bar, VIb).
KWOK 10 COMMERCIAL LAW p460 Answer: A corporation can pay cash dividends when declared by the board and can have stock dividends when declared by the board and approved by stockholders owning 2/3 of the capital stock outstanding. Dividends, whether cash or stock, can be paid only from unrestricted retained surplus. This fund is the balance of net profits, income and gains of a corporation from the date of incorporation after deducting losses and contributions of stockholders and transfers to capital stock accounts when made out of such surplus.
Author's note: Answer still valid under N.C.C
Bar Question: (2) After one year of operation, Safe Realty, Inc., wanted to declare dividends to its stockholders. Ramos, its President, asked Santos, its Treasurer, whether this is feasible, considering the financial standing of the corporation. Santos reported that the corporation posted a P1 M profit and its real estate has appreciated in value to the tune of P4 M. The Board then declared dividends to its stockholders computed on the basis of P5 M representing profits and appreciation in value of its real estate. In the dividend declaration proper? Reasons, (1989 Bar, I-2).
Answer: The dividend declaration is not proper. The P4 Million which is the increase in appreciation value of real estate owned by the corporation, is not unretricted retained earnings of the corporation, which is the only fund it can declare as dividends. The appreciation value increase is not an earning. It is still a part of the capital funds of the corporation and is not at all an earning because the corporation did not acquire it in the course if business operation.
Bar Question: Under the Corporation Law nothing but surplus profits may be distributed as dividends. If a dividend was made from any other source, what did it constitute? Is that lawful, or not by the positive provision of the Corporation Law? State the provision fully or its substance. (1957 Bar, IXb).
Answer: If the dividend was made from a source other than surplus profits, it would constitute a violation of the trust fund doctrine, and would be a fraud against creditors. The act is not lawful under the provisions of Sec. 16 of the Corporation Law, which in part states that no corporation shall declare dividends except from profits earned by the corporation and not yet distributed to its stockholders.
Author's note: Under the N.C.C., the provision violated would be Sec. 43. CORPORATION LAW p461 Bar Question: A company was incorporated in 1947 with an authorized and paid-up capital in cash of P1,000,000.00. It has not engaged in business up to now and its cash of P1,000,000.00 is intact at the Philippine National Bank. May the board of directors declare a dividend of P50,000.00 from the cash? (1948. bar IIb).
Answer: No, the board may not declare dividend from its paid-up capital. The only fund available for dividends is the earned surplus profit of the corporation. The corporation in the problem, not having engaged in business yet, cannot possibly have an earning, much less, a profit from the said business.
Author's note: Answer still valid under N.C.C., but the fund available for dividends is now called unrestricted retained earnings.
Bar question: Taurus Corporation (TC) commenced operation in 1985. During that year, TC's loss from operations amounted to P500,000. In 1986, TC recouped all its losses in 1985 registering a net after tax profit of P500,000. In the same year, the management of the company discovered that a parcel of land originally acquired in 1985 for P300,000 had at least doubled in value and accordingly the Board of Directors of TC with the conformity of the external auditors and backed up by a valuation report of a reputable appraiser, recognized a revaluation or appraisal surplus of P300,000. May the Board of Dorectors of tC declare a cash dividend out of this surplus? Explain. (1987 Bar, 11).
Answer: No, the Board of Directors of Tc cannot declare a cash dividend out of the revaluation or appraisal surplus. The fund available for dividends of any kind is the unrestricted retained earnings of the corporation. A revaluation or appraisal surplus is not an earning of the corporation, but is part of its capital, and therefore cannot be utilized for dividend declaratin.
Bar Question: On December 9, 1985, Matatag Corporation revalued its assets. On the basis of the reappraisal, the Board of Directors also declared cash dividends for all stockholders. On December 16, 1985, Matatag Corporation amassed substantial profits in a highly lucrative transaction. Some minority stockholders, however, did not want to complicate their income tax problems for 1985 and refused to accept the cash dividends. They also filed suit to compel the other stockholders to return to Matatag Corporation the money received as dividends. Not one of the stockholders who formed the majority joined in the suit since they are happy with the money they received. (a) Will the action prosper? Explain.
MACKUN (p. 462-463)
b. As one of its defenses in court, the Board of Directors raised the “business judgement rule”. What is the business judgement rule and does it have any relevance to this case? Explain. (1986 Bar, 12) Answer: (a) The action to declare the cash dividend invalid will prosper Dividends can only be declared from unrestricted retained earnings. The increase in assets due to a revaluation is not an earning of the corporation, and therefore, cannot become the basis for a dividend declaration. The dividend declaration from revaluation of assets is in effect, a declaration of capital; not of earnings, as dividend. The is outlawed by law. (b) The “business judgment” rule is a principle under which judgment and decisions of the corporation, made by its management body, the board of directors, should not be interfered with, even by courts, unless such are so oppressive and unconscionable as to amount to a wanton destruction of the rights of the minority. The “business judgment” rule has no relevance to the problem above. Dividend declarations are governed by certain rules provided for by law. Compliance of these rules is mandatory on the corporation, and gives no room at all for the exercise by the corporation of a “business judgment”. e.
Classes of Dividends
Bar Question: Distinguish cash dividends from stock dividends. (1957 Bar, Ia3) Answer: A cash dividend is differentiated from stock dividend as f ollows: a. Cash dividends withdraw assets from the corporation; stock dividends do not; b. In cash dividend, money is received by the stockholder; in stock dividend, stock instead of money is received; c. Cash dividend is taxable income; stock dividend is not; d. Cash dividend may be declared by the board alone; a stock dividend is declared by the board, and the declaration is approved by stockholders holding at least ⅔ of capital stock outstanding and entitled to vote. Author’s Note: Answer
still valid under N.C.C.
Bar Question: Distinguish between cash dividend and stock dividend. When may the declarations of these dividends be revoked? (1989 Bar, 1-1) Answer: Cash dividends are different from stock dividends in the following respects: Author’s Note: See
answer to question Ia3 of the 1957 Bar stated above:
The declaration of cash dividends may be revoked before official notice is sent to the stockholders of the declaration by the board. The declaration of stock dividends may be revoked for any of the following reasons: (1) the unissued stocks cannot absorb the stock dividend, and the corporation is not willing to increase the capital stock of the corporation; (2) when the vote of stockholders in a meeting called for the approval of said
stock dividend d eclaration, does not reach the required ⅔ of outstanding capital stock and (3) no official notice has as yet been sent to the stockholders of aforesaid stock dividend declaration. Bar Question: The estate of deceased “B”, owner of 108,000 shares of stock of a mining company, received from the letter of 54,000 shares representing 50% stock dividend on the 108,000 shares. The widow, Mrs. “B”, as usufructuary or life tenant of the estate, petitioned the estate’s administrator to indorse and deliver to her the corresponding certificate of stock, claiming that the said dividend was fruit or income. The legal heirs of “B” opposed, alleging that the said dividend was part of the capital and, therefore, belonged to the remainderman. Decide the case with reasons (?1958 B, IXc) Answer: Dividends, whether cash or stock, are profits earned by the corporation and distributed to the stockholders. Between the usufructuary and the naked owner (remainderman), the former (usufructuary) is entitled because dividends are fruits. The widow of B is entitled to the stock dividend. Author’s Note: Answer
still valid under N.C.C.
Bar Question: “A”, stockholder of “X Corporation”, assigns his shares of stock to “B” for a valuable consideration. The certificate of stock was there upon delivered to “B”. A few days later, “A” died. The heirs of “A”, in a Deed of Extra - judicial Partition, adjucated his shares of stock to his son “C”. In the meantime, “X Corporation” declared cash dividends and sent the corresponding notice to “A”’s address, “A”, being the registered owner of the shares of stock in the books of the corporation. “C” received the notice and by virtue of the aforestated deed of partition claimed payment of the dividend. “B” likewise claimed payment asserting ownershi p of the shares by virtue o the assignment made by “A”. Note: REMAINDERMAN - One who is entitled to the remainder of the estate after a particular estate carved out of it has
MALONZO
COMMERCIAL LAW (p. 464)
Who has the better right? Explain briefly. (5%) (1981 Bar, 11). Answer : For purposes of the corporation, there being no change in ownership of the questioned shares in its stock and transfer book, the rightful owner of the dividends would be the estate of the deceased A. There is no statement in the problem that C, the son of A, presented the Deed of Extrajudicial Partition to the corporation; neither does the problem state that B, the assignee, presented the duly indorsed stock certificate to X corporation for cancellation, and issue to him (B) of a new stock certificate. The corporation is bound, in so far as ownership of its shares is concerned, by its stock and transfer book, and as far as the questioned shares are concerned, their owner is still A, and it is therefore to his estate that dividends should be paid. Neither B nor C under the circumstances mentioned in the problem would be entitled to the dividends. 1.)
Nature and Concept of Stock Dividend “Stock Dividend” is any div idend payable in shares of stock of the corporation declaring or authorizing such dividend. It is, as what the term itself implies, a distribution of the shares of stock of the corporation among the stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead of cash, and is properly payable only out of surplus profits (Sec. 16, Corporation Law). So, a stock dividend is actually two things: (1) a dividend, and (2) the enforced use of the dividend money to purchase additional shares of stocks at par. (Words and Phrases, p. 270). When a corporation
issues stock dividends, it shows that the corporation’s accumulated profits have been capitalized instead of distributed to the stockholders or retained as surplus available for distribution in money or kind, should opportunity offer. Far from being a realization of profits for the stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock has been transferred from surplus to assets and no longer available for actual distribution. (Fisher vs. Trinidad, 43 Phil. 973). Thus, it is apparent that stock dividends are issued only to stockholders. This is so because only stockholders are entitled to dividends. They are the only ones who have a right COMMERCIAL LAW (p. 465)
to a proportional share in that part of the surplus which is declared as dividends. A stock dividend really adds nothing to the interest of the stockholders; the proportional interest of each stockholder remains the same (Towne vs. Fisher, 62 L. Ed. 372). If a stockholder is deprived of his stock dividends – and this happens if the shares of stock forming part of the stock dividends are issued to a non-stockholder – then the proportion of the stockholder’s interest changes radically. Stock dividends are civil fruits of the original investment, and to the owners of the shares belong the civil fruits. (Art. 441), Civil Code). The term “dividend” both in the techni cal sense and its ordinary acceptation, is that part or portion of the profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division among the holders of the capital stock. It means that the fund has actually been set aside, and declared by the directors of the corporation as dividend, and duly ordered by the directors, or by the stockholders, at a corporate meeting to be divided or distributed among the stockholders according to their respective interests. (7 Thompson on Corporations, 134-135; Nielson and Company, Inc. vs Lepanto Consolidated Mining Company, 26 SCRA 542-543). A stock dividend, being one payable in capital stock, cannot be declared out of outstanding capital stock, but only from retained earnings. (Com. Of Internal Revenue vs. Maning et al., 66 SCRA 14). f. Procedure for Dividend Declaration 1) Cash Dividend Declaration a) Existence of unrestricted retained earnings; b) Cash dividend declaration by board; c) Notice of declaration to stockholders 2) Stock Dividend Declaration Bar Question: A domestic corporation with an authorized and paid-up capital stock of P200,000.00 has accumulated profits amounting to P200,000.00. In order to expand the business of the corporation, its board of directors approved a resolution
MORENO (466-477)
stock Answer:
Commercial Law declaring a 100% stock dividend. Briefly state all the steps which must be taken in order that the dividend may be validly issued (1955 Bar, IVb).
The
procedure
for
stock
dividend
issue
follows:
1) As there are no unissued shares, the capital stock should be increased $400,000 by ammendmend of the articles of incorporation; 2) Stock dividend declaration by the board; 3) Approval of the declaration by the stockholders holding ⅔ of the capital stock outstanding; 4) Notice to stockholders; 5) Issuance to stockholders of stock certificates corresponding to the stock dividends. Author’s
note:
Answer
still
valid
under
N.C.C.
Bar question: “X” corporation has authorized capital stock of par value at ten pesos (P10.00), 30,000 shares of which have been subscribed. The total payment for these shares is P200,000 only. As of September 30, 1970, the corporation had a surplus of P150,000. May the corporation declare a stock dividend? If so, to what extent? (1970 Bar, Vc). Answer: YEs, the corporation can declare a stock dividend. It can do so up to the full extent of its surplus of P150,000 or 15,000 shares. Reason: The only limit is that the stock dividend can be absorbed by the unissued shares of the corporation.
Only 30,000 of the 50,000 authorized number of shares were issued by the corporation, leaving a balance unissued of 20,000 shares. 150,000 shares are only needed to absorb the 150,000 stock dividend. Author’s
note:
Answer
still
valid
under
N.C.C.
Bar question: Palmera Corporation has an authorized capital stock of P500,000.00, all subscribed and outstanding as of December 31, 1981. The corporation has an unrestricted retained earnings in its book amounting to P375,000.00. Since the corporation needed the cash surplus to carry out its expansion projects, the board of directors, in its meeting held on January 5, 1982, approved a resolution declaring the ordering of the issuance of 50% stock dividends in lieu of cash dividends.
(a) Was the resolution declaring the issuance of stock dividends valid? Explain your answer. (2%) (b) What step or steps needed be taken in order that the decision of the Board could be implemented? State the required vote (3%), (1982 Bar, 2) Answer: (a) No, the resolution of the board declaring a 50% stock dividend is invalid for the following reasons: 1. There is no unissued stock to absorb the stock dividend; 2. Stock dividend declaration need further approval of stockholde rs holding at least ⅔ of the outstanding capital stock of the corporation.
(b) In order that the stock dividend declaration may be implemented, the following steps should be taken: 1. The articles should be amended to increase the capital stock by at least P250,000.00 This needs approval by a majority of the board, and approval by stockholders holding ⅔ of the outstanding capital stock of the corporation filed with SEC 2. The declaration of 50% stock dividend already approved by the board, should be
approved by stockholders holding at least ⅔ of the outstanding capital stock of the corporation. 2. (Right
to
withdraw
Appraisal under
the
old
Right law)
Bar Question: Under what circumstances may a stockholder compel the corporation of which he is stockholder to buy his shares of stock? (1950 Bar, Ib) Answer: There are five instances in the Corporation Law where a stockholder, not agreeable to certain corporate actuations may protest, and compel the corporation to buy his shares. These are:
1. When the articles of incorporation are amended to extend the duration of existence of the corporation; 2. When the Articles of Incorporation are amended to change the rights of stockholders, authorize preferences superior to those of existing stockholders, or restrict the rights of any stockholder; 3. When the stockholders authorize the board to invest the corporate funds in another corporation 4. When the stockholders authorize the board to engage in a purpose other than the main purpose(s) stated in the article 5. When the corporation decides to sell or dispose of all or substantially all of the assets of the corporation
OLIVARES Commercial Law Author’s note: The right to withdraw under the old law is now called “appraisal right” by the N.C.C. and is available in four instances in favor of a stockholder who dissents toL1) amendments of the articles to change, restrict existing rights or do authorize new preferences of stockholders;(2) sale or other dispositions of all or substantially all of the corporate assets;(3) mergers or consolidations (Sec, 81, N.C.C.) and (4) investment of corporate funds in another corporation or for a different purpose. (Sec 82, N.C.C.) Bar Question: Under what conditions and circumstances may a corporation acquire, by purchase or otherwise, its own stocks? Is it allowed by our corporation law? Explain your answer. (1956 Bar, IX) Answer: A corporation may acquire its own stocks in the following instances: 1) Purchase at auction in a sale of delinquent shares where there are no other bidders: 2) When a stockholder, in any of the following instances, withdraws from the corporation: A) Amendment of the article to extend corporate life; B) Amendment of the articles to change or modify the rights of stockholders; C) Investment of funds in another corporation; D) Use of funds for a purpose not the principal purpose(s) E) Sale or disposition of all our substantially of the corporate assets Author’s note: Under sec. 41, N.C.C., a corporation may acquire its own shares in the follow ing cases, among others;(1) to eliminate fractional shares,(2) to compromise an indebtedness of the corporation arising out of unpaid subscription,(3) to purchase delinquent shares,(4) exercise by stockholders of appraisal rights. Bar questions:(2) X subscribed and paid for P10,000.00 worth of original shares of stock of Rainbow Mines, Inc. as an incorporator and original subscriber. He was employed as the mine superintendent and as such, made the design of certain equipment used in its mines. Due to some technical error in the design, the corporation suffered a loss of P1M. The board accused X of infidelity and breach of trust, and confiscated his shares. Is the action of the board legal? Reasons. (1989 Bar, II-2)
Answer: The action of the board is not legal. The rights of X as a stockholder and his obligation as a mine superintendent are two different matters. The code provides for the manner by which the corporation may become owner of the stocks of a stockholder (like where the stockholder is declared delinquent, his stocks sold at auction, and there is no person interested in the bidding, as a consequence of which the corporation becomes owner of the stocks). His being remiss as an employee in his obligations is not a ground for the corporation to confiscate his shares. Bar question: Authorized by a resolution of stockholders owning two-thirds of the stock entitled to vote, the board of directors of a corporation invests the corporate funds in a business other than the main business for which the corporation was organized. If you were a stockholder who did not vote to authorize the action of the board of directors, what remedy would you have and how is such remedy obtained? What is the reason behind that remedy? (1959 Bar, IVa). Answer: If I were the stockholder who did not vote to authorize the action by the Board, I will compel the corporation to by my stocks. To avail of this remedy, I will have to do the following: a) Within 40 days after that action was taken by the corporation, I should object in writing and demand payment of my share. b) If I and the corporation agree with the price, or in case of disagreement, where the committee of appraisers fixes price, the corporation pays me the price within 30 days after such fixing. c) Upon payment, I will indorse my certificate my stock and deliver the same to the corporation. Author’s note: This right is now called the appraisal right by the N.C.C. The period to claim is reduced to 30 days from the date of corporate action; If there is disagreement as to the price, within 60 days, a three man committee of disinterested persons is created; payment to the dissenting stockholders is made within 30 days from agreement, or from the award, incase of disagreement as to the price. (Sec. 82, 2 nd par., N.C.C.) Bar question: The board of directors of a corporation approves a resolution to sell substantially all of its property and assets. Discuss the remedy or remedies available to a stockholder who does not conform to the resolution. (1957 Bar, IXa). Answer: A stockholder who does not conform to said resolution should object to the resolution within 40 days after it was Perlada
COMMERCIAL LAW (p 470-471) approved and demand payment of the value of his shares. He may compel the corporation to pay him the price voluntarily agreed, or if no agreement is reached as to the price, then the price as fixed by a committee of appraisers, in which case, said amount will have to be paid by the corporation to the withdrawing stockholder within 30 days from the time the price was fixed by that committee. Author’s note: See Note to immediately preceding question. Bar Question: A corporation has Jose Santos and his son as its president and manager respectively. In 1947, the corporation suffered losses. The minority directors in the organization meeting of the board in March 1948 exposed the incompetence and the negligence of the management and moved that a new president and a new manager be appointed. The motion was disapproved. In 1948, the corporation again suffered losses due to the negligence and incompetence of the manager and president. Nothing could be said however against their honesty. In the organization meeting of the board in Manila, the minority directors again moved for appointment of a new president and a new manager. Motion was again turned down. The business operations of 1947 impaired 10% of the capital of the corporation, and those of 1948 impaired
40% of the capital. In January 1949, the corporation was in need of cash, and all the directors including the minority directors loaned to the corporation, P2,000,00 each, payable on demand. After the organization meeting of 1949 the minority directors demanded the payment of their respective loans, but the corporation refused to pay. (a) What can the minority directors do the protect their interest? (b) Can a limited partner be an attorney-in-fact for the firm? (c) What are the liabilities of a limited partner, whose name is adopted for the firm name? (1949 Bar, Xa). Answer: (a) The minority directors may bring a derivative suit, for and in behalf of corporation to make the erring management officials account for their management. T hey may also include as a provisional remedy the creation of a receivership over the assets of the corporation. (b) and © Author’s note: Not answered because no longer covered by Commercial Law. Author’s note: Answer still valid under N.C.C. The obligation of a corporation to pay a withdrawing stockholder for his stocks availing of his appraisal right is dependent on the existence of unrestricted retained earnings, otherwise the preference of creditors to corporate assets is violated, ((Boman Environmental vs. CA, 167 SCRA 540). 3. Issuance of Stock Certificate A stockholder is entitled to the issuance of a certificate of stock to him after his compliance of the conditions for its issuance, usually full payment of the subscription. Bar Question: An employee of Juan Gutierrez sold in the Manila Stock Exchange 100 shares of the Benguet Mining Company belonging to his employer, without the knowledge of the latter. Jose Lorenzo bought the said shares thru another broker of the exchange. The Benguet Mining Company issued 100 shares in the name of Jose Lorenzo, in lieu of the 100 shares of Juan Gutierrez, (whose signature at the back of the certificate was forged by the employee). (1) Who has the better right to said shares, Juan Gutierrez or Jose Lorenzo? (2) What are the liabilities of the two brokers and of the Benguet Mining Company? (1949 Bar, IXa). Answer: (1) Shares of stock, unlike negotiable instruments, do not create the so-called holder in due course. Transfers of shares, although the method of transfer to them is by indorsement followed by delivery, become mere assignees, and as such assignees they acquire only those rights which their transferors had over the stocks transferred. As the forger had transferred nothing, I submit therefore that Juan Gutierrez still has a better right to the shares. (2) The brokers were negligent in the performance of their duties, hence, they become liable to the prejudiced party, Jose Lorenzo, without prejudice to these brokers running after the forger. Benguet Mining Company becomes liable to Juan Gutierrez if it does not cancel the certificate of stock it issued to Jose Lorenzo on the basis of the forged signature of Juan Gutierrez - Benguet Mining, being in possession of necessary documents to determine for itself the genuineness of the signature of one of its registered stockholders. Where stock certificates prepared by a corporation are claimed by the registered stockholder and a third person who alleges that the certificates are merely held in trust by said stockholder, an action on interpleader filed by the issuing corporation against the two claimants is a proper reRELLOSA Stockholder Suits and Remedies (p. 472 - 473) medy. (Co Lim vs. Continental Development Corporation, 69 SCRA 349). A corporation against whom stocks are claimed by two different persons should initiate an interpleader suit between the claimants and not wait for the claimants to file a suit against it. (Dy vs. Enage, 70 SCRA 96). D. Stockholders Suits and Remedies There are three classes of suits which a stockholder may bring in a corporation. These are: 1. Individual Suit
An individual suit is one brought to assert a right by a stockholder peculiar to himself. Suits brought by a stockholder for the issuance to him of a stock certificate, payment of his dividend, payment to him of the book value of his stocks, in those instances where the law allows him to withdraw, are individual suits. 2. Representative Suit A representative suit is one brought by a stockholder in his own behalf, and in behalf of other stockholders similarly situated, and having a common cause against the corporation. 3. Derivative Suit a. Defined A derivative suit is a suit brought by a stockholder, for and in behalf of the corporation and against any person be he also a stockholder, director, officer, or third person. The right can be availed of by the stockholder after he has exhausted intra-corporate remedies, by requesting the board to act, and the board does not act at all. A derivative suit may be instituted by a stockholder in behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation, refuse to sue or are the ones to be sued, or hold control of the corporation. (Gamboa vs. Victoriano, 90 SCRA 40) b. Requisites There are three requisites before a derivative suit can be filed by a stockholder. These are: (1) cause of action in favor of the corporation, (2) refusal of the corporation to sue, and (3) party filing the suit is a stockholder. (SMC vs. Kahn 176 SCRA 447). The fact that no other stockholder has made common cause with the plaintiff is irrelevant since the smallness of plaintiff’s holding is no ground for denying him relief. (Republic Bank vs. Cuaderno, 19 SCRA 671). A stockholder has a cause of action to annul certain actions of the board of directors of a bank, which actions were considered anomalous and a breach of trust prejudicial to the bank. (Republic Bank vs. Cuaderno, 19 SCRA 671). A derivative suit will be dismissed if the petitioners fail to show that they have a legal basis for representing their co-members and have not shown what acts of the board are detrimental to the interests of the corporation and its members. (PPSTA vs. Quisumbing, G.R. 72913, Nov. 17, 1990). Bar Question: Reliably informed that the properties of the corporation are being wasted and fraudulently disposed of by the management, the minority stockholders met and decided to seek remedy in court either through an action in their own name or through an action in behalf of themselves and other stockholders of the corporation. If you were counted for the minority stockholders, which of these actions would you file and what would you allege and prove? Explain your answer. (1959 Bar, IVb) Answer: If I were counsel for the minority stockholders, I will file an action in behalf of my clients and other stockholders for the benefit of the corporation. This is called as the stockholder’s derivative suit. To succeed in this action, I will have to prove the following (1) The wasting away and fraudulent disposition by the management of corporate assets, the cause of action; (2) refusal of the Board to sue, after the matter was brought to the attention of the board and (3) injury to the corporation. Author’s Note: Answer still valid under N.C.C. Bar Question: A group of minority stockholders of a corporation brought action against the principal officer for damages alleging that the latter as president and manager mismanaged its affairs and its assets, and demanding that he pay to them COMMERCIAL LAW (p.474-475) RESPICIO the value of their respective participation in the corporate assets on the basis of their respective holdings. Did the minority stockholders have the right to bring this action for their own benefit? Reason out your answer, briefly. ((1960 Bar. Va). Answer: No, the minority stockholders did not have the right to bring this action in their own behalves. What should have been brought by them should be the stockholder’s derivative suit where the action is filed, for and in behalf of the corporation. But then other conditions must be present besides the cause of
action here. The stockholders should have exhausted intra-corporate remedies by informing the board to take proper remedies. Author’s note: Answer still not valid under N.C.C. c. Nature at a Derivative Suit An individual stockholder may institute a derivative or representative suit on behalf of the corporation, wherein he holds stock in order to protect or vindicate corporate rights whenever officials of the corporation refuse to sue or are the ones to be sued or hold control of the corporation. In such actions the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. (Republic Bank vs. Cuaderno, 19 SCRA 671). The bonafide ownership by a stockholder of stock in his own right, suffices to give him a standing to bring a derivative suit. The number of shares is immaterial, as he brings the suit, not in his behalf, but in behalf of the corporation . (SMC vs Kahn, 176 SCRA 447). 1) When Exhaustion of Intra-corporate Remedies Dispensed with. Where the corporate directors are guilty of a breach of trust – not of mere error of judgment or abuse of discretion – and intra-corporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and of other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders. (Angeles vs. Santos, 64 Phil. 697). (Reyes vs. Tan, SCRA 198) Such a suit need not to be authorized by the corporation where its objective is to nullify the action taken by its manager and the board of directors, in which case any demand for intra-corporate remedy would be futile. (Republic Bank vs. Cuaderno, 19 SCRA 671). Bar Question: A small stockholder of a Bank filed a suit praying for an injunction to prevent he approval of the appointments of two persons whom he claimed were being appointed to their positions only for the purpose of shielding form criminal prosecution the controlling stockholder, alleged to be committing fraud in the bank affairs. Defendants were the Board of Directors of the Bank, the two persons whose appointments were being questioned and the controlling stock holder of the Bank. These defendant s=moved to dismiss the suit on the ground that a mere stockholder is not allowed to question the appointments because they were corporate acts. Should the case be dismissed? (1975 Bar, 13) Answer: Yes, the case should be dismissed. Generally it is the board which determines whether or not the corporation should file a case in court. In a situation, however, where the possible defendants are members of the board itself, the law allows the filing by a stockholder of a derivative suit for and in behalf of the corporation, the stockholder appearing in the case as a nominal party. In the case at bar, however, the case is filed not as a derivative suit but as an individual suit of the plaintiff stockholders. The suit will not proper as such. Author’s notes: Answer still valid under N.C.C. VII. Liabilities of Stockholders A. To the corporation for unpaid subscription plus interest; B. To creditors for unpaid subscriptions. A stockholder may be sued directly by creditors to the extent of their unpaid subscription to the corporation. (Keller vs. COB Marketing, (141 SCRA 86) C. To the corporation for watered stock. (Sec. 65, N.C.C.) VIII. Dissolution of Corporations A. Dissolution Defined Dissolution is the extinguishment of the franchise of a corporation and the termination of its corporate existence.
ROJAS (p. 476-477) B. Modes of Dissolution 1. Voluntary dissolution
a. Where no creditors are affected (Sec. 118, N.C.C.) b. Where creditors are affected (Sec. 119, N.C.C.) c. By shortening corporate term. 2. Involuntary dissolution, for: a. Grounds, such as: 1. Violation of the New Corporation Code (Sec. 144, N.C.C.) 2. Failure to organize and commence business within two years from incorporation (Sec. 22, N.C.C.) A corporation may be dissolved by the SEC upon the filing of a verified complaint and after proper notice and hearing on grounds provided by existing laws, rules and regulations. (Sec. 121, N.C.C.) The failure by a corporation to file its by-laws within thirty days from issue of its certificate of incorporation, does not automatically dissolve a corporation, but may be a ground for dissolution. (Chung vs. IAC, 163 SCRA 534) 3. Procedure for Voluntary dissolution a. Where no creditors are affected 1) Affirmative vote of majority of Board; 2) Call for meeting of stockholders or members and publication of notice of the same once a week for three weeks. 3) Affirmative vote of 2/3 of members or of stockholders owning at least 2/3 of capital stock outstanding; 4) Certified copy of resolution signed by majority of the directors and countersigned by the secretary filed with SEC. (Sec. 118 N.C.C.) b. Where creditors are affected 1) Call for meeting of stockholders or members for the specific purpose of dissolving the corporation; 2) Affirmative vote of majority of members in non-stock corporations, and of stockholders holding at least 2/3 of outstanding capital stock in stock corporations; 3) Petition filed with SEC signed by majority of the board and verified by the President or secretary or director; 4) Order setting a date for filing objections, not less than 30 nor more than 60 days after entry of the order; 5) Publication of the order in a newspaper, once a week for three weeks and posting of the order in 3 public places in the town or city where the principal corporate office is located for three weeks; 6) Hearing of Petition by the SEC; 7) Judgment (Sec. 119 N.C.C.) c. By shortening corporate term. A voluntary dissolution may be done by amending the articles to shorten corporate life and submitting a copy to the SEC of said agreement; when the shortened term expires, the corporation is deemed dissolved without further proceedings. (Sec. 120, N.C.C.) The Problem: Some businessmen with an available starting capital totaling only 100,000.00 php ask you to help organize a business firm. Subject to legal limitations, they have future plans to invite alien investors who are agreeable to rendering financial assistance by way of direct investments and/or loans. Your professional assistance is solicited on the following various questions that may arise.
Bar Question: The management of your firm embarks on a long-range plan to either discontinue or expand the business, depending upon fast-changing economic conditions. Your legal advice is sought on the following matters. (a) X X X
SALDIVAR CORPORATION LAW (478) (b) If your firm petitions for insolvency, does that automatically terminate its legal existence? Why? (c) x x x (1973 Bar, Xb). Answer : (a) x x x (b) The filing of a petition for insolvency by my firm will not automatically dissolve it. While the existence of insolvency may be a good ground for dissolving my firm, the mere ceedings are over, the firm, unless fresh capital comes in, has no more reason to continue to exist. (c) x x x C. Winding-up or Liquidating 1. Defined Liquidation means the winding up of affairs of the corporation by getting in the assets settling with the creditors and debtors, and apportioning the amount of profit and loss. 2. Methods of Winding Up. Accepted in this jurisdiction are three methods by which a corporation may wind-up its affairs (1) under Section 3. Rule 104, of the Rule of Court (which superseded Section solution of a corporation, the court may direct “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) under Section 77 of the Corporation Law, whereby a corporation whose co rporate existence is terminated, “shall nevertheless be continues as a body corporate for three years after the time when it would have been so dissolved for the purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its affair, to dispose of and convey its property and to divide capital stock, but not for the purpose of continuing the business for which it was established; (3) under Section 78 of the Corporation Law, by virtue of which the corporation, within the three-year period just mentioned, :is authorized and empowered to convey all of its property to trustees for the benefit of the members, stockholder, creditors, and others interested.” (Board of Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 987). CORPORATION LAW (479) These three methods of liquidation are maintained by Sec. 122, N.C.C. a. By Corporation Itself The corporation during the winding-up may negotiate and transfer the assets of the dissolved corporation, provided the stockholders give their consent. (Chung vs. IAC, 163 SCRA 534) Bar Question: “X” corporation brought an action against “Y” for collection for a sum of money. “Y” sets up the defense that “X” had no legal capacity to sue because it was no longer in existence, for, a week before suit was filed, the stockholders held a meeting where a resolution was adopted unanimously dissolving said corporation. Is the defense valid? Give reasons. (1968, Ic). Bar Question: Plaintiff “X”, a local corporation, brought an action against defendants “Y” and “Z” for the collection of a loan. On of the affirmative defenses set up by the defendants was that the plaintiff had no legal capacity to sue for the reason that it was no longer in existence, because at a meeting of the stockholders held previous to the filing of the action, a resolution was adopted dissolving it. Is the affirmative defense meritorious? State the reasons of your answer. (1963 Bar, VII). Answer : The defense is not valid. After a corporation is dissolved, the law gives it a period of three years to wind-up its affairs, should it decide to liquidate through its own board. The filing of a suit against a Author’s note:
debtor of a corporation after dissolution but within the three year winding-up period is a perfectly valid act on the part of the corporation. Author’s note: Answer still valid under N.C.C. Bar Question: The corporate life of “a” company expired on December 31, 1958. On January 15, 1959, the company filed an action against “B” to recover the sum of money. The action is still pending trial. (August 12, 1962). Should the defendant’s motion to dismiss on the ground that plaintiff no longer has the legal capacity to sue be granted? (Answer Yes or No, the give reasons). (1962 Bar, Va). Answer : Yes, the trial court should grant defendant’s motion to dismiss on the ground that plaintiff corporation no longer has the legal capacity to sue. If the corporation after dissolution decides to wind up through its own board, it should terminate all acts of winding up within three years after dissolution. In the case at bar, SANTOS (p. 480-481)
all pending actions should have been terminated on or before December 31, 1961. The corporation has no judicial personality to continue with any corporate actuation after that period. Author’s note: See however doctrine in Gelano vs. CA decided by the Supreme Court on Feb. 4, 1981 cited below The Problem: Some businessmen with an available starting capital totalling only P100,00.00 ask you to help organize a business firm. Subject to legal limitations, they have future plans to invite alien investors who are agreeable to rendering financial assistance by way of direct investments and/or loans. Your professional is solicited on the following various questions that may arise: Bar Question: The management of your firm embarks on a long-range plan to either discontinue or expand the business, depending upon fast-changing economic conditions. Your legal advice is sought on the following matters: a. x x x b. x x x c. May your firm still sue or be sued even after the termination of its legal existence as a corporation? Why? (1973 Bar, Xc). Answer: a. x x x b. x x x c. After dissolution of the firm as a corporation, the law allows a three year winding up period, during which time the corporation still possesses juridical personality to sue and be sued. My firm therefore can sue and be sued within that three year period. Author’s note: Answer still valid under N.C.C. Bar Question: A group of stockholders of Sesame Corporation filed a court suit against the members of the Board of Directors to make good to the shareholders, in proportion to their shareholdings, the losses incurred by the corporation because of the defendant Board of Directors’ mismanagement. a. x x x b. While the case was pending, the corporation was dissolved. During the three-year period from its dissolution, the Board of Directors decided to extend the corporate life by an amendment of its Articles of Incorporation. Can the Board of Directors do so? Reasons. (1986 Bar, 10b). Answer: The Board of Directors cannot pass a resolution to extend corporate life after the corporation was dissolved, for the following reasons: a. After a corporation is dissolved, corporate life terminates. So there is no life to extend; b. If the board is given a three year grace period after its dissolution to wind up and liquidate, that grace period can be utilized for nothing more than for the liquidation of the corporation. The board cannot pass a resolution not germane to the liquidation process;
c. Even if the extension was done by the board before its dissolution, the extension and filing an amendment to the Articles of Incorporation need the approval of stockholders holding at least 2/3 of the outstanding capital stock of the corporation. When Insular Sawmills was dissolved on Dec. 31, 1960, under Sec. 77 of the Corporation Code, it had up to Dec. 31, 1963 to prosecute in its name, cases filed by it in court, after which period, it ceases to exist and can no longer sue or be sued. However, the corporation can convey its properties to trustees or have a receiver appointed by SEC who can continue suits beyond said three year period. If a case is filed before dissolution, it may however continue even after the three year period, and said period is necessarily prolonged until final determination of the litigation, otherwise, corporations in liquidation, would lose what justly belongs to them, or be exempt from the payment of just obligations through a mere technicality. The lawyer who handled the case in the trial court may be considered as trustee for the dissolved corporation, with respect to the matter in litigation only, although no appointment as such, was extended to him. (Gelano vs. Court of Appeals, 103 SCRA 90) b. By Receivership A trial court has jurisdiction to order a receiver of a corporation under receivership to do any act so as to protect and preserve its properties, and to that end it may order the secretary of the corporation to do an act within the
SITOSTA COMMERCIAL LAW (p. 482)
internal affairs of the corporation aimed at protecting the interests of the stockholders. (C.N. Hodges vs. Lezama. 8. SCRA 717). C. By Trustees At any time during the said three years (for winding up), said corporation is authorized and empowered to convey all of its properties to the trustee for the benefit of stockholders, creditors and other interested persons. The trustee holds legal title to these assets, but beneficial interest remains with the stockholders and creditors. However, the corporation can convey its properties to trustees who can continue suits beyond said three-year period. The lawyer who handled the case in the trial court may be considered as trustee for the dissolved corporation, with respect to the matter in litigation only, although no appointment as such, was extended to him. (Gelano vs. Court of Appeals, 103 SCRA 90). Bar question: On February 15, 1970, "Acme Corporation" filed a complaint for collection against "D". While the case was pending. "Acme Corporation" amended its Articles of Incorporation to shorten its term of existence up to December 31, 1970. The Securities and Exchange Commission approved the amendment. The Trial Court, however, was not notified thereof, so that proceedings continued until May 5, 1974, when "D", learning of the dissolution, questioned the personality of the corporation to continue prosecuting the case. "D" alleged that since the corporation had already been dissolved but had not taken steps to wind up its affairs and transfer its assets to a trustee or assignee within the three-year period as provided under Sec. 77 and 78 of the Corporation Law (now Sec. 122 of the Corporation Code), it had ceased to exist for all purposes. Decide the case with reasons. (5%), 1981 Bar, 12) Answer: The case can continue until it is decided by the court.
In a case lately decided by the Supreme Court, where the case for collection was filed before the dissolution of the corporation, it may continue even after the three year period for winding up done by its corporate board, and said period is necessarily prolonged until final determination of the litigation otherwise, corporations in liquidation, would lose what justly belongs to them, or be e xempt from payment through a mere technicality, CORPORATION LAW (p. 483) Besides, the lawyer who handled the case, may be considered a trustee for the dissolved corporation, and as such trustee can continue with the prosecution of the case until final determination thereof. 3. How Assets Distributed The assets are distributed in the following order: first, to creditors starting with the preferred, and continuing with all common if the assets can pay all; second, refund of the par value of stocks of preferred stockholders; third, refund of the par value to common stockholders; fourth, if assets still remain, then they are proportionately distributed to all stockholders, common or preferred. There can be no distribution of assets to stockholders without first paying the creditors. (Boman vs. CA, 167 SCRA 542). Assets distributable to any creditor, stockholder or member who is unknown or who cannot be located shall be escheated to the city of municipality where such assets are located. (Sec. 122, 4th par., N.C.C.). A buyer at foreclosure of assets of a corporation with a previously approved application for clearance to terminate its employees, buys such assets subject to the preferential right of laborers to be paid their unpaid wages and salaries. (PCIB vs. National Mines and Allied Workers Union, 115 SCRA 873) 4. Take Over of Assets of a Dissolved Corporation A corporation taking over the assets of a dissolved corporation becomes liable for the obligations of the dissolved corporation, even if the charter of the corporation taking over limits its liabilities with respect to obligations of the dissolved corporation. (Gonzales vs. Sugar Regulatory Administration, 174 SCRA 377) IX. Other Corporations A. Foreign Corporations 1. Defined Sta. Maria COMMERCIAL LAW (p. 484) A foreign corporation is a corporation formed, organized, or existing under any law other than those of the Philippines, and whose laws allow Filipino citizens and corporations to do business in its own country or state. 2. License to Engage in Business in the Philippines a. Meaning of Engaging in Business The issue of whether or not a foreign corporation is doing business in the Philippines pertains to the RTC and not to the Intermediate Appellate Court. (Linger vs. IAC, 125 SCRA 522) The term “engaging in” business implies a continuity of commercial dealings and arrangements and contemplates to some extent the performance of acts or works of the exercise of some of the functions normally incident to and in the progressive prosecution of, the purpose and object of its organization. (Aetna Casualty vs. Pacific Star, 80 SCRA 635, as reiterated I Bulakhidas vs. CFI of Rizal et al. 142 SCRA 1) Doing business implies a continuity of commercial dealings and arrangements and contemplates to that extent the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organization. A corporation not doing business in the Philippines can bring suits on isolated acts. If it can sue, it can likewise be sued. (Facilities Management Corporation vs. Osa et al., 89 SCRA 131).
As long as it can be shown that a foreign corporation and a domestic corporation entered into a series of agreements, as in the successive sales of the foreign corporation’s regular products, the foreign company shall be deemed as doing business in the Philippines. It is the performance by a foreign corporation of the acts for which it was created, regardless of the volume of business, that determines whether or not it needs a license to operate in the Philippines. (Granger Associates vs. Microwave Systems et al, G.R. 79986, Sept. 14, 1990). CORPORATION LAW (p. 485) A foreign corporation entering into a contract for the construction of a lime plant in Guimaras, Iloilo, can be considered as doing business in the Philippines, under the provisions of R.A. 5455 (Foreign Investment Law) and its implementing regulations, it being shown that the turnkey proposal was initiated by the Manila Branch of said foreign corporation. Besides, under our corporate laws, a foreign corporation, whether or not it is licensed to engage in business in the Philippines, is subject to the processes and jurisdiction of local courts. (Marubeni etc. vs. Tensuan, G.R. 61950, Sept. 26, 1990) What constitutes "doing" or "engaging in" or "transacting business" in the Philippines, must be judged in the light of peculiar circumstances. Thus, foreign corporation which issued 12 marine policies covering different shipments done through a settling agent and a foreign corporation which collected premiums on outstanding policies were regarded as doing business here. Single isolated business, occasional, incidental or casual but indicates the foreign corporation's intention to do other business in the Philippines, said single act constitutes "engaging in business" in the Philippines (Top Weld vs. ECED, S.A., 138 SCRA 118; Wang Laboratories vs. Mendoza, 156 SCRA 44). A single or isolated business transaction does not constitute doing business within the meaning of the law. The respondents in the case at bar challenged the petitioner's capacity to sue, it being admittedly a for eign corporation without license to engage in business in the Philippines, citing Section 69 of the corporation Law. It must be stated however that this section is not applicable to a foreign corporation performing single acts or “isolated transactions.” ( Swedish East Asia Co., Ltd. vs. Manila Port Service, 25 SCRA 634). A foreign insurance company not licensed to engage in business in the Philippines may file collection claims as-
SYCHING 486 COMMERCIAL LAW signed to it, as these are isolated acts (Aetna Casulaty vs. Pacific Star, 80 SCRA 635). A foreign corporation, doing business through an indentor, is not doing business in the Philippines and therefore needs no license to engage in business in the Philippines and therefore needs no license to engage in business in the Philippines. (Schmid and Oberly vs. Martines, 166 SCRA 183). Three transactions which are occasional, incidental and casual, not of a character to indicate a purpose to engage in a continuity of transctions, do not constitute doing business. (Gonzaes vs. Raquiza, 180 SCRA 254). Bar Question: a. Under what circumstances are foreign enterprises considered as “doing business in the Philippines”? b. If a foreign corporation which has been licensed to do business in the Philippines (by the BOI and the SEC) wants to expand its business activities in the Philippines, is further approval from the BOI necessary? (1971 Bar. III-2). Answer : (a) A foreign enterprise is considered to be doing business in the Philippines if it indulges in a continuity of commercial dealings and arrangements normally incident to and in the prosecution of its purpose and object of its organization.
While an isolated transaction will not result in the enterprise being deemed as doing business in the Philippines, where, however, it is shown that the single act is not merely incidental or casual, but of such character as to distinctly indicate a purpose to make the Philippines a base of operations for the conduct of the ordinary business of the corporation, the transaction constitutes the doing business for the purpose of the law. (b) Board of Investment (BOI) approval of the expansion of business of a foreign corporation already licensed on or before the effectivity date of the Foreign Investments Law (1968) to engage in business in the Philippines is not necessary. BOI approval is needed only in situations where the foreign enterprise desires to exceed the permitted percentage of equity of its investments under under the Foreign Investments Law, Law, Author’s note: Answer still valid under N.C.C. The Problem: Some businessmen with an available starting capital totaling only Php100,000.00 ask you to help organize a business firm. Subject to legal limitations, they have future plans to invite alien investors who are agreeable to rendering financial assistance by way of direct investments and/or loans, 487 CORPORATION LAW Your professional assistance is solicited on the following various questions that may arise. Bar Question: Assume that your firm is incorporated under the laws of Texas with power to engage in petroleum and oil exploration activities. Your advice is solicited on various questions which affect the business. Briefly explain with with reasons: (a) Is the firm automatically entitled to drill for oil in the Philippines? Philippines? State the alternatives alternatives to enable your firm to do so lawfully under existing laws, including the New Constitution. (b) x x x (1973 Bar, VI-a). VI-a). Answer : (a) The American corporation is not automatically entitled to drill for oil in the Philippines because the development and exploitation of our natural resources is reserved by our Constitution to Filipino citizens and to corporations and associations at least 60% of the capital of which is owned by Filipinos. However, under the constitution, a qualified Filipino citizen or corporation may, with the approval of the President of the Philippines enter into service contracts for financial, technical, management or other forms of assistance with the American corporation mentioned in the problem. (b) x x x Author’s note: Answer still valid under N.C.C. If an unlicensed foreign corporation appoints an agent in the Philippines who transacts business for the foreign corporation in the name of the latter, the foreign corporation is doing business in the Philippines and should procure a license to do so. (Chemise Lacoste vs. Fernandez, 129 SCRA 373). b. How License Secured The foreign corporation must file an application for a license setting forth the information required by the SEC, and attaching to it, the following documents: 1) Certified copy of its articles and by-laws; Verified certificate by an authorized official of the country where the corporation is incorporated that Filipino citizens and corporations can do business therein and that the applicant corporation is a TAN 488 COMMERCIAL LAW 3) Verified statement by the authorized representative of applicant corporation that it is solvent and in sound financial condition, setting forth its assets and liabilities; 4) Authority from the appropriate Philippine government agency. (Sec. 125, N.C.C.) If the SEC is satisfied that all requirements are complied with by the applicant, license is issued to it to transact business in the Philippines. Within 60 days from license issuance, the licensee (except banks and insurance companies) shall deposit with SEC Philippine government securities valued at P100,000 for the benefit of present and
future creditors. Within 6 months after each fiscal year, the licensee shall deposit in government securities 2% of the amount by wh ich the licensee’s income exceeds P5 million for that year. (Sec. 126, N.C.C.) The Board of Investments under P.D. 1789, may impose requirements on foreign corporations other than those set by the Corporation Code. (Continental Air Lines vs. Santiago, 172 SCRA 490) c. Consequences on Foreign Corporation Engaging in Business in the Philippines Without License 1) It shall not be permitted to transact business in the Philippines. 2) It cannot sue, but it can be sued (Sec. 133, N.C.C.) If a foreign corporation, not engaged in business in the Philippines is not barred to seek redress from Philippine courts, with more reason can said corporation not claim exemption from being sued in Philippine courts. (FBA Aircraft vs. Zosa, 110 SCRA 1) Bar Question Question: “A”, a forei gn corporation dealing in the sale of heavy equipment entered into an isolated transaction for the sale and delivery of twenty (20) compressors to “B”, a domestic corporation. For failure of “A” to abide by the contract, “B” filed suit, serving summons on the President of “A”, who happened to be in Manila on a pleasure trip. “A”, contest the court’s jurisdiction on two grounds: (1) 489 CORPORATION LAW that there is no valid summons; (2) that because it has no license to do business in the Philippines and because the transaction is an an isolated one, it cannot be sued sued in Philippine courts. courts. May the objection to the court’s jurisdiction be upheld? Reason out your answer 1963 Bar, II) Answer : No, both objections to the court’s jurisdiction cannot be upheld becau se: (1) a summons against a foreign corporation may be served ser ved on any of its officers or agents found in the Philippines and (2) a foreign corporation, transacting in the Philippines P hilippines whether under an isolated transaction or under a series of transactions may be sued in Philippine courts irrespective of whether or not it has a license to operate in the Philippines. Author’s note: Answer still valid under N.C.C. 3) Persons transacting business for it are criminally liable. (Sec. 144, N.C.C.) d. When Unlicensed Foreign Corporation Can Sue In the following cases, actions may be filed f iled by a foreign corporation in Philippine P hilippine courts although said corporation is not licensed to engage in business in the Philippines: 1. Isolated Transactions A foreign corporation not engaged in business in the Philippines may file an action in the Philippines for isolated transactions. The object of Secs. 68 and 69 of the Corporation Law was not to prevent a foreign corporation corporation from performing single acts, acts, but to prevent it from acquiring domicile domicile for the of conduct of its business without taking the steps necessary to render it amenable to suits in the local courts. (Bulakhidas vs. CFI of Rizal, et al., 142 SCRA 1) Bar Question Question: “A” is sued, in the Court of First Instance of Manila, by California Candy Corp., a corporation organized under the laws of California, for damages in the sum of P50,000 arising from breach of a contract whereby “A” had agreed agreed to sell sell to said corporation 500 tons of of sugar to be delivered in San Francisco, where t he contract was entered into. Would you grand “A’s” motion to dismiss the complaint on the ground that the plaintiff corporation has no ca pacity to sue, it not having previously obtained a license to transact business in the Philippines? State your reason briefly. (1995 Bar, V) TANTOCO Page 490-491 SN #25 Answer: if I were the judge trying the case, I will not grant "A's" motion to dismiss. It is true that California Candy Corporation has not obtained a licence to tr ansact business in the Philippines, but the transaction herein is isolated, and was entered in not in the Philippines but in California. A license to engage in business in the Philippines is required only of those foreign corporations who have intentions of transacting business with a degree of permanence and continuity in the Philippines. This is not the
situation of California Candy Corporation. Hence, it can bring a suit in the Philippines arising from an isolated transaction. Author's note: Answer still valid under N.C.C. Bar question: A California corporation takes 0 art in bidding for the construction of a building in Manila. The California corporation won the bid, but the construction company which opened the bid refused to sign a contract c ontract with the California corporation for the construction of the building. As the California corporation did not previously previously obtain a licence to engage in business in the Philippines, the construction company moved to dismiss the suit on the ground that the California corporation has no right or personality to sue in the Philippine P hilippine court. How should the motion to dismiss be resolved? Reasons for your answer. (1957 Bar, Ila). Answer: The motion to dismiss should be denied. One isolated act of the California corporation in the Philippine s does not constitute “transacting”business in the Philippines. Hence, there is no need of a license in the Philippines for it to be allowed to sue in Philippines Courts. Author’s note: Answer still valid under N.C.C. Where a single act or transaction is not merely incidental or casual, but is of such character as distinctly to indicate a purpose on the part of the corporation to do other business in the state, and to make the state a base of operations for the conduct of a part of the corporation ’s ordinary business, such act or transaction constitutes doing of business under which a foreign corporation may be served with summons. (Far East Int’s Import and Export Corp vs Nankai Kogyo Company Ltd., 6 SCRA 725) 2. Action to Protect Good Name, Good Will and Reputation of Foreign Corporation The disability of a foreign corporation from suing in the Philippines is limited to suits to enforce any legal or contractual rights arising from or growing from any business transacted in the Philippines. Where the puropse of the suit is to protect its reputation, its corporate name, and its goodwill acquired in the natural development of trade, an unlicensed foreign corporation may sue in the Philippines. (Universal Rubber vs. CA, 130 SCRA 104; Puma vs IAC, 158 SCRA 233). Bar Question: Rubberworld, Inc. sought registration of the trademark trademark “Juggler” for its casual rubber shoes in Inter Partes Case No. 602 filed with the Patent Pa tent Office. The registration was opposed by a Belgian Corporation which alleges th at it owns and has not abandoned the trademark “Juggler” in the Philippines, and it has not licensed nor does it have any agreement with any local entity or firm to sell any of its products in the Philippines. A the trial, it was established that Rubberworld had spent a considerable amount and effort in popularising said trademark in the Philippines, had been using the same since 1969 and had built up enormous goodwill. Acting on the petition, the Patent Office dismissed the op position and ordered the registration of the trademark “Juggler” in the name of Rubberworld. Discuss the validity of the aforesaid decision. (1985 Bar, 2) Answer: I submit that the dismissal of the opposition of the Belgian corporation was erroneous. Admittedly, the Belgian corporation created the trademark “Juggler” and used it on shoes manufactured by it continuously. This made it owner of the said trademark. The opposition is brought in the Bureau of Patents to prevent Rubberworld from registering the trademark which it (Belgian corporation) owns, does not amount to engaging in business, but is an act to protect its reputation, good will will or corporate name; hence, it may be filed (opposition) without need of the Belgian corporation procuring a license to engage in business in the Philippines. That the Belgian corporation is presently in the Philippines not selling footwear with the questioned trademark, and that it does not have Philippine agents to sell its products, are matters which do not affect its right of ownership over the trademark which it has created and continuously used abroad.
USON (pp. 492-493)
The right of a trademark owner to be protected extends even beyond the territorial limits of the country where the trademark is registered. Modern trade and commence, and international agreements demand that depredations on legitimate trademarks should not be countenanced. A foreign corporation without license to engage in business in the Philippines may file a suit to question quashal of a search warrant issued pursuant to a complaint filed with the National Bureau of Investigation for infringement of its trademark in the Philippines. (Chemise Lacoste vs. Fernandez, 129 SCRA 373) 3.) Where Contract Provides Philippine Courts as Venue for Controversies A foreign corporation without license to engage in business in the Philippines may file a suit under a contract executed by it, which provides as venue the proper Philippine courts. (Lingner vs. IAC, 125 SCRA 522) 4.) License Subsequently Granted Enables Foreign Corporation to Sue on Contracts Executed Before Grant of License A foreign corporation not licensed to engage in business in the Philippines cannot sue. However, contracts entered into by it are valid, and the subsequent license granted to it enables it to file suits. (Home Insurance vs. Herrera, 123 SCRA 424) 5.) Recovery of Misdelivered Property There is nothing in the record to show that the petitioner has been in the Philippines engaged in a continuing business or enterprise for which it was organized, when the sixteen bundles were erroneously discharged in Manila, for it to be considered as transacting business in the Philippines. The fact is that the bundles, the value of which is sought to be recovered, were landed not as a result of a business transaction, “isolated” or otherwise, but due to a mistaken belief that they were part of the shipment of forty similar bundles consigned to persons or entities in the Philippines. There is no justification, therefore, for invoking the provisions of Section 69 of the Corporation Law. (The Swedish East Asia Co., Ltd. vs. Manila Port Service, 25 SCRA 634). 6.) Where the Unlicensed Foreign Corporation Has a Domestic Corporation for a CoPlaintiff Where the suit is filed by an unlicensed foreign corporation as subrogor to an all risk marine insurance where the co-plaintiff domestic corporation is subrogee, the failure of the fore ign corporation to allege that it is licensed to engage in business in the Philippines or that the transaction sued upon is isolated, will not result in the dismissal of the case brought by the foreign corporation, one of the plaintiffs being adomestic corporation, and there being a declaration by the Court of Appeals of the absence of a valid defense. (Olympia Business Machines and California Ins. vs. Razon et al., 155 SCRA 208). 3. Acquisition by Philippine Courts of Jurisdiction Over Foreign Corporation. Three modes of effecting service of summons upon private foreign corporations are provided in Section 14, Rule 7 of the Rules of Court, to wit: (1) by serving upon the agent designated in accordance with law to accept service of summons; (2) if there is no resident agent, by service on the government official designated by law to that effect, and (3) by serving on any officer or agent of said corporation within the Philippines. (Far East Int’l Import and Export Corp. vs. Nankai Kogyo Company, Ltd. , 6 SCRA 725). Under the N.C.C., the licensed foreign corporation is required to designate a resident agent in the Philippines, either a resident individual or domestic corporation, by means of a power of attorney. Service of summons and other legal processes on said agent, is equivalent to service on the licensed foreign corporation. If for any reason, the licensed foreign corporation is without any resident agent in the Philippines, service of summons or other legal processes on the SEC is required to transmit by mail a copy of said summons, or legal processes Velez
COMMERCIAL LAW to the corporation of its home office, within ten days. (SEC. 127 and 128, N.C.C.). 4. Laws and Rules Governing Foreign Corporations Doing Business in the Philippines. Bar Questions: By what laws, rules and regulations are foreign corporations corporations doing business in the Philippines? Answer : They are bound by all laws, rules, and regulations applicable to domestic corporations of the same class except such only as provide for the creation, formation, organization, or dissolution of corporations, or such fix the relations, liabilities and responsibilities or duties of members, stockholders or officers of corporations to each other or to the corporations. Author’s note: Answer still valid under Sec . 129, N.C.C. The Problem: Some businessmen with an available starting capital totaling only P 100,000.00 Ask you to help organize a business form. Subject to legal limitations, they have future plans to invite alien investors who are agreeable to rendering financial assistance by way of of direct investments and/or loans. Your professional assistance is solicited on the following various questions that may arise: Bar Questions: Assume that your firm is incorporated under the laws of Teas with power to engage in petroleum and oil exploration activities. Your advice is solicited on various operations which affect the business. Briefly explain the reasons : (a) x x x (b) In case of a dispute between the stockholders and officers on the inspection by the Former of the corporate brooks, what law will be govern? Give legal reason. ( 1973 Bar, VIIb). Answer: (a) x x x (b) In the case of dispute between the stockholders and officers of the American ( Texas) corporation in the problem, on the inspection by the stockholders of the corporate books, the laws of texas (U.S.A.) will govern, because the matter is intracorporate. Author’s note: Answer still valid under N.C.C. B. Religious Corporations Religious corporations are two classes: the corporations sole and religious societies . ( Sec. 109, N.C.C. ). 1. Corporation Sole a. Defined A corporation sole is a special form of corporation usually associated with the clergy and consists of one person only and his successors, who are incorporated by law to give them some legal capacities and advantages. A corporation sole, by its incorporation, is vested with the r ight to hold real and personal property. ( Republic vs. IAC, 168 SCRA 165). Bar Questi ons: Who may organize a corporation sole and for what purpose? ( 1953 Bar, Va). Answer: The bishop, chief priest, or presiding elderof a religious denominations, society or church may organize a corporation sole. The purpose of a corporation sole is the administration of any religious denomination, society or church, and the management of the estates and properties thereof. Author’s note: Answer still valid under N.C.C. The incorporating heads however now include, besides the three above, the chief archbishop, minister or rabbi.
Bar Questions: Petitioner is a corporation sole organized and eisting in accordance with the Philippine laws, with Msgr. Trudeau a Canadian citizen, as actually incumbent. It presented for registration a deed of sale to the register of Deeds of Cebu who denied it for lack of proof that at least 60% of the capital, property or assets of the corporations sole in owned or controlled by Filipino citizens. Was the action of the Register of Deeds correct? Give reasons for your answer. ( 1978 Bar, 8b). Answer: No, the action of the Register of Deeds is not correct. Under the Corporation Law, the bishop, chief priest or presiding elder of a church, religious denomination or society may become a corporation sole of such organization, and thereafter possess the power to administer the temporalities and properties of the organization which he heads. Without regard to the citizenship of said head who is the corporation sole, the law expressly authorizes a corporation sole to purchase and hold real estate and personal property for his church for charitable, benevolent or educational purposes, with further authority to mortgage and sell such properties, except that in selling real properties, he must secure an order from the CFI of the province where such real estate is located. A corporation sole therefore always acts in a representative capacity, not in his own private capacity . Hence, there would be no need for the register of deeds to require the corporation sole proof of Filipino citizenship of 60% of its members. The Register of Deeds therefore committed error in imposing the said requirement, Author’s Note: Answer still valid under N.C.C. Bar Question : A religious society known as the Carmelites owns and manages churches, schools and other properties in the Philippines. It is a foreign religious corporation. How may its estate, properties and other interest be administered? Indicate the procedure to be followed for the control and administration of said properties and interest. (1966, Bar, IIIb). Answer : Its estate, properties and other interest may be administered through a corporation sole. The procedure to be followed for the control and administration of said Properties is as follows: 1. The head of the society files with the SEC and Affidavit of Incorporation setting forth the following: a. That she is the head of the religious society; b. That the rules of her society are not inconsistent with her becoming a corporation sole; c. That as such head, she is charged with the management of the esTate and properties of the society; d. The manner of filling up the vacancy of head of the society; and e. Place of principal office of the corporation sole. 2. The articles are accompanied by a certified copy of her appointment as head of the society and filed with the SEC. Author’s note: Answer still is valid under N.C.C. 2. Religious Societies A religious society is a non-stock corporation governed by a board, but with religious purposes. The law on n on-stock corporation applies to it. The minority members in a COFRADIA (Religious Society) who have Seceded, can claim no rights to the property of the COFRADIA where they were members. (Canete) vs. CA, 171 SCRA 13).
C. .
Educational Corporation 1. Necessity of Incorporation Under Act 2706 passed in 1917, before any educational institution maybe granted a permit to operate a school, it is necessary that it should incorporate. Its incorporation must be favorably recommended by the Department of Education, Culture and Sports. (Sec. 107, N.C.C.). 2. Classes of Educational Corporation a. Non-Stock Corporations 1.) Features a) Trustees shall not be less than 5 nor more than 15, and should be in multiples of 5; b) Only one fifth of the trustees are elected annually; c) Term of office of trustees --- 5 years; d) Powers and authority of the trustees shall be defined by the bylaws . ( Sec. 108, 1sr and 2nd par., N.C.C. ) b. Stock Corporations The term and number of directors are governed by the provisions on stock corporations. ( Sec. 106, 3 rd par., N.C.C.) D. Close Corporations 1. Defined A close corporation is one whose articles provide: a. that its shares shall not be held by a group of more than 20 persons; b. that all of the issued stocks shall be subject to one or more restrictions on transfer; c. that the corporation shall not list in any stock exchange or make public offering of any of its stocks. If at least 2/3 of the voting stock of the above corporation is owned or controlled by another corporation which is not a close corporation, then the above corporation shall not be deemed a close corporation. Villafuerte ( 498-500) 2. Principal Characteristics a. Stockholders act as directors without need of election and therefore are liable as directors; b. Quorum may be greater than a mere majority; c. Transfers of stocks to others, which would increase the number of stockholders to more than the maximum are invalid; d. Corporate actuations may be binding even without a formal board meeting, if the stockholders had knowledge or ratify the informal action of the others; e. Preemptive right extends to all stock issues; f. Deadlocks on the board are settled by the SEC, on written petition by any stockholder; g. A stockholder may withdraw and avail of his right of appraisal (Secs. 97-105, N.C.C.) Bar Question: Ten classmates, all graduates of Class ’78 of the Los Banos School of Agriculture and Husbandry, decided to form “Gatas Atbp. Inc.”, the principal purpose of which is to produce, package, and sell carabao’s milk. The Articles of Incorporation provided, among others, that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors and restricts the transfer of shares to outsiders. One of the ten classmates, Mr. Sakit-ulo, disgruntled at the way the affairs of the corporation was being handled, demanded that all the ten stockholders meet to elect directors, citing Section 50 of the Corporation Code. Meanwhile, Ms. Sakit-tiyan, sued all the ten classmates stockholders for damages
for violation of the Food Drugs Cosmetics Act – a cockroach was found in the milk she drank, the package bearing the inscription “produced, packaged, and sold by Gatas Atbp., Inc.” (a) Can Mr. Sakit-ulo demand that a stockholders meeting be called to elect directors of the corporation? (b) Does Ms. Sakit-tiyan have a cause of action against the ten classmates-stockholders, albeit no negligence has been proven? (1988 Bar, 8) Answer : (a) Mr. Sakit-ulo cannot demand that a stockholders meeting be called to elect the directors. 499 Under the facts and circumstances stated in the problem, the corporation is a close corporation, under which the stockholders without need of election, act as directors of the corporation; (b) If no negligence or fault is proven against the corporation by Ms. Sakit-tiyan, who found a cockroach in one of the packages containing milk drank by her, then neither the corporation, nor all of the directors, nor any one of them would be liable. E. Non-Stock Corporation 1. Defined A non-stock corporation is one where no part of its income is distributable to its members, trustees or officers. Any profit earned by it incident to its operation shall be used for the furtherance of the purposes for which it was organized. (Sec. 87, N.C.C.) 2. Purposes They may be organized for charitable, religious, educational, professional, cultural, fraternal, literary, trade, industry, agricultural and like chambers or any combination thereof. (Sec. 88, N.C.C.) 3. Membership Membership in a non-stock corporation and all rights arising therefrom are personal and nontransferable, unless otherwise provided in the articles or by-laws, (Sec. 90, N.C.C.) and may be terminated for the causes provided for therein. (Sec. 91, N.C.C.) Courts cannot strip a member of a non-stock, non-profit corporation of his membership therein without cause. Otherwise, that would be an unwarranted, and undue interference with the well established right of the corporation to determine its membership. (Chinese YMCA vs. Ching, 71 SCRA 460) 4. Voting Each member shall be entitled to one vote, unless that right is limited, broadened or denied by the articles or by laws. 500 Voting may be done by proxy, unless denied by the articles or by the by-laws. The voting may be conducted by mail or other similar means as authorized by the articles or by-laws, and under such conditions as may be fixed by the SEC. (Sec. 89, N.C.C.) 5. Board of Trustees The board may be more than 15 in number divided into three groups, such that the term of one group after each other shall expire every year. A trustee shall have a three year term of office. (Sec. 92, 1st par., N.C.C.) 6. Officers Officers of a non-stock corporation may be directly elected by the members, unless the articles or the by-laws provide otherwise. (Sec. 92, 3rd par., N.C.C.) 7. Place of Members’ Meetings The meetings, special or regular of members of non-stock corporations may be held anywhere in the Philippines, not necessarily its place of principal office, with proper notice to all members. (Sec. 92, N.C.C.) 8. Distribution of Assets on Dissolution Assets of a non-stock corporation, on its dissolution shall be distributed in the following manner: a. All its creditors shall be paid;
