Corporation Code or BP 68
Chapter I: Fundamentals and Concept Section 16, Article 12 of 1987 Constitution – the Congress shall not except by general law (Corporation law (Corporation Code), provide for the formation, organization or regulation of private corp. corp. GOCC – created by special charter The constitution prohibits the creation of private corporations except by general law. This is to ban private corp. created by special charters which gave special privileges to other citizens that were denied to others. Cooperative code governs the incorporation of Cooperative.
Corporation – an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence (Sec.2). Corporation is a juridical entity under Art. 44(3) of the Civil Code. Attributes of the Corporation 1. A corporation treated as an artificial being 2. Created by operation of law 3. Having the right of succession 4. Having the powers, attributes and properties expressly authorized by law or incident to its existence Corporation as an Artificial Being Corporation, partnership and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from of each shareholder, partner or member. (Art. 44(3) of CC) General Rule: juridical persons are governed by law creating or recognizing them. Private Corp. – general law such as Corp. Code Partnership and associations for private interest – Civil Code A juridical person may acquire ad possess property of all kids as well as incur obligations and bring civil and criminal actions ( Art. 46 CC) A corporation being a juridical person is regarded by law with personality normally possessed by an individual and may hereinafter be known as an artificial being or person . Exist only by Legal Fiction. No physical existence. Exist only by law, but because of its attributes it is regarded as an artificial being. Operation of Law Explained – it means that the law is the only authority that allows the corporation to be created. It is the process of putting into course of action, in accordance or substantial s ubstantial compliance of the law that makes the operation, or simply, the creation of the corporation. Right of Succession It means that the death of any stockholder or director does not dissolve the corporation. Its life continues to exist until the term expires or unless sooner dissolved in the accordance with the law. Upon the death of the stockholder or director, the heir is called upon by operation of law or through succession to inherit the corresponding stocks or shares of the decedentstockholder or director. No transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the corp. 1 e g Constitutional Provision a
Corporations created by special law or charters Shall be governed by the special law or charter creating them, supplemented by the Corporation Code (Sec. 4). Statutory Construction o Generalia specialibus non derogant (as between a general and special law, the latter shall prevail.) Government owned or Controlled Corporation – refers to any agency organized as a stock or non-stock corp. vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or where applicable as in the case of stock corp., to the extent of at least fifty-one (51) percent of its capital stock; provided provided that GOCC may be furthered categorized by DOB, CSC, and the COA for purposes of the exercise and discharge of their respective powers, functions and responsibilities with respect to such corp. (Section 2 (13) of the AC of 1987).
For Non-stock Corp, at least majority of the members must be gov’t officials holding such membership by appointment appoint ment or designation.
Stock Ownership in Certain Corporations – as provided in Section 140 of the Corp. Code: NEDA shall from time to time make a determination of whether the corporate vehicle has been used by any corp. or by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their prevention or correction. Maximum limits may be set by the Batasang Pambansa for stockholding in corp. declared by it to be vested with a public interest pursuant to this sec. belonging to ind. Or group of ind. related to each other by consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restraint or trade , or to implement national economic policies declared in laws, rules and regulations designed to promote the general welfare and foster economic development.
Corporation Code or BP 68
In recommending to the Batasang Pambansa corp.,businesses or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the NEDA shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity , the export potential, as well as other factors which are germane to the realization and promotion of business and industry.
Forms of Business Organization 1. Sole proprietorship 2. Partnership 3. Corporation Sole proprietorship – the oldest, simplest and most prevalent form of business enterprise. enterprise. It is an unorganized business owned owned by one person. The sole proprietor is personally liable for all debts and obligation of the business. No law authorizing proprietorships to file a suit or to defend an action in court. Does not possess a juridical personality separate and distinct from the personality of the owner of the enterprise.
Partnership – by the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession (Art. 1767 of CC) Partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the reqt’s of Article 72 of CC on registration reqt’s with the SEC (Art. 1768 of CC). Resemblance of Corporation and Partnership 1. Both are associations of persons or both are composing of group of persons 2. Both are regarded by law as juridical persons or artificial beings 3. Both exist only by legal fiction and can only act through its legitimate representatives 4. Both having possessed a personality separate and distinct from the person composing it 5. Both are subject to the same corporate income tax rates subject to the provisions of NIRC. Distinctions of Corp and Partnership
2 Governing law e g a Creation
Corporation Corporation Code Operation of law
Partnership Civil Code agreement
Formation Purpose Exposure liability Term Birth
Transfer Interest Succession Management Dissolution
At least 5 For profit or not to Stockholders are liable to the extent of their contributions 50 years subject to extension Upon issuance of Cert, of Incorporation of Even without
At least 2 For profit General Partners are liable By agreement Meeting of the minds of the partners
With the consent of partners allowed Not allowed BOD/BOT Partners W/ the consent of Even w/o consent of state state
Classification of Corporations 1. Stock Corporations – corp. w/c have capital stock divided into shares and are authorized to distribute to holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. 2. Non-Stock Corporations – corp. with no capital stock and where no part of its income is distributable to its members, trustees or officers subject to the provisions of the Code on Dissolution. Provided that, any profit obtained incident to its operation shall whenever necessary or proper, be used for the furtherance of the corp. Other Classifications: 1. Corporation Sole – a series of successive persons holding an office with continuous legal personality. Ex. Holders of monarchial or ecclesiastical positions 2. Corporation aggregate – corp. made up of number of individuals. 3. Ecclesiastical Corp. – corp. organized for spiritual purposes or for the administration of property for religious purposes. Known as Religious Corp. 4. Lay Corp. – corp. made up of laypersons and existing for business or charitable purposes 5. Eleemosynary corp. – charitable corporation dedicated to benevolent purposes 6. Civil Corp. – any corp. other than a charitable or religious corp. 7. Domestic Corp - organized and chartered chartered under the laws of the state 8. Foreign Corp - organized and chartered under the laws of another state, government or country. 9. Close Corp - stock isis not freely traded and is held by only few shareholders (w/in family). Also termed closely held corp. 10. Open Corp - allows general public to to become stockholders stockholders or members
Corporation Code or BP 68
In recommending to the Batasang Pambansa corp.,businesses or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the NEDA shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity , the export potential, as well as other factors which are germane to the realization and promotion of business and industry.
Forms of Business Organization 1. Sole proprietorship 2. Partnership 3. Corporation Sole proprietorship – the oldest, simplest and most prevalent form of business enterprise. enterprise. It is an unorganized business owned owned by one person. The sole proprietor is personally liable for all debts and obligation of the business. No law authorizing proprietorships to file a suit or to defend an action in court. Does not possess a juridical personality separate and distinct from the personality of the owner of the enterprise.
Partnership – by the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession (Art. 1767 of CC) Partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the reqt’s of Article 72 of CC on registration reqt’s with the SEC (Art. 1768 of CC). Resemblance of Corporation and Partnership 1. Both are associations of persons or both are composing of group of persons 2. Both are regarded by law as juridical persons or artificial beings 3. Both exist only by legal fiction and can only act through its legitimate representatives 4. Both having possessed a personality separate and distinct from the person composing it 5. Both are subject to the same corporate income tax rates subject to the provisions of NIRC. Distinctions of Corp and Partnership
2 Governing law e g a Creation
Corporation Corporation Code Operation of law
Partnership Civil Code agreement
Formation Purpose Exposure liability Term Birth
Transfer Interest Succession Management Dissolution
At least 5 For profit or not to Stockholders are liable to the extent of their contributions 50 years subject to extension Upon issuance of Cert, of Incorporation of Even without
At least 2 For profit General Partners are liable By agreement Meeting of the minds of the partners
With the consent of partners allowed Not allowed BOD/BOT Partners W/ the consent of Even w/o consent of state state
Classification of Corporations 1. Stock Corporations – corp. w/c have capital stock divided into shares and are authorized to distribute to holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. 2. Non-Stock Corporations – corp. with no capital stock and where no part of its income is distributable to its members, trustees or officers subject to the provisions of the Code on Dissolution. Provided that, any profit obtained incident to its operation shall whenever necessary or proper, be used for the furtherance of the corp. Other Classifications: 1. Corporation Sole – a series of successive persons holding an office with continuous legal personality. Ex. Holders of monarchial or ecclesiastical positions 2. Corporation aggregate – corp. made up of number of individuals. 3. Ecclesiastical Corp. – corp. organized for spiritual purposes or for the administration of property for religious purposes. Known as Religious Corp. 4. Lay Corp. – corp. made up of laypersons and existing for business or charitable purposes 5. Eleemosynary corp. – charitable corporation dedicated to benevolent purposes 6. Civil Corp. – any corp. other than a charitable or religious corp. 7. Domestic Corp - organized and chartered chartered under the laws of the state 8. Foreign Corp - organized and chartered under the laws of another state, government or country. 9. Close Corp - stock isis not freely traded and is held by only few shareholders (w/in family). Also termed closely held corp. 10. Open Corp - allows general public to to become stockholders stockholders or members
Corporation Code or BP 68
11. 12. 13.
14. 15. 16.
17. 18. 19. 20. 21. 22. 23. 24. 25.
Parent Corp - has a controlling interest in another corp. corp. through ownership of more than one-half voting stock Subsidiary Corp - a parent corp has controlling controlling shares Affiliated Corp - one related to another by owning owning or being owned by common management or by a long term lease of its properties or other control device. Private Corp - founded by and and composed of ind. Principally for non-public purpose Public Corp - whose shares are traded to among the general public Corporation by Estoppel - a business that is deemed deemed by law as rd a corporation because a 3 party dealt with the business as if it were a corp., thus preventing a the 3 rd party from holding the shareholder or officer of corp individually liable. Corp by prescription prescription - lacking a charter, has acquired its its corporate status through a long period of operating as a corp. Dormant corp. – inactive corp. legal but is not operating. Authority may be revoked or suspended. Joint venture Corp - joined with one or more individuals or corporations to accomplish some specified project Quasi Corp. – entity that exercise some functions of corp. but has not been granted corporate status. With limited authority. Quasi-public Quasi-public Corp – for profit corp providing essential public service Trading Corp - whose business involve involve buying and selling of goods Tramp Corp - chartered in a state where it does not conduct business. De Jure Corp - formed in accordance with all applicable laws and recognized as corp. for liability purposes. De Facto Corp – incompletely formed corp. whose existence is a defense to personal liability of directors, shareholders or officers who in good faith thought they were operating the business as a duly formed corp.
De Facto Corporations – the due incorporation of any corp. claiming in good faith to be a corp. under the code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private sui to which such corp. may be a party. Such inquiry may be made by the Solicitor General in a quo warranto w arranto proceeding (Sec. 20). Distinctions between De Facto and De Jure Corp.
Creation Manner incorporation Compliance 3 e g a
De Jure In accordance w/ the law of No defect in the incorporation Strictly substantially complied w/
De Facto Colorable compliance w/ the law Defective in the manner of incorporation or An attempt in good faith to incorporate the based on the reqt’s of
Power
reqt’s of law incorporation Can exercise power May also exercise under section 36 such powers since it may not be attacked collaterally.
Requisites of a De facto Corp 1. Presence of the valid law on the basis of w/c the corp. may be incorporated 2. Attempt in good faith to incorporate or organize a corp. o n the basis of that valid law 3. An actual exercise of corporate powers 4. Issuance of cert. of incorporation Nature and Purpose of the Action (Quo Warranto) – means by “what authority” and the object is to determine the right of the person to the use or exercise of a franchise or office and to oust the holder from its enjoyment if his claim is not well founded, or if he has forfeited his right to enjoy the office. Examples of De Facto Corporations: 1. Identical or confusing deceptive corporate name 2. Failure to state purpose in AOI 3. Place of principal office was not mentioned in AOI 4. Majority of incorporators are not residents of the Phil 5. Number of directors is less than 5 6. Treasurers affidavit was not under oath Nationality of Corporation 1. Incorporation Test – the country where it was incorporated (controlling in the Philippine jurisdiction) 2. Control Test 3. Place of Principal business test
Nationality of the corporation is determined under laws it was formed, organized or created.
Control Test - the nationality of a private corporation is determined by the character or citizenship of its controlling stockholders. Grandfather Rule - - this is applied only if there is an issue on the nationality of the investor corporation. The nationality of a corporation with alien equity based on the percentage of capital owned by Filipino Citizens can be determined through this rule. “Shares belonging to corporations or partnerships is less than 60% of the capital of which is owned by Filipino citizens shall be considered as with Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as with Philippine nationality.”
Corporation Code or BP 68
Corporate Juridical Personality – a corporation has personality separate and distinct from those of the stockholders, directors, or officers, such separate and distinct personality is merely a fiction created by law for the sake of convenience and to promote the ends of justice. If the corporate entity is being used as follows then the corporate juridical personality shall be disregarded: cloak or cover for fraud or illegality; as a justification for a wrong; as an alter ego; an adjunct; a business conduit for the sole benefit of stockholders Doctrine of Separate Juridical Personality 1. As to obligations The liability of the corporations is not the liability of the stockholders or vice versa. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. 3 Basic instances when doctrine of the piercing the corporate veil applies: a. When the separate and distinct corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing obligation. b. In fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or c. Is used in alter ego cases, i.e, where a corporation is essentially farce, since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corp. 2. As to action An action filed against the corporation is not an action filed against the stockholders or vice versa unless they exceeded their authority. 3. As to property The property of corporation is not the personal property of the stockholders or vice versa. A property belonging to a corporation cannot be attached to satisfy the debt of a stockholder and vice versa, the latter having only an indirect interests in the assets and business of the former. 4. As to parent-subsidiary The business transaction of the parent corporation is not the business 4 e g transaction of the subsidiary corporation or vice versa. Further any a
claim that may be filed by the parent corporation is not the claim filed by the subsidiary corporation or vice versa. 5. As to crime A corporation cannot be imprisoned unlike natural persons. Section 144 of the Corporation Coe provides for the imposable fine or imprisonment of the violations of the code. If corporation committed such violation, after notice and hearing the corporation may be dissolved in appropriate proceedings before the SEC. Section 144 may apply in a violation of a stockholder or member’s right to inspect the corporate books/records as provided in Sec. 74. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment. However, a corporation may be charged and prosecuted for a crime if the imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted, and if fined guilty may be fined. The corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. The doctrine of piercing the corporate veil should be done with caution. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Solidary Liability of Corporate Directors and Officers General Rule: A corporate officer cannot be held liable for acts done in his official capacity because a corporation, by legal fiction, has a personality separate and distinct from its officers, stockholders and members. Exception: They are solidary liable if bad faith or malice exists. Liability for Torts and Crimes General Rule: A corporate officer cannot be held liable for acts done in his official capacity because a corporation, by legal fiction, has a personality separate and distinct from its officers, stockholders and members. Exception: To pierce this fictional veil, it must be shown that the corporate personality was used to perpetuate fraud or an illegal act, or to evade an existing obligation, or to confuse a legitimate issue. Corporation and its directors, trustees or officer may be solidary liable when the directors, trustees or officer: 1. Assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons. 2. He consents to the issuance of watered down stocks or who , having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;
Corporation Code or BP 68
3. 4.
Agrees to hold himself personally and solidary liable with the corporation He is made by a specific provision of law personally answerable for his corporate action.
Note that these are also the grounds for the application of Doctrine of Piercing the veil. Recovery of Damages – a corporation cannot suffer or be entitled to moral damages. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows and grieves of life – all of which cannot be suffered by an artificial, juridical person. As a juridical person it is not entitled to moral damages because unlike a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. Exception: A corporation may have good reputation which, if besmirched may also be ground for the award of moral damages. o When the corporation has a reputation that is debased, o Resulting in its humiliation in the business plan o Essential to prove the existence of the factual basis of the damage and its causal relation to petitioner’s act. While the Court may allow grant of moral damages to corporations, it is not automatically granted; there must still be proof of the existence of the factual basis of the damage and its causal relation to the defendant’s acts. This is so because moral damages, though incapable of pecuniary estimation, are in the category of an award designed to compensate the claimant for actual injury suffered and not to impose a penalty on a wrongdoer.
Bad Faith – imports a dishonest purpose or some moral obliquity and conscious wrongdoing. It means a breach of a known duty through some ill motive or interest. It partake the nature of fraud. Negligence – characterized by the want of even slight care, acting or omitting to act in a situation where there is a duty to act, not inadvertently but willfully and intentionally with a conscious indifference to consequences insofar as other persons may be affected and must be established by clear and convincing evidence. Elements of the application of the Doctrine of piercing the veil of corporate fiction: 1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect of the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own. 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of the plaintiff’s legal rights 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. Veil of separate corporate personality may be lifted when it is used as a: 1. Shield to confuse legitimate issues 2. Where lifting the veil is necessary to achieve equity or 3. For the protection of creditors Three areas where piercing of the veil may be applied: 1. Defeat of public convenience 2. Fraud cases 3. Alter ego cases Chapter II: Incorporations and Organization
Doctrine of Piercing the Veil Grounds for the application of the Doctrine: 1. Assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons. 2. He consents to the issuance of watered down stocks or who , having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 3. Agrees to hold himself personally and solidary liable with the corporation 4. He is made by a specific provision of law personally answerable for his corporate action. 5 e g a
Corporators and Incorporators, Stockholders and Members Corporators – those who compose a corporation, whether as stockholders or as members Incorporators – those stockholders or members mentioned in the AOI as originally forming and composing the corp and who are signatories thereof Stockholder or Shareholders – Corporators in a stock corp Members – Corporators in a non-stock corp Incorporators continue to be stockholders of a corporation, unless, subsequent to the incorporation, they have validly transferred their subscriptions to the real parties in interest.
Corporation Code or BP 68
Theory of Multiple Corporate Personalities 1. Incorporator, corporator and a director trustee/stockholder/member at the same time 2. Corporator and stockholder at the same time 3. Corporator, member and a trustee at the same time 4. Corporator and a stockholder at the same time 5. Corporator and a member only at the same time
or
An incorporator may always be a corporator be it a stock or non –stock corp. A corporator may or may not be an incorporator at the same time A corporator may only become a stockholder or a member after the incorporation AOI is a public document that preceded that precedes an incorporation
2.
3.
Number and Qualifications of Incorporators 1. Any number of natural person not less than 5 but not more than 15 2. All of legal age 3. A majority of whom are residents of the Philippines 4. May form a private corp for any lawful purpose or purposes 5. Each of the incorporators of a stock corp must own or be a subscriber of at least 1 share of the capital stock of the corp (Sec 10) 6. Duly established cooperatives and corporations primarily organized to hold equities in rural banks may organize rural bank (Section 4). Note that a juridical person, a corporation for one cannot be an incorporator, as incorporators must sign the AOI. However a corporation may become a corporator either as a stockholder or a member in another corp. Incorporator must at least own 1 share of the stock of the corp. Aliens and non-residents may be incorporators as section 10 only requires that majority are residents of the Philippines. No citizenship requirement. SEC Opinion, July 18, 1989 and 1993 provides that corporations cannot be incorporators because they are not natural persons, corporation may nevertheless, be original subscribers to the shares of a corp and such corp may appear in the AOI as subscribers and not as incorporator. Philippine Citizenship Requirements on certain Corporations for stock ownership 1. 100% Stock ownership a. Mass media b. Corp in retail trade 6 e g c. Rural banks a
4.
d. Corp engaged in rice and corn industry e. Security, watchman or detective agencies 75% stock ownership a. Corp in cottage industries b. Corp in recruitment and placement workers, locally or abroad 70% stock ownership a. Pawnshops b. Savings and loan associations 60% stock ownership a. Corp for EDU of natural resources b. Public utilities c. Educational Institutions, charitable org d. Corp in coastwise shipping e. CAC f. Financing companies g. Atomic energy corp h. Banking corp
Minimum Capital Stock required of stock corporations Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law, and subject to the provisions of the following section. (Sec 12) 25%-25% Rule – pertains to the amount of capital stock subscribed and be paid for incorporation purposes. It states that: 25% of the ACS as stated in AOI must be subscribed at the time of incorporation At least 25% of the total subscription must be paid upon subscription The balance payable on a date or date fixed in the contract of subscription w/o need of call, or in the absence of a fixed date or dates, upon call or payment by the board of directors, and In no case shall the paid-up capital be less than 5,000 pesos (Section 13). Paid-up capital is merely seed money to start a corporation or business entity. It merely represented the capitalization upon incorporation. The equity portion cannot be equated to the viability of a business concern, for the best test is the working capital which consists of the liquid assets of a given business relating to the nature of the business concern.
Definition of Terms Capital stock – total number of shares of stock that a corp may issue under its charter or AOI, including both common and preferred stock. Capital – aggregate sum subscribed and paid in or secured to be paid in, by the shareholders, with the addition of all gains or profits realized
Corporation Code or BP 68
in the use and investment of those sums, or, if losses have been incurred, then it is the residue after deducting such losses. Subscribed Capital Stock – part of capital stock subscribed by the subscribers whether paid or unpaid. Paid-up capital stock – part of the subscribed capital which has been paid to the corp. Stated capital – capital with which the corp issuing shares w/o par value begins business, increased by any net addition and decrease by net deductions therefrom. Unissued Capital Stock – Portion of capital stock that is not subscribed or issued Legal Capital – amount equal to the aggregate par value of all the par value share and/or issued value of all the no par value shares subscribed by the subscribers. Premium or excess are not considered part of legal capital. Outstanding capital stock – total shares of stocks issued to subscribers or stockholders, whether or not fully or partially paid (as long as there is a binding subscription agreement) except treasury shares (Sec. 137). The code did not distinguish between common and preferred shares nor exclude either class of shares, in determining the OCS of the corporation. Incorporation and Organization Incorporation – the forming of a new corp that is being a legal entity and is recognized by the law. Sequence of the formation of the corporation: 1. Promotion 2. Incorporation under the Code 3. Start of Business 4. Going – concern stage Promoter – a person who acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefore. Liability of Promoter General Rule: A corp should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business. Exception: Contracts made by promoters of a corp on its behalf may be adopted, accepted or ratified by the corporation when organized 7 e g a Liability of Corporation for Promoter’s Contracts
Contracts by the promoter for and in behalf of a proposed corporation generally bind only him, subject to and to the extent of his representations and not the corporation because a corp, until organized, has no being, franchises or faculties. Subscription Contract (Section 60) Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. o Defined as any contract for the acquisition of unissued stocks in an existing corp or a corp still to be formed.
Stock Subscription - is a subscription by which the subscriber agrees to take a certain number of shares of the capital stock of a corp, paying for the same or expressly or impliedly promising to pay for the same.
After incorporation, one may become a shareholder by subscription or by purchasing stock directly from the corp or from individual owners thereof.
Pre-incorporation Subscription Agreements 1. A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, 2. unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: 3. Provided, that no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission. Consideration for Stocks - Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
Corporation Code or BP 68
Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. Articles of Incorporation – contents of AOI bind the corp and its stockholders. Its contents cannot be disregarded considering that it was the basic document which legally triggered the creation of the corp. It defines the charter of the corp and the contractual relationship between the state and the corp, the stockholders and the state, and between the corp and its stockholders. SEC registration requirement a. Stock Corporation Basic Requirements 1. Name verification Slip 2. AOI and BL 3. Treasurers affidavit 4. Joint affidavit of two incorporators undertaking to change or use corporate name or it acquired a prior right to use the name b.
Non- Stock Basic Requirements 1. Name verification Slip 2. AOI and BL 3. Joint affidavit of two incorporators undertaking to change or use corporate name or it acquired a prior right to use the name 4. List of members certified by corp sec unless stated already in AOI 5. List of contributors or donor and the amounts contributed or donated certified by the Treasurer. i. No fixed amount for contribution but only such reasonable amount except in case of foundations which requires at least 1 M.
Steps in the Incorporation 8 e g 1. Verification of the proposed name (Sec. 18) a
2. 3. 4. 5.
Filing of AOI and BL (Sec 14, 15 and 46) Filing of Treasurer’s Affidavit ( Sec 12, 13 and 14) Payment of filing and application fees (Sec 139) Issuance of Certificate of Incorporation (Sec. 19)
Contents of the Articles of Incorporation - All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such; 3. The place where the principal office of the corporation is to be located, which must be within the Philippines; 4. The term for which the corporation is to exist; 5. The names, nationalities and residences of the incorporators; 6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); 7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; 9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and 10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five (25%) percent of the authorized capital stock of the corporation has been subscribed, and at least twenty-five (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five
Corporation Code or BP 68
(25%) percent of the said subscription, such paid-up capital being not less than five thousand (P5,000.00) pesos.
Originated in the field of trade mark law Its application has been extended to corporate names since the right to use a corporate name to the exclusion of others is based upon the same principle which underlines the right to use a particular trademark or tradename. It provides that a word or phrase originally incapable of exclusive appropriation with reference to an article in the market, because geographical or otherwise descriptive might nevertheless have been used so long and so exclusively by one producer with the reference to this article that, in that trade and to that group of the purchasing public, the word or phrase has come to mean that the article was his produce.
Forms of Articles of Incorporation (Check form as provided in Section 15) Significance of AOI A CONDITION PRECEDENT before incorporation A public document consisting of the corp basis terms and expressions Its filing is mandatory in character before it can secure the imprimatur of the state Must be written in the official languages of this jurisdiction o Filipino o English o Spanish and Arabic are optional Doctrine of Substantial Compliance – once there is substantial compliance with the requirement of the code, the general law authorizing the creation of the corp, then it becomes ministerial on the part of SEC to approve the registration of the proposed corp, because as to the proposed corp, it becomes now a matter of right. Contents of the Articles of Incorporation I. Name of the Corporation No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is a. identical or b. deceptively or c. confusingly similar to that of any existing corporation or to any other name already protected by law or d. is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. (Section 18) SEC Memorandum Circular No. 14-00, October 24, 2000 Revised guidelines in the approval of Corporate and Partnership names require that: I. A corporate name shall not be identical, misleading or confusingly similar to one already registered by another corporation with the Commission II. If the proposed name is similar to the name of a registered firm the proposed name must contain at least one distinctive word different from the name of the company already registered. The right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption. 9 e g a Doctrine of Secondary Meaning
SEC Memorandum Circular Number 5 Series of 2008 provides guidelines and procedures in adopting corporate names (Check pages 83-88 of the book) Purpose or Purposes – the AOI must state the specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such (Section 14(2).
II.
Section 17 of the code empowers SEC to reject AOI or disapprove any amendment thereto if the same is not in compliance with the requirements of the code. III.
Principal Office – must be within the Philippines 1. It is a resident of the place where its principal office is located
IV. 1.
Terms of Existence A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission. (Section 11).
2.
3.
V.
Incorporators – names, nationalities and residences of the incorporators must be stated
Section 10 requires that:
Corporation Code or BP 68
1. 2. 3. 4.
Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of s Stock Corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation.
X.
Amount contributed by ach
Other Matters – other matters not inconsistent with the law and which the incorporators may deem necessary and convenient.
Section 27 provides that: No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.
Grounds when AOI or amendment may be rejected or disapproved (Section 17) The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval:
Directors or Trustees – not less than 5 but not more than 15 must be stated in the AOI
1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein;
A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held o f record by not more than a specified number of persons, not exceeding twenty (20); (Sec 96)
2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations;
VI.
VII.
Acting Directors and Trustees – names and nationalities of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with the code
Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees, and officers elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the Securities and Exchange Commission. (Sec 26) VIII.
0 IX. 1 e g a
3.
Stock Corporation – the following must be stated 1. Amount of its ACS in lawful money of the Philippines 2. Number of shares into which it is divided 3. In case of par value shares, the par value of each 4. Original subscribers 5. Amount subscribed and paid by each subscription 6. If some shares are w/o par value, such must be stated Non Stock Corporation – the following must be stated 1. Amount of its capital 2. Contributors
3. That the Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false; 4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. (n) Non-amendable items 1. Names, nationalities and residences of incorporators and directors of corp 2. Names, nationalities and residences of subscribers and treasures elected Amendment of Articles of Incorporation 1. Unless otherwise prescribed by this Code or by special law, 2. and for legitimate purposes, 3. any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding
Corporation Code or BP 68
4.
5.
6.
capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. Such articles, as amended shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.
Commencement of Corporate Existence (Section 19) 1. A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; 2. and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law Certificate of Incorporation – evidence of the corporate existence and signifies its live birth. The date appearing on the certificate of incorporation gives the corporation legitimate existence and not its actual issuance or delivery. Effects of Non-use of Corporate Charter and Continuous inoperation of a corporation (Section 22) 1. If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. 2. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. 1 This provision shall not apply if the failure to organize, commence 1 e g the transaction of its businesses or the construction of its works, a
or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission. By-law requirement the government of the corporation, directory in nature subordinate to AOI by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. PD NO. 902-A provides that non-filing of BL is a ground for its suspension or revocation of its COI. Proper notice and hearing is required in this case. No automatic dissolution By –law as to third person Merely are internal in nature as it only affects stockholders, they cannot prejudice or affect third persons, unless they have knowledge of the same. Adoption of By-laws (section 46) 1. Adoption - Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. 2. Voting Requirement - For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of nonstock corporations, shall be necessary. 3. Signature - The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. 4. Certification - A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such bylaws shall be approved and signed by all the incorporators and
Corporation Code or BP 68
submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. Contents of By-Laws (Section 47) Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. Amendments of By-laws (Section 49) 1. Vote of the Board (MBOD+MOCS/MOM) The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. 2. By delegation of the Board (2/3 OCS/M) The owners of two-thirds (2/3) of the outstanding capital stock or two 2thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any 1 e g by-laws or adopt new by-laws: Provided, That any power delegated to a
the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. SEC (Section 139, 141-142) The Securities and Exchange Commission is hereby authorized to collect and receive fees as authorized by law or by rules and regulations promulgated by the Commission (Section 139). Every corporation, domestic or foreign, lawfully doing business in the Philippines shall submit to the Securities and Exchange Commission an annual report of its operations, together with a financial statement of its assets and liabilities, certified by any independent certified public accountant in appropriate cases, covering the preceding fiscal year and such other requirements as the Securities and Exchange Commission may require. Such report shall be submitted within such period as may be prescribed by the Securities and Exchange Commission. (Section 141) All interrogatories propounded by the Securities and Exchange Commission and the answers thereto, as well as the results of any examination made by the Commission or by any other official authorized by law to make an examination of the operations, books and records of any corporation, shall be kept strictly confidential, except insofar as the law may require the same to be made public or where such interrogatories, answers or results are necessary to be presented as evidence before any court. (Section 142). Rule-making power of the SEC (Section 143) The Securities and Exchange Commission shall have the power and authority to implement the provisions of this Code, and to promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers
Chapter III: Capital Affairs
Corporation Code or BP 68
Capital Explained Used to described the capital structure of a corporation It refers to the value of the property or assets of a corporation Capital Subscribed - the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for It is the amount that the corporation receives, inclusive of the premises if any, in consideration of the original issuance of the shares. In the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account. Loosely termed as trust fund
Note that it may also classify its shares for the purpose of insuring compliance w/ constitutional or legal requirements. Requisites: 1. Any if which classes or series of shares may have such rights, privileges or restrictions as may be stated in the AOI 2. Provided, that no share may be deprived of the voting rights except those classified and issued as preferred or redeemable share, unless otherwise provided in the code. 3. Provide, further, that there shall always be a class or series of shares which have completed voting rights. 4. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the AOI
Trust Fund Doctrine – considers the subscribed capital as a trust fund for the payment of debts of the corporation, to which creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of the redeemable shares) without violating this principle. Dividends must never impair the subscribed capital Subscription commitments cannot be condoned or remitted Corporation cannot buy its own shares using the subscribed capital as the considerations
Corporations Mandated to Issue Par Value Shares of Stock 1. Banks 2. Trust companies 3. Insurance companies 4. Public utilities 5. Building and loan associations shall not be permitted to issue no-par value shares of stock
Definition of terms Capital Stock – total # of shares of stock that a corp. may issued under its charter or AOI which include common and preferred stocks Capital – aggregate sum subscribed and paid in, or secured to be paid in by stockholders. It also includes all its gains and profits. If losses have been incurred, it is the residue after deducting such losses. Subscribed Capital Stock – paid or unpaid part of capital stock subscribed Paid-up Capital Stock – paid subscribe capital stock Stated Capital – capital issuing shares w/o par value begins business. May increased or diminished by its net additions or deductions. Unissued Capital Stock – capital stock not subscribed or issued Legal Capital – amount equal to aggregate par value of all the par value shares and/or issued value of all the no par value shares subscribed by the subscribers. Outstanding Capital – total shares of stock which are not fully or partially paid. There must be subscription agreement. Exception, treasury shares (Section 137). The code did not distinguish between common and preferred shares nor exclude either class of shares, in determining the outstanding capital stock. Classification of terms (Section 6) Shares of stock may be divided into: 1. Classes 3 2. Series of share 1 3. Both e g a
Preferred Shares of Stock may be given preference: 1. In the distribution of the assets of the corp in case of liquidation 2. In distribution of dividends 3. Such other preference may be stated in the AOI which are not violative of the provisions of the Code Requisities: 1. Provided that preferred shares of stocks may be issued only with a stated par value 2. The BOD, where authorized in the AOI, may fix the terms and conditions of preferred shares of stock or any series thereof 3. Provided that such terms and conditions shall be effective upon the filing of a certificate thereof with SEC Shares of Capital Stock issued without Par Value 1. Shall be deemed fully paid and non-assessable 2. Holder of such shares shall be liable to the corp or to its creditors Requisites 1. Provided that shares w/o par value may not be issued for a consideration less than the value of 5 pesos per share 2. Provided further that the entire consideration received by the corp for its no-par value shares shall be treated as capital and shall not be available for distribution of dividends Doctrine of Equality of Shares All share shall be equal in all respect to every other share Exception: AOI provide otherwise Voting Power of holders of Non-Voting Shares 1. Amendment of AOI
Corporation Code or BP 68
2. 3. 4. 5. 6. 7. 8.
Adoption and amendment of BL Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property Incurring, creating and increasing bonded indebtedness Increase or decrease of capital stock Merger or consolidations of the corp with another corp or other corp Investment of corp funds in another corp or business in accordance with the code Dissolution of the corp
Except those enumerated above, the vote necessary to approve a particular corporate act as provided in the code shall be deemed to refere only to stocks with voting rights. Shares that may be deprived of voting rights 1. Preferred shares 2. Redeemable share 3. Treasury shares – no voting rights as long as they remain in the treasury (Section 57) 4. Common shares when declared delinquent 5. After the exercise of appraisal rights Restriction on voting rights (Must be in the AOI) Deprivation of voting rights must be categorical If not stated in the AOI, nor absence of the evidence to the contrary, then the corresponding shares will be allowed to exercise voting rights As provided in Section 6, only preferred and redeemable shares may be deprived of voting rights unless provided otherwise. In the absence of provisions in the AOI, denying voting rights to preferred shares, preferred shares have the same voting rights as common shares Preferred shareholders are often excluded from any control that is deprived of the right to vote in the election of directors and on other matters, on the theory that the preferred shareholders are merely investors in the corporation for income in the same manner as bondholders. Common shares cannot be deprived of the right to vote in any corporate meeting and in any provision in the AOI restricting the right of common shareholders to vote is invalid. Capital in Section 11 of Article 12 of the constitution refers to common shares which have voting rights as opposed to preferred shares. Other classification of shares Founders Shares are shares classified in AOI which may: o be given certain rights and privileges not enjoyed by 4 owners of stocks 1 e g a
where the exclusive right to vote and be voted in the election of directors is granted, it must be for a limited period not to exceed 5 years subject to approval of SEC o 5 year period shall commence from the date of the aforesaid approval of SEC (Section 7) Redeemable Shares Shares issued by the corp when expressly so provided in the AOI May be purchased or taken by the corp upon expiration of a fixed period Regardless of existence of the unrestricted retained earnings in the books of corp and upon such other terms and conditions as may be stated in the AOI, which terms and conditions must also be stated in the certificate of stock representing said shares (Section 8) Redeemable shares may be deprived of voting rights Treasury Shares Shares which have been issued and fully paid for, but subsequently reacquired by issuing corp by purchase, redemption, donation or through some lawful means May again be disposed of for a reasonable price fixed by BOD (Sec.9) Have no voting rights as long as they remain in the treasury (Sec 57) May be common or preferred shares of stocks While held in the company treasury, it earns no dividends and has no vote in company affairs. Common stock Entitle the holder to vote in corporate matters, to receive dividends after other claims and dividends have been paid and to share in assets upon liquidation Known as capital stock or ordinary shares Cannot be deprived of voting rights Related provisions are Sections 24, 71 and 83. Common shares may be deprived of voting rights when: 1. Shares are declared delinquent 2. Shareholders have already exercised appraisal rights, in such case voting and dividends right are withheld, o
Par value stock Originally issued for a fixed value derived by dividing the total value of capital stock by the number of shares to be issued Non par stock Issued w/o specific value assigned to it Given a legal or stated value for accounting purposes Deferred stock Whose holders are entitled to dividends only after the corp has met some other specified obligation Non-assessable stock
Corporation Code or BP 68
Owned by a holder whose potential liability is limited to amount paid for the stock Cannot be charged additional funds to pay issuers debts Watered stock Issued w/ a par value greater than the value of corp. assets It is the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value. Non-voting stock No voting rights
Types of preferred shares 1. Cumulative preferred stock – must pay in dividends in full before common shareholders may receive any dividends 2. Non- cumulative preferred stock – does not have to pay dividends that is in arrears 3. Participating preferred stock – holders entitled to receive stated dividends and to share with the common shareholders in any 4. Non-participating preferred stock – does not give the shareholders the right to additional earnings beyond those stated in the contract Issuance of stock certificates No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid (Sec 64). Stocks can be alienated; dividends or fruits derived therefrom can be enjoyed and they can be conveyed, pledged or encumbered. If a stockholder, in a stock corporation, subscribes to a certain number of shares of stock, and he pays only partially, he can be issued the corresponding certificates of stock pertaining to number of shares paid. Subscription is one indivisible whole contract, it cannot be divided into portions so that the stockholder shall not be entitled to a certificate of stock until he has paid the full amount of his subscription. Nature of the Certificate Stock An evidence of a holder’s interest and status in a corporation Written instrument, signed by the proper officer of a corporation stating or acknowledging that the person named in the document is the owner of a designated number of shares of its stock. Prima facie evidence that the holder is a shareholder in a corporation. Paper representative or tangible evidence of the stock itself and of the various interests therein. 5 Certificate is not a stock itself but a merely evidence and is 1 e g not equivalent with ownership a
Expresses the contract between a corp and stockholder
Negotiability Capability of a commercial paper to have its title transferred by indorsement and delivery, or delivery alone, so that the transferee has a rightful claim on it. Negotiability (w/c pertains to commercial paper) differs from assignability (w/c pertains to contracts in general) because an assignee traditionally takes title subject to all equities, and an assignment is not complete w/o notice to the debtor, whereas and indorsee takes free of all equities and w/o notice to the debtor. It must comply with Section 1 of NIL Certificate of Stock is not negotiable Requirements for valid transfer of stocks (Sec 63) 1. The certificate must be signed by the president or VP, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation. 2. Delivery of the certificate is an essential element of its issuance. Delivery must be done by the owner or his attorneyin-fact. No transfer shall be valid except as between parties until the transfer is recorded in the books of corp show ing the names of the parties to the transaction. 3. The par value, as to par value shares, or the full subscription as to no par value shares, must first be fully paid 4. Original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from a stockholder. Shares of stock Considered personal property, they do not represent the property of the corporation. It only typifies an aliquot part of the corp property, or the rights to share in its proceeds to the extent when disturbed according to law and equity, but its holder is not the owner of any part of the capital of the corp Certificate of stock and transfer of shares (Section 63) 1. Capital stock of stock corp shall be divided into shares for w/c certificates signed by the president or VP, countersigned by the secretary or assistant secretary, and sealed with the seal of the corp shall be issued in accordance with the bylaws. 2. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. 3. No transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the corp showing the names of the parties to transaction, the date of the transfer,
Corporation Code or BP 68
the number of the certificate or certificates and the number of shares transferred. 4. No share of stock against w/c the corp holds any unpaid claim shall be transferable in the books of the corp. Lost or destroyed certificates; Procedure shall be followed for the issuance 1. Affidavit of loss 2. Publication once a week in 3 consecutive weeks 3. No Contest Scenario 4. Cancellation in the books and issuance of new certificate 5. Bond 6. Contest – issuance of the certificate is suspended until the final decision by the court 7. Exception: fraud, bad faith or negligence (Section 73) Liability to the corporation for the interest of unpaid subscription (Section 66) Subscribers for stock shall pay to the corp interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interests is fixed in the by-laws, such rate shall be deemed to be the legal rate. Liability to the Creditor of the Corporation on the Unpaid Subscription Subscription to the capital stock of a corp 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 debts. If these funds which ought to be fully subscribed by the stockholders were not paid or remain unpaid subscription of the corp then the creditors have no other recourse to collect from the corp its liability Stockholder may be sued directly by creditors to the extent of their unpaid subscriptions to the corp. Corp has no power to release a subscription or its capital stock, w/o valuable consideration for such releases, and as against creditors, a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the charter or this code. Unpaid creditors may satisfy its claim from unpaid subscriptions; stockholders must prove full payment of their subscriptions. Liability of stockholders for corporate debts is up to the extent of their unpaid subscription.
he keeps the stock and transfer book and makes proper and necessary entries thereon. Interest on Unpaid Subscription (Section 66) Subscribers for stock shall pay to the corp interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the bylaws, such rate shall be deemed to be the legal rate Trust fund doctrine – is a rule that the property of a corporation is a trust fund for the payment of creditors, but such property can be called a trust fund “only by way of analogy or metaphor.” As between the corporation itself and its creditors and stockholders its assets are in equity a fund for the payment of its debts. Dividends – profits, payment or return to the stockholders for their investment Action to recover delinquent stock (Section 69) Must be commenced by filing of complaint w /in 6 months from the date of sale which is governed by Section 68 Stock dividends – the amount that the corp transfers from its surplus profit account to its capital account, that is, the amount the stock dividends represent is equivalent to the value paid for its original issuance. Chapter 4: Corporate Powers Except for the powers conferred in the Code and those that are implied by are incidental to its existence, a corporation has no powers Corporate powers are exercised through its BOD or its duly authorized officers and agents. Its power to sue and be sued is lodged to the BOD. The general rule is that the power to bind a corp by contract lies with its BOD or BOT, but this power may either expressly or impliedly be delegated to other officers or agents of the corp. Exception is the binding of corporation by the employment of such agent and employees as are usual and necessary in the conduct of such business. But the contracts of employment must be reasonable. o Requisites Existence of authority w/c could be established in the: Course of business Usage and practices Knowledge of BOD or by presumption from acts of recognition
Officer to make entries (Section 74) 6 In the absence of any provision to the contrary, the corporate secretary is the custodian of the corporate affairs. Corollary, 1 e g a
Corporation Code or BP 68
Corporate powers and capacity 1. To sue and be sued in its corporate name 2. Of succession by its corporate name for the period of time stated in the AOI and Cert of Inc. 3. Adopt and use corp seal 4. Amend its AOI in accordance w/ the provisions of the code 5. Adopt by-laws, not contrary to law, morals or public policy and to amend or repeal the same in accordance with the code 6. In case of stock corp, to issue or sell stocks to subscribers and to sell treasury stocks in accordance w/ the code, and to admit members to the corp if it be non-stock corp 7. To purchase, receive, take, grant, hold, convey, sell, pledge, mortgage and otherwise deal w/ such real and personal property, including securities and bonds of other corp, as the transaction of lawful business of the corp may reasonably and necessarily require, subject to the limitations prescribed by law and the constitution 8. To enter into merger or consolidation with other corp 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic or similar purposed; provided, that no corp, domestic or foreign shall give donations in aid of any political party or candidate or for purposes of partisan political activity 10. To establish pension, retirement and other plans for the benefit of its directors, trustees, officers and employees 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the AOI. This refers to Implied Powers (Section 36). Donation – an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it (Article 725). Donations to political or coalition of parties (election campaign) (Section 99) Any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election, as amended (Section 99). Classification of corporate powers Express powers – those found or state in the provisions of the Corp. Code. It is categorical, definite and specific. Examples of express powers are Section 36, 37 to 44. May be conferred regardless the bylaws or AOI provide the contrary. Implied powers – powers that are naturally and reasonably necessary to not only exercise but execute as well the express powers of the corp necessary to carry out its purpose. 7Incidental powers – power sanctioned by Section 2 granting the corp 1not only the right of succession, powers, attributes, and property e g a
authorized by law but also those which are incidental to its existence. Preceded by express or implied powers. Other express powers 1. Power to extend or shorten corporate term (Sec. 37) 2. Power to increase or decrease capital stock or incur, create, increase bonded indebtedness (Sec. 38) 3. Power to deny pre-emptive rights (Sec. 39) 4. Power to sell or dispose of corporate assets (Sec. 40) 5. Power to acquire own shares (Sec. 41) 6. Power to invest corporate funds in another corporation or business (Sec. 42) 7. Power to declare dividends (Sec. 43) 8. Power to enter into management contract (Sec. 44) Power to extend or shorten corporate term 1. Vote required – MBOD+2/3 OCS or MBOT+2/3 M 2. Ratification – Stockholders representing at least 2/3 of OCS or at least 2/3 members in case of non-stock corp. 3. Notice 4. Appraisal right (Sec. 81) – in case of extension of corporate o, any dissenting stockholder may exercise his appraisal right under the conditions provided this code. (Sec. 37) Doctrine of Relation – will apply, where the delay is due to neglect to the neglect of the officer with whom the certificate is required to be filed, or to a wrongful refusal on his part to receive it. Power to increase or decrease capital stock or incur, create, increase bonded indebtedness 1. Vote required – (MBOD+2/3 OCS); if non-stock – (MBOT + 2/3 M) 2. Written notice 3. Certificate in duplicate signed by a majority of directors of the corp and countersigned by the chairman and the secretary of stockholder’s meeting 4. SEC approval 5. Record Keeping – shall be filed in the office of corp and other shall be filed w the SEC 6. Effectivity – from and after approval of SEC and upon issuance of Certificate 7. Treasurer’s affidavit 8. Protection to Creditors 9. Bond Power to deny pre-emptive rights – covers only shares that are issued out of new shares resulting from the increase in corp capital stock those existing unsubscribed shares. It extends to all issues or deposition of shares of any class. It is so broad enough to cover not only issues but also disposition of shares. Hence, the rights cover not only new shares but even old shares because of the term “disposition.”
Corporation Code or BP 68
Section 102, preemptive right of stockholders in close corp shall extend to all stocks to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the AOI provide otherwise. The coverage is clear and extends to re-issuance even treasury shares. 1. Entitled: Section 102 2. Exception: Section 39 Power to sell or dispose of corporate assets 1. Vote required – MBOD + 2/3 OCS or MBOT or 2/3 M 2. Notice 3. Appraisal Right 4. Substantially all 5. Power to abandon Power to acquire own shares 1. Power to purchase or acquire its own shares 2. For a legitimate corporate purposed or purposes 3. The corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired. Including but not limited to the ff. cases: a. To eliminate fractional shares arising out of stock dividends b. To collect or compromise an indebtedness to the corp, arising out of unpaid subscription, in a delinquency sale and to purchase delinquent shares sold during said sale c. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of the code (Sec. 41). Elimination of fractional shares – in cases of declaration of stock dividends, it may result to fractional shares. Power to invest funds in another corporation or business – subject to the provisions of the code, a private corp may invest its funds. 1. Purpose – any other purpose other than its primary purpose 2. Vote required – MBOD+2/3 OCS or MBOT +2/3 M 3. Written Notice 4. Pre-emptive right 5. Exception to the approval of the stockholders – Section 42 Power to declare dividends Dividend – a portion of company’s earnings or profits distributed pro rata to its shareholders, usually in the form of cash or additional shares. Stock Dividend – is one paid in stock expressed as a % of the # of shares already held by the shareholder 8 1 Other forms of dividends e g a
1. 2. 3. 4.
Property dividend – dividend paid in the form of property rather than cash Bond Dividend – a dividend in which a shareholder receives a bond instead of a scrip, property or money Cash Dividend – dividend paid to shareholders in form of money Scrip Dividend – dividend paid in cert. entitling the holder to ownership of capital stock to be issued in the future. Known as liability dividend due to poor cash flow.
Related provisions are Section 72 and Section 43 (please read the provisions). General Rule: dividends belong to the persons who are the owners of the stock at the time they are declared Dividend is considered parcel of the mass of corporate property until declared and theretofore incident to and parcel of the stock up to the time it is declared; and before its declaration, will pass with the sale or devise of the stock. It is define as a corporate profit set aside, declared and ordered by the directors to be paid to the stockholder on demand or at a fixed time. Until the dividend is declared, these corporate profits belong to the corporation, not to stockholders, and are liable for corporate indebtedness. BOD may declare dividends: 1. Vote required - (MBOD) 2. Source – out of the unrestricted earnings a. Unrestricted earnings – pertains to income of the corp not appropriated for specific undertaking or purpose. 3. Payments – payable in cash, property or in stock 4. Delinquent Stock 5. Stock dividends voting requirement – MBOD + 2/3 OCS 6. Prohibition from returning surplus profits in excess of 100% of their paid- up capital except: a. When justified by definite corporate expansion projects or programs approved by the BOD b. When the Corp is prohibited under any loan agreement w/ any financial institution or creditor, whether local or foreign, from declaring dividends w/o its/his consent and such consent has not yet been secured c. When it can be clearly shown that such retention is necessary under special circumstances, obtaining in the corp such as when there is need for special reserve for probable contingencies (Section 43). Power to enter into management contract – management contract is based on the theory that a corporation may likewise managed by other corporation.
Corporation Code or BP 68
Management Contract – refers to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation. No corp shall conclude a management contract with another corp unless such contract shall have been: 1. Vote required – MBOD + MS or MM 2. Additional vote – 2/3 OCS or 2/3 M 3. Period – 5 years (Sec. 44) Summary of the voting requirement Power Voting requirements extend or shorten corporate term MBOD or T + 2/3 OCS or M Increase or decrease capital MBOD + 2/3 OCS stock or increase or decrease debt Deny pre-emptive rights If provided by AOI Sell or dispose corp assets MBOD or T + 2/3 OCS or M Acquire own shares BOD Invest corp funds in another corp MBOD or T + 2/3 OCS or M Declare dividends Sec 43 Cash dividend MBOD Stock dividend MBOD+2/3 OCS Enter management contracts MBOD+T +MS or M Ultra vires acts – No corp under the code shall possess or exercise any corporate powers except those conferred by this code or by its AOI ad except such necessary or incidental to the exercise of the powers conferred (Section 45). Corporation may only exercise powers conferred by: 1. Corp code 2. AOI and BL 3. Necessary Powers 4. Incidental Powers Beyond this 4 conferred powers action may fall under ultra vires acts. Ultra Vires – means unauthorized; beyond the scope of power or granted by the corporate powers. Note that plea of ultra vires will not be allowed to prevail against a corporation, when it will not advance justice. Contracts ‘intra vires’ entered into by the BOD are binding upon the corp and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights of the minority, as when plaintiffs aver that the defendants have concluded a transaction among themselves as will result in serious injury to the plaintiff’s stockholders. Status of ultra vires acts – should be distinguished from illegal act. 9Acts which are merely ultra vires are not illegal and may be ratified by 1 e the stockholders of the corp. g a
Requisites for the ratification of ultra vires 1. The acts have been ratified by all stockholders in a resolution 2. Act to be ratified has been executed and consummated already 3. No creditors are prejudices of if affected, must have given conformity 4. Rights of the state and the public are not involved or affected 5. Act to be ratified must be merely voidable and not illegal or void ab initio. Power of corporate officers General Rule: in the absence of authority from the BOD, no person, not even its officers, can validly bind a corp. The responsibility and the power to decide whether the corp should enter into a contract that will bind a corp are lodged in the BOD. Authority to bind the corp in a corporation may be delegated to agents or representatives. Authority may be actual or apparent. The authority of such individuals to bind the corp is generally derived from law, corporate by-laws or authorization from the board either expressly or impliedly, by habit, custom or acquiescence, in the general course of business. Doctrine of Apparent Authority In the absence of authority from the BOD, no person, not even its officers, can validly bind a corp. However, if it consciously one of its officers or any agent acts within the scope an apparent authority, it will be stopped from denying such officer’s authority. The corporation, when it has knowledge thereof must promptly disaffirm the contract or act and allow the party or third persons to act in belief that it was authorized or has been ratified. Chapter Five: Board of Directors or Trustees The governing body of a corp is its BOD or BOT Unless otherwise provided in the code, corporate powers of all corp formed under the Code shall be exercised, all business conducted and all property of such corp controlled and held by the BOD or BOT (Section 23). BOD is a creation of the stockholders. It occupies a position of trusteeship in relation to the minority of stock. The general principle of agency governs the relation bet the corp and its officers or agents. Ratification – means the principal voluntarily adopts, confirms and gives sanction to some unauthorized act of its agent on its behalf It may be implied or express.
Powers of the BOD or BOT
Corporation Code or BP 68
1. 2. 3.
The corporate powers of all corp formed under the code shall be exercised All business conducted All property of such corp controlled and held by the BOD or BOT to be elected from among the members of the corp, who shall hold office for one year until their successors are elected and qualified
Qualifications of Directors, Trustees or Officers 1. Each director must own at least 1 share of the capital stock of the corp of which he is a director, which share shall stand in his name on the books of the corp 2. Any director who ceases to be the owner of at least 1 share of the capital stock of the corp of which he is a director shall thereby ceases to be a director 3. Trustees of non-stock corp must be members thereof 4. Majority of the directors or trustees of all corp organized under the code must be residents of the Phil (Sec. 23) 5. Must be natural persons 6. Not less than five but not more than 15 7. All of legal age 8. Majority of whom are residents of the phil 9. Must be a private corp 10. For lawful purpose or purposes (Sec.10) Disqualification of Directors 1. When convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years 2. A violation of the code committed w/in 5 years prior to his election or appointment (Section 27) 3. Directors who cease to be owners of at least 1 share as mandated by Section 23. Term defined – the term of the BOD shall only be 1 year until the successor are elected and qualified. Term – the time during which the several incumbents shall succeed one another. Holdover period – that time from the laps of one year from a member’s election to the Board and until his successor’s election and qualification – is not part of the director’s original term of office, nor is it a new term; the holdover periods constitutes part of his tenure. The power of the Corporations BOD emanates emanate from its stockholders. Corporate policies – need not be in writing unless the law requires that such be in some form. 0 Corporate Officers immediately after their election: 2 e g 1. The directors must formally organize by the election of: a
a. b. c.
A president, who shall be a director A treasurer who may or may not be a director A secretary who shall be a resident and citizen of the Phil d. Such other officers as may be provided for in the by-laws Any two or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as a president and treasurer at the same time (Sec 25). Acting Directors (Section 14 par.7) – upon incorporation, incorporators must decide among themselves who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with the code in order to commence the corp business. At all Election of Directors or trustees: 1. There must be present owners of Majority of the OCS, or if non-stock, majority of members entitled to vote: a. In person b. By representative authorized by written proxy 2. Election must be by ballot if requested by any voting or stockholder or member 3. In stock corp, every stockholder entitled to vote shall have the right to vote in person or by proxy: a. The number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corp, or where the by-laws are silent at the time of the election b. Said stockholders may vote such number of shares for as many persons as there are directors to be elected c. He may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal; or d. He may distribute them on the same principle among as many candidates 4. The total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corp multiplied by the whole number of directors to be elected 5. No delinquent stock shall be voted. 6. Unless otherwise provided in the AOI, or in the BL, members of corp w/c have no capital stock may cast as many votes as there are the trustees to be elected but may not cast more than one vote for one candidate 7. Candidates receiving the highest number of votes declared elected 8. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if they are not present or represented by proxy at the
Corporation Code or BP 68
meeting, the owners of a majority of the outstanding capital stock shall, or if there be no capital stock, a majority of the member entitled to vote. (Section 24) Report of election of Directors, Trustees and Officers 1. W/in 30 days after election, the secretary or any other officer of the corp shall submit to the SEC the names and nationalities and residences of the elected Directors, trustees and officers elected. 2. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of the corp, or the director, trustee or officer himself, shall immediately report such fact to the SEC (Sec 26). This is to keep stockholders and the public transacting business with domestic corp properly informed of their organizational status SEC issued the ff. rules: o Filing of GIS within 30 days, no extension shall be allowed except for very justifiable reasons stated in writing by the President, Secretary, Treasurer or other officers which SEC may grant an extension of not more than 10 days. o Should the said officer die, resign or cease to hold office, the corp shall report such with the SEC w/in 15 days o If for justifiable reason, the annual meeting has to be postponed, the company should notify the Commission in writing such postponement. GIS shall state among other the names of the elected officers and directors, together with their corresponding position title. Corporate Officers and Duties Immediately after election the directors must: 1. Election for president(director), treasurer (not necessarily a director), secretary (resident of the Philippines) and other officers provided in the BL. 2. Duties to perform are those enjoined on them by law and by – laws of corp (Section 25) Quorum 1. Quorum for directors or trustees (Majority in the AOI) – Section 25 2. Quorum for Stockholders or Members (Majority of OCS or M) – Section 52 Prohibition on Proxy –directors or trustees cannot attend or vote by a proxy at board meetings (Section 25). Corporate officers – are those officers who are given that character 1either by the corp code or by the corp BL. 2 e g a
Ordinary employees – generally employed not by action of the directors or stockholder but by the managing officer of the corp who determines compensation to be paid to such employees. Jurisdictional Requirement ORDINARY EMPLOYEE CORPORATE OFFICERS
NLRC RTC
As provided in Section 5 of PD NO. 902-A enumerates the cases over which the SEC now the RTC as a special commercial court exercises exclusive jurisdiction, it includes controversies arising out of intra=corporate or partnership relations such as: 1. Between and among stockholders 2. Members or associates 3. Between any or all of them and the corp, partnership, or association of which they are stockholders, members or associates respectively 4. Between such corp, partnership, or association and the state insofar as it concerns their individual franchise or right to exist to such entity 5. Controversies in the election or appointment of directors, trustees, officers, or managers of such corp, partnerships or associations Whether a case involves an intra-corporate controversy to be heard by RTC, the elements are: 1. The status or relationship of parties 2. The nature of the question that is subject of their controversy Office – a creation of the charter of corp Officer – a person elected by the directors or stockholders Removal of directors or trustees – Directors or trustees cannot claim permanent seat otherwise the provision on Section 28 and 29 will be violated 1. Vote required – 2/3 of OCS or 2/3 M 2. At a meeting and notice requirement – Either in a regular or special meeting after previous notice of such propose removal 3. Called by : a. Secretary or President b. On a written demand of stockholders representing minority of OCS c. Written demand of the majority of members for nonstock 4. If there is no secretary or secretary refuse or fail to call or to notify upon demand, the call may be addressed directly to the stockholder or members by any stockholder or members signing the demand 5. Notice – must be published or in a written notice, (notice must constitute time, place and purpose of the meeting)
Corporation Code or BP 68
6.
Cause of Removal a. With cause b. Or w/o cause
Provided that removal w/o cause may not be used to deprive minority stockholders or member of the right of representation to which they may be entitled under Section 24 of the code. (Sec. 28) Vacancies in the office of Directors and Trustees 1. Vacancy in BOD/BOT a. Reason may be other than removal or expiration of the term b. Vote required – Majority of the remaining directors or trustees if it still constitutes quorum c. No quorum scenario – stockholders will fill it in special or regular meeting d. A director or trustee to fill vacancy shall be elected only for the unexpired term of his predecessors 2. Increase in the number of BOD/BOT shall only by: a. An election at a regular or special meeting duly called for that purpose b. In the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. (Section 29) Compensation of Directors – in the absence of any provision in the BL fixing their compensation, the directors shall not receive any compensation. Exception: 1. Reasonable per diems 2. Compensation granted to directors by the vote of stockholders representing MOCS at a regular or special stockholders meeting. Yearly compensation should not exceed 10% of the net income before tax of corp during the preceding year (Sec 30). For non-stock corp – it is regulated by Section 87 of the code. Disloyalty of Directors Requisites: 1. A director by virtue of his office 2. Acquires for himself a business opportunity that belongs to the corp 3. Obtaining profits to the prejudice of such corp He must account to the corp for all profits refunding the same, unless his act has been ratified by a vote of 2/3 OCS. This will apply even if the director risked his own funds in the venture. This is the doctrine of corporate opportunity (Section 34). 2 Business Judgment Rule – questions of policy or of management are 2 e g left solely to the honest decisions of officers and directors of a
corporation, and so long as they act in good faith, their orders are not reviewable by the courts. Liability of the Directors for Watered Stocks – solidary liable to the corporation and its creditors for the difference between the fair value received at the time of the issuance of the stock and the par or issued value of the same upon: 1. Consenting to the issuance of a watered stock 2. Who having knowledge thereof do not express objection in writing and file the same with the corporate secretary (Sec.65) Personal Liabilities may attach to director, trustee and officers when: 1. He assents to patently unlawful acts 2. He consents to the issuance of watered down stocks 3. He agrees to hold himself personally and solidarily liable 4. He is made by a specific provision of law personally answerable for corporate actions. Requisites to hold a director or officer personally liable: 1. Complainant must allege in the complaint that the director or officer assented to the unlawful acts of the corp, or that the officer was guilty of gross negligence or bad faith 2. Complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith. Liability of directors, trustees or officers shall be jointly and severally for damages when they: 1. Willfully and knowingly vote for or assent to patently unlawful acts of the corp 2. Who are guilty of gross negligence or bad faith in directing the affairs of corp 3. Acquire any personal or pecuniary interest in conflict with their duty Liability of trustee – When a director, trustee or officer attempts to acquire or acquire, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. Dealing of Directors, trustees or officers with corporation – A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;
Corporation Code or BP 68
2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in case of an officer, the contract has been previously authorized by the board of directors. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances. (n) Contracts between corporations with interlocking directors Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. (Section 33) Substantial Interest Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. (Section 33) Executive committee. – The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders’ approval is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders. (Section 35) Regular and special meetings of directors or trustees. – Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise. 3Special meetings of the board of directors or trustees may be held at 2any time upon the call of the president or as provided in the by-laws. e g a
Place of Meeting Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. Notice Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly (Section 53). Teleconferencing or videoconferencing – in light of RA 8792 and SEC Memorandum Circular No. 15 Who shall preside at meetings – The president shall preside at all meetings of the directors or trustee as well as of the stockholders or members, unless the by-laws provide otherwise. (Section 54) Chapter 6: Stockholders and Members Stockholders are the owners of the corporation and are basically investors They are to be distinguished from its directors and officers Management of the corp is vested with the BOD unless stockholders are at the same time directors or officers of corp Criminal liable only to acts of corporation if they have knowledge of the criminal act committed and he took part in committing it or failed to prevent it by his inaction How to become a stockholder 1. By subscription during the incorporation 2. By purchasing directly from the corporation 3. By purchasing directly from the individual stockholders 4. Other mode of acquiring properties (e.g donation, exchange, etc.) Fundamental rights of a stockholder 1. Right to vote on matters under Section 6 a. Amendment of the articles of incorporation; b. Adoption and amendment of by-laws; c. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; d. Incurring, creating or increasing bonded indebtedness; e. Increase or decrease of capital stock; f. Merger or consolidation of the corporation with another corporation or other corporations; g. Investment of corporate funds in another corporation or business in accordance with this Code; and h. Dissolution of the corporation.
Corporation Code or BP 68
2. 3. 4. 5.
6. 7. 8.
9. 10. 11. 12. 13. 14. 15. 16.
Right to elect and remove directors (Sec 24 and 28) Right to preemption (Sec 39) Right to adopt and amend BL (Sec 46 and 48) Right to approve certain corporate acts (Sec 37 and 44) a. Power to extend or shorten corporate term b. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness c. Power to deny pre-emptive right. d. Sale or other disposition of assets. e. Power to acquire own shares. f. Power to invest corporate funds in another corporation or business or for any other purpose. g. Power to declare dividends. h. Power to enter into management contract. Rights to dividends (Sec 43) Rights to attend vote in person or by proxy at stockholders meetings (Secs. 50 and 58) Right to compel the calling of meetings of stockholders when for any cause there is no person authorized to call the meeting (Sec.50) Right to enter into voting trust agreement (Section 59) Right to transfer shares and have stocks transferred in the corp books (Sec.63) Right to issuance of certificates of stock or other evidence of stock ownership (Sec. 63) Right to recover stocks unlawfully sold during delinquency sale (Sec.69) Right to inspect corporate books including financial statements (Sec. 74 and 75) Appraisal right/ right to withdraw from the corporation (Section 81) Right to have the corp dissolved voluntarily (Sec. 118 and 119) Right to bring suits
Corporate powers of a stockholders (Exercise by BOD but require voting powers of Stockholders) (Secs 37-44) 1. Power to extend or shorten corporate term 2. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness 3. Power to deny pre-emptive right. 4. Sale or other disposition of assets. 5. Power to acquire own shares. 6. Power to invest corporate funds in another corporation or business or for any other purpose. 7. Power to declare dividends. 8. Power to enter into management contract. The ff corporate acts need a vote or written assent of stockholders MOCS or MOM: 4 1. Adopt BL 2. Enter into management contract with another corp 2 e g 3. Grant compensation to the members of the board a
Stockholders Participation in Management Being owners of the corp their equity and interests are regarded, hence there are corporate affairs that requires their assent. Their right to participate in management is manifested through their 2/3 votes of the majority Proxy – stockholders may vote in all meetings of stockholders or members in 2 ways: 1. In person 2. By proxy Requisites of proxy (Section 58) 1. Proxies shall in writing, signed by the stockholder or member and 2. filed before the scheduled meeting with the corporate secretary. 3. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. These rules are applicable only for the meetings of the stockholders or members. Voting trust (Section 59) One or more stockholders of a stock corporation may: 1. create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares 2. for a period not exceeding five (5) years at any time: 3. Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan. 4. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. 5. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. 6. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. 7. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. 8. The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be
Corporation Code or BP 68
9.
10.
11.
12.
13.
14.
transferable in the same manner and with the same effect as certificates of stock. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of this Code. Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. The voting trustee or trustees may vote by proxy unless the agreement provides otherwise.
Purpose of voting trust To gain control of the corp To assure continuity of management and stability of corp Voting trust – is a trust created by an agreement between a group of stockholders of a corp and the trustee or by a group of identical agreements between individual stockholders and a common trustees, whereby it is provided that for a term of years, or for a period contingent upon a certain event, or until the agreement is terminated, control over the stock owned by such stockholders, either for certain purposes or for all purposes is to be lodged in the trustee, either, either with or without reservation to the owners, or person designated by them, of the power to direct how such control shall be used. Corporate acts requiring stockholders action 1. Stockholders action in general 2. Stockholders action requiring 2/3 votes 3. Stockholders action requiring majority vote 4. Stockholders action requiring all votes Stockholders action requiring 2/3 votes 1. Amendment of the AOI 2. Removal of the directors and trustees 3. Ratification of corporate contract with a director or trustee 4. Ratification of extension or shortening of the corporate term 5 5. Incurring, creating or increasing bonded indebtedness 2 6. Increase or diminution of capital stock e g a
7. 8. 9. 10. 11. 12. 13. 14. 15.
Power to deny pre-emptive rights when shares are issued in good faith Sale or disposition of all substantially all of the assets of the corporation Investment of corporate funds in any other corporations etc. Issuance of stock dividends Approval of management contracts with another corporation with interlocking directors Delegation of the board of the power to amend, repeal or adopt new laws Ratification of merger or consolidation Voluntary dissolution where no creditors are affected Voluntary dissolution where creditors are affected
Stockholder action requiring majority votes 1. Adoption of BL 2. Amendment, repeal and adoption of new BL 3. Revocation of the delegated powers 4. Election of directors 5. Grant of compensation to directors 6. Approval of management contracts with another corp 7. Filling vacancies in the BOD and BOT Stockholders action requiring all votes 1. Ultra vires acts Right to vote A. The right to vote in Stock Corp The right is inherent and incidental to the ownership of corporate stocks Unissued stocks may not be voted or considered in determining whether a quorum is present in a stockholders meeting, or whether a requisite proportion of the stock corp is voted to adopt certain measure or act. Only stock actually issued and outstanding may be voted. B. The right to vote in A Non Stock Corp Voting rights is attached in the membership Members vote in accordance with the law and the bylaws of the corp Each member is entitled to one vote unless so limited, broadened or denied in AOI or BL In determining the quorum for stock corporations is applied by analogy to non-stock corp, only those who are actual members with voting rights should be counted. Section 52 provides that, unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations. C. Effect of death of a member or a shareholder Shareholders may generally transfer their shares
Corporation Code or BP 68
Stock Corp - The executor or administrator duly appointed by the court is vested with legal title to the stock and entitled to vote for it. Until settlement and division is effected, the stocks of the decedent are held by the administrator or executor. Non Stock Corp – members in and all rights arising therefrom are personal and non-transferable, unless the AOI or BL of the corp provide otherwise. Therefore, whether they can transfer shares of deceased stockholders are dependent to the AOI or BL. Termination extinguishes all the rights of a member unless otherwise provided in AOI.
Stockholders right to vote directors or trustees 1. By straight voting 2. By cumulative voting for one candidate 3. By cumulative voting by distribution Straight voting – stockholder may vote such number of shares for as many persons as there are directors to be elected. Cumulative voting for one candidate – stockholders may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number by the number of his shares. Cumulative voting by distribution (Section 24) He may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. “One vote for one candidate.” Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there are not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. Illustration: Federer has 5 shares in RF Corp and there are 10 directors to be elected, as such he is entitled to 50 votes, having 5 shares 6multiplied by the number of 10 directors to be elected. 1. By straight voting – Federer may cast 5 votes for each 10 2 e g candidates a
2. 3.
By cumulative voting for one candidate – he may cast all 50 votes for one candidate By cumulative voting by distribution – he may cast 30 for one candidate and 20 for other candidate
Reason for cumulative voting GR: all share shall be equal in all respects to every other share Exception: unless otherwise stated by the corp code Each share must have proper representation in the management With Cumulative voting, it gives minority stockholders adequate representation to have a say at least or a seat in the Board Proprietary rights 1. Right to dividends 2. Right to appraisal 3. Right to inspect corporate books 4. Right to financial statements 5. Pre-emptive right Rights of unpaid Shares (Section 72) - Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. Right to Dividends The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid (Section 43). Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held (Section 3). Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends (Sec 6). For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers (Sec 87). Right of appraisal – means that a stockholder who dissented and voted against the proposed corporate action, may choose to get out of the corp by demanding payment of the fair market value of his shares.
Corporation Code or BP 68
If there is no buyer, then he has no recourse but to stay with the corp. Exception: a major change in investment
whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen.
Instances of Appraisal Right (Section 81) Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of changing 2. or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, 3. or of extending or shortening the term of corporate existence; 4. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and 5. In case of merger or consolidation. 6. Power to invest corporate funds in another corporation or business or for any other purpose (Sec 42) 7. Any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock (Sec 105)
5. Appraiser’s decision The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (30) days after such award is made.
How Appraisal Right is exercised 1. Written demand in 30 days The appraisal right may be exercised by any stockholder who shall have voted against the proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares: 2. Waiver Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal right. 3. Payment at fair value If the proposed corporate action is implemented or affected, the corporation shall pay to such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. 4. Appraiser If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the 7corporation cannot agree on the fair value of the shares, it shall be 2determined and appraised by three (3) disinterested persons, one of e g a
6. Unrestricted retained earnings requirement Provided, That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment: and Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation. 7. Returns of shares 8. Notation on certificates; rights of transferee Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee. Effect of Demand and Termination of Right From the time of demand for payment of the fair value of a stockholder’s shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, 1. all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this Code, except the right of such stockholder to receive payment of the fair value thereof: 2. Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored. When right to payment ceases (Section 84) No demand for payment under this Title may be withdrawn unless the corporation consents thereto. If, however, such demand for payment is: 1. withdrawn with the consent of the corporation, 2. or if the proposed corporate action is abandoned or rescinded by the corporation 3. or disapproved by the Securities and Exchange Commission where such approval is necessary, or
Corporation Code or BP 68
4.
if the Securities and Exchange Commission determines that such stockholder is not entitled to the appraisal right,
Then the right of said stockholder to be paid the fair value of his shares shall cease, his status as a stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to him. Who bears costs of appraisal (Section 85) The costs and expenses of appraisal shall be borne by the corporation, unless the fair value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the stockholder, in which case they shall be borne by the latter. In the case of an action to recover such fair value, all costs and expenses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was unjustified. Resolutions and minutes resolution is distinct and different from the minutes of the meeting Board resolution is a formal action by a corporate BOD. Ordinarily special and limited applying usually to some special acts or affair of the corp or to some specific person Minutes are brief statements not only of what transpired at a meeting of BOD/BOT but also at an executive committee Right to inspect (Section 74) Based upon their ownership of the assets and property of corp Incident to the ownership corp property Predicated upon the necessity of self-protection Inspection has to be germane to the petitioners interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corp Limitation on the right to inspect corporate books 1. One requesting must not have been guilty of using improperly any information secured through prior examination 2. Or that the person asking for such examination must be acting in good faith and for a legitimate purpose in making his demand Books to kept: stock transfer agent (Section 74) 1. Business records and minutes Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in 8which shall be set forth in detail the time and place of holding the 2meeting, how authorized, the notice given, whether the meeting was e g a
regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. 2. Yeas and nays Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. 3. Protest The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. 4. Right to inspect business records and minutes The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. 5. Liability for refusal Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under S ection 144 of this Code: 6. Refusal based on resolution Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: 7. Defense and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation’s records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. 8. Stock and transfer book Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept: a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment;
Corporation Code or BP 68
a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe.
outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt. Right to vote
9. Right to inspect stock and transfer book The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. 10. License to engage as stock transfer agent No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: 11. Right of stock corp to transfer own shares Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. (51a and 32a; P.B. No. 268.) Right to financial statements (Section 75) Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include 1. a balance sheet as of the end of the last taxable year 2. and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant. However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. Pre-emptive right (Section 39) All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in 9compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the 2 e g approval of the stockholders representing two-thirds (2/3) of the a
Right to vote of pledgor, mortgagors and administrator (Section 55) In case of pledged or mortgaged shares in stock corporations, 1. the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, 2. unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy. Voting in case of joint ownership of stocks (Section 56) In case of shares of stock owned jointly by two or more persons, in order to vote the same, 1. the consent of all the co-owners shall be necessary, 2. unless there is a written proxy, signed by all the coowners, authorizing one or some of them or any other person to vote such share or shares: 3. Provided, That when the shares are owned in an "and/or" capacity by the holders thereof, any one of the joint owners can vote said shares or appoint a proxy therefore. Voting right for treasury shares (Section 57) Treasury shares shall have no voting right as long as such shares remain in the Treasury. Remedial rights 1. Individual suit – whew a stockholder or member is denied the right of inspection, his suit would be individual because the wrong is done to him personally and not to the other stockholders or corporation. 2. Class or representative suit – where the wrong is done to a group of stockholders as where preferred stockholders rights are violated, a class or representative suit will be proper for the protection of all stockholders belonging to the same group 3. Derivative suit – where the acts complained of constitute a wrong to the corporation itself, the cause of action belongs to the corp and not to individual stockholder or member. This is the right of a stockholder to sue on behalf of the corporation. a. Requisites i. Party bringing suit is the shareholder during and at the time of the complaint or
Corporation Code or BP 68
b.
ii. Party has tries to exhaust intra-corporate remedies iii. Cause of action actually devolves from the corporation iv. Derivative suit must be alleged in the complaint Purpose – to allow the stockholder/member to enforce rights which are derivative in nature.
Reasons why direct individual suit are not allowed: It is in conflict with the separate corporate entity principle Prior rights of creditors may be prejudiced In conflict with the duty of management Produce multiplicity of suits Would involve confusion on the recovery of damages Jurisdiction of special commercial courts Removal of corporate officers Venue Obligations of stockholders 1. Liability of the corporation for unpaid subscription Demand Subject to the provisions of the contract of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. Date of payment Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Interest Due Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. 30 day rule If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. 0Effect of delinquency 3 Order of Delinquency sale e g a
The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. Notice and Publication Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. Public auction Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. Stock Transfer The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. Remaining Shares The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. No bidder scenario and the power of the corp to acquire shares Should there be no bidder at the public auction who offers to pay t he full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Treasury shares Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code. When sale may be questioned (Section 69): No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action
