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CORPORATION LAW
Corporation is one of the types of business organizations. It is also the most important in economic development.
INTRODUCTION
Sole proprietorship
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One man form of business entity, personally answers all liabilities, but enjoys all the profits with the exclusion of others
General rule: Moral damages cannot be granted to corporations
Exception: Filipinas Broadcasting Network Inc. vs. Ago Med
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In cases of slander, libel and other forms of defamation (should not qualify because the code does not qualify whether natural or juridical) Art. 2219 of the civil code: Art. 2219. Moral damages may be recovered in the following and analogous cases:
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Limited shareholders responsibility
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Paid subscription in full, you are no longer liable
Partnership
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Based on mutual trust and confidence
Joint venture
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one time grouping of persons whether they be natural or juridical
(5) Illegal or arbitrary detention or arrest;
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does not entail continuity because after undertaking is completed it is already the end
(6) Illegal search;
(1) A criminal offense resulting in physical injuries;
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(2) Quasi-delicts causing physical injuries; (3) Seduction, abduction, rape, or other lascivious acts; (4) Adultery or concubinage;
the
(7) Libel, slander or any other form of defamation; particular partnership and joint venture would be similar, but there is already a decision of the Supreme Court declaring them as different
(8) Malicious prosecution;
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when they do not register, it does not exist
(9) Acts mentioned in Article 309;
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Foreign corporations enters into an agreement with a domestic corporation, it must be registered. Generally they do not need to be registered.
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Corporations
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They may enter into joint venture, but generally they cannot enter into a partnership, but there are exceptions allowed by the SEC: the 3 exceptions must go hand in hand 1.
The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of this article, may also recover moral damages. The spouse, descendants, ascendants, and brothers and sisters may bring the action mentioned in No. 9 of this article, in the order named.
The articles of incorporation expressly authorized the corporation to enter into contracts of partnership;
Advantages (SEE LADIA BOOK)
-
No. 2 may also be a disadvantage
2.
The agreement or articles of partnership must provide that all the partners will manage the partnership; and
-
No. 5 may also be a disadvantage
3.
The articles of partnership must stipulate that all the partners are and shall be jointly and severally liable for all obligations of the partnership.
A corporation is a person, therefore protected by the due process clause and equal protection clause of the Constitution
CLASSIFICATION OF CORPORATIONS DEFINITION AND ATTRIBUTES
4 attributes of a corporation
1.
Artificial being
2.
Created by operation of law
3.
Right of succession
4.
Powers, attributes and properties expressly authorized by law or incident to its existence.
Doctrine of limited capacity
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Only such powers as are expressly granted to it by law and by its articles of incorporation including others which are incidental to such conferred powers, those reasonably necessary to accomplish its purpose and those which may be incidental to its existence
Section 3 Stock and non-stock
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Importance of knowing, determining what provisions of the code or the law may be applicable Section 3. Classes of corporations. Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. (3a)
Non-stock- title 10
Stock- section 51
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Can do things as the law asks or allows it to do
Stockholders must generally cast their votes in the meeting; section 4 governed primarily by the law creating them
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If it does anything beyond, it shall be considered as ULTRA VIRES
Section 4. Corporations created by special laws or charters. - Corporations created by special
Notes on Corporation Law “Notes come in handy only when you have studied…” ©GTan; ASoguilon; VVillanueva
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laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. (n)
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If incorporated under the laws of the Philippines it is a domestic corporation
•
ME Gray vs. CA
Section 3
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Parent or Holding/ subsidiaries and affiliates
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The two requisites must always concur
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Affiliates- no majority vote
1.
That they have a capital stock divided into shares; and,
2.
That they are authorized to distribute dividends or allotments as surplus profits to its stockholders on the basis of the shares held by each of them.
SMC 12%
HERSHEY
CBP
CBPl 12%
12% Affiliate is subject to common control by the 12 % owners De jure
Section 4
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Created by a special law, they have their own character
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cannot be attached by the state even in a quo warranto proceeding
They are not immune from suit unless provided by the law of their creation
De facto
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Primarily governed by the law creating them
-
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Their subsidiaries are entirely different or independent from that of the other
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Attached directly only by the state in a quo warranto proceeding
Close corporation
Corporation by estoppel
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There is no exemption it is absolute
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Public corporation
So defectively formed, but still considered corporation, but only in relation to those who cannot deny their existence section 20 and 21
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Political or governmental purposes
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Those formed or organized for the government or a portion of the State or any of its political subdivision and which have for their purpose the general good and welfare
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Private Corporation
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Immediate benefit, aim or advantage of private individuals
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Those formed for some private purpose, benefit, aim or end
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Distinction: public for governmental purpose
Corporation Sole
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FORMATION AND ORGANIZATION
An incorporator may also be a juridical person
Close corporation
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There is exclusivity of shares of stock
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Section 96-105
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Restrictions to transfer shares
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Only those indicated can own shares
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3 stages 1.
Creation
2.
Re-organization or quasi-reorganization
3.
Dissolution/winding-up
Purpose clause
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Defining the scope of authority of the corporate enterprise pr undertaking. Both confirmed and limited
4 limitations of purpose clause
Exemption to the rule because it is composed only of one person
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exists by virtue of colorable compliance
1.
Lawful
2.
Specific or stated concisely
3.
More than one, the primary and secondary must be specified
4.
Lawfully combined
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Provision that states, cannot be issued less than par, exception is treasury shares because it can be issued less than par
A corporation commences only upon issuance of the certificate, prior thereto it has no being and cannot transact business. Promoters cannot act for a projected corporation
Article must provide that there will be no public offering
Metro Manila- paid up capital requirement is 10 M
Open corporation
Non- stock- mere mention of the operating capital
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openly admit investors
Mention the authorized capital
Restrictions
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example: stock exchange
Domestic/ Foreign
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Mandatory in close
Test
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Not mandatory in ordinary
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Incorporation test
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Non-stock
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venue of actions for or against the corporations
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If value is not more than 100,000
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venue of meetings
A corporation cannot use any other name unless it has been amended
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section 51 meetings may only be within boundaries of the city where the principal office
Section 19
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non-stock may be held anywhere in the Philippines, if provided in its by-laws
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where summons may be served
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registration of chattel mortgage must be registered in the register of deeds where the principal office is located
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Clavecilla Radio System vs. Antillon
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action not upon a written contract
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city where the defendant resides
term of existence
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corporate term required
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determining what point in time the juridical personality will cease to exist
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enter into personality
Section 18. Corporate name. - No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. (n)
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once it ceases to exist, it no longer has personality
Doctrine of secondary meaning
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If confusingly similar it will not be allowed to be registered Verification slip from the records officer Section 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (n)
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-
-
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Words corporation or inc. either in full or abbreviated form must be included
A word or phrase originally incapable of exclusive appropriation [usually generic] with reference to an article in the market, because of geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has become to mean that the article was his product. Section 18 Lyceum of the Philippines case, the additional geographical name does not make it confusingly similar
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that the complainant corporation acquired a prior right over the use of such corporate name identical, deceptive
deceptively
or
confusingly,
it
has
exist for another 3 years only for purposes of liquidation
When should extension be made?
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General rule: Not earlier than 5 years
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Exception: unless there are justifiable reasons
May it be extended after expiration?
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juridical
Alhambra cigar vs. SEC once it ceases to exist it has no vested politic, exist only for a period of 3 years only for liquidation and for that purpose only
Article 5 How many incorporators should there be?
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5-15
May a corporation be an incorporator?
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General rule: only natural persons Exception: cooperatives and corporation primarily organized to hold equities in rural banks
How about minors?
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NO, because they must be of legal age
May a corporation organized consisting solely of foreigners
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Yes, there is no nationality requirement only residence, as long as majority are residents of the Phil
Define incorporators
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Those person mentioned in the articles as originally forming the corporation and who are signatories of the articles of incorporation.
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Must be signatories to be incorporators
by
incorporators
patently
principal office
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statement of principal office is required
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city and municipality not only province must be specified
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principal office NOT operations office
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necessary because it will establish the residence of corporations
Notes on Corporation Law “Notes come in handy only when you have studied…” ©GTan; ASoguilon; VVillanueva
when
Dissolution- it is automatic
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2 requisites must be proven
only
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actual confusion is not necessary- Philips case “it is enough that there is probable confusion”
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contract
the
Section 5. Corporators and incorporators, stockholders and members. - Corporators are those who compose a corporation, whether as stockholders
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or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.
Corporators in a stock corporation are called stockholders or shareholders. Corporators in a nonstock corporation are called members. (4a)
Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:
Define corporators
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All persons who compose the corporation at any given time and need not be among those who execute the articles of incorporation at the start of its formation and organization.
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Originally or subsequently
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Section 5 provides:
1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, indebtedness;
Corporators in a stock corporation are called stockholders or shareholders. Corporators in a nonstock corporation are called members. (4a)
May a corporation be a corporator?
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YES. There is nothing to prevent a corporation from being a stockholder
Incorporator must subscribe to 1 share
There are those that are exclusively reserved to Filipinos
creating
or
increasing
bonded
5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. (5a)
An incorporator maybe a corporator as long as he is a stockholder
section 6
How many directors should there be?
Section 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock.
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General rule: Not less than 5 not more than 15
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Exceptions:
Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission.
3.
Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements.
Notes on Corporation Law “Notes come in handy only when you have studied…” ©GTan; ASoguilon; VVillanueva
1.
2.
Educational corporations registered as non stock corporation whose number of trustees, though not less than five and not more than [15] should be divisible by five [5], meaning they must have either five, ten, or fifteen trustees and no other; In close corporations where all the stockholders are considered as members of the board of directors thereby effectively allowing twenty members in the board. The by-laws of a corporation may provide for additional qualifications and disqualifications of its members of the board of directors or trustees. However it may not do away with the minimum disqualifications lay down by the Code.
Qualifications of the governing board
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Requires mere residency Section 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of
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the directors or trustees of all corporations organized under this Code must be residents of the Philippines.
reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. (n)
May a domestic corporation have a governing board consisting solely of foreigners?
-
YES, section 23 majority of them must be residents of the Philippines, no nationality requirement
Anti-dummy act
Minimum for a domestic corporation?
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If the business undertaking or activity is only partially nationalized, aliens can be elected as such directors, [unless the law provides otherwise] but their number shall only be in proportion to their equity or participation in the capital stock of the corporation.
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In no case shall the paid- up capital be less than 5k
Disqualifications
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The disqualifications provided for is absolute and may not be done away with. Corporate by-laws may, however, provide for additional qualifications and disqualifications. Section 27. Disqualification of directors, trustees or officers. - No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation. (n)
Section 27 and 23 minimum disqualifications and qualifications
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Lee vs. CA
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By laws may provide for additional
Gov’t vs. El hogar Filipino, Gokongwei vs. SMC
Is there a minimum authorized capital imposed by the code?
-
If there is minimum paid-up logically there should also be a minimum capital =5000
Minimum paid-up capital for a financing company metro manila 10 M if located in MM
Shares of stock
Purpose of classification
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To specify and define the rights and privileges of the stockholders;
-
For regulation and control of the issuance of sale of corporate securities for the protection of purchasers and stockholders.
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As a management control device.
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To comply with statutory requirements particularly those which provide for certain limitations on foreign ownership and shares like overseas employment agencies requiring to own at least 75% of the shares of stock thereof.
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To better insure return on investment which can be affected through the issuance of redeemable shares or preferred shares, i.e., granting the holders thereof, preference as to dividends and/or distribution of assets in case of liquidation; and,
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For flexibility in price, particularly, no par shares may be issued or sold from time to time at different price depending on the net worth of the company since they do not purport to represent an actual of fixed value.
Section 6
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Each shall be equal in all respects to every other share
Preferred shares
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Specific preference
Capital structure Foundation- minimum paid-up capital 3M Authorized capital 1 M
No. of shares 1M shares par value 1.00
Amount of shares subscribed 50 K
A
50 K
B C
250K
D E PAID UP =62,500 -
Dividends or during liquidation
Corporation cannot exceed more than 1 M it is the maximum amount it cannot issue more unless amended
No par
Maximum shares it can issue is 1M shares unless amended
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Can sell it with the network of the corporation
Distinction between the subscribed and outstanding stocks?
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Section 137
How much shares should be subscribed?
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Must be at least 25% of the authorized capital stock
Paid- up must be at least 25%-minimum
Section 30
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Total subscription compliance with minimum 25% total
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Any combination would comply with the minimum required by section 30 Section 30. Compensation of directors. - In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for
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Section 137. Outstanding capital stock defined. - The term "outstanding capital stock", as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares. (n) -
Voting and dividend rights, it refers to the outstanding capital stocks
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Only outstanding stocks are allowed to vote and receive dividends
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Actually the same
Treasury shares
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are also subscribed shares
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(1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n)
while they remain in the treasury, no voting and dividend rights
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may be reissued by the corporation
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once reissued they become outstanding stocks again
common shares
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carry the right to vote
preferred shares
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grants the holder preference
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preference as to dividends
-
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preference as to distribution of the remaining assets upon dissolution or
-
-
both
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YOU MUST STATE THE PREFERENCE BECAUSE IF NOT THEY ARE PRESUMED TO BE EQUAL
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It may include such other preferences not inconsistent with the Code. This is so because Section 6 of the said law allows a stock corporation to issue preferred shares subject only to the limitations imposed therein which are:
a.
They can be issued only with sated par value; and,
b.
The preferences must be stated in the articles of incorporation and in the certificate of stock, otherwise, each share shall be, in all respect, equal to every other share.
Participating
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Must be stated because the presumption is that it is participating
Cumulative
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Irrespective of whether or not they where earned
Preferred
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May be denied
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Unless denied they are still entitled
What if hindi i-declare kahit na may dividends rights for the previous years? May they be denied dividend rights because they are non holders of noncumulative? NOTE: YOU CANNOT COMPEL THE CORPORATION TO DECLARE DIVIDENDS UNLESS IT EXCEEDS 100 % PAID UP CAPITAL SEC. 43 Section 43. Power to declare dividends. The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except:
Notes on Corporation Law “Notes come in handy only when you have studied…” ©GTan; ASoguilon; VVillanueva
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It depends because there are three types of noncumulative preferred shares
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Discretionary dividend type
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Mandatory if earned
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Earned cumulative or dividend credit type
Compare cumulative share from non-cumulative, earned cumulative or dividend credit type Cumulative share –whether or not earned Non-cumulative earned cumulative or dividend credit type- only if earned
Par
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stated par value; shall not be issued less than par
No par
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without stated par value
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once fully paid no longer liable
Corporations cannot use its capitals in declaring dividends; not all can issue no par value section 6
Voting
-
entitled to vote at any motion brought up in writing
Non-voting
-
not entitled to vote
What types of shares may be denied of the right to vote?
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Preferred and redeemable shares
Is it correct to state that common shares can never be denied the right to vote?
-
Only preferred and redeemable shares are denied unless provided in this code
-
PWEDENG MA-DENY YUNG COMMON SHARES, KASI YUNG FOUNDER’S SHARES MERON SILANG EXCLUSIVE RIGHTS NA SILA LANG ANG MERON, SO PWEDE SILANG BUMOTO WITH REGARDS TO SOMETHING NA HINDI NA SAKOP NG COMMON SHARE RIGHTS
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Example: founders shares- may be given certain rights and privileges
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Even common shares may be denied the right to vote of founders’ shares issued Section 7. Founders' shares. - Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. (n)
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Do you include non-voting shares in passing a valid corporate act?
-
-
Even non-voting shares are entitled to vote under section 6
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Redeemable shares
The code does not require ordinary corporations to provide for restrictions, but it does not likewise prohibit restrictions
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Discretionary/optional
-
Example: right of first refusal
-
Obligatory or mandatory
-
The restriction must be contained in the articles of incorporation
Generally a corporation can reacquire its own shares if it has unrestricted retained earnings
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If provided in by-laws but not in the articles of incorporation then it will not be binding
Exception: redeemable shares may be reacquired irrespective of retained earnings
Treasury shares
-
They are treasury while in the treasury account of the corporation
May they be reissued by the corporation?
-
YES
If they are reissued will they be denied the right to vote?
-
Once reissued they shall become outstanding stocks again and purchasers shall be entitled to all the rights and privileges as the other holders have
Section 57 treasury shares have no voting and dividend rights. Why not? Section 57. Voting right for treasury shares. - Treasury shares shall have no voting right as long as such shares remain in the Treasury. (n)
-
Answer: commissioner vs. manning page 62 first par. “Although authorities may differ on the exact legal and accounting status of so-called treasury shares, they are more or less in agreement that treasury shares are stocks issued and fully paid for and reacquired by the corporation either by purchase, donation, forfeiture or other means. Treasury shares are therefore issued shares but being in the treasury they do not have the status of outstanding shares. Consequently, although a treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again, such shares, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor in meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetrate their control of the corporation, though it still represents a paid for interest in the property of the corporation. The foregoing essential features of a treasury stocks are lacking in the questioned shares. In this case, and under the terms of the trust agreement, the shares of stock of Reese participated in dividends which the trustee received and the said shares were voted upon by the trustee in all corporation meetings. They were not, therefore, treasury shares.”
When the law speaks of outstanding rights it does not include treasury shares
Treasury shares may be reissued
-
They are actually assets of the corporation
-
Once re-issued they become outstanding stocks again
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The corporation may cancel them; in effect there will be a reduction in the outstanding capital stocks
Restrictions and preferences are mandatorily required in close corporations If it does not provide restrictions it is not a close corporation
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Specified persons- close corporations
-
If not one of those specified you are not included because there is exclusivity in close corporations
-
Should also be in the by-laws not only in the articles of incorporation
No transfer clause
Execution clause
Acknowledgment
Treasurer affidavit part of the articles of incorporation
Section 23-27 minimum qualifications, but there may be additional
Grounds for disapproval
-
Only substantial and not strict is required
May the SEC refuse or reject registration?
-
Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. - The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval: 1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; 3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid is false; 4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a
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favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. (n)
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Strict or substantial compliance
De facto
-
But the grounds in section 17 are not exclusive
-
4 requisites must go hand in hand take out anyone of them there can be no de facto corporation
When will the corporation commence to exist?
1.
-
Section 19
There is a valid statute under which the corporation could have been created as a de jure corporation.
2.
An attempt, in good faith, to form a corporation according to the requirements of law, which goes far enough to amount to a “colorable compliance” with the law;
3.
A user of corporate powers, the transaction of business in some way as if it were a corporation; and,
4.
Good faith in claiming to be and doing business as a corporation.
Are the rights and obligations between officers and directors of a de jure and de facto the same?
-
YES. Governed by the same law, rules and regulations
Only important in determining, is for the purpose of applying the rules with regards to the direct and collateral attack
The existence of a de jure cannot be questioned even by the State, either directly or indirectly
Existence of a de facto can be questioned only by the State directly in a quo warranto proceeding only
•
Municipality of Malabang vs. Benito
Section 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (n)
A corporation de jure can come into existence only upon the issuance of the certificate of registration by the SEC? TRUE OR FALSE?
-
TRUE
-
EXCEPTION: CORPORATION SOLE Section 112. Submission of the articles of incorporation. - The articles of incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public. From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof. (n)
-
What is the missing link so as to consider it a de facto? A law, because the executive order is unconditional An unconditional act affords no rights, creates no office
-
Legal contemplation it was never passed at all
-
It can therefore be questioned by any person
If the certificate of registration has not been issued, may a corporation de facto exist?
-
NO!
-
CORPORATION SOLE- upon filing of the verified articles of incorporation, once filed it is vested with a judicial capacity
Number 4 requirement, good faith in claiming to be and doing business as a corporation
•
Hall vs. Piccio
General rule section 19
-
Missing link is good faith
-
Vested with judicial capacity upon issuance of the certificate by the SEC
-
The certificate was not yet issued by the SEC, the members knew and therefore they were not acting in good faith, therefore anybody can question its existence
Corporation by estoppel
-
So defectively formed so that they are not to be considered a de jure or de facto
-
General partners- liable even beyond his promise even his personal properties are prone to attachment
-
o
However it is not accurate according to atty. Ladia because there are those that can issue for example cooperatives- BUREAU OF COOPERATIVES which register, home insurance guaranty corporation- HOME OWNERS
•
Cagayan Fishing vs. Sandika
-
Corporations are created by law
•
Lozano vs. Delos Santos
-
Commence to exist upon issuance by the CONCERNED government corporation or agency
-
Founded on principle of equity
-
Prior there to it has no being
-
Exercise corporate powers
-
The transfer of the property was not valid, it likewise did not have the right to transfer
-
Enters with business with 3rd parties
De jure
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9
-
When there is no 3rd persons involved and the problem arises between there members, therefore they themselves know that there is no corporation by estoppel
o office, it is in legal contemplation, as inoperative as though it had never been passes
Hall vs. Piccio
-
No good faith
•
Albert vs. University
-
1965 case, no section 21 yet
Corporation by estoppel
-
Applied where the rules governing agency
-
Admission, conduct or agreement
-
A person purporting in behalf of a non existing corporation
-
-
Section 21, you arrive at the same decision
-
Cannot escape when benefited
•
Chiang Kai Siek vs. CA
-
General rule: you deal with a corporation, as to estop it
-
SC based its decision from the provision of the education act
-
-
It cannot immune itself by virtue of its non compliance with the law
Assuming there was no law?
-
YES, it may still be sued as a school for the past 32 years the school represented itself as possessed of juridical personality
General rule: a 3rd party transacting with a non existent corporation shall be estopped to deny
•
Asia banking vs. standard products
-
General rule: absence of fraud a person who has dealt with a non incorporated corporation shall be stopped to deny from actions in which it had benefited
-
Exemptions: when there is fraud the general rule shall not apply
Will not apply among members themselves there must be a 3rd party
Exceptions: 1. fraudulently misrepresents the third person may file an action directly to those members, 2. 3rd party will not be estopped if he is not trying to escape liability
2 possible remedies
-
Chiang kai siek case
-
Albert case
What would be the effect if the corporation failed to commence transaction?
-
Automatic
Operated but becomes subsequently inoperative for 5 years only a ground for suspension, proper notice and hearing
Commencement
-
Example realty company
•
Salvatierra vs. Garlitos
-
As a general rule a person who has contracted it a corporation lacking personality
What do you understand by the word charter? Is it the same as articles of incorporation?
-
Doctrine is not applicable where fraud takes part in the transaction
-
Corporate charter is broader
Another exemption
Franchise
•
International express travel and tours vs. CA
Primary power granted by the state to be and act as a corporation
-
No fraud in this case
-
Secondary franchise is the right or privilege that the corporation may exercise
-
How come Kahn was made liable?
-
Doctrine of incorporation
-
Applies only if that person is trying to escape from a contract where he is benefited
You cannot issue investment contracts without a secondary franchise, kailangan primary muna hindi pwede mauna secondary kasi sa section 19 it does not exist until issued with a certificate of registration or incorporation
-
In this case petitioner is not trying to escape liability, but rather the one claiming from the contract
Corporate entity
Would this apply to foreign corporation?
Corporation exist separately and independently from the stockholders
-
YES, it may apply
-
Stockholders cannot bring an action, to bring back the properties of a corporation
-
Georg Grotjahn vs. Isnami -
A foreign corporation cannot gain access to our courts unless they attain a license to engage in business in the Philippines but applying corporation by estoppels, the court allowed
Corporation has no interest in the individual properties of its members
•
Sulo ng Bayan vs. Araneta
-
Corporation cannot bring an action for the recovery of the properties of its members
•
Caram vs. CA
Municipality of Malabang case
-
No law, hence may be questioned by any person
-
An unconstitutional act is not a law, t confers no rights, it imposes no duties, it affords no protections, it crates
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CORPORATE CHARTER AND ITS AMENDMENTS
10
-
Stockholders cannot be held liable for the legitimate obligations of the corporation, they exist separately and independently from one another
•
Cruz vs. Dalisay
-
Final judgment against a corporation cannot be enforced against stockholders
•
Rustan Pulp vs. CA
-
Corporation exist separately and independently
-
Corporation are juridical entities, they exist only in legal contemplation, can act only through its authorized representatives
•
Soriano vs. CA
-
They are not personally liable
-
They where signed for and in behalf of the corporation
•
Palay inc. vs. Clave
-
Liabilities incurred by the corporation cannot be enforced against stockholders, etc., even if stockholders, etc. happens to own a substantial interest in the corporation, mere ownership does not disregard the corporate entity theory
Corporate entity for legal or legitimate purposes only
Two or more corporations, one of them will be treated as a mere alter-ego
You cannot pierce the veil of corporate fiction when there are no facts attendant in the case
Corporate Entity Theory
-
The corporation is possessed with a personality separate and distinct from the individual stockholders or members and is not affected by the personal rights, obligations or transactions of the latter
Instrumentality rule
-
Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality” may be disregarded
-
Courts are concerned with reality and not form
-
Mere ownership of all or substantially all of the shares of stock of a corporation is not, in itself, insufficient ground for disregarding the separate corporate personality. And for the separate personality of the corporation to be disregarded, the wrong doing must be clearly and convincingly established
-
Fraud must be proven by clear and convincingly evidence amounting to more than preponderance. It cannot be justified by speculation and can never be presumed. And only if it sought to hold the stockholders liable directly for corporate debt
•
Palacio vs. Fely
-
Piercing the veil of corporate fiction
-
Fely trans and the other corporation is one and the same
•
Marvel bldg. vs. David
-
There must be facts before the court will be justified in piercing the veil of corporate fiction
-
Corporation was a mere extension of the personality of the person
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•
Yutivo and sons vs. Court of Tax Appeals
-
What where the facts or circumstances arrived by the court here?
-
Subscribed capital where all advanced by Yutivo, the board where the same as Yutivo
•
Commissioner of Internal Revenue vs. Norton and Harrison -
Court applied the general rule
-
Mere substantial ownership does not mean that it has a same corporate entity
•
La Campana Coffee Factory, Inc. vs. KKM
-
Two corporations managed by the same family, workers were made interchangeably
•
Emilio Cano vs. CIR
-
Sued in there official capacity
-
Reverse of Soriano vs. CA (signed in their official capacity)
•
Tesco vs. WCC
-
The two corporations where located in the same office
•
Claparols vs. CIR
-
Same as NAFLU and A.C. Ransom
•
Concept builders vs. NLRC
-
Instrumentality rule. What is the instrumentality rule? “where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality” may be disregarded.”
-
Has no separate mind of its own. What is the degree of control?
1.
Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own.
2.
Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty or dishonest and unjust act in contravention of plaintiff’s legal rights; and,
3.
The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
-
The absence of one of the elements prevents “piercing the corporate veil.” In applying the “instrumentality” or “alter ego” doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation.
There must facts and circumstances before warrant piercing the veil of corporate fiction
The control necessary does not mean stock ownership
•
MCConnel vs. CA
-
were located in the same floor
-
“while the mere ownership of all or nearly all of the capital stock of a corporation does not necessary
11
mean that it is a mere business conduit of the stockholder, that conclusion is amply justified where it is shown, as in the case before us, that the operations of the corporation were so merged with the stockholders as to be practically indistinguishable from them. To hold the latter liable for the corporation’s obligations is not to ignore the corporation’s separate entity, but merely to apple the established principle that such entity cannot be invoked or used for purposes that could not have been intended by the law that created that separate personality.” •
Tan boon bee vs. Jarencio
-
Why would a drug company need a printing machine
-
The property must be in pursuance of a company business
1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and 3. In case of merger or consolidation. (n) -
Right granted only in specified instances
Are non-voting shares included in amending the articles of incorporation
•
Cease vs. CA
1
100/s
-
Alter-ego or the extension of the person of forest ware does the court pierced the veil of corporate fiction
2
100/s
-
XYZ-----ABC
To As to not deprive the holders of their successional rights
10
-
Mere ownership of all or substantially all is not a justification of piercing the veil of corporate fiction
=1M/S be the 2/3?
Fraud must be proven by clear and convincing evidence cannot presume or speculate, there must be facts and circumstances
Section 6 last paragraph
Fraud must be clear and convincing evidence more than preponderance
1
1
2
2
•
Remo Jr. vs. IAC
3
3
-
The resolution was not entered to defraud anyone
4
4
•
Del Rosario vs. National Labor Commission
-
The wrongdoing must be clearly established
5
5
-
There must be facts to support
6
6
-
Payment of claims cannot thus be presumed
•
Indophil Textile Mill vs. CALICA
-
How do you distinguish this ruling to La Campana, having the same issues: La campana, one payroll, employees were made interchangeable. Acrylic had its own standards
•
PNB vs. Ritratto Group
-
Control test
-
Not mere majority but rather complete
-
Twin ace was only a subsequent interested party
-
Assets and machineries
Amendment of the articles of incorporation
-
Express power granted to a corporation
Section 16
-
Appraisal right
-
Section 81 to object on certain acts and transactions Section 81. Instances of appraisal right. Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances:
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100/s what
would
Voting shares are excluded except the foregoing instances
1 & 2=absent 1&2=absent but gave their written assent 3 & 4= objected 3&4=objected 5 & 6= approved the amendment 5&6=approved Would there be a valid amendment
Special amendments 37 & 38 shortening that would result to dissolution require prior approval by the SEC Section 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n) Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, twothirds (2/3) of the outstanding capital stock shall favor
12
the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally.
Commission, which shall have the authority to determine the sufficiency of the terms thereof. (17a)
The vote must be cast at the meeting called for that purpose
Written assent would not suffice
When do amendments become valid and effective?
-
Only upon the approval of the SEC TRUE OR FALSE?
A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:
-
(1) That the requirements of this section have been complied with;
Why is it retroactive?
What provision may be amended, altered or repealed
Can you change name, address for example she married or changed address?
-
NO. you cannot change that
Fait accompli, are beyond the powers or authority of the corporation to change, alter or modify. These would include the following:
-
Names of the incorporators and
-
The incorporating directors or trustees,
-
The name of the treasurer originally or first elected by the subscribers or members to act as such until his successor has been duly elected and qualified,
-
The number of shares and amount originally subscribed and paid out of the original authorized capital stock of the corporation,
-
The date and place of execution of the articles of incorporation,
-
The signatories and acknowledgment thereof.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission.
-
All other provisions or matters stated or contained in the articles are subject to amendment.
Founder’s or signatories hindi pwede palitan
One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twentyfive (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors.
Names, nationalities- you cannot
Capital- right granted by law to all corporation
Paid up capital- NO
Restriction and transfer of shares in ordinary stock corporations
-
You can, but close corporation cannot
-
Section 96, otherwise it will not be a close corporation
(2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness.
Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose.
registered
Bonds issued by a corporation shall be with the Securities and Exchange
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FALSE because it can be valid upon the date of filing if not acted upon within 6 months without fault attributable to the corporation
Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public
13
utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.
-
Will be bound by corporate officers if they acted within the 5 classification page 150
•
Ramirez vs. Orientalist co.
-
Transfer clause, executor clause, acknowledgment, treasury affidavit-NO
•
Philippine First Insurance case
-
Mere change in the name of a corporation or by merely complying with the law is general amendment
-
It does not change its personality. It is the same person in a different name. the charter is the same
Amendment of a corporate term
-
Extending the same can never be made 7 years prior? TRUE or FALSE
-
FALSE. It can be if there are justifiable reasons for earlier extension as may be determined by the SEC
Can you extend the corporate term if it has already expired?
-
Once the term expires without an amendment having happen it ceases to exist as a body politic. It is dissolved automatically on the day it expires.
Alhambra cigar and PNB case
Instances when the SEC allowed extension whose term has already expired
-
Why did the court rule that actions of Fernandez bound the corporation when he is not even a board of director? “if a man is found acting for a corporation with the external indicia of authority, any person not having notice of want of authority, may usually rely upon those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted.”
-
Actions of the stockholders in such matters is only advisory and not in any way binding in the corporation
•
Barreto vs. La previsora Filipina
-
Everything emanates from the board of directors
-
Stockholders action is merely advisory except their approval or vote is necessary to prove a valid corporate act
Qualifications:
-
All of them involved are institutions of learning, it was the case in order to avoid confusion that would arise later on.
Section 23 Section 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.
Contracts must be made by the director and not the stockholders
-
No citizenship requirement, at least majority must be residents
-
Can have a governing board consisting solely of foreigners
-
But we have to take into consideration partly nationalized industries and other laws which prohibits or limits foreign ownership
-
Anti-dummy act
-
Utilization development of natural resources 60% must be owned by Filipino citizens, therefore they only own 40%---10 members they can only have 4 seats, but not entirely correct because the law may provide otherwise; educational institutions restricted to Filipinos, but there are exceptions when created by religious and charitable institutions.
-
By-laws may provide additional qualifications and disqualifications
-
To qualify as a director he must own at least 1 share
Should the stockholder be the equitable or beneficial owner in order to qualify as a director?
-
NO, it is not necessary, as long as you are listed in the books as owner of one share
BOARD OF DIRECTORS/TRUSTEES
What was the position of Fernandez in this case? TREASURER
-
Controlled by the board of directors
-
Authority are however restricted to the day to day
•
Lee vs. CA
-
Stockholders may have all the profit but will turn over the management to the governing board
-
As long as you are listed in the books as owner of one share
-
But unless the law provides the power may be delegated
-
General rule
Under the old law he must be the beneficial owner and legal owner thereof but in the new law it is not required as long as it stands in his name he is qualifies
-
Corporations must sit and act as a body
1 A-100t/S director? 2
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B (own in the trust of X) is B qualified to be a
14
3-10
Who wins? Or who gets elected?
2– transferring there voting rights in favor of VT
-
No vote requirement, the one who gets the most number of votes gets elected, section24.
What is cumulative voting?
-
Process of multiplying the number of shares to the number of director to be elected
-
Matter of right granted to stockholders in a stock corporation
Other rights will accrue in favor of them, but not the voting rights voting rights must be recorder in the books of the corporation that it is transferred PNB-IFL- wholly owned subsidiary of PNB PNB will assign to PNB-IFL nominal shares and PNB-IFL now will be able to be nominated
Gen. Rule:
-
Term of one year who will serve as such until there successors are elected and qualified
Exception:
-
1 to 5 has 200k/s and members of the same family- majority 800k they have 4M votes they are guaranteed 4 seats 6 to 10 are not related- 1 seat 1M votes
Cumulative to allow the minority to have a rightful representation in the board
Non-stock corporation can serve for a term of 3 years
Is it allowed in a non-stock corporation?
-
Educational non-stock- term of the governing board can be 5 years
-
Not generally available
May this term exceed one year?
Section 89 unless the articles or by-laws allow cumulative voting
-
Yes, they may serve in a hold over capacity until their successors have been duly elected and qualified
•
Detective and protective bureau vs. Cloribel
-
In the by-laws, managing director must be elected from among themselves
-
Must be duly elected and qualified
Section 89. Right to vote. - The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote. Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code. (n)
How are the directors elected?
Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission.
1-100T/S 2-100T/S 3-100T/S to 10=1M/S
Do you include the vote of 1 & 2 to have a quorum to have a valid meeting?
-
NO, quorum requirements is 401,000
Other corporate officers other than the governing board section 25 Section 25. Corporate officers, quorum. Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time.
Quorum requirement is 501k Holders of non-voting shares are only entitled to vote in last par. Of section 6 1-200k 2-200k 3-200k
The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board.
4-100k 5-100k 6-100k 7-50k 8-40k
Directors or trustees cannot attend or vote by proxy at board meetings. (33a)
9-5k 10-5k
Is the president required to be a stockholder. YES
The chairman may be another person
The president may also be another person
=1MS 1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10, tumakbo and ninominate nila yung sarili nila and cast all their shares on themselves
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15
Prohibited is president to be secretary or treasurer at the same time
-
The contract here is so onerous that it would throw the corporation into insolvency
Board of director must sit and act as a body to arrive at a corporate act
•
Francisco vs. GSIS
-
GSIS cannot evade the binding effect of the telegram
What would constitute a quorum if 5 then 3 must be present
-
Only 15 months later that the corporation said there was a mistake
May the vote of 2 members past a 5 man governing board pass a valid corporate act?
-
The silence coupled with the unconditional acceptance of the other subsequent remittances is binding to the corporation
•
Board of liquidators vs. Kalaw
-
YES. Voting requirement is majority of directors present at which there where a quorum
1 requirement
1
and
2
present=valid
2
1 and 2 voted yes
3
3 voted no
voting “Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of general practice, custom and policy, the general manager may bind the company without formal authorization of the board of directors. In varying language, existence of such authority is established, by proof of the course of business, the usages and practices of the company and by the knowledge which the board of directors has, or must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. So also, “xx authority to act for and bind a corporation may be presumed from acts of recognition in other instances where the power was in fact exercised.” “xx Thus, when, in the usual course of business of a corporation, an officer has been allowed in his official capacity to manage its affairs, his authority to represent the corporation may be implied from the manner in which he has been permitted by the directors to manage its business.”
4 5
Is it absolute?
-
NO, except in the election because it requires the majority of all the members of the board
-
If by-laws or requirement
Artificial beings must act through its members and act as a body to have a valid corporate act
Exception:
-
Delegation
-
Expressly conferred
-
Where the officer or agent is clothed with actual or apparent authority
-
Otherwise it will not bind the corporation
Yao ka sin trading case “already asked in the bar”
-
Only bind the corporation to the extent of authority confined to him or virtue of customs, usage and policy
-
Must pass first the controller and counsel
What if the notice requirement is not complied with?
•
Lopez realty vs. Fotencha
-
articles
provide
a
higher
voting
Notice requirement must be complied with hence it should have been with force and effect, but according to the SC, it may be ratified expressly if there is a subsequent meeting called for that purpose
In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute contracts in its copra trading activities for and in NACOCO’s behalf without prior board approval. If the by-laws were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that Board itself, by its acts and through acquiescence, practically laid aside the by-law requirement of prior approval. -
Kalaw signed alone and said contracts were submitted to the board of directors after its consummation and not before
•
Buenaseda vs. Bowen
-
Express ratification is made through a formal board action
-
Implied ratification is through: silence or acquiescence, acceptance benefits and lastly recognition or adoption
An unauthorized act may nevertheless be binding either by express or implied by estoppels
By virtue of silence the board had impliedly accepted the act
By recognition or adoption
By virtue of payment of obligations arising thereforeLopez realty
May directors or trustees be disqualified to act as such?
-
Impliedly through acts
-
Asuncion was aware of the corporations obligation
-
There was implied ratification or she was estopped
•
Pua casim vs. Neumark and Co.
-
Considered 3 circumstanced
-
YES, crime, etc. disqualifications in book
-
Check which was the proceed of the loan which was endorsed and deposit in the corporate account
-
Possess or dispossess any of the qualifications or disqualifications , cease to hold at least one share
-
Neumark as president and also stockholder
May directors be ousted from office?
•
Yu chuck vs. Kong Li Po
-
-
General manager usually has the power to hire but the SC said the contract must be reasonable
At least 2/3 of members representing outstanding capital stock. Again notice requirement must be complied with
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16
1-200 family
1-5
same
compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. (n)
2-200 -
Generally not entitled to receive because they render it gratuitously
-
Unless the by-laws allows
-
Stockholders may also grant pursuant to a majority vote
-
Must not exceed net income of 10% tax of the preceding year
-
Acting in special capacity
-
In, sum directors may receive compensation when
3-200 4-100 5-100
electing
6-100 related
6 to 10 not
compensation
7-50 8-40 9-5 1. 10-5 director
Meetings called by the president or the secretary ordered by the president It depends if the removal is without cause they cannot do so because removal without cause shall not deprive the minority stockholders or members of the right of representative If with cause they can even if it will prejudice the rights of the minority, provided of course additional requirements by-laws and articles of incorporation Who will fill up the vacancy created due to the ouster of a member of the board of directors Section 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in office. Any directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. (n)
Other than by removal or expiration of term they do not have the power
When will the vacancies be filled up?
Is notice required, to fill up vacancies due to removal?
What if the vacancy is due to an increase, can it be filled up in the same meeting where in the number is increased?
Election due to removal-in the same meeting notice is not required
Election due to increase in number- it must be so stated in the meeting
there is a provision in the by-laws to that effect
outstanding
Section 30 Section 30. Compensation of directors. - In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly
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2.
When the stockholders, by a majority vote of the outstanding capital stock grant the same; and,
3.
If the director renders extra-ordinary or unsual service
•
Central cooperative exchange vs. Tibe
-
By-laws may allow, stockholders may also allow such
What do you understand by the phrase “as such directors”
•
Western institute vs. Salas
-
Compensation was granted without by-laws authority
-
Prohibition is not a sweeping rule
-
Members of the board may receive when they receive in a special capacity
-
Mere act of the board will suffice
Is the 10% ceiling applicable to other officers?
-
NO. the phrase “as such director” was used twice
-
The SC ruled that the 10% ceiling will not likewise apply if they acted in a capacity other than “as such directors”
•
Government vs. El Hogar
-
Judicial intervention is not proper
-
The appropriates remedy is to those who can make or unmake the by-laws
Liability of corporate officers
-
Obligations incurred by those acting for and in behalf of the corporations are not there’s BUT there are exceptions even if they are acting for and in behalf of the corporation
•
Tramat vs. CA
-
General rule was applied in the case
-
Ong acted as officers and acted within the scope of his authority
1.
Court laid down 4 instances when even if acting within the scope of his authority he is held solidarily liable He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;
17
2.
He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;
3.
He agrees to hold himself personally and solidarily liable with the corporation;
4.
He is made, by a specific provision of law, to personally answer for his corporate action.
-
Watered stocks- issued, fully paid up when in fact they have not been fully paid or promised as such
•
Llamado vs. CA
-
Distinction between section 31 and 34 relative to the ratification by the stockholders
-
The second paragraph of section 31 which makes a director liable to account for profits if he attempts to acquire or acquires any interest adverse to the corporation in respect to any matter reposed in him in confidence as to which equity imposes a disability upon him to deal in his own behalf is not subject to ratification by the stockholders. Whereas, in section 34 if a director acquires for himself a business opportunity which should belong to the corporation, he is bound to account for such profits unless his act is ratified by the stockholders owning ore representing at least 2/3 of the outstanding capital stock.
The corporate entity theory cannot be used as a defense to escape liability in violation of B.P. 22
-
If reposed in him in confidence, not subject to ratification
-
Where the check is drawn by a corporation the persons who signed the check shall be liable.
-
•
Uichico vs. NLRC
If the acquisition is merely that of a business opportunity which has not been reposed in him in confidence, the same may be subject to ratification by the stockholders.
-
Labor case corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employee done with malice and bad faith
Director x co. A-REALTY B
3 fold duty of directors
-
obedient
-
diligent
-
loyal
Business judgment rule
C
Z owns property and is going abroad never to Return, he wants to sell for 25M the fair market value is 30M
D E
-
-
Questions of policy and management are left solely to the honest decision of the board of directors and the courts are without authority to substitute its judgment as against the former. The directors are the business managers of the corporation and as long as they act in good faith, its actuations are not subject to judicial review. Montelibano vs. Bacolod Murcia Milling questions of policy and management are left solely to the board of directors
E goes to Z and offers to pay the property for 26 M and later he sells it for 30M making 4M profit, one of the stockholders learned and complains that he should submit the profits. E said that he will move for ratification of his actuation. Can it be ratified? -
It can be ratified he merely acquired a business owning to the corporation
-
It would be different if it was entrusted in his confidence
Another scenario:
-
BOD, business manager of the corporation and as long as they act in good faith, its actuations are not subject to judicial review
-
They are not insurer of the property of the company, they were guarantors that the enterprise undertaken by the corporation shall be successful
•
Montelibano vs. Bacolod Murcia Milling Co.
-
Directors are not liable due to imprudence or honest error of judgment
-
Duty of loyalty of corporate directors
-
-
31,32,33,34
The law would be impotent if the sale were not invalidated
-
31,32,33- specific instances when corporate officers may violate loyalty
Self-dealing director and interlocking director
What is a self-dealing director?
-
Director of a corporation dealing business with his corporation
Are the contracts and dealing of a self0dealing director valid?
General rule: voidable
May the contracts of a self-dealing director be valid per se.
-
32,33 self-dealing and interlocking director
Corporate opportunity doctrine
-
It places a director of a corporation in the position of a fiduciary and prohibits him form seizing a business opportunity and/or developing it at the expense and with the facilities of the corporation. He cannot appropriate to himself a business opportunity which in fairness should belong to the corporation.
Last paragraph of section 31 and the provision of section 34 make reference to recovery of “forbidden profits”
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Had A not attended the meeting he would not have known of the sale it is then a matter reposed in him in confidence
A corporation cannot reaquire its share if it has no restricted unretained earnings
•
Strong vs. Rapide
-
What duty did he violate?
-
He violated his duty of loyalty
-
or
transacting
YES. If all the 4 conditions are present they will be valid per se
18
1.
That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;
May corporate property?
•
Mead vs. Mccullogh
2.
That the vote of such director or trustee was not necessary for the approval of the contract;
-
3.
That the contract is fair and reasonable under the circumstances; and
interlocking director- a director of one corporation who deals and transacts business with another corporation who is himself a director
A-
director of X company also a director of Y corporation
4.
That in case of an officer, the contract has been previously authorized by the board of directors.
When do they become voidable?
-
When any of the two requisites are absent it is voidable, but subject to ratification by 2/3 of the outstanding capital stock or 2/3 of the member
directors
purchase
the
corporate
BCDE-
Requisites for ratification (subject to ratification by the stockholders holding or representing at least 2/3 of the outstanding capital stock or 2/3 of the members.)
Both companies enter into a contract and A sits, is the contract valid?
-
Yes on the ground of fraud or if it is unfair
-
it must be at a meeting called for the purpose
-
May be subject to the provision of section 32
-
full disclosure of the adverse interest of the director concerned must be made
-
Section 32 contract may become voidable, hence it may also be ratified
-
the contract is circumstances
-
fair
and
reasonable
under
the
X Co. Y Co.
Problem if self-dealing director involved owns all or substantially all of the shares of stock of the corporation thereby making it easily possible to have the contract ratified
A owe 20% A owe 20%
last sentence of section 32 should be made to apply by determining the reasonableness and fairness of the contract
25%
Is it generally valid or voidable? VALID
25% VALID 15%
Section 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;
25% VOIDABLE SUBJECT TO section 32 More than 20 substantial
BOD mismanages corporate officers. Who may file a suit?
-
General rule: BOD which can institute a case because it has all the powers. To allow stockholders to file would violate the doctrine of corporate entity and may result to multiplicity of suits
2. That the vote of such director or trustee was not necessary for the approval of the contract;
-
3. That the contract is fair and reasonable under the circumstances; and
Derivative suit
-
An action based on injury to the corporation-to enforce a corporate right- wherein the corporation itself is joined as a necessary party, and recovery is in favor of and for the corporation.
-
Remedy granted by law to stockholders to institute a case to remedy a wrong done directly to the corporation and indirectly to the stockholders, if the board refuses to do so. Otherwise if not they would be left without any recourse
Available suits
•
individual or personal
-
Wrong done against his person as a stockholder
•
Class suit
-
Filed by a stockholder in representation of other stockholders
-
A wrong or redress done, a derivative suit in nature
Intra-corporate remedies
4. That in case of an officer, the contract has been previously authorized by the board of directors. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances. (n) •
Prime white cement vs. IAC
-
a director of a corporation owes a position in trust
-
in case of conflict between himself and that of the corporation, he cannot sacrifice the interest of the corporation to his own advantage
-
as a director he should have acted in a manner as not to unduly prejudice the corporation
-
he cannot be allowed to enrich himself
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Stockholders cannot therefore generally file a case EXCEPT of course in a DERIVATIVE SUIT
19
-
Demand to the BOD to institute such action
-
Negated by the BOD
-
The one who instituted must be a stockholder at the date when the act was done, must have been a stockholder by that time
Demand will not be required if the majority of the BOD are the one’s guilty of the wrong charged
The corporation must be made a party in the case whatever side will not matter because under Philippine law misjoinder is not a ground for dismissal
Non-joinder is a ground for dismissal
Any benefit should inure to the corporation
Stockholder bringing the action is entitled to reimbursement such as attorney’s fee ONLY IF the case is SUCCESSFUL to avoid harassment suit to their management
being intra-corporate disputes, per Section 5 (b) of P.D. 902-A •
San Miguel vs. Khan
-
Was a demand made? NO
-
It is not necessary because he objected in the board meeting, but still it was adopted therefore it was useless
•
Chase vs. Buencamino
-
Argument that he should be in estoppels since he filed in the U.S.
-
Assuming the case prospered in the U.S. would not estoppels apply as against him? NO for estoppels to step in it must be a case by the corporation
•
Reyes vs. tan
-
Corporate director are guilty of breach of trust
-
A stockholder may institute an action to remedy a wrong done
-
Fraud in the conduct of corporate affairs
•
Gamboa vs. Victoriano
-
Is derivative suit appropriate in this case
-
They are not vindicatory damage done to the corporation, but rather they where vindicating damage against him
•
Pascual vs. Orozco
-
By virtue of the fact that he is a stockholder, may maintain a derivative suit
-
Depend on how, when and what reason
-
Seeking for the years 1898 all the way 1907
-
Only became a stockholder in 1903
-
He can sue only in 1903 forward because he must be a stockholder
-
Violation of their rights as individuals, hence derivative suit is not the remedy
-
The right of action is personal in nature. He became a stockholder only in 1902
•
Evangelista vs. Santos
Derivative suit
-
Derivative suit is not proper
-
By a stockholder to address a wrong done against the corporation and the stockholder indirectly
-
Claim is not for the benefit of the corporation, but rather his individual benefit
-
Essential requisite must have been a stockholder from the time the act complained of took place
From the cases above cited, these are the requirements and the procedures that must be followed in order that a derivative suit may prosper
-
Cannot institute an action from the years he was still not a stockholder
1.
That the party bringing the suit should be a stockholder as of the time the act or transaction complained of took place, or whose shares have evolved upon him since by operation of law. This rule, however, does not apply if such act or transaction continues and is injurious to the stockholder or affect him specifically in some other way.
•
Everett vs. Asia Banking
-
Stockholders cannot ordinarily commence suit in equity and such is in the hands of its BOD however there are exceptions when the BOD will not sue since they are themselves principals to the fraud.
•
Republic vs. Cuaderno
-
The facts constitute sufficient cause of action
-
It is not the corporate interest to shield one from criminal prosecution which is personal interest
-
Perez is not suing in his behalf, but in behalf of the corporation
•
Western institute vs. Salas
-
Assuming it was filed in the proper forum would there argument that it is a derivative suit prosper? NO. it is people of the Philippines vs. individual director, it must be stated in the complaint that it is being instituted as a derivative suit and for and in behalf of the corporation
-
Granting arguendo, that this is a derivative suit, the same is still outrightly dismissible for having been wrongfully filed in the regular court devoid of any jurisdiction to entertain the complaint. The case should have been filed with the SEC which exercises original and exclusive jurisdiction over derivative suits, they
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The number of his hares is immaterial since he is not suing in his own behalf or for the protection or vindication of his own right, or the redress of a wrong done against him, individually, but in behalf and for the benefit of the corporation. 2.
He has tried to exhaust intra-corporate remedies, he has made a demand on the board of directors for the appropriate relief but the latter had failed or refused to heed his plea. Demand, however, is not required if the company is under the complete control of the directors who are the very ones to be sued (or where it becomes obvious that a demand upon them would have been futile and useless) since the law does not require a litigant to perform useless acts;
3.
The stockholder bringing the suit must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated, otherwise, the case is dismissible. This is because the cause of action actually devolves on the corporation and not to a particular stockholder.
4.
The corporation should be made a party, either as party-plaintiff or defendant, in order to make the
20
5.
court’s judgment binding upon it, and thus, bar future litigation of the same issues. On what side the corporation appears loses importance when it is considered that it lay within the power of the court to direct the making of amendment of the pleading, by adding or dropping parties, as may be required in the interest of justice. Misjoinder of parties is not a ground to dismiss action; and,
Corporate authority may be classified into three classes namely:
1.
Those expressly granted or authorized by law inclusive of the corporate charter or articles of incorporation;
2.
Those impliedly granted as are essential or reasonably necessary to the carrying out of the express powers;
Any benefit or damages recovered shall pertain to the corporation. This is so because in all instances, derivative suit is instituted for and in behalf of the corporation and not for the protection or vindication of a right or rights of a particular stockholder, otherwise, the aggrieved stockholder should institute, instead, an individual or personal suit to vindicate his personal or individual right. Or, for that matter, representative or class suit for all other stockholders whose rights are similarly situated, injured or violated, personally or individually.
3.
Those that are incidental to its existence.
Section 36 to 45- POWER GRANTED BY LAW
Section 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation;
Executive committee
-
Not allowed under the OLD law
How may constituted?
3. To adopt and use a corporate seal;
-
executive
committee
created
and 4. To amend its articles of incorporation in accordance with the provisions of this Code;
Section 35 Section 35. Executive committee. - The bylaws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders' approval is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders.
-
Said committee may act and bind the corporation by the majority vote of all its members except with respect to those matters provided for in sec. 35 these are:
1.
Approval of any action approval is also required
2.
The filing of vacancies in the board;
3.
Amendment or repeal of by-laws or the adoption of new by-laws;
4.
for
which
shareholders’
Amendment or repeal of any resolution of the board which by its express terms is not so amenable or repealable; and,
5.
Distribution of cash dividends to the shareholders.
May the board alone create an executive committee without any authority provided for the by-laws?
-
NO board of directors must sit and act as a body to have a valid transaction
May a non-member of the board of directors be a member of the executive committee?
-
NO, all of them must be members of the board of directors
-
BOD cannot act by proxy it would be abdication of powers
Purpose clauses necessary because it confers and also limits the actual authority of the corporation
CORPORATE POWERS AND AUTHORITY
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5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into merger or consolidation with other corporations as provided in this Code; 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. (13a) Section 37. Power to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n) Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of
21
any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. (17a) Section 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in Notes on Corporation Law “Notes come in handy only when you have studied…” ©GTan; ASoguilon; VVillanueva
exchange for property needed for corporate purposes or in payment of a previously contracted debt. Section 40. Sale or other disposition of assets. Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (a) Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a) Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of
22
the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a)
-
strict compliance is necessary
-
should be served to those named in the statute
-
secretary of a dep’t are not those included in the statute
•
E.B. Villarosa vs. Benito
-
decision En Banc repeals all other pronouncement
Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n)
-
section 13 Rule 14 was repealed
-
the old rules was ambiguous and broad and at all time illogical
the particular revision under Section 11 of Rule 14 was explained by retired Supreme Court Justice Florenz Regalado, thus: “xxx the then section 13 of this Rule allowed service upon a defendant corporation to “be made on the president, manager, secretary, cashier, agent or any of its directors.” The aforesaid terms were obviously ambiguous and susceptible of broad and sometimes illogical interpretations, especially the word “agent” of the corporation. The Filoil case, involving the litigation lawyer of the corporation who precisely appeared to challenge the validity of service of summons but whose very appearance for that purpose was seized upon to validate the defective service, is an illustration of the need for this revised section with limited scope and specific terminology. Thus the absurd result in the Filoil case necessitated the amendment permitting service only on the in-house counsel of the corporation who is in effect an employee of the corporation, as distinguished from an independent practitioner.”
Section 44. Power to enter into management contract. - No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. (n)
o
notes: additional knowledge
-
special appearance enter for that particular appearance you are not the counsel in the case
-
Section 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (n)
would apply only if it does not involve an intracorporate controversy (controversy between and among the stockholders)
-
upon any of the statutory officers or officers fixed in the by-laws any secretary, any of the directors; any managers in the by-laws
Section 36
Seal
Where should the corporation be sued?
-
merely ministerial or permissive
-
principal office is important because it establishes the residence of the corporation and determining service of summons, venue of action
Power to amend
-
section 16
-
it can be sued in the city or municipality where its principal office is found
-
special 37,38,120
Power to adopt by-laws
Principal office is also important for venue of meetings
-
section 46-48
Non-stock corporation may provide in its by-laws that the venue of meeting be anywhere in the Philippines
Power to issue or sell stocks and to admit members
Upon whom service of summons be made?
stock of stockholders and provision governing nonstock
Power to acquire or alienate real or personal property
-
is there any limitation? YES
-
Two specific limitation
1.
Section 36, as lawful transactions of business of the corporation may reasonably and necessarily require
2.
Constitution and law
-
•
Section 11. Service upon domestic private juridical entity- when the defendant is a corporation, partnership or association organized under the laws of the Philippines with a juridical personality, service may be made upon the president, managing partner, general manager, corporate secretary, treasurer, or in house counsel. Delta motor vs. Mangosing
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23
•
Luneta vs. A.D. Santos
-
Importance of the purpose clause
-
Cannot have the power to acquire
-
Cannot engage in land transportation
-
Doctrine of limited capacity
•
Gov’t vs. El Hogar
-
As the lawful transaction reasonably represent
•
Director of Lands vs. CA
-
Exception to the rule in the constitution
-
Alienable public land
-
Converts the property to a private land automatically once converted it can now be registered
Power to make donation
-
Limitation section 36 par.9
-
These are circumstances, however, under which a donation by a corporation may be to its benefit as a means of increasing its business or promoting patronage. Thus, paragraph 9 of section 36 expressly authorizes a corporation to make donations. The only limitations imposed are the following:
of
its
business
may
-
Examined the articles of incorporation to arrive at its decision
•
National Power vs. Vera
-
For purpose of prohibiting the NAPOCOR
-
The court must decide whether or not a logical and necessary relation exists between the act questioned and the corporate purpose expressed in the NPC charter
Importance of PLACE of registration
-
Residence
-
Venue
-
Place of meetings
-
Place or registration of chattel mortgage
Power to extend its terms
-
Once its term expires, already dissolved automatically, thus can no longer ask for extension
-
After dissolution, it has 3 years to windup
What are the modes of increasing capital stock?
1.
Increasing the par value of the existing number of shares without increasing the number of shares;
2.
Increasing the number of existing shares without increasing the par value thereof; and,
1.
The donation must be “reasonable”;
2.
It must be for public welfare, or for hospital, charitable, scientific, cultural or similar purpose; and,
3.
Increasing the number of existing shares and at the same time increasing the par value of the shares.
3.
It shall not be in aid of political party or candidate, or for purposes of partisan political activity.
Why a corporation increases it capital stock?
Power to establish pension
-
Include any act to promote and improve the convenience, welfare and benefit of the employees or offices
Generate funds, business expansion, or payment of liabilities, purposes of acquiring other business. (example: to buy cars for the officers, purpose of acquiring other business, expansion, other valid reasons)
•
Republic vs. Acoje
How do you decrease capital stock and why a corporation decreases?
-
While as a rule an ultra-vires act is one committed outside the object for which a corporation is created as defined by law, there are however certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation. Thus, it has been held that “although not expressly authorized to do so a corporation may become a surety where the particular transaction is reasonably necessary or proper to the conduct of its business,” and here it is undisputed that the establishment local post office is a reasonable and proper adjunct to the conduct of the business of appellant company. Indeed, such post office is a vital improvement in the living condition of its employees and laborers who came to settle in its mining camp which is far removed from the postal facilities or means of communication accorded to people living in a city or municipality.
-
Reduce or wipeout existing deficit where no creditors would thereby be effected
-
When capital is more than necessary to procreate the business or reduction of capital surplus
-
To write down the value of its fixed assets to reflect those present and actual
o
NOTE: any increase or decrease of capital stock requires approval of government agency like SEC it can never take place unless SEC approves the same
Relevance of decrease of capital?
1.
To reduce or wipe out existing deficit where no creditors would thereby be affected;
2.
When the capital is more than what is necessary to procreate the business or reduction of capital surplus; or,
3.
To write down the value of its fixed assets to reflect there present actual value in case where there is a decline in the value of the fixed assets of the corporation.
-
Examples: Php 10M capital for grocery business, mayor didn’t want to issue license/permit because mayor has 3 other grocery stores, only allowed sarisari store permit, reduce capital for sari-sari so that the money will not sleep in bank
Power to exercise such other powers essential or necessary to carry out its purpose (implied power)
1.
Acts in the usual course of business;
2.
Acts to protect debts owing to the corporation;
3.
Embarking in a different business;
4.
Acts in part or wholly to protect or aid employees; and,
5.
Acts to increase business
•
Teresa Electric and Power Co. vs. P.S.C.
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24
-
Example: car rental agencies-Php 10M capital for 20 taxi’s, after some time each taxi is only 250K, nagmura ang taxi, to reduce capital is to show actual assets
Limitation imposed by law
-
Decrease shall not in any way affect the rights of the creditors
Philippine Trust Company vs. Rivera
-
Without the appraisal of SEC, a decrease in capital stocks has no effect
TRUST FUND DOCTRINE:
-
Subscription to capital stock of a corporation constitute a fund to which the creditors have a right to look upon for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts.
•
Madrigal vs. Zamora
-
Decrease in capital has a subterfuge to evade payment
-
Thus not valid and effective
-
Must not prejudice employees
Bond
-
Commonly understood as an obligation of a state, its subdivision or a private corporation, represented by a certificate or an instrument for the principal and by detachable coupons for the payment of interests. In its simplest term, it is one where an obligor obliges himself to pay a certain sum of money to another at a day named.
-
creditors
which
includes
-
Pre-emptive rights
-
A right granted by law to all existing stockholders of a stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective stockholdings, subject only to the limitations imposed under section 39 of the Code.
Yes, if provided by articles of incorporation or by an amendment
-
However, pre-emptive rights is unavailable to shares in trading in stock exchange otherwise stockholders must waive first their right before they may sell such.
Exceptions 1.
When the shares to be issued is in compliance with laws requiring stock offerings or minimum stock ownership by the public
2.
Shares to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock either a.
In exchange for property corporate purpose or,
needed
for
b.
In payment of a previously contracted debt
-
The exceptions, however will not apply to stockholders of a close corporation by virtue of a subsequent and specific provision of the Code which provides that the “pre-emptive right of a stockholder in a close corporation shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services or in payment of a corporate debt, unless the articles of incorporation provide otherwise, if not entirely absolute, in that it extends to all issuance and disposition of shares
-
Such right of pre-emption may be lost by waiver of the stockholder, expressly or impliedly by his inability or failure to exercise it after having been notified of the proposed issuance or disposition of shares
When is it unavailable?
-
In shares traded openly in stock exchange/market
Is it applicable to close corporations?
-
See section 96, close corporations must provide it first on its articles of incorporation, that its articles does not really deny such pre-emptive rights.
Section 102, will not apply to close corporations
The right of pre-emptive rights is absolute in close corporations
the
There are different kinds of bond but before they may be issued or floated by the corporation, the same must be registered and approved by the SEC subject to the rules and regulations that may be adopted by that agency. The procedure and requirements set forth in section 38 is the same as in increasing or decreasing the capital stock except that the certificate does not have to state the matters required in sub-section 2 & 3 thereof.
May it be denied? How?
“All issues or depositing shares of any class” form part of ACS
Certain instances when a stockholder nevertheless be unable to exercise this right:
may
-
Internationally granted
-
Issued for public ownership
Pre-emptive rights, why it is granted?
-
-
In order that the existing stockholders may maintain their proportionate right as not to dilute their right
Issued in good faith, with approval of 2/3 of outstanding capital stock either a) in exchange for property needed or b) for payment of a previously contracted debt
Power to deny pre-emptive rights
Pre- emptive rights of stockholders in ordinary stock corporations may be denied
Section 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.
-
if the shares are to be issued in compliance with laws requiring stock offering or minimum stock ownership by the pubic
-
In exchange purposes
-
In payment of previously contracted debts
This rule, however, does not apply in a close corporation as the pre-emptive rights of the stockholders thereof is broadened to include all issues
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for
property
needed
for
corporate
25
without exceptions unless, of course, denied or limited by the articles of incorporations. Section 102 provides:
May 1-5 subscribe to the unsubscribed capital stock to the exclusion of 6-10?
Section 102. Pre-emptive right in close corporations. - The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise.
-
If a corporation makes 2M unrestricted retained earnings, it is the shares and not the number of persons that matters
May 6-10 complain for a dilution of their interest?
-
YES, it’s an internationally recognized right because it includes “all issues and disposition of shares of any class” and all kinds of shares new or old
Denial will not apply to a close corporation, ABSOLUTE
-
section 96
-
If the remaining unsubscribed shares are issued, it’s an issuance of any class
May a stock holder in a close corporation insist in the exercise of his pre-emptive rights?
May a corporation sell/dispose all or substantially all of its corporate assets and liabilities?
-
YES
-
1) RESOLUTION 2) AUTHORIZATION 3) RATIFICATION 4) PRIOR WRITTEN NOTICE 5) SALE SUBJECT TO PROVISIONS OF EXITING LAWS 6) DISSENTING STOCKHOLDERS HAVE THE RIGHT TO EXERCISE THEIR APPRAISAL RIGHT
If a corporation sells substantially all of it assets and properties, will the buyer assume liability?
-
NO, EXCEPT
1)
Express or implied agreement to the purchase
2)
Where the transaction amounts to consolidation or merger of the corporations
3)
When purchasing corporation is merely a continuation of the selling corporation
4)
Where the transaction is entered into fraudulently in order to escape liability for such debt
Legitimate purpose: for a corporation to reacquire its own shares
-
Limitation: it must have surplus/unrestricted retained earnings
-
Exception: may redeem irrespective of unrestricted retained earnings
-
Yes, section 102
What type or shares are covered by pre-emptive rights?
Does it include those originally unsubscribed?
-
NO. Benito vs. SEC
Will the stockholders be able to exercise their preemptive right with respect to the old unissued shares?
-
Pre-emptive rights is applicable only to new issued shares and not to the old unissued shares because it is presumed that the original subscribers is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares
-
When the shares, left unsubscribed are re-offered, he cannot therefore claim. DILUTION OF INTEREST
Will the acquiring purchaser be liable for debts of the former corporation?
-
Generally no, corporate entity theory because there may be instances when purchasing corporation may be held liable
May a corporation acquire its own shares?
-
Yes
Is there any restriction provided for by law in reacquiring its own shares?
1)
Exercise of stockholders’ right to compel “close corporation” to purchase his shares
-
Yes, it must have been unrestricted retained earnings appearing in the books of corporation
2)
Where corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock
A corporation can never acquire its own shares if it has no unrestricted retained earnings
-
False, exception close corporation and redeemable shares
EXAMPLE:
1M
SUBSRIBED
1M
PAID-UP
1M
ASSETS
ACS
2M
SUBSCRIBED
1M
PAID UP
ACS
500K 1M PROFITS
-
500K LIABILITIES
1M
____________________
1
100K
500K RESERVES IN A CLOSE CORPORATION IT CAN USE THIS TO REACQUIRE ISSUED STOCKS
2
100K X – REALTY CORPORATION
TO 10
100K
If 1-5 became 200K each, may 6-10 demand the exercise their pre-emptive right?
-
YES
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•
THE ONLY PROPERTY OF THE CORPORATION
•
BOARD OF DIRECTORS DECIDED TO SELL IT
Will it need the approval of the stockholders?
26
-
NO, if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business
•
Steinberg vs. Velasco
-
For as long as there are debts and liabilities, a corporation may not reacquire its shares (subject to exceptions)
If X is a manufacturing company, then it can sell its only property upon approval of the stockholders because it will render itself capable of continuing its business, BUT if the proceeds will be used to purchase a better one for the continuance of its business, then it does not need the approval of the stockholders
-
Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare dividends to stockholders when the corporation is insolvent.
Conditions for the valid exercise of this power are the following
Power to invest funds
1.
Resolution by the majority vote of the board of directors/trustees
2.
Authorization from the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members;
3.
The ratification of the stockholders or members must be made at a meeting duly called for that purpose
4.
Prior written notice of the proposed action and of the time and place of meeting must be made addressed to all stockholders of record, either by mail or personal service;
5.
The sale of the assets shall be subject to the provisions of existing laws on illegal combinations and monopolies
6.
Any dissenting stockholder shall have the option to exercise his appraisal right
•
IDP vs. CA
-
Consent of the members was not secured
•
Edward Nell Co. vs. Pacific Farms
-
Generally where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor, except:
-
For any other purpose other than the primary purpose, stockholder’s consent or approval is necessary
-
Thus, if it’s for the secondary purpose, it is necessary
-
If it’s in connection with the primary purpose, only board resolution is necessary
Requirements and steps to be followed for a valid investment of corporate funds are:
1.
Where the purchaser expressly or impliedly agrees to assume such debts;
1.
Resolution by the majority of the board of directors or trustees;
2.
Where the transaction amounts to a consolidation or merger of the corporations;
2.
3.
Where the purchasing corporation is merely a continuation of the selling corporation;
Ratification by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations;
3.
Where the transaction is entered into fraudulently in order to escape liability for such debts.
The ratification must be made at a meeting duly called for that purpose;
4.
Prior written notice of the proposed investment and the time and place of the meeting shall be made, addressed to each stockholder or member by mail or by personal service, and;
5.
Any dissenting stockholder shall have the option to exercise his appraisal right
•
Dela rama vs. Ma-ao Sugar
-
There is a substantial and not remote connection between the sugar bags and the sugar manufacture, thus stockholder’s approval is not necessary for validity
-
A private corporation, in order to accomplish its purpose as stated in its articles of incorporation, and imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge, or dispose of shares bonds, securities and other evidences of indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not need the approval of the stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the
4.
Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a)
Power to acquire own shares Section 41. Power to acquire own shares. A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (a)
The corporation must at all times have “unrestricted retained earnings” to exercise this corporate power
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27
purpose of its incorporation, the vote of approval of the stockholders is necessary. •
Gokongwei vs. SEC
-
Investments made by SMC is necessarily connected with its primary purpose and this was ratified in a meeting
What are property dividends?
-
Those paid in property surplus
Like tables and chairs? Can tables and chairs make surplus profits?
-
No, they do not make surplus, bonds, etc.
Where should dividends come from?
-
Stock dividends are declared as stocks coming from corporation
-
Submission of previous action is a sound corporate practice
Redeemable shares
Closed corporation (see section 105)
Who declares dividends stockholders have any say?
-
For any reason, compel the value of shares “withdrawal shares” provided corporation has sufficient funds to cover its debts and liabilities
-
Board of Directors, if stock approval of 2/3 outstanding capital stock
Section 105. Withdrawal of stockholder or dissolution of corporation. - In addition and without prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution of such corporation whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted.
ACS-1M SUB-1M profits of the corporation)
P.U.-1M
to
be
declared?
1M-U.R.E.
Do
(surplus
1-100k 2-100k To 10-100k 1M
Board decides to declare 1M, how much will each receive? May the board declare stock dividend
-
NO. that would be over issuance of shares, violation of securities regulation code
If shares are reacquired, what happens?
-
It becomes treasury shares
-
It must have a free portion
Stockholder’s consent/ approval is not necessary and mere board action is sufficient if in accordance with primary purpose
-
The corporation may increase its capital
Z co. 1M to X Co. is 2/3 of Xco. Stockholders reacquired?
The logical relation of act done and primary purpose of corporation and between the board of directors to undertake submission of acts is a sound corporate practice
What is the effect of declaration of dividends with regards to the assets of a company?
-
As compared to stock dividends, the declaration of cash or property dividends have the effect of reducing corporate assets to the extent of dividends declared.
-
Neither would stock dividends increase proportionate interest of the stockholders of corporation although it will have the effect increasing the subscribed and paid-up capital of corporation. It gives the stockholders nothing in way of distribution of assets but merely divides existing shares into smaller units.
Earnings belong to the corporation until declared or given
Revocation
-
No revocation of dividend may be has unless it has not been officially communicated to the stockholders or is in the form of stock dividends which is revocable at any time prior to distribution.
Stock dividends- no reduction, you capitalize your restricted retained earnings, what is issued is a piece of paper. The restricted earnings remain in the corporation
Cash and property- reduces corporate assets
Stock dividends increase corporate assets? No, it will only have the effect of increasing the subscribed and paid-up capital of the corporation
Dividends Section 43. Power to declare dividends. The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n)
What are dividends?
-
Corporate profits set aside, declared and ordered by the Board of Directors to be paid to the stockholders.
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No, because in property 2/3 is not required
the the of the the his
28
Will there be a corresponding increase in their proportionate interest?
How did the court decide dividends in the case of Neilsen
-
REMAINS THE SAME
-
Stock dividends cannot be issued to a person who is not a stockholder in payment of services rendered.
Exception: when stock dividends will result in a fractional share
-
Whether cash, property or stock, only stockholders may receive dividends. Dividends are fruits of investments. They come from the U.R.E. or surplus profits of the corporation.
-
ACS-2M 1-100K 200 (10%) DIVIDEND RIGHTS STILL THE SAME SUB-1M
*VOTING AND
TO 10%
PU-1M
ACS
2M
1M
SUB
1M JULY 31
JULY
PU
1M
10-100K
ACS
2M
SUB
1M
PU
1M
1M
RE
1
100K
2
100K
1
100K
U.R.E. 24
DECLARATION
100T JULY 26-Y(NEW ONE WAS DECLARED TO Y) JULY 30- 100K
2 TO RECORDED 10
TO
HAVE
THE
TRANSFER
100K
1M
TO 10
100K
1M
Insofar as 1 and Y who has a better right? Already declared, but not yet paid?
-
Right to receive vest upon declaration. Who ever owns at the time of declaration owns the dividends
May they be compelled? -
Unless there is a stipulation to the contrary
NO. You cannot declare if it does not come from unrestricted retained earnings.
TRUST FUND DOCTRINE
1.
1M-U.R.E. (is it true there is no way to compel?)
-
The power to declare it if paid-up capital is not maintained or is impaired
2.
2M-U.R.E. -
May they be compelled to declare dividends
-
Mandatory if earned, the board may be compelled to declare dividends
Trust fund must be kept intact for the protection of creditors who have the right to rely on such subscription and the paid-up capital for the satisfaction of their claims
Cannot accumulate surplus unreasonably
Basis is the paid-up capital
Entitled to dividends
-
-
if exceeds 100% of the paid-up capital the boards may be compelled
ACS
2M
1M
U.R.E.
SUB
1M
Irrespective of whether the subscription is full
PU
800K
Illegally declared
1-100K
50K PU
-
Declare dividend with the belief that it formed part of the U.R.E., but yun pala sa capital
2-100K
50K
Directors are not liable, unless sec31 acted in bad faith or gross negligence in the conduct of corporate affairs
Directors even if acting in behalf of the corporation, may still be held solidarily liable
Power to enter into management contract
-
New provision
TO 10-100K 1M
Will 1 and 2 receive full amount of dividends?
-
YES. They are entitled however if they are declared delinquent, the amount due them shall first be applied to his delinquency plus expenses.
Delinquency occurs, you are called to pay, but you failed to pay. In case of stock dividend, the delinquent stock holder will not be entitled thereto until he has paid his subscription in full.
Are non-stockholders entitled to receive dividends?
-
No, tock dividends are civil fruits of the original investment, and to the owners of the shares belong the civil fruits.
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Section 44. Power to enter into management contract. - No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a nonstock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the
29
members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. (n)
The requirement for a valid management contract are as follows:
1. 2.
Resolution of the board of directors Approval by the stockholders holding or representing a majority of the outstanding capital stock or majority of the members in case of non-stock corporation of both the managing and the managed corporation The approval of the stockholders or members must be made at the meeting called for that purpose The contract shall not be for a period longer than 5 years for any one term, except those which relate to exploration, development or utilization of natural resources which may be entered into for such periods as may be provided by pertinent laws and regulations Every corporate act emanates from the BOARD
3. 4.
-
-
Ultra-vires acts which are not illegal per se may become binding and enforceable either by satisfaction, estoppels or equitable grounds
Consequences of ultra-vires acts?
1.
On the corporation itself
-
The proper forum, in accordance with the provisions of PD 902-A, as amended and R.A. No. 8799 may suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of the corporation for serious misrepresentation as to what the corporation can do or is doing to the great damage or prejudice of the general public
2.
On the rights of the stockholders
-
A stockholder may bring either an individual or derivative suit to enjoin a threatened ultra-vires act or contract. If the act or contract has already been performed, a derivative suit for damages against the directors may be filed, but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into the contract.
3.
On the immediate parties
-
The courts have not agreed as to the legal effect of a corporate contract outside of its authorized business but Ballatine gives the following summary of the doctrines evolved:
Is the voting requirements of a majority stockholder ABSOLUTE? Not only a majority but 2/3 of the outstanding capital stock or 2/3 of the members in a non-stock corporation would be required for the approval of a management contract in the following instances:
a.
If the contract is fully executed on both sides, the contract is effective and the courts will no interfere to deprive either party of what has been acquired under it
b.
If the contract is executory on both sides, as a rule, neither party can maintain an action for its non-performance
c.
Where the contract is executor on one side only, and has been fully performed on the other, the courts differ as to whether an action will lie on the contract against the party who has received benefits of performance under it. Majority of the courts, however, hold that the party who has received benefits from the performance is estopped to set up that the contract is ultra-vires to defeat an action on the contract. This is more in conformity with the doctrine that no person shall be allowed to enrich himself at the expense of another
1.
Where the stockholders representing the same interest of both the managing and managed corporation own or control more than 1/3 of the total outstanding capital stock of the managing corporation; and
2.
Where a majority of the members of the board of directors of the managing corporation also constitute a majority of the directors of the managed corporation
3.
Where the contract would constitute the management or operation of all or substantially all of the business of another corporation, whether such contracts are called service contracts. If it will not constitute the management of all or substantially all of the business of another corporation the first paragraph of section 44 will apply and not that of the second, that is, only the vote of the stockholders holding or representing at least a majority of the outstanding capital stock or majority of the members in the case of non-stock corporation will be required.
•
Privano vs. Dela Rama
-
Court looked into the purpose clause
-
The purpose clause empowers and limits
-
Articles likewise provide that it may deal with any of its money
-
“deal” broad enough to cover the donation it is not then ultra-vires
How long?
-
Not illegal per se hence (law of agency) excess powers are subject to ratification
-
Not longer than 5 years for any one term -
Ratified by passing the resolution in question
-
Exception: exploration, development or utilization of natural resources
•
Carlos vs. Mindoro sugar Co.
What is an ultra-vires act or contract?
-
PTC- trust company as such, it also has implied powers as to make them more attractable
-
Doctrine of limited capacity. Corporation can do such acts and things as it is allowed to do
-
Not ultra-vires in pursuance of its legitimate business
•
Japanese war notes vs. SEC
-
Non-stock corporations cannot make distribute profits to its shareholders
-
Acts beyond it will be ultra vires, allowing a collateral attack
-
If not illegal per se merely voidable. Can be ratified expressly or impliedly or even stopped as equitable grounds
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profits
and
30
-
Ultra-vires because Japanese war notes is a non-stock corporation
-
•
Crisologo-Jose vs. CA (ALWAYS ASKED BY DEAN SUNDIANG)
When do by-laws become effective?
-
The negotiable instruments law which holds an accommodation party liable on the instrument to a holder for value, although such holder at the time of taking the instrument knew him to be only an accommodation party, does not include nor apply to corporations which are accommodation parties. This is because the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation of another is ultra-vires
-
Until and unless the SEC gives it stamped of approval
-
Suspension of any government agency. permission must first be secured- section 46
Elements of a valid by-law
1.
It must not be contrary to law, public policy or morals;
2.
It must not be inconsistent with the articles of incorporation;
3.
It must be general and uniform in its effect or applicable to all alike or those similarly situated;
4.
It must not impair obligations and contracts or vested rights; and’
5.
It must be reasonable.
-
Must not be inconsistent with existing laws. Not be inconsistent with articles of incorporation
By-laws
-
Corporate officers may guarantee or endorse an accommodation only if specifically authorized
Section 36 paragraph 11 Section 10 Section 14 and 15
Corporate powers depend on the agreement of the stockholders rather than any director
-
It may sell and it may guarantee, contract not necessarily illegal, it will in the absence of proof to the contrary presumed within its power. Corporations are presumed to contract with in its powers- CARLOS CASE
-
-
Purpose clause may be stretched to cover PLDT internet. It may be within its business. May it sell computers? NO! other line of business. Its trading!
BY-LAWS
-
Subject the corporation to a fine, as may be issued by the SEC
The
None filing would not affect the status of the corporation, Loyola grand villas case
-
The word “must” is not always imperative
-
Stockholders are conlusively presumed to know the provisions of the by-laws
How about 3rd persons?
-
NO. unless there is actual knowledge of the same they are not presumed to know of the provisions of the bylaws
By-Laws
-
Rule adopted by the corporation for its internal governance
Is the adoption of by-laws mandatory?
•
Fleischer vs. Botika Nolasco
When should the by-laws be adopted or filed? Can it not be adopted earlier?
-
Shares of stock are personal properties
-
Shares of stock may transfer to whom ever he wishes
-
After incorporation- within 1 month (emanates from the BOARD)
-
The by-laws is contrary to law
-
Prior-more convenient (signed by the incorporators)
Articles of incorporation
Who will sign the adoption clause?
-
May provide reasonable restriction
-
Majority of the stockholders or members attested to by the corporate secretary
-
By-laws merely internal laws
What happens if the corporation fails to adopt the bylaws from the tie provided by the law? Would there be an automatic revocation or suspension?
Articles is the contract between and among the parties and corporation
•
Gov’t vs. El Hogar
-
Proper notice and hearing, must first be complied with
•
Loyola grand villas vs. CA
-
Not the SEC, but the HIGC
-
Must – not always imperative
-
Filing of by-laws mandatory
-
Empowered by SEC
-
Merely a ground, there must be proper notice and hearing
-
Not affect the status of the corporation as a juridical person
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-
Did the court categorically ruled here that provision in the 5th cause of action is valid?
the
-
Rules governing equity, considering the fact that there was always lack of quorum
-
Section 29 BOD if still constituting a quorum may fill up a vacancy other than by removal, etc.
•
Gokongwei vs. SEC
-
Section 48 allows a corporation to amend it by-laws
-
Section 47 of the code, the by-laws may provide for the qualification and disqualification
-
It cannot be said Gokongwei has a vested rights
31
-
Prevent directors from taking advantage of position to promote his individual interest to the damage of others
-
The validity or reasonableness of a by-laws is a question of law
-
Subject to the limitations that reasonableness of a bylaw is a mere matter of judgment
-
Rule of the majority and not the tyranny of the minority
May the by-laws be amended altered or appealed?
-
YES. HOW? Two modes
Meetings
1.
By a majority vote of the directors or trustees and the majority vote of the outstanding capital stock or members in a non-stock corporation, at a regular or special meeting called for that purpose;
-
Meetings of stockholders in the by-laws or by-law
-
Meetings of director or trustees
Meetings are regular and special
Meetings of stockholders
What is regular and what is special?
When are regular meetings of the stockholders held?
-
Fixed date provided by the by-laws
What if there is no date?
-
April
Why april?
-
Point in time the audited financial statement have been prepared
What if in the date specified in the by-laws or by the law itself the meeting was not convened, for instance lack of quorum or force majeure?
-
It may be postponed on a reasonable date
Notice requirement?
-
Regular- 2 weeks prior notice
-
Special- 1 week
May the notice requirement be lessened?
-
By-laws may provide a longer or a shorter duration
What if the notice requirement is not complied with?
What happened to any act passed in a meeting when notice requirement was not required with?
-
Voidable, subject to ratification
•
Board of directors vs. Tan
-
Notice requirement is the by-laws is a mandatory requirement
-
Improperly served, any action will be invalidated at the objection of any stockholder or member
Must be held in the proper place
Where should it be held?
-
Apparent from the foregoing provision is that meetings of stockholders must, at all times, be held in the city or municipality where the principal office of the corporation is located and, as far as practicable, in the principal office of the corporation.
May the by-laws of a corporation provide meetings be held anywhere in the Philippines?
2.
-
By the board of directors alone when delegated by 2/3 of the outstanding capital stock or 2/3 of the members in a non-stock corporation. This delegated power, however, is considered revoked whenever a majority of the outstanding capital stock or members shall so vote at a regular or special meeting.
If it is to be amended what is the proceeding?
-
Section 48 2nd paragraph provides: Section 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in nonstock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission the same to be attached to the original articles of incorporation and original bylaws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. (22a and 23a)
•
Baretto vs. La Previsora
-
Any corporate act emanates from the board
-
Directors themselves cannot amend the by-laws if they were not granted the same
Section 48
The power granted is not subject to revocation T or F?
-
FALSE
If the by-laws are amended when will they become valid?
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-
Upon issuance inconsistent
of
What if the SEC failed to act within 10 months without fault attributable to the corporation?
T or F any amendment of the by-laws will never become valid until it gives its stamp of approval even after 1 year
-
TRUE. Articles different
of
the
SEC
that
incorporation
they
and
are
by-laws
not
are
MEETINGS
1. Date fixed
that
32
-
-
While there is no provision authorizing a stock corporation to hold stockholders’ meetings outside of the City of Municipality where the principal office is located, the law allows a non-stock corporation to provide in its by-laws any place of members’ meeting provided that proper notice is sent to all members indicating the date, time and place of the meeting which shall be within the Philippines. T or F the by-laws of a stock corporation may validly provide that meetings shall be held anywhere in the Philippines? FALSE. Non-stock corporations lang pwede provided nakalagay sa by-laws and provided proper notice is given
Mandamus would be appropriate remedy if there is a person authorized but refuses
Quorum and voting requirement
-
Majority stockholders or members constitute a quorum
Is the presence of the majority owners of the outstanding capital stock ABSOLUTE to have a quorum?
-
NO. when the code requires a higher quorum it must also be equivalent to the vote required
Do you include non-voting shares in arriving at the voting requirement to have a valid corporate act?
-
It depends.
-
Section 6 last par. If it falls within the penultimate par. Of section 6
Five requisites of a valid meeting
1.
It must be held on the date fixed in the by-laws or in accordance with law
Corporation can do only such things as the law allows it to do, DOCTRINE OF LIMITED CAPACITY
San Miguel office located in Ortigas Center. May stockholders meeting be held in PICC center?
-
YES. Metro Manila, one single city
Must be called by the proper party
Who calls?
2.
Prior notice must be given
-
President until and unless there is a provision , secretary on order of the president
3.
It must be held at he proper place
What if there is nobody who can call?
4.
It must be called by the proper party
5.
Quorum and voting requirements must be met
-
The petitioner, stockholder may petition the court
What if there is a person who can call, but he fails or neglects to call the meeting? May a stockholder petition to authorize a meeting?
Date not complied with, notice, place, not complied with and the person who called not authorized, what happens to any resolution called?
-
Ponce case only applies when there is NO person authorized to call the meeting. If there is a person, but neglects his duty. Ponce will not apply.
Writ of injunction may never be issued ex parte
Is there any exception?
-
Section 28 only instance Section 28. Removal of directors or trustees. - Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code. (n)
-
-
Section 51, any meeting shall be valid provided all the stockholders are present or duly represented and provided it is within the power of the corporation. 3RD paragraph of 324 If the voting requirement is met, any resolution passed in the meeting, even if improperly held or called will be valid if all the stockholders or members are present or duly represented thereat. The last paragraph of section 51 is clear on the matter when it provides: “all proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting.”
Directors/trustees meeting
Regular (monthly) and special (anytime)
May that be restricted (within or outside the Phil)
-
YES. unless the by-laws provide otherwise.
Is there any notice requirement?
-
YES. 1 day unless otherwise provided by the by-laws
What happens if notice is not complied with?
-
If the notice requirement is not complied with the meeting is illegal and will not bind the corporation except when subsequently ratified or in the case of a close corporation where the act of any one director may bind the corporation even without a meeting under the special provision of Section 101 of the Code.
Can notice be waived?
Cases of removal or ouster of a director Section 53. Regular and special meetings of directors or trustees. - Regular meetings of the
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33
board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise.
-
However this right is not always inherent, because it may be denied: 1.
Redeemable and preferred shares, however if founders shares are issued others may be denied the right to vote.
2.
May be denied by the articles of incorporation or contracts
Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the by-laws. Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly. (n) -
YES. Expressly and impliedly
-
SEC ruling A special meeting is valid without notice where the directors are all present or where they consent to the meeting. Presence at the meeting waives the want of notice. Moreover, it has been ruled that the meeting of the directors without a formal call first being had, and notice thereof given to the members, did not operate to invalidate it or to render the proceedings which were taken at it void, for every member of the board were present, and their joint action had completely bound the corporation as if the meeting has been called with due formality, and everyone of the directors had received proper notice.
What is the quorum and voting requirement in the directors meeting?
-
Majority of the members of the board of directors (entire membership)
Vote required to pass a valid corporate act?
-
Majority of those present at which there is a quorum (3 present, vote of 2 sufficient)
-
Exception, majority of all the members of the board in case of election of corporate officers, unless the articles provide for a greater quorum or voting requirement
Should the director or trustees be physically present?
-
General rule, must sit and act as a body to have a valid corporate act
Five man member board, a meeting was called today, should the physical presence or warm bodies requires to constitute a quorum?
-
NO. it is not required. Teleconference or video conference is allowed, E- commerce law
Membership subject to laws
Stockholder not yet
May director vote by proxy?
-
NO
If A is a director and a meeting is called for the purpose of electing a new set of BOD can A vote by proxy?
-
YES. Because it is a stockholders meeting
If directors meeting, cannot vote by proxy
Stockholder’s right to vote
-
Inherent in stock ownership
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-
When not denied they may do so in person or by proxy
May the right to vote by proxy be denied?
May the articles of incorporation deny?
May the by-laws validly provide that proxy voting is not allowed?
-
NO
Only non-stock may be denied proxy voting (may be broaden, limited or denied)
Proxy voting is a matter of right granted by law
Requirements of a valid proxy?
-
Section 58 Section 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. (n)
How long may a proxy exist?
-
Maximum of 5 years
-
Valid for the meeting in which it is intended
Is proxy revocable?
-
Generally revocable, unless coupled with interest
Revocation
-
A proxy, like agency in general is revocable unless coupled with an interest and revocation need not be made by formal notice in writing. Revocation may be expressed to the proxy holder, to the election committee, by a subsequent proxy to another or by sale of the shares. Thus it may be revoke orally by conduct such that appearing and asserting the right to vote at a meeting by the registered owner of the shares revokes a proxy previously given.
Must be submitted to a validation committee
By-laws of non-stock corporations may deny proxy voting
What is voting trust agreement?
-
One created by an agreement between a group of stockholders of a corporation and a trustee, or a group of identical agreements between individual stockholders and a common trustee, whereby it is provided that for a term o years or for a period contingent upon a certain event, or until the agreement is terminated, control over the stock owned by such stockholders, shall be lodged in the trustee, either with or without reservation to the owners or persons designated by them the power to direct how such control shall be issued.
-
It is a devise of binding stockholders to vote as a unit and thus assuring a desirable stability and continuity in management in situations where it is needed.
34
What is the effect of a voting trust agreement relative to the rights?
Being still the beneficial owner they may transfer these rights
Lee vs. CA must pass these criteria
Is the right granted to a voting trust agreement absolute? (to inspect)
1.
That the voting rights of the stock are separated from the other attributes of ownership;
-
NO.
2.
That the voting rights granted are intended to be irrevocable for a definite period of time; and,
-
3.
That the principal purpose of the grant of voting rights is to acquire voting control of the corporation.
During the duration of the trust they are irrevocable unless there is a violation either by fraud
The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record. Provided, that both the transfer and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of this Code.
Legal title is transferred to the voting trustee
May the voting trustee vote by proxy?
-
Yes, legal owner may vote by proxy
May the proxy holder vote by proxy?
-
NO, (AGENT) an agent can have no other agent unless specifically allowed by the principal
Stockholder executing as a proxy, is he qualified to be voted as a director?
Why is he qualified to act as a director if the stockholder executes as a director?
-
The beneficial owner of the shares in a voting trust is disqualified to be a director in a voting trust whereas in a proxy, the owner of the shares may be elected as such since legal title thereof remains with him
-
Requisites
-
Section 59 Section 59. Voting trusts. - One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any time: Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding five (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise the right of inspection of all corporate books and records in accordance with the provisions of this Code. Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. The voting trustee or trustees may vote by proxy unless the agreement provides otherwise. (36a)
Does it need to be notarized?
-
Yes, otherwise it is ineffective and unenforceable
Only legal ownership is transferred
Is the stockholder executing in a voting agreement, is he qualified to act as a director?
-
NO. ceases to be stockholder of record, no longer the legal owner of shares
May the corporation enforce the voting agreements executed by its stockholders?
-
NO. NIDC vs. AQUINO
-
Not a privy to the contract
-
Rights liabilities of a stockholder are there in their individual capacity- corporate entity theory
Voting trust agreements
-
Normally executed in favor of banking and financial institutions
-
So that they can vote a certain set of directors
-
They will be more secured
Voting pull agreement
-
Enters into an agreement
-
Pull all their shares to cast one vote
-
Covered by rules governing contracts
-
By pulling their votes they can decline the resolution passed by the board
END OF MIDTERMS
STOCKS AND STOCKHOLDERS
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YES he remains to be the owner
3 modes
trust
trust
35
1.
By a contract of subscription with the corporation;
2.
By purchase of treasury shares from the corporation; and,
3.
By purchase or acquisition of shares from existing stockholders.
Section 60 subscription
-
Any contract
-
Whether existing or still to be formed
Section 60. Subscription contract. - Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. (n)
-
2nd example galling sa treasury shares hindi sa unissued share
NO such thing as purchase of unissued stocks
A subscription contract can be conditional provided there is nothing in the charter or statute prohibiting it and not against public order, law, etc.
Must it be in writing?
-
NO, it may be oral
5M should it be in writing to be valid and binding as a subscription?
-
NO, statutes of frauds only applies to SALES
•
Trillana vs. Quezon College
-
Counter proposal, therefore there was a need for an acceptance
Under the old law the 4th mode is PURCHASE
Purchase
-
Reciprocal in nature
-
Facultative because it is in his own free will, it is void
-
Purchaser can neither require the issuance
What may be used as a consideration and how much should be the consideration?
-
Section 62 provides:
Xco. Inc.
P Authorized capital
Section 62. Consideration for stocks. Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following:
1M
500
SUBSCRIBED
500
UNISSUED STOCKS (AS LONG AS GALING DITO)
1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued;
Z wants to acquire 100K Entered in June 50% shall be down payment remainder December 08 o
3. Labor performed for or services actually rendered to the corporation;
he will not be considered a stockholder unless he has paid in full
4. Previously incurred indebtedness of the corporation;
August 08 property is ravaged by fire all are turned into shares
Is Z liable to pay the balance of his acquisitions?
-
YES, no matter how the party refer to it, it is considered subscription
-
5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion.
Once you subscribe, you become a stockholder which is entitled to all the liabilities of a stockholder
Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission.
Z- subscribed to 100T/S of XCo. Amount he paid 50k Z did not pay on the date called and was declared a delinquent share
Corporation paid 100T/S therefore the corporation reacquired the shares again, what are they called?
-
Treasury shares
Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. (5 and 16)
Y- 80T/S DECEMBER 08 40 % (AUGUST) WAS DESTROYED BY FIRE, IS HE STILL LIABLE TO PAY THE UNPAID PORTION?
IT WAS AGREED THAT IT WAS A PURCHASE AND WILL BE A STOCKHOLDER ONLY IF PAID IN FULL IS HE LIABLE?
-
NO, because that was a purchase
-
First example galing sa unissued stock
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“Amounts transferred from unrestricted retained earnings to stated capital” what does it mean?
-
Stock dividends will in effect capitalize the unrestricted retained earnings
36
-
After 5 years the founders shares may be converted into common shares or other kinds of shares May shares of stocks be issued without consideration? Why? NO, two reasons by the SC, discriminatory against other stockholders and second unlawful, it prejudices the right of the creditors “Trust Fund Doctrine”
If issued without a consideration
-
Section 65, they will be considered as watered stocks Section 65. Liability of directors for watered stocks. - Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. (n)
-
Subscribers may be compelled to pay the value
Issuance of a certificate of stock is another thing
What are the requisites for the issuance of a valid certificate of stock?
1.
2.
B stole and forged the signature C is purchaser in good faith and for value will C acquire title
It must be signed by the president or vice-president and countersigned by the secretary or assistant secretary;
Endorsement from When issued by owner Endorsed by owner- strict compliance
ANSWER: a certificate of stock is not regarded as negotiable in the same sense that a bill or note is negotiable, even if it is endorsed in blank. Thus, while it may be transferred by endorsement coupled with delivery thereof, and therefore merely quasi-negotiable, it is nonetheless non-negotiable in that the transferees takes it without prejudice to all the rights and defenses which the true and lawful owner may have except in so far as the principles governing estoppels may apply. He acquired it by virtue of a forged instrument; no matter how innocent the purchaser is because it is subject to all the rights and defenses
What if A endorsed it?
-
He is estopped, unless there are other available defenses
Transfer is required to be recorded in the books of the corporation, however even if not recorded, it will be valid between the parties. Non-registration will not however, affect the validity thereof at least in so far as the contracting parties are concerned.
It must be sealed with the corporate seal; and the entire value thereof (together with interest or expenses, if any) should have been paid.
Section 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.
While it appears, that a subscriber to shares of stock cannot be entitled to the issuance of a certificate of stock until the full amount of his subscription together with interest and expenses (in case of delinquent shares) if any is due, has been paid, a subscriber to shares of stock, even if not yet fully paid, is entitled to exercise all the rights of a stockholder and the corresponding liability that attach thereunder. Thus, the Code provides: Section 72. Rights of unpaid shares. Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. (n)
Is the issuance of a certificate of stock necessary to consider the subscriber a stockholder?
-
NO, shall be considered a stockholder even without a certificate of stock
Instances when he may not be able to exercise his rights as such stockholder
-
Declared delinquent
-
When he exercises his appraisal right
Are certificate of stocks transferrable?
-
YES
Are certificate of stocks considered negotiable?
-
Quasi-negotiable
Why are they considered quasi-negotiable when it may be transferred through endorsement and delivery?
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. (35)
100t/s 10/s
001
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Abc co.
“Until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus the, unrecorded transfer cannot enjoy the status of a stockholder; he cannot vote nor be voted for, and he will not be entitled to dividends. The corporation will be protected when it pays dividend to the registered owner despite a previous transfer of which it had no knowledge. The purpose of registration therefore is twofold: to enable the transferee to exercise all the rights of a stockholder and to inform the corporation of any change in shares ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder.” Thus, it was also ruled by the High Court in Nautica Canning Corp. vs. Yumul that “A transfer of shares not recorded in the stock and transfer book of the corporation is nonexistent in so far as the corporation is concerned.” This is so because “the corporation looks only through its books for
37
the purpose of stockholders are.”
determining
who
its
-
Register of deeds where the corporation resides and if different in the register of deeds of owner’s domicile
Unson vs. Dinamito
-
All transferred not register will not have a valid force and effect
Registration is necessary for the following:
1.
To enable the stockholders are;
2.
To enable the transferee to exercise his rights a s stockholders;
Right to transfer may be regulated
3.
To afford the corporation an opportunity to object or refuse registration of the transfer in case allowed by law;
May not be unreasonably restricted
Violation of nationalization law- Central Bank
4.
To avoid fictitious and fraudulent transfers; and,
•
Lambert vs. Fox
5.
To protect creditors who have the right to look upon stockholders, in case of no-payment or watered shares, for the satisfaction of their claims.
-
Valid , may be reasonably regulated, restricted by agreement of parties
-
Reasonable agreement by the parties
Duty of the secretary is ministerial, hence mandamus will lie if the secretary refuses to record the transfer, but he cannot be compelled when the transferee’s title to the said shares has no prima facie validity or uncertain
-
Reasonable as to length of time
•
Padgett vs. Babcock
-
Any attempt to restrain transfer
-
SC, in the absence of a valid lien upon its shares
-
Valid restrictions shares are applicable
-
Any restriction on a stockholder’s right to dispose of his shares must be construed strictly; and any attempt to restrain a transfer of shares is regarded as being in restraint of trade, in the absence of a valid lien upon its shares, and except to the extent that valid restrictive regulations and agreements exist and are applicable. Subject only to such restrictions, a stockholder cannot be controlled in or restrained from exercising his right to transfer by the corporation or its officers or by other stockholders, even though the sale is to a competitor of the company, or to an insolvent person, or even though a controlling interest is sold to one purchaser.
Certificate of stocks are transferrable
-
By endorsement and delivery of the stock certificate to the transferee
In order to be valid, must be registered in the books. If not, will only be binding among parties
How may shares of stock be transferred?
corporation
to
know
who
its
Transfer- absolute and unconditional transfer to warrant registration in the books of the corporation in order to bind the latter and other third persons. Other restrictions on the right to transfer shares would include:
1.
It is not valid, except as between the parties, until recorded in the books of the corporation;
2.
Shares of stock against which the corporation holds any unpaid claim shall not be transferable in the books of the corporation; unpaid claims, refer to claims arising from unpaid subscription and not to any indebtedness which a stockholder may owe the corporation such as monthly dues;
3.
Restrictions required to be indicated in the articles of incorporation, by-laws and stock certificates of a close corporation;
4.
5.
Restrictions imposed by special law, such as the Public Service Act requiring the approval of the government agency concerned if it will vest unto the transferee 40% of the capital of the public service company; Sale to aliens in violation of maximum ownership of shares under the Nationalization Laws;
6.
Those covered by reasonable agreement of the parties.
-
Endorsement of stock certificate by owner or attorneyin-fact with delivery
•
Monserat vs. Ceron
•
Embassy farms vs. CA
-
Does it include mortgage?
-
-
NO, it is not an absolute transfer
Must be endorsed by owner or attorney-in-fact coupled with delivery
-
Will not affect the transfer through mortgage
-
Endorsed not delivered
-
Absolute and unconditional transfer
-
Proper mode and manner must be complied with
-
Only the transfer or absolute conveyance of the ownership of the title to a share need be entered and noted upon the books of the corporation in order that such transfer may be valid, therefore, inasmuch as a chattel mortgage of the aforesaid title is not a complete and absolute alienation of the dominion and ownership thereof, its entry and notation upon the books of the corporation is not necessary requisite to its validity
•
Razon vs. IAC
-
Delivered not endorsed
-
Reverse of Embassy Farms
-
Endorsement alone is not sufficient nor delivery without endorsement is not allowed
-
Endorsement plus delivery is mandatory
Is there any other mode of transferring stock?
-
Notarized deed
-
Deed of assignment
Chua guan vs. Magsasaka
-
Was the mortgage valid and effective as against subsequent third parties
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38
•
Rural bank of Salinas vs. CA
-
Valid between contracting parties even if not recorded in corporation books
-
If denied or refused without good cause, mandamus will lie
-
Right accrues only if refused
•
Tay vs. CA
-
Statute of limitations does not apply in registration of shares of stock
-
Mandamus may issue if petition has a clear legal right
-
Must determined from the time of refusal
-
Never issued in doubtful cases
-
Petitioner failed to establish a clear legal right and alleged ownership is without merit
Why are they non-negotiable when they may be transferred?
-
Did not acquire ownership by virtue of the contract of pledge
-
In a contract of pledge there must be foreclosure
Transferees pays it without prejudice to all the rights and defenses as the true and lawful owner may have under the law except insofar as such rights and defenses are subject to the limitations imposed by the principles governing estoppels
-
In the case there was no attempt to foreclose
•
De los Santos vs. Republic
-
Petitioner must have a prima facie right
-
•
Nava vs. Peers Marketing
Why is he, not considered as the owner of shares? When it has been said that when endorsed by the owner it is considered as strict certificate? Because certificate of stocks are non-negotiable
-
A stock subscription is a subsisting liability from the time the subscription is made
-
-
The subscriber is as much bound to pay subscription as he would be to pay any other debt
-
No stock certificate was issued. Without stock certificate, which is the evidence of ownership of corporate stock, the assignment of corporate shares is effective only between the parties to the transaction
Although a stock-certificate is sometimes regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with delivery, it is well settled that the instrument is non-negotiable, because the holder thereof takes it without prejudice to such rights or defenses as the registered owner or creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposes by the principles governing estoppels.
Exception to the general rule
Unauthorized issuance of stock certificates
•
Rural Bank of Lipa vs. CA
-
By notarized deed
-
his
100/s 100
Certificate of stocks already issued must be coupled with delivery, exception (TAN vs. SEC)
Stock certificate has already been issued it must be coupled with the delivery
After certificate of stock is issued, may it be effectively transferred even without endorsement or delivery of the stock certificate?
-
Person sought to be a stockholder is an officer and has custody
XYZCo 100 pesos per share Stolen by B and forged the signature of A B sells to C will C acquire title? NO
ENDORSEMENT FORM
Endorsement and delivery is not necessary (TAN vs. SEC)
C armed with the endorsement form certificate, sold to D (innocent purchaser for value), will D acquire title?
•
Tan vs. SEC (FULL KNOWLEDGE, HE IS ESTOPPED)
-
NO, subject to such rights and defenses as the true and lawful owner may have
-
Persons sought to be stockholder is officer and has custody of the book (estopped)
What if C now goes to the corporation and presents the form?
General Rule for valid transfer
-
Certificate of stock must be endorsed by owner or attorney-in-fact coupled with delivery
- Then the corporation shall cancel the old certificate and issues a new one, now in the name of C, now registered in the name of C, will C acquire title?
Exceptions
-
Section 63 uses the word “may”
-
Showing that there transferring shares
Is there a time frame or fixed period as when transfer can be made?
may
-
NO, (WON vs. WACK WACK)
•
Won vs. Wack Wack
be
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other
modes
of
A found out what happened and goes corporation who has a better title C or A?
to
the
- A, A cannot be deprived of his right by virtue of an unauthorized transfer
Corporation can compel C to deliver the new stock certificate because he made a representation that the certificate where good.
Armed with the new certificate issued to C, C delivers to D a purchaser in good faith and for value will D acquire title?
39
- D will acquire title took the shares not by virtue of a forged or unauthorized transfer, but on the reliance that the stock certificate is valid and owned by C
-
the corporation may be compelled to recognize both, A as stockholder (non-negotiable) D, reliance that the stock certificate is valid and existing and owned by C Forged transfers
-
If the corporation should issue a new certificate in pursuance of a forged transfer, the corporation incurs no liability to the person in whose favor it is issued and it may demand its return for cancellation. The corporation in such case has been guilty of no misrepresentation. On the other hand, it is the duty of the purchaser to determine that the indorsement of the owner is genuine. However, if the new certificate issued to the purchaser comes into the hands of a bona fide purchaser for value, the corporation will be stopped from denying validity thereof, since by issuing such new certificate it represents that the person named therein is a stockholder of the corporation. The corporation is thus forced to recognize both the original certificate and new certificate-the original, because the true owner could not be deprived of his title by a forged transfer, and the new, because of its representation that the person named therein is the owner of shares in the corporation. But if the recognition of both stockholders would result in an over issue of shares, then only the original and true owner can be recognized as a stockholder. The bona fide purchaser of the new certificate will however have a right of damages against the corporation. The corporation, in turn, would have a right of action against the person who made false representations and in whose favor it issued a new certificate. The true owner of the shares which were wrongfully transferred would of course have a right to compel the corporation to issue him a certificate in lieu of the original one which was wrongfully cancelled.
Authorized capital stock 1M shares
All are subscribed who will the corporation recognize as rightful owner A or D? if both will be recognized there will be over issuance only A citing citizens national bank vs. state (but if recognition of both stockholders would result in an over issue of shares, then only the original and true owner can be recognized as a stockholder)
-
by virtue of the doctrine of non-negotiability of certificate of stocks
The true and lawful owner will never be deprived of his rights
What happens to D?
- D will have a cause of action against the corporation for the value of his acquisition cost inclusive of damages, attorney’s fees and cost of suit
D sues the corporation for the value of his acquisition cost, inclusive of damages, attorney’s fees and cost of suit. What may the corporation do?
- NO defense, no valid defense, because it was represented to other parties that the certificate of stocks is valid, subsisting, etc.
A certificate of stock cannot be issued unless he fully paid the amount subscribed
Subscription to the capital stocks of the corporation are indivisible
Clear mandate of section 148 of the code is that the ruling of the court in Baltazar vs. Lingayen Gulf, no longer holds true Section 148. Applicability to existing corporations. - All corporations lawfully existing and doing business in the Philippines on the date of the effectivity of this Code and heretofore authorized, licensed or registered by the Securities and Exchange Commission, shall be deemed to have been authorized, licensed or registered under the provisions of this Code, subject to the terms and conditions of its license, and shall be governed by the provisions hereof: Provided, That if any such corporation is affected by the new requirements of this Code, said corporation shall, unless otherwise herein provided, be given a period of not more than two (2) years from the effectivity of this Code within which to comply with the same. (n)
Subscription to shares of stocks are indivisible
Also apparent is that once a subscriber has paid his subscription in full, he becomes entitled to be issued a stock certificate and in the event that the corporation refuses to do so, the stockholder my institute a case for mandamus with damages. Thus, it has been said that the duty of the corporate officers to issue stock certificates to those entitled thereto is a ministerial duty enforceable by mandamus.
•
Fua Cun vs. Summers and China Banking Corp.
-
The court erred in holding the plaintiff as the owner of 250 shares of stock; “the plaintiff’s rights consist in equity in 500 shares and upon payment of the unpaid portion of the subscription price he becomes entitled to the issuance of certificate for said 500 shares in his favor.”
-
No certificate of stock until the full amount has been paid.
Watered stock
-
One which is issued by the corporation as fully paid-up shares, when in fact the whole amount of the value thereof has not been paid.
-
Basis is par value and not the fair market value
Section 62 states that stocks shall not be issued for a consideration less than par or issued price thereof, while section 13 states that in no case shall be paid-up capital be less than five thousand [P5000] pesos.
If issued below par, issued value considered as water
How may watered stocks be issued?
1.
For a monetary consideration less than its par or issued value;
2.
For a consideration in property, tangible or intangible, valued in excess of its fair market value;
3.
Gratuitously or under an agreement that nothing shall be paid at all; or
4.
In the guise of stock dividends when there are no surplus profits of the corporation.
2nd situation, what cause of action may the corporation have? Remedy? Third party complaint against C, but what if he is a purchaser for value? 4th party claim against B When may certificate of stocks be issued?
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Section 64 provides: Section 64. Issuance of stock certificates. No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid. (37)
Stock certificate now in possession of D. A knew of what happened and went to the corporation and complains. Who will have a better title?
-
-
40
Why is stock watering illegal?
-
Those having knowledge thereof, but did not interpose their objection shall be liable
1.
The corporation is deprived of its capital thereby hurting its business prospects, financial capability and responsibility;
-
Section 65 provides:
2.
Stockholders who paid their subscriptions in full, or promised to pay the same, are injured and prejudiced by the reduction of their proportionate interest in the corporation; and,
3.
Present and future creditors are deprived of the corporate assets for the protection of their interest.
-
Corporation is prejudiced
-
Stockholders, dilution of interest
-
Creditors are prejudiced, virtue of right to look upon corporations properties for the satisfaction of their claims
What is the effect of issuance of watered stocks
1.
As to the corporation - when a corporation is guilty of ultra-vires or illegal acts which constitute an injury to or fraud upon the public, or which will tend to injure or defraud the public, the State may institute a quowarranto proceeding to forfeit its charter for the misuse or abuse of its franchise.
Section 65. Liability of directors for watered stocks. - Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. (n)
ACS-100M 1.00
100M/S
SUBSCRIBED-50M 12.00/S
PAR
FAIR
MARKET
VALUE-
VALUE-
UNSUBSCRIBED-50M A B C
2.
As between the corporation and the subscriber- The subscription is void. Such being the case, the subscriber is liable to pay the full par or issued value thereof, to render it valid and effective.
3.
As to the consenting stockholders - They are stopped from raising any objection thereto;
4.
As to dissenting stockholders - In view of the dilution of their proportionate interest in the corporation, they may compel the payment of the “water” in the stock solidarily against the responsible and consenting directors and officers inclusive of the holder of the watered stocks;
5.
6.
As to creditors - They may enforce payment of the difference in the price, or the water in the stock, solidarily against the responsible directors/officers and the stockholders concerned; and’ As against transferees of the watered stock – His right is the same as that of his transferor. If, however, a certificate of stock has been issued and duly indorsed to a bona fide purchaser, without knowledge, actual or constructive, the latter cannot be held liable, at least as against the corporation, since he took the shares on reliance of the misrepresentation made by the corporation that the stock certificate is valid and subsisting. This is because a corporation is prohibited from issuing certificates of stock until the full value of the subscriptions have been paid and could not, therefore, deny the validity of the stock certificate it issued as against a purchaser in good faith. Thus, Ballentine states that whether there is any liability on the part of the transferee of watered stock is made to depend upon whether he acquired the same without notice, either as purchaser or donee. If he had knowledge thereof, he is subject to the same liability as his transferor.
What is the nature of the liability of the corporate directors consenting to the issuance of watered stocks and the extent of their liabilities?
-
Solidarily liable with the holder of the watered stocks to the extent of the water from said shares of stocks
Will all the directors be liable? What if you objected will you also be liable?
-
If you do not issue a written objection, you are still liable
-
Even passive directors may be liable
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D E There is a denial of pre-emptive rights and directors A,B,C,D,E decided to issue the remaining 50M and subscribed for 10M each at 2 per share.
Is there stock watering if the fair market value is 12.00?
-
No stock watering
-
The basis is the par value
-
The shares where in fact paid more than the par value indicated in the articles of incorporation
3 days later they sold their 10M share for P11.00 each, therefore making a profit.
Can you question there actuations? What would be the cause of action?
-
It may be questioned.
-
Duty of loyalty or fiduciary duty as such directors
-
They cannot advance their own motives to the damage prejudice of the corporation which they represents and stockholders as a whole instead of it being sold outside
-
500M would have gone to the coffers of the corporation, 500M should be there for the protection of creditors
-
They are placed in a fiduciary relationship
-
Sila lang ba ang kikita, pano naman yung corporation, opportunity na yun para kumita
When are unpaid subscriptions due and payable?
-
Section 67. Payment of balance of subscription. Subject to the provisions of the contract of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary.
41
Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. (38)
Remedies of the corporation to enforce payment of unpaid subscription
1.
By board action in accordance with the procedure laid down in sections 67 to 69 of the code By a collection case in court as provided for in section 70
of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code. (39a-46a)
Who is the winning bidder in a delinquency sale?
-
Bidder who shall “offer to pay the full amount of the balance on the subscription together with accrued interest, cost of advertisement and expenses of sale, for the smallest number of shares or fraction of a share.” X Co. has 1M authorized capital stock
2.
-
-
A subscribed to 100 thousand shares, 50 thousand is already paid leaving 50 thousand unpaid
Are subscribers of shares of stocks not fully paid, liable to pay interest?
The corporation is at a loss of 250 thousand, the board decides to make a call for the payment of the unpaid subscriptions, however A could not paid, hence declared delinquent and decides to sell his share at a public auction
General rule is they are not liable to pay interest because the code says unless requires in the by-laws Aside from the mandate of the law that subscribers to shares of stock must pay the full value of their subscription, they may likewise be required to pay interest on all unpaid subscriptions if so imposed in the contract or in the corporate by-laws at such rate as may be indicated thereat or the legal rate if not so fixed. Unless so required or provided, however, subscribers to shares of stock, not fully paid, are not liable to pay interest on their unpaid subscriptions. The code thus provides: Section 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. (37)
500 thousand is already subscribed
Until a call is made, they are not due and payable, but still subject to the provisions of the contracts Procedures in case of sale of delinquent stocks
55 thousand is to be paid, remaining balance plus cost and expenses BIDDERS: X-55K FOR 99,900 shares Y-55K FOR 99,500 shares Z-55K FOR 99,000 shares (winning bidder)
Assume there is no bidder, may the corporation bid?
-
NO. It cannot bid because the law says, subject to the provisions of this CODE. Section 68 and 41 should be reconciled. Section 68 states that: Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code. (39a-46a)
Section 68. Delinquency sale. - The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions
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-
There was no unrestricted retained earnings in the example given therefore the corporation cannot bid , section 41, it states that: Section 41. Power to acquire own shares. A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (a)
42
What if the shares of A were sold without compliance of the requirements? May A question the sale?
-
The law prescribes two conditions before an action to recover delinquent stocks irregularly sold may be allowed. These are:
1.
The party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of the sale at the legal rate; and, The action shall be commenced by the filing of a complaint within six months from the date of the sale.
2.
-
The reason for such is the stability of transactions of the shares of stock
Suppose in the example, since there are no unrestricted retained earnings, hence the corporation cannot bid, is the corporation left without any recourse?
-
stock subscription in order to realize assets for the payment of its debts. A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation.
•
Edward Keller and Co. vs. COB
-
May the stockholder be held liable for the debts of the corporation? YES. To the extent of their unpaid subscription As to the liability of the stockholders, it is settled that a stockholder is personally liable for the financial obligations of a corporation to the extent of his unpaid subscriptions
-
Is there a prescriptive period wherein a demand for unpaid subscription should be made?
Section 70. Court action to recover unpaid subscription. - Nothing in this Code shall prevent the corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and expenses. (49a)
-
NO. Garcia vs. Suarez case
•
Garcia vs. Suarez
-
•
Velasco vs. Poizat
-
-
The subscriber is as much bound to pay the amount of the share subscribed by him as he would be to pay any other debt, and the right of the company to demand payment is no less incontestable. Two available remedies: the first and most special remedy given by the statute consist in permitting the corporation to put up the unpaid stock and dispose of it for the account of the delinquent subscriber. The other remedy is by action in court.
Never became due and payable until there is a call made Prescription will not run until and unless there is demand Prescription should be determined from the time demand has been made and not from the time of subscription
-
-
•
De Silva vs. Aboitiz and Co.
-
Discretionary on the part of the board of directors to do whatever is provided in the said article relative to the application of the part of the 70 percent of the profit distributable in equal parts on the payment of the shares subscribed to and fully paid
•
Lingayen Gulf vs. Baltazar
-
Exception: pursuant to a bona fide compromise or to set off a debt due from the corporation, a release supported by consideration, will be effectual as against dissenting stockholders and subsequent and existing creditors. A release which might originally have been held invalid may be sustained after a considerable lapse of time
•
Apocada vs. NLRC
-
Set-off is without any legal basis It was premature Unpaid subscriptions will become due and payable only upon certain instance Call or if there is a stipulation in contract If no call and no stipulation in contract then it will not be demandable or payable at all
-
•
Lumanlan vs. Cura
-
Trust Fund Doctrine- subscription to the capital of a corporation constitute a fund to which the creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts.
•
PNB vs. Bitulak
-
Where it not for the promise, the defendants would have not subscribed Trust Fund Doctrine, it is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid
-
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-
If declared delinquent, what would be the effect as to the owner of said shares?
-
Section 71. Effect of delinquency. - No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any. (50a) However if the shares are not delinquent, subscribers to the capital of a corporation, though not fully paid, are entitled to all the rights of a stockholder, according to section 72
-
Section 72. Rights of unpaid shares. Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. (n)
May the rules governing delinquency sale apply to a non-stock corporation? Are there unpaid shares in a non-stock corporation?
-
Rules governing stock corporations, when applicable, also applies to a non-stock corporation There are delinquent shareholders also in a non-stock corporation. Example is membership dues
-
A corporation paid 50% of subscription and was later on declared delinquent when he could not pay upon call; A is also a director of the corporation. Will A, upon declaration of delinquency , still be able to exercise his right as a director?
-
Yes, he loses all his right as a stockholder except his right to receive dividends He remains to be a director, only qualification to be a director is he must own at least 1 share and since it still stands in his name pending the sale, he remains to be and act as a director Even if there is sale, he may still be director because the winning bidder may not bid or pay for all the shares or there might be remaining shares, which would be credited in favor of the delinquent stockholder Section 43 provides:
-
-
-
Section 43. Power to declare dividends. The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or
43
in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a)
-
Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n)
Could it be issued earlier than 1 year?
-
Yes it can be, the code states that:
When a certificate of stock is loss or destroyed, what must be done by the owner thereof?
-
Section 73. Lost or destroyed certificates. - The following procedure shall be followed for the issuance by a corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed: 1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares represented by such certificate, the serial number of the certificate and the name of the corporation which issued the same. He shall also submit such other information and evidence which he may deem necessary; 2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for three (3) consecutive weeks at the expense of the registered owner of the certificate of stock which has been lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner and the serial number of said certificate, and the number of shares represented by such certificate, and that after the expiration of one (1) year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock, unless the registered owner files a bond or other security in lieu thereof as may be required, effective for a period of one (1) year, for such amount and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one (1) year period provided herein: Provided, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed. Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described. (R.A. 201a)
-
The rationale of the above-quoted law is to avoid duplication of certificates of stock and the avoidance of fictitious and fraudulent transfers. When will the replacement certificate be issued?
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The code provides that: after the expiration of one (1) year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock,
unless the registered owner files a bond or other security in lieu thereof as may be required, effective for a period of one (1) year, for such amount and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one (1) year period provided herein: Provided, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed.
May corporate officers unauthorized issuance?
be
-
YES, the code provides that:
held
liable
for
the
Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described. (R.A. 201a)
Assuming the last paragraph is not there; would it be not the same, that they should be held liable due to fraud, bad faith or negligence?
-
YES. Section 31 provides that: Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting there from suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. (n)
Certificate of stock was lost, the owner transfers his shares by way of a notarized deed will it be valid?
-
He cannot do so, if a certificate of stock is issued by a corporation, a mere notarized deed will not suffice Deed of assignment was not sufficient since there was no endorsement (Rural Bank of Lipa vs. CA)
-
Rights and liabilities of stockholders
-
RIGHTS
1.
Participation in the management of the corporate affairs by exercising their right to vote and be voted upon either personally or by proxy as provided for under sections 50 and 58 of the code;
44
2. 3. 4.
5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.
To enter into a voting trust agreement subject to the procedure, requirements and limitations imposed under section 50; To receive dividends and to compel their declaration if warranted under section 43; To transfer shares of stock subject only to reasonable restrictions such as options and preferences as may be allowed by law inclusive of the right of the transferee to compel the registration of the transfer in the books of the corporation as provided for in section 63; To be issued a certificate of stock for fully paid-up shares in accordance with 64; To exercise pre-emptive rights as provided for in section 39; To exercise their appraisal right in accordance with the provision of section 81 and in those instance allowed by law such as section 42 and 105; To institute and file a derivative suit; To recover shares of stock unlawfully sold for delinquency as may be allowed under section 69; To inspect the books of the corporation subject only to the limitations imposed by section 73; To be furnished by the most recent financial statement of the corporation as by section 75; To be issued a new stock certificate in lieu of the lost or destroyed one subject to the procedure laid down in section 73; To have the corporation dissolved under section 118 to 121, and section 105 in a close corporation; To participate in the distribution of the assets of the corporation upon dissolution under section 122; In the case of a close corporation, to petition the SEC to arbitrate in the event of a deadlock as allowed under section 104; and, Also in the case of a close corporation, to withdraw therefrom, for my reason, and compel the corporation to purchase his shares as provided for under section 105.
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45
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LIABILITIES
1.
To pay to the corporation the balance of his unpaid subscriptions subject to the provision of section 67 to 70; To pay interest on his unpaid subscription if required by the by-laws or by the contract of subscription in accordance with section 66; To answer to the creditors for the unpaid portion of his subscription under the TRUST FUND DOCTRINE; To answer the “water” in his stocks as provided for in section 65; To be liable, as general partners, for all debts, liabilities and damages of a determinable corporation as envisioned under section 21 (corporation by estoppel); and, To be personally liable for torts, in the event that a stockholder in a close corporation actively participates in the management of the corporate affairs.
2. 3. 4. 5.
6.
No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. (51a and 32a; P.B. No. 268.)
To summarize:
1.
Records of all business transactions which include, among others, journals, ledger, contracts, vouchers and receipts, financial statements and other books of accounts, income tax returns, and voting trust agreements which must be kept and carefully preserved at its principal office; Minutes of all meetings of stockholders or members and of the directors or trustees setting forth in detail the date, time, and place of meeting, how authorized, the notice given whether the same be regular or special, and if special, the purpose thereof shall be specified, those present and absent, and every act done or ordered done there at which ,must likewise be kept at the principal office of the corporation; and, Stock and transfer book showing the names of the stockholders, the amount paid or unpaid on all stocks for which subscription has been made, a statement of every alienation, sale or transfer of stock made, if any the date thereof, and by whom and to whom made which must also be kept at the principal office of the corporation or in the office of its stock transfer agent.
CORPORATE BOOKS AND RECORDS
What are these books and records that are required to be kept?
-
Section 74. Books to be kept; stock transfer agent. Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand.
2.
3.
These corporate books and records, inclusive of all business transactions and minutes of meetings, are subject to inspection by any of the directors, trustees, stockholders or members of the corporation at reasonable hours on business days and a copy of excerpts of said records may be demanded. In fact, in so far as financial statement is concerned, the Code clearly provides: Section 75. Right to financial statements. Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations.
The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days.
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At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant. However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. (n)
May books and records be examined? Who may examine? Can they copy them? In whose expense?
-
Yes, according to the code: “The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. “
Is there any defense available that could be raised? By the corporate officers to justify the refusal?
-
Yes, the code provides that: “and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy
46
excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand.”
ownership of shares and the necessity of self-protection. Managers of some corporations deliberately keep the shareholders in ignorance or under misapprehension as to the true condition of its affairs. Business prudence demands that the investor keep a watchful eye on the management and the condition of the business. Those in charge of the company may be guilty of gross incompetence or dishonesty for years and escape liability if the shareholders cannot inspect the records and obtain information.”
What is the stock and transfer? Where should stock and transfer be kept? Can it be kept elsewhere? “Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the bylaws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. “
Stock and transfer agent
-
Records every movement Person who monitors movement by the minutes or by the hours Non-stock corporation- stock and transfer books Club share- membership
Are stockholders entitled to financial statements?
-
Yes, they are entitled to a copy, the code provides that: Section 75. Right to financial statements. Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant.
Is there any distinction of the right of inspection of a stockholder and that of a director?
-
Yes, as compared to a stockholder or member, the right of a director or trustee to inspect and examine corporate books and records is considered absolute and unqualified and without regard to motive. This is because a director supervises, directs and manages corporate business and it is necessary that he be equipped with all the information and data with regard to the affairs of the company in order that he may manage and direct its operations intelligently and according to his best judgment in the interest of all the stockholders he represents. Thus, while stockholders and members are entitled to inspect and examine the books and records as provided in sections 74 and 75 they may not gain access to highly sensitive and confidential information. In the case of directors. “it is not denied” that they have such access. This would include, among others, a. b. c. d.
May this right be exercised, other than by the stockholders themselves?
-
Yes, while the right is founded on stock ownership thus personal in nature it may be made by the stockholder’s agent or representative since it may be unavailing in many instances
What if the right of the stockholder to inspect is denied? What is his remedy?
1. 2.
Mandamus Damages either against the corporation or responsible officer who refused the inspection Criminal complaint for violation of his right to inspect and copy excerpts of all business transactions and minutes of meeting. Section 74 provides that Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code. The latter provision imposes a penalty of a fine of not less than P1,000 but not more than P10,000 or an imprisonment for not less than 30 days but not more than 5 years, or both, at the discretion of the court. If the refusal is pursuant to a resolution or order of the board, the liability shall be imposed upon the directors or trustees who voted for such refusal.
3.
However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. (n) -
-
Audited financial statement filed in the SEC, 120 days from the end of the final year, or must be filed on or before April of each year Must be stamp received by the BIR
Those in the stock exchange
-
Disclosure of any matter that have to do with increasing and decreasing If not “kulong” violation of securities and regulation act
-
-
Why is this stockholder?
right
of
inspection
granted
to
“The right of the shareholders to ascertain how the affairs of his company are being conducted by its directors and officers is founded by his beneficial interest through Notes on Corporation Law “Notes come in handy only when you have studied…” ©GTan; ASoguilon; VVillanueva
Defense of the responsible corporate officer
1.
That the person demanding has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation; That he was not acting in good faith or for a legitimate purpose in making his demand; The right is limited or restricted by special law or the law of it creation.
a
The basis of the right of the stockholder to inspect the books and records of the corporation for a proper purpose is to protect his interest as a stockholder. Thus, it has been said that:
Marketing strategies and pricing structure; Budget for expansion and diversification; Research and development; Sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms
2. 3.
•
W.G. Philpotts vs. Philippine Manufacturing Co.
-
The right of inspection given to a stockholder can be exercised either by himself or by any proper representative or attorney-in-fact, and either with or without the attendance of the stockholder
47
-
The right may be regarded as personal, in the sense that only a stockholder may enjoy it; but the inspection and examination may be made by another. Otherwise it would be unavailing in many instances. o
Note: Usually hires an auditor or accountant to safeguard his interest
•
Pardo vs. Hercules Lumber Co.
-
The law is clear, it may be exercised during reasonable hours on any business days, the by-laws cannot deny this right all together The general right given by the statute may not be lawfully abridged to the extent attempted in this resolution. It may be admitted that the officials in charge of a corporation may deny inspection when sought at unusual hours or under other improper conditions; but neither the executive officers nor the board of directors have the power to deprive a stockholder of the right altogether. The corporation, or its responsible directors and officers cannot unduly restrict this right of inspection and may not arbitrarily set a few days of the year within which the stockholder may make the inspection. A by-law unduly restricting the right of inspection is undoubtedly invalid
-
-
-
•
Vegaruth vs. Isabela Sugar Co.
-
Directors of a corporation have the unqualified right to inspect the books and records of the corporation at all reasonable hours. We do not conceive, however, that a director or stockholder has any absolute right to secure certified copies of the minutes of the corporation until these minutes have been written up and approved by the directors.
-
May a stockholder of a holding company inspect the books and records of a subsidiary?
-
It depends The right of the stockholders to examine corporate books extends to wholly-owned subsidiary which is completely under the control and management of the parent company where he is such a stockholder. But if the two entities (subsidiary and parent) are legally being operated as separate and distinct entities, there is no such right of inspection on the part of the stockholder of the parent company.
-
-
-
-
Assuming you are a stockholder of PNB, and then it was privatized, may you already have the right to inspect?
-
No, unless its charter has been altered or repealed it is still subject to the same law
3 stages in the life of a corporation
-
Formation or birth We now discuss the union of the corporation The last would be its death or dissolution
MERGER AND CONSOLIDATION
Merger and consolidation
-
In corporate parlance it is called spin-off Almost a year ago San Miguel separated its brewery business San Miguel Corporation is now a full time holding company; it can later on absorb the company Corporations are granted by the code to merge or consolidate most common type of corporate recognition not the same in every case but most common in the weal financial or insolvent condition, aim is to bring it back to its financial capability also a method of recapitalization
AYALA- HOLDING COMPANY/PARENT COMPANY SUBSIDIARIES: BPI/GLOBE/AYALA LAND (not whollyowned subsidiary) o
HOLD ATLEAST 50 +1 shares in order to be a PARENT COMPANY
A, is a stockholder of Ayala, does he have a right to inspect the records of its subsidiaries?
-
If wholly owned pwede, but its subsidiaries are not wholly owned kaya hindi pwede
•
Gokongwei vs. SEC
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San Miguel corporation owns all of the shares of stock of San Miguel International It is wholly-owned It would be in accord with equity, good faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of such wholly-owned subsidiary which are in respondent corporation’s possession and control
-
o
-
If being operated as separate and distinct corporations, there is no such right Telecommunications- special franchise, it is a legislative grant
•
Gonzales vs. PNB
-
Provisions of the old law was unqualified, when it granted stockholders the right to inspect
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However, whole seemingly enlarging the right of inspection, the new code has prescribed limitations to the same. It is now expressly required as a condition for such examination that the one requesting it must not have been guilty of using improperly any information secured through a prior examination and that the person asking for such examination must be acting in good faith and for a legitimate purpose in making his demand Admittedly, he sought to be a stockholder in order to pry into transactions entered into by the respondent bank even before he became a stockholder. His obvious purpose was to arm himself with materials he can use against the respondent bank for acts done by the latter when the petitioner was a total stranger to the same. Bank was created by a special law, it has its own charter and primarily governed by the law creating them The bank is only subject to the inspection of the Central Bank and any information pertaining to the bank is confidential and shall not be revealed to any person other than the President of the Philippines, the Secretary of Finance and the Board of Directors, nor shall any information relative to the funds in its custody, its current accounts or deposits belonging to private individuals, corporations or other entities except by order of a Court of Competent Jurisdiction, hence inspection sought to by the petitioner is violative of the provisions of its charter and is even subject to penal sanctions
-
purchase and sale of corporate assets is another form of corporate reorganization
How do you value the assets of the merging corporation, do you consider goodwill? First secure favorably recommendation of government agency Section 79. Effectivity of merger or consolidation. - The articles of merger or of consolidation, signed and certified as herein above required, shall be submitted to the Securities and Exchange Commission in quadruplicate for its approval: Provided, That in the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained. If the Commission is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, at which time the merger or consolidation shall be effective.
48
If, upon investigation, the Securities and Exchange Commission has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard. Written notice of the date, time and place of hearing shall be given to each constituent corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed as provided in this Code. (n)
Merger
-
A union effected by absorbing one or more existing corporations by another which survives and continues the combined business It is the uniting of two or more corporations by the transfer of property to one of them which continue in existence, the other or the others being dissolved and merged therein.
1. 2. 3.
-
A
4.
B
A transfers all assets, properties, rights, obligations, liabilities to B
5.
B issues shares of stocks in exchange of the transfer A is then dissolved and B SURVIVES Parties to a corporation
o
merger
are
called
constituent
Consolidation
-
The uniting or amalgamation of two or more existing corporations to form a new corporation In merger there is a surviving corporation, the others are dissolved, while in consolidation, all constituent are dissolved and a new one organized
-
A
B
Like all other corporate acts, it emanates from the board
1.
The board of directors or trustees of each constituent corporations shall approve a plan of merger or consolidation setting forth the matters required in section 76; Approval of the plan by the stockholders representing 2/3 of the outstanding capital stock or 2/3 of the member in non-stock corporations of each of such corporations at separate corporate meetings called for the purpose; Prior notice of such meeting, with a copy or summary of the plan of merger or consolidation shall be given to all stockholders or members at least two (2) weeks prior to the scheduled meeting, either personally or registered mail stating the purpose thereof; Execution of the articles of merger or consolidation by each constituent corporations to be signed by the president or vice-president and certified by the corporate secretary or assistant secretary setting forth the matters required in section 78; Submission of the articles of merger or consolidation in quadruplicate to the SEC subject to the requirement of section 79 that if it involve corporations under the direct supervision of any other government agency or governed by special laws the favorable recommendation of the government agency concerned shall first be secured and; Issuance of the certificate of merger or consolidation by the SEC at which time the merger or consolidation shall be effective. If the plan, however, is believed to be contrary to law, the SEC shall set a hearing to give the corporations concerned an opportunity to be heard upon proper notice and thereafter, the Commission shall proceed as provided in the Code.
2.
3.
4.
5.
6.
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There will only be a single corporation. In case of merger, the surviving corporation or the consolidated corporation in case of consolidation; The termination of the corporate existence of the constituent corporations, except that of the surviving corporation or the consolidated corporation; The surviving corporation or the consolidated corporation will possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under the Code; The surviving or consolidated corporation shall possess all the rights, privileges, immunities and franchises of the constituent corporations, and all property and all receivables due, including subscriptions to shares and other choses in action, and every other interest of, or belonging to or due to the constituent corporations shall be deemed transferred to and vested in such surviving or consolidated corporation without further act and deed; and, The rights of creditors or any lien on the property of the constituent corporations shall not be impaired by the merger or consolidation.
Is there a liquidation process in case of merger or consolidation?
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None, there is nothing to distribute
•
Associated Bank vs. CA
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By virtue of a specific provision in the merger agreement Although the subject promissory note names CBTC as the payee, the reference to CBTC in the note shall be construed, under the very provision of the merger agreement, as a reference to petitioner bank, “as if such reference (was a) direct reference to the latter for all intents and purposes Section 80 par. 4 states:
-
-
The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and
C
Although merger and consolidation is an express power granted to corporation, it is subject to limitations, as maybe proscribed by law What would be the effect of merger or consolidation?
-
Without further acts, meaning it is automatic
When do merger and consolidation become effective? What if the SEC fails to act on it without fault attributable to the corporation involved?
-
It will never become valid until and unless the SEC gives its stamp of approval It will be up to the constituent corporation to follow it up It will never take effect until the SEC gives its approval and issues the articles of merger
-
o
Granted 3 years to wing up unless there is a trustee to wing up its affairs
Could there be liquidators and winding up with respect to the corporation in consolidation and merger?
-
No, there is none No assets properties or rights to collect, they are transferred No debts and liabilities to pay because they become the liabilities of the surviving corporations No properties transferred because they will be the properties of the surviving corporations
-
o
Hardest part is the financial act, regarding how many shares would be issued, probability of collection and the like
49
o
In merger and consolidation, there is diligence and an economist is usually hired
due
majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (30) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment: and Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation. (n)
APPRAISAL RIGHT
Define appraisal
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Right to withdraw from the corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in corporate structure
What property? When may this right be exercises?
-
Section 81 provides: Section 81. Instances of appraisal right. Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances:
Principal Office- QC, it was changed to Manila A objects and makes a written demand for payment of fair value of shares. Can he make a demand of payment of shares?
True or False, no stockholder in a stock corporation can ever demand if the principal office is amended, changing it from QC to Manila
1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence;
-
False, a stockholder in a close corporation may for any reason compel the close corporation that he be paid the fair value of his shares
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and
May a stockholder who hasn’t paid his subscription in full exercise his appraisal rights?
-
Yes, he can exercise his appraisal rights, by reconciling the provisions of section 72, section 82 and section 86
3. In case of merger or consolidation. (n)
X Co.
May it be exercised by a stockholder who dissents to the act of a business other than a primary purpose?
Can he exercise his appraisal rights in the first place? He hasn’t even paid his subscription in full.
Section 72. Rights of unpaid shares. Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. (n)
X Co. inc Principal office is in Quezon city, it was changed to Paranaque A objects and makes a written demand. May he exercise his right of appraisal? -
It is not available in all amendments of the corporation It must be changing or restricting the rights of any stockholder
What if the principal office is changed from QC to TAWI-TAWI, will it change or affect the rights of A?
-
To some it may change or restrict the rights to others it may not
How is the right exercised?
-
According to section 82 of the code: Section 82. How right is exercised. - The appraisal right may be exercised by any stockholder who shall have voted against the proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares: Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. The findings of the
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Section 82. How right is exercised. - The appraisal right may be exercised by any stockholder who shall have voted against the proposed corporate action, by making a written demand on the corporation within thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares: Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. If within a period of sixty (60) days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (30) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment: and Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation. (n) Section 86. Notation on certificates; rights of transferee. - Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend
50
distributions which would have accrued on such shares shall be paid to the transferee. (n)
When may the right to be paid the value of his shares cease? Can he withdraw his right of appraisal?
-
Notation is not mandatory, it is even discretionary because the code provides “at the option of the corporation” because it never issued one for that matter since the subscriptions are not yet fully paid
-
Yes, he may withdraw, but there must be consent by the corporation as provided for by section 83 of the code:
May the corporation be compelled to pay the interest of A
Section 84. When right to payment ceases. - No demand for payment under this Title may be withdrawn unless the corporation consents thereto. If, however, such demand for payment is withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the Securities and Exchange Commission where such approval is necessary, or if the Securities and Exchange Commission determines that such stockholder is not entitled to the appraisal right, then the right of said stockholder to be paid the fair value of his shares shall cease, his status as a stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to him. (n)
300 T, 150T, 150T and 0 unrestricted retained earnings
No stockholder may be able to compel the corporation to pay the value of his shares if the corporation has no unrestricted retained earnings
-
False, a stockholder of a close corporation may for any reason, provided only that the corporation has sufficient assets to cover its debts and liabilities o o
1. 2.
3.
4.
5.
General rule: there should be unrestricted retained earnings Exception: section 105 “close corporation”
Instances when the right of a dissenting stockholder to be paid the fair value of his shares ceases.
1.
When he withdraws his demand for payment and the corporation consents thereto; When the proposed action is abandoned or rescinded by the corporation; When the proposed action is disapproved by the SEC where such approval is necessary; When the SEC determines that he is not entitled to exercise his appraisal right; When he fails to submit the stock certificate within ten (10) days from demand to the corporation for notation that such shares are dissenting shares; and, If the shares are transferred and the certificate subsequently cancelled.
The procedure and requirements for the valid exercise of this rights are:
2.
The stockholder must have voted against the proposed corporate action in any of the instances allowed by law for the exercise of the right of appraisal; The written demand for payment must be made by the dissenting stockholder within thirty (30) days after the date on which the vote was taken thereon. Failure to make the demand within the said period shall be deemed a waiver on the part of the stockholder concerned to exercise his appraisal right; Surrender of the certificate of stock by the dissenting stockholder for notation in the corporate books and the payment by the corporation of the fair market value of the said shares as of the day prior to the date on which the vote was taken. If the stockholder and the corporation cannot agree on the fair market value thereof, the same shall be determined in accordance with the provision of paragraph 2 of section 82; The fair value of the shares of the dissenting stockholder must be paid by the corporation only if it has “unrestricted retained earnings” in its books to cover such payment. If the corporation has no unrestricted retained earnings, the dissenting stockholder may not, therefore, be able to effectively exercise his appraisal rights; Upon payment of the shares by the corporation, the dissenting stockholder shall transfer his shares to the corporation.
4.
3.
5. 6.
Who bears the cost of appraisal?
-
It depends The corporation bears the cost if a. b.
-
Dissenting stockholder will be liable for the cost and expenses of appraisal when a.
-
What would be the effect if the stockholder exercises his appraisal rights? What happens to his voting and dividend rights if he exercises his appraisal rights?
b.
It will be suspended, with a limitation of 30 days, as provided for by section 83 of the code: Section 83. Effect of demand and termination of right. - From the time of demand for payment of the fair value of a stockholder's shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this Code, except the right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored. (n)
-
How do you compare the rights of a stockholder, declared delinquent compared to a dissenting stockholder exercising his appraisal rights What if a stockholder exercising his appraisal rights is also a director, will he also lose his rights as a stockholder? The shares remain to stand in his name until he is paid, unless there is a stipulation in the by-laws
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The price offered by the corporation is lower than the fair value of the shares of the dissenting stockholder as determined by the appraisers; Where an action is filed by the dissenting stockholder to recover such fair value and the refusal of the stockholder to receive payment is found by the court to be justified.
When the price offered by the corporation is approximately the same as the fair value ascertained by the appraisers; Where the action filed by the dissenting stockholder and his refusal to accept payment is found by the court to be unjustified.
The dissenting stockholder may also sell, transfer or assign his shares Section 86. Notation on certificates; rights of transferee. - Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee. (n)
NON-STOCK CORPORATIONS
What is a non-stock corporation?
-
A non-stock corporation is one where no part of its income is distributable as dividends to its members,
51
trustees, or officers, subject to the provisions of this code on dissolution
What provision of the code will govern non-stock corporations? Would the provision governing stock corporations also apply to non-stock corporations?
-
Yes, 2nd par. Of section 87 provides:
office of one-third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period. No person shall be elected as trustee unless he is a member of the corporation.
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. (n)
How is the right to vote exercised in a non-stock corporation compared to a stock corporation May a member in a non-stock corporation vote cumulatively?
Unless otherwise provided in the articles of incorporation or the by-laws, officers of a non-stock corporation may be directly elected by the members. (n)
Qualifications?
1. 2.
He is a member of the association; Majority thereof must be residents of the Philippines; and, Other qualifications as may be provided for in the bylaws.
-
General rule is NO
May it be granted or allowed by the by-laws?
-
Yes
Governing board in a non-stock
May the right to cumulative voting be denied in a stock corporation?
-
Board of Trustees, however section 138 provides that:
-
No, Doctrine of Limited Capacity
May members in a non-stock corporation vote by proxy?
-
Yes, section 89 provides that: “Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code. (n) “
May the right to vote by proxy be validly denied in a stock corporation?
-
No, it is a matter of right in a stock corporation
May member of a non-stock corporation cast their vote by text?
-
Yes, subject to the approval and terms and conditions of the SEC
3.
Section 138. Designation of governing boards. - The provisions of specific provisions of this Code to the contrary notwithstanding, non-stock or special corporations may, through their articles of incorporation or their by-laws, designate their governing boards by any name other than as board of trustees. (n)
Disqualifications
-
Section 27 also applies to a non-stock corporation, same holds true to the manner of removal Section 27. Disqualification of directors, trustees or officers. - No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation. (n) Section 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in office.
“Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission. “
How about in stock?
-
Voting by mail or other similar means may also be authorized and allowed by the by-laws of non-stock corporations. Generally, in stock corporations, the vote must be cast at a duly constituted meeting. The only exception, in case of the latter, is in the matter of general amendment of the articles of incorporation where the written assent of the stockholder may be sufficient.
How is the governing board constituted in a non-stock corporation? How many members?
-
It may exceed 15 in a non-stock corporation unless the AOI or by-laws provide otherwise, as provided for by section 92 of the code: Section 92. Election and term of trustees. Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of
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Any directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. (n) Section 30. Compensation of directors. - In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. (n)
Who elects the other officers?
-
Directly by the general members unless the by-laws or articles provide otherwise.
52
“Unless otherwise provided in the articles of incorporation or the by-laws, officers of a non-stock corporation may be directly elected by the members. (n) “
In stock corporations who elect officers?
-
Directors
The provision that stock corporations cannot validly provide that members cannot be voted by stockholders is only a general rule because there is an exception section 97 of the code states that:
Section 91. Termination of membership. Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws. Termination of membership shall have the effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by-laws. (n)
1.
The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect:
2. 3.
1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and 3. The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors.
•
Chinese YMCA vs. Ching
-
Right of the corporation to choose who the members are, cannot be inquired or intervened by the court The appealed decision thus contravened the establish principle that the courts cannot strip a member of a non-stock corporation of his membership therein without cause.
-
•
Lions Club International vs. CA
-
Courts will not generally interfere on matters involving the internal affairs of an unincorporated association such as election contest unless the acts complained of are arbitrary, oppressive, fraudulent, violative of civil rights and the like General rule is that the courts will not interfere with the internal affairs of an unincorporated association so as to settle disputes between the members, or questions of policy, discipline, or internal government, so long as the government of the society is fairly and honestly administered in conformity with its by-laws and the law of the land, and no property or civil rights are involved. Exceptions are the following:
Nature of membership is non-transferrable and personal in nature unless the articles of incorporation or by-laws provide otherwise -
How is a membership requirement in a non-stock corporation
-
a.
A holds a membership certificate B goes to the corporation and compels the corporation to record the transfer in his name -
b.
Membership in non-stock corporations may be acquired by complying with the provisions of its rules prescribed in the by-laws. This is in consonance with the express power granted by law under section 36, paragraph 6 of the code, authorizing them to admit members thereof and that authority carries with it the power to prescribe rules on membership. It has thus been stated that in the absence of charter or statutory restrictions, non-stock corporations may determine who shall be admitted to membership and how they shall be admitted.
c. d.
Section 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; -
They can provide the manner in which to admit depending on their own rules
The power or authority to terminate members in nonstock corporations is said to be inherent but strict compliance with the manner and procedure laid down in the by-laws must be observed, otherwise it may render the expulsion ineffective and invalid.
Notes on Corporation Law “Notes come in handy only when you have studied…” ©GTan; ASoguilon; VVillanueva
When an offense is committed which, although it has no immediate relation to a member’s duty as such, it is so infamous as to render him unfit for society of honest men, which is indictable at common law; When the offense is a violation of his duty as member of the corporation; and, When the offense is of a mixed nature, being both against his duty as a member of the corporation, and also indictable at common law.
If the conduct of the member comes within any of this cases, it is a ground for valid expulsion although it may not be expressly made so by the by-laws
Section 90. Non-transferability of membership. - Membership in a non-stock corporation and all rights arising there from are personal and nontransferable, unless the articles of incorporation or the by-laws otherwise provide. (n)
Power is inherent and may be exercised in certain situations:
Where law and justice so require, and the proceedings of the association are subject to judicial review where there is fraud, oppression, or bad faith, or where the action complained of is capricious, arbitrary, or unjustly discriminatory To grant relief in case property or civil rights are invaded, although it has also been held that the involvement of property rights does not necessarily authorize judicial intervention, in the absence of arbitrariness, fraud or collusion. Are violative of the laws of the society, or the law of the land, as by depriving the person of due process of law There is lack of jurisdiction on the part of the tribunal conducting the proceedings, where the organization exceeds its powers, or where the proceedings are otherwise illegal
Corporations, stock and non-stock, may be dissolved in accordance and pursuant to the provisions of Sections 118 to 121 of the Corporation Code and the pertinent provisions of P.D. 902-A, as amended. If such be the case, the assets of the corporation are to be distributed in accordance with law and established jurisprudence. If a non-stock corporation is dissolved how will its properties be distributed? Section 94. Rules of distribution. - In case dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefore;
53
2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements; 3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter; 4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the by-laws, determine the distributive rights of members, or any class or classes of members, or provide for distribution; and 5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter. (n)
Non-stock corporations with 4Billion funds, may it be distributed for and among its members?
- Section 94 number 3 provides: 3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter; -
-
-
The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in this Code for the giving of notice of meetings to members. Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the members having voting rights present or represented by proxy at such meeting. (n)
CLOSE CORPORATIONS Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not
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Between and among themselves, they feel and act alike Not more than 20 stockholders Specified persons, if you are not specified, you cannot be a stockholder All the issued stocks of all classes is subject to restrictions Shall not be listed in the stock exchange not publicly offered 3 qualifying conditions must be contained in the articles of incorporation, to be considered as a close corporation, if not, it will not be considered as such and will be governed by the general provisions of the code Even if 100 % is owned by one person it will not be considered a close corporation without the 3 qualifying provisions Identity of stockholders, specified persons Active management either as directors or partners in management Combination of the corporation and partnership type of business
May any type of corporation, be organized as such close corporation?
-
No, the 3 qualifying conditions must be present
What if 2/3 of the outstanding capital stock is owned by another corporation which is also a close corporation, will it be a close corporation?
-
No, it will only be a closed corporation if 2/3 of the voting stocks of a close corporation is also owned by a close corporation. It must be “voting” stocks Even if another corporation owns or controls 2/3 of the voting stocks of a close corporation, the latter may still be considered as such close corporation if the corporation owning or controlling the shares is also a close corporation.
-
“Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code.”
If there is no distributive agreement then they may do so through a plan of distribution under section 95 Section 95. Plan of distribution of assets. A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner:
be deemed a close corporation when at least twothirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code.
What kind of corporation?
corporations
cannot
be
1. 2. 3. 4. 5. 6.
Mining or oil companies, Stock exchange Banks and insurance companies, Public utilities Educational institutions Corporations vested with public interest
Classification of directors
-
Ordinary stock- no such right Close corporation-yes there is such a right
Section 97 is a permissive provision
a
close
Section 97. Articles of incorporation. - The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code.
54
After classification what then?
-
After classification, qualification and then restriction as provided for under the 3 qualifying conditions in section 96
Cumulative voting is restricted in close corporations if will be elected solely by a particular class
In a close corporation, the articles of incorporation may provide for a greater quorum and voting requirement in meetings of both stockholders or directors to increase the veto power of minority stockholders, unlike in a stock corporation wherein only directors meetings may provide for greater quorum requirement and in stockholders meeting which may not be altered or increased, as provide for in section 25, following the doctrine of limited capacity The articles of a close corporation may likewise provide that the business of the corporation shall be managed by the stockholders rather than by the board of directors. However the same must contain the continuing provisions required in paragraph 2 of section 97, that is:
1. 2. 3.
-
-
o
Unless all the stockholders consent they “may”
What if the other stockholders object to register? What will be the remedy of the transferee?
-
His remedy is rescission. The effect of rescission is mutual restitution
How about the stockholder, what is his recourse?
-
He may compel the close corporation to purchase his shares at their fair value for any reason, provided the corporation has sufficient assets in its books to cover the debts and liabilities exclusive of capital In a close corporation, there is a withdrawing stockholder, unlike in an ordinary stockholder where there is none, they may only do so in the exercise of appraisal rights
-
No meeting of stockholders need be called to elect directors; Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors; and; The stockholders of the corporation shall be subject to all liabilities of directors.
Section 105. Withdrawal of stockholder or dissolution of corporation. - In addition and without prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution of such corporation whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted.
Liability of stockholders acting as directors in a close corporation are more extensive since they are personally liable for corporate torts unless the corporation has obtained a reasonable adequate liability insurance, unlike a ordinary stock corporation, wherein directors thereof are only liable for corporate torts only if they have been negligent or acted fraudulently in the performance of their functions. Restrictions In ordinary stock corporations, the restrictions must appear in the articles of incorporation as well as the certificate of stocks In a close corporation, the restrictions must appear in the articles of incorporation, the by-laws and the certificate of stocks. Otherwise, the same shall not be binding on any purchaser thereof in good faith
Will have to amend the articles of incorporation to accommodate other purchasers of share Will cease to be a close corporation if it amends and becomes in excess of 20
Agreements may also corporation
be
entered
in
a
close
-
They can even agree to be partners in management Pre-incorporation Manner in which the business of the corporation shall be managed
What if the stockholders do not want to exercise their right or option to purchase may it be sold to any person?
-
Yes, any third person, section 98 provides:
Board resolution
Section 98. Validity of restrictions on transfer of shares. - Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person.
-
Ordinary stock corporations- sit and act as a body at a duly constituted meeting, they may do so by virtue of the E-Commerce Act through teleconference or video conference
Exception to the rule: other officers may be directly appointed and hired by the stockholders Close corporations may validly act even without a meeting provided the conditions are obtained
o
Section 101. When board meeting is unnecessary or improperly held. - Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if:
ordinary stock corporations are liable only if acted in Bad faith, fraud or negligence in performance of duty
What if there are already 20 stockholders and they want to add 2 more, may it compel?
-
In ordinary stock corporations, they may compel by mandamus In close corporations, may not be compelled to admit because it breaches the qualifying conditions
-
Since they cannot be compelled, may they admit?
-
Yes, provided all the stockholders consented or instead of consenting they decide to amend their articles of incorporation
Notes on Corporation Law “Notes come in handy only when you have studied…” ©GTan; ASoguilon; VVillanueva
1. Before or after such action is taken, written consent thereto is signed by all the directors; or 2. All the stockholders have actual or knowledge of the action and make no objection thereto in writing; or
implied prompt
3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing.
Pre-emptive rights in a close corporation is absolute
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Section 102. Pre-emptive right in close corporations. - The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise.
Why is it said to be absolute?
-
Because there is no public offering in a close corporation, otherwise it will not be considered as close
In a close corporation the pre-emptive rights is broadened to include all issues without exception unless denied or limited by the articles of incorporation Section 39 is the governing provision concerning rights of the stockholder in an ordinary stock corporation and it may be denied. If it is not denied a stockholder can exercise his pre-emptive rights for all issues of shares whether money, property or previously incurred indebtedness.
A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the Commission. A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the Commission or by all the stockholders. His compensation shall be determined by agreement between him and the corporation subject to approval of the Commission, which may fix his compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation. -
Section 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.
1. 2. 3. 4.
5. 6. 7.
Are treasury shares covered in the exercise of preemptive rights in ordinary stock corporations? As regards amendments Section 103. Amendment of articles of incorporation. - Any amendment to the articles of incorporation which seeks to delete or remove any provision required by this Title to be contained in the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose.
What happens if there is a deadlock?
-
Section 104 provides for a remedy Section 104. Deadlocks. - Notwithstanding any contrary provision in the articles of incorporation or by-laws or agreement of stockholders of a close corporation, if the directors or stockholders are so divided respecting the management of the corporation's business and affairs that the votes required for any corporate action cannot be obtained, with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally, the Securities and Exchange Commission, upon written petition by any stockholder, shall have the power to arbitrate the dispute. In the exercise of such power, the Commission shall have authority to make such order as it deems appropriate, including an order: (1) cancelling or altering any provision contained in the articles of incorporation, by-laws, or any stockholder's agreement; (2) cancelling, altering or enjoining any resolution or act of the corporation or its board of directors, stockholders, or officers; (3) directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action; (4) requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders; (5) appointing a provisional director; (6) dissolving the corporation; or (7) granting such other relief as the circumstances may warrant.
Notes on Corporation Law “Notes come in handy only when you have studied…” ©GTan; ASoguilon; VVillanueva
Powers of the SEC in intra-corporate concerns has been transferred to the proper commercial courts Prohibit, even if acting in good faith Provisional director appointed by the court Requiring the purchase, irrespective of unrestricted retained earnings The provision of the law above-quoted gives the SEC a very wide discretion in respect to management of a close corporation in the event of a deadlock. It may: Cancel or alter any provision in the articles of incorporation, by-laws or any stockholders agreement Cancel, alter or enjoin any resolution or other act of the corporation or its board of directors, stockholders or officers Prohibit any act of the corporation or its board of directors, stockholders or officers or other persons party to the action; Requiring the purchase of the par value of the shares of any stockholders, either by the corporation regardless of availability of unrestricted earnings, or by the other shareholders, Appointment of a provisional director Dissolving the corporation; or Other relief as the circumstances may warrant.
Section 105
-
Dishonesty is a ground for dissolution of a close corporation Even one stockholder may petition for dissolution
-
o
when there is a relief available, dissolution would not be available in an ordinary corporation
CLOSE CORPORATION 1. The number of stockholders cannot exceed 20 2. To the extent that all stockholders can be deemed directors, the number of directors can effectively be more than 15 3. Shares of stock are subject to specified restrictions 4. Shares of stock are prohibited from being listed in the stock exchange or offered for sale to the public 5. Stockholders may take an active part in corporate management by vesting management to them rather than a Board of Director 6. Those active in management are personally liable for corporate torts unless the corporation has obtained an adequate liability insurance 7. Directors can validly act even without a meeting 8. Agreements between stockholders regarding the operations of the business can validly be made 9. To the extent that directors may be classified into one or more classes and to be voted solely by a particular
ORDINARY STOCK CORPORATION No limitation as to number of shareholder Maximum number of directors is 15
Generally no restriction transfer of shares No prohibition
on
Management is lodged in the Board of Directors
Directors are liable for torts only if they have acted negligently or fraudulently
Directors must, as a rule, act as a body at a duly constituted meeting Not valid and binding since stockholders’ agreement cannot limit the discretion of the Board to manage corporate affairs Ordinarily, no such classification and no restrictions on cumulative voting
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class of stock, cumulative voting may, in effect, be restricted 10. The articles of incorporation may provide that all officers shall be elected or appointed by the stockholders 11. It may provide for greater quorum and voting requirements in meetings of stockholders and directors
12. Restriction on transfer of shares should be indicated in the articles of incorporation, by-laws and stock certificates 13. Pre-emptive rights of Pre-emptive rights may be stockholders is broader as it denied as provided for in include all issues without section 39 exception 14. A stockholder may Unless he sells his shares, a withdraw and compel the stockholder cannot get back corporation to purchase his his investment nor compel the shares for any reason with corporation to buy his shares the limitation only that the except in the exercise of his corporation has sufficient appraisal right assets to cover its liabilities exclusive of capital stock 15. The proper forum may Courts cannot interfere I the interfere in the business judgment of the management of a close directors/stockholders corporation in case of “BUSINESS JUDGMENT RULE” deadlocks under Section 104, even of the directors/stockholders are acting in good faith 16. Any stockholder may Dissolution may be had only petition the SEC for on the grounds provided by corporate dissolution on the provisions of the Code on grounds among others, dissolution and P.D. 902-A, as provides for in section 105 amended • Manuel Dulay Enterprises vs. CA -
-
What was the position of Manuel Dulay here? President, General Manager and Treasurer Cannot act both as president and treasurer at the same time Since it is a close corporation owned by the family of Manuel Dulay, save and except the secretary, it should be governed by Title XII Petitioner is classified as a close corporation and consequently a board resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president. At any rate, a corporate action taken at a board meeting without proper call or notice in a close corporation is deemed ratified by the absent director unless the latter promptly files his written objection with the secretary of the corporation after having knowledge of the meeting which, in this case, petitioner Virgilio Dulay failed to do. Virgilio Dulay is a signatory witness, he knows very well about the deed of absolute sale, he is estopped
•
Naguiat vs. NLRC
-
Section 100 par. 5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance.
Section 106. Incorporation. - Educational corporations shall be governed by special laws and by the general provisions of this Code. (n)
Officers are elected by the Board of Directors
Although the articles of incorporation or by-laws may provide for greater quorum and voting requirements in directors’ meeting under section 25, those for stockholders’ meeting cannot generally be altered Valid and binding if indicated in the articles of incorporation and stock certificates
Family corporations is not automatically a close corporation the 3 qualifying conditions must be present.
SPECIAL CORPORATIONS
2 types of special corporations
1. 2.
Educational corporations Religious corporations 2.1 Corporation Sole 2.2 Religious Societies
Notes on Corporation Law “Notes come in handy only when you have studied…” ©GTan; ASoguilon; VVillanueva
What provision governs educational corporations?
-
-
-
Special laws like they Education Act of the Philippines These institutions of learning, once recognized by the government as such are mandated by law to be incorporated within ninety (90) days under the provisions of the Corporation Code and must, perforce, comply with the requirements and procedure laid down there under. Their failure to so will not immune the educational institution from suit as a corporation. (Chiang Kai Siek Case) Favorable recommendation of government agency involved
Two types of educational corporations
-
Certificate of completion in the academic field Vocational and technical one’s o
Recommendation of DECS if certificate of completion in the academic field
How is the governing institution instituted?
-
Non-stock- multiples of 5 only (example: 5,10,15) Stock- can be anywhere between 5 to 15
Can they consist of 7 or 9 members?
-
Yes, if stock
Can they be incorporated also as non-stock?
-
Yes B.P. 232 allows the organization of an educational institution that is stock corporation, only if they do not issue a certificate of completion in the academic field
Qualifications and disqualifications of the membership in the board of an educational corporation
-
Educational corporations are governed by special laws and general provisions, hence if there is no provision in the special law, you go back to section 25 and 27 of the general provisions Stock- must be a stockholder Non-stock- must be a member By-laws may provide for additional qualifications and disqualifications
-
board
of
an
educational
Section 25. Corporate officers, quorum. Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings. (33a) Section 27. Disqualification of directors, trustees or officers. - No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to
57
the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation. (n)
-
Section 111. Articles of incorporation. - In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file with the Securities and Exchange Commission articles of incorporation setting forth the following:
Article 14 section 4 par. 2 of the Constitutions Educational institutions, other than those established by religious groups and mission boards, shall be owned solely by citizens of the Philippines or corporations or associations at least sixty per centum of the capital of which is owned by such citizens. The Congress may, however, require increased Filipino equity participation in all educational institutions. The control and administration of educational institutions shall be vested in citizens of the Philippines.
1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious denomination, sect or church and that he desires to become a corporation sole;
No educational institution shall be established exclusively for aliens and no group of aliens shall comprise more than one-third of the enrollment in any school. The provisions of this sub section shall not apply to schools established for foreign diplomatic personnel and their dependents and, unless otherwise provided by law, for other foreign temporary residents. -
Term of office of governing board in an educational institutions
-
Can serve a term of 5 years. If that be the case, 1/5 of their number shall expire every year
Non-stock or stock, can they serve for a 1 year term only?
-
Yes, the articles of incorporation may provide that it be 1 year only
What are these religious corporations spoken off?
-
Corporation sole and religious societies
What is a corporation sole?
-
Consists of one person only and his successor in some particular station, who are incorporated by law in order to give them some legal capacities and advantages, particularly that of perpetuity, which in their natural persons they could not have had
-
2. That the rules, regulations and discipline of his religious denomination, sect or church are not inconsistent with his becoming a corporation sole and do not forbid it; 3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with the administration of the temporalities and the management of the affairs, estate and properties of his religious denomination, sect or church within his territorial jurisdiction, describing such territorial jurisdiction;
Management is left solely to citizens of the Philippines Board of Directors manages the corporate affairs, foreigners cannot therefore be elected in the board Exceptions are, mission boards and religious orders, which may have a governing board consisting of foreigners
4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi of presiding elder is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect or church to which he belongs; and 5. The place where the principal office of the corporation sole is to be established and located, which place must be within the Philippines. The articles of incorporation may include any other provision not contrary to law for the regulation of the affairs of the corporation. (n) Section 112. Submission of the articles of incorporation. - The articles of incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public. From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof. (n)
May a corporation be organized by less than 5 natural persons?
-
General rule, 5 to 15 natural persons(except cooperatives and corporations primarily organized to hold equities in rural banks and may rightfully become incorporators thereof) Exception, corporation sole, consist of only one person
May any person form or organize a corporation sole?
-
No, not any person can form a corporation sole, section 110 provides: Section 110. Corporation sole. - For the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. (154a)
Is it required to file the articles of incorporation in the SEC?
-
Yes
What should incorporation?
be
contained
in
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the
articles
of
Section 111 and section 112 provides for the contents and procedures
Is it required to indicate its terms of execution? Why not?
-
Not required because they are supposed to exist in perpetuity However, it does not mean that it shall continue to exist forever, it merely means that it has the capacity of continuous existence during a particular period until dissolved in accordance with law
-
When will it acquire judicial personality? How do you compare this to other types of corporation?
-
After the filing the verified articles of incorporation along with the documents required in Section 112 with the SEC, immediately becomes endowed with corporate personality, this serves as an exception to the rule that a corporation acquires juridical personality only upon the issuance of a certificate of incorporation by the said government agency.
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Upon filing of verified articles of incorporation with the SEC, will not require the approval of SEC
A corporation sole is possessed with the same power, rights and privileges, to own, acquire and hold or convey properties like any other corporation? True or False
-
False, they have the same power rights and privileges, but when it comes to alienation and acquisition, it must possess a court order, however when there is a regulated method, a court order may be dispensed with Section 113. Acquisition and alienation of property. - Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the Court of First Instance of the province where the property is situated upon proof made to the satisfaction of the court that notice of the application for leave to sell or mortgage has been given by publication or otherwise in such manner and for such time as said court may have directed, and that it is to the interest of the corporation that leave to sell or mortgage should be granted. The application for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination, sect or church represented by the corporation sole: Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary. (159a)
No, it will not vest unto the head, the head is acting merely as a guardian
•
Roman Catholic Apostolic Adm. Of Davao, inc. vs. Land Reg. Comm, et al.
-
Act only as a guardian Ownership devolves upon the congregation or religious denomination A corporation consists of one person only and his successors (who will always be one at a time, in some particular station), who are incorporated by law in order to give them some legal capacities and advantages, particularly that of perpetuity, which in their natural persons they could not have had Roman Catholic Church has no nationality and that the framers of the Constitution, as will be hereunder explained, did not have in mind the religious corporations sole when they provided that 60 percent of the capital thereof be owned by Filipino citizens.
-
During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church incorporated as a corporation sole, the person or persons authorized and empowered by the rules, regulations or discipline of the religious denomination, sect or church represented by the corporation sole to administer the temporalities and manage the affairs, estate and properties of the corporation sole during the vacancy shall exercise all the powers and authority of the corporation sole during such vacancy. (158a)
•
Director of Lands vs. CA
-
Alienable public land is converted into private land when the same has been openly, continuously and exclusively in possession of the property as concept of an owner for 30 years, automatically that is
The declaration of dissolution shall set forth: 1. The name of the corporation; 2. The reason for dissolution and winding up; 3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or church; 4. The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation. Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs. (n) -
-
Republic of the Philippines vs. IAC
-
Determination of the character of the land should be in mind If they still form part of public domain they cannot be owned, but if they are converted into private land, the constitutional prohibition will not apply
-
If there is vacancy who will fill up the same? What if there is none, what must the successor do?
-
According to section 114:
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While section 115 of the code provides for the process and procedure for the dissolution of a corporate sole, there is nothing in the law itself which would prohibit it from amending its articles of incorporation It is believed that authorization for the dissolution by the particular religious denomination, sect or church, as required in sub-paragraph 3 of section 115 would still be necessary in the case of amending the articles of incorporation to affect dissolution. o
Expiration of a corporate term will not apply to a religious corporation
May a corporation sole be dissolved by judicial decree?
-
General rule: No, because a corporation sole, is by its very nature ecclesiastical and religious (doctrine of separation of church and state) Exception: police power of the state, if its purpose is being carried out and is instead being used for illegal purpose, it may be so dissolved
-
•
If a corporation exists in equity may it not be dissolved? Section 115. Dissolution. - A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Securities and Exchange Commission a verified declaration of dissolution.
Since a corporation sole is consists only of one person, will the registration of the property in the name of the corporation sole vest unto the head thereof the ownership of the property?
-
-
Section 114. Filling of vacancies. - The successors in office of any chief archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation sole shall become the corporation sole on their accession to office and shall be permitted to transact business as such on the filing with the Securities and Exchange Commission of a copy of their commission, certificate of election, or letters of appointment, duly certified by any notary public.
What are religious societies?
-
Under common law, a religious society is a body of persons associated together for the purpose of maintaining religious worship.
Is it also required to file its articles of incorporation to the SEC?
-
No “may”
What should incorporation?
be
contained
in
the
articles
of
59
-
Section 116 provides:
3 modes of dissolution
Section 116. Religious societies. - Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties and estate by filing with the Securities and Exchange Commission, articles of incorporation verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious society or religious order, or diocese, synod, or district organization of the religious denomination, sect or church, setting forth the following:
1. 2.
By expiration of its term; By voluntary surrender of its primary franchise (voluntary dissolution); By revocation of its corporate franchise (involuntary dissolution)
3.
•
Philippine National Bank vs. CFI
-
When the period of corporate life expires, the corporation ceases to be a body corporate for purposes of continuing the business for which it is organized. But it shall nevertheless be continued as a body corporate for three years after the time when it would have be dissolved, for the purpose of prosecuting and defending suits by or against it and for enabling it gradually to settle and close its affairs to dispose of and convey its property and to divide its assets. There is no need for the institution of a proceeding for quo warranto to determine the time and date of the dissolution of a corporation because the period of corporate existence is provided in the articles of incorporation. When such period expires and without any extension having been made pursuant to law, the corporation is dissolved automatically insofar as the continuation of its business is concerned. The rights of the lessor and the lessee over the improvements which the latter constructed on the leased premises are governed by Article 1678 of the Civil Code. The provision gives the lessee the right to remove the improvements if the lessor chooses not to pay one half of the value thereof. However, in the case at bar the law will not apply because the parties herein have stipulated in the contract their own terms and conditions concerning the improvements before the termination of the lease. Petitioner PNB as assignee of PBM succeeded to the obligation of the latter under the contract of lease. It could not possess rights more than what PBM had as lessee under the contract. Hence, petitioner was duly bound to remove the improvements before the expiration of the period of lease. Its failure to do so when the lease was terminated was tantamount to a waiver of its rights and interest over the improvements on the leased premise.
1. That the religious society or religious order, or diocese, synod, or district organization is a religious organization of a religious denomination, sect or church; 2. That at least two-thirds (2/3) of its membership have given their written consent or have voted to incorporate, at a duly convened meeting of the body;
-
3. That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious denomination, sect, or church of which it forms a part; 4. That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate; 5. The place where the principal office of the corporation is to be established and located, which place must be within the Philippines; and 6. The names, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese, synod, or district organization to serve for the first year or such other period as may be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district organization, the board of trustees to be not less than five (5) nor more than fifteen (15). (160a)
Is it required to indicate its term of existence?
-
Likewise to exist in perpetuity, the law does not require to indicate its term of existence
When will it acquire juridical personality?
-
o
3 modes of dissolution, 3 modes of voluntary dissolution and 3 modes of liquidation and winding up- FREQUENTLY ASKED IN THE FINALS
What are the 3 modes of voluntary dissolution?
1.
Voluntary dissolution where no creditors are affected; Voluntary dissolution where creditors are affected; Shortening of corporate term.
2. 3.
Voluntary dissolution where no creditors are affected
-
The formal and procedural requirements necessary are the following:
However it is not accurate according to atty.
1. 2.
Ladia because there are those that can issue for example cooperatives- BUREAU OF COOPERATIVES which register, home insurance guaranty corporation- HOME OWNERS
3.
Only a corporation sole may come into existence without SEC approval, section 19 will thus govern, Vested with judicial capacity upon issuance of the certificate by the SEC
What is dissolution?
6.
Majority vote of the board of directors or trustees; Sending of notice of each stockholders or member either by registered mail or personal delivery at least thirty (30) days prior to the meeting (scheduled by the board for the purpose of submitting the board action to dissolve the corporation for approval of the stockholder or members.); Publication of the notice of time, place and subject of the meeting for three (3) consecutive weeks in a newspaper published in the place where the principal office of said corporation is located or in a newspaper of general circulation in the Philippines; Resolution adopted by the affirmative vote of the stockholders owning at least 2/3 of the outstanding capital stock or 2/3 of the members at the meeting duly called for the purpose; A copy of the resolution authorizing the dissolution must be certified by a majority of the board of directors or trustees and countersigned by the corporate secretary; Issuance of a certificate of dissolution by the SEC.
-
Extinguishment of the corporate franchise and the termination of corporate existence
Should this be strictly complied with?
o
How may religious societies be dissolved?
-
Go to the general rules governing dissolution, because the rules under special corporations do not provide for such rule
4.
5. DISSOLUTION
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60
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Yes, compliance with the requirements and formalities prescribed above is mandatory such that failure to comply therewith will have no effect on the legal existence of the corporation.
Will dissolution be effective and valid by a mere resolution of the BOD and stockholders?
-
-
incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon approval of the amended articles of incorporation of the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings, subject to the provisions of this Code on liquidation. (n) o
No, a mere resolution by the stockholders or the BOD of a corporation to dissolve the same does not affect the dissolution but that some other steps, administrative or judicial is necessary. (Daguhoy Enterprises vs. Ponce) Since it is the State which grants its right to exist, it is only through the State which can allow the termination of its existence; without consent of the State, it will not be dissolved.
Voluntary dissolution where creditors are affected
1.
2.
3.
4.
5. 6.
7.
By virtue of a petition, when there are creditors affected The following formalities would thus be required: Affirmative vote of the stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members at a meeting duly called for that purpose; Petition for dissolution shall be filed with the SEC signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by the president or secretary or one of its directors or trustees, setting forth all claims and demands against it. Issuance of an order by the SEC reciting the purpose of the petition and fixing the date on or before which objections thereto may be filed by any person, which date shall not be less than thirty days nor more than sixty days after entry of the order. Before such date, a copy of the order must be published once a week for three (3) consecutive weeks in a newspaper of general circulation published in the city or municipality where the principal office is situated or in a newspaper of general circulation in the Philippines. Posting of the same order for three (3) consecutive weeks in three (3) public places in such city or municipality. Upon five (5) days’ notice, given after the date on which the right to file objections has expired, the SEC shall hear the petition and try any issue made by the objections filed. Judgment dissolving the corporation and directing of its assets as justice requires and the appointment of a receiver (if necessary in its discretion) to collect such assets and pay the debts of the corporation. o
The foregoing requirements
are
also
mandatory
Is the appointment of a receiver mandatory?
-
No, it is merely permissive or discretionary on the part of the court. The code uses the word “may”; the law intended to let the shareholders have the control of the assets of the corporation upon dissolution and winding up.
-
-
The directors may also undertake liquidation and winding up of its corporate affairs, and sound business judgment, on how they will wind up Dissolution
by
shortening
-
Dissolution is tantamount to the imposition of death penalty Instead of dissolving the corporation, courts normally enjoin the further commission of the questioned act The relief of dissolution will be awarded only where no other remedy is available and it will not be allowed where the rights of the stockholders can be, or are, protected in some other way (Republic vs. Bisaya Land Trans. Co. Inc.)
What are the grounds for involuntary dissolution?
-
It is commenced through a verified complaint or motu proprio by the proper courts Section 6 of PD 902-A provides for the grounds for involuntary dissolution as follows:
-
-
1. 2. 3. 4. 5. 6.
of
corporate
term
Will be valid upon approval of the SEC, unlike general amendments, which will be deemed approved if not acted upon by the SEC within 6 months from the date of filing for a cause not attributable to the corporation. Shortening of the corporate term partakes the nature of an amendment of the articles of incorporation. Section 16 under general amendments allows “written assent” section 37 mandates that the vote must be cast at a duly constituted meeting. Section 120. Dissolution by shortening corporate term. - A voluntary dissolution may be effected by amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this Code. A copy of the amended articles of
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Fraud in procuring its certificate of registration; Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public; Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would amount to a grave violation of its franchise; Continuous inoperation for a period of at least five (5) years; Failure to file by-laws within the required period; Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period.
-
Other grounds are provided for in the corporation code itself: among them are:
1.
Violation of any provision of the Code under section 144; In case of deadlock in a close corporation as provided for in section 105; In a close corporation, any acts of directors, officers or those in control of the corporation which is illegal or fraudulent or dishonest or oppressive or unfairly prejudicial to the corporation or any stockholder or whenever corporate assets are being misapplied or wasted under section 105.
2. 3.
Another way of dissolving a corporation is through involuntary dissolution Section 121. Involuntary dissolution. - A corporation may be dissolved by the Securities and Exchange Commission upon filing of a verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulations. (n)
-
-
Intra-corporate- special commercial courts
-
Mere dishonesty is also a ground in a close corporation Other grounds can be found in other special laws like the Securities Regulation Code and the General Banking Act as well as the Insurance Code.
•
Government vs. Philippine Sugar Estate
-
It is necessary in order to secure judicial foreclosure of respondent’s charter to show a mis-user of its franchise justifying such a forfeiture Object is to protect the public, and not to redress private grievances, the mis-user must be such as to work or threaten a substantial injury to the public, or such as to amount to a violation of the fundamental condition of the contract by which the franchise was granted and thus defeat the purpose of the grant
-
-
Courts proceed with extreme caution which has for their object the forfeiture of corporate franchise, and forfeiture will not be allowed, except under express limitation, or for plain abuse of power by which the corporation fails to fulfill the design and purpose of its organization. But when the abuse or violation constitutes or threatens a substantial injury to the public or such as to amount to a violation of the fundamental conditions of its charter, or its conduct is
61
-
characterized by obduracy or pertinacity in contempt of law, dissolution will be granted Did the court dissolve the corporation? No, it did not, it granted the corporation 6 months to cease and desist the performance of the questioned act otherwise it will be dissolved
•
Government vs. El Hogar
-
3 causes of action, the first is that the corporation violated the law by holding on the property beyond that provide for by law, the second is that the corporation undertook the management f petitioners belonging to delinquent shareholders of the association, and lastly that the by-law provision, which empowers the BD to cancel shares and to return to the owners thereof the balance returning from the liquidation
Compare to Philippine Sugar Estate, wherein the court ruled conditional dissolution. Why decree conditional dissolution in one and not in the other case?
-
Because in El Hogar the government was at fault, the government wasn’t able to issue the certificate of title on time When the case was instituted, El Hogar was already able to dispose the properties in question, in Philippine Sugar Estate it was still the holding the properties in order to enrich itself at the expense of the taxpayers
-
-
May a corporation ask for dissolution of the corporation when there is no prejudice to the general public?
-
Yes, in a close corporation, a petition for the dissolution of the corporation may be instituted by any one individual shareholder on the ground, even by mere dishonesty
Effects of dissolution
-
The dissolution of a corporation not only terminates its primary franchise to be a corporation, but generally prevents it from further exercising other or secondary franchises which have been conferred to its. It terminates its power to enter into contracts or t o continue the business as a going concern. Based on this general rule, the Supreme Court held that a corporation, whose corporate life expired, cannot lawfully pursue the business for which it was organized. It cannot apply for a new certificate or a secondary franchise for it is incapable of receiving a grant. Neither can it enforce a contract executed prior its dissolution for the purpose of continuing the business of its organization. In general the rights and liabilities of the corporation are not extinguished by its dissolution.
-
•
-
Republic vs. Security Credit and Acceptance Corp. et al.
-
The corporation here is a lending institution and not a banking institution Defendant corporation violated the law because before a corporation may engage into a banking activity it must first obtain a secondary franchise from the Central Bank Defendant corporation threatens substantial injury to the general public, dissolution is warrant If there is a bank run kawawa naman yung depositors
•
Republic vs. Bisaya Land Transportation Co. Inc
-
The relief of dissolution will be awarded only where no other remedy is available and it will not be allowed where the rights of the stockholders can be, or are, protected in some other way Misuse and misapplication of the funds and assets of the respondent were committed particularly by the corporate officers, where they can instead be held personally liable Since there is another remedy available dissolution is not warranted
-
-
-
-
Section 145. Amendment or repeal. - No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof. (n) •
Buenaflor vs. Camarines Sur Industry Corp.
-
From that time on Camarines Sur was plying in an activity that was illegal A corporation where the corporate life has expired it cannot lawfully pursue the business for which it was organized. the Supreme Court held that a corporation, whose corporate life expired, cannot lawfully pursue the business for which it was organized. It cannot apply for a new certificate or a secondary franchise for it is incapable of receiving a grant. Awarding it to Camarines Sur is tantamount to a medal for its illegal acts It cannot apply for a new certificate or a secondary franchise for it is incapable of receiving a grant. It was not even a corporation de facto. And then, there is no application subscribed by the new corporation And yet as stated, the new corporation has not filed any application for certificate of public convenience in Sabang, and has not published such application.
-
-
Assuming the above stated corporation is a close corporation, would the court decree otherwise?
-
Yes, because in a close corporation, mere dishonesty is a ground for the dissolution Can even be dissolved by petition of only one stockholder on the grounds stated in the code < sec. 105>
-
-
•
-
Financing Corporation of the Philippines vs. Teodoro
Minority stockholders may not ask for the dissolution of a corporation in private suits and that such actions should be brought by the Government through its legal officers, except in cases where the intervention of the State, for one reason or another, cannot be obtained, as when the State is not interested because the complaint is strictly a matter between the stockholders and does not involve, in the opinion of the legal officer of the Government, any of the acts or omissions warranting quo warranto proceeding , in which minority stockholders are entitled to have such dissolution. It should be exercised if necessary in order not to entirely ignore and disregard the rights of said minority stockholders, especially when said minority stockholders are unable to obtain redress and protection of their rights within the corporation itself. Stockholders should not be left without recourse Present set up
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Any stockholder or member of a corporation can institute a dissolution proceeding against his own corporation before the proper forum Special Commercial Courts, shall hear and decide intra-corporate disputes
•
Cebu Port Labor Union vs. State Marine Co
-
Even a cursory reading of the provision would convey the idea clearly manifested in the limitation “but not for the purpose of continuing the business for which it was established,” that the 3-year period allowed by the law is only for the purpose of winding up its affairs.
•
Gonzales vs. Sugar Regulatory Administration
-
Instead of applying the corporation code, the court applied the constitutional provision Cannot be read as permitting to destroy the substantive rights Such would collide with the non-impairment of contracts clause of the constitution Complainants will have the right to follow the assets of the corporation in the hands of SRA or any other agency for that matter
-
After dissolution what next?
-
Liquidation and winding up should follow
62
What is the definition of liquidation and winding up?
-
Collection of all corporate assets, the payments of all its debts and settlement of its obligations and the ultimate distribution of the corporate assets, if any of it remains, to all stockholders in accordance with their proportionate stockholdings in the corporation or in accordance with their respective contracts of subscription.
-
If this method is used, the three year period limitation imposed by section 122 will not apply provided the designation of the trustee is made within that period
3.
By appointment of a receiver
-
A receiver may be appointed by the proper forum on petition or motu proprio upon the dissolution of the corporation The appointment of a receiver is, however, permissive rather than mandatory and the law tends to recognize that in cases of voluntary dissolution there is no occasion for the appointment of a receiver except under special circumstances and upon proper showing If a receiver is appointed, the 3 year period fixed by law within which to complete the task of liquidation will not likewise apply because the dissolved corporation is substituted by the receiver who may sue or be sued even after that period
Preference upon liquidation
-
If there are preferred shares, the preference granted to such should be complied with Preferred shares may give the holder thereof, preference only in the dividends but also in the distribution of corporate assets upon liquidation or termination of the corporate existence. If such is the intent, the contract of subscription must so indicate lest they are placed on equal footing with common shareholders Preference may be participating or non-participating
-
Dissolved corporations are granted a period of 3 years to liquidate Section 122. Corporate liquidation. - Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located.
-
o
•
National Abaca other Fibers Co. vs. Pore
-
Actions pending for or against the corporation when the 3 year period expires, are abated since after that period, the corporation ceases for all intents and purposes and is no longer capable of suing or being sued May be continued by the trustee provided done within the 3 year period Should the corporation, therefore, finds it difficult to finish its liquidation, it may, at any time during the three year period, convey all its assets and receivables to a trustee to prosecute and defend suits by or against the corporation begun before the expiration of said period The effect of the conveyance is to make the trustees the legal owners of the property conveyed, subject to the beneficial interest therein of creditors and stockholders
-
-
•
Sumera vs. Valencia
-
Thus it was held that when a corporation is dissolved and the liquidation of the assets is placed in the hands of receiver or assignee, the period of 3 years prescribed by law is not applicable and the assignee may institute all actions leading to the liquidation of the corporation even after the expiration of 3 years. If the corporation carries out the liquidation of its assets through its own officers and continues and defends the actions brought by or against it, its existence shall terminate at the end of three years from the time of dissolution; but if a receiver or assignee is appointed, with or without a transfer of its properties within 3 years, the legal interest passes to the assignee, the beneficial interest remaining in the members, stockholders, creditors and other interested persons and said assignee may bring an action, prosecute that which has already been commenced for the benefit of the corporation, or defend the latter against any other action already instituted or which may be instituted even outside of the period of three years fixed for the offices of the corporation.
-
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. (77a, 89a, 16a)
However the 3 year period is not absolute Liquidation may be undertaken in either of the 3 ways
1.
By the corporation itself through the BOD
-
Usual method or procedure of liquidating a corporation and although there is no law authorizing it, neither is there anything that prohibits the BOD from undertaking the same If this method is resorted to, the board will only have a period of 3 years to finish its task of liquidation Claims for or against the corporate entity not filed within the period will become unenforceable as there exist no corporate entity against which they can be enforced Actions pending for or against the corporation when the 3 year period expires, are abated since after the period, the corporation ceases for all intents and purposes and is no longer capable of suing or being sued
-
-
2.
By a trustee appointed by the corporation
-
The corporation may opt to convey all corporate assets to a trustees who will take charge of liquidation
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Mere appointment of a receiver without anything more does imply in the dissolution of a corporation
•
Board of Liquidators vs. Kalaw
-
If there is a trustee, assignee or liquidator, it can continue prosecuting suit even beyond the 3 year period fixed by law because he becomes the legal owner of the rights, assets and properties conveyed to him
•
Gelano vs. CA
-
“Trustee” as used in the corporation statute must be understood in its general concept which could include the counsel to whom was entrusted in the instant case, the prosecution of the suit filed by the corporation. The purpose in the transfer of the assets of the corporation to a trustee upon its dissolution is more for the protection of its creditors and stockholders. Debtors like the petitioners herein may not take advantage of the failure of the corporation to transfer its assets to a trustee, assuming it has any to transfer which petitioner has failed to show, in the first place. To sustain petitioners’ contention would be to allow them to enrich themselves at the expense of another, which all enlightened legal systems condemn.
63
-
The counsel who prosecuted and defended the interest of the corporation may be considered as a “trustee” at least with respect to the matter in litigation only
May a corporation that is already dissolved, transfer and assign its assets and properties to a new corporation which will continue the business of the dissolved one?
•
-
-
-
According to atty Ladia: What happens to a corporation that is already dissolved, that has not been able to appoint a trustee with in the 3 year period?
-
a corporation dissolved which failed to exercise its rights granted in section 122 after the 3 year period has elapsed, ceases to exist for all intents and purposes, it can no longer sue or be sued according to 122 of the code, the property should be escheated, accordingly:
Yes, provided all the stockholders gave their consent (Chung Ka Bio vs. IAC) Republic vs. Marsman Chung Ka Bio vs. IAC
Development
Company
Section 122. Corporate liquidation. - Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established.
&
During the three year period granted to a corporation to liquidate or wind up its affairs, the BOD is not normally permitted to undertake any activity outside the usual liquidation of the corporation. There is, however, nothing to prevent the stockholders from conveying their respective shareholdings toward the creation of a new corporation to continue the business of the old. This is because winding up is the sole activity of the dissolved corporation that does not intend to incorporate a new. If it does, however, it is not unlawful for the old board of directors to negotiate and transfer the assets of the dissolved corporation to the new corporation intended to be created as long as the stockholders have given their consent (Republic vs. Marsman Development Company)
At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest.
Winding up is the sole activity of a dissolved corporation that does not intend to incorporate anew. If it does, however, it is not unlawful for the old board of directors to negotiate and transfer the assets of the dissolved corporation to the new corporation intended to be created as long as the stockholders have given their consent (Chung Ka Bio vs. IAC)
Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located.
What happens to the remaining assets and properties of the dissolved corporation if liquidation and winding up as provided in section 122 is not complied with, as a result of which the 3 year period has elapsed
If the three year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period, the board of directors o trustees itself, following the rationale of the Supreme Court’s decision in Gelano vs. CA may be permitted to do so continue as” trustees” by legal implication to complete the liquidation. Still in the absence of a BOD or BOT, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper representations with the SEC, which has primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns (Clemente vs. CA) o
FOREIGN CORPORATIONS
Definition
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Section 123. Definition and rights of foreign corporations. - For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency. (n)
What if the law of the state of the foreign corporation does not allow Filipino citizens to do business in their country?
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The phrase “and whose laws allow Filipino citizens and corporations to do business in its own country or state” is not, however, an accurate inclusion in the definition as ay corporation registered or organized under the laws of another state is necessarily a foreign corporation whether or not the state of its incorporation allow Filipino citizens or corporations to do business in that forum. The said phrase was inserted by the framers of the law only as a condition precedent to the grant of a license of a foreign corporation to do business in the Philippines.
According to atty. Ladia the ruling of the Supreme Court in the case of Clemente vs. CA is wrong, opinion is further discussed after the Clemente Case
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Clemente vs. CA
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Who owns the properties? SOCIEDAD ANONIMA The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity or those of its owners and creditors. If the three year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period, the board of directors o trustees itself, following the rationale of the Supreme Court’s decision in Gelano vs. CA may be permitted to do so continue as” trustees” by legal implication to complete the liquidation. Still in the absence of a BOD or BOT, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper representations with the SEC, which has primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns o
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. (77a, 89a, 16a)
the ruling is wrong according to atty. Ladia
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Composed of 100% Americans; organized under the laws other than the Philippines
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The test is the “incorporation test” General rule: the place of its incorporation irrespective of the nationality Exception: control test would apply in determining the corporate nationality, i.e., the citizenship of the
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controlling stockholders determines the nationality of the corporation
If a foreign corporation wants to transact business in the Philippines, what must it do?
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Obtain a license
How may it do so?
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According to sec. 125: Section 125. Application for a license. - A foreign corporation applying for a license to transact business in the Philippines shall submit to the Securities and Exchange Commission a copy of its articles of incorporation and by-laws, certified in accordance with law, and their translation to an official language of the Philippines, if necessary. The application shall be under oath and, unless already stated in its articles of incorporation, shall specifically set forth the following:
Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply with the provisions of existing laws applicable to them. In the case of all other foreign corporations, no application for license to transact business in the Philippines shall be accepted by the Securities and Exchange Commission without previous authority from the appropriate government agency, whenever required by law. (68a)
Is there any deposit or security requirement?
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Yes, within 60 days after the issuance of the license, a foreign corporation, except those engaged in foreign banking or insurance, shall deposit with the SEC, for the benefit of creditors, securities consisting of bonds or other evidence of indebtedness of the Philippine government or its political subdivision, or of government owned or controlled corporation, shares of stock in “registered enterprises” as this term is defined in R.A. 5186, shares of stock in domestic insurance companies and banks or any combination thereof with an actual market value of 100,000 Additional securities may be required by the SEC if the actual market value of the securities on deposit has decreased by at least 10%. Section 126 of the code provides:
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1. The date and term of incorporation; 2. The address, including the street number, of the principal office of the corporation in the country or state of incorporation;
Section 126. Issuance of a license. - If the Securities and Exchange Commission is satisfied that the applicant has complied with all the requirements of this Code and other special laws, rules and regulations, the Commission shall issue a license to the applicant to transact business in the Philippines for the purpose or purposes specified in such license. Upon issuance of the license, such foreign corporation may commence to transact business in the Philippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revoked, suspended or annulled in accordance with this Code or other special laws.
3. The name and address of its resident agent authorized to accept summons and process in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation; 4. The place in the Philippines where the corporation intends to operate; 5. The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of authority issued by the appropriate government agency;
Within sixty (60) days after the issuance of the license to transact business in the Philippines, the license, except foreign banking or insurance corporation, shall deposit with the Securities and Exchange Commission for the benefit of present and future creditors of the licensee in the Philippines, securities satisfactory to the Securities and Exchange Commission, consisting of bonds or other evidence of indebtedness of the Government of the Philippines, its political subdivisions and instrumentalities, or of government-owned or controlled corporations and entities, shares of stock in "registered enterprises" as this term is defined in Republic Act No. 5186, shares of stock in domestic corporations registered in the stock exchange, or shares of stock in domestic insurance companies and banks, or any combination of these kinds of securities, with an actual market value of at least one hundred thousand (P100,000.) pesos; Provided, however, That within six (6) months after each fiscal year of the licensee, the Securities and Exchange Commission shall require the licensee to deposit additional securities equivalent in actual market value to two (2%) percent of the amount by which the licensee's gross income for that fiscal year exceeds five million (P5,000,000.00) pesos. The Securities and Exchange Commission shall also require deposit of additional securities if the actual market value of the securities on deposit has decreased by at least ten (10%) percent of their actual market value at the time they were deposited. The Securities and Exchange Commission may at its discretion release part of the additional securities deposited with it if the gross income of the licensee has decreased, or if the actual market value of the total securities on deposit has increased, by more than ten (10%) percent of the actual market value of the securities at the time they were deposited. The Securities and Exchange Commission may, from time to time, allow the licensee to substitute other securities for those already on deposit as long as the licensee is solvent. Such licensee shall be entitled to collect the interest or dividends on the securities deposited. In the event the licensee ceases to do business in the Philippines, the securities deposited as aforesaid shall be returned, upon the licensee's application therefor and upon proof to the satisfaction of the Securities and Exchange Commission that the licensee has no liability to Philippine residents, including the Government of the Republic of the Philippines. (n)
6. The names and addresses of the present directors and officers of the corporation; 7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to issue, itemized by classes, par value of shares, shares without par value, and series, if any; 8. A statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued, itemized by classes, par value of shares, shares without par value, and series, if any; 9. A statement of the amount actually paid in; and 10. Such additional information as may be necessary or appropriate in order to enable the Securities and Exchange Commission to determine whether such corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable. Attached to the application for license shall be a duly executed certificate under oath by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing. If such certificate is in a foreign language, a translation thereof in English under oath of the translator shall be attached thereto. The application for a license to transact business in the Philippines shall likewise be accompanied by a statement under oath of the president or any other person authorized by the corporation, showing to the satisfaction of the Securities and Exchange Commission and other governmental agency in the proper cases that the applicant is solvent and in sound financial condition, and setting forth the assets and liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the application. Notes on Corporation Law “Notes come in handy only when you have studied…” ©GTan; ASoguilon; VVillanueva
Other than section 125 and 126. What other requirements are set under Philippine Law before a
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foreign corporation may transact business in the Philippines
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Yes. A Resident agent is required. As a condition precedent to the grant of a license to do or transact business in the Philippines, the foreign corporation is required to designate its resident agent on whom summons and other legal processes may be served in all actions or legal proceedings against such corporation Section 128 provides:
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Section 128. Resident agent; service of process. - The Securities and Exchange Commission shall require as a condition precedent to the issuance of the license to transact business in the Philippines by any foreign corporation that such corporation file with the Securities and Exchange Commission a written power of attorney designating some person who must be a resident of the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and consenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office. Any such foreign corporation shall likewise execute and file with the Securities and Exchange Commission an agreement or stipulation, executed by the proper authorities of said corporation, in form and substance as follows: "The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being granted by the Securities and Exchange Commission a license to transact business in the Philippines, that if at any time said corporation shall cease to transact business in the Philippines, or shall be without any resident agent in the Philippines on whom any summons or other legal processes may be served, then in any action or proceeding arising out of any business or transaction which occurred in the Philippines, service of any summons or other legal process may be made upon the Securities and Exchange Commission and that such service shall have the same force and effect as if made upon the duly-authorized officers of the corporation at its home office." Whenever such service of summons or other process shall be made upon the Securities and Exchange Commission, the Commission shall, within ten (10) days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home or principal office. The sending of such copy by the Commission shall be necessary part of and shall complete such service. All expenses incurred by the Commission for such service shall be paid in advance by the party at whose instance the service is made.
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If the foreign corporation conducts business in the Philippines without the license requirement. What is the effect?
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Section 133 provides: Section 133. Doing business without a license. - No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. (69a)
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if they do so, the responsible officers may be subjected to the penal sanctions provided for in section 144 of the code, which may either be fine or imprisonment
What if it is not doing business without a license?
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If it is not transacting business in the Philippines, even without a license, it can sue before the Philippine Courts
The general rule is that “it is not the lack of required license but doing business without a license which bars a foreign corporation form access to our courts.” Exception:
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In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing the Securities and Exchange Commission of the new address. (72a; and n) -
No, if there is a resident agent, the designation is exclusive and service must be made only to the resident agent or else the service is without force and effect unless made to him Thus, while the law allows service upon the SEC or any of its officers or agents within the Philippines The two modes may become effective only if the foreign corporation failed or neglected to designate such a person or an agent Summons must be made only to resident agent except when there is no resident agent appointed Where such foreign corporation actually doing business here has not applied for a license to do and has not designated an agent to receive summons, then service of summons on it will be made pursuant to the provisions of the rules of court. If such foreign corporation has a license to do business, then summons to it will be served on the agent designated by it for the purpose, or otherwise in accordance with the Corporation Law (General Corporation of the Philippines vs. Union Insurance Soc. Of Canton Ltd.)
2.
The necessity of the appointment of a resident agent is only for the purpose of receiving summons and other legal processes in any legal action or proceeding against the foreign corporation
3.
Who may be appointed as a resident agent?
4. 5.
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Section 127 provides that: Section 127. Who may be a resident agent. - A resident agent may be either an individual residing in the Philippines or a domestic corporation lawfully transacting business in the Philippines: Provided, That in the case of an individual, he must be of good moral character and of sound financial standing. (n)
May a partnership be appointed as a resident agent?
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Yes, domestic corporation taken in its general sense not legal sense
If there is a resident agent appointed. May summons be served to any officers of the corporation?
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Foreign corporations can sue before the Philippine Courts if the act or transaction involved is an “isolated transaction” or the corporation is not seeking to enforce any legal or contractual rights arising from, or growing out of, any business which it has transacted in the Philippines Neither is a license required before a foreign corporation may sue before the forum if the purpose of the suit is to protect its trademark, trade name, corporate name, reputation or goodwill; Or where it is based on a violation of the Revised Penal Code; Or merely defending a suit filed against it Or where a party is stopped to challenge the personality of the corporation by entering into a contract with it.
Rules laid down by the SC A.
As to whether or not it can sue A foreign corporation transacting or doing business in the Philippines with a license can sue before Philippine Courts Subject to certain exceptions, a foreign corporation doing business in the country without a license cannot sue in Philippine Courts If it is not transacting business in the Philippines, even without a license, it
B.
As to whether or not it can be sued A foreign corporation transacting business in the Philippines with the requisite license can be sued in the Philippine Courts A foreign corporation transacting business in the Philippines without a license can be sued in Philippine Courts if it is not doing business in the Philippines, it cannot be sued in Philippine Courts for
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petitioner has been in the Philippines engaged in continuing business or enterprise for which it was organized, when the sixteen bundles were erroneously discharged in manila, for it to be considered as transacting business in the Philippines. The fact is that the bundles, the value of which is sought to be recovered, were landed not as a result of a business transaction, isolated or otherwise, but due to a mistaken belief that they were part of the shipment of forty similar bundles consigned to persons or entities in the Philippines, there is no justification therefore, for invoking the section
can sue before the lack of jurisdiction Philippine Courts A foreign corporation not doing business in the Philippines, may it be sued? -
If it is not transacting business in the country it cannot be sued for lack of jurisdiction
Is there any sanction that can be enforced to foreign corporations which are doing business without the required license?
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Penal sanctions under section 144 Any violation of the code is subject to such penal sanctions
What would constitute doing business?
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The true test, however, seems to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organization (Mentholatum Co. Inc. vs. Mangaliman)
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Mentholatum vs. Mangaliman
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The true test, however, seems to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organization Whatever transaction the Philippine-American Drug Co. had executed in view of the law, the Mentholatum Co. did it itself. And the Mentholatum Co. being a foreign corporation doing business in the Philippines without the license required by section 68 of the Corporation Law, it may not prosecute this action for violation of trade mark and unfair competition
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There were 3 contracts entered into, how come they were still not considered as doing business? (Antam Consolidted, Inc. vs. CA)
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Every case shall be judged in the light of its peculiar circumstances, where a single act or transaction however, is not merely incidental or casual but indicates the foreign corporation’s intention to do other business in the Philippines, said single act or transaction constitutes “doing” or “engaging in” or “transacting” business in the Philippines In the case at bar, the transaction entered into by the respondent with the petitioners are not a series of commercial dealings which signify an intent on the part of the respondent to do business in the Philippines but constitute an isolated one which does not fall under the category of “doing business.” The records show that the only reason why the respondent entered into the second and third transactions with the petitioner was because it wanted to recover the loss it sustained from the failure of the petitioners to deliver the crude coconut oil under the first transaction and in order to give the latter a chance to make good on their obligation. From these facts alone, it can be deducted that in reality there was only one agreement between the petitioners and the respondent. The three seemingly different transactions were entered into by the parties only in an effort to fulfill the basic agreement and in no way indicate an intent on the part of the respondent to engage in a continuity of transactions with petitioners which will categorize it as a foreign corporation doing business in the Philippines 3 contracts, but according to the court was not doing business in the Philippines
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Far East Int’l import vs. Nankai Kogyo Co. Ltd.
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Only one contract , but according to the Supreme Court was doing business in the Philippines Every case shall be judged in the light of its peculiar circumstances, where a single act or transaction however, is not merely incidental or casual but indicates the foreign corporation’s intention to do other business in the Philippines, said single act or transaction constitutes “doing” or “engaging in” or “transacting” business in the Philippines In the instant case, the testimony of Atty. Pablo Ocampo, that appellant was doing business in the Philippines corroborated by no less than Nabuo Toshida, one of appellant’s officers, that he was sent to the Philippines to look into the operation of mines, thereby revealing the defendant’s desire to continue engaging in business here, after receiving the shipment of the scrap iron under consideration, making the Philippines a base thereof. In such a case, the single act of transaction is not merely incidental or casual, but is of such character as distinctly to indicate a purpose on the part of the operations for the conduct of a part of corporation’s ordinary business
Why is foreign corporations barred access from our courts if they do business without a license?
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Marshall-Wells Co. vs. Henry W. Elser and Co.
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Marshall-Wells Co. vs. Henry W. Elser and Co.
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The object of the statute was to subject the foreign corporation doing business in the Philippines to the jurisdiction of its courts. The object of the statute was not to prevent the foreign corporation from performing single acts, but to prevent it from acquiring a domicile for the purpose of business without taking the steps necessary to render it amenable to suit in local courts.
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Bulakhidas vs. Navarro
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It is settled that if a foreign corporation is not engaged in business in the Philippines, it may not be denied the right to file an action in Philippine courts for isolated transactions The object of section 68 and 69 of the Corporation law was not to prevent the foreign corporation from performing single acts, but to prevent it from acquiring a domicile for the purpose of business without taking the steps necessary to render it amenable to suit in the local courts. It was never the purpose of the Legislature to exclude a foreign corporation which happens to obtain an isolated order for business from the Philippines, from securing redress in the Philippine courts
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If a corporation appoints a distributor or a representative, will it necessarily imply doing business in the country?
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If the foreign corporation maintained an independent status during the existence of the disputed contract.
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Appointment of a distributor or representative in the Philippines, unless it has an independent status (transacts and does business in its own name and for its account and not of the foreign corporation) if that be the case the mere appointment of a distributor will not constitute doing business
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The Swedish East Asia Co., Ltd. Vs. Manila Port Service
How do you know if it has an independent status?
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It must stated that the section is not applicable to a foreign corporation performing single acts or “isolated transactions.” There is nothing to show that the
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Communications Materials and Design vs. CA
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Communications Materials and Design vs. CA
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Le Chemiste Lacoste vs. Fernandez
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A perusal of the agreements between petitioner ASPAC and the respondents show that there are provisions which are highly restrictive in nature, such as to reduce petitioner ASPAC to a mere extension or instrument of the private respondents ITEC was doing business without a license, however ASPAC is estopped by entering into the Representative Agreement” with ITEC, petitioner is charge with knowledge that ITEC was not licensed to engage in business activities in the country, and is thus stopped from raising in defense such incapacity of ITEC, having chosen to ignore or even presumptively take advantage of the same In top-weld we ruled that a foreign corporation may be exempted from the license requirements in order to institute an action in our courts if its representative in the country maintained an independent status during the existence of the disputed contract. Petitioner is deemed to have acceded to such independent character when it entered into the Representative Agreement with ITEC
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The French company may gain access to our courts, in the first place it was not doing business in the Philippines The marketing of its products in the Philippines is done through an exclusive distributor, Rustan Commercial Corporation. The latter is an independent entity which buys and then markets not only products of the petitioner but also many other products bearing equally well-known and established trademarks and trade-names
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Western Equipment and Supply Co. vs. Reyes
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The company is not here seeking to enforce any legal or contract rights arising from, or growing out of any business which it has transacted in the Philippine Islands. The sole purpose of the action is to protect its reputation, its corporate name, its goodwill, whenever that reputation, corporate name or goodwill have through the natural development of its trade, established themselves And it contends that its rights to the use of its corporate and trade name, is a property right, a right in rem, which may assert and protect against all the world, in any of the courts of the world even in jurisdictions where it does not transact business just the same as it may protect its tangible property, real or personal, against trespass, or conversion Since it is the trade and not the mark that is to be protected a trademark acknowledges no territorial boundaries or municipalities or states or nations, but extends to every market where the trader’s goods have become known and identified by the use of the mark
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Assuming Rustans had no independent status would the SC grant Lacoste access to our courts?
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Even if Lacoste did business in the Philippines it can bring action because the case involves a violation of our penal code Such was a violation of article 189 of the RPC, if prosecution follows after the completion of the preliminary investigation being conducted by the Special Prosecutor the information shall be in the name of the People of the Philippines and no longer the petitioner which is only an aggrieved party since a criminal offense is essentially an act against the State. It is the latter which is principally the injured party although there is a private right violated The records show that the goodwill and reputation of the petitioner’s products bearing the trademark Lacoste date back even before 1964 when Lacoste clothing apparels were forst marketed in the Philippines. To allow Hemandas to continue using the trademark Lacoste for the simple reason that he was the first registrant in the Supplemental Register of a trademark used in international commerce and not belonging to him is to render nugatory the very essence of the law on trademarks and trade names
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Atlantic Mutual Insurance Co. vs. Cebu Stevedoring Co.
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The law denies to a foreign corporation the right to maintain suit unless it has previously complied with a certain requirement, then such compliance, or the fact that the suing corporation is exempt there from, becomes a necessary averment in the complaint These are matters peculiarly within the knowledge of appellants alone, and it would be unfair to impose upon appellee the burden of asserting and proving the contrary. It is enough that foreign corporations are allowed by law to seek redress in our courts under certain conditions: the interpretation of the law should not go so far as to include, in effect, an inference than those conditions have been met from the mere fact that the party suing is a foreign corporation
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General Garments Corporation vs. Director of Patents
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A foreign corporation which has never done business in the Philippine Islands and which is unlicensed and unregistered to do business here, but is widely and favorably known in the Islands through the use therein of its products bearing its corporate and trade name has a legal right to maintain an action in the Islands Mentholatum case was subsequently derogated when Congress, purposely to “counteract the effects” of said case, enacted R.A. 638, inserting Section 21-A in the Trademark Law, which allows a foreign corporation or juristic person to bring an action in Philippine Courts for infringement of a mark or trade-name, for unfair competition, or false designation of origin and false description, “whether or not it has been licensed to do business in the Philippines under Act Numbered Fourteen hundred and fifty-nine, as amended, otherwise known as Corporation Law, at the time it brings complaint.
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Puma Sporschufabriken Rudolf Dassler, K.G. vs. IAC and MIL-ORO MFG. Corp.
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Treaties for part of the law of the land Quoting the Paris Convention and the case of Vanity Fair Mills Inc. vs. T. Eaton Co. this court further said: “By the same token, the petitioner should be given the same treatment in the Philippines as we make available to our own citizens. We are obliged to assure to nationals of countries of the Union an effective protection against unfair competition on the same way that they are obligated to similarly protect Filipino Citizen and firms
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The ruling in the aforecited case is in consonance with the Convention of the Union of Paris for the protection of Industrial Property to which the Philippines became a party. Article 8 thereof provides that a trade name shall be protected in all the countries of the Union without the obligation of filing or registration, whether or not it forms part of the trademark
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Olympia Business Machines Co. vs. E. Razon
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How do you distinguish this case with Atlantic? In Atlantic it dismissed the case, while in Olympia it did not
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Time Inc. vs. Reyes
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We fail to see how these doctrines can be a propos in the case at bar, since the petitioner is not “maintaining any suit” but is merely defending one against itself; it did not file any complaint but only a corollary defensive petition to prohibit the lower court from further proceeding with a suit that it had no jurisdiction to entertain
What law govern foreign corporation doing and transacting business in the Philippines with a license
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Laws of the Republic of the Philippines save and except that would normally be those matters which concern its formation, organization or dissolution, or those fixing the relationship, liabilities, responsibilities, or duties of the stockholders, members or officers of the foreign corporation or their relations to each other. In effect, intra-corporate or internal matters not affecting creditors or the public in general are governed not by Philippine laws but the law under which the foreign corporation was formed or organized
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Section 129. Law applicable. - Any foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class, except such only as provide for the creation,
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formation, organization or dissolution of corporations or those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of corporations to each other or to the corporation. (73a)
the appropriate government agency in the proper cases. The Securities and Exchange Commission shall also mail to the corporation at its registered office in the Philippines a notice of such revocation accompanied by a copy of the certificate of revocation. (n)
Will the pre-emptive rights of a foreign corporation be governed by the same section of the code? Is the preemptive rights of a stockholder in a domestic corporation same as the pre-emptive of a stockholder of a foreign corporation.
Voluntary withdrawal of license
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No
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All 3 conditions must be complied with
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M.E. Grey vs. Insular Lumber Company
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PNB vs. Gonzales, will this apply to a foreign corporation? How do you distinguish this case from a Philippine law? Since it concerns the rights of stockholders it is the law of New York that should govern
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Is the license to do business of a foreign corporation subject to suspension or revocation? What are the grounds?
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Section 134 provides:
Section 136. Withdrawal of foreign corporations. - Subject to existing laws and regulations, a foreign corporation licensed to transact business in the Philippines may be allowed to withdraw from the Philippines by filing a petition for withdrawal of license. No certificate of withdrawal shall be issued by the Securities and Exchange Commission unless all the following requirements are met; 1. All claims which have accrued in the Philippines have been paid, compromised or settled; 2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions have been paid; and
Section 134. Revocation of license. Without prejudice to other grounds provided by special laws, the license of a foreign corporation to transact business in the Philippines may be revoked or suspended by the Securities and Exchange Commission upon any of the following grounds:
3. The petition for withdrawal of license has been published once a week for three (3) consecutive weeks in a newspaper of general circulation in the Philippines.
1. Failure to file its annual report or pay any fees as required by this Code; P.D. 902-A 2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title;
P.D. 902-A was amended by R.A. 8799 or the SECURITIES REGULATION CODE in the year 2000
The jurisdiction of SEC for cases falling under section 5 thereof was transferred to the courts of general jurisdiction designated by the SC, they were called special commercial courts, the only exceptions were revocation of corporate franchise and calling of elections
However the SEC retained receivership or suspension payments within June 20,2000
5. A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions;
Jurisdiction of special commercial courts are exclusive and original, jurisdiction is conferred by law; 1 Special Commercial Court per region except MAKATI and QUEZON CITY which has two
Devices or Schemes
-
Pyramid scheme Commercial Courts
-
Syndicated estafa- not bailable
8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or
Alleje case
-
Falls squarely under sec. 5 (a) Special Commercial Courts
9. Any other ground as would render it unfit to transact business in the Philippines. (n)
-
Allegation corporate officers employing schemes in diverting
SEC does not have the sole authority to suspend or revoke the license of a foreign corporation doing business in the Philippines, other government agencies like the Central Bank , the Insurance Commission may also do so within their respective dominion, despite the provision of section 134 If the SEC believes that revocation is warranted, section 135 provides that:
-
Not only detrimental to corporation, but general membership
-
Fraud must be stated with particularity
•
Abad vs. CFI of Pangasinan
-
Fraud must be stated with particularity otherwise it may be filed to any court
Intra-corporate
3. Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a statement of such change as required by this Title; 4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by this Title;
7. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license;
Section 135. Issuance of certificate of revocation. - Upon the revocation of any such license to transact business in the Philippines, the Securities and Exchange Commission shall issue a corresponding certificate of revocation, furnishing a copy thereof to Notes on Corporation Law “Notes come in handy only when you have studied…” ©GTan; ASoguilon; VVillanueva
(misrepresentation)-Special
69
-
Exclusive and original commercial courts
jurisdiction
of
special
-
Sole criteria is there must be an intra-corporate relationship
-
Pertaining to a controversy (speaks also of intrapartnership controversy, that partnership must be registered with the SEC)
Rule now
1.
Necessarily be an intra-corporate relationship; and,
2.
The controversy must arise out of said relationship
Intra-corporate relationship alone will not suffice to put it in the ambit of special commercial courts and courts of general jurisdiction may take cognizance
Case of a transferee of shares of stock to compel the corporation to recognize him as a stockholder
How can it be intra-corporate when he is not yet fully paid
-
When the transferee has done all he can be required to do to render the transfer effectual and the corporation refuses to register the transfer, the requirement of the registration is waived and the transferee is considered technically a stockholder who may sue to enforce the right to have the transfer registered
Florendo vs. rivera, Embassy Farms
-
The transferor withheld the delivery, they are not yet prima facie; it will not be considered intra-corporate
Controversies in the appointment (asked in the bar)
-
Cases involving election, appointment and removal
In Andaya the court said that a corporate officer elected or appointed by the BOD is always a corporate act
-
The fact that petitioner sought payment of his back wages, other benefits as well as moral and exemplary damages and attorney’s fees in his complaint will not operate to prevent the SEC from exercising its jurisdiction under P.D. 902-A. The jurisdiction will not wrest on the NLRC just because of that
•
Tabang vs. NLRC
-
Jurisdiction lies originally and exclusively to special commercial courts and not in the NLRC
-
SEC has jurisdiction over cases of removal from employment of corporate officers
-
The relationship of a person to a corporation, whether as officer or as agent or employee or not determined by the nature of the servides performed, but by the incidents of the relationship on they actually exist
-
Corporate officers dismissal is always a corporate act or intra-corporate controversy
•
Midland construction vs. Movilla
-
NLRC will be possessed of jurisdiction exception will not apply to mere recovery
Main consideration
-
Asserts his right to the office or questions the propriety or validity of his ouster or removal, it will be the special commercial courts and not the NLRC
Securities Regulation Code
-
Transferred jurisdiction Commercial Courts
of
the
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SEC
to
Special
-
Suspension of payment, appointment of management receivership
What is the reason for suspension of all claims?
-
The reason for suspending actions for claims against the corporation is not really to enable the management committee or the rehabilitation receiver to substitute the defendant in any pending action against it before any court, tribunal or body. The real justification is to enable the management committee or rehabilitation receiver to effectively exercise his powers free from any Judicial or extra-judicial interference that might unduly hinder or prevent the “rescue” of the debtor company. To allow such other actions to continue would only add to the burden of the management committee pr rehabilitation receiver, whose time, effort and resources would be wasted in defending claims against the corporation instead of being directed towards restructuring and rehabilitation.(PAL vs. Spouses Sadic and Kurangking)
-
To enable the receiver to effectively exercise his or her power free form any judicial or extra-judicial that may disturb
3 types of suspension of payments
1.
Simple suspension of payments
-
where deferment of payment of claims against a distress company; ask the court to be given time to the payment of liability by postponing the payment
-
When it has sufficient assets and liabilities but forces the impossibility of meeting them when they respectively fall due
2.
Suspension of receiver with a management committee with a rehabilitation play or suspension of payments accompanied by a proposal for rehabilitation (with or without rehabilitation)
-
corporation has sufficient assets to cover its liabilities, but sees the possibility; is or without rehabilitation plans; normally would attach the rehabilitation plan
-
For purpose of economic development
3.
Suspension of payments when the corporation has no sufficient assets to its liabilities
May it still be revived?
-
Yes, it may still be revived
How can a corporation with more liabilities than assets continue its operations profitably?
-
Even if the distressed company has no sufficient assets and liabilities it can go for suspension
-
It asked for a management committee without a receiver plan (Victorius Milling case)
Convert their claims into equity
-
Their liability was almost wiped out they became stockholders instead of creditors
-
After 5 years those who converted sold it back to the corporation, thereby making profits
Amendment is for the economic development of the country
What if walang amendment, e mas maraming liabilities kesa assets
Suspension order- all actions for claims against the corporation are accordingly suspended at whatever stage the proceedings maybe
Effect of suspension- you cannot foreclose
70
What are claims?
-
Debts or demands of pecuniary nature. Assertion of a right to have money paid
-
Claims against the corporation shall be suspended, assertion of a right to have money paid; it must present a monetary claim, liquidated or unliquidated
Nullification of corporations does monetary claim of pecuniary nature
not
present
a
•
Union vs. CA
-
It does not allow a mere individual to file the petition which is limited to corporations partnership or associations.
-
Where no authority is granted to hear petitions of individuals for suspension of payments, such petition are beyond the competence of the SEC
What happens if there is a suspension order?
Explain the key phrase “quality is equity”
-
All creditors stand on equal footing, secure or unsecure, holding or lien or without a lien, no creditor may enforce his lien while rehabilitation is going (Alemar case)
-
No preference shall be given
•
RCBC vs. IAC
-
Decided on motion for reconsideration
-
It court 7 years to decide authentication
Rule of the thumb
-
Automatic suspension even if not decreed in the decision itself
-
Once lifted the preferred creditors will regain their preference
Appointment of a management committee
-
Take over the management distressed corporation
committee
of
the
-
Extraordinary and drastic remedy
-
Without any remedy
What is an intra-corporate controversy?
-
Section 5(B)
-
Sole criteria is whether there exists an intra-corporate dispute is that if there is an intra-corporate relationship
Why is there suspension of all actions against claims when a receiver is appointed?
-
To enable the management committee to exercise its powers
•
Sy Chim vs. Sy Siy Ho (before a management committee may be opt by a court)
-
2 requisites for a valid appointment of management committee
1.
Imminent danger of dissipation, loss, wastage or destruction of assets or other corporate properties
2.
Paralysis of business operations, the mere apprehension of future misconduct based upon prior management
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-
Save and except in the case of a close corporation in case of deadlock management committee is allowed to take over right away
•
Jacinto case
-
2nd par of page 676
-
2 requisites where present
-
Wala ng mapautang, there was a paralyzation
•
Sy Chim
-
Did not appoint a management committee
-
In the absence of a strong showing of an imminent danger of dissipation, loss wastage or destruction of assets or other properties of a corporation and paralysis of its business operations, the mere apprehension of future misconduct based upon prior mismanagement will not authorize the appointment of a management committee
Section 5 and 6(D) governed by separate rules; interim rules and intra-corporate controversy
Venue of actions
-
Rules of court- where the parties are residing
-
Intra-corporate- no matter where the parties are residing it will be in the city or municipality where the principal office is located
Rehabilitation proceedings venue
-
In rem
-
Acquired upon publication without furnishing the creditors a copy of the petition and attachments thereof
-
A creditor may now file the suspension proceedings; provides that creditors owns at least 25%
Intra-corporate- rule 1 section 6
Service of summons- rule 2 section 5
-
Summons may be made to anyone
In case of intra-corporate dispute, elections, fraud, etc; if they are governed by interim rules of procedure on intra-corporate controversies
Venue
-
Special commercial courts where principal office is located/established (section 5 rule 1)
-
Matters of payment/suspension must be filed in the city/ municipality where corporation is located
Under old rule, creditors have no right to institute an action for receivership; now creditors, if they sold 20% they can institute an action for receivership
Section 5
-
Service of summons may be made by fax/e-mail
•
E.B. Villarosa vs. Benito
-
Will apply only controversy
If the controversy arose out of an intra-corporate dispute rules on interim rules of procedure of intracorporate controversies shall govern
Rule 4 section 17- immunity from suit
if
it
is
not
an
intra-corporate
71
Rehabilitation receiver shall not subject to any action, claim or demand in connection with any act done omitted by him in good faith in the exercise of his functions and powers herein conferred
Claim
-
Right to payment, whether or not it is reduced judgment, liquidated or unliquidated, fixed contingent, matured or unmatured, disputed undisputed, legal or equitable and secured unsecured
to or or or
Investment contracts
-
A contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits primarily from the effects of others
The management committee receiver are empowered to:
and
1.
Take custody corporation
all
2.
Evaluate assets and liabilities, earnings operations of the corporation
3.
Determine the best way to protect the investors and creditors
4.
Study, review evaluate the feasibility of continuing operation and structures
5.
Submit recommendations rehabilitation plan
6.
Rehabilitate the corporation if determined to be feasible by the RTC
7.
Report to the RTC until the corporation is dissolved
and
control
of
to
the
rehabilitation
assets
RTC
of
the
regarding
THE SECURITIES REGULATION CODE (RA8799) - Also known as the Blue Sky Law since it was enacted to protect the public from unscrupulous promoters who stake business which have no basis and sell shares and interest therein to investors, who are then left holding certificates representing nothing more than a claim to a square of the blue sky. -SEC. 2. Declaration of State Policy. – The State shall establish a socially conscious, free market that regulates itself, encourage the widest participation of ownership in enterprises, enhance the democratization of wealth, promote the development of the capital market, protect investors, ensure full and fair disclosure about securities, minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market. BROKER - person who buys and sells securities for the account of others. DEALER - person who buys and sells securities for his/her own account in the ordinary course of business. NOTE: No person shall engage in the business of buying or selling securities in the Philippines as a broker or dealer, or act as a salesman, or an associated person of any broker or dealer unless registered as such with the Commission. (Sec 28) SECURITES - shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. It includes: CODE: COFDIPS
a) b) c) d) e)
Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments; Other instruments as may in the future be determined by the Commission; Fractional undivided interests in oil, gas or other mineral rights; Derivatives like option and warrants; Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription;
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f) g)
Proprietary or non proprietary membership certificates incorporations; and Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities;
GR: Securities shall not be sold or offered for sale or distribution within the PH, without a registration statement filed with and approved by SEC. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser. (Sec 8) EXCEPT: Exempt Securities under Sec 9 a) Any security issued or guaranteed by the Government of the PH, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government. b) Any security issued or guaranteed by the government of any country with diplomatic relations with the PH, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, that the SEC may require compliance with the form and content of disclosures the Commission may prescribe. c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. d) Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Regulatory Board, or the Bureau of Internal Revenue. e) Any security issued by a bank except its own shares of stock. AND Exempt Transactions under Sec 10 a) A judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy. b) By or for the account of a pledge holder, or mortgagee or any other similar lien holder selling or offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provisions of this Code, to liquidate a bona fide debt, a security pledged in good faith as security for such debt. c) An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owner’s account, such sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transactions of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security. d) Distribution by a corporation, actively engaged in the business authorized by its AOI, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus. e) Sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock. f) Issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, where the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale. g) Issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under this Code or was, when sold, exempt from the provisions of this Code, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under this Code. Upon such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold. h) Broker’s transactions, executed upon customer’s orders, on any registered Exchange or other trading market. i) Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stock under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscriptions is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can
72
be registered and duly incorporated, or its authorized capital increased. j) The exchange of securities by the issuer with its existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. k) The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period. l) The sale of securities to any number of the following qualified buyers: (i) Bank; (ii) Registered investment house; (iii)insurance company; (iv) Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions; (v) investment company or; (vi) Such other person as the Commission may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management. PROTECTION OF SHAREHOLDERS INTEREST 1. 2. 3. 22)
Tender Offers (Sec 19) Proxy solicitation (Sec 20) Internal record keeping and accounting (Sec
TENDER OFFER – A publicly announced intention acting alone or in concert with others to acquire equity securities of a company. (2002 Bar Exams) Instances when Tender Offer is Required 1. When the person intends to acquire 15% or more of the equity share of a public company pursuant to an agreement made between or among the person and one or more sellers; 2. When the person intends to acquire 30% or more of the equity share of a public company within a period of 12 months; 3. When the person intends to acquire shares that would result in an ownership of more than 50% of the equity shares of a public company. PROXY SOLICITATION NOTE: A broker or dealer who holds or acquires the proxy for at least ten per centum (10%) or such percentage as the Commission may prescribe of the outstanding share of the issuer, shall submit a report identifying the beneficial owner within ten (10) days after such acquisition, for its own account or customer, to the issuer of the security, to the Exchange where the security is traded and to the Commission. (Sec 20.5) FRAUDULENT TRANSACTIONS MANIPULATIONS
AND
OTHER
MARKET
1.
Wash Sale (Sec 24.1(a)(i)) – any transaction in a security which involves no change in the beneficial ownership thereof.
2.
Matched Order (Sec 24.1(a)(ii)) – order or orders for the purchase or sale of security with the knowledge that a simultaneous order or orders of substantially the same size, time and price for the sale or purchase of such security has, or will be entered by or for the same or different parties. Note: Wash sale and matched orders become illegal when they are used as a means to create false appearance of active trading in the security concerned.
3.
Marking the close – placing the purchase order, at or near the close of the trading period. The price that was closed will then be the price that will be posted on the following trading day.
4.
Painting the tape – involves a series of transactions that are reported publicly to give the impression of an activity in a security.
5.
Squeezing the float – the part of an outstanding security intentionally held by dealers or other persons with a view of reselling them later for profit.
6.
Hype and dump – Act employed by a person or group of persons of purchasing the outstanding capital stock of a dormant public shell company for a nominal amount and merge it with their privately held company. They would then gain control of the majority stocks of the merged entity. Stock certificates are often re-issued in the name of the merged entity to relatives and associates who act as nominees of the person or persons employing the device. They would then look for a broker-dealer who would be willing to make a “hype” of the securities. The broker-dealer then generates volume and advance bid price. When the market reaches a high price, they would “dump” their shareholdings and bail out.
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7.
Boiler Room Operations – involves an intensive selling campaign through numerous salesmen by telephone or through direct mail offerings for securities of either a certain type or from a specific issuer. Investors are induced to purchase through hard-sell based on unfounded predictions and mailing of misleading market letters. Note: Marking the close, Painting the tape, Squeezing the float, Hype and dump, Boiler Room Operations become unlawful if it is effected to either raise the price or induce the purchase of a security or of a controlling, controlled, or commonly controlled company by others or to depress the price to induce the sale of a security, whether of the same or of a different class, of the same issuer or of a controlling, controlled company or common controlled company by others or to create active trading to induce the purchase through said devices or schemes.
8.
Circulating or Disseminating Information – circulating an information that any of the security listed in the exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security and thus inducing the purchase of such security.
9.
Making False or Misleading Statements with respect to any material fact which he knew or had reasonable ground to believe was so false or misleading for the purpose of inducing the purchase or sale of such security.
10.
Pegging or Fixing Or Stabilizing the price of security effected either alone or with others through any series of transactions for the purchase or sale thereof, if done for such purpose.
11.
Short sale – selling of security which the vendor does not own unless done in accordance with the rules and regulations of the SEC.
12.
Insider Trading – the act of an insider to buy or sell security of the issuer while in possession of material information with respect to such security that is not generally made known to the public unless (a) The insider proves that the information was not gained from such relationship; or (b) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves: (i) that he disclosed the information to the other party, or (ii) that he had reason to believe that the other party otherwise is also in possession of the information. Note: When is information “material nonpublic”? - if: (a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security. Note: Who is an “insider”? - “Insider” means: (a) the issuer; (b) a director or officer (or person performing similar functions) of, or a person controlling the issuer; (c) a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public; (d) a government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (e) a person who learns such information by a communication from any of the foregoing insiders. INDEPENDENT DIRECTOR Person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Corporations which require an Independent Director 1. An exchange; or 2. Any corporation with a class of equity securities listed for trading on an Exchange or with assets in excess of P50M and having 200 or more holders, at least 200 of which are holding at least 100 shares of a class of its equity securities or which has sold a class of equity securities to the public pursuant to an effective registration statement shall have at least two (2) independent directors or such independent directors shall constitute at least 20% of the members of such board, whichever is the lesser. OPTION TRADING • Put – a transferrable option or offer to deliver a given number of shares of stock at a stated price on any given time during the stated period. • Call – a transferrable option to buy a specified number of share at a stated price
73
•
Straddle – a combination of put and call.
SETTLEMENT OFFERS At any time, during an investigation or proceeding under this Code, parties being investigated and/or charged may propose in writing an offer of settlement with the Commission. The Commission may only agree to a settlement offer based on its findings that such settlement is in the public interest. Any agreement to settle shall have no legal effect until publicly disclosed. Such decision may be made without a determination of guilt on the part of the person making the offer. DAMAGES All suits to recover damages shall be brought before the Regional Trial Court, which shall have exclusive jurisdiction to hear and decide such suits. The Court is authorized to award damages in an amount not exceeding triple the amount of the transaction plus actual damages. NOTES • If there are goods involved in the multimarket, it is beyond the jurisdiction of SEC (Ex First Quadrant) • Criminal charge for violation of SRC is a specialized dispute, hence it must be first referred with SEC (Baviera vs. Paglinawan G.R. No. 168380 Feb 8, 2007)
•
T3 Rule in trading of Securities – Trading day + 3 more days you must comply with your obligations.
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