Corporation Code Review

ATENEO LAW LAW SCHOOL 2-D L.T.J.F.

CORPORA CORPOR ATION LAW LAW [DEAN VILLANUEV VILLANU EVA] A] nd 2 Semester S.Y. 2012-2013

CORPORATION LAW REVIEWER I. CONCEPTS

4 Corporate Attributes 1. Artificial Being – juridical juridical capacity to enter into contracts and transactions created by operation 2. Creature of the law – created of law 3. Strong Juridical Personality – has has right of succession and a separate existence 4. Creature of Limited Powers – only only has powers as authorized by law (express, implied and incidental) Tri-Level Tri-Level Existence 1. Aggregation of Assets – assets assets only level 2. Business Enterprise – business business only level 3. Juridical Entity – a a creature of the law

II. NATURE AND ATTRIBUTES

Constitutional Guarantees 1. Due Process and Equal Protection 2. Unreasonable Searches and Seizure NOTES: Corporate officers who are searched in their personal capacity cannot invoke the corporation's Constitutional rights since the latter h as a separate personality from its officers.

A corporation has NO right against selfincrimination since this is a moral right. A corporation, being a creature of the law, has no morals. Corporate Criminal Liability A corporation can only act through it s officers and agents. A crime committed in the name of the corporation is actually committed by the individuals who act for and in behalf of such corporation. A corporation, having no corporal existence, cannot be imprisoned. It cannot have an intent since it has no mind 

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Tri-Level Tri-Level Relationship between 1. Juridical Entity Level – between corporation and the State 2. Intra-corporate Level – between between corporation and its agents, officers, share holders; between shareholders and the corporate directors, officers; between the shareholders 3. Extra-corporate Level – between between the corporation and its employees, its creditors, contracting parties and the dealing public Characteristics of a Corporation vs. a Partnership Corporation Strong Juridical Personality

Partnership Weak Juridical Personality

Centralized Management Mutual Agency Limited Liability of Investors and Officers

Unlimited Liability of Partners

Free Transferability of Shares

Delectus Personae

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Civil Liabilities Arising from Criminal Offenses While corporate officers are held criminally liable for the for violations of the terms of the trust receipts, they cannot be held personally liable for the amount covered where they signed the contract in their official capacity (Consolidated Bank and Trust Corp v CA, 356 SCRA 671) 671) Debts incurred by corporate agents, acting in their official capacity, capacity, are not no t theirs but the direct liability of the corporation. Exception: when the corporate agents and officers contractually agree or stipulate their personal liabilities. 

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Sources: CLV Lectures Villanueva, Cesar, Philippine Cesar, Philippine Corporate Law, Law, Manila: Rex Printing Company, 2010. Ateneo Central Bar Operations, Commercial Law Reviewer , 2007.

ATENEO LAW LAW SCHOOL 2-D L.T.J.F. Anti-Money Laundering Act of 2001 (AMLA) AMLA defines an “Offender” as any person who commits such offenses. o ffenses. If the corporation is the criminal offender, the penalty applies to the responsible officers The offending corporation can be cited as the accused or defendant, but the penalty imposed is the revocation or suspension of its license or franchise 

CORPORA CORPOR ATION LAW LAW [DEAN VILLANUEV VILLANU EVA] A] nd 2 Semester S.Y. 2012-2013 War-time Test – Test – a a form of the Control Test. A corporation is an enemy due to the fact that majority of its shareholders are nationals of an enemy enem y State.

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Entitlement to Moral Damages General Rule: Corporations are not entitled to recover moral damages, being a creature incapable of feeling and having no emotions or senses. Exception: A juridical person may recover moral damages in cases of libel, slander or an y form of defamation under Article 2219 of the Civil Code.

Investment Test – Test – Foreign Foreign Investment Act 1991: Where at least 60% of the voting capital stock is owned by Filipinos, then the corporation is a Philippine national. Grandfather Rule – Rule – The The ownership of the investing corporation is counted in calculating how much capital is controlled by Filipino citizens. This test is applied up to the 2nd level of corporate ownership. Query: Is the Grandfather Rule only used when there is doubt as to the ownership o wnership of a corporation and that the control test is still the default test?

There are conflicting Opinions in this case: While the court may allow the grant of moral damages to corporations, it is not automatically granted since there is a need to prove actual damage suffered (Crystal (Crystal v BPI, 572 SCRA 697 ) Nationality of Corporations Tests of Nationality 1. Place of Incorporation 2. Control 3. War-time Test 4. Investment Test Test (Based on FIA 1991) 5. Grandfather Rule Place of Incorporation – Incorporation – a a corporation is a national of the country under whose laws it is organized. This is the primary mandatory test in peace time. NOTE: a corporation which is 100% Filipino-owned but incorporated abroad is a foreign corporation.

Control Test – Test – a a corporation's nationality is/ determined by the nationality of the majority of the stockholders. Test Test is generally applied in nationalized industries.

DOJ Opinion No. 18, s. 1989: the “Grandfather Rule” … will not apply in cases where the 60-40 Filipino-alien equity ownership … is not in doubt. But the SEC-OGC Opinion No. 10-31 (09 December 2010) seemed to indicate a revival of the Grandfather Rule: that the control test must not be applied in determining if a corporation satisfies the Constitution’s requirements … Philippine citizenship is being unduly attributed to foreign individuals … Thus, applying the control test effectively circumvents the Constitutional mandate … One must not stop until the citizenships of the individual or natural stockholders of layer after layer of investing corporations have been established, the very essence of the Grandfather Rule. Illustration: A 60% Filipino-owned corporation investing in another corporation (principal) that is also 60% Filipino-owned. Assume that the investing corporation comprises of the entire 60% Filipino


ATENEO LAW LAW SCHOOL 2-D L.T.J.F. Anti-Money Laundering Act of 2001 (AMLA) AMLA defines an “Offender” as any person who commits such offenses. o ffenses. If the corporation is the criminal offender, the penalty applies to the responsible officers The offending corporation can be cited as the accused or defendant, but the penalty imposed is the revocation or suspension of its license or franchise 

CORPORA CORPOR ATION LAW LAW [DEAN VILLANUEV VILLANU EVA] A] nd 2 Semester S.Y. 2012-2013 War-time Test – Test – a a form of the Control Test. A corporation is an enemy due to the fact that majority of its shareholders are nationals of an enemy enem y State.

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Entitlement to Moral Damages General Rule: Corporations are not entitled to recover moral damages, being a creature incapable of feeling and having no emotions or senses. Exception: A juridical person may recover moral damages in cases of libel, slander or an y form of defamation under Article 2219 of the Civil Code.

Investment Test – Test – Foreign Foreign Investment Act 1991: Where at least 60% of the voting capital stock is owned by Filipinos, then the corporation is a Philippine national. Grandfather Rule – Rule – The The ownership of the investing corporation is counted in calculating how much capital is controlled by Filipino citizens. This test is applied up to the 2nd level of corporate ownership. Query: Is the Grandfather Rule only used when there is doubt as to the ownership o wnership of a corporation and that the control test is still the default test?

There are conflicting Opinions in this case: While the court may allow the grant of moral damages to corporations, it is not automatically granted since there is a need to prove actual damage suffered (Crystal (Crystal v BPI, 572 SCRA 697 ) Nationality of Corporations Tests of Nationality 1. Place of Incorporation 2. Control 3. War-time Test 4. Investment Test Test (Based on FIA 1991) 5. Grandfather Rule Place of Incorporation – Incorporation – a a corporation is a national of the country under whose laws it is organized. This is the primary mandatory test in peace time. NOTE: a corporation which is 100% Filipino-owned but incorporated abroad is a foreign corporation.

Control Test – Test – a a corporation's nationality is/ determined by the nationality of the majority of the stockholders. Test Test is generally applied in nationalized industries.

DOJ Opinion No. 18, s. 1989: the “Grandfather Rule” … will not apply in cases where the 60-40 Filipino-alien equity ownership … is not in doubt. But the SEC-OGC Opinion No. 10-31 (09 December 2010) seemed to indicate a revival of the Grandfather Rule: that the control test must not be applied in determining if a corporation satisfies the Constitution’s requirements … Philippine citizenship is being unduly attributed to foreign individuals … Thus, applying the control test effectively circumvents the Constitutional mandate … One must not stop until the citizenships of the individual or natural stockholders of layer after layer of investing corporations have been established, the very essence of the Grandfather Rule. Illustration: A 60% Filipino-owned corporation investing in another corporation (principal) that is also 60% Filipino-owned. Assume that the investing corporation comprises of the entire 60% Filipino


ATENEO LAW LAW SCHOOL 2-D L.T.J.F.

CORPORA CORPOR ATION LAW LAW [DEAN VILLANUEV VILLANU EVA] A] nd 2 Semester S.Y. 2012-2013

ownership in the principal corporation Ownership and Status Investing Corp (%) Principal Corp (%) Filipino Ownership of Investing Corp Filipino Ownership of Principal Corp Status

Grandfather Rule Applied Filipino: 60 Foreign: 40 Investing: 60 Foreign: 40 Limited to 60% (0.6 x 0.6) = 0.36 or 36% Disqualified Disqualifi ed

No Grandfather Grandfather Rule Applied Filipino: 60 Foreign: 40 Investing: 60 Foreign: 40 Considered 100% (1 x 0.6) = 0.6 or 60% Qualified

NOTES: The term “capital” refers only to shares of stock stock entitled to vote (common shares and preferred shares entitled to vote) and NOT the total outstanding capital stock (Gamboa (Gamboa v Teves, 652 SCRA 690) 690)

“Effective Control” means outstanding capital stock entitled to vote, coupled with beneficial ownership ( Heirs Heirs of Gamboa v Teves, Teves, GR 176579, 09 Oct 2012) 2012) Control of a corporation is not limited to voting rights of stocks alone but is determined by equity (right to vote + right to receive dividends) SEC Memo Circular 8 (2013)

The SEC gave a new interpretation of the rule on Filipino ownership which pretty much overturned the Gamboa v. Teves Doctrine Teves Doctrine The required percentage of Filipino ownership shall be applied to BOTH: 1. Total number of outstanding o utstanding shares of stock entitled to vote -AND2. Total number of outstanding o utstanding shares of stock whether or not entitled to vote NOTE: If a corporation is incorporated in the Philippines, but its equity is 59% Filipino, it is a

Filipino Corporation (pursuant to the Place of Incorporation Test) Test) but is not qualified to engage in nationalized industries. Nationalized Industries of the 1987 Constitution Industry

Filipino Ownership (%)

Natural Resources

60

Public Utilities

60

Mass Media

100

Advertising

70

NOTE: For nationalized industries, a corporation may be disqualified even if the voting shares are controlled by Filipinos. This scenario is possible when the corporation enters into a transaction enumerated under Sec. 6 of the Corporation Code where in all shares, including non-voting shares are entitled to vote. Such votes of the non-voting shares will be counted in determining the ownership requirements.

Mere ownership of the facilities of a public utility is not prohibited for foreign corporations. What is prohibited is the operation of these facilities to serve the public. What constitutes a public utility is not their ownership but their use to serve the public. (Tatad v Garcia 243 SCRA 436 ) NOTE: A corporation corporation is unlimitedly liable in terms of its own liability. The stockholders are limitedly liable to the extent of their investment. III. PIERCING PI ERCING THE VEIL DOCTRINE

A corporation's separate juridical personality is disregarded and it is seen merely as an association of persons when the corporation is used to commit fraud and other illegitimate purposes. General Characteristics Doctrine applies only when the business 


ATENEO LAW LAW SCHOOL 2-D L.T.J.F. enterprise is threatened or compromised Generally used only as a last resort (except in fraud cases) – cases) – cannot cannot be invoked when other remedies are available. Doctrine can only be invoked once an operation or transaction has taken place Doctrine cannot be invoked to resolve remedial issues (circumventing technicalities) since it is a commercial doctrine When the veil is pierced, the corporation does not lose its separate personality entirely – it it only loses it for purposes of that particular situation (Res Judicata Effect) Effect) 3 Purposes of Piercing the Veil Veil 1. Equity Cases 2. Fraud Cases 3. Alter Ego Cases 

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Equity Cases A “catch“catch-all” provision where no fraud or alter ego circumstances can be culled by the Court to warrant piercing When the piercing is necessary to achieve justice or equity Cannot be invoked if no public policy is involved Eg: When the corporate fiction was used to confuse legitimate issues

CORPORA CORPOR ATION LAW LAW [DEAN VILLANUEV VILLANU EVA] A] nd 2 Semester S.Y. 2012-2013 Alter Ego Cases A.K.A. Instrumentality Piercing Corporation is used as a mere agent, conduit or instrumentality of another person. A disrespect of the separate juridical entity Uses the corporate fiction to defeat public convenience Does not necessarily do a wrong but it creates public inconvenience Eg: When a corporation is used for a purpose other than achieving a commercial end  

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IV. CORPORATE CONTRACT LAW

3 Levels of Corporate Contracts 1. Pre-incorporation Level 2. Post-incorporation Level 3. Dissolution and Liquidation Level

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Fraud Cases When the corporate entity is used to commit fraud or justify a wrong Mere fraud does not automatically lead to corporate piercing but the fact that the corporate personality is used as a tool to commit fraud Does not always relate to fraud or a crime. As long as a wrong is done, which may even be civil in nature (eg: Joint tort feasor) Piercing need not be a last resort in fraud cases. (Can be availed of to prevent fraud) 

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Pre-incorporation Level Business Enterprise level of existence Promoters – Promoters – those those who organize the corporation. They promote the business venture – venture – not not the juridical entity. entity. Promoters are NOT agents. Pre-incorporation Subscription Agreements – Agreements – a contract for the acquisition of unissued stocks Promoter's Contracts – Contracts – contracts contracts entered into in behalf of a corporation which is in the process of organization. Both contracting parties are aware that the corporation is still in the process of registration Such contracts are valid as to the promoter but void as to the corporation yet to be formed (for absence of consent)  

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Post-incorporation Level Ratification is the key element in upholding the validity and enforceability of promoter's 


ATENEO LAW SCHOOL 2-D L.T.J.F.

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CORPORATION LAW [DEAN VILLANUEVA] nd 2 Semester S.Y. 2012-2013

contracts Promoter is personally liable in the event the corporation is NOT duly organized – stockholders (people who purchased issued stocks) are NOT liable. Once a corporation comes into existence, the ratification is a NEW contract, separate and distinct from the promoters contract ( Rizal Light and Ice Co. v. Municipality of Morong, Rizal, 25 SCRA 285)

Post-incorporation At least one of the the parties intended to contract with a fully formed corporation

Pre-incorporation There is knowledge of both parties that a corporation is yet to be formed or exist

3 Types of Corporation in Post-incorporation Level 1. De Jure Corporation – Immaculate, perfect and duly formed corporation. 2. De Facto Corporation – A corporation exists but is defective. 3. Corporation by Estoppel – There is no corporation but the people act as if there is one De Facto Corporation Elements: 1. Existence of a valid law under which corporation may be incorporated 2. Attempt in good faith to incorporate or colorable compliance with law 3. Assumption of corporate powers The alleged defect or inexistence of the corporation cannot be raised collaterally in a private suit and can only be pursued in a direct suit such as a quo warranto proceeding (Sec. 20 Corporation Code) Such defect cannot be used as an excuse to set aside a transaction entered into in good faith Examples of defects: 

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Defects in the incorporation papers

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Failure to submit the by-laws on time

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Ineligibility of the incorporators

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Articles of incorporation or the certificate of incorporation is defective or insufficient in form

Corporation by Estoppel Doctrine seeks to enforce a contract where the element of consent is lacking. Considered a corporation with respect to those who cannot deny its existence because of some agreement or conduct on their part. Applies when at least one party to a contract was under the impression that the corporate party was a duly incorporated entity Persons who assume to act as a corporation knowing it to be without authority will be held as general partners (unlimitedly liable) 

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Liabilities Under a Corporation by Estoppel Party Involved Active investor with knowledge that there is no authority

General Partner (unlimitedly liable)

Active investor without knowledge Limited Partner that there is no authority (limitedly liable) Passive Investor in good faith

No Liability

Comparative Summary Characteristic

De Facto

By Estoppel

Existence in Law Yes

None

Dealings on a corporate basis

Not required

Required

Effect of lack of requisites

Could be a corporation by estoppel

Not a corporation in any shape

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Liable as a

Trust Fund Doctrine (TFD) Purpose is to protect corporate creditors 

Sources: CLV Lectures Villanueva, Cesar, Philippine Corporate Law, Manila: Rex Printing Company, 2010. Ateneo Central Bar Operations, Commercial Law Reviewer , 2007.


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Capital of the corporation is held in trust in favor of the creditors Subscriptions to the capital of a corporation constitute the trust fund Retained earnings (profits) are for the benefit of the stockholders and are NOT part of the trust fund Stockholders

Creditors

As investors, their right is Their right is to be paid to have a share of the back what they have profits earned loaned Assumes the risk of losses incurred by the corporation in the business venture

Entitled to be protected for the credit they extended to the corporation

Claim is satisfied through Claim is satisfied the retained earnings through the trust fund General Rule: Until the liquidation of the corporation, no part of the subscribed capital ma y be returned or released to the stockholder ( PLDT v NTC, 539 SCRA 365) Exceptions: Capital may be distributed in only three instances: 1. Amendment of the Articles of Incorporation to reduce the authorized capital stock 2. Purchase of redeemable shares by the corporation 3. Dissolution & liquidation of the corporation

Consequences of TFD 1. It is unlawful to return to the stockholders a portion of their investment 2. Corporations cannot declare dividends out of the capital stock 3. TFD covers both paid up capital (paid subscriptions) and subscription receivables (stocks yet to be paid). However, payments for additional stocks (increase of capital

stock) prior to the approval of the SEC are NOT covered by the TFD 4. Funds of creditors are placed against the corporation's equity and not its liabilities: ◦

To protect the creditors from losses

The equity absorbs the impact of losses 5. Upon dissolution, stockholders absorb the losses; creditors get paid first. ◦

Q: If an investor violates the subscription agreement, can such agreement be rescinded? A: No. Rescission of a subscription agreement will result in the unauthorized distribution of capital assets, which is a violation of the TFD. (Ong Yong v Tiu, 401 SCRA 1) V. ARTICLES OF INCORPORATION AND BYLAWS

Articles of Incorporation (AI) Charter of a corporation upon approval by the SEC. Charter = AI + SEC certificate Corporate existence commences upon the issuance of the certificate of incorporation Source of stockholders' rights AI is a contract between: 

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The State and the Corporation

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Stockholders and the State

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Corporation and its stockholders

Contents of Articles of Incorporation Name of corporation Purpose of corporation Place of principal office in the Philippines Term of existence (not exceeding 50 years) Incorporators:     

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Names

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Nationalities

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Residences



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Number of directors or trustees Directors and Trustees ◦

Names

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Nationalities

Residences Amount of capital stock Name, residences and nationalities of subscribers and amount subscribed by each Other matters not inconsistent with law ◦

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CORPORATION LAW [DEAN VILLANUEVA] nd 2 Semester S.Y. 2012-2013 Matters Commonly Found in By-Laws Time, place and manner of conducting meetings Required quorum in meetings and manner of voting Qualifications, duties and compensation of directors, officers and employees Penalties for violation of by-laws Manner of election or appointment and term of all officers, except directors and trustees Other matters for conducting business 

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Grounds for Disapproval of AI Failure of substantial compliance with the prescribed form by law Illegal or immoral purpose of corporation Treasurer's affidavit is false Failure to comply with the required percentage of Filipino ownership in nationalized industries 

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Limits of By-Laws Cannot be contrary to law or charter Cannot be unreasonable Cannot discriminate   

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Treasurer's Affidavit An additional requirement for the approval of the AI, which is a sworn statement certifying that: 1. at least 25% of the total capital stock is subscribed 2. At least 25% of the subscribed capital stock is paid in cash or property 3. Paid-up capital is not less than Php5,000 

By-Laws Governs intra-corporate relationship Public documents Binding with the State; has obligatory force Only regulates rights – not diminish them Some provisions may appear on both AI and the By-Laws Some matters normally appearing on the ByLaws can appear solely on the AI But matters that should appear on the AI cannot appear solely on the By-Laws     

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Amendments Action Vote of the Board

Articles of Incorporation Absolute Majority

By-Laws Absolute Majority

Consent of Corporation

Ratification 2/3 OCS Majority of Stockholders (outstanding OCS capital stock) (50%+1 share) Approval of SEC

SEC

State

Rationale of Ratification: Every stockholder has the right to expect that the corporation will act (use their investments) in accordance with the Articles of Incorporation. In the even that the corporation deviates or conducts the business contrary to the AI, the stockholders must be asked to give their consent. Articles of Incorporation

By-Laws

Governs relationship between State and corp.

Intracorporate relationship

Source of rights

Regulates rights




Amendment needs ratification of 2/3 OCS

Amendment needs majority of OCS

Power to amend cannot be delegated to the Board by stockholders

Power to amend may be delegated by stockholders to Board

VI. CORPORATE POWERS & AUTHORITY

Types of Corporate Powers 1. Express – expressly authorized by law, the Articles of Incorporation or Charter 2. Incidental or Inherent – incidental to the corporation's existence. Flow from the nature of the corporation as a juridical person. 3. Implied – necessary for the exercise of express powers. Flow from the nature of the underlying business enterprise. Power

Type of Power

Sue and be sued

Express

Succession

Express

Amend the AI

Express

Adopt by-laws

Express

Issue and sell stocks

Express

Purchase, sell, mortgage, convey property or assets

Implied

Borrow money or create bonded indebtedness

Incidental

Enter into management contracts

Express

Corporate Acts Requiring 2/3 OCS Ratification 1. Extend or shorten corporate term 2. Increase or decrease capital stock 3. Incur or crate bonded indebtedness 4. Sell, dispose, lease or encumber all or substantially all of corporate assets 5. Investing in another corporation or business other than the primary purpose 6. Declare stock dividends 7. Amend the Articles of Incorporation 8. Delegate to the Board of Directors the power to amend the By-Laws (not considered a corporate act since no prior board resolution is required) 9. Enter into a management contract (upon certain instances) Bonded Indebtedness Ordinarily, the power to borrow money (debentures) falls within the business judgment power of the board and would not require stockholder's ratification But the issuance of bonds (evidence of indebtedness for a period of at least 360 days or more) will need SEC approval and stockholder's ratification An exception to the rule that corporate power is lodged in the Board of Directors If SEC approval is not secured, the loan contracts are still valid but the corporation may be penalized 

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Increase or decrease capital stock

Express

Extend corporate term

Express

Shorten corporate term

Incidental

Invest in another corporation or business

Express

Obligation is evidenced by a bond

Based on general credit of corporation

Declare dividends

Express

Secured by collateral

Not secured by collateral

Make donations

Express

Ratification is required

No ratification required

A public issue since the

The public will not be

Bonded Indebtedness


Debentures

ATENEO LAW SCHOOL 2-D L.T.J.F. bond (a negotiable instrument) would be circulated in the public

CORPORATION LAW [DEAN VILLANUEVA] nd 2 Semester S.Y. 2012-2013 involved

Rationale of Ratification: The corporation's earnings are diverted to paying or maintaining the loan obligation. None of the earnings,in the form of dividends, might be left to the stockholders thus their consent is required. Investing in Another Corporation Purpose of the power to invest – to seek the maximum return for their investible funds. When the investment is pursuant to the corporation's secondary purpose, it shall require the ratification of the stockholders As long as the investment is for the accomplishment of the primary purpose, the approval of the stockholders shall not be necessary. 

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Q: If a corporation wants to invest in another corporation or business beyond its primary and secondary purpose, can it do so provided that the ratification of the stockholders is secured? A: No. The Corporation Code limits the powers of the corporation as to those provided in the Articles of Incorporation, and the Code. Such ratification would be limited to pursuing the secondary purpose only.

Rationale of Ratification: Stockholders have the right to expect that the corporation will pursue only its primary purpose and the stockholders have the right to evaluate and give their consent in the event that corporate funds will be diverted to pursue a secondary purpose. Sale, Disposition or Encumbrance of Assets Affects the business enterprise level and does not affect the corporation's relationship with the State thus securing the State's consent is not required 

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Any sale, disposition or encumbrance effected without the appropriate ratification renders such transactions void

General Rule: Stockholders have a proprietary or beneficial interest on the business enterprise thus it is necessary to secure their authorization when selling, encumbering or disposing of corporate assets. Exceptions: 1. If such disposition is necessary in the usual course of business of the corporation 2. If the proceeds of the disposition of assets be appropriated for the conduct of the remaining business

Test of Substantial Disposition of Assets If the corporation will be rendered incapable of: 1. Continuing the business -OR2. Accomplishing its purpose Management Contracts A contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation No management contract shall be entered into for a period longer than 5 years for any one term Covers not only management contracts between 2 corporations but also a contract between a corporation and an individual or a partnership 

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Conditions Requiring Two-Thirds (2/3) Ratification 1. Stockholders representing the same interest of both the managing and managed corporations own more than one-third (1/3) of the total OCS entitled to vote of the managing corporation. -OR2. A majority of the board of directors of the managing corporation also constitute the majority of the board of the managed corporation.




NOTE: If both of the conditions mentioned above are absent, only a concurrence of the majority of the outstanding capital stock is required.

Ultra Vires Doctrine No corporation shall possess or exercise any corporate powers except those conferred by this Code or by its Articles of Incorporation and those that are necessary or incidental to the exercise of the powers so conferred. An act of a corporation committed beyond its authority or those that are beyond the powers provided by law or its charter is an Ultra Vires Act. Ultra Vires Acts refer to contracts since a corporation can only act by entering into contracts through the resolution of its Board of Directors

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its conferred powers. Lack of capacity to give consent makes the contract voidable. Contract is void as to the State but voidable as to 3rd persons (valid until annulled) Rationale: On the extra-corporate level, the dealing public has the right to expect that the contracts they enter into will be enforced. This wins over the voidness of the contract as to the State because of the non-impairment of contracts clause in the Constitution.

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Second Type of Ultra Vires Act Contracts made on behalf of the corporation by agents who have not been authorized by the Board of Directors or without proper ratification by the stockholders A specie of unenforceable contracts under Contract Law Void as to the corporation as having entered into by an agent without its consent. Also void for violating the Centralized Management Doctrine 

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Types of Ultra Vires Acts (Contracts) 1. First – executed or committed outside the powers of the corporation 2. Second – executed or committed within the powers of the corporation but without authority from the board of directors 3. Third – acts committed, which are duly authorized but are illegal, contrary to morals and public policy. Status of Contracts and the Ultra Vires Act Ultra Vires Act

Contract Status

First Type

Void as to the State Voidable as to 3rd persons

Second Type

Unenforceable Void as to the Corporation

Third Type

Null and Void

First Type of Ultra Vires Act A corporation has no capacity to give its consent since the acts committed are outside 

Third Type of Ultra Vires Act Contracts and transactions which are entered into in the name of the corporation, but are contrary to laws, morals or public policy Void contracts even when acted through the authority of the Board of Directors. 

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Ultra Vires Doctrine

Piercing the Veil Doctrine

Corporate acts are done without authority or beyond the powers granted by law.

There is a disrespect or misuse of the separate juridical entity as to undermine public interest.

Types: First, Second, Third Ultra Vires

Types: Fraud, Alter-ego, Equity Piercing

Separate juridical Separate juridical personality is never set personality is set aside for aside. that particular situation.




Issue is on the validity Issue is how the corporate or status of the fiction was used as a tool to contract entered into. undermine public interest Can be invoked Cannot be invoked when anytime by the injured there are other remedies party. available (last resort). VII. DIRECTORS, TRUSTEES AND OFFICERS

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Sub-agents of the BOD as agents of the corporation

Business Judgment Rule The manner of enforcing Sec. 23 Questions of management are left solely to the honest decision of the officers and the directors of the corporation The courts have no authority to review the boards management decisions or substitute their own judgment  

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Centralized Management All corporate powers shall be exercised by and all business shall be conducted through the Board of Directors (Sec. 23) An exercise of the police power of the State Splits ownership of the corporation between: 1. Board of Directors (Trustees) – naked title holder 2. Stockholders (Beneficiaries) – beneficial title holder Sec. 23 is a form of Express Trust 

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2 Levels: 1. Transaction Level ◦

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Binding on the corporation provided there is no bad faith, malice or fraud Cannot be overturned by the shareholders or the courts Fraudulent transactions:

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Board of Directors (BOD) as Trustees Not an agent of the beneficiary Carries the “face” of owner and exercises ownership BOD does not owe duty of obedience to the stockholders BOD are agents of the corporation but not agents of the stockholders BOD can ignore resolutions of the stockholders because such resolutions are merely advisory in nature  

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still binding until annulled

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Merely voidable contracts

Only vice of consent is involved 2. Accountability of the Board, Officers and Employees ▪

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Default Rule in Commercial Law Every power vested in a person can be delegated and re-delegated An agent can appoint a sub-agent An agent becomes liable for the acts of the sub-agent Officers

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Agency rules apply If the loss is merely due to an error in business judgment, not amounting to bad faith, then the officers are not liable General Rule: Directors and officers acting within such business judgment cannot be held personally liable for the consequences of such acts Exceptions: officer is held liable when: ▪

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Collectively called “management”


the business judgment is for patently unlawful acts there is gross negligence or bad faith he acquires any interest in conflict with his duty as a director or officer



Doctrines on Corporate Acts Estoppel or Ratification Premised on a “reliance in good faith” by the dealing public Precludes a corporation from denying the validity of the transaction entered into with a third party who relied in good faith on the authority of the former A corporation's ratification of a contract and acceptance of the benefits made such contract valid and binding Ratification must come from the Board of Directors or an authorized representative, who has full knowledge of the contract or transaction concerned Ratification cannot be made by the same person who wrongfully assume the power to make the contract

contract the contracting director must submit to the wishes of the corporation, his principal

Laches or “Stale Demands” The failure to assert a right for an unreasonable and unexplained length of time Presumption that the party entitled to assert such right has abandoned it

Reliance thereon by the corporation Rationale for Doctrine: Third person has little or no information as to what occurs in corporate meetings and he must rely upon the external manifestations of corporate consent.

Apparent Authority General Rule: In the absence of authority from the BOD, no person can validly bind a corporation

Exception to the Exception: Self-dealing contracts of directors and officers – when one of the directors enters into a contract with his own corporation.

Principles of Good Corporate Governance 1. Size – Not less than 5 members and not more than 15 members 2. Term of Board of Directors – 1 year limit 3. Qualification requirement to be a director – a registered stockholder of at least 1 share 4. Other qualifications must be stated in the ByLaws. Corporation Code is supplementary 5. Only the stockholders have the power to remove a member of the board. Disciplinary measures provided in the by-laws exercised by the board are void.

A director cannot use the doctrine of apparent authority to enforce the contract he entered with the corporation because, as an agent, he cannot prioritize his own interests over the interest of the corporation. If the corporation wishes to rescind the

Hold -Over Period A situation which arises when no successor is cleared due to valid and justifiable reasons The incumbent holds over and constitutes to function until another officer is chosen and

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The corporation is estopped from denying the agent's authority Burden of proof is on the corporation to show that its corporate officer is not authorized The apparent power of an agent is determined by the acts of the principal (how the corporation holds out the agent to the public) and not by the acts of the agent Party invoking apparent authority must prove: ◦

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Exception: When corporation knowingly permits one of its officers or agents to act within the scope of apparent authority, it holds him out to the public as possessing the power to do those acts

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Acts of the purported officer or agent justifying belief in the agency by the principal corporation Knowledge of the corporation on such agency or authority

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qualified. Incumbent Board is defacto but functions as a de jure board Vacancies of directors through the expiration of term may not be filled by the Board Any attempt to grant a person a permanent seat in the Board of Directors in unlawful When no meeting or election is held, the stockholders may initiate or call for one by a petition filed in court

Removal and Discipline of Directors Removal is by vote of stockholders representing two-thirds (2/3) of the outstanding capital stock Such removal must take place at a meeting called for such purpose Called by the Corporate Secretary on order of the President or on the written demand of the stockholders representing at least a majority of the outstanding capital stock The Board may initiate legal actions (filing a criminal case, recover damages, etc.) against the erring director on behalf of the corporation but the Board has no power to suspend or remove a director on its own Removal with cause – when a director has violated his duties of diligence, obedience and loyalty (duties of an agent)


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corporation Must not act in bad faith or with gross negligence

Duty of Loyalty A director shall prioritize the interests of the principal corporation over his own Doctrine of Corporate Opportunity 

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Prevents the creation of an opportunity for the competitor to prejudice the corporation's interests Self-Dealings (Sec. 32 Corporation Code) ◦

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Fiduciary Duties of Directors Duty of Obedience Board shall direct the affairs of a corporation only in accordance with the purpose for which it was organized Directors should act in a manner and within the formalities prescribed by its charter or by law 

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A contract between the corporation with one or more of its directors or officers Generally voidable at the option of the corporation unless all conditions are present: 1. Presence of such director was not necessary to constitute quorum 2. Vote of director was not necessary for approval of contract 3. Contract is fair and reasonable 4. In case of a dealing officer, the contact has been previously authorized by the Board When the 1st or 2nd conditions are absent, contract may be ratified by a vote of stockholders representing 2/3 of the outstanding capital stock: Provided full disclosure is of the interests is made

NOTE: Even if the Board has approved the contract, when it is unfair and unreasonable, the stockholders can still bring a derivative suit. Corporations with Interlocking Directors ◦

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Duty of Diligence Must not willfully and knowingly vote or assent to patently unlawful acts of the

A person cannot be a director of a corporation when he is also an owner or officer of a competing corporation.

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Contracts between corporations cannot be invalidated simply because they have interlocking directors



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Exception: in cases of fraud or when the contract is unfair and unreasonable Stockholdings exceeding 20% of the outstanding capital stock shall be considered substantial for purposes of interlocking directors

Duty to Inform Directors are trustees of the stockholders (beneficiary) All property of the corporation are held by the Board of Directors The Board has the duty to submit audited financial statements and corporate records Stockholders have the right to inspect and copy corporate records 

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Breach of Duties by the Board Breach of Duty of Obedience Gives rise to 

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Ultra Vires of the 1 and 3 type

But NOT the 2nd type (where an act is within the powers of the corporation but committed without authority) Because the Board has plenary powers It is impossible for the Board to commit acts without proper authority since authority is vested in the Board in the first place NOTE: Does not cover acts requiring stockholders' ratification since the Board owes its duty of obedience to the corporation and not to the stockholders. ◦

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Breach of Duty of Diligence Covers both acts of malice and negligence Degree of negligence must be gross to constitute breach Does not cover failures and injuries brought by the risks of doing business (ex: losses)  

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Breach of Duty of Loyalty

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The Corporation Code contemplates a situation where a director, trustee or officer incurs profits which should have been for the account of the corporation Sec. 31 – holds a director, trustee or officer, in violation of this duty, liable as a trustee (not as an agent) Sec. 34 – provides for a “forgiveness clause” through a stockholders' ratification. However, this applies only to disloyal directors and not trustees and officers.

Q: Why is a director, trustee or officer liable as a trustee and not as an agent under Sec. 31? A: Because an implied trust arises. The director or officer is considered a trustee of the profits, wrongfully acquired, for the benefit of the corporation. Q: Why is the “forgiveness clause” in Sec. 34 limited only to directors and not trustees or officers? A: The Board has plenary powers, under Sec. 23, which includes the power to forgive its officers. However, the Board has no power to discipline or forgive its directors. The power to “forgive” o r grant a waiver for the acts of the erring director rests solely on the stockholders.

Trustees are not included for 2 reasons: 1. Trustees are only for non-stock corporations. There can be no stockholders to give the ratification, under Sec. 34, if there are no stocks to hold in the first place. 2. The provision contemplates a situation where profits are wrongfully acquired by a director to the prejudice of the stockholders. Trustees cannot do the same thing because in a nonstock corporation, no part of the corporation's income is distributable as dividends to its members (Sec. 87). The members of a nonstock corporation cannot give their




ratification, in case a trustee wrongfully acquires corporate profits, since they are not entitled to the profits in the first place. Corporate Officers Sub-agents of the Board of Directors and of the corporation Officers are also trustees of the stockholders Also considered as employees under Labor Law, with the corporation as the employer With delegated powers and functions from the Board Election of Officers

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Definition of “Officers”: ◦

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Stock Corporation – solely by the Board Close Corporation – may be granted directly to the stockholders Non-stock Corporation – by the members

Employee

Occupies an “office” created Occupies no office by charter, by-laws or law Elected by directors or stockholders

Employed by a managing officer

Jurisdiction in case of controversy – RTC Special Commercial Courts

Jurisdiction in case of controversy NLRC

An agent of the Board. Termination of agency can be at the sole will of the principal (Board)

Has all the rights of an employee afforded by the Labor Code

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If not defined by the Code or the ByLaws, the officer is merely an employee, thus protected by the security of tenure.

NOTE: When a by-law provision expressly grants the Board of Directors the “full power to create new offices and to appoint officers thereto,” any office created and any officer appointed pursuant to such clause does not become a “corporate officer” but is an employee. This is to prevent the circumvention of the security of tenure afforded by law to employees (Matling Industrial Corp v Coros, 633 SCRA 12)

Officers Defined by the Corporation Code

Officers and Employees Officer

Officers are those defined or given such character by the Corporation Code or the By-Laws. (Gurrea v Lezama, 103 Phil. 553). They are agents.

Pursuant to the Business Judgment Rule, it is within the prerogative of the Board to appoint and remove officers and employees. The Labor Code grants security of tenure to both employees and officers. This applies to corporations. The Board has the prerogative to hire but no prerogative to fire.

Officer

Function

President

Highest executive office. Presumed to have the authority to bind the corporation in the ordinary pursuit of business.

Secretary Custodian of corporate records; register valid transfer of stocks in corporate books Treasurer

Qualifications Must be a director

Must be a resident AND citizen of the Philippines

Receive, keep and disburse May or may not the funds of the corporation be a director

Liabilities of Officers General Rule: Corporate officers are not personally liable for their official acts Exception: When the officer exceeded his authority, acted with bad faith or malice, or when he breached his duties of obedience, loyalty or diligence.

Directors or trustees are solidarily liable when they: 1. Assent to patently unlawful acts


ATENEO LAW SCHOOL 2-D L.T.J.F. 2. Are guilty of gross negligence or bad faith 3. Acquire interest in conflict with their duties as directors or trustees VIII. STOCKHOLDERS AND MEMBERS

Nature of Rights Basic Rights of Stockholders: 1. Vote 2. Receive dividends 3. Receive distributions upon liquidation 4. Inspect the books of the corporation Restrictions on the rights of stockholders are valid only if provided for in the Articles of Incorporation – not the By-Laws Rights remain with the stockholders even when shares have been sequestered Rights of Members Membership in a non-stock corporation is personal in character Non-transferable unless the Articles of Incorporation or By-laws provide otherwise Members may be entirely denied of their voting rights even if it is on fundamental matters 

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Pre-Emptive Right General Rule: Stockholders shall be granted the first option to subscribe to any opening of unissued capital stock Exceptions: 1. When such right is denied by the AI 2. When the law requires minimum stock ownership by or offering to the public 3. Issued with the approval of 2/3 OCS in exchange for property needed for corporate purposes 4. Issued with the approval of 2/3 OCS in payment of previously contracted debt

CORPORATION LAW [DEAN VILLANUEVA] nd 2 Semester S.Y. 2012-2013 Pre-Emptive Right

Right of First Refusal

Common law right

Contractual right

A personal right and cannot be waived through a majority vote of stockholders

Stipulation is optional since RFR is a creature of Contract Law

Pertains to unissued shares of stock

Pertains to issued shares of stock

Exercised against the corporation

Exercised against another stockholder

Restrictions on Transfers of Shares 1. Right of First Refusal – stockholder must first offer the shares to the corporation or to existing stockholders before selling to third parties 2. Right of First Option – right to buy the shares at a fixed price 3. Right of Prior Consent – a stockholder may sell his shares only when he obtains the consent of the Board of Directors or other stockholders 4. Buy-Back Agreement – when shares are given or assigned to officers or employees, the corporation shall be granted the right to buy back the shares should said employees or officers resign or be terminated. 5. Absolute Prohibition to Transfer Shares – self explanatory Type of Restriction

Status

Right of First Refusal

Valid under reasonable terms and consideration

Right of First Option


Buy-Back Agreement


Right of Prior Consent

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Absolute Prohibition

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Right of First Refusal (RFR) Such restriction in an agreement is valid and binding upon the contracting stockholders even if not provided for in the AI or by-laws provided the terms are reasonable RFR stipulation placed in the by-laws alone is void since it is not the function of the bylaws to diminish stockholder's rights RFR stipulation placed in the Articles of Incorporation is valid To bind third persons, RFR must be expressly stipulated in:

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An agency relationship Right to issue a proxy cannot be denied in stock corporations Such right may be denied entirely when it comes to non-stock corporations

Requisites for Valid Proxy 1. Must be in writing 2. Signed by stockholder 3. Filed with the Corporate Secretary before the scheduled meeting

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Articles of Incorporation

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By-Laws

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Certificate of Stock

Test of Reasonable Restraint 1. Restriction has a beneficial purpose of protecting the corporation and its stockholders 2. Length of time of the suspension or restriction is reasonable

General Rule: Written authority from the principal stockholder is necessary for the proxy to act on his behalf. Exception: Executors, administrators and legal representatives appointed by the court may vote on behalf of the stockholders without need of any written proxy.

Voting Trust Agreements (VTA) Stockholder becomes the beneficial owner (right to receive dividends) Voting Trustee is the legal title owner (right to vote) Fiduciary but not revocable because the trustee is essentially an owner of the legal title (thus trustee is qualified to be a director) But stockholders who are defrauded by their trustees have a right to revoke the trust Can be considered as a real contract since there is delivery of the legal title Notarization of VTA – a means of tradition (delivery) 

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Right to Vote Inherent and incidental to the ownership of stocks Right to participate in the control and management of the corporation Even if a series of shares is classified as nonvoting, such shares are still entitled to vote on matters enumerated in Sec. 6 (Amendments, mergers, dissolution, etc.) Sequestered shares does not entitle the government to exercise acts of ownership – the registered owners of such shares still General Rule: Parties can enter into a VTA for a exercise acts of dominion over them period not exceeding 5 years at any one time Shares of stock owned jointly by 2 or more persons – consent of all co-owners are Exception: VTA required in a loan agreement may necessary to be entitled to vote exceed 5 years but shall automatically expire upon full payment of loan Voting by Proxy 

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Requisites for Valid VTA 1. In writing and notarized 2. Must specify the terms and conditions 3. Certified copy of such agreement is filed with the corporation and the SEC Proxy An agency relationship

Voting Trust Agreement

Revocable since it is only a mere agency relationship

Irrevocable because of the binding contractual relationship

Proxy has no other rights not specifically granted by the principal

Trustor may confer upon trustee other rights (not limited to voting rights)

No right to inspect corporate books

Trustee is entitled to the right to inspect

Proxy cannot exercise appraisal right unless granted by the principal

Trustee can exercise appraisal right, subject to his trust obligations

Right to Inspect Corporate Records Shareholders, members, directors and trustees of record and their respective agents can inspect the records of the corporation upon demand Demand must be accompanied with a statement of the purpose of inspection Proving or alleging fraud or mismanagement is not necessary to exercise right to inspect Corporation may refuse the demand to inspect when: 

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the demand was made at an unreasonable time of day the person demanding is not a member, stockholder, trustee or director of record the purpose of the inspection is improper. But the burden of proof lies with the corporation

the records (such as the minutes of meetings) have not been written up and approved by the directors

the person demanding has used for illegitimate purposes previously examined records If inspection is denied, the proper remedy is mandamus For financial statements, corporation shall furnish to the person demanding such copies within 10 days from receipt of written request Right to inspect extends to the records of controlled subsidiaries of the parent corporation ◦

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A contractual relationship

Only needs to be in In writing, notarized and writing to be enforceable filed with the SEC

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Criminal Liability The stockholder or member who was wrongfully denied his right of inspection may bring a criminal suit against the offending director or trustee Elements of the penal provision ( Ang-Abaya v. Ang ): 1. A person with the right to inspect has made a prior demand in writing for a copy of the records 2. The officer or agent of the corporation refused to allow such inspection 3. If refusal is made pursuant to a resolution or order of the Board, the liability shall be imposed on the directors or trustees who voted for such refusal 4. When the allegation, that the demand is for an illegitimate purpose, is raised as a defense, the contrary must be proved 

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Appraisal Right Right of a stockholder to demand payment of the fair value of his shares after dissenting from a proposed corporate action Such corporate action involves a fundamental change in the corporate setting or where there is a radical change in the contractual 

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relationship (rebus sic stantibus) Not a common law right but a statutory right Such right is personal in nature and can only be waived individually. Purely applicable to stock corporations Equivalent to a repurchase of shares – contrary to the Trust Fund Doctrine Needs unrestricted retained earnings for the corporation to buy back the shares

CORPORATION LAW [DEAN VILLANUEVA] nd 2 Semester S.Y. 2012-2013 implemented, the corporation shall pay the dissenting stockholder the fair value upon surrender of the stock certificates NOTE: Failure to submit a written demand within the 30-day period is deemed a waiver of the appraisal right

Effects of Exercising Appraisal Right All rights (voting and dividend rights) accruing to such shares shall be suspended The only right not suspended is the right to receive payment for the fair value of the shares Dividends accrue but cannot be claimed If the dissenting stockholder is not paid within 30 days after the award, his voting and dividend rights shall be restored (by operation of law) Cost and expenses of appraisal shall be borne by the corporation If the fair value ascertained by the appraisers is approximately the same as the price the corporation may have offered to pay, the cost is borne by the shareholder Derivative Suits A common law right to sue for and in behalf of the corporation (NOT for the stockholders) A suit instituted primarily for the benefit of the stockholders is not a derivative suit A suit by a shareholder to enforce a corporate cause of action (Chua v. CA) It is a condition sine qua non that the corporation is formally impleaded as a party to the action or else it cannot amount to a derivative suit A remedy that may be resorted to whenever the corporate officials refuse to sue or are the ones being sued Some acts that may be remedied by derivative suit: 

Applicable Situations 1. Amendment of the Articles of Incorporation which has the effect of changing or restricting stockholders rights 2. Extending (NOT shortening) the corporate term 3. Sale, lease or disposition of all or substantially all of the corporate assets 4. Investment in a non-primary business or purpose 5. Merger or consolidation

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Q: Why resort to exercising the right of appraisal when a stockholder can simply sell his shares under the doctrine of Free Transferability of Shares? A: Because the 5 situations mentioned above destroy the market or the marketabilty of the shares and the dissenting stockholders will dispose the shares at a great loss. NOTE: The amendments to the AI must result in changing or restricting the rights of the stockholder. Mere amendment of the AI in order to change the corporation's name does not entitle the stockho lder to exercise his appraisal right.

How Right is Exercised 1. Stockholder has voted against the proposed corporate action 2. Submits a written demand for payment of the fair value of his shares within 30 days after the date on which the vote was taken 3. If the proposed corporate action is

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Where the Board of Directors wastes or


ATENEO LAW SCHOOL 2-D L.T.J.F. dissipates corporate funds ◦

Mismanagement of the Board

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Performance of ultra vires acts

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When intra-corporate remedy is unavailing or futile

Exception to the Business Judgment Rule Right to bring a derivative suit is an exception to the business judgment rule Derivative suit comes into play whenever the Board is not in a position to validly exercise business judgment (eg: when the Board is the author of the wrongdoing) But not all actions against third parties automatically entitle the stockholder to bring a derivative suit – determination still with the Board as an exercise of business judgment 

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Requisites to Bring Suit 1. Plaintiff is a stockholder or member at the time of the questioned act or transaction 2. Exhaustion of intra-corporate remedies 3. Reliefs sought pertain to the corporation 4. No appraisal rights are available for the acts complained of 5. Suit is not a harassment or nuisance suit NOTE: Not every suit filed in behalf of a corporation is a derivative suit (eg: civil case arising out of a criminal complaint) General Rule: Exhaustion of intra-corporate remedies is a requisite in filing a derivative suit. Exception: It is not required when it is futile (eg: when the Board itself is guilty of the acts committed against the corporation) General Rule: Plaintiff must be a stockholder or member at the time of the injurious act or transaction Exception: A transferee (who was not a stockholder

CORPORATION LAW [DEAN VILLANUEVA] nd 2 Semester S.Y. 2012-2013 at the time of the questioned act) may bring a derivative suit when the covered transactions continue and are injurious to him. Exceptions to the Exception: 1. When the transferor failed to institute the derivative suit when he had the chance to do so, he becomes estopped. Transferee is also estopped. 2. When the transferor himself was part of the fraud against the corporation IX. SHARES OF STOCK

Types of Shares of Stock 1. Common shares – have complete voting rights but normally is not given preference in the distribution of dividends 2. Preferred shares – have preference in the distribution of assets and dividends. May or may not be given voting rights 3. Redeemable shares – a class of shares which may be purchased by the corporation upon an expiration of a fixed period. Such shares may only be issued if expressly provided in the AI 4. Treasury shares – shares phave been issued and fully paid for but subsequently reacquired by the issuing corporation. Despite the reacquisition, such treasury shares are not part of the corporate assets. 5. Founder's shares – May be given exclusive voting rights, which must not exceed 5 years from date of approval by the SEC. Must be specifically classified in the AI. 6. Authorized Capital Stock – Number of stocks a corporation is allowed to issue to the dealing public. It is the sum total of both the issued and unissued shares of stock. 7. Outstanding Capital Stock – portion of the Authorized Capital Stock actually issued, whether or not fully or partially paid, except Treasury Shares. 8. Paid-up Capital – portion of the OCS which




have been paid by the stockholders 9. Subscription Receivables – portion of which is yet to be paid on the subscriptions Nature of Shares of Stock Units of ownership of the corporation issued in exchange for cash, property or any other consideration An intangible personal property of the stockholder Issued for the purpose of raising capital Shares of stock do not represent assets or property of the corporation

of any share where subscription is not fully paid ◦

Refuse to recognize a sale or assignment of shares which have not been duly registered in the corporate books

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Original Dealings There can be a subscription over unissued shares in the following instances: 1. Original issuance of the Authorized Capital Stock at the time of incorporation 2. Issuing a portion of the Capital Stock previously unissued 3. Increase in the Authorized Capital Stock

Modes of Dealings Dealing Original

Transaction Between Issuing corporation and subscribing stockholder

Contract Involved Subscription Agreement

Subsequent Original stockholder as Sale, assignment, seller and buyer of shares mortgage, attachment

Modes of Constructive Delivery 1. Execution of a public document 2. Transfer of titles, certificates or other evidence of the incorporeal right 3. Use and enjoyment of the buyer of the rights with the knowledge and consent of the selling stockholder Rights of Corporation Over Shares A corporation has no proprietary claim (no right to vote or receive dividends) on the shares it issues or redeems But the following rights are granted: 

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Call for the payment of unpaid subscription Impose interest on the unpaid subscriptions Refuse to issue certificates of stock for subscriptions not fully paid Refuse to register the sale or assignment

Subscription Underlying contract – subscription agreement Subscription contract/agreement covers the acquisition of unissued shares (meeting of the minds of the corporation and the subscriber as to the number and value of the shares) Any condition imposed on the subscription contract which undermines the ultimate obligation of the subscriber to pay is void. It is not treated as a sale between the corporation and subscriber There is no such thing as a void subscription agreement; what may be void is the consideration (eg: future services) Subscription contract would constitute itself the tradition (mode of delivery) of the shares It is subscription and not the payment of such subscription that vests:  

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stockholder's rights to the subscriber

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subscriber with ownership over the shares

General Rule: A subscriber, upon issuance legally owns the shares and has rights over them even if they are not fully paid for. Exception: A subscriber may be deprived of his rights when he is declared as a delinquent


ATENEO LAW SCHOOL 2-D L.T.J.F. stockholder. NOTE: Since the subscription agreement is not a specie of sale, it is not governed b y Contract Law or the Law on Sales. Thus it cannot be a subject of rescission or waiver by the corporation-creditor (and since it will also violate the trust Fund Doctrine). An exception to the general rule of irrevocability is provided for by Section 61 but is limited to corporations yet to be formed:

A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least 6 months from the date of subscription, except:

CORPORATION LAW [DEAN VILLANUEVA] nd 2 Semester S.Y. 2012-2013 common shares for preferred shares) Query: Section 62 of the Corporation Code expressly prohibits the acceptance of promissory notes as consideration for subscription. However, SEC rulings state that receivables may be legally accepted as property consideration. But aren't receivables essentially promissory notes and the terms only differ depending on who holds the instrument? In the hands of a debtor, it is a promissory note, while in the hands of a creditor (the corporation), it is a receivable.

To answer this question, some accounting terms must first be defined:

a. When all the other subscribers consent to the revocation; or b. Unless the incorporation fails to materialize within said period or a longer period stipulated in the subscription contract

Accounts Receivables – refers to negotiable instruments (promissory notes, bills of exchange, etc.) paid for goods sold or services rendered in lieu of cash. It reflects the profit-making activity of a business enterprise. Treated as assets.

However, no pre-incorporation subscription may be revoked after the submission (not approval by) of the articles of incorporation to the SEC.

Subscription Receivables – refers to the unpaid portions of subscriptions. It reflects the capitalraising activity of the corporation. Not treated as assets.

Consideration for Issuance of Shares Valid Considerations (any one or a combination of): 1. Actual cash paid to the corporation 2. Property actually received by the corporation which is necessary or convenient for its use. Fair valuation of the property is subject to the approval by the SEC 3. Labor or services actually rendered to the corporation (NOT future services) 4. Previously incurred indebtedness by the corporation 5. Amounts transferred from unrestricted retained earnings to stated capital (eg: retained earnings converted into stock dividends) 6. Outstanding shares exchanged for stocks in the event of reclassification (eg: exchange of

What the Corporation Code prohibits is not the kind of consideration the corporation receives in exchange for the subscription but rather it is how such consideration is recorded in the accounting books. If a promissory note is recorded under accounts receivables it erroneously increases the assets of the corporation. It gives the wrong impression to creditors that the corporation is earning profits, when in fact it never sold goods or rendered services. After all, the purpose of issuing stocks is to raise capital and not generate profits. If such promissory notes are recorded as accounts receivables, then they will be treated as assets and


ATENEO LAW SCHOOL 2-D L.T.J.F. will be subject to the various modes of extinguishment such as waiver, and rescission, which will be violative of the Trust Fund Doctrine. The prohibition in the Corporation Code wants to ensure that such promissory notes and other negotiable instruments received are properly recorded to reflect the capital-raising activity of the corporation. It is not treated as an asset thus it is beyond the realm of the modes of extinguishment under Contract Law. A corporation may receive promissory notes or other negotiable instruments provided such promissory note or instrument arose from the profitmaking activity of the subscriber. Watered Stocks When stocks are issued and deemed fully paid but the underlying consideration has less value or it is less than the stock's par value Fraud is not an element to make directors and officers liable It is enough that such director or officer consented to such issuance or had knowledge thereof and failed to express his objection in writing and file it with the corporate secretary The stockholder concerned is solidarily liable with the director or officer to the corporation and its creditors They will be liable for the difference between the fair value and the par value of the stock 


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order to pay for corporate debts In a subscription agreement, one cannot deny the obligation to pay even when the corporation becomes insolvent

General Rule: A call (board resolution and notice to stockholder) is necessary to make subscriber liable for unpaid subscriptions. Exceptions: 1. When the subscription is payable on a specified day on the contract 2. When the corporation becomes insolvent, unpaid subscription becomes due and demandable

Delinquent Shares If no payment is made within 30 days from the due date specified in the subscription contract or from the date stated in the call of the Board, stocks become delinquent 

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Effects: ◦

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Unpaid Subscriptions Insolvency or dissolution of a corporation does NOT release an original subscriber from the liability of paying for his unpaid shares. When insolvency supervenes a corporation, unpaid stock subscriptions becomes payable on demand The assignee in the insolvency can maintain an action upon any unpaid subscription in

Disqualification to exercise any of the stockholder's rights, except the right to dividends Cash dividends received shall be applied first to the unpaid balance

Stock dividends are withheld until the unpaid balance is fully paid Delinquency sale – date of sale shall not be less than 30 days nor more than 60 days from the date the stocks become delinquent Notice of sale – sent to every delinquent stockholder and shall be published once a week for 2 consecutive weeks in a newspaper of general circulation Highest bidder is one who shall pay for the smallest number of fraction of a share: ◦

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Delinquent stock shall not be voted for and is not entitled to vote

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Full amount of the balance on the subscription Interest

Cost of advertisement and sale Should there be no bidder, the corporation may bid and the shares shall be converted to Treasury Shares Questioning the Sale: ◦

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No action can be sustained on the ground of irregularity in the notice or sale unless such party pays or tenders the price of the sale including interest from date of sale Action must be commenced within 6 months from date of sale

Highest Bidder - Illustration Available shares for bid: 500 shares Bid Price (Php) Number of Shares Fraction (Price per share)

Q: May a corporation issue certificates of stock even if the price is not fully paid for? A: Yes. But the officers will be solidarily liable with the stockholder concerned for watered stocks.

Quasi-Negotiable Character There is no such thing as a holder in due course (unlike in Negotiable Instruments Law) Quasi-negotiability protects the stockholderowner – in the event that the certificates are lost through fraud or stolen, their investments in the corporation will not be undermined Requirements for a valid transfer of stock: 1. Delivery of certificate 2. Certificate is indorsed by the owner 3. Transfer is recorded in the books of the corporation Absent the third requirement, the transfer is valid only between the parties but void as to the corporation Recording the transfer makes it valid and binding against third persons, including the corporation 

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500,000

100

500,000/100 = 5,000

500,000

50

500,000/50 = 10,000

500,000

1

500,000 (highest bidder)

The person who bid for 1 share is the highest bidder. The remaining 499 shares are returned to the delinquent stockholder

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Right to Issuance of Certificate A subscriber is entitled to the issuance of certificate of stock only upon full payment of the subscription Remedies available to stockholders of record if corporation refuses to issue certificate: 1. Specific performance 2. Damages 3. Mandamus 

Certificate of Shares of Stock Merely evidence of the issuance of shares of stock A stockholder may own shares of stock without possessing a stock certificate What matters is that such stockholder is recorded in the transfer books of the corporation Certificate is not necessary to confer upon the shareholder full ownership of the shares When certificates are issued and in circulation, it means that the stocks are fully paid 

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NOTE: The remedy of mandamus (or any of the other remedies) is not available to a third person who has bought registered shares of a selling stockholder even when they are fully paid for. Such buyer must first establish his rightful purchase by clear evidence before the corporation may be compelled to issue new certificates in the buyer's name.



Street Certificates Certificate of stock endorsed in blank Behaves like a negotiable instrument except there can be no holder in due course Street certificate can be transferred from one owner to another Risk in the transfer falls on the owner Mere blank indorsement of the certificate of stock by itself does not indicate the right of the holder to have the stocks transferred (recorded in the corporate books) in his name Express instructions from the registered owner or a power of attorney is required to compel the corporation to register the transfer of shares

CORPORATION LAW [DEAN VILLANUEVA] nd 2 Semester S.Y. 2012-2013 to a single transferee provided the consent of the corporation is secured.

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General Rule: Certificates of stock are quasinegotiable – a holder in good faith and for value is not protected from the invalidity of the transaction (still subject to defenses). Exception: When the owner was guilty of negligence that directly contributed to the loss, the holder is entitled to demand from the issuing corporation, the transfer of stocks into his name. (Santamaria v. HSBC, 89 Phil. 780).

Involuntary Dealings A mortgage or pledge of shares that involves outright assignment or delivery and indorsement of the certificates would constitute a valid mortgage even without registration with the register of deeds (RD). Outside the physical delivery of the certificates, a mortgage over the shares would be valid and binding on third parties only upon registration of the mortgage in the register of deeds. Writ of attachment or execution would be valid and binding on the shares (including third parties) upon proper service of the writ to the proper corporate officer. First in time is priority in right (eg: mortgage duly constituted and registered in the RD ahead of the registration of the sale in the corporate books is preferred over the latter) 

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Transaction Pledge or Mortgage

Requirement for Validity No delivery of certificates: Registration in the register of deeds is essential for validity and notice to the world With delivery of certificates: There is already completion of process thus registration is not necessary

Subsequent Dealings For shares held in trust – approval of the beneficial owners is necessary for the validity of the transfer Sale or Mere indorsement and delivery of When Subscriptions are not Fully Paid: Assignment certificates only binds the parties. o General Rule: Corporation may Registration in the stock and transfer refuse to acknowledge and register book is essential for validity and such assignment notice to the world. Sale of unpaid shares (SEC Opinion): Sale of a portion of shares not fully o Levy or Upon proper delivery of the writ to the paid – cannot transfer such portion of Attachment proper corporate officer the subscription since the subscription contract is indivisible. NOTE: For a chattel mortgage of shares (without Sale of entire shares not fully paid – o physical delivery of certificates), double registration entire subscription may be transferred 

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is required (at the mortgagor's residence and where the chattel is located) except when the residence and chattel are located in the same place. X. CORPORATE ACQUISITIONS, MERGERS & CONSOLIDATIONS

Acquisitions and Transfers General Rule: The purchaser does not become liable for the debts and liabilities of the transferring corporation Exceptions: 1. When purchaser expressly or impliedly agrees to assume the liabilities 2. When purchaser acted in collusion with the transferring corporation to defraud the creditors 3. When purchaser merely continues the business of the transferring corporation 4. When transaction amounts to a merger or consolidation

3 Levels of Acquisitions and Transfers Transfer Assets-Only

Object of Transfer Only tangible properties

Business Enterprise The profit-earning capacity Equity

Controlling shareholdings

NOTE: Mere purchase of shares of stock for what they are is an “assets-only” acquisition. But when the motive of the purchase is the ability to control the corporation, it is an “equity” acquisition (eg: buying 2/3 of the outstanding capital stock).

Liability Rules Transfer AssetsOnly

Transferee's Liability Not liable unless assumed

Rationale No contractual privity between buyer and creditors Common Law Lien

Equity

Doctrine of separate

juridical personality

Assets-Only Transfer General Rule: Transferee is not liable for the debts of the transferor Exceptions: 1. When the transfer is in violation of the Bulk Sales Law (in fraud of creditors), the buyer is not entitled to the goods purchased since such transaction is rendered void. 2. Corporate Dissolution – the succeeding corporation is liable for the debts of the dissolved corporation to the extent of the fair value of the assets assumed.

Business Enterprise Transfer Primary interest of buyer is the earning capacity of the business The enterprise comprises of the assets, goodwill, list of clientele, suppliers, employees, etc. Transferee assumes the liabilities of the enterprise Common law lien – form of protection to the creditors by allowing recovery of debts to the transferee Business enterprise transfers requiring 2/3 ratificatory vote: o Sale of all or substantially all the assets of the corporation (Sec. 40) Management contracts where a o corporation operates all or substantially all of the business of another corporation (Sec. 44) If the transferor and transferee enter into a “Free and Harmless” clause (transferee does not assume the liabilities of the business) such contractual stipulation is valid only between them and not to the creditors. 

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Business Liable for debts of Enterprise the business Not liable unless

assumed

Equity Transfer



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Buyer takes ownership of the business by purchasing the controlling shareholdings of the corporate owner Must be substantial as to give transferee control of the corporation Mere transfer of shares is not an equity transfer Transferee is not liable to the debts of the transferor or the corporation – he is liable only to the extent of his investment.

Merger and Consolidation Merger – union where one or more corporations are absorbed by the surviving corporation Consolidation – union of two or more existing corporations to form a new corporation There is transfer of both the business enterprise and the juridical entity New corporation assumes ipso jure the liabilities of the dissolved corporation


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Procedure 1. A plan of merger or consolidation approved by the majority of the Board 2. Ratificatory vote of 2/3 outstanding capital stock 3. Exercise of appraisal right by any dissenting stockholder 4. Any amendments must be approved by a majority of the Board and ratified by 2/3 OCS 5. Execution of the Articles of Merger or Consolidation 6. Submission of the financial statements to the SEC (long form audit report for insolvent corporations) 7. Approval by the SEC Effects of Merger or Consolidation Surviving or consolidated corporation shall possess all rights, immunities and franchise 

of each of the constituent corporations All property, receivables due, and other interests are deemed transferred without further act or deed Any claim or action pending by or against the constituent corporations may be prosecuted by or against the surviving corporation Neither the rights of creditors nor any lien shall be impaired There is no legal “break” in the juridical personalities and business enterprise Surviving or consolidated corporation is not treated as a transferee of the constituent corporations

De Facto Mergers or Consolidations Elements: 1. A corporation acquires all or substantially all the properties of another 2. In exchange for shares of stock (not cash/funds) of the acquiring corporation 3. Separate juridical personalities of the corporations would remain 4. Rules on succession of liabilities under business enterprise transfers would apply 5. Since the transaction does not involve the use of corporate funds the acquiring corporation need not secure the ratificatory vote of the stockholders 6. But the corporation selling the assets will need to secure such ratificatory vote Spin Off Where a department or division of a corporate business is sold-off or assigned to a new corporation arising in the process New (spun-off) corporation is called a subsidiary Original corporation is called the parent corporation 

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Effects of Transfers on Employees


ATENEO LAW SCHOOL 2-D L.T.J.F. Transfer Assets-Only

Liability of Transferee Not bound to retain employees

Business Enterprise Not bound to retain employees Equity

Employees remain with the corporate owner as they were since the corporate juridical personality remains intact

Mergers and Consolidations

New or surviving corporation absorbs liabilities including employment contracts

Spin-Offs

Subsidiary remains liable for employment contracts (security of tenure) but Parent Corporation is not liable anymore for the obligations of the subsidiary

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An employment contract is one with personal considerations Contracts of service (eg: labor contracts) do not fall within the succession of liability rule in business enterprise transfer A laborer is hired because of his qualifications and skills In business transfers, only those with commercial considerations are involved in the transaction Example: Loan – a personal contract but the o consideration is commercial in character. The loan (a liability) follows the business enterprise in the event of a transfer o Employment – a personal contract but the consideration is personal. It does not follow the business enterprise in the event of a transfer. To avoid the assumption of labor obligations by the new or surviving corporation, a “clean break” in the employment contract or a formal termination of employment is necessary.

CORPORATION LAW [DEAN VILLANUEVA] nd 2 Semester S.Y. 2012-2013 In the case of Manlimos v NLRC (242 SCRA 145), the Court ruled that an equity transfer is nothing more than a complex business enterprise transfer. Rationale: the object of an equity transfer is to take control of the business enterprise by purchasing a substantive amount of shares. Thus in an equity transfer, the “new employer -corporation” is not bound to retain the employees. Employment becomes a management prerogative. NOTE: Some commentators disagree with the logic of the ruling since in reality, there is no new corporate employer arising from the process since the corporation retained its separate juridical entity. XI. FOREIGN CORPORATIONS 

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Corporations organized under any laws other than those of the Philippines (Place of incorporation test) Reciprocity clause – merely emphasize the policy of granting business access to foreign corporations whose state would also grant business access to Filipinos Reciprocity clause does not affect nor qualify the definition of a foreign corporation under the place of incorporation test

License to Do Business Purpose is for courts to acquire jurisdiction over the person of the foreign corporation Grants to the foreign corporation access to domestic courts For the protection of the dealing public – to ensure that the foreign corporation is doing business in the Philippines Proof that the alien corporation has surrendered itself to the jurisdiction of the host state 

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NOTE: The requirement to obtain license is not to


ATENEO LAW SCHOOL 2-D L.T.J.F. prevent alien corporations from doing business. Noncompliance does not affect the validity of the transactions. It only removes the capacity of the corporation to sue in the domestic courts. How to Obtain License 1. File a verified application with the SEC including consularized (certified) copies of the Articles of Incorporation and By-laws 2. Designation of a resident agent (stated in the application) 3. Execution of an agreement that if the foreign corporation shall cease to do business or shall not have a resident agent and an action was instituted against alien corporation, service of summons may be made upon the SEC 4. Execute a certificate under oath attesting to the fact that the laws of the state of the applicant allow Filipino citizens and corporations to do business therein 5. Deposit of Securities – for the benefit of the corporation's present and future creditors. Philippine Securities (bonds, shares of stock in domestic corporations, certificates of indebtedness) must be in the actual market value of Php 100,000.00, subject to further deposit of additional securities every 6 months equivalent in actual market value to 2% of the amount by which the foreign corporation's gross income exceeds Php 5,000,000.00. Consequences of Not Obtaining License 1. Foreign corporation shall not be permitted to maintain or intervene in any action in any court or administrative agency of the Philippines 2. But foreign corporation may be sued against on any valid cause of action NOTE: Subsequent acquisition of the license will cure the lack of capacity to sue at the time of the execution of the contract. It then can re-file the suit

CORPORATION LAW [DEAN VILLANUEVA] nd 2 Semester S.Y. 2012-2013 on the same contract or transaction. Jurisdiction Over Foreign Corporations No state can directly bind persons or property beyond the limits of that state (jurisdiction is territorial) How jurisdiction is acquired over a foreign corporation: 

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Consent – voluntary surrender to the authority of the courts Presence – by doing business in the host country

NOTE: When a contract between a domestic and foreign corporation stipulates the venue to be within the proper courts in the Philippines, it is a form of giving consent by the foreign corporation to be sued in the Philippines even when it does not engage in business in the country

Summary Transaction Doing Business

May Sue

May be Sued

No license – NO No license – YES With license – YES With license – YES

GR: NO – no jurisdiction Isolated YES – by mere Transaction consent or voluntary over the foreign corp. surrender Except: consent through a contractual stipulation

Jurisprudential Tests of “Doing Business” 1. Twin Characterization Test ( Mentholatum Case) a) Nature of Transaction – performance of works directly for or normally incident to the purpose and object of the corporation b) Continuing Intent – intent to pursue the continuity of commercial dealings or business; not an isolated transaction. 2. Contract Test ( Pacific Vegetable Case) As long as the perfection and consummation of a series of transactions are done outside Philippine territory, the 


ATENEO LAW SCHOOL 2-D L.T.J.F. same would not constitute doing business in the Philippines. If the salient points of a contract are not performed within Philippine territory, Philippine authorities would have no business subjecting the parties to local registration and licensing requirements. 3. Indentors and Brokers (Top-Weld Case) If the transactions are done in the name and account of the foreign corporation, then it is deemed doing business in the Philippines If the foreign corporation transacts with middlemen acting in their own names and accounts, the former is not considered to be doing business in the Philippines. If the terms of agreements between the foreign corporation and the local company are very restrictive in nature, it shows that the local company is a mere conduit or extension of the foreign corporation (not an independent broker) 4. Profit-Making Test ( Agilent Case and National Sugar Trading Corp Case) To constitute “doing business,” the activity to be undertaken in the Philippines is for profit-making Activities within Philippine jurisdiction that are not directly connected with the foreign corporation's main business of creating profits do not constitute doing business in the Philippines If activity is not to make profit, it is an isolated transaction 5. Performance of Corporate Purpose (Granger Associates Case) Performance by a foreign corporation of the acts for which it was created, regardless of volume of business, determines whether a foreign corporation needs a license or not. Controlling factor in the test of “doing business” is whether or not the foreign 


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corporation is performing the acts for which it was created. By dealing with its products with local brokers or distributors, regardless of what the latter do with the products subsequently, a foreign corporation is performing acts integral to its purpose. If the investment of the foreign corporation in the domestic corporation is substantial enough to enable the former to participate in the management of the latter, then the foreign corporation is doing business in the Philippines.

Summary Test

Twin 1. Performance of corporate purpose Characterization 2. the intention to perform it continuously Contract

Where the salient points of the contract are performed

Brokers and Indentors

For whose name and account the transaction was done

Profit-Making

Whether or not the activity is for profit

Performance of Purpose

Considers purely whether or not the foreign corporation is performing the acts for which it was created. Whether or not the middlemen or brokers are independent or not is irrelevant

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Factor Considered by Test

NOTE: It seems that there is no single standard or correct test of “doing business”. Some tests are in conflict with the statutory concept of “doing business” (FIA 1991), yet they have not yet been overturned. All of these jurisprudential tests of doing business can be validly applied depending on what the situation calls for.

Foreign Investments Act of 1991 (FIA) Statutory Definition of “Doing Business” Includes 1. Soliciting orders, service contracts, opening


ATENEO LAW SCHOOL 2-D L.T.J.F. liaison offices or branches 2. Appointing representatives or distributors domiciled in the Philippines or who stay in the country for a period of 180 days or more 3. Participating in the management, supervision or control of any domestic business, firm or corporation in the Philippines 4. Any other acts that imply a continuity of commercial dealings Does Not Include 1. Mere investment as a shareholder by a foreign entity in a domestic corporation 2. Having a nominee director or officer to represent its interests in such corporation 3. Appointing a distributor or representative domiciled in the Philippines which transacts business in its own name and for its own account. Acts Not Considered as “Doing Business” Under DTI Implementing Rules and Regulations 1. Publication of advertisement through any print or broadcast media 2. Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines 3. Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export 4. Collecting information in the Philippines 5. Performing services auxiliary to an existing isolated contract of sale Special Rules on Firm Names and Trademarks Trademarks, goodwill and reputation are personal properties The right to use of the corporate name and trade name of a foreign corporation is a property right, which may be asserted and protected in any courts of the world A foreign corporation with no license to do 

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business still has standing since the subject of the suit is a property right – not arising from a business transaction The foreign corporation does not need to obtain a license to institute actions regarding trademarks and firm names since it is not engaged in business in the Philippines in the first place.

Withdrawal of License Voluntary Withdrawal Foreign corporation files a petition for withdrawal of license Petition shall be published once a week for 3 consecutive weeks in a newspaper of general circulation SEC will not issue certificate of withdrawal unless all claims and taxes have been settled 

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Mergers and Consolidations When a foreign corporation becomes a party to a merger or consolidation in its home state, such corporation shall, within 60 days after such merger or consolidation becomes effective, file with the SEC, a copy of the Articles of Merger or Consolidation duly authenticated by the proper officials of the state where the merger or consolidation was effected If the absorbed corporation is the foreign corporation doing business in the Philippines, the latter shall file a petition for withdrawal of its license 

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Involuntary (Revocation) Grounds for revocation of license by SEC Failure of the foreign corporation to: 

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File its annual report or pay any fees

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Appoint and maintain a resident agent

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Pay taxes

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Submit a statement of the change of its resident agent or his address



Submit an authenticated copy of any amendment to its articles of merger or consolidation within the time prescribed Misrepresentation of any material matter in any affidavit, report or document submitted Transacting business in the Philippines ◦

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outside its corporate purpose

as an agent of another foreign entity not licensed to do business in the Philippines Any other ground rendering corporation unfit to transact business in the Philippines ◦

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Non-Stock Foreign Corporations Provisions on reciprocity and license to do business have no application to non-stock foreign corporations The tests of “doing business” cannot be used to determine the presence of non-stock foreign corporations “Presence” is tested using the Twin Characterization test of pursuing the corporate purpose (eleemosynary activities) and continuity


Exception: It may engage in profitable business only if it is necessary or essential to carry out the eleemosynary purpose for which it was organized. Earning profits is merely its secondary, not primary, purpose ( Republic v. Sun Life Assurance Co, 473 SCRA 129) General Rule: A non-stock corporation may not distribute any part of its income to its members Exception: Assets and profits may be distributed to the members in the event of the corporation's dissolution provided :

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All of the corporate liabilities have been paid All assets, subject to limitations permitting their use have been returned The remaining net assets shall be distributed in accordance with rules provided by the Articles of Incorporation and By-Laws In the absence of such rules: ◦

XII. NON-STOCK CORPORATIONS ◦

Elements Primary distinction with Stock Corporations – No part of the corporation's income may be distributed to its trustees, officers or members. (Sec. 87 ) 2 Elements of Non-Stock Corporation 1. Eleemosynary purpose – organized for charitable, religious, educational, professional, cultural, fraternal, social, civic or similar purposes 2. Non-distribution of profits – no part of its income is distributable as dividends to its members, trustees or officers

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Net assets may be distributed to such persons, organizations, societies or corporations whether or not organized for profit -ORDistribution to the members Distributed as specified by the plan of distribution adopted by the Board of Trustees and ratified by the members

Board of Trustees Corporate entities can become members of the Board of Trustees provided such provisions are indicated in the Articles of Incorporation or By-Laws (SEC Opinion, 16 April 1991) AI or By-Laws may provide for a number of Board of Trustees exceeding 15. Structure of Terms and Elections: 

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General Rule: A non-stock corporation is not empowered to engage in business for profit.

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Upon organization, the Board members shall classify themselves so that the term




of 1/3 of them shall expire every year. ◦

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subsequent elections of trustees comprising 1/3 of the Board shall be held annually

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Trustees so elected in such election shall have a term of 3 years. Subsequent elections are held after every 3 years. Trustees elected to fill in vacancies shall hold office only for the unexpired period

such officer must be a Filipino citizen and a resident of the Philippines Since Nationalization Laws pertain to businesses and industries reserved for Filipino citizens, the qualifications provided by such laws do not extend to the activities of a non-stock-corporation (SEC Opinion No.12, series of 2002, 21 November 2002)

Conversion to Stock Corporation An existing stock corporation may be converted into a non-stock corporation by mere amendment of its AI However , an existing non-stock corporation CANNOT be converted into a stock corporation through the amendment of its AI Ratio: In the first place, members of a nonstock corporation are not entitled to any profit or income earned from the activities of the non-stock corporation. The mere amendment of the AI in order to grant them the right to receive dividends is legally impossible based on Sec. 87 of the Corporation Code The only way for a non-stock corporation to be “converted” into a stock corporation is to dissolve the existing corporation and organize a new entity 

Voting and Elections Default rule: straight voting unless the AI or By-Laws provide otherwise A member may vote by proxy unless otherwise provided for in the AI or By-laws 

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Members Membership is purely personal and nontransferable unless otherwise provided for in the AI or By-Laws Membership may be terminated in manner and for causes provided for in the AI or ByLaws Members may be denied to vote even on fundamental issues or matters of the corporation enumerated in Sec. 6. A delinquent member is still entitled to vote unless the AI or By-Laws specifically provides for the denial of the right to vote of the delinquent member (SEC Opinion 16 June 1998) A provision in the By-Laws which forfeits the fully-paid membership shares on the basis of delinquency of the member to pay monthly membership dues is lawful (Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300) 

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Nationalization Laws A foreigner may be a member or officer of a non-stock corporation However , he may not be assigned the position of Corporate Secretary since, by law, 

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Dissolution Upon dissolution, its assets shall be applied and distributed as follows: 1. Pay or discharge all of its liabilities and obligations 2. Return all assets held upon a condition requiring return, and which condition occurs by reason of dissolution 3. Transfer to other non-stock corporations all assets received and held subject to limitations permitting their use only for charitable, religious, education or similar purposes 



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4. Any remaining assets shall be distributed in accordance with the Articles of Incorporation or By-Laws 5. In any other case, assets may be distributed to such persons, societies, organizations or corporations whether or not organized for profit, as may be specified in an adopted plan of distribution. A recommended plan providing for the dissolution of assets may be adopted by the majority vote of the Board of Trustees Such recommended plan shall be adopted upon the approval (ratification) of at least 2/3 of the members having voting rights After dissolution, a non-stock corporation is not prohibited from continuing its operation However , its status will be that of an ordinary association without a juridical personality (SEC Opinion, 25 September 1995)

Stock vs. Non-Stock Stock Corporation Has power to declare dividends

Non-Stock Corporation No power to distribute income to members

Purpose is to earn profits Eleemosynary purposes Shares of stock may be transferred under the Free Transferability of Shares Doctrine

Membership is personal thus all rights arising therefrom are nontransferable

Right to vote is inherent in stock ownership

Right to vote may be completely denied

Rights are terminated by Rights are terminated by the disposition of shares the termination of of stock membership Cumulative voting

Straight voting

Transferability of Shares Membership is personal may not be subject to and non-transferable unreasonable restrictions unless the AI or By-Laws provide otherwise

Proxy voting cannot be denied but the By-Laws may regulate it

Proxy voting may be denied by the AI or ByLaws

Meetings must be held Meetings may be held within the place where anywhere in the the corporation's Philippines provided that principal office is located proper notice is sent to the members XIII. CLOSE CORPORATIONS

Definition and Nature Convergence of ownership and management Akin to a partnership A sharing of control, benefits and risks in the business enterprise among the shareholders Shareholders who manage the businesses may be liable as directors   

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A Close Corporation is one whose AoI provide that: 1. All issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding 20. 2. All issued stock of all classes shall be subject to “Right of First Refusal”. 3. Corporation shall not list in any stock exchange or make public offering of any of its stocks. Provided: A Corporation shall not be deemed a close corporation when at least 2/3 of its Voting Stock or Voting Rights is owned or controlled by another corporation not a close corporation (Sec. 96) General Rule: Any corporation may be incorporated as a close corporation Exceptions: 1. Mining and oil companies 2. Stock exchanges 3. Banks


ATENEO LAW SCHOOL 2-D L.T.J.F. 4. 5. 6. 7.

Insurance companies Public utilities Educational institutions Other corporations declared to be vested with public interest

Unique Features and Characteristics 1. Classification of shares or rights 2. Qualifications of owning such shares 3. Restriction on the transfer of shares 4. Pre-emptive rights 5. A greater quorum or voting requirements 6. All officers or employees may be elected or appointed by the stockholders, instead of the board of directors


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Qualifications of Owning Shares The qualifications to be a stockholder must appear in the: 


Stock certificate Qualifications shown on a stock certificate is conclusive presumption that the person or transferee has notice of the fact of his ineligibility to be a stockholder When the a person or transferee is not entitled to own such shares, either by a violation of the restrictions of transfer or some other qualification, the corporation may, at its option, refuse to register the transfer of stock in the name of the transferee The power of the corporation to refuse the registration in the name of the transferee shall NOT be applicable if: ◦

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The transfer has been consented to by ALL of the stockholders The close corporation has amended its Articles of Incorporation

Restrictions on the Transfer of Shares Restrictions on the right to transfer shares must appear in the:


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By-Laws

Certificate of Stock If said restrictions are NOT found on any one of the said documents, the same shall not be binding on any purchaser in good faith Restrictions shown on a stock certificate is conclusive presumption that the transferee has notice of such restriction The restrictions must not be more onerous than granting the existing stockholders or corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or periods If the existing stockholder or corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares freely The restrictions on the transfer must be reasonable and a perpetual prohibition of transfer is void ◦

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Example of a restriction declared void by the SEC: SEC Opinion 13 March 2006

“Encumbrance of Shares. The shareholders may mortgage, pledge, or otherwise encumber all or part of their shares in the Corporation; provided that, the other parties shall give their written consent thereto; provided further that, written notice to the other parties shall be sufficient if the mortgagee or pledge is a banking or financial institution,” The acquisition of a prior written consent in order for a shareholder to be able to encumber his shares is deemed by the SEC as an unreasonable restriction, thus it was declared void. Pre-emptive Rights

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General Rule: Pre-emptive right of stockholders


ATENEO LAW SCHOOL 2-D L.T.J.F. shall extend to all stock to be issued including the reissuance of treasury shares Exception: Unless the AoI provide otherwise

Management of Close Corporations Management by the Stockholders (Sec. 97) AoI may provide that corporate business shall be managed by the stockholders rather than by a Board of Directors, and so long as such provision con tinues in effect: 1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly appears otherwise, stockholders shall be deemed to be directors for purposes of applying provisions of the Code; and 3. Stockholders shall be held to strict fiduciary duties to each other and among themselves and shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. 4. ALSO: AoI may provide that all officers or employees or that specified officers or employees shall be elected or appointed by Stockholders, instead of by the Board of Directors. Agreements Among Stockholders (Sec. 100) 1. Those executed before formation and organization of close corporation, signed by all stockholders, shall survive the incorporation and shall continue to be valid and binding between and among such stockholders, if such be their intent, to the extent not inconsistent with AoI, except those

CORPORATION LAW [DEAN VILLANUEVA] nd 2 Semester S.Y. 2012-2013 required by the Title on closed corporation to be embodied in said AoI. 2. Voting Agreements between two or more stockholders if in writing and signed by the parties thereto. 3. No provision in any written agreements signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves. 4. Written agreement among some or all of the stockholders shall not be invalidated on the ground that it so related to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors; Provided: Such agreement shall impose on the Stockholders-Parties thereto the liabilities for managerial acts imposed on Directors.

Board Meetings (Sec. 101) BoD Action of a close corporation is valid even without a meeting if: 1. Before or after such action is taken, when there is written consent thereto signed by all directors; 2. All of Stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; 3. Directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders, or 4. All directors have express or implied


ATENEO LAW SCHOOL 2-D L.T.J.F. knowledge of the action in question and none of them makes prompt objection thereto in writing. Amendment of the AoI (Sec. 103) Any amendment which seeks to: 

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delete or remove any provision of required by the Title on Close Corporations to be contained in the AoI

Reduce a quorum or voting requirement Must be approved by at least 2/3 of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be provided in the Articles of Incorporation ◦

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Requiring purchase of the fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other Stockholders; Appointing a Provisional Director; Dissolving the corporation Granting such other relief as the circumstances may warrant

Withdrawal and Dissolution Any stockholder may, for any reason, compel the close corporation to purchase his shares at their fair value when the corporation has sufficient assets A stockholder may compel the dissolution of the close corporation by written petition to the SEC when: 

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Deadlocks Notwithstanding any contrary provision in AOI, Bylaws, or Stockholders’ Agreement: 1. If Directors or Stockholders are so divided respecting the management of the corporation’s business and affairs that the votes required for any corporate action cannot be obtained 2. That corporate business and affairs can no longer be conducted to the advantage of the stockholders generally The SEC, upon written petition, shall have the power to arbitrate the dispute, with authority to make such orders as it deems appropriate, including an order: Cancelling or altering any provision contained in AOI, By laws, or any Stockholder’s Agreement Cancelling, altering or enjoining any resolution or other act of BOD, Stockholders, or Officers Directing or prohibiting any act of the corporation or its BOD, Stockholders, Officers, or other persons party to the action 

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The acts of the directors are illegal, fraudulent, dishonest or prejudicial to any of the stockholders Corporate assets are misapplied or wasted

XIV. DISSOLUTION AND LIQUIDATION

Effects of Dissolution Termination of the corporate juridical personality, except for the purpose of settling and closing its affairs (See: Liquidation) No authority to enter into new business At the point of dissolution, the doctrines of corporation by estoppel or de facto corporations are not made to apply to save the transaction. ( Buenaflor v. Camarines Sur Industry Corp., 108 Phil. 472) No vested right to corporate fiction Not even the creditors of the corporation can claim the any constitutional right to a corporation’s perpetual existence Corporate dissolution does not imply diminution or extinction of rights demandable against a corporation ( Republic 

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v. Tancinco, 394 SCRA 386 ) When the assets of dissolved entity are taken over by another entity, the latter is liable for obligations of dissolved entity “to the extent of the fair value of assets actually taken over.” (Gonzales v. Sugar Regulatory Administration, 174 SCRA 377 )

Nature of Dissolution De Jure Dissolution: 

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Extinguishment of its franchise and termination of its corporate existence for all business purposes. Cessation of the pursuit of all business enterprise without termination of its judicial person.

Maintenance of the Separate Juridical Personality for another three (3) years for purposes of liquidation. De Facto Dissolution: ◦

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When the Corporation has ceased to do or pursue any business, it does not constitute dissolution, if it is still solvent and has not gone into liquidation.

Methods of Dissolution Voluntary 

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Voluntary dissolution where no creditors are affected Voluntary dissolution where creditors are affected Dissolution by shortening the corporate term

Dissolution by allowing the expiration of the corporate term under the AoI Involuntary ◦

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Dissolved by the SEC upon filing of a verified complaint and after notice and hearing

CORPORATION LAW [DEAN VILLANUEVA] nd 2 Semester S.Y. 2012-2013 the quasi-judicial body involved) ◦

Grounds for Involuntary Dissolution:

1. Failure to organize and commence transaction of its business or construction of its works within 2 years from incorporation: deemed dissolved 2. Although commenced business, subsequently becomes continuously inoperative for at least 5 years: Ground for suspension or revocation of franchise 3. Failure to adopt and register/file with SEC the By-laws 4. Offended against legal provision for its creation or renewal 5. Committed or omitted an act amounting to a surrender of its corporate rights, privileges, or franchises 6. Misused a right, privilege, or franchise, or Exercise thereof in contravention of law, such as commission by the corporation of ultra vires or illegal acts 7. When SEC Management Committee or Rehabilitation Receiver, or based on SEC's own findings, continuance of business would not be feasible nor profitable nor work to the best interest of stockholders, partieslitigants, creditors, or general public 8. Is guilty of fraud in procuring Certificate of Registrations 9. Is guilty of serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public 10. Refusal to comply or defiance of an y lawful SEC order restraining commission of acts which would amount to a grave violation of its franchise 11. Failure to comply with SEC reportorial requirements Voluntary Dissolution

Always quasi-judicial in nature (SEC as




Voluntary dissolution where no creditors are affected Equivalent to application for AoI amendment 

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Procedure (Sec. 118): Majority vote of BOD Notices to stockholders, of time, place and object of meeting, at least 30 days prior to meeting Publication of notice, for 3 consecutive weeks in newspaper where principal office located, if none, in newspaper of general circulation Stockholders’ resolution, by at least 2/3 of OCS at meeting held for purpose BOD certification/application filed with SEC SEC issues Certificate of Dissolution 

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consecutive weeks in 3 public places in principal place of business At hearing, SEC shall hear petition and try any issue made by objections filed SEC may render judgment of dissolution, directing such disposition of its assets as justice requires, and may appoint receiver to collect such assets and pay corporate debts

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Voluntary dissolution where creditors are affected File a formal SEC petition for dissolution Proceedings quasi-judicial in nature Conducted to ensure Creditors’ rights fully protected SEC not mandated to dissolve Especially when detrimental to Creditors Who may wish to rehabilitate corporate operations to ensure higher recovery   

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Procedure (Sec. 119): Petition filed with SEC Signed by BOD majority Verified by President, Secretary, or Director Certifying that dissolution was resolved by affirmative vote of at least 2/3 of OCS, at meeting called for that purpose If petition sufficient in form and substance, SEC issues order fixing date on or before which objections may be filed, which date not less than 30 days nor more than 60 days after order Publication of SEC order, at least once a week for 3 consecutive weeks in newspaper of general circulation, and Posted for 3    

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Dissolution by shortening the corporate term Effected by amending AoI to shorten corporate term Upon approval of the amended AoI, the corporation shall be deemed dissolved with without any further proceedings when the shortened term expires (Sec. 120) 

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Procedure (Sec. 120): Notice published in a newspaper of general circulation for 3 consecutive weeks Listing of corporate creditors, with their consent Submission by majority stockholders or principal officers verified Undertaking to personally answer corporate debts Latest audited financial statements, not earlier than date of Stockholders' meeting approving action BIR clearance on tax liabilities Upon SEC approval, corporation is deemed dissolved by mere expiration of term without further proceedings, subject only to provisions for liquidations 

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Dissolution by allowing the expiration of the corporate term under the AoI Upon expiration of corporate term, corporation deemed dissolved without need of further action on the part of the corporation or the State A corporation cannot extend its life by amendment of its AOI effected during the 3

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ATENEO LAW SCHOOL 2-D L.T.J.F. year statutory period for liquidation when its original term had already expired, because that would constitute new business. Procedure (Sec. 11): Wait for the corporate term stated in the AoI to expire Upon expiration of the term, the corporation is deemed dissolved without need of further proceeding 

CORPORATION LAW [DEAN VILLANUEVA] nd 2 Semester S.Y. 2012-2013 Methods of Liquidation 1. Liquidation Through the BOD 2. By Receiver Appointed by SEC (now RTC) Upon Decreeing Dissolution of Corporation 3. By Conveying All the Corporate Assets to a Trustee Who Will Take Charge of Liquidation

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Disposition of Pending Claims General Rule on Abatement: 

In the absence of contrary statutory provision, pending actions by or against a corporation are abated upon expiration of 3-year Liquidation period. Procedures Against Officers and Stockholders Possessing Corporate Assets ◦

Effects of Liquidation Winding up of a corporation and settling with creditors and debtors Assets are distributed to those entitled to receive them The process of reducing assets to cash, discharging liabilities and dividing surplus or loss. Limited period to liquidate the assets – 3 years from the date of dissolution Dissolution always precedes liquidation, and there is no legal basis to proceed with liquidation without the corporation first having been dissolved 

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3-Year Period A corporation's existence shall be continued as a body corporate for 3 years from the date of dissolution for the purpose of settling and closing its affairs It is also the period in which to prosecuting and defending suits by and against it It is the period in which the corporation is authorized to liquidate its assets and distribute them to corporate creditors Any asset distributable to any creditor, stockholder or member who is unknown or cannot be located shall be escheated to the city or municipality where such assets are located (Sec. 122)

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Even after 3-year liquidation period, corporate creditors can still pursue claims against corporate assets against officers or stockholders who have taken over properties of the corporation. Although [Sec. 122 of Corporation Code] provides for 3-year Liquidation period, there is nothing in said provision which bars an action for the recovery of the debts of the corporation against the liquidator thereof, after the lapse of the said three-year period. General manager who obtains corporate property to apply to his own claims, liable to the extent thereof to corporate liabilities, since knowing fully well that certain creditors had similarly valid claims, he took advantage of his position as general manager, and applied the corporation's assets in payment exclusively to his own claims.

Summary General Rule: Dissolution itself does not entirely extinguish the juridical entity or cause extinction or


Corporation Code Review

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