CORPORATION CODE Professor: Dean Nilo T. Divina Sources: Aquino, Timoteo B. (2006). PHILIPPINE CORPORATE LAW COMPENDIUM . Quezon City: Rex Printing Company, Inc.; Marx Notes BATAS PAMBANSA BLG. 68 THE CORPORATION CODE OF THE PHILIPPINES
TITLE I - GENERAL P ROVISIONS DEFINITIONS AND CLASSIFICATIONS
Section 1. Title of the Code. - This Code shall be known as "The Corporation Code of the Philippines." (n)
Section 2. Corporation defined. – defined. – A corporation is 1) an artificial being 2) created by operation of law, 3) having the right of succession and 4) the powers, attributes and properties expressly authorized by law or incident to its existence. (2) ARTIFICIAL BEING – it exist in contemplation of law. It derives its existence to the law that created it either by a general or special law. It is not a natural person but the law considers the corporation not just a group of persons but as a person. A legal person and therefore it has a personality that is separate and distinct from the person composing it. (DOCTRINE OF LEGAL ENTITY) can acquire properties, enter into contracts can have a cause of action, can incur liabilities principal-agent relationship applies can be held liable for torts or quasi-delict can be entitled to constitutional protections like unreasonable search and seizure can be held liable for a crime if the penalty is fine or forfeiture of license or franchise but not if the penalty is imprisonment can be entitled to moral damages o GR: A corporation is not entitled to moral damages because, not being a natural person it cannot experience physical suffering or sentiments. o XPN: When the corporation has a reputation that is debased, resulting to humiliation in the business realm Case: Tortuous act should have directly o resulted to the destruction or impairment of the reputation or good will of the corporation (MERALCO v. TEAM ELECTRONICS) Case: Under the NCC, in case of libel, oral o defamation or slander, the aggrieved person is entitled to moral damages. (FILIPINAS BROADCASTING v. AGO MEDICAL) CREATED BY OPERATION OF LAW – the corporation owes its existence to the State thru a law enacted by Congress (CONCESSION THEORY) A private corporation can only be organized in accordance with the Corporation Code. A GOCC that may have a charted on its own, are not organized under the Corporation Code.
Congress cannot enact a special law to create a private corporation to compete with another private corporation (See Sec. 4) Congress can only enact a special law creating a corporation only if such corporation is owned and controlled by the Government (at least 51%) and is organized for a governmental purpose. Otherwise, such law is unconstitutional and it cannot even create a de facto corporation (See Sec. 20) 2 kinds of franchise: 1. Primary franchise – the authority to act as a corporation. All corporation registered in SEC has primary franchise 2. Secondary franchise – a special authority given to a corporation to engage in a specialized business. (banks, insurance companies, etc.)
RIGHT OF SUCCESSION – A corporation is not immortal but is capable of continued existence because any change of ownership or in the composition of the stockholders will not result to the dissolution of the Corporation. It will continue to exist for as long as there is an extension of corporate term (See Sec. 11) in case of death, ownership of shares is transmitted to the heirs by operation of law POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE – these powers are found in the Corporation Code, AOI, By-laws. It also includes powers incidental to its express powers of incorporation. DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION – FICTION – 1. a doctrine 2. that allows the State (judicial function) 3. to disregard for certain justifiable reasons the notion that a corporation has a personality separate and distinct from the person composing it
Objective: To make the stockholders liable for the debts and obligations of the corporation and not the other way around.
Rules: a.
b.
The obligation of the corporation is not the liability of the stockholders, officers or directors The properties of the Corporation are not properties of the stockholders, officers or directors i. a stockholder is not a tenant, not an owner nor a co-possessor or usufructuary
Factors not enough to disregard the separate legal personality of the corporation: a. controlling ownership or ownership over the controlling shares b. common directors
c.
substantial identity of the incorporators and similarity of business
Various test adopted by the SC: a. Fraud test – when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime; when the corporation is being used to accomplish an intent to commit a wrong b. Alter Ego or Instrumentality test – when the corporation is a mere alter ego or business conduit of a person, or when the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another persons. Fraud is not an element c.
d.
Control test – i. 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 f its own; ii. 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 right; and iii. the aforesaid control and breach of duty must proximately cause the injury or loss complained of Objective test – the end result is to make the stockholders liable for the debts and obligations of the Corporation and not the other way around.
Corporations formed or organized under this Code may be 1) stock or 2) non-stock corporations. Corporations which have a) capital stock divided into shares and b) are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits c) on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. (3a) Classification of Corporations: A. Function 1. Public – organized for the government to govern a portion of a State; governed by the special law creating it 2. Private – organized for a private purpose; governed by the Corporation Code and its AOI and By-laws B. Existence of shares 1. Stock – See Sec. 3 2. Non-stock – defined by exclusion (See also Secs. 87 and 88) Capital stock – the absolute amount specified in the AOI and is available for subscription Capital – represents the assets of the Corporation. It fluctuates, maybe more or less, depending on the results of operation Stock – an integral unit of the capital stock C.
As a general rule, the buyer of corporate assets are not bound to honor or assume the obligation of the seller except: 1. merger or consolidation 2. if the buyer us only an extension or continuation of the corporate personality of the seller 3. if the sale of assets is made in bad faith 4. if the buyer assumes the obligation of the seller There are only 6 cases where a director or officer may be held solidarily liable with the corporation: 1. gross negligence or bad faith in directing the affair of the corporation 2. assenting or consenting to a patently unlawful act 3. acquiring interest in conflict of his duty as a director or officer 4. if he agrees to make himself solidarily liable with the corporation 5. if by express provision of law he is made liable 6. issuance of watered stocks
D.
Legal status 1. De jure – a corporation that fully conforms with the requirements for incorporation under the law. A corporation in law and in fact. 2. De facto – a corporation with a colorable imitation or substantial compliance with the requirements prescribed by law. A corporation in fact but not in law. 3. By estoppel – if a group of person assumes to be or represents themselves to be a corporation when they have no legal authority to do so and as such they are precluded from denying their corporate existence as regards to the 3rd p ersons who relied on the representation. 4. By prescription – a corporation since time immemorial have all the attributes and powers of a corporation (e.g. Roman Catholic Church) Relationship of management and control 1. Parent – a corporation that owns shares in another corporation. It has the power to elect the board of directors of a subsidiary or affiliate thru the ownership of shares 2. Holding – a corp that owns shares in various companies for investment purposes 3. Subsidiary – if the parent owns shares in another corp, if the investee is 50% or more owned by the other corp
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c.
substantial identity of the incorporators and similarity of business
Various test adopted by the SC: a. Fraud test – when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime; when the corporation is being used to accomplish an intent to commit a wrong b. Alter Ego or Instrumentality test – when the corporation is a mere alter ego or business conduit of a person, or when the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another persons. Fraud is not an element c.
d.
Control test – i. 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 f its own; ii. 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 right; and iii. the aforesaid control and breach of duty must proximately cause the injury or loss complained of Objective test – the end result is to make the stockholders liable for the debts and obligations of the Corporation and not the other way around.
Corporations formed or organized under this Code may be 1) stock or 2) non-stock corporations. Corporations which have a) capital stock divided into shares and b) are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits c) on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. (3a) Classification of Corporations: A. Function 1. Public – organized for the government to govern a portion of a State; governed by the special law creating it 2. Private – organized for a private purpose; governed by the Corporation Code and its AOI and By-laws B. Existence of shares 1. Stock – See Sec. 3 2. Non-stock – defined by exclusion (See also Secs. 87 and 88) Capital stock – the absolute amount specified in the AOI and is available for subscription Capital – represents the assets of the Corporation. It fluctuates, maybe more or less, depending on the results of operation Stock – an integral unit of the capital stock C.
As a general rule, the buyer of corporate assets are not bound to honor or assume the obligation of the seller except: 1. merger or consolidation 2. if the buyer us only an extension or continuation of the corporate personality of the seller 3. if the sale of assets is made in bad faith 4. if the buyer assumes the obligation of the seller There are only 6 cases where a director or officer may be held solidarily liable with the corporation: 1. gross negligence or bad faith in directing the affair of the corporation 2. assenting or consenting to a patently unlawful act 3. acquiring interest in conflict of his duty as a director or officer 4. if he agrees to make himself solidarily liable with the corporation 5. if by express provision of law he is made liable 6. issuance of watered stocks
D.
Legal status 1. De jure – a corporation that fully conforms with the requirements for incorporation under the law. A corporation in law and in fact. 2. De facto – a corporation with a colorable imitation or substantial compliance with the requirements prescribed by law. A corporation in fact but not in law. 3. By estoppel – if a group of person assumes to be or represents themselves to be a corporation when they have no legal authority to do so and as such they are precluded from denying their corporate existence as regards to the 3rd p ersons who relied on the representation. 4. By prescription – a corporation since time immemorial have all the attributes and powers of a corporation (e.g. Roman Catholic Church) Relationship of management and control 1. Parent – a corporation that owns shares in another corporation. It has the power to elect the board of directors of a subsidiary or affiliate thru the ownership of shares 2. Holding – a corp that owns shares in various companies for investment purposes 3. Subsidiary – if the parent owns shares in another corp, if the investee is 50% or more owned by the other corp
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4.
Affiliate – if the parent owns shares in another corp, if the investee is less than 50% owned by the other corp Place of Incorporation 1. Domestic – a corp formed organized and existing under Philippine laws 2. Foreign – a corp formed organized and existing under foreign laws AND whose government allows Filipino citizens to do business in their own country Composition 1. Sole – a corp with only 1 corporator 2. Aggregate – at least 5 incorporators Other classification 1. Open – shares are made available to the public 2. Close – a corp whose AOI provides that (1) the shares should be held by specified number of persons not exceeding 20 and (2) subject to certain restrictions on transfer of shares and (3) whose shares are not available for listing in the stock exchange 3. Religious 4. Educational
Tri-level hierarchy 1. Stockholders – elect the BOD 2. BOD – appoints the corporate officers; exercises corporate powers 3. Corporate officers – appoint employees of the corporation; implements the policies laid down by the BOD
Corporation going public – the shares will be listed in the stock exchange Corporation going private – it will limit the number of shares to a certain number of stockholders
Underwriter – one who sells security or shares in the corporation 1. Firm commitment – shares acquired by the underwriter are considered sold 2. Best effort – acts as an agent, shares not sold will be returned to the corporation
E.
F.
G.
Must be a natural person except in case of a registered cooperative or a rural bank Majority must be Philippine resident
May be a natural or juridical person No such requirement
Names in the AOI can never be amended!
Promoter – person who brings about the formation of the corporation; he may or may not be an incorporator Is the corporation bound by the contract entered into by promoters? No, there is no corporation yet. Subscriber/ stockholder – one who owns shares in the corporation
Section 4. Corporations created by special laws or charters. Corporations created by special 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) Discussion: GOCC with charter – Civil Service; not subject to SEC except only to determine whether or not GOCC Corporation organized under the Corporation Code – RTC as special commercial court (corporate officers) or Labor court (ordinary officers) Government-acquired corporations – not subject to rules of GOCC
Nationality of the corporation, how determined 1. Incorporation test – place of incorporation 2. Domiciliary test – where the corporation is located 3. Control test – the nationality of the stockholders determines the nationality of the corporation, e.g. 60% of the capital Case: "Capital" – all types of shares, in terms of voting, management, finance, etc. (GAMBOA v. TEVES, on MR) Nationalized activities:
Section 5. Corporators and incorporators, stockholders and
100% 1. 2.
members. – members. – Corporators are those who compose a corporation, whether as stockholders or as members.
3. 4.
Mass media Retail and trade – if capital of the corporation exceeds $2.5M, foreigners may be stockholders Rice and corn Security, watchman and detective agency
5.
Recruitment
6.
Advertising
7. 8. 9. 10. 11. 12.
Exploration of natural resources/mining Public utility/transport service Educational Banks Realty Investment house
Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. (4a) Incorporator Signatory of the AOI Always a corporator Not less than 5 but not more than 15 except in case of corporation sole (1 only)
Corporator x Not always an incorporator There is no limit except for a close corporation (20 only)
75%
70%
60%
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Foreigners cannot occupy any executive position in any corporation engaged in a nationalized activity, whether wholly or partly nationalized GRANDFATHER RULE – RULE – a method to determine the nationality of the corporation by making reference to the nationality of the stockholders of the investor corporation DOUBLE 60% RULE – in case of registered enterprise corporations under the Foreign Investments Act of 1991, 60% of the stockholders must be Filipinos and 60% of the BOD must be Filipinos
Section 6. Classification of shares. – 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 1) "preferred" or 2) "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. (COMMON SHARES) Any or all of the shares or series of shares may 1) have a par value or 2) 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 . Preferred shares of stock issued by any corporation may be given preference 1) in the distribution of the assets of the corporation in case of liquidation and 2) in the distribution of dividends, or 3) 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. Shares of capital stock issued without par value 1) 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: 2) Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: 3) 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. 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. 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: 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, creating or increasing bonded indebtedness; 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)
Section 7. Founders' shares. – 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, 1) 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 2) 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)
Section 8. Redeemable shares. – shares. – Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. 1) They may be purchased or taken up by the corporation upon the expiration of a fixed period, 2) regardless of the existence of unrestricted retained earnings in the books of the corporation, and 3) upon such other terms and conditions as may be stated in the articles of incorporation, 4) which terms and conditions must also be stated in the certificate of stock representing said shares. (n)
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Section 9. Treasury shares. – shares. – Treasury shares are shares of stock 1) which have been issued and fully paid for, 2) but subsequently reacquired by the corporation by a. purchase, b. redemption, c. donation or d. through some other lawful means.
issuing
Such shares may again be disposed of for a reasonable price fixed by the board of directors. (n) Classification of shares 1. Common and Preferred 2. Par Value and No Par Value 3. Voting and Non Voting 4. Founder's 5. Redeemable 6. Treasury 7. Watered 8. Other Classifications as may be provided for in the AOI Street Certificate a. indorsed in blank by the stockholder (quasinegotiable instrument) b. held by a stock broker for the benefit of a client Common – shares not accorded with any special privileges, rights, except that they always have the right to vote and be voted Preferred – Preferred – 1. As to assets – in case of dissolution and liquidation, they get the assets of the corporation ahead of the common shares; they are given priority or preference with respect to distribution of assets 2. As to dividends – they have to be paid ahead of the holders of common shares; they are not absolutely entitled, it depends on the availability of surplus profits; they are not creditors a. Cumulative – the right to receive dividends are carried over to the succeeding year (accrued) b. Non-cumulative – the right to receive dividends only in the year the dividends were declared; if no declaration made, extinguished c. Participating – can participate in the residual dividends with the holders of the common shares d. Non-participating – not allowed to participate in the residual dividends
Preferred shares are not bonds or borrowing instruments. The relationship between the holders of the preferred shares to the corporation is different from the relationship of the corporation with the bond holders or creditors Par Value – Value – the assigned value for the share determined by the BOD indicated in the stock certificate and in the AOI Book Value – actual value of share based on the finances and capital of the corporation (Formula: Capital or Net worth / # of outstanding shares)
FMV – the value in which the seller is willing to sell and a buyer is willing to buy without any compulsion
Par value is a limitation on the amount of the shares to be issued by a corporation, not to the shares sold or transferred by the stockholder to another Par value is the minimum amount for which the corporation may issue shares Corporation cannot issue value below par; otherwise, watered shares Stockholder can sell his share below par
No Par Value – Value – a corporation cannot issue a No Par value share below P5.00; in Par Value shares, the minimum is 1 centavo Limitations on the issuance of No Par Value shares 1. shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: 2. That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: 3. 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. 4. 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 . 5. That preferred shares of stock may be issued only with a stated par value. Voting/ Non-Voting – Non-Voting – Common shares cannot be denied the right to vote or be voted Treasury shares, by their nature, cannot vote or be voted Shares that may be deprived the right to vote: 1. Preferred 2. Redeemable In computing, computing, exclude the non-voting shares when the law requires at least 2/3 of the outstanding capital stock Founder's – Founder's – accorded certain rights and privileges that are not given to ordinary shares IF AUTHORIZED BY AOI must be classified as such IN THE AOI The 5-year limitation, with regard the exclusive right to vote and be voted subject to the approval of the SEC, is reckoned from the date of said approval Redeemable – Redeemable – 1. Compulsory – if the corporation has no choice but to redeem the shares UNLESS it will result in the insolvency of the corporation 2. Optional – there is no mandatory obligation on the part of the corporation to redeem the shares
SEC issued a regulation that any corporation issuing redeemable shares must set up a savings fund. Savings fund in the sense that every year until the term arise, the corporation 5 | P
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must allocate or earmark or segregate certain funds to be able to meet the cost of r edemption
3) 4)
all of legal age and a majority of whom are residents of the Philippines,
The law says there is no need to have surplus profit or retained earnings to effect the redemption
may form a private corporation for any lawful purpose or purposes.
Instances when a corporation may reacquire shares even without U.R.E 1. when shares are redeemable 2. when it is a close corporation
Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. (6a)
Once reverted to the corporation, they form part of the treasury shares. Thus, they are no longer outstanding, they can no longer declare dividends. Once redeemed, they are retired (cease to exist) unless reissuance is expressly authorized by the AOI Treasury – as distinguished from redeemable shares, a corporation may acquire its own shares ONLY IF it has unrestricted retained earnings no need for a provision in the AOI to acquire its own shares. Mere board approval suffices may be reissued by the Corporation upon approval of the BOD.
Qualifications 1) natural persons – except in case of a cooperative as regards rural banks (but still through a representative) 2) not less than five (5) but not more than fifteen (15) – except in case of a corporation sole 3) a majority of whom are residents of the Philippines – except when engaged in a nationalized activity 4) all of legal age Citizenship is NOT a requirement except if the corporation is engaged in a nationalized activity SEC & DOJ: GRANDFATHER RULE will only apply if the percentage of share ownership of Filipinos is less than 60% of the investor corporation
Trust Fund Doctrine – the legal capital of the corporation which cannot be touched or impaired because it is intended for the benefit of the creditors. This cannot be used to acquire treasury shares
Section 11. Corporate term. –
The corporation has to have money on top of the legal capital, such is called surplus profits.
The corporate term as originally stated in the articles of incorporation may be extended for periods 1) not exceeding fifty (50) years 2) in any single instance 3) by an amendment of the articles of incorporation, in accordance with this Code;
"Other lawful means" (See Sec. 41) 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. Appraisal right – the right of the stockholder to dissent from a proposed corporate act and demand the payment of the fair value of the shares (See Sec. 81) POINT OF CLARIFICATION: If the shares are redeemed, apply Section 8: shares are retired by redemption, thus, can no longer be reissued unless reissuance is expressly authorized by the AOI If the shares are reacquired other than redemption , apply Section 9: shares can be reissued. TITLE II - INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS
Section 10. Number and qualifications of incorporators. – Any number of 1) natural persons 2) not less than five (5) but not more than fifteen (15),
A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended.
4)
Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) a. unless there are justifiable reasons for an earlier extension b. as may be determined by the Securities and Exchange Commission. (6)
No limit as to number of extensions Extension of corporate term entails an amendment in the AOI thus, approval of the BOD by at least majority vote and by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or in case of a non-stock, 2/3 of the members
Section 12. Minimum capital stock required of stock corporations. – Stock corporations incorporated under this Code SHALL NOT BE REQUIRED TO HAVE ANY MINIMUM AUTHORIZED CAPITAL STOCK except 1) as otherwise specifically provided for by special law, and 2) subject to the provisions of the following section.
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3)
The place where the principal office of the corporation is to be located, which must be within the Philippines; 4) The term for which the corporation is to exist; 5) The names, nationalities and residences of the incorporators; 6) The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); 7) The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; 8) If it be a stock corporation, a. the amount of its authorized capital stock in lawful money of the Philippines, b. the number of shares into which it is divided, and c. in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and d. if some or all of the shares are without par value, such fact must be stated; 9) If it be a non-stock corporation, a. the amount of its capital, b. the names, nationalities and residences of the contributors and c. the amount contributed by each; and 10) Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient.
Section 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. – 1) At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and 2) at least twenty-five (25%) per cent of the total subscription must be paid upon subscription,
the balance to be payable 1) on a date or dates fixed in the contract of subscription without need of call, or (Demand is not necessary to put the obligor in default ) 2) in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. (n) Under certain special laws, there are certain corporations that are required to have a minimum capital, e.g.: 1. Universal bank 4.95B 2. Commercial bank 2.4B 3. Thrift bank 325M/52.5M 4. Insurance company 5. Investment company If there is no special law, there is no minimum authorized capital stock Under the 25-25 Rule, it is not always required to pay up the subscription GR: Partial payment is allowed for as long as the first tranche represent at least 25% of the total subscription XPN: Must be fully paid a. No Par Value shares b. Non-Resident Foreign Subscriber unless it is secured by a surety undertaking made by a Filipino resident The corporation cannot declare dividends out of the subscribed capital stock
Section 14. Contents of the articles of incorporation. – All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by ALL OF THE INCORPORATORS, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1) The name of the corporation; 2) The specific purpose or purposes for which the corporation is being incorporated. a. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or 1 purposes: (See Sec. 42) b. Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such;
1
Investment of corporate funds in the secondary purpose requires stockholders' approval by 2/3 of the outstanding capital stock
The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that a. at least twenty-five (25%) percent of the authorized capital stock of the corporation has been subscribed, and b. at least twenty-five (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five (25%) percent of the said subscription, c. such paid-up capital being not less than five thousand (P5,000.00) pesos.
Section 15. Forms of Articles of Incorporation. xxx ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following): "No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in the proper books of the corporation and this restriction shall be indicated in all stock certificates issued by the corporation." xxx 7 | P
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Documents needed: 1. Articles of Incorporation 2. By-laws (See Sec. 46) a. to be with the AOI b. within 1 month from approval of incorporation 3. Treasurer's Affidavit – proof of compliance. 2 situations when needed: a. upon incorporation b. amending the AOI that concerns the increase of capital stock 4. Bank Certification – showing money is in the hands of the treasurer; deposit in the name of the "treasurer in trust for the corporation" 5. Name Verification Slip – an undertaking to change the name if it is identical or similar to an existing corporate name (See Sec. 18) 6. Company data maintenance sheet 7. In case of special corporation, an endorsement from the appropriate government agency 8. Payment of Fees
The amendments shall take effect 1) upon their approval by the Securities and Exchange Commission or 2) from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.
SEC will issue a certificate of registration which is the operative date by which a corporation acquires legal personality (See Sec. 19)
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.
Place where the principal office of the corporation is to be located – Test: the place where the books are kept and where the meeting is held must be consistent with what appears in the AOI for purposes of venue in filing an action (the principal place in the AOI. it would be easy on the part of the corporation to evade service of process, it will just keep on changing the principal office of the corporation
Section 16. Amendment of Articles of Incorporation. – Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended 1) by a majority vote of the board of directors or trustees and (ENTIRE BOARD) 2) the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, a. without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, 3) or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. (CERTIFICATE OF AMENDMENTS) 1) Such articles, as amended shall be indicated by underscoring the change or changes made, and 2) a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, (include when it was approved) 3) shall be submitted to the Securities and Exchange Commission.
With respect to the board approval, it is indispensable that there be a board meeting.
Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. – The Securities and Exchange Commission may 1) reject the articles of incorporation or 2) disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: a. 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.
No articles of incorporation or amendment to articles of incorporation of 1) banks, banking and quasi-banking institutions, 2) building and loan associations, 3) trust companies and other financial intermediaries, 4) insurance companies, 5) public utilities, 6) educational institutions, and 7) other corporations governed by special laws shall be accepted or approved by the Commission UNLESS accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. (n) Section 17 is not exclusive,. Other possible grounds: 1. fraud or misrepresentation in filing the AOI or in procuring certificate of registration/incorporation 2. non-filing of by-laws within one month from incorporation
Section 18. Corporate name. – No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is 1) identical or deceptively or confusingly similar to that of any existing corporation or 2) (identical or deceptively or confusingly similar) to any other name already protected by law or 3) is patently deceptive, confusing or contrary to existing laws. 8 | P
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Section 21. Corporation by estoppel. – When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. (n) DOCTRINE OF SECONDARY MEANING – if the generic word has become distinctive such that it is associated with the mind of the public as it has been sourced or manufactured by a person or a corporation then it is entitled to protection under the law
Requisites: 1. the one who opposes the use of the corporate name must have acquired a prior right over such corporate name (through registration from filing with the SEC 2. See Enumerations under Sec. 18. Obligations of a corporation under the old name will be absorbed by the same corporation under the new corporate name
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)
Section 20. De facto corporations. – 1) 2) 3)
The due incorporation of any corporation (VALID LAW) claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers,
shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (n) There is NO de facto corporation unless there is a certificate of incorporation issued by the SEC which presupposes the filing of AOI Stockholders of such corporation have the same rights and subject to the same obligations of stockholders of a de jure corporation
1) 2) 3)
All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof:
Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. (n) Only those who made representations! So, anyone who benefited from the transaction The doctrine cannot be invoked when there is no 3rd party involved
Section 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. – 1) If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. 2) However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. (19a)
This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission. When the corporation appoints the board and the board appoints the corporate officers within 2 years, it is deemed organized Other grounds to suspend or revoke corporate franchise: 1. failure to submit by-laws 2. violation of Code 3. Non-submission of reports 4. fraud or misrepresentation TITLE III - BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
A de facto corporation for all intents and purposes, is a de jure corporation except that the State reserves the right to question its corporate existence through a quo warranto proceeding Other examples of infirmities resulting to de facto existence: 1. majority of the residences of the incorporators 2. treasurer's affidavit is false 3. information indicated in the AOI inaccurate 4. non-submission of by-laws
Section 23. The board of directors or trustees. – 2
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
2
certain powers are reserved for the stockholders solely, or jointly with the BOD 9 | P
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1)
2)
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) (HOLD 3 OVER CAPACITY)
Every director 1) must own at least one (1) share of the capital stock of the corporation of which he is a director, a. which share shall stand in his name on the books of the corporation. b. 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. 2) A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. Qualifications of a BOD: 1. All the qualifications under the Code, as well as under the By-laws 2. None of the disqualifications under the Code, as well as under the By-laws 4
Qualifications under the Code: 1. natural person except cooperative 2. legal age 3. ownership of at least 1 share registered in his name in the books. (continuing qualification) When required to own? a. as indicated in the by-laws, or b. upon assumption of office *acquisition is not a mode for the election or appointment of a director *when legal title is lost then the director automatically losses his seat *a trustee can qualify as a director even if he is not a full owner because it is the legal title that counts not the beneficial title 4. not less than 5 nor more than 15 except in case of corporation sole (only 1) or in case of merger or consolidation (up to 21) or non-stock (more than 15) except educational (up to 15) 5. majority must be Philippine residents except when engaged in nationalized activity (if 100%) Disqualifications: See Sec. 27. Any transaction not authorized by the board is ultra vires or beyond the authority of the corporation, thus, unenforceable.
The following must be required: 1. Board resolution that the transaction has been approved by the board 3
Not a fresh term! In case the director resigns, it will be considered as expiration of term NOT resignation. (Relevant to Sec. 29) 4 By laws may expand the qualifications as long as it is not intended to deprive minority representation.
2.
The officer concerned is duly authorized by the board for that purpose
Powers of the BOD in a hold over period: Same as regular BOD BUSINESS JUDGMENT RULE – stockholders or the courts cannot interfere with the BOD on how to run the affairs of the corporation. (questions of policy) remedy: removal with or without cause, derivative suit, don't elect next time
Majority of the entire board + 2/3 stockholders 1. amendment of AOI 2. adoption or amendment of by-laws 3. power to extend or shorten corporate term 4. power to increase or decrease capital stock; incur, create or increase bonded indebtedness 5. sale or other dispositions of substantially all or all assets 6. power to invest corporate funds in another corporation or for any other (secondary) purpose 7. merger or consolidation 8. dissolution Majority of the board of directors (quorum) + Majority of stockholders (outstanding shares) 1. power to enter into management contract Note: See Section 44
Section 24. Election of directors or trustees. – At all elections of directors or trustees, 1) there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock 5 (may only be 1, e.g. Henry Sy) , or a. if there be no capital stock, a majority of the members entitled to vote. 2) The election must be by ballot if requested by any voting stockholder or member. (generally viva voce) In stock corporations , 1) every stockholder entitled to vote shall have the right to vote in person or by proxy 2) the number of shares of stock standing, a. at the time fixed in the by-laws, b. in his own name on the stock books of the corporation, or c. where the by-laws are silent, at the time of the election; and 3) said stockholder may vote 6 a. such number of shares for as many persons as there are directors to be elected (spread) b. or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, c. or he may distribute them on the same principle among as many candidates as he shall see fit: (apportion) d. Provided, That the total number of votes cast by him shall not exceed the number of 5
If meeting will deal on other matters, you need a higher number of those present if the Code requires such 6 Subscribed, not necessarily paid up! 10 | P
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shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. (non-voting shares shall also be excluded) Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there are not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote. (31a) INDEPENDENT DIRECTORS – requirement of at least 2 independent directors for 1. issuers of registered securities to the public whether or not listed in the PSE 2. public companies or those with assets of at least 50M and having 200 or more holders each holding at least 100 shares 3. finance co 4. investment houses 5. broker and dealers of securities 6. investment co 7. pre-need co 8. subsidiaries or branches of foreign corporations which operate in the Philippines and are listed in the PSE 9. stock and other securities exchange/s
Must not be: 1. a director or officer or substantial stockholder 2. a relative of any d, o, subs SH 3. acting as a nominee or representative of a subs SH 4. employed in any exec capacity 5. retained as professional adviser 6. engaged in any transaction with the corporation or with any of its company or with any of its subs SH The law does not mandate the stockholders to vote for independent directors There will still be only one election held; Computation is still no. of shares x 15
Section 25. Corporate officers, quorum. – Immediately after their election, the directors of a corporation must formally organize by the election of 7 1) a president, who shall be a director, 8 2) a treasurer who may or may not be a director, 7
He must have all the qualifications and none of the disqualifications of a director 8 SEC: must be a resident
3) 4)
a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the bylaws.
Any two (2) or more positions may be held concurrently by the same person, except that no one shall act 1) as president and secretary or 2) 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) Points to remember: The president is required to be a Filipino citizen if the corporation is engaged in a nationalized activity, wholly or partly, under the Anti-Dummy Law. No foreigner will be allowed to occupy an executive position SEC: President cannot be chairman Foreigner can be a chairman if such position is non executive Secretary must be a Filipino. See also other qualifications according to the SEC Treasurer need not be a citizen but must be a resident Treasurer can be a secretary General counsel may be a secretary Vice president not required to be a stockholder unless it takes the place of the president Other positions: controller Importance in determining whether one is a corporate officer or an ordinary officer: 1) jurisdiction: a. C.O.: Intra-corporate controversy = RTC as special commercial court b. O.O.: Labor dispute = Labor court 2) manner of creation: a. C.O.: required by the by-laws b. O.O: created by the BOD Majority "of the entire board" or "of the board" 1. amendment of AOI (+ SH 2/3) 2. adoption or amendment of by-laws (+ SH majority) 3. power to extend or shorten corporate term (+ SH 2/3) 4. power to increase or decrease capital stock; incur, create or increase bonded indebtedness (+ SH 2/3)
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5.
sale or other dispositions of substantially all or all assets (+ SH 2/3) 6. power to invest corporate funds in another corporation or for any other (secondary) purpose (+ SH 2/3) 7. merger or consolidation 8. dissolution 9. election, appointment or removal of corporate officers 10. delegation of powers to the executive c ommittee "Majority of the directors" (quorum) 1. declaring cash dividends 2. declaring stock dividends (+ SH 2/3) 3. power to enter into management contract (+ SH majority) 4. filling up vacancies not due to removal, expiration or increase in number of directors 5. investment for primary purpose 6. sale mortgage or other dispositions in ordinary course of business
Section 26. Report of election of directors, trustees and officers. - Within thirty (30) days after the election of the directors, trustees and officers of the corporation, 1) the secretary, or any other officer of the corporation, 2) shall submit to the Securities and Exchange Commission, a. the names, nationalities and residences of the directors, trustees, and officers elected. b. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the Securities and Exchange Commission. (n)
General Information Sheet – controlling as to the names of directors elected
Section 27. Disqualification of directors, trustees or officers. – No person 1) convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or 2) 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 28. Removal of directors or trustees. – Any director or trustee of a corporation may be removed from office 1) 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: 2) 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,
3)
4)
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, a. 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, b. 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 1) by publication or 2) 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) Important points: The provisions in the by-laws contrary to this Section will not justify the acts of the BOD in removing a director the power to remove belongs solely to the stockholders Removal of a director cannot included as other matters. There must be notice of the intention to remove! The replacement may be appointed by the stockholders in the same meeting where the removal was effected or in a meeting called for the purpose of electing a replacement
Section 29. Vacancies in the office of director or trustee. – Any vacancy occurring in the board of directors or trustees OTHER THAN 1) by removal by the stockholders or members or 2) by expiration of term, a. may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; b. 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. 12 | P
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3)
Any directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees a. shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, b. or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. (n)
The stockholders in these cases has the power to fill up vacancies: 1. due to expiration of term, removal and increase in the number of board seats 2. Not due to No. 1 but the remaining directors do not constitute a quorum 3. Not due to No. 1 and the remaining directors constitute a quorum the directors but they decided to delegate the matter or responsibility to the stockholders The board is NOT obligated to fill up the vacancy. Term of the replacement director: unexpired portion
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
LIMITATION: Must not exceed 10% of the net income before income tax of the corporation during the preceding year The limitation does not apply to payment of compensation for other services meaning it was rendered in a capacity other than as a director
Section 31. Liability of directors, trustees or officers. – Directors or trustees 1) who wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or 2) who are guilty of gross negligence or bad faith in directing the affairs of the corporation or 3) acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. (n)
In a broad sense, management has threefold duties namely, (a) obedience, (b) diligence, and (c) loyalty
GR: As a rule, directors and officers are not solidarily liable with the corporation. Obligations incurred by them, acting as such corporate agents, are not theirs but the direct accountabilities of the corporation they represent XPN: In the following cases, personal liability may be incurred by directors and officers:
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)
In addition to Sec. 31, 1-3: 4) When a director has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto (Sec. 65) 5) When a director, trustee or officer is made, by specific provisions of law, personally liable for his corporate actions (e.g. Trust Receipts Law) 6) When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation (e.g. surety or guarantor)
Compensation – any form of remuneration
GR: No compensation because of the presumption that the return of their investment is enough compensation. XPN: provided that it has been authorized by the 1. by-laws 2. stockholders representing at least majority of the outstanding capital stock at a regular or special stockholders' meeting 3. OR when they render services to the corporation other than as director a. Example: director as president Per diem – allowance for the attendance during the meetings must be reasonable
Enumeration is EXCLUSIVE.
Conflict of interest per se is not a ground for liability: Doctrine of Corporate Opportunity – The duty of loyalty mandates that directors should not give preference to their own personal amelioration by taking the opportunity belonging to the corporation.
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If there is an interest that belongs to the corporation, it must not be seized or taken advantage of by the director or officer, otherwise any interest, income or profit earned by that venture or undertaking must be fully accounted for and remitted to the corporation. There is an obligation on the part of the director or officer to hold the profit in trust for the benefit of the corporation (Sec. 34)
Section 34. Disloyalty of a director. – Where a director, by virtue of his office, 1) acquires for himself a business opportunity which should belong to the corporation, 2) thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, UNLESS his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture. (n)
Section 34 applies if the corporate/business opportunity: 1) is one which the corporation is financially able to undertake; 2) from its nature, is in line with corporation's business and is of practical advantage to it; and 3) is one in which the corporation has an interest or a reasonable expectancy
The burden of proof on the questions of good faith, fair dealing and loyalty of the officer to the corporation should rest upon the officer who appropriated the business opportunity for his own advantage
The theory is that profits made and advantage gained by an agent belongs to the principal
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: 1) Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: 2) Provided, however, That the contract is fair and reasonable under the circumstances. (n)
Self-dealing directors, trustees, or officers are those who personally contract with the corporation in which they are directors, trustees or officers o It is discouraged because the directors, trustees and officers have fiduciary relationship with the corporation and there can be no real bargaining where the same is acting on both sides of the trade
The contract between the corporation and the self-dealing director, trustee or officer is voidable. However, the contract is valid if the requirements for its validity under Section 32 are present
However, even if not all the requirements are met, the contract with the self-dealing director, trustee or officer may still be ratified by a vote of stockholders representing at least 2/3 of the Outstanding Capital Stock or by the vo te of at least 2/3 of the members in a meeting called for the purpose provided the following conditions are met: 1) There must be full disclosure of the adverse interest of the directors or trustees involved is made at such meeting 2) the contract is fair and reasonable under the circumstances
The corporation may choose to ratify the acts of the director
Property or business opportunity ceases to be a corporate opportunity and is transformed into personal opportunity where the corporation is definitely no longer able to avail itself of the opportunity
Discussion: When may a corporate officer bind the corporation? 1) Authorized by the By-Laws 2) Authorized by the Board of Directors 3) If not authorized by By-Laws nor the Board, the act can be ratified by the Board 4) Doctrine of Apparent Authority (must be related to his function)
Section 32. Dealings of directors, trustees or officers with the
Section 33. Contracts between corporations with interlocking
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; 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in case of an officer, the contract has been previously authorized by the board of directors.
directors. – 1) Except in cases of fraud, and 2) provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, o he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned.
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,
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. (n) 14 | P
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1.
Interlocking directorship by itself is not prohibited under the Corporation Code. However, the by-laws may contain provisions that disallow interlocking directorship in certain cases. A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone
2. 3. 4.
There is an interlocking director in a corporation when one (or some or all) of the directors in one corporation is (or are) a director(s) in another corporation
5.
approval of any action for which shareholders' approval is also required; the filing of vacancies in the board; the amendment or repeal of by-laws or the adoption of new by-laws; the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and a distribution of cash dividends to the shareholders. N.B. Distribution of stock dividends falls under the first exception
If the interest of the interlocking director in one of the corporations is nominal in one and substantial in the other, a contract between the two corporations shall be valid, if the conditions under Section 32 are present
The Corporation Code allows the creation of an executive committee because the board may not readily face the contingency of confronting urgent matters which requires its attention
Contract between corporations with interlocking directors/trustees must always meet the third condition , that is, said contracts must be fair and reasonable under the circumstances o If the contract is fair and reasonable, the absence of either the first or second condition makes the contract voidable and capable of ratification
Section 33 which provides for rules regarding transactions between corporations with interlocking directors applies if the contract results in prejudice to one of the corporations. This rule does not apply if the corporation allegedly prejudiced is a third party, not one of the corporations with interlocking directors o The option to nullify the contract belongs to the parties to the contract (stockholders, directors, corporations) only and not to a third party
The executive committee can only be created by virtue of a provision in the by-laws. The board, by itself, cannot create an executive committee if nothing is stated in the by-laws GR: The board alone or the board per se cannot o create a mini board or a committee that will function as BOD XPN: o 1) the by-laws may authorize the creation of the executive committee 2) the BOD pursuant to an authority under the by-laws may likewise create an executive committee
TEST: Will that committee perform board functions? Will that committee act on matters according to the board competence? If yes, then it requires authority in the by-laws. If it does not perform the functions of the board and is for administrative purposes only, the BOD can create such by mere board approval .
Section 35 provides that an executive committee must be composed of not less than three members of the board, to be appointed by the board. This means that there can be members of the executive committee who are not directors provided that at least three members are directors Can non-board directors be members? o Yes, provided their function is merely recommendatory or advisory in nature. They cannot vote. SEC Opinion, November 5, 1984: The required o majority vote requirement for an executive committee shall be interpreted to mean majority of all the committee members regardless of the classification of the membership into director/members or non-director/members
A foreigner can be a member of the executive committee in proportion to the foreign shareholdings in the corporation
The executive committee has all the authority of the board to the extent provided in the resolution of the board or in the by-laws. The resolutions passed and approved by the executive committee are as valid as the resolutions of the
Interlocking directors are not allowed between banks, quasi-banks, investment houses, insurance companies without prior BSP approval. o How about in non-banks? Allowed, except if there is a contrary provision (e.g. Gokongwei) SUMMARY – For a contract between 2 corporations with interlocking directors to be valid: 1) there is no fraud 2) the contract if fair and reasonable 3) the interest of the interlocking director in one corporation is substantial and his interest in the other corporation is merely nominal 4) compliance with the requirements in Section 32 in so far as the nominal corporation is concerned
Section 35. Executive committee. – The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, EXCEPT with respect to: (Limitations)
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board provided the resolutions have been made at the time the committee is co nstituted
i.
Decisions of executive committee are not absolute. It can be abdicated by the board of directors SEC Opinion, July 29, 1995: The decision of the o executive committee is not subject to appeal to the board. They are valid and unappealable. However, if the resolution of the executive committee is invalid (as for instance it is not one of the powers conferred thereto) it may be ratified by the board
2)
3)
If the executive committee was not validly co nstituted, the members thereof may be considered de facto officers
Read CASE OUTLINE in Marx, pages 57-70 TITLE IV - POWERS OF CORPORATIONS
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; 3. To adopt and use a c orporate seal; 4. To amend its articles of incorporation in accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell 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)
A corporation may exercise 1) Express powers – the powers expressly provided by the a. The Corporation Code;
The general powers under Section 36 and ii. The specific powers under Section 11, 16 and 37 to 44 b. Applicable special laws; c. Administrative regulations; and d. The Articles of Incorporation and bylaws of the corporation Implied powers – all powers that are reasonably necessary or proper for the execution of the powers expressly granted and are not expressly or impliedly excluded Incidental powers – powers that are deemed conferred on the corporation because they are incidental to the existence of the corporation. It includes: a. Right to succession b. Right to have a corporate name c. Right to make by-laws for its government d. Right to sue and be sued e. Right to acquire and hold properties for the purposes authorized by the charter
To sue and be sued in its corporate name This power is exercised by the corporation through the board. Hence, the Supreme Court now requires corporations to attach a copy of the Board Resolution authorizing the filing of the complaint or petition
The suit must be in the name of the corporation. It should use the complete name and not an acronym (LIDECO v. CA)
Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation Section 11
To adopt and use a corporate seal A corporate seal is a sign, emblem, device adopted by the corporation to distinguish it from other corporations
Under the Corporation Code, a seal is not indispensable for the transactions or contracts of the corporation. A document may be considered valid and binding even in the absence of a seal. However, one instance when a seal is necessary is with respect to the certificate of stock as provided for under Section 63 (merely directory not mandatory, thus, the absence of such will not invalidate the certificate)
To amend its articles of incorporation in accordance with the provisions of this Code (not to adopt because AOI is required at the outset) Section 16
To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code Section 46 and 48
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In case of stock corporations, to issue or 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 Sections 60-72 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, 1) as the transaction of the lawful business of the corporation may reasonably and necessarily require, 2) subject to the limitations prescribed by a. law and b. the Constitution
The power under this provision can be exercised by the Board without concurrence of the stockholders. Stockholder’s approval is necessary only in cases covered by Sections 40 and 42. What are the basic requirements/limitations? 1) It must be reasonably and necessarily required by the transaction of the lawful business of the corporation a. It can mortgage its properties to secure its obligations b. Parent can mortgage its properties to secure its subsidiary’s obligation IF (1) the latter is wholly-owned by the former, and (2) it will not prejudice third persons. c. It can act as an accommodation mortgagor IF it is engaged in the business of a surety, bonding company, etc. d. In case of donations, if such is contrary to the corporation’s purpose, amend the AOI first before accepting. 2) It is subject to limitations prescribed by law and the Constitution a. Foreign corporations are not allowed to acquire private lands in the Philippines unless 60% of its capital stock is owned by Filipinos b. Corporation cannot acquire alienable lands of public domain c. Domestic corporation owned by Filipinos can lease a public land d. Foreign banks can be a mortgagee but cannot foreclose properties. Remedy: They assign the right to their lawyers. e. Bulk Sales Law
The Corporation Code now allows corporations to make donation so long as the following are complied with: 1) The donation must be reasonable ; 2) The donation must be for valid purposes including public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes; 3) The donation must not be in aid of any political party or candidate or for purposes of partisan political activity
To enter into merger or consolidation with other corporations as provided in this Code Section 76 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
Factors to determine reasonableness: 1) Income of the corporation 2) Capital/Assets of the corporation 3) Operations 4) Volume or magnitude of the donation
To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees superior than what the law provides Article 27 of the Labor Code provides a default retirement plan: If 60 years of age and at least 5 years in service, you get ½ month salary for every year of service
A corporation can act as a collection agent as long as it will not earn any commission or remuneration from that arrangement
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 ALL ENCOMPASSING A corporation cannot enter into a contract of partnership. This limitation is based on public policy since in a partnership, the corporation would be bound by the acts of the persons who are not its duly appointed and authorized agents and officers, which would be entirely inconsistent with the policy of the law that the corporation shall manage its own affairs separately and exclusively. By way of exception, the SEC allows a corporation to be a partner if the following conditions are present: 1) The authority to enter into a partnership relation is expressly conferred by the charter or Articles of Incorporation of the corporation, and the nature of the business venture to be undertaken by the partnership is in line with the business authorized by the charter or articles of incorporation of the corporation involved 2) The partnership must be a limited partnership and the corporation must be a limited partner 3) If it is a foreign corporation, it must obtain a license to transact business in the country A corporation can enter into a joint venture agreement The general rule is that a corporation may not ordinarily be bound by a contract of gu arantee or surety for the benefit of third persons. However, such guaranty may be given in the accomplishment of any object for which the corporation was created, or when the particular transaction is reasonably necessary or proper in the conduct of its business Consistently, a corporation cannot act as an accommodation party in a negotiable instrument 17 | P
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o
UNLESS it is engaged in such nature of business (e.g. surety, bonding company, etc)
to extend or shorten corporate term. - A private corporation may extend or shorten its term as stated in the articles of incorporation 1) when approved by a majority vote of the board of directors or trustees and 2) 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. 3) 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 co rporation 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)
2)
Section 37. Power
3)
4)
Limitations on the power: 1) Done during the lifetime of the corporation a. X expiration of term, liquidation or winding up. The corporation is already dissolved, there is nothing more to extend. Remedy if term already expired: Reincorporation. 2) Approved by at least majority of the board a. Entails amendment of the AOI therefore approval by the stockholders representing at least 2/3 of the OCS is required at a meeting b.
3) 4)
5)
6)
corresponding increase in capital stock – board approval suffices 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 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 (of amendment) in duplicate must be a. signed by a majority of the directors of the corporation and b. countersigned by the chairman and the secretary of the stockholders' meeting,
1. 2. 3.
For purposes of such stockholder’s meeting, 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 residences as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally
Must not exceed 50 years at any given time Cannot be done earlier than 5 years or prior to the original or subsequent expiry date unless there are justifiable reasons for an earlier extension as may be determined by the SEC In case of banks, insurance co mpanies, public utilities, the favorable endorsement of the appropriate government agency A copy of the amended articles of incorporation shall be submitted to the SEC for its approval
4. 5.
6. 7.
Appraisal right is available in extension AND shortening of corporate term (see Sec. 81). However, if shortening will result in the corporation’s dissolution, the right is no longer practical.
8.
c. setting forth: That the requirements of this section have been complied with; The amount of the increase or diminution of the capital stock; 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; Any bonded indebtedness to be incurred, created or increased; The actual indebtedness of the corporation on the day of the meeting; Consent of creditors not required The amount of stock represented at the meeting; and The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. (the original articles of incorporation and the amended articles of incorporation with the amendments duly underscored)
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 1) approved by a majority vote of the board of directors and, But when you issue shares from the unissued portion of the capital stock without the
5)
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
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the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation.
1)
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:
3)
6)
(Treasurer’s affidavit required in increase) 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 (of the increase not as increased ) 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:
2)
By increasing (reducing) the number of shares and retaining the par value Increasing (reducing) the par value without changing the number of shares Increasing (reducing) the number of shares and increasing (reducing) the par value
There will be no increase or decrease of capital in case of stock split. In stock split, a share is divided or converted into two or more shares but the amount of the outstanding capital remains the same because the par value is also divided in as many shares Increase in the capital stock of the corporation is necessary when additional funds are required by the operation and the corporation opted to raise funds through additional investments. Additional investment may be infused initially by increasing the subscribed capital. Increase in the subscribed capital need not go through the process provided for under Section 38 and mere approval of the board is sufficient o However, an increase in the authorized capital stock is required if the additional subscription cannot be covered by the original authorized capital or if the original authorized capital is already exhausted See Section 38 for requirements for increase in capital stock
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)
Tools to obtain funds: 1) Increase capital stock 2) Issuance of primary shares (Quorum of BOD’s approval suffices) 3) Loans granted by stockholders to the corporation (creditor-debtor relationship, thus, stockholder can insist on payment and interest) 4) Deposit for future subscription (converted to equity)
What are the requirements for reduction of capital stock? 1) Same requirements except the treasurer’s affidavit 2) The reduction of capital stock must not prejudice creditors Ways of methods allowed by law where properties of the corporation may be distributed back to the stockholders: 1) Dissolution 2) Redemption of redeemable shares 3) Reduction of capital stock
INCUR, CREATE OR INCREASE BONDED INDEBTEDNESS
To incur and to increase requires two board and stockholders’ approvals. You cannot in one approval incur and increase. It cannot be done holistically.
All borrowings are not subject to stockholder’s approval Only in cases of bonded indebtedness – if the obligation is burdened with or encumbered by corporate assets, then there is a need for stockholder’s approval.
INCREASE OR DECREASE IN CAPITAL STOCK
The exercise of the power to increase or decrease the authorized capital stock of the corporation results in the amendment of the articles of incorporation. o This should be distinguished from mere increase of subscribed capital stock or paid-up capital which does not necessarily require amendment of the Articles of Incorporation A corporation may increase its capital stock even though the original authorized capital stocks are not yet fully subscribed
Different situations: 1) Ordinary borrowing – board approval suffices if only against the general credit of the corporation 2) Loan secured by mortgage – SH approval if it includes all or substantially all (See Sec. 40) 3) Obligations in a form of a bond – SH approval not required if not secured by mortgage BUT if registered with SEC and encumbered or secured by the assets of the corporation regardless of volume or magnitude, SH approval is required
What are the ways by which the corporation may increase or decrease its capital stock?
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BONDED INDEBTEDNESS Requires stockholder’s approval
Long term and involve large number of investors Bonded indebtedness is a form of a bond secured by a mortgage or a charge of corporate assets Bonds must be registered with the SEC BONDS Borrowing Bond holder must be paid and is entitled to the payment of interest on the bond regardless of whether or not there is surplus profit
Bond holders are creditors of the corporation; they have no right to participate in the management of the corporation
ORDINARY BORROWING Board approval suffices if the value is against the general credit of the corporation Short term and usually involves one lender Based only on the capacity of the debtor or the borrower of the corporation to pay based on the perception or judgment of the lender without charging the properties SHARES OF STOCK/ DIVIDENDS Equity investment/ Fruits thereof Earns dividends/ Dividends are available only if there are surplus profits Sec. 8, corporation is bound to redeem despite lack of surplus profits so long as it would not result to insolvency Stockholders are risk takers of the corporation; they have the right to participate in the management and to vote
Can a bond be converted into shares? It depends if the bonds are convertible in nature. Unless there is such feature, the bonds are simply loan obligations on the part of the corporation and the owner thereof are not entitled to vote nor to the assets of the corporation upon dissolution (?)
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 1) such right is denied by the articles of incorporation or an amendment thereto: 2) 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 (all listed companies: 10% of the capital stock must be owned by the public); or 3) to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, a. in exchange for property needed for corporate purposes or b. in payment of a previously contracted debt.
This is a limitation on the power to issue shares
Preemptive right – the right of the stockholder to subscribe to all issues or disposition of shares of any class (preferred, treasury, or issuance from increase of capital stock or from original or unissued portion of capital stocks) in proportion to their shareholdings
PREEMPTIVE RIGHT Section 39 The right of the stockholder to subscribe to all issues or disposition of shares of any class by the corporation in proportion to their respective shareholdings
RIGHT OF FIRST REFUSAL Not in the Corporation Code The right of a stockholder to buy the shares of a selling stockholder before they are offered to third parties
before such shares can be offered to third parties Available even if AOI is silent
Not available if AOI, By-Laws, Certificates of Stock is silent
Purpose: To maintain the stockholder’s proportionate influence or interest in the corporation To maintain the relative and proportionate o voting strength and control of existing shareholders. It is aimed to maintain the existing ratio of the shareholder’s interest and voting power in the corporation
A owns 100,000 common shares. Corporation will issue common and preferred shares. Is preemptive right available to both issuances? No. It is available only in common shares because he has no basis in the proportionate sharing of the preferred shares. Remedy: Appraisal right.
SEC Opinion, July 28, 1988: The pre-emptive right is not available when shares are issued in exchange for shares in another corporation if the same is the result of a merger to which the corporation are parties
SEC Opinion, October 9, 1990: The right to subscribe to new issues and disposition may be transferred by the shareholder. Unless there is an express restriction in the Articles of Incorporation, the pre-emptive right is transferable
Preemptive right is not absolute. Cases where pre-emptive right of stockholders does not apply: In addition to Sec. 39, Nos. 1 – 3: 4) Waiver of preemptive right, express or implied. If there’s a period indicated in a board resolution to exercise such right and if not exercised by the stockholder within said period, then it is deemed waived.
Bar Exam Question Seller of property wants to be paid in shares of stock in exchange of property to be purchased by the corporation. Board approved the issuance of shares in exchange of the property. In a stockholders meeting, a proposal to increase capital stock to accommodate shares to be issued in exchange of property was approved by stockholders representing 2/3 of the outstanding capital stock. One stockholder invoked violation of his preemptive right. Will it prosper? Yes. Approval of the stockholders to increase the capital stock is independent to the approval to issue shares in exchange for property.
Section 40. Sale or other disposition of assets. – Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, 1) 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, 20 | P
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o
2)
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. 3) 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 co rporation 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.
2 kinds of sale contemplated in Section 40: 1) Sale, mortgage, pledge or disposition of properties in the ordinary course of business – board approval suffices (quorum) 2) Sale, mortgage, pledge or disposition a. not in the ordinary course of business, or b. of all or substantially all of the assets, or c. of all or substantially all of the business of the corporation – majority of entire board and stockholders representing at least 2/3 of OCS’ approval are required and subject to laws against illegal combination, monopoly or restraint of trade and the Bulk Sales Law. The transferee-corporation of all or substantially all of the assets (or even shares) of the transferor-corporation will not be liable for the debts of said transferor-corporation
However, by way of exception, the transfereecorporation is liable: 1) If there is an express or implied assumption of liabilities; 2) There is a consolidation or merger or a de facto merger ; 3) If the purchase was in fraud of creditors; and 4) If the purchaser becomes a continuation of the seller ACT No. 3952 THE BULK SALES LAW (as amended)
Sec. 2. Sale and transfer in bulk. — Any sale, transfer, mortgage or assignment of a stock of goods, wares, merchandise, provisions, or materials otherwise than in the ordinary course of trade and the regular prosecution of the business of the vendor, mortgagor, transferor, or assignor, or sale, transfer, mortgage or assignment of all, or substantially all, of the business or trade theretofore conducted by the vendor, mortgagor, transferor, or assignor, or of all, or substantially all, of the fixtures and equipment used in and about the business of the vendor, mortgagor, transferor, or assignor, shall be deemed to be a sale and transfer in bulk, in contemplation of this Act: Provided, however, That if such vendor, mortgagor, transferor or assignor, produces and delivers a written waiver of the provisions of this Act from his creditors as shown by verified statements, then, and in that case, the provisions of this section shall not apply.
Under the Bulk Sales Law, it requires: 1) A verified list of creditors under oath given by the seller to the buyer 10 days before the sale, which contains the names, addresses, due dates and amount owing to the creditors. 2) Inventory of goods or properties to be sold, cost price, acquisition price and the amount for which it has been sold 3) The list of inventory and notice filed with the DTI.
Non-compliance – proceeds of the sale are held in trust for the benefit of the creditors. The sale is void with respect to the creditors but not with respect to the buyer and seller. Once the creditor has been paid, the b uyer has the right to reimbursement and damages against the seller.
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 f ollowing cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. 2.
3.
To eliminate fractional shares arising out of stock dividends; 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 To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (a)
Enumeration is NOT EXCLUSIVE
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Other cases: (N.B. URE not required) 4) In case of redeemable shares (Sec. 9) 5) In case of close corporations 6) Dacion en pago or shares conveyed in payment of a debt
According to foreign laws, surplus profit is only required when there is cash out on the part of the corporation in acquiring its own shares
SEC Opinion, October 12, 1992: the power to acquire its own shares is now an express power. However, in order to avoid the dangers that accompany the exercise of this express power, the SEC has always imposed the following conditions on its exercise: 1) The capital of the corporation must not be impaired; 2) A legitimate and proper corporate objective is advanced; 3) The condition of corporate affairs warrants it; and 4) The transaction is designed and carried out in good faith
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 1) 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. 2) 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:
SEC imposes the following requirements: (See Page 242, Philippine Corporate Law Compendium)
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 1) in cash, 2) in property, or 3) in stock to all stockholders on the basis of outstanding stock held by them: Provided,
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)
Board of Directors has the discretion to declare dividends. It should be noted that the decision of the board alone is necessary to declare cash or property dividends o In the case of stock dividends, the decision of the Board is subject to the approval of the stockholders representing at least 2/3 of the Outstanding Capital Stock of the corporation Nevertheless, the directors’ discretion is o maintained even if the dividends to be declared are stock dividends. It is still up to the board to declare stock dividends
Kinds of dividends: 1) Cash – requires board approval only (quorum) 2) Property – considered as cash, thus requires board approval only (e.g., treasury shares) 3) Stocks – taken from the original, unissued portion, or increase of capital stock, thus requires both board and stockholders’ approval
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)
Investment of a corporation in a business which is in line with its primary purpose requires only the approval of the board
Investment of funds includes not only investment of money but also investment of property of the corporation
SEC Opinion, November 9, 1994: Lease of property is included in the term “investment of funds.” However, the
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:
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CASH Approved by the BOD by majority of the quorum
Payable in cash Applied against subscription price
unpaid
There is cash outlay
Determined by the number of outstanding shares
Cannot be revoked once declared. The declaration creates a creditor-debtor relationship If received by a natural, subject to tax; if by corporation, not subject to tax
STOCK Approved by the BOD by majority of the quorum and by the SH representing at least 2/3 of the OCS Payable in shares If there is unpaid subscription, it shall be withheld until full payment of the subscription No cash outlay. Surplus profits is transferred to capital, once reclassified, it is no longer available for dividend distribution Two step process: Declare cash dividends but instead of distributing, the corporation will use it to subscribe to shares at par 9 value May be revoked even after actual declaration but before actual issuance to the SH Not subject to tax whether received by a natural person or a corporation
Basic conditions to enable the corporation to declare dividends: 1) Unrestricted retained earnings (surplus profits) 2) Resolution of the board 3) If stock dividends are declared, there must be resolution of the board with the concurrence of the stockholders representing at least 2/3 of the outstanding capital stock SEC rules provide that the property to be distributed as dividends shall consist only of property which are no longer intended to be used in the operation of the business of the corporation and which are practicable to be distributed as dividends o In addition, the issuance of the property dividends shall not result in an inequitable distribution of property to the stockholders in terms of the book value and market value, if any, of the property distributed
When stock dividends are declared, the earnings are distributed to the stockholders in the form of shares of stock. It involves the conversion of surplus or undivided profits into capital
Dividends cannot be declared out of the capital. The exception is with respect to “wasting assets corporations” which are corporations solely or principally engaged in the exploitation of “wasting assets.” They are allowed to distribute the net proceeds derived from exploitation of their holdings such as mines, oil wells, patents and leaseholds, without allowance or deduction for depletion
9
The trust fund doctrine will be violated if dividends are declared out of capital except only in two instances: (1) liquidating dividends and (2) dividends from investments in Wasting Assets Corporation
If the unissued portion of the capital stock is not enough to accommodate the shares brought about by the stock dividend declaration, the corporation will increase the capital stock to be able to accommodate the issuance of shares
Dividends cannot be declared outside the total subscription of the corporation because it will violate the trust fund doctrine. It can only be taken from the excess of liabilities and total subscription Formula: Assets -Liabilities -Total Subscription Unrestricted Retained Earnings
SEC Opinion, September 23, 1986: Retained earnings mean the accumulated profits realized out of normal and continuous operations of the business after deducting therefrom distribution of stockholders or transfers to capital stock or other accounts.
Unrestricted retained earnings is defined as the undistributed earnings of the corporation which have not been allocated for any managerial, contractual, or legal purposes and which are free for distribution to the stockholders as dividends o Unrestricted means there must be no encumbrance, limitation, restriction in the declaration of dividends
What is included in retained earnings? Kinds of surpluses: 1) Operation/Profit surplus – earned in the course of operation; it can be a basis of dividend declaration 2)
Revaluation (Reappraisal) surplus – if there is an increase in the value of assets. Generally they cannot be declared as dividends because they cannot be considered earnings of the corporation. They are by nature subject to fluctuations Exception: The SEC allows distribution of the portion of the increase in the value of fixed assets as a result of revaluation thereof after the assets are depreciated and the depreciation is charged against the operation provided the following conditions are complied with: 1) The company has sufficient income from the operations from which the depreciation on the appraisal increase is charged; 2) The company has no deficit at the time the depreciation on the reappraisal increase was charged to operations; and 3) Such depreciation on the appraisal increase previously charged to operations is not erased or impaired by subsequent losses, otherwise, only that portion not impaired by subsequent losses is available for dividend
Discussion: If not sold for an amount higher than the acquisition cost, it cannot be a basis for dividend declaration because it is only a paper gain
3)
Paid-in surplus – cannot be declared as dividends because they are part of capital. Paid-in surplus is the difference between the par value and the issued value or selling price of the shares and are not therefore considered profits earned in the conduct of the business of the corporation 23 | P
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Exception: The SEC allows the distribution of paid-in surplus in exceptional cases when the following are present: a. That they be declared only as stock dividends and not as cash dividends; b. Not creditor shall be prejudiced therefrom; and c. There is no resulting impairment of capital
4)
Reduction Surplus – where surplus arises from the reduction of the par value of the issued shares of stocks. They are available for dividend declaration provided the following are met: a. They are declared as stock dividends; b. No creditor is prejudiced; and c. There is no resulting impairment of capital after declaration of dividends
Discussion: It is brought about by the reduction of capital stock. It will be distributed to the stockholders with the consent of the creditors
Who is entitled to dividends? Stockholders are entitled to dividends pro rata based on the total number of shares and not on the amount paid for the shares 1) Stockholders as of the date fixed by the by-laws 2) If the by-laws is silent, fixed by the board 3) If both are silent, whoever is the stockholder of record at the time of declaration (Record date)
SEC Opinion, June 19, 1991, August 6, 1990 & June 5, 1974: A record date is the future date specified in the resolution declaring dividend that the dividend shall be payable to those who are stockholders of record on such specified future date or as of the date of the meeting declaring said dividends.
Even unpaid subscribers are entitled to dividends (see Sections 71 and 72, subject to Section 43)
Can a corporation be compelled by way of mandamus to declare dividends? GR: No because it is discretionary on the part of the corporation
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 twothirds (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)
A management contract is an agreement 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
Section 44 applies to situations where the contract is between two corporations. It does not normally apply to a contract with natural person who will be appointed as manager because the same is covered by general powers of the corporation. The contract with the natural person is more appropriately called employment contract rather than management contract Since partnership and private individuals are not o mentioned in Section 44, any management contract between them shall not be subject to the requirements thereof
Interlocking directors – if 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
Interlocking stockholders - a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than onethird (1/3) of the total outstanding capital stock entitled to vote of the managing corporation
XPN: Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in (not subscribed) capital stock XPN to XPN: Section 43, last paragraph. (3)
Subscription agreement may provide that also nondelinquent stocks may be subject to Section 43.
Section 44. Power to enter into management contract. – No corporation shall conclude a management contract with another corporation unless such contract shall have been 1) approved by the board of directors (quorum) and 2) 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:
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1) 2) 3) 4)
Section 45. Ultra vires acts of corporations. – No corporation under this Code shall possess or exercise any corporate powers except those conferred 1) by this Code or 2) by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (n)
Ultra vires acts are those powers that are not conferred to the corporation by law, by its articles of incorporation and those that are not implied or necessary or incidental to the exercise of the powers so conferred o It is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the powers conferred upon it by law o The concept can also include those acts that may ostensibly be within such powers but are, by general or special laws, either proscribed or declared illegal Discussion: They are not binding or enforceable o against the corporation Discussion: An ultra vires act is not necessarily an o illegal act but an illegal act is necessarily an ultra vires act
ULTRA VIRES ACT Simply an act not consistent with the express, implied or incidental to the express powers of the corporation Can be ratified by estoppel
ILLEGAL ACT An act that is contrary to law, public morals and public policy
Cannot be ratified
Remedy: INJUNCTION to stop the corporation from performing an ultra vires act
Effects of ultra vires acts: 1) A corporation that is engaged in ultra vires business is liable for torts committed by its agents within their authority in the course of that business 2) Where the contract is fully executed on both sides, the contract is effective and will stand as a foundation of rights acquired under it 3) When the contract is executory on one side and has been fully performed in the other, the party who has received benefits from the performance is estopped in claiming that the contract is ultra vires 4) When both contracts are wholly executory on both sides, neither party can maintain an action. The rule is justified since the only injustice that will be caused is loss of prospective profits but the protection of the stockholders may be sufficient ground to enjoin the performance of the act
Discussion: If an act has been performed by one party or both parties then the doctrine of ultra vires will not apply because the other party is now estopped from invoking it. Thus, the doctrine applies only to purely executory contracts. Remedy: Derivative suit in behalf of the corporation to set aside the act
No authority under the by-laws No authority under the board His acts were not ratified by the corporation Doctrine of Apparent Authority
N.B. If any of the following are present, i.e. authority under the by-laws, authority from the board, ratification, apparent authority, the corporation is bound by the act of the officer TITLE V - BY LAWS
Section 46. Adoption of by-laws. – Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation 1) the affirmative vote of the stockholders representing AT LEAST A MAJORITY OF THE OUTSTANDING CAPITAL STOCK, or of at least a majority of the members in case of non-stock corporations, shall be necessary. 2) The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. 3) A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission a. which shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; o in such case, such by-laws shall be approved and signed by all the incorporators and o submitted to the Securities and Exchange Commission, o together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any 1) 2) 3) 4) 5) 6) 7) 8)
bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws,
unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. (20a)
Ultra vires act of an officer of the corporation: 25 | P
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Articles of incorporation – constitution of the corporation By-Laws – the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and of its stockholders or members and directors and officers in relation thereto and among themselves in their relation to it By-laws are relatively permanent and continuing o rules of action adopted by the corporation for its own government and that of the individuals composing it and those having the direction, management and control, in whole or in part, of its affairs and activities
a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members;
3.
Modes of adopting the by-laws of the corporation: 1) Pre-Incorporation. Submit together with the articles of incorporation (all incorporators must sign) thus you get two approvals: a. Certificate of filling of AOI b. Certificate of filling of by-laws 2) Post-Incorporation. Submit to the SEC within 1 month from approval or issuance by the SEC of a certificate of incorporation (must be signed by stockholders representing at least majority of the OCS and certified by majority of the board and the corporate secretary)
4. 5.
Requisites: 1) It must be consistent with the Corporation Code, other pertinent laws and regulations; 2) It must be consistent with the Articles of Incorporation; 3) It must not be contrary to morals or public policy; 4) It must not disturb vested rights, impair contract or property rights of stockholders or members or create obligations not sanctioned by law
The best manner or mode of giving notice is by publication (Affidavit of publisher as proof of compliance)
The manner of election or appointment and the term of office of all officers other than directors or trustees;
8.
The basic qualifications are spelled out in Section 23
The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof;
7.
Exclude the non-voting shares in determining the majority of the outstanding capital stock Quorum is determined not by the number of persons present but by the number of shares represented
The form for proxies of stockholders and members and the manner of voting them; The qualifications, duties and compensation of directors or trustees, officers and employees;
6.
Why is there no “place”? Because Section 51 provides the place: In the city or municipality where the principal office is located or in the latter if practicable
The required quorum in meetings of stockholders or members and the manner of voting therein;
If the corporation fails to submit the by-laws within one month from incorporation, it does not result in the automatic dissolution of the corporation. At the very least, it is a de facto corporation.
The provisions of the by-laws are binding not only upon the corporation but also on its stockholders, members and those having direction, management and control of its affairs However, the provisions of the by-laws are not o binding on subordinate employees having no actual knowledge of the provisions thereof As to third persons, the by-laws provisions are o also not binding unless there is actual knowledge
the articles of incorporation,
Important to include the qualifications, duties and term of office of officers other than the directors because it will determine which committee has jurisdiction in case of issues surrounding the appointment, removal or termination (RTC or Labor Court?)
The penalties for violation of the by-laws;
Must be consistent with the law
9.
In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. (21a)
By-laws must contain the corporate seal of the corporation. It must also contain the principal place of corporation
Section 48. Amendments to by-laws. – 1)
A provision in the by-laws that the corporation has a first lien on the share for the unpaid dues and assessments is not complete unless complemented by an accessory contract like a pledge or chattel mortgage agreement where the shares will stand as security for the payment of the dues and assessment. ( Carag v. Valle Verde Golf and Country Club )
Section 47. Contents of by-laws. – Subject to the provisions of the Constitution, this Code, other special laws, and
The board of directors or trustees, by a majority vote thereof, 2) 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, 3) 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: 26 | P
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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 o whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting.
Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, o shall be filed with the Securities and Exchange Commission the o same to be attached to the original articles of incorporation and original by-laws.
prior to the meeting, unless a different period is required by the by-laws. 2)
Special meetings of stockholders or members shall be a. held at any time deemed necessary or as provided in the by-laws: b. Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission, 1) upon petition of a stockholder or member 2) on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws.
The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. (22a and 23a)
The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have chosen one of their number as presiding officer. ( 24, 26)
Section 51. Place and time of meetings of stockholders of
How do you amend the by-laws of the corporation? 1) Approval of the board of directors by a majority vote AND stockholders representing at least majority of the outstanding capital stock may amend 2) Approval of stockholders representing at least 2/3 of the outstanding capital stock delegating to the board the power to amend a. May be revoked by stockholders representing a majority of the outstanding capital stock Discussion: Open issue: According to the SEC, delegation must be contained in a separate stockholders’ resolution. According to Dean Divina, a separate stockholders’ resolution is not necessary because the by-laws is more compelling and more persuasive than a stockholders’ resolution. By-laws are more permanent TITLE VI – MEETINGS
Section 49. Kinds of meetings. - Meetings o f directors, trustees, stockholders, or members may be 1) regular or 2) special. (n)
Section 50. Regular and special meetings of stockholders or members. – 1) Regular meetings of stockholders or members shall be a. held annually i. on a date fixed in the by-laws, or ii. if not so fixed, on any date (SEC: must be specific) in April of every year as determined by the board of directors or trustees: b. Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks
members. – Stockholder's or member's meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. (SEC, 2004 regulation)
Notice of meetings shall be in writing, and the time and place thereof stated therein. 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. (24 and 25)
Section 52. Quorum in meetings. – Unless otherwise provided for 1) in this Code or 2) in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations. (n)
Section 53. Regular and special meetings of directors or trustees. – 1) Regular meetings of the board of directors or trustees of every corporation shall be a. held monthly, unless the by-laws provide otherwise.
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2)
Special meetings of the board of directors or trustees may be a. held at any time upon the call of the president or as provided in the by-laws.
The pledgor or mortgagor does not part with the ownership of the shares, they are just encumbered; unless the pledge or mortgage agreement provides otherwise
Is the corporation bound by the agreement? If it is registered, all that the pledgee/mortgagee has to do is to give a copy of the agreement to the corporate secretary
If approved by the court, an executor or administrator may attend and vote
Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide o therwise. Notice of regular or special meetings (need not be in writing unless the by-laws provides otherwise) 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)
The quorum is the same even if there is a vacancy in the board. If the required quorum cannot be satisfied because of the vacancy, the remedy is for the stockholders to fill the vacancy
How often Purpose Where
When convened
Notice
Stockholders meeting Regular Special Once a year Anytime
Voting the directors in the city or municipality where the principal office of the corporation is located; and if practicable in the principal office of the corporation On the date Any date stated in the by-laws; if silent any day of April 2 weeks 1 week
Board meeting Regular Special Once a Anytime month
Anywhere
1 day
Anywhere
Section 56. Voting in case of joint ownership of stock. – In case of shares of stock owned jointly by two or more persons, in order to vote the same, the consent of all the co-owners shall be necessary, unless there is a written proxy, o signed by all the co-owners, o authorizing one or some of them or any other person to vote such share or shares: Provided, That when the shares are owned in an "and/or" capacity by the holders thereof, any one of the joint owners can vote said shares or appoint a proxy therefor. (n)
“AND” – both or all of them must consent, unless one is authorized by the other(s) “AND/OR” – one of them can vote “OR” – then with more reason one of them can vote
Requisites for a valid meeting: 1) Proper notice must be given to the stockholders or to the board as the case may be a. Given in accordance with the requirements of the by-laws b. Issued, called, and presided by the one specified in the by-laws c. Must contain the date, time and place 2) There must be a quorum a. SH: stockholders representing a majority of the outstanding capital stock unless the law or by-laws provide otherwise b. BOD: majority of the number of directors as fixed in the AOI unless the law or by-laws provide otherwise c. Proxy voting is allowed in stockholders meeting but never in board meeting
Can a representative of the director attend, but without the right to vote? No, only board of directors can attend the directors’ meeting. However, if the board of directors meets because they are hostile directors, then you need to get approval from the board. So the board has authorized you to assist the board during deliberation (?)
Once the corporate secretary has certified that there is a quorum, it continues all throughout the proceedings. So if some stockholders walked out and some stockholders are still present, the meeting can continue. Remedy: Motion to adjourn. It takes precedence over all other motions, except motion to declare you out of order.
1 day
Why April? Because by that time, the corporation shall have known already the results of its corporation or the audited financial statements
Section 54. Who shall preside at meetings. – The president (in practice: Chairman) shall preside at all meetings of the directors or trustee as well as of the stockholders or members, unless the by-laws provide otherwise. (n)
Section 55. Right to vote of pledgors, mortgagors, and administrators. – In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor 1) shall have the right to attend and vote at meetings of stockholders, 2) unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. (n)
Executors, administrators, receivers, and other legal representatives duly appointed by the court 1) may attend and vote in behalf of the stockholders or members 2) without need of any written proxy. (27a)
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Section 57. Voting right for treasury shares. - Treasury shares
SEC Opinion, September 9, 1991: The power to appoint a proxy is purely personal. The right to vote is inseparable from the right of ownership of stock. Therefore, to be valid, a proxy must have been given by the person who is the legal owner of the stock and is entitled to vote
Discussion: Can a proxy appoint a proxy (sub-proxy)? Yes, unless otherwise prohibited by the proxy form
SEC Opinion, September 8, 1995: The by-laws may impose restrictions as to the person who can be proxies and the manner of voting them. In the absence of such provision, anybody can be appointed as proxy without limitation as to the number of members to be represented o SEC Opinion, March 12, 2002: A proxy can be given to two or more persons jointly o SEC Opinion, October 28, 1991: When two or more persons are given separate proxies but they are not intended to be joint proxies, the giving of the last proxy is to be deemed a revocation of all former proxies
A proxy is governed by the law on agency. Thus, death of the stockholder terminates the proxy (instrument)
When does SEC/RTC acquire jurisdiction when it comes to violation of proxies? If it involves an election contest or intra-corporate dispute, it is the RTC that has jurisdiction. When it deals with administrative supervision, it i s the SEC
Discussion: Cease and Desist Order 1) Can it be issued ex parte? Yes 2) Can it be signed by only one commissioner? No, the law requires that at least majority of the members of the SEC commission must sign
shall have no voting right as long as such shares remain in the Treasury. (n)
Treasury shares are not part of the outstanding capital
But once they are resold by the corporation, they become outstanding again and, thus, can vote
Section 58. Proxies. - Stockholders and members may vote 1) in person or 2) by proxy in all meetings of stockholders or members. Proxies shall 1) in writing, 2) signed by the stockholder or member and 3) 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)
The right to vote at a stockholder’s meeting depends upon the ownership of the stock as disclosed by the stock and transfer book of the corporation and a registered stockholder must be allowed to vote irrespective of any question of bona fides o Importance: Proxy is a way by which a stockholder may participate and exercise the right of management even though he may not be physically present during the stockholders meeting
Proxy refers either to the instrument evidencing the authority to vote or it may refer to the proxy holder
Formalities of a proxy under the law: 1) In writing 2) Signed by the stockholder 3) Filed with the corporate secretary before the meeting 4) If it is a specific proxy, it is valid only for the meeting intended a. If it is general and continuing in nature, it may be extended but not to exceed 5 years
It need not be notarized. Documentary stamp need not be affixed, although it will not be admissible in evidence SRC: A proxy statement must be submitted with o the SEC
The corporation has to fix a period to validate proxies. So that the aggrieved party can take the appropriate remedy in case the proxy forms are rejected o For public companies, the SEC requires that the proxy forms be submitted at least five days before the stockholders meeting. The by-laws may provide for a longer period but not shorter
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 1) the right to vote 2) and other rights pertaining to the shares 3) 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 1) may be for a period exceeding five (5) years 2) but shall automatically expire upon full payment of the loan. A voting trust agreement must be 1) in writing and 2) notarized, and 3) shall specify the terms and conditions thereof. 4) 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.
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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)
As to form
As to period
As regards title conveyed
As to rights acquired
As to law governing it Effect of presence of SH
PROXY In writing, signed by the stockholder, and filed with the corporate secretary Valid only for the meeting intended, unless it is general and continuing in nature but not to exceed 5 years
No legal title is transferred to the proxy holder, thus, he has no right to vote and be voted Only the right to vote
Law on Agency Proxy loses authority
VTA In writing, notarized, and filed with the corporate secretary and the SEC Valid for all meetings but not to exceed 5 years, unless it is made pursuant to a loan agreement in which case the VTA is coterminus with the loan Legal title is transferred, thus, he is qualified to be elected as director
Once the VTA expires, the shares issued to the trustee will be cancelled and a new one issued again in favor of the stockholder-trustor TITLE VII - STOCKS AND STOCKHOLDERS
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)
A person may become a stockholder in a corporation by acquiring a share. Acquisition of the share can be by (1) purchase or (2) through subscription. Purchase may be from the corporation itself or from the shareholders
SUBSCRIPTION Not governed by the Statute of Frauds
Applies to corporation to be formed or already in existence Subscriber acquires and can exercise all the rights pertaining to his shares even though not fully paid Corporate creditor can enforce payment of the subscription if the assets of the corporation are not enough, even though they have no privity of contract
PURCHASE Governed by the Statute of Frauds, thus, must be in writing if the amount is in excess of P500, otherwise, it is unenforceable Limited to acquisition of shares of a corporation already formed Buyer cannot exercise all the rights pertaining to the shares unless he as complied with the terms and conditions of the purchase Corporate creditors cannot enforce payment on the purchase price because there is no privity of contract
Treasury shares, being existing shares, are purchased not subscribed
A subscriber cannot be released from his obligation to pay the balance of the subscription – as it will violate the trust fund doctrine XPN: if all the stockholders consent & no o creditors prejudiced
The Trust Fund Doctrine is violated in the following instances: 1) When the corporation releases or condones payment of the unpaid subscription and the stockholder has no right to demand the refund of his investment; 2) When there is payment of dividends without unrestricted retained earnings; 3) When properties are transferred in fraud of creditors; and 4) When properties are disposed or undue preference is given to some creditors even if the corporation is insolvent
With respect to subscribed capital, the same can be increased by the corporation 1) By issuing the remaining balance of the authorized capital stock or
Not only the right to vote but also all other rights pertaining to the shares (e.g. to inspect, to obtain copies, etc) Law on Trust and Corporation Code Presence does not revoke authority
The stockholder has beneficial title while the trustee has legal title
Who has the right to receive dividends? Stockholder, unless otherwise stipulated under the terms of the VTA The stockholder gets a voting trust certificate from the trustee, while the latter gets the stock certificate. Both can be assigned
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2)
By increasing the authorized capital stock which necessarily involves additional subscription
In both cases, additional capital in the form of shareholder’s investments is likewise infused to the corporation through postincorporation subscription. It should be noted in this connection that issuance of shares out of the unsubscribed shares of the authorized capital stock does not need stockholder’s approval. What is necessary is only a resolution of the Board of Directors approving the same
What are the rights of a stockholder? 1) Proprietary a. To receive dividends (43) b. To approve stock dividends (43) c. Appraisal right (81) d. To assets in case of dissolution and liquidation (122) 2) Management a. To vote on certain corporate acts (84) 3) Remedial a. Preemptive right (39) b. Issuance of stock certificates (63, 64) c. To inspect (74) d. To obtain copies of the financial statements (75) e. To file a derivative suit (not in the Code) Requisites of a derivative suit (must be alleged) 1) Can only be filed by a stockholder a. Must be a stockholder at the time the cause of action accrued b. Usually filed the minority because the majority refuses to take action 2) Must be suing in behalf of the corporation a. Cause of action must not be personal to the stockholder (e.g. violation of preemptive right, issuance of stock certificate) 3) Must exhaust all administrative and intracorporate remedies except if the ones who are guilty are the BOD themselves, in which the requirement of exhaustion may be waived 4) Appraisal right is not available
Must be filed with the RTC in the city where the principal office is located. CASE: The action for annulment of mortgage is only incidental to the principal cause of action filed which is the derivative suit, thus, it must be initiated in the city where the principal office is located not in the city where the property is situated. (High Yield Realty v. CA) N.B. Approval of the board is not necessary; otherwise, it will defeat the purpose of such suit
Section 61. Pre-incorporation subscription. – A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, 1) unless all of the other subscribers consent to the revocation, or 2) unless the incorporation of said corporation fails to materialize within said period or
within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission. (n)
If the corporation did not materialize, the treasurer must remit or return everything to the subscribers otherwise, he is liable for estafa
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: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors , subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fi xed 1) in the articles of incorporation or 2) by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or 3) 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)
Actual cash paid to the corporation
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 Initial valuation determined by the o incorporators or by the board o Subject to the approval of the SEC. Reason: To insure non-issuance of watered shares. 31 | P
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present because there is, in the first place, no promise or order to pay money. However, it has been said that stock certificates are quasi-negotiable because they can be transferred by indorsement coupled with delivery
Labor performed for or services actually rendered to the corporation
Case: See Nielson v Lepanto (not subject to preemptive right)
Previously incurred indebtedness of the corporation;
SHARES OF STOCK Intangible property
Amounts transferred from unrestricted retained earnings to stated capital (stock dividends)
Outstanding shares exchanged for stocks in the event of reclassification or conversion
SITUATION: A contract where the subscription will be paid by the dividends declared. Valid? Contract is valid but condition is void because dividends may or may not be declared.
Compare with: Transfer of shares, fully paid and evidenced with a stock certificate? Endorsement by the stockholder, delivery to the transferee, payment of taxes and recording in the books – consent of the corporation no longer necessary
Section 63. Certificate of stock and transfer of shares. –
Shares of stock so issued are personal property and may be transferred (requisites) 1) by delivery of the certificate or certificates 2) indorsed by a. the owner or b. his attorney-in-fact or c. other person legally authorized to make the transfer. 3) No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing a. the names of the parties to the transaction, b. the date of the transfer, c. the number of the certificate or certificates and d. the number of shares transferred. N.B. If not recorded, not binding against the corporation. Also, taxes must also be paid before the recording of such transfer otherwise, the corporate secretary may go to jail by virtue of Revenue Regulation 2-82.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. (35)
Stock certificates are non-negotiable instruments under the Negotiable Instruments Law. The requirements of Section 1 of the Negotiable Instruments Law are not
How do you sell shares, not yet fully paid and not evidenced by a stock certificate? Deed of assignment – consent of the corporation is required because it will result to novation (change in the person of the debtor) (?) There must be a special power of attorney executed by the registered owner of the share authorizing the transferee to demand the transfer in the stock and transfer books. It is believed however that this authority may be included in the deed of assignment or document of transfer itself
SEC: If the corporation is insolvent or is in imminent danger of insolvency, 25% of the subscription must be paid Distinguish with the 25%-25% requirement upon incorporation (the authorized capital stock, subscribed and paid up) or increase in capital stock (the increase, subscribed and paid up)
The capital stock of stock corporations shall be divided into shares for which certificates 1) signed by the president or vice president, 2) countersigned by the secretary or assistant secretary, and 3) sealed with the seal of the corporation shall be 4) issued in accordance with the by-laws. a. If paid in full
STOCK CERTIFICATE Evidence of ownership of the shares
See also Sec. 98 – the corporation cannot impose a condition more onerous than the right of first refusal
If the requirements under Section 63 with respect to transfers of shares are not complied with, the corporation is not bound to recognize the right of the buyer. The buyer-transferee has no right or standing in so far as the corporation is concerned. Only XPN: If under the circumstances, it is o considered endorsed by reason of equitable considerations. (Tan v. CA)
If there is no indorsement in favor of the transferee, the transferee may file an action to compel the transferor to make such indorsement. However, the same cannot be considered as an intra-corporate controversy because the transferee is not yet a shareholder ( Aquilino Rivera v. Hon. Florendo, 144 SCRA 643, 657)
Who can file a petition for mandamus if the requirements are not complied with? The seller-transferor, unless the buyer-transferee is authorized by the former to cause the transfer of shares in the latter’s name in the books of the corporation
See GARCIA v ____
UNPAID CLAIM – refers to unpaid subscription and not to any other obligation by the stockholder to the corporation The provisions in the by-laws are not binding against third persons because by-laws are binding only against stockholders except when the third person has actual knowledge of the contents thereof For shares to be considered as security for the o payment of an obligation, there must be an 32 | P
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o
actual chattel mortgage or pledge agreement, not just a provision in the by-laws authorizing the corporation to sell the shares for nonpayment of dues and assessments (CLEMENTE v CA & CHINABANK v CA & CARAG v VALLEY GOLF)
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. o If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. (37)
Section 64. Issuance of stock certificates. – No certificate of stock shall be issued to a subscriber 1) until the full amount of his subscription 2) together with interest and expenses (in case of delinquent shares), if any is due, has been paid. (37)
Requisites for the issuance of the stock certificate 1) The certificate must be signed by the president or vice president, countersigned by the secretary or assistant secretary; 2) The certificate must be sealed with the seal of the corporation; 3) The certificate must be delivered; 4) The par value, as to par value shares or full subscription as to no par value shares must first be fully paid; and 5) The original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from a stockholder Can the corporation issue stock certificates even if the subscription price is not fully paid? Is the requirement waivable? Yes. The provision is for the benefit of the corporation, not for the stockholder, thus, the former can waive it.
Section 65. Liability of directors for watered stocks. – Any director or officer of a corporation 1) consenting to the issuance of stocks a. for a consideration less than its par ( for par ) or issued value ( for no-par )or b. for a consideration in any form other than cash, valued in excess of its fair value, 2) or who, having knowledge thereof, does not forthwith express his objection a. in writing and b. file the same with the cor porate 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)
The issued price of no-par value shares may be fixed 1) in the articles of incorporation or 2) by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or 3) 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. (Section 62) N.B. See Sec. 6, it must not be less than P5.00
Section 66. Interest on unpaid subscriptions. –
Section 67. Payment of balance of subscription. – Subject to the provisions of the contract of subscription, the board of directors of any stock corporation o may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and o may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. 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, o unless a different rate of interest is provided in the by-laws, o 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 o shall thereupon become delinquent o and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. (38)
Section 68. Delinquency sale. – The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state 1) the amount due on each subscription plus all accrued interest, and 2) 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, 1) shall be sent to every delinquent stockholder either personally or by registered mail. 2) 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, 33 | P
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costs of advertisement and expenses of sale, or unless the board of directors otherwise orders,
o
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 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)
The steps to be taken in a delinquency sale may be outlined in this wise: 1) Resolution. The board of directors shall issue resolution ordering the sale of delinquent stock; 2) Notice. Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail; 3) Publication. The notice shall furthermore be published once a week for two consecutive weeks in a newspaper of general circulation in the province or city where the principal officer of the corporation is located; 4) Sale. The delinquent stock shall be sold at public auction to be held not less than 30 days nor more than 60 days from the date the stocks become delinquent; 5) Transfer . The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor; and 6) Credit of Remainder . 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 the same Remedies of the corporation to enforce payment of the subscription Extrajudicial – to cause the sale of the o delinquent shares based on the procedures and formalities provided
Judicial – file an action for collection to recover the subscription
Due date o
o
o
The date indicated in the contract of subscription OR Call on the part of the directors, if there is no due date specified An exception to the rule that a call is necessary to make the unpaid subscription price due and payable is in case of insolvency (Velasco v. Poizat , 37 Phil. 802)
A corporation cannot deduct from any amount due to an employee, the latter’s unpaid subscription of shares. There can be no set-off if there is no notice or call for the payment of unpaid subscription. In the absence of a notice or call for payment, the subscription price is not demandable (APOCADA V NLRC)
Non-payment of the subscription price on the due date does not make the shares delinquent o It becomes delinquent if payment has not been made within the 30-day grace period o The entire subscription becomes delinquent because the contract of subscription is indivisible
If the shares become delinquent, the BOD will pass a resolution to order the sale of the delinquent shares which should be not earlier than 30 days but not more than 60 days from delinquency date o Notice will be given to the stockholder Published for once a week for two consecutive o weeks in a newspaper of general circulation
In the sale of delinquent shares, the winning bidder offers the full amount of subscription for the smallest number of shares or fraction of a share o The bid price is the full amount of the balance on the subscription + accrued interest + cost of advertisement and expenses of sale o The shares so bidded shall be issued in favor of the winning bidder and the remaining shares, if any, shall be credited in favor of the erstwhile delinquent stockholder
If there is no participant in the bidding, the corporation can bid and acquire the shares if the corporation has surplus profit The shares so acquired will be considered o treasury shares and will be disposed of again upon the approval of the board
From the day of subscription up to the day before delinquency sale, all the rights may be exercised
From delinquency date until the auction sale, all rights are suspended except the right to receive dividends in accordance with law o If cash dividends are declared, it should be applied against the unpaid subscription o If stock dividends are declared, it shall be withheld until full payment of the subscription
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The delinquent stockholder may actually stop the delinquent sale if he 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. Payment made by the delinquent shareholder automatically stops the sale However, the sale may also be stayed upon the o order of the board of directors 2 kinds of INTEREST contemplated: Moratory – interest from the subscription date o Under Section 66 There must be a stipulation If the rate is silent, it is the legal rate (6%) Compensatory – interest from the delinquency o date Under Sections 67 & 68 By reason of default, thus due with or without a stipulation
Section 69. When sale may be questioned. – No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect 1) in the notice of sale, or 2) n the sale itself of the delinquent stock, unless 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 sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a complaint within six (6) months from the date of sale. (47a)
The 6-month period does not apply to sale of shares of a non-stock corporation. The period will be base on the grounds provided for in the By-Laws (?)
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 o the amount due on any unpaid subscription, o with accrued interest, costs and o o expenses. (49a)
Section 71. Effect of delinquency. – No delinquent stock shall 1) be voted for or 2) be entitled to vote or 3) to representation at any stockholder's meeting, nor shall the holder thereof be entitled 4) to any of the rights of a stockholder a. 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)
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)
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, a. the circumstances as to how the certificate was lost, stolen or destroyed, b. the number of shares represented by such certificate, c. the serial number of the certificate and d. 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 a. 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 b. at the expense of the registered owner of the certificate of stock which has been lost, stolen or destroyed. c. The notice shall state i. the name of said corporation, ii. the name of the registered owner and iii. the serial number of said certificate, and iv. the number of shares represented by such certificate, and d. 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, i. the right to make such contest shall be barred and ii. 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, a. effective for a period of one (1) year, b. for such amount and c. in such form and d. with such sureties as may be satisfactory to the board of directors, 35 | P
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in which case a new certificate may be issued even before the expiration of the one (1) year period provided herein: e. 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, i. 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 1. fraud, 2. bad faith, or 3. 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 procedure under Section 73 may be summarized in this wise: 1) Affidavit . The registered owner shall execute a nd file an affidavit regarding the share and the circumstances regarding its loss; 2) Verification. The corporation shall verify the affidavit and other information and evidence with the books of the corporation; 3) Publication. The 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; 4) One Year Waiting Period . There shall be a waiting period of 1 year from the date of the last publication during which a contest can be interposed; 5) Contest . 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; and 6) Replacement . If there is no contest within the 1 year period, the corporation shall then replace the certificate. The replacement of shares can only be made before the expiration of the 1 year period if a bond is posted If there is a claim within the 1 year period o The issuance of the replacement should be deemed suspended and o The corporation may file an action for interpleader to compel two conflicting claimants
to litigate and prove who has the better right over the shares
If the claim is presented only after the expiration of the 1 year period and a replacement was already issued Insofar as the corporation is concerned, it is not o liable for the issuance of replacement if made after the expiration of the 1 year period and if there is no fraud, bad faith or negligence on its part The stockholder who misrepresented shall be o the one liable – estafa
Who has better rights? (see Marx Notes for Dean’s example) o If the pledge or mortgage on the original certificate is not in a public instrument, then the transferee of the replacement stock certificate has a better right because such certificate should be given same faith and credit as the original stock certificate o If the pledge or mortgage on the original certificate is in a public instrument which binds the whole world, then the transferee of the original stock certificate has a better right TITLE VIII - CORPORATE BOOKS AND RECORDS
Section 74. Books to be kept; stock transfer agent . – Every corporation shall keep and carefully preserve at its principal office 1. a record of all business transactions and 2. minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail a. the time and place of holding the meeting, b. how authorized, c. the notice given, d. whether the meeting was regular or special, if special i. its object, ii. those present and absent, and iii. every act done or ordered done at the meeting. e. Upon the demand of any director, trustee, stockholder or member, i. the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and f. on a similar demand, i. the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. ii. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. 36 | P
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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 1) for damages, and 2) in addition, shall be guilty of an o ffense 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 1) 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 2) or was not acting a. in good faith b. 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 1) all stocks in the names of the stockholders alphabetically arranged; 2) the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; 3) a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and 4) 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 o at reasonable hours on business days. o 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, o 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 o provided, shall be applicable. (51a and 32a; P.B. No. 268.)
“Record of all business transactions and minutes of all meeting” – is there a retention period? None in the Philippines
The minutes have persuasive effect once certified by the corporate secretary. It is prima facie proof of what transpired during the meeting. (not conclusive)
PEOPLE v DUMLAO
Under Section 63, the transfers must be recorded in the “books” of the corporation to make the transfer binding to the corporation. The book referred to is the Stock and Transfer Book o Conveyances or transfers such as sale, donation, and succession must be recorded Note: Pledge and chattel mortgage are not o transfers, not conveyances, therefore not required to be recorded in the books of the corporation
Right to inspection; Limitations: 1) Must be exercised any time during reasonable hours on business day 2) Must be exercised in a manner or in the procedure provided for by the by-laws a. Provided it is not tantamount to a denial of the right to inspection 3) Must not extend to trade secrets 4) Must be exercised for a purpose germane to his interest as a stockholder 5) May be denied if the stockholder improperly used the information secured in the previous examination or examination was made in bad faith 6) Subject to special laws
SEC has “visitorial rights” – right to inspect books and documents of a corporation (regulatory power)
Liability for refusal to allow inspection – damages and penalty provided for under Section 144 (criminal offense) o Corporate secretary, officer or agent o BOD who voted for the adoption a board resolution disallowing such right
File a petition for declaratory relief to pre-empt the filing of a criminal complaint for violation of Section 74
Section 75. Right to financial statements. – 1)
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 37 | P
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a) b)
2)
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 a. assets and b. liabilities and c. 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 o 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 a) treasurer b) or any responsible officer of the corporation. (n)
2. 3.
4.
Section 77. Stockholder's or member's approval. – 1)
2)
3)
Read CASE OUTLINE in Marx, pages 120-124 TITLE IX - MERGER AND CONSOLIDATION
A buyer does not assume the obligations of the seller unless: 1) The buyer is a continuation of the personality of the seller 2) The legal personality is supposed to be pierced 3) In cases of merger 4) In cases of consolidation Merger is one where a corporation absorbs another corporation and remains in existence while the other is dissolved Although there is dissolution of the absorbed o corporations, there is no winding up of their affairs or liquidation of their assets because the surviving corporation automatically acquires all their rights, privileges and powers as well as their liabilities. Upon the effectivity date, the merged or absorbed corporation ceases to exist and its rights, privileges, properties as well as liabilities pass on to the surviving corporation (ASSOCIATED BANK V CA) Consolidation is one where a new corporation is created, and consolidating corporations are extinguished
Section 76. Plan or merger of consolidation. – 1)
2)
Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation .
The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: 1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations;
The terms of the merger or consolidation and the mode of carrying the same into effect; A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. (n)
4)
Upon approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation, the same shall be submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose. Notice of such meetings shall be given to all stockholders or members of the respective corporations, at least two (2) weeks prior to the date of the meeting, either personally or by registered mail. a. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for the approval of such plan. a. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code: b. Provided, That if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made, provided such amendment is 1) approved by majority vote of the respective boards of directors or trustees of all the constituent corporations and 2) ratified by the affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the c onstituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation. (n)
Section 78. Articles of merger or consolidation. – After the approval by the stockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president o and o certified by the secretary or assistant secretary of each corporation setting forth: 38 | P
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1. 2.
3.
The plan of the merger or the plan of consolidation; As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members; and As to each corporation, the number of shares or members voting for and against such plan, respectively. (n)
a.
4) 5)
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. 1)
2)
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, a. it shall issue a certificate of merger or of consolidation, at which time the merger or consolidation shall be effective. 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, a. it shall set a hearing to give the corporations concerned the opportunity to be heard. b. 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. c. The Commission shall thereafter proceed as provided in this Code. (n)
PROCEDURE: 1) Preparation (not in the Corporation Code) of plan of merger or consolidation. Contents of the plan: a. Names of the constituent corporations b. Terms of merger or consolidation and mode of carrying the same into effect i. Who will be the surviving corporation? ii. Exchange & Swap Ratio c. In case of merger, statement of the changes in the articles of incorporation of the surviving corporation; and, in case of consolidation, all the statements required to be set forth in the articles of incorporation d. Other matters 2) Submission of the plan for approval by majority vote of each of the board of directors or trustees a. of each constituent corporations b. in separate meetings 3) Notice to stockholders
6)
7)
8)
at least two (2) weeks prior to the date of the meeting, either personally or by registered mail b. stating the purpose of the meeting c. include a copy or a summary of the plan Affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock Execution of the Articles of Merger or Consolidation by each of the constituent corporations a. be signed by their respective presidents or vice-presidents and b. certified by their respective secretary or assistant secretary c. See Section 78 for contents Amendment to the plan of merger or consolidation may still be made before filing with the SEC provided a. approved by majority vote of the respective boards of directors of all the constituent corporations and b. ratified by the affirmative vote of stockholders representing at least twothirds (2/3) of the outstanding capital stock of each of the constituent corporations In the cases of special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained Issuance of a certificate of merger or of consolidation if not inconsistent with the provisions of this Code and existing laws a. If contrary to or inconsistent, SEC will set a hearing to give the corporations concerned the opportunity to be heard
CASE: 2010 Decision: In cases of special corporations governed by special laws, like Banks, the effectivity of the merger or consolidation commences upon the approval of the SEC not upon approval of the BSP.
Section 80. Effects of merger or consolidation. – The merger or consolidation shall have the following effects: 1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; 2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code; 4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation WITHOUT FURTHER ACT OR DEED; and 39 | P
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5.
The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation.
The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation. (n)
The surviving corporation is bound to honor the Collective Bargaining Agreement of the absorbed corporation. o This means that there will be 2 CBAs
CASE: BPI DAVAO UNION v. BPI, 2010: Human beings are not corporate assets. The law refers to property rights. Therefore, the surviving corporation is not bound to absorb the employees of the absorbed corporation.
Novation is not a valid defense because it is settled that in the merger or consolidation of two existing corporations, one of the corporations survives and continues the business, while the other corporation is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation Consent of creditors not necessary because they are protected by express provision of law. See last paragraph of Section 80
CASE: ASSOCIATED BANK v CA: Receivables, during or after execution of the merger or effectivity thereof, are deemed acquired by the surviving corporation. The law refers to all assets and liabilities without qualifications
Transfers of property from the absorbed corporation to the surviving corporation are not subject to tax.
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 o 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 o certificates of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, o 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, o one of whom shall be named by the stockholder, o another by the corporation, o 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)
TITLE X - APPRAISAL RIGHT
Appraisal right is the right of the stockholder to demand payment of the fair value of his share after dissenting from a proposed corporate act involving fundamental changes in the corporation in the case specified by law Statutory right o o Proprietary right of a stockholder Limited by law o
REQUISITES: 1) The right can only be exercise in the cases provided by law a. Section 81 b. Section 42, investment of corporate funds in another business or secondary purpose c. Section 105, in a close corporation, for any reason 2) The stockholder must have been present during the stockholders’ meeting and he must dissent to the proposed corporate act 3) Written demand within thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares
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: 1. In case any amendment to the articles of incorporation has the effect a. of changing or restricting the rights of any stockholder or class of shares, or b. of authorizing preferences in any respect superior to those of outstanding shares of any class, or c. of extending or shortening the term of corporate existence; 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition a. of all or substantially all of the corporate property and assets as provided in the Code; and (See test under Section 40) 3. In case of merger or consolidation. (n)
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a.
4)
5) 6)
7)
The fair value thereof as of the day prior to the date on which the vote was taken i. excluding any appreciation or depreciation in anticipation of such corporate action b. If the withdrawing stockholder and the corporation cannot agree within a period of sixty (60) days from the date the corporate action was approved by the stockholders, i. Fair value is determined and appraised by three (3) disinterested persons (appraiser) ii. The award shall be paid by the corporation within thirty (30) days after such award is made Submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares within ten (10) days after demand The corporation has unrestricted retained earnings in its books to cover such payment Upon payment by the corporation of the agreed or awarded price, the stockholder shall fo rthwith transfer his shares to the corporation (shares shall become treasury shares) Implementation of the proposed corporate act
b.
disapproved by the Securities and Exchange Commission where such approval is necessary, 3) 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)
Corporate actions where approval of SEC is necessary 1) In case any amendment to the articles of incorporation… 2) In case of merger or consolidation
Corporate actions where approval of SEC is not necessary 1) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition… 2) Investment of corporate funds in another business or secondary purpose
A transferee cannot demand the payment of the fair value of the shares because once the shares are sold then it ceases to be subject to appraisal right. So the buyer acquires all the rights of a regular stockholder. The law even says that the right to receive dividends which would have accrued from the shares had there been no appraisal right would likewise inure to the benefit of the buyer.
Section 85. Who bears costs of appraisal. –
SEC Opinion, October 1, 2001: If the corporation unjustifiably refuses to pay the dissenting stockholder despite full compliance with all the requirements for the valid exercise of appraisal right and despite the fact that the corporation has sufficient unrestricted retained earnings, the aggrieved stockholder may file the appropriate action before the proper Regional Trial Court to compel the corporation to allow him to exercise his appraisal right
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 1) the abandonment of the corporate action involved or 2) 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)
Section 84. When right to payment ceases. – No demand for payment under this Title may be withdrawn unless the corporation consents thereto. 1) 2)
If, however, such demand for payment is withdrawn with the consent of the corporation, or if the proposed corporate action is a. abandoned or rescinded by the corporation or
The costs and expenses of appraisal shall be borne by the corporation, UNLESS the fair value ascertained by the appraisers is approximately the same as the price which the corporation may have offered to pay the stockholder, o in which case they shall be borne by the latter. In the case of an action to recover such fair value, all costs and expenses shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was unjustified. (n)
Summary: 1) Corporation bears the cost if a. Price that the corporation is willing to pay is lower than the value as determined by the appraisers b. In an action to recover the cost of appraisal in case the refusal by the stockholder is justified 2) Stockholder bears the cost if a. Price that the corporation is willing to pay is approximately the same as determined by the appraisers b. In an action to recover the cost of appraisal in case the refusal by the stockholder is unjustified
Section 86. Notation on certificates; rights of transferee. – Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall
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submit the certificates of stock representing his shares to the corporation for notation thereon that such shares are dissenting shares. o 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 o have accrued on such shares shall be paid to the transferee. (n) TITLE XI - NON-STOCK CORPORATIONS
Existence of capital stock
Profit Distribution of profits
Right to vote
for
Term limit
Number directors
NON-STOCK Has no authorized capital stock
Increase in capital stock requires approval of board and stockholders
Increase in the capital of non-stock corporation does not require consent of the members Not organized for profit Not distributable thus, no dividends; must be used in furtherance of the purpose for which it is organized
Organized for profit Distributed thru dividends to the stockholders
Cumulative method of voting is a statutory right; it cannot be denied in the AOI
Membership
Grounds expulsion
STOCK Has capital stock divided into shares
of
Not personal, hence transferable; consent of the corporation is not required; they can sell freely and voluntarily unless there is a right of restriction in the AOI A stockholder cannot forfeit his share; the corporation cannot forfeit his shares because such shares are owned by the stockholder even in case of violation of the AOI or by-laws; otherwise it will amount to confiscation without due process 1 year until successor is elected or qualified
Not less than 5 not more than 15 XPN: in case of merger or consolidation, up to 21; or in case of corporation sole
Note: Distribution is allowed if it is by reason of dissolution The right to vote may be broaden, denied, or limited as provided in the AOI; voting by district is a form of limitation Personal and nontransferable, unless the AOI or by-laws otherwise provide
The grounds for expulsion or termination may be provided for in the AOI or by-laws
Staggered term In case of vacancy, apply Section 29 Not less than 5 may be more than 15 XPN: in case of nonstock educational corporation, not more than 15
Election or appointment of corporate officers
Meetings
Dissolution
Stockholders elect the board; the board elects or appoints the corporate officers (trilevel hierarchy) see Section 25 Conducted in the city or municipality where the principal office is located, preferably in the principal office itself Sections 117-122
Members may directly elect their corporate officers See Section 92
Anywhere for as long as it is within the Philippines
Sections 94-95
The nationality of a non-stock corporation is computed on the basis of the nationality of its members and not premised on the membership contribution
Section 87. Definition. – For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, o whenever necessary or proper, o be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. o 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)
Section 88. Purposes. – Non-stock corporations may be formed or organized for 1) charitable, 2) religious, 3) educational, 4) professional, 5) cultural, 6) fraternal, 7) literary, 8) scientific, 9) social, 10) civic service, or 11) similar purposes, like a. trade, b. industry, c. agricultural and d. like chambers, or 12) any combination thereof, a. subject to the special provisions of this Title governing particular classes of non-stock corporations. (n) CHAPTER I MEMBERS
Section 89. Right to vote. – The right of the members of any class or classes to vote may be 1) limited, 2) broadened or 3) denied to the extent specified in 42 | P
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a. the articles of incorporation or b. 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) Voting by mail or other similar means by members of nonstock corporations 1) may be authorized by the by-laws of non-stock corporations 2) with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission.
Section 90. Non-transferability of membership. – Membership in a non-stock corporation and all rights arising therefrom are 1) personal and 2) non-transferable, UNLESS the articles of incorporation or the by-laws otherwise provide. (n)
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, o unless otherwise provided in the articles of incorporation or the by-laws. (n) CHAPTER II TRUSTEES AND OFFICES
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 o number as may be fixed in their articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their number shall expire every year; o 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 o 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. 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)
Section 93. Place of meetings. – The by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: o Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place o f meeting o shall be within the Philippines . (n) CHAPTER III DISTRIBUTION OF ASSETS IN NON-STOCK CORPORATIONS
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; 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)
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: 1) The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting ri ghts. 2) Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the
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3)
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)
A stock corporation may be converted to a non-stock corporation by mere amendment of the AOI
A non-stock corporation cannot be converted to a stock corporation by mere amendment of the AOI. Remedy: Dissolution o
Can we merge a stock corporation with a non-stock corporation? Yes
Appraisal right
The provisions for stock corporations can be applied to non-stock corporations suppletorily. In case of conflict, the provisions of non-stock o corporation shall prevail. TITLE XII - CLOSE CORPORATIONS
Number of stockholders Stocks listed in the stock exchange Management by stockholders
Meetings
Preemptive right
OPEN No limit on the number May be listed
Extends to treasury shares by way of SEC Opinion Can only be exercised in cases provided for by law; Can be exercised if there is unrestricted retained earnings
Extends to treasury shares by explicit provision of law
Cannot be listed Stockholders may actively participate in the management of the corporation
Stockholders – no management powers (those reserved to them do not pertain to the management of the corporation)
Thus, they should be subject to the same liabilities as members of the BOD
Does not extend to issuance of
issuance of shares whether for payment of a debt or exchange of property
CLOSE Not exceeding 20
BOD exercises corporate powers and performs acts of management
There is a meeting in which the resolution is taken up and adopted by the BOD
shares in payment of a debt or in exchange of property unless ratified by the stockholders representing at least 2/3 of the outstanding capital stock
They can be made liable for corporate tort unless the corporation obtain adequate liability insurance coverage Formalities are dispensed with; an action may be implemented by the corporation sans prior or after board meeting for as long as the stockholders are accustomed in doing it in such manner or no objection from them or the directors consent before or after the meeting Absolute! Extends to any or all
SEC interference
Business Judgment Rule; SEC cannot interfere
Dissolution
In case voluntary dissolution, approval majority of board stockholders representing least 2/3 of outstanding capital stock
of the of the and at the
It can be exercised for any reason or for no reason at all Can be exercised regardless of existence of unrestricted retained earnings for as long as it will not result to the insolvency of the corporation In case of deadlock in the management of the corporation, SEC may intervene and can do certain acts See Section 105 Any stockholder who thinks there is mismanagement or fraud in the corporation may petition with the SEC to dissolve the corporation
A stockholder may file a Derivative Suit
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. 44 | P
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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.
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.
Section 98. Validity of restrictions on transfer of shares. – Any corporation may be incorporated as a close corporation, EXCEPT 1) mining or 2) oil companies, 3) stock exchanges, 4) banks, 5) insurance companies, 6) public utilities, 7) educational institutions and 8) 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.
In case of death of one of the shareholders, the close corporation is still subject to the same restriction even if the deceased has two or more heirs whose presence will result in the presence of more than 20 shareholders. In which case, the heirs have two options, namely: 1) The shares of the deceased may be placed in the name of one of the heirs who will be the nominee or representative of the heirs; or 2) A corporation can be organized to hold all the shares (Proceedings Batasan Pambansa, February 14, 1980)
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. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and 3. The stockholders of the corporation shall be subject to all liabilities of directors .
Restrictions on the right to transfer shares must appear 1) in the articles of incorporation and 2) in the by-laws as well as 3) in the certificate of stock; a. 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.
Section 99. Effects of issuance or transfer of stock in breach of qualifying conditions. – 1. If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder . 2. If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such number , and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact. 3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction. 4. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either a. that he is a person not eligible to be a holder of stock of the corporation, or b. that transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or c. that the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the transferee.
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5.
6. 7.
The provisions of subsection (4) SHALL NOT BE APPLICABLE IF the transfer of stock, though contrary to subsections (1), (2) or (3), a. has been consented to by all the stockholders of the close corporation, or b. if the close corporation has amended its articles of incorporation in accordance with this Title. The term "transfer ", as used in this section, is not limited to a transfer for value. The provisions of this section shall not impair any right which the transferee may have a. to rescind the transfer or b. to recover under any applicable warranty, express or implied.
Good faith is not a defense
Section 100. Agreements by stockholders. – 1.
2.
3.
4.
Agreements by and among stockholders executed before the formation and organization of a close corporation, a. signed by all stockholders, i. shall survive the incorporation of such corporation and ii. shall continue to be valid and binding between and among such stockholders, 1. if such be their intent, 2. to the extent that such agreements are not inconsistent with the articles of incorporation, 3. irrespective of where the provisions of such agreements are contained, 4. except those required by this Title to be embodied in said articles of incorporation. An agreement between two or more stockholders, if a. in writing and b. signed by the parties thereto, i. may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, ii. or as they may agree, iii. or as determined in accordance with a procedure agreed upon by them. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs, shall be invalidated as between the parties a. on the ground that its effect is to make them partners among themselves. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated a. on the ground that it so relates to the conduct of the business and affairs of the corporation
i.
5.
as to restrict or interfere with the discretion or powers of the board of directors: Provided, That such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed by this Code on directors. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, a. the stockholders shall be held to strict fiduciary duties to each other and among themselves. b. Said stockholders shall be personally liable for corporate torts i. unless the corporation has obtained reasonably adequate liability insurance.
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: 1. Before or after such action is taken, written consent thereto is signed by all the directors; or 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing.
If a director's meeting is held without proper call or notice , an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof.
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.
Section 103. Amendment of articles of incorporation. – Any amendment to the articles of incor poration which seeks 1) to delete or remove any provision required by this Title to be contained in the articles of incorporation or 2) 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 46 | P
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aforesaid provisions, at a meeting duly called for the purpose.
4)
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. A provisional director shall be 1) an impartial person who is a. neither a stockholder b. nor a creditor i. of the corporation or ii. of any subsidiary or affiliate of the corporation, c. and whose further qualifications, if any, may be determined by the Commission. 2) A provisional director is a. not a receiver of the corporation and b. does not have the title and powers of a custodian or receiver. 3) A provisional director shall have a. all the rights and powers of a duly elected director of the corporation, i. including the right to notice of and to vote at meetings of directors, ii. until such time as he shall be removed 1. by order of the Commission or 2. by all the stockholders.
His compensation shall be determined by agreement between him and the corporation a. subject to approval of the Commission, which may fix his compensation i. in the absence of agreement or ii. in the event of disagreement between the provisional director and the corporation.
This covers not only cases where the votes of two contending groups are equal but also cases when the required vote cannot be obtained because of the division in the corporation
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 o 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, o compel the dissolution of such corporation whenever any of acts of the directors, officers or those in control of the corporation is 1) illegal, or 2) fraudulent, or 3) dishonest, or 4) oppressive or 5) unfairly prejudicial to the corporation or any stockholder, or 6) whenever corporate assets are being misapplied or wasted.
Some of the provisions under close corporation are applicable to open corporations: 1) Restriction on transfers 2) Classification of shares 3) Qualifications of directors 4) Pulling of shares and manner of voting TITLE XIII - SPECIAL CORPORATIONS CHAPTER I EDUCATIONAL CORPORATIONS
Section 106. Incorporation. – Educational corporations shall be governed 1) by special laws and 2) by the general provisions of this Code. (n)
Section 107. Pre-requisites to incorporation. – Except upon favorable recommendation of the Ministry of Education and Culture,
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the Securities and Exchange Commission shall not accept or approve the articles of incorporation and by-laws of any educational institution. (168a)
Section 108. Board of trustees. – Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5). Unless otherwise provided in the articles of incorporation on the by-laws, 1) the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year. a. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only fo r the unexpired period. b. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. 2) A majority of the trustees shall constitute a quorum for the transaction of business. 3) The powers and authority of trustees shall be defined in the by-laws.
o o
corporations sole and religious societies.
Religious corporations shall be governed by this Chapter and by the general provisions on non-stock corporations insofar as they may be applicable. (n)
Kinds: 1)
2) 3)
Corporation sole under Sections 110; a. Consists of one person only b. Not required to file by-laws c. Governed by the rules, regulations and discipline of its religious denomination, sect or church d. May be allowed to exist perpetually i. AOI may however fix a term Corporation aggregate/religious society under Section 116; Ordinary non-stock religious corporation under Section 88
Section 110. Corporation sole. –
For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations . (169a)
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 1) chief archbishop, 2) bishop, 3) priest, 4) minister, 5) rabbi or 6) other presiding elder of such religious denomination, sect or church. (154a)
Educational corporations – organized for the purpose of providing facilities for instruction and learning. o They are governed by the “Education Act of 1982” and the provisions of the Corporation Code in a suppletory basis
An educational corporation may be organized as a o Educational stock corporation Number of directors – not less than 5 not more than 15 Term of office – 1 year until the successors are elected and qualified Educational non-stock corporation o Number of directors – not less than 5 not more than 15 (multiples of 5) Term of office – staggered, 1/5 will be replaced every year
Whether stock or non-stock educational corporation, it cannot be organized without the favorable endorsement of the appropriate government agency o CHED o DEPED CHAPTER II RELIGIOUS CORPORATIONS
Section 111. Articles of incorporation. – In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file with the Securities and Exchange Commission articles of incorporation setting forth the following: 1.
2.
Section 109. Classes of religious corporations. – Religious corporations may be incorporated by one or more persons. Such corporations may be classified i nto
It is very important to make a fine distinction between the natural character and juridical character in terms of capacity to acquire private lands in the Philippines o If at least 60% of the members of the religious sect or denomination are Filipinos, the corporation sole regardless of the nationality of the presiding elder or bishop may acquire private lands in he Philippines o He is only acting as trustee for his religious sect or denomination. He is not acting in his personal capacity
3.
That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious denomination, sect or church a. and that he desires to become a corporation sole; 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; That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, 48 | P
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a.
4.
5.
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, b. describing such territorial jurisdiction; 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 The place where the principal office of the corporation sole is to be established and located, a. which place must be within the Philippines.
i.
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. – 1)
2)
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, a. duly certified to be correct by any notary public.
From and after the filing with the Securities and Exchange Commission of the said 1) articles of incorporation, 2) verified by affidavit or affirmation, and 3) 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)
From the very moment the articles of incorporation are filed with the SEC he is transformed into a corporation sole o It does not require the issuance by the SEC of the certificate of incorporation
c.
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 ii. that it is to the interest of the corporation that leave to sell or mortgage should be granted. 1. 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, 2. 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)
A corporation sole may acquire properties, through purchase, donation and other lawful means, without court intervention
A corporation sole may sell, convey, encumber, pledge or mortgage properties With court intervention – by filing a petition for o leave of court upon proof o f compliance with the requirements under Section 113 Without court intervention – where the rules, o 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
Section 114. Filling of vacancies. – Section 113. Acquisition and alienation of property. – 1)
2)
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 a. by obtaining an order for that purpose from the Court of First Instance of the province where the property is situated b. upon proof made to the satisfaction of the court
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 o 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.
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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)
or diocese, synod, or district organization of the religious denomination, sect or church, setting forth the following: 1.
2.
3.
Section 115. Dissolution. – A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Securities and Exchange Commission a verified declaration of dissolution . The declaration of dissolution shall set forth: 1. The name of the corporation; 2. The reason for dissolution and winding up; 3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or church; 4. The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation.
4.
5.
6.
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)
How do you dissolve a corporation sole? By filing a verified affidavit of dissolution of the o corporation sole, the reason why the corporation is being dissolved, and how the dissolution shall be carried out
Registration not mandatory o SEC Opinion, June 15, 1998: However, an unregistered religious group does not acquire all the rights and attributes of a juridical person if not registered. For instance, since the status of an unincorporated religious group is merely an organization which has no legal personality, the members themselves, not the organization may be sued and be held personally liable for their acts
The religious society can be converted/transformed into a corporation and therefore can acquire properties and therefore have all the powers of a corporation as long as there is approval of at least 2/3 of the total members and the rules and regulations of the religious society do not forbid creation/formation of a religious corporation
Does the corporation sole have a term? o None. It can exist forever. The successor of the presiding elder will have to simply submit to the SEC his proof of appointment, his commission, etc.
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 1) by the constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, 2) 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 o o verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious society or religious order,
That the religious society or religious order, or diocese, synod, or district organization is a religious organization of a religious denomination, sect or church; That at least two-thirds (2/3) of its membership have given their written consent or have voted to incorporate, a. at a duly convened meeting of the body; That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not fo rbidden a. by competent authority or b. by the constitution, rules, regulations or discipline of the religious denomination, sect, or church of which it forms a part; That the religious society or religious order, or diocese, synod, or district organization desires to incorporate a. for the administration of its affairs, properties and estate; The place where the principal office of the corporation is to be established and located, a. which place must be within the Philippines; and 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, a. the board of trustees to be not less than five (5) nor more than fifteen (15). (160a)
TITLE XIV – DISSOLUTION
Dissolution is the extinguishment of corporate franchise of a corporation and the termination of its corporate existence
If a corporation is dissolved then it ceases to exist and cannot continue with its business; it cannot enter into new
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business; it cannot undertake any activity meant to promote the purpose for which it was organized
If a corporation is dissolved, whether voluntarily or involuntarily (expiration of term, annulment or forfeiture of its franchise, or any other modes), the corporation exists only for one thing – to liquidate and wind up its corporate affairs
Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency
ii.
4)
5)
Section 117. Methods of dissolution. – A corporation formed or organized under the provisions of this Code may be dissolved 1) voluntarily or 2) involuntarily. (n)
and if no newspaper is published in such place, then in a newspaper of general circulation in the Philippines, after sending such notice to each stockholder or member either by registered mail or by personal delivery at least thirty (30) days prior to said meeting. A copy of the RESOLUTION authorizing the dissolution shall be certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation. The Securities and Exchange Commission shall thereupon issue the certificate of dissolution. (62a)
Even if creditors are not affected, it is still subject to the approval of the SEC
Section 119. Voluntary dissolution where creditors are
Modes of dissolution 1) Voluntary a. By petition of the corporation where creditors are not affected b. By petition of the corporation where creditors are affected c. Shortening the corporate term d. In case of corporation sole – by filing an affidavit of dissolution e. Merger and consolidation 2) Involuntary 3) By court order through a quo warranto proceeding De jure dissolution is one that is “adjudged and determined by judicial sentence, or brought about by an act of or with the consent of the sovereign power, or which results from expiration of the charter period of corporate life De facto dissolution is one which takes place in substance and in fact when the corporation by reason of insolvency, cessation of business or otherwise, suspends all operations and, it may be, goes into liquidation still retaining its primary franchise to be a corporation
Section 118. Voluntary dissolution where no creditors are affected. – If dissolution of a corporation does not prejudice the rights of any creditor having a claim against it, the dissolution may be effected 1) by majority vote of the board of directors or trustees, and 2) by a resolution duly adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock or of at least twothirds (2/3) of the members of 3) a meeting to be held a. upon call of the directors or trustees b. after publication of the notice of time, place and object of the meeting for three (3) consecutive weeks i. in a newspaper published in the place where the principal office of said corporation is located;
affected. – Where the dissolution of a corporation may prejudice the rights of any creditor , the PETITION FOR DISSOLUTION shall be filed with the Securities and Exchange Commission.
The petition 1) shall be signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors or trustees, and 2) shall set forth all claims and demands against it, and 3) that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members a. at a meeting of its stockholders or members called for that purpose. If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition, fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order . Before such date, a copy of the order shall be published at least once a week for three (3) consecutive weeks o in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a o newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or city. Upon five (5) day's notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient , and the material allegations of the petition are true, 51 | P
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o
o
it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation. (Rule 104, RCa)
If the creditors are affected the SEC must conduct a hearing to determine the claims of the various creditors
Is the consent of the creditors necessary to dissolve the corporation? No because there is a proceeding where their interest will be protected (liquidation of corporate properties)
a.
2) 3) 4) 5)
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. 1) A copy of the amended articles of incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. 2) Upon approval of the amended articles of incorporation of the expiration of the shortened term, as the case may be, a. the corporation shall be deemed dissolved without any further proceedings, b. subject to the provisions of this Code on liquidation. (n)
Shortening of corporate term entails amendment of the articles of incorporation o approval of majority of the board o approval of stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members o favorable endorsement of the public agency concerned if the corporation is a bank, insurance company, public utility, educational, or other corporations governed by special laws
Resolution must show the provisions sought to be amended in the AOI (corporate term)
This is akin to filing of petition where creditors are affected o Thus SEC will conduct a hearing to determine the claims against the corporation
In merger or consolidation, there is no liquidation procedure because the properties or assets of the absorbed corporation are transferred to or assumed by operation of law by the surviving corporation or the new corporation
Section 121. Involuntary dissolution. – A corporation may be dissolved by the Securities and Exchange Commission 1) upon filing of A VERIFIED COMPLAINT and 2) after proper notice and hearing on the grounds provided by existing laws, rules and regulations. (n)
Involuntary modes 1) Failure to commence business within 2 years from incorporation (Section 22)
6)
Not automatic, this requires the approval of the SEC b. “Not organized” means no off icers are elected or not a single business activity is transacted Continuous inoperation for a period of 5 years (Section 22) Fraud or misrepresentation in procuring the articles of incorporation Refusal to comply or violation of laws, rules and regulation implemented by the SEC Failure to submit reports required by law and the SEC a. For ordinary corporations i. General Information Sheet ii. Audited financial statements every year b. For public company – many requirements Failure to submit by-laws within one month from incorporation
BIR clearance (payment of taxes) o If voluntary, it is required If involuntary, it is not required o
Quo Warranto Proceeding o It is the government through the OSG that can initiate quo warranto proceedings A stockholder cannot file a petition with the SEC o to dissolve a corporation except in cases of close corporations
Section 122. Corporate liquidation. – Every corporation whose charter 1) expires by its own limitation 2) or is annulled by forfeiture or otherwise, 3) 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 52 | P
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shall be escheated to the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and o o after payment of all its debts and liabilities. (77a, 89a, 16a)
Modes of liquidation. Liquidation may be done by – 1) Receiver a. Appointed by the court upon petition of the corporation b. Operates to suspend the authority of a corporation and its directors and officers over its properties and effects 2) Trustee a. Appointed by the corporation b. The trustee will be the one who shall have the legal title over the properties and assets of the corporation c. GILLANO V CA 3) Board of Directors 3 YEARS o
If a suit is filed during the lifetime of the corporation (before dissolution) there is no reason why it cannot proceed and continue even beyond the 3-year liquidation period, because under Section 145 of the Corporation Code, no rights of the corporation shall be impaired on account of the subsequent dissolution of the corporation. So dissolution cannot extinguish, impair rights belonging to the corporation (KNECHT V UNITED CIGARETTE CORP)
Take note: No new business during the 3-year liquidation period. It is only for the purpose of liquidating and winding up the corporate affairs TITLE XV - FOREIGN CORPORATIONS
Section 123. Definition and rights of foreign corporations. – For the purposes of this Code, a foreign corporation is one 1) formed, organized or existing under any laws other than those of the Philippines and (incorporation test ) 2) whose laws allow Filipino citizens and corporations to do business in its own country or state. (principle of reciprocity ) It shall have the right to transact business in the Philippines after it shall have obtained 1) a license to transact business in this country in accordance with this Code and 2) a certificate of authority from the appropriate government agency. (n)
It is possible that a foreign corporation be composed of Filipinos for as long as it is formed, organized, and existing under foreign laws
Section 124. Application to existing foreign corporations. – Every foreign corporation which on the date of the effectivity of this Code is authorized to do business in the Philippines under a license therefore issued to it, shall continue to have such authority under the terms and condition of its license, subject to the provisions of this Code and o other special laws. (n)
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 o o 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: 1. 2.
The date and term of incorporation; The address, including the street number, of the principal office of the corporation in the country or state of incorporation; 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: a. Provided, That said purpose or purposes are those specifically stated in the certificate of authority issue d by the appropriate government agency; 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 a. to determine whether such corporation is entitled to a license to transact business in the Philippines, and b. 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 1) that the laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein, 2) and that the applicant is an existing corporation in good standing. 53 | P
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4)
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 1) that the applicant is solvent and in sound financial condition, 2) 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. 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)
shares of stock in domestic insurance companies and banks, or 5) any combination of these kinds of securities, with an actual market value of at least one hundred thousand ; (P100,000.00) 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 1) if the gross income of the licensee has decreased, 2) 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.
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 o may commence to transact business in the Philippines o 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, o unless such license is sooner surrendered, revoked, suspended or annulled in accordance with this Code or other special laws. Within sixty (60) days after the issuance of the license to transact business in the Philippines, the licensee, 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 1) 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, 2) shares of stock in "registered enterprises" as this term is defined in Republic Act No. 5186, 3) shares of stock in domestic corporations registered in the stock exchange, or
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, o upon the licensee's application therefor and o 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)
BASIC RULES 1) It must obtain a license from the SEC 2) To obtain a license, it has to submit a. Articles of Incorporation b. By-Laws as approved by the country where it was incorporated c. Deposit securities with the SEC i. Intended to answer for any possible violation of laws, rules and regulations, and conditions to be imposed by the SEC ii. The amounts indicated under the Corporation Code are no longer relevant. They have been updated by the SEC
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proceedings against the foreign corporation doing business in the Philippines o The power of a resident agent is limited to receive, for and in behalf of the corporation, services and other legal processes in all actions and other legal proceedings against the foreign corporation. He is not the attorney-in-fact of the corporation. Thus, a resident agent cannot eve sign the certificate on non-forum shopping that is a requirement in filing an initiatory pleading in court o Discussion: The resident agent may be authorized to certify against non-forum shopping through a separate authority from the foreign corporation
Section 127. Who may be a resident agent. – A resident agent may be either 1) an individual residing in the Philippines or 2) 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)
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 1) a written power of attorney designating some person who must be a resident of the Philippines, a. on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, b. 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. 2) 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. 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)
A resident agent is one on whom any summons and other legal processes may be served in all actions or other legal
Who can be a resident agent? 1) An individual who is a. Residing in the Philippines b. Of good moral character and c. Of sound financial standing 2) A domestic corporation lawfully transacting business in the Philippines
If there is no one authorized to receive summons for the corporation, then it can avoid service and thereby impugn the jurisdiction of local courts
Consequences if a foreign corporation transact within the Philippines without license 1) It cannot intervene or maintain any action or suit in any court or administrative agencies 2) It can be sued for any cause of action recognized under Philippine laws a. Lack of license is not a bar to the filing of a case against a foreign corporation but it is a bar for a foreign corporation to file a case in the Philippines, because it has no legal capacity, unless it obtains a license to do business here
Cases where a foreign corporation may sue in the Philippines despite lack of license to do business in the Philippines 1) Isolated or casual transaction (e.g. unloading of cargo in the Philippines; reinsurance LORENZO SHIPPING V CHUBB AND SONS) 2) If the foreign corporation had no license at the time of the transaction was consummated but subsequently obtains a license to engage in business before filing the case in the Philippines a. The act of obtaining license subsequent to the action retroacts to the date of the transaction and confers upon the corporation the legal capacity to sue in the Philippines (HOME INSURANCE V EASTERN SHIPPING LINES) 3) An action to enforce intellectual property rights a. PHILIP MORRIS V CA b. COLUMBIA PICTURES V CA 4) If the foreign corporation is a co-plaintiff with a domestic corporation and latter filed a suit here in the Philippines a. To avoid multiplicity of suits 55 | P
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5) 6)
If by stipulation the venue shall be laid in the Philippine courts In case of estoppel a. MERRIL LYNCH FEATURES V CA b. COMART V CA
a duly authenticated copy of the articles of incorporation or by-laws, as amended, indicating clearly in capital letters or by underscoring the change or changes made, duly certified by the authorized official or officials of the country or state of incorporation.
Twin Characterization Test: 1) Substance Test 2) Continuity Test
The filing thereof shall not of itself enlarge or alter the purpose or purposes for which such corporation is authorized to transact business in the Philippines. (n)
Each case must be judged in the light of its own peculiar environmental circumstances
Section 131. Amended license. –
“Doing business” includes any act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in the progressive prosecution of commercial gain or of the purpose and object of the business organization o Discussion: Continuity of dealings or transactions with the end view of achieving the purpose for which the corporation was organized, if there is no continuity of activity or undertaking, then it is an isolated or casual transaction Mere participation in a public bidding is tantamount to doing business (HUTCHISON V SBMA) Other cases wherein a foreign corporation is doing business in the Philippines When a foreign corporation – 1) Appoints a local representative in the Philippines 2) Appoints a distributor 3) Has headquarters in the Philippines 4) Extends credit (ERIK PTE V CA)
Take note: The act of not obtaining a license or failure to obtain a license to do business in the Philippines is a criminal offense under Section 144 of the Corporation Code
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, 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)
Section 130. Amendments to articles of incorporation or by laws of foreign corporations. – Whenever the articles of incorporation or by-laws of a foreign corporation authorized to transact business in the Philippines are amended, such foreign corporation shall, within sixty (60) days after the amendment becomes effective, 1) file with the Securities and Exchange Commission, 2) and in the proper cases with the appropriate government agency,
A foreign corporation authorized to transact business in the Philippines shall obtain an amended license in the event it changes its corporate name, or desires to pursue in the Philippines other or additional purposes, by submitting an application therefor to the Securities and Exchange Commission, favorably endorsed by the appropriate government agency in the proper cases. (n)
Section 132. Merger or consolidation involving a foreign corporation licensed in the Philippines. – One or more foreign corporations authorized to transact business in the Philippines may merge or consolidate with any domestic corporation or corporations if such is permitted under Philippine laws and by the law of its incorporation: Provided, That the requirements on merger or consolidation as provided in this Code are followed.
Whenever a foreign corporation authorized to transact business in the Philippines shall be a party to a merger or consolidation in its home country or state as permitted by the law of its incorporation, such foreign corporation shall, 1) within sixty (60) days after such merger or consolidation becomes effective, 2) file with the Securities and Exchange Commission, and in proper cases with the appropriate government agency, a. a copy of the articles of merger or consolidation b. duly authenticated by the proper official or officials of the country or state under the laws of which merger or consolidation was effected: 3) Provided, however, That if the absorbed corporation is the foreign corporation doing business in the Philippines, a. the latter shall at the same time file a petition for withdrawal of its license in accordance with this Title. (n)
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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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: 1. Failure to file its annual report or pay any fees as required by this Code; 2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title; 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; 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; 7. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license; 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 9. Any other ground as would render it unfit to transact business in the Philippines. (n)
Basically a violation of the conditions imposed by the SEC for the issuance of the 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 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 o revocation. (n)
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
3.
its agencies or political subdivisions have been paid; and 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. TITLE XVI - MISCELLANEOUS PROVISIONS
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)
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)
Section 139. Incorporation and other fees. - The Securities and Exchange Commission is hereby authorized to collect and receive fees as authorized by law or by rules and regulations promulgated by the Commission. (n)
Section 140. Stock ownership in certain corporations. Pursuant to the duties specified by Article XIV of the Constitution, the National Economic and Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation or by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their prevention or correction. Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section, belonging to individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restraint or trade, or to implement national economic policies declared in laws, rules and regulations designed to promote the general welfare and foster economic development. In recommending to the Batasang Pambansa corporations, businesses or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export potential, as well as other factors which are germane to the realization and promotion of business and industry.
Section 141. Annual report or corporations. - Every corporation, domestic or foreign, lawfully doing business in the Philippines shall submit to the Securities and Exchange Commission an annual report of its operations, together with a financial statement of its assets and liabilities, certified by any independent certified public accountant in appropriate cases, 57 | P
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