Samplex Corpo Finals

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Corporation Law Lex Centurion Notes Sherryl Anne Balane Sarmiento --------------------------------------------------------------------------------------------------------------------------------------------------

1. Marking the close – is is the placing of purchase or sale order, at or near the close of the trading period. 2. Watered Stocks – may may be defined as one which is issued by the corporation as fully paidup shares, when in fact the whole amount of the value thereof has not been paid. 3. Trust Fund Doctrine – is is a legal proposition that a subscription to the capital stock of a corporation constitute a trust fund which w hich the creditors have the right to look upon to for the satisfaction of their claims and that their assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. 4. Fraud or Misrepresentation Theory – is is a theory that liability is based on the false representation made by the corporation and the stockholder concerned to the creditors that the t rue par value or issued price of the shares has been paid or promised to be paid in full. 5. “Transfer” – is is the act by which the owner of a thing delivers the same to another with the intent of passing the rights which he has in it to the latter. It contemplates an absolute transfer of dominion and ownership. (Note: a chattel mortgage is not within the meaning of such terms inasmuch as a chattel mortgage is not a complete and absolute alienation of the dominion and ownership thereof) 6. Voting Trust Agreement – is is an agreement in writing whereby one or more stockholders transfer their shares to a trustee or trustees, the right to vote and other rights pertaining to the shares for a period not exceeding 5 years at any one time. The voting trustee, in reality becomes merely a “sham owner with a colorable and fictitious title” for the purpose of voting upon stocks that he does not actually own. 7. Define and state whether they are illegal per se or when they may ma y become illegal. a. Wash Sale – any any transaction in a security which involves no change in the beneficial ownership thereof. b. Matched Order – order order or orders for the purchase or sale of security with the knowledge that a simultaneous order or orders of substantially the same size, time and price for the sale or purchase of such security has or will be entered by or for the same or different parties. Wash sale and matched orders are not illegal per se. They only become illegal when they are used as a means to create a false or misleading appearance of active t rading in the security concerned. ---------------------------------------------------------------------------------------------------------------------------------------------The contents of this compilation are based on Atty. Ladia’s Lectures during the 2 nd Semester of S.Y. 2009-2010.

Corporation Law Lex Centurion Notes Sherryl Anne Balane Sarmiento

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c. Short Sale – refers to the selling of security which the vendor does not own. It is illegal per se, unless it is done in accordance with the rules and regulations of the SEC. 8. Insider Trading – the act of an insider to buy or sell security of the issuer while in possession of material information with respect to such security that is not generally made known to the t he public, unless: (a) the insider proves that the information was not gained from such relationship; or (b) if the other party pa rty selling to or buying from the t he insider (or his agent) is identified, the insider proves: i. that he disclosed the information to the other party, or ii. that he had reason to believe that the other party otherwise is also in possession of the information. 9. An Isolated Transaction – may may be defined as an occasional, incidental or casual act or transaction of a foreign corporation in the Philippines, which does not indicate an intent on the part of the corporation to engage in a continuity of transaction tra nsaction in the country, and hence does not fall under under the category of “doing business.” 10. “doing business” in the Philippines – a a series of commercial dealings which signify an intent on the part of a foreign corporation to do business in the Philippines as judged in the light of the peculiar circumstances of the case.

Voting rights of stockholders in a stock corporation vs. Voting Rights of members in a non-stock corporation. 1. In a stock corporation, stockholders have the right to cumulative voting which may not be withheld from them; whereas In a non-stock corporation, members generally have no such right because they are entitled only to one vote each, unless the by-law of the corporation limits or broadens their right to vote. 2. In a stock corporation, proxy voting may not be denied to any stockholder entitled to vote; whereas In a non-stock corporation, proxy voting may be denied to members pursuant to Section 89 of the Corporation Code.

1. The statement that the transferability of shares in an advantage as well as a disadvantage in the corporate form of business. The statement that the transferability of share is an advantage of corporate form of business because unless reasonably restricted, shares of stock, being personal properties, can be transferred by the owner without the consent of the other stockholders. ---------------------------------------------------------------------------------------------------------------------------------------------The contents of this compilation are based on Atty. Ladia’s Lectures during the 2 nd Semester of S.Y. 2009-2010.


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The same is however a disadvantage, because transfers of share may result to uniting incompatible and conflicting interests. An example of this is the case case of Gokongwei, wherein John Gokongwei purchased shares of stocks of San Miguel Corporation, a competitor of his own corporation.

2. The Doctrine of Secondary Meaning In Philippine Nut Industry vs. Standard Banks (65 SCRA 575), the doctrine of secondary meaning was defined as a word or phrase originally incapable of exclusive appropriation [usually generic] with reference to a n article in the market, because of geographically or ot herwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has become to mean that the article was his product. This definition was likewise cited in the case of Lyceum of the Philippines vs. CA.

3. Corporate Entity Theory Under Section 19 of the Corporation Code, a corporation comes into existence upon the issuance of the certificate of incorporation. Only then will it acquire a juridical personality to sue and be sued, enter into contracts, hold or convey property or perform any legal act, in its own name. As a legal entity, the corporation is possessed with a personality separate and distinct from the individual stockholders or member and is not affected by the personal rights, obligation or transactions of the latter. Meaning, the properties it possesses belongs to it exclusively as a separate juridical entity, such that the personal creditors of its stockholder or members cannot attach corporate properties to satisfy their claims.

4. Piercing the Corporate Veil The doctrine of piercing the corporate veil is the exception to the general rule on corporate entity, that personal creditors of is corporation’s stockholder or members cannot attach corporate properties to satisfy their claims, the corporation having a juridical personality separate and distinct from it stockholders. This doctrine is resorted to in cases where w here the corporation is used or being used to defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate issues, or to circumvent the law or perpetuate deception, or an alterego, adjunct or business conduit for the sole benefit of a stockholder or a group of stockholders or another corporation. In such cases, the law will regard the corporation as a mere association of persons, or in the case of two corporations, merge them into one, the one being merely regarded as part or instrumentality of the other.

---------------------------------------------------------------------------------------------------------------------------------------------The contents of this compilation are based on Atty. Ladia’s Lectures during the 2 nd Semester of S.Y. 2009-2010.


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5. Corporate Opportunity Doctrine Corporate Opportunity Doctrine as cited in one case decided by the Supreme Court, is a legal proposition that places a director of a corporation in the position of a fiduciary and prohibits them from seizing a business opportunity and/or developing it at the expense and with the facilities of the corporation. He cannot appropriate it to himself a business opportunity which in fairness should belong to the corporation.

6. Business Judgment Rule The “Business Judgment Rule,” as enunciated in the case of Montelibano vs. Balolod Murcia Milling, is that questions of policy a nd management of the business are left solely to the honest h onest decision or judgment of officers and directors of a corporation, and the court is without authority to substitute its judgment of the board of directors. The board is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts.

7. Pre-emptive Right Pre-emptive right is a right granted by law to all existing stockholders of a stock corporation to subscribe to all a ll issues or disposition of shares of any an y class, in proportion to their respective r espective stockholdings, subject only to the limitations imposed under Section 39 of the Corporat ion Code.

8. Ultra Vires Acts Ultra Vires Acts are those that can not be executed or performed by a corporation because they are not within its express, inherent, or implied powers as defined by its charter or articles of incorporation, thus allowing a collateral attack upon the authority of the corporation to engage in such particular endeavor. Mere ultra vires acts, which are not illegal per se, may become binding and enforceable, either by ratification, estoppel or on equitable grounds, unless the public or third parties are thereby prejudiced.

9.

“Non-filing of by- laws will not result to the automatic dissolution of the corporation” “Non-filing of by-laws will not result to t o the automatic dissolution of the corporation” as explained in the case of Loyola Grand Villa Homeowners (South) Association, Inc. vs. CA, means that there must first of all be a hearing to determine the existence of the ground of failure to file by-laws within the required period, and secondly, even assuming such finding, the penalty is not necessarily revocation, but may only be suspension of the charter. In fact, under the rules and regulations of the SEC, failure to file the by-laws on time may be penalized merely with the imposition of an administrative fine without affecting the corporate existence of the erring firm.



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1. Kinds of Business Organization (1) Sole Proprietorship A one-man form of business entity and is defined as one conducted for pr ofit by a lone or single individual who owns all the assets, personally owes and answers all the liabilities or suffers all the losses and enjoys all the profits p rofits to the exclusion of others

(2) Partnership Composed of 2 or more persons who bind themselves to contribute money, property or industry to a common fund, with the intention of dividing the profits among themselves.

(3) Joint Venture Partakes the nature of a partnership contract and it is created for the purpose of prosecuting a particular business transaction. It is a one time grouping of two or more persons, natural or juridical, in a specified undertaking. An organization formed for some temporary purpose.

(4) Corporation An artificial being, created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. Corporation plays the most important role in the economic development of a country.

2. Attributes of a corporation: (1) It is an artificial being It has a personality, juridical at that, separate and distinct from the persons composing it.



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(2) It is created by operation of law the formal requirement of the State’s consent through compliance with the requirements imposed by law is necessary for its creation. Mere agreement of the parties intending to organize it is not enough

(3) it has the right of succession death, incapacity or civil interdiction of one or more of its stockholders does not result in its dissolution (4) it has the powers, attributes and properties expressly expressly authorized by law or incident to its existence it can only exercise only such powers and can hold only such properties as are granted to it by the enabling statutes unlike natural persons who can to anything as they please

3. Exceptions to the General Rule that corporations can never enter into a contract of partnership: (1) when expressly authorized by the Articles of Incorporation (AOI) (2) the agreement of the articles of partnership must provide that all the partners will

manage the partnership (3) the article of partnership must stipulate that all the are and shall be jointly and

severally liable for all obligations of the partnership.

4. Purposes or Reasons for classification of shares: (1) To specify and define the rights and privileges of the stockholders; (2) For regulation and control of the issuance of sale of corporate securities for the protection of purchasers and stockholders; (3) As management control device; (4) To comply with statutory requirements particularly those which provide for certain limitations on foreign ownership of shares; (5) To better insure return on investment; and (6) For flexibility in price, particularly no par shares.

5. Requirements for a valid stockholders’ meeting: (1) It must be held on the date fixed in the by-laws or in accordance with the law; (2) Prior notice must be given; (3) It must be held at a proper place; (4) It must be called by the proper party; (5) Quorum and voting requirement must be met



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6. Instances when the stockholder cannot avail of its voting rights: (1) Non-voting shares are not entitled to vote except in those instances provided for in the last paragraph of Section 6; (2) Treasury shares have no voting rights while they remain in the treasury; (3) Shares of stock declared delinquent are not entitled to vote at any meeting; (4) Unregistered transferees of shares of stock.

7. Generally, where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor, except where: (1) The purchaser expressly or impliedly agrees to assume such debts; (2) The transaction amounts to a consolidation or merger of the corporations; (3) The purchasing corporation is merely a continuation of the selling corporation; (4) The transaction is entered into fraudulently in order to escape liability for such debts.

8. A corporation may be dissolved in any of these three ways: a. by expiration of its term; b. by voluntary surrender of its primary franchise (voluntary dissolution); or c. by the revocation of its corporate franchise (involuntary dissolution).

9. The three modes of Voluntary Dissolution under the Code are: a. Voluntary dissolution where no creditors are affected; b. Voluntary dissolution where creditors are affected; and c. Shortening of Corporate Term

10. Enumerate Grounds for Involuntary Dissolution: Sec 6 of PD 902-A provides for the grounds for involuntary dissolution as follows: 1. Fraud in procuring its cert of registration; 2. Serious misrepresentation as to what the corporation can do or is doing to the prejudice or damage of the general public; 3. Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would amount to a grave violation of the franchise; 4. Continuous inoperation for a period of at least 5 years; 5. Failure to file its by-laws within the required period; 6. Failure to file required separate reports in appropriate forms as determined by the Commission within the prescribed period. Other grounds provided for in the Corporate Code itself: 1. Violation of any provision of the Code under Section 144;



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2. In case of a deadlock in a close corporation as provided for in Section 105; 3. In a close corporation, any acts of directors, officers or those in control of the corporation which is illegal, or fraudulent or dishonest or oppressive or unfairly prejudicial to the corporation or any SH or whenever corporate assets are being misapplied or wasted under Section 105. Other grounds can be found in other ot her special laws like the Securities Regulation Code and the General Banking Act.

11. VTA limitations, restrictions, etc. Under Section 59 of the Corporation Code, the following are the requisites and limitations of a voting trust agreement: (1) It must be in writing w riting and duly notarized, and shall specify the terms a nd conditions thereof; (2) A certified true copy must be filed with the Securities and Exchange Commission; (3) The voting trust shall not exceed 5 years at any one time, except if it is specifically required under a loan agreement, in which case, the period may be more than 5 years, but it shall automatically expire upon full payment of the loan; (4) Unless the voting trust is renewed, all rights granted in the agreement shall automatically expire at the period agreed upon, and the voting trust certificates and the stock certificates issued in the name of the trustee shall be deemed cancelled, and new stock certificates issued in the name of the transferors. (5) No voting trust agreement shall be b e entered into to circumvent laws against monopolies and illegal combinations in restraint of trade or used for purposes of fraud.

12. Rights of unpaid shares Section 72 of the Corporation Code substantially provides that holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. Such rights include the right to vote and be voted for, the right t o receive dividends and other rights of a stockholder, except the right to be issued certificate of stock.

13. Instances when a foreign corporation with no license to do business in the Philippines can sue: (1) Where the act or transaction involved is an “isolated transaction” or the corporation is not seeking to enforce any legal or contractual rights arising from, or growing out of, any business which it has transacted in the Philippines;



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(2) Where the purpose of the suit is to protect its trademark, trade name, corporate names, reputation or goodwill; (3) Where it is based on a violation of the Revised Penal Code; (4) Where the foreign corporation is merely defending a suit filed against it; or (5) Where a party is estopped to challenge the personality of the corporation by entering into a contract with it.

14. The three methods of liquidation and their effects on the 3-year period to liquidate the corporate affairs: (1) By the corporation itself through the Board of Directors If this method is resorted to, the board will only have a period of 3 years to finish the task of liquidation. Claims for or against the corporation not filed within the period become unenforceable as there exists no corporate entity against which they can be enforced. (2) By a Trustee (legal owner) appointed by the corporation If this method is used, the 3-year period limitation imposed will not apply, provided the designation of the trustee is made within that period. During the period of liquidation, but before completion thereof, a corporation, as represented by its trustee, can sue and be sued even beyond the 3-year period fixed by law. (3) By Appointment of a receiver (liquidator) If a receiver is appointed, the 3-year period fixed by law within which to complete the task of liquidation will not likewise apply because the dissolved corporation is substituted by the receiver who may sue or be sued even after that period.

15. Distribution of assets upon dissolution of non-stock corporations: Section 94 of the Corporation Code provides that in case of 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 corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by r eason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements; 3. Assets received received and held by the corporation subject subject to limitations permitting their use only for charitable, religious, b enevolent, educational or ---------------------------------------------------------------------------------------------------------------------------------------------The contents of this compilation are based on Atty. Ladia’s Lectures during the 2 nd Semester of S.Y. 2009-2010.


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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, corporation s, 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 p rovisions 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)

16. Suspension of Payments Rules of Thumb for the guidance of the Bench and Bar: a. All claims against corporations, partnerships, or associations that are pending before any court, tribunal or board, without distinction as to whether or not a creditor is secured or unsecured, shall be suspended effective upon the appointment of a management committee, rehabilitation receiver, board or body in accordance with the provisions of PD 902-A. b. Secured creditors retain their preference over unsecured creditors, but enforcement of such preference is equally suspended upon the appointment of a management committee, rehabilitation receiver, board or body. In the event that the assets of the corporation, partnership or association are finally liquidated, however, secured and preferred credits under the applicable provisions of the Civil Code will definitely have preference over unsecured ones.

17. Two requisites for a valid appointment of management committee: a. Imminent danger of loss, wastage or destruction of assets or other corporate properties; b. Serious paralysis of business operations.

18. To have a valid corporate act, there must be: a. a quorum, which is the majority of the number of the board as fixed in the articles of incorporation; and b. a decision of at least a majority of the directors or trustees present at the meeting Expect in the case of election of officers where the voting requirement would ordinarily be a majority of all the members of the board.

18. Consequences / Effects of Ultra Vires Act: Act: *** a. On the Corporation Itself The proper forum may suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of the corporation for serious ---------------------------------------------------------------------------------------------------------------------------------------------The contents of this compilation are based on Atty. Ladia’s Lectures during the 2 nd Semester of S.Y. 2009-2010.


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misrepresentation as to what the corporation can do or is doing to the great damage or prejudice of the general public. b.

On the Rights of the Stockholders A stockholder may bring either an individual or derivative suit to enjoin a threatened ultra-vires act or contract. If the act or contract has already been performed, a derivative suit for damages against the directors may be filed, but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into the contract.

c.

On the Immediate Parties i.) If the contract is fully executed on both sides, the contract is effective and the courts will not interfere to deprive either party of what has been acquired under it; ii.) If the contract is executory on both sides, as a rule, neither party can maintain an action for its non-performance; and iii.) Where the contract is executory on one side only, and has been been fully performed on the other, the courts differ as to whether an action will lie on the contract against the party who has received benefits of performance under it. Majority of the courts, however, hold that the party who has received benefits from the performance is estopped to set up that the contract is ultra vires to defeat an action on the contract. This is more in conformity with the doctrine that no person shall be allowed to enrich himself at the expense of another.

19.

Reasons for increasing its capital stock: a. To generate funds; b. For business expansion; c. For payment of liabilities; or d. For purpose of acquiring other business.

20. The three modes of decreasing capital stock are: a. Decreasing the par value of the t he existing number of shares without wit hout decreasing the numbers of shares; b. Decreasing the number of existing shares without decreasing the par value thereof; and c. Decreasing the number of existing shares and a t the same time decreasing the par value of the shares.

1. Explain the effects of declaration of delinquency vis-à-vis vis -à-vis the rights of the stockholder. a. To vote and be voted upon Section 71 of the Corporation Corporat ion Code provides that no delinquent shares shall be voted for or be entitled to vote or to representation at any stockholders’ meeting.


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Delinquency occurs when a stockholder is called to pa y for his subscription but failed to pay on the time he is expected to do so. b. To receive cash and stock dividends Section 43 of the Corporation Corporat ion Code provides that any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. Delinquency occurs when a stockholder is called to pay for his subscription but failed to pay on the time he is expected to do so.

2. Explain the following statements: a. The right of a stockholder to compel the corporation to pay the value of his shares is broader in a close corporation than in an ordinary stock corporation. In a close corporation, a stockholder may withdraw and compel the corporation to purchase his shares “for any reason” with the limitation only that the corporation has sufficient assets to cover its liabilities exclusive of capital stock, whereas, in an ordinary stock corporation, unless he sells his shares, a stockholder cannot get back his investment not compel the corporation to buy his shares except in the exercise of his appraisal right. b. In cases of deadlocks in a close corporation, the courts can interfere in the management of corporate affairs. In case of deadlocks, the courts can interfere in the management of a close corporation, even if the directors or stockholders are acting in good faith. Section 104 of the Corporation Corpo ration Code gives the SEC a very wide w ide discretion in respect to management of a close corporation in the event of a deadlock. It may: 1. Cancel or alter any provision in the articles of incorporation, by-laws or any stockholders’ agreement; 2. Cancel, alter or enjoin any resolution or other act of the corporation or its board of directors, stockholders or officers; 3. Direct or prohibit any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action; 4. Require 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. Appoint a provisional director; 6. Dissolve the corporation; or 7. Grant such other relief as the circumstances may warrant. ---------------------------------------------------------------------------------------------------------------------------------------------The contents of this compilation are based on Atty. Ladia’s Lectures during the 2 nd Semester of S.Y. 2009-2010.


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c. Subscriptions to shares of stock of a corporation are indivisible. The statement that “Subscriptions to shares of stock of a corporation are deemed indivisible” means that the paym ent made by the subscriber shall be applied pro-rata to the entire number of shares. d. Certificates of stock are merely quasi-negotiable and are non-negotiable. Certificates of stock are not regarded as negotiable in the same sense that bills or notes are negotiable, even if they are endorsed in blank. Thus, while a certificate of stock may be transferred by endorsement, coupled with delivery thereof, and therefore, merely quasi-negotiable, it is nonetheless non-negotiable, in that, the transferee takes it without prejudice to all the rights and defenses which t he true and lawful owner may have, except in so far as the principles governing estoppel may apply. e. A director / stockholder whose shares are declared delinquent is not automatically disqualified to be and act as a director. The only qualification to be a director is that he must own at least 1 share standing in his own name in the books of the corporation. And since the shares of a director although declared delinquent, still stand in his name pending the sale, he remains to be and act as a director. And even if there is a sale, he ma y still be a director because the winning bidder may not bid or pay for all the shares or there might be remaining shares, which would be credited in favor of the delinquent stockholder.

3. Can the court determine the rules in the Corporation Sole when there are no rules on discipline? Explain. No, because a corporation sole is by its very nature, ecclesiastical and religious, and under the Doctrine of Separation of Church and State, the State, through the courts, may not interfere with the rules on discipline of the church.

4. Explain the Service of Summons under the 1997 Rules of Civil Procedure. Section 11 Rule 14 of the Revised Rules of Civil Procedure which took effect on July 1, 1997 repealed the provision of Section 13 Rule 14 of the Rules of Court. The changes introduced include the general manager instead of mana ger, the corporate secretary instead of secretary, the in-house counsel as may be distinguished from an outside counsel, treasurer instead of cashier, the managing partner in case of partnership. The new rules brushed aside the relaxation of service of summons upon a corporation which, through the years was liberalized liberalized by the Supreme Court. The resultant effect of the new rules would thus render the service of summons upon persons other than those named thereat to be without force and effect. ---------------------------------------------------------------------------------------------------------------------------------------------The contents of this compilation are based on Atty. Ladia’s Lectures during the 2 nd Semester of S.Y. 2009-2010.


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In one decided case by the Supreme Court after the effectivity of the new rules, it was said that strict compliance comp liance with the mode of service is necessary to confer jurisdiction of the court over a corporation. Service must therefore be made on the one named by the statute.

1. What does it mean by the provision that directors / trustees shall hold office for one (1) year, until their successors are elected and qualified ? It means that the directors / trustees have one year to serve. However, they can continue their office, in a hold-over capacity, as directors / trustees if there is no successor duly elected and qualified in accordance with law. For instance, Director X, after his one year term, shall continue to serve as director of Corporation Y if any aspiring nominee for his position is not qualified. 2. Can a corporation extend its corporate term after the expiration of its term originally indicated in its Articles of incorporation? A corporation can no longer extend its corporate term after the expiration of the term of existence originally fixed by its charter or the general law, since as a rule, the corporation is ipso facto dissolved as soon as that time expires, which means that there would really nothing to extend. However, upon reaching said expiration of the term, it may be thereafter continued to act for 3 years for the purpose of closing up its business, but only for that purpose. This is the ruling in Alhambra Cigar vs. SEC. 3. Why is it important to state the purpose for which the corporation was organized? It is important to state the purpose / purposes for which a corporation is organized because it will be the basis for determining the scope of the corporate powers and authority. It will define the rights and powers that a corporation and its officers and members / stockholders can perform. It will also provide for the limitations in the exercise of the said rights and powers. 4. What is the test to be applied in determining whether a corporation has implied power to do a certain act? In determining whether a corporation has implied power to do a certain act, it is important to look into the “purpose clause” indicated in its articles of incorporation, and check whether the questioned corporate act has a logical relation with the purpose or purposes of the corporation. In the Montelibano vs. Bacolod Murcia Milling Co, Inc., the Supreme Court said that the test to be applied is “whether the act in question is in direct and immediate furtherance of the corporation’s business, fairly incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it, otherwise, not. 5. Can a director be removed for any cause? It depends. If the removal is without cause, the board of directors cannot do so if it will deprive the minority stockholders or members of their right to representation. If it is with cause, the board can remove a director even if it will prejudice the rights of the minority, provided that the requirements set forth in the corporation’s articles of incorporation and by-laws are properly complied with.



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6. May the vacancy in the board of directors be filled at the same meeting? If the vacancy in the board of directors is due to removal, it may be filled up by election of a replacement at the same meeting even without further notice. If vacancy id due to increase in number o f directors, such vacancy may be filled up in the same meeting authorizing the increase in directors or trustees, provided that it is so stated in the notice of the meeting. 7. May common shareholders be possibly denied the right t o vote? Under Section 6 of the Corporation Code, only preferred and redeemable shares may be deprived of voting rights, ri ghts, unless otherwise provided in the Code. The phrase “unless otherwise provided in the Code” may be applied in case there are founders’ shares issued, as said shares may be given certain rights and privileges not enjoyed by the owners of other stocks. This means that even common shareholders may be deprived of voting rights, provided that w here the exclusive right to vote and be be voted for in the election of directors is granted, it must be for a limited period not to exceed 5 years subject to the approval of the SEC. 8.

Where should the suit against a corporation be filed? Under the Rules of Court, when the action is not upon a written contract, the same must be filed in the municipality w here the defendant or any of the defendants resides or may be served with summons. Settled is the principle that the residence of a corporation is the place where its principal office is established. The term “may be served with summons” in the Rules of Court does not apply when the defendant resides in the Philippines for, in such case, he may be sued only in the municipality of his residence regardless of the pla ce where he may be found fo und and served with summons.

The facts that a corporation maintains a branch office in some parts of the country does not mean that it can be sued in any of there places. To allow otherwise would create confusion and work untold inconveniences to the corporation.

1. A director whose shares are declared delinquent does not automatically cease to be a director. True Reason: The only qualification to be a director is that he must own at least 1 share and since his shares stand in his name pending the sale, he remains t o be and act as a director. And even if there is a sale, he may still be a director because the winning bidder may not bid or pay for all the shares or there might be remaining shares, which would be credited in favor of the delinquent stockholder.

2. Cumulative voting is generally not allowed in non -stock corporations. True Reason: In non-stock corporations, cumulative cumulative voting is generally generally not available, as each member is entitled only to one vote, unless the right of the members to vote is limited, broadened or denied to the extent specified in the articles a rticles of incorporation or the by-laws. ---------------------------------------------------------------------------------------------------------------------------------------------The contents of this compilation are based on Atty. Ladia’s Lectures during the 2 nd Semester of S.Y. 2009-2010.


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3. Non-filing of by-laws within the period of time provided for by laws results r esults to the automatic dissolution of the corporation. False The Supreme Court ruled in the case of Loyola Grand Villa Homeowners (South) Association, Inc. vs. CA, that non-filing of by-laws will not result to the automatic dissolution of the corporation. There must first of all be a hearing to determine the existence of the ground of failure to file by-laws within the required period, and secondly, even assuming such finding, the penalty is not necessarily revocation, but may only be suspension of the charter. In fact, under the rules and regulations of the SEC, failure to file the by-laws on time may be penalized merely with the imposition of an administrative fine without affecting the corporate existence of the erring firm. 4. The by-laws of a stock corporation may provide that stockholders’ meeting may be held anywhere within the Philippines. False Only non-stock corporations may provide that members’ meeting may be held anywhere within the Philippines. In case of stock corporations, stockholders’ meetings, whether regular or special, shall be held in the city or municipality where the principal officer of the corporation is located, and if practicable, in the principal office of the corporation. 5. Any meeting of stockholders/ members irregularly held or called is necessarily without force and effect. False An irregularly held stockholders’ or members’ meeting is subject to ratification, either expressly or impliedly, as the last paragraph of Section 51 of the Corporation Code provides that, 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. 6. A trustee in a voting trust agreement a greement can vote by proxy. True Reason: So long as a person is the legal owner of a share or shares, he has the right to vote by proxy. A proxy holder may vote by proxy. False An agent can have no other agent, unless he is specifically allowed by the principal. 7. An educational institution can have nine (9) me mbers. True Reason: It is true that non-stock educational institutions institutions should only have members whose number is 5, 10 or 15. However, in case of stock educational institutions, they may consist of members whose number is anywhere between 5 and 15. All educational corporations must have a governing board of only either 5, 10 or 15 members. False In case of stock educational institutions, they ma y consist of members whose number is anywhere between 5 and 15.



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8. In all cases, dissolution is followed by liquidation and w inding up. False All corporations dissolved necessarily undertake liquidation and winding up of their corporate affairs. False The dissolved constituent corporation in a merger should necessarily liquidate its corporate affairs. False Section 80 subparagraph 4 of the Corporation Code substantially provides that in case of merger or consolidation, the surviving or the consolidated corporation shall thereafter possess all the rights, privileges, immunities and fra nchises of each of the constituent corporations, and all property, real or personal, and all receivables due on whatever account, shall be deemed transferred to and vested in such surviving or consolidated corporation without further a ct or deed. The phrase “without further act or deed” means that there is no need for liquidation. The transfer of rights and properties shall be automatic.

9. Purchase of treasury shares is equivalent t o subscription. False The basic distinction between the purchase of treasury shares and subscription is that, while the former refers to purchase of issued shares which have been fully paid, the latter refers to the acquisition of unissued stock of a corporation. There is no distinction between a purchase / sale and subscription of the “unissued stocks” of a corporation. True Reason: Under Section 60 of the Corporation Code, the distinction between a purchase and subscription of “unissued stocks” of a corporation has been eliminated. So long as the shares to be acquired from the corporation are unissued stocks of the latter, the contract will be deemed a subscription contract.

10. A corporation is a close corporation if 2/3 of voting rights is owned by another corporation. False Section 96 of the Corporation Code also requires that the corporation which owns 2/3 of the voting rights of the close corporation must likewise be a close corporation.

11. In amendment in the by-laws, appraisal right is available. False Appraisal right may be exercised only on certain instances. Section 81 of the Corporation Code does not include amendment of by-laws in its enumeration of the instances when appraisal right may be exercised by a stockholder. Although said enumeration is not exclusive, a by-law amendment may not still fall under these instances because it does not result in t he changing or restricting the rights of the stockholders, but merely affects the internal governance of the corporation.



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12. Pre-emptive right is available to shares issued in exchange for corporate property. False. Section 39 of the Corporation Code expressly provides that pre-emptive right shall not extend to shares to be issued in good faith with the approval of the stockholders representing 2/3 of the outstanding capital stock in exchange for property needed for corporate purposes. True Reason: In case of close close corporations, pre-emptive right of of stockholders is broader as it include all issues without exception.

13. The power and authority of a corporation sole to own, dispose and alienate real properties is the same as in any other corporation. False A corporation sole can acquire, alienate and / or dispose of its real properties in the same way and manner as any other ordinary corporation. False Under Section 113 of the Corporation Code, for a corporation sole to own, dispose or alienate real properties, it must first secure a court order for that purpose, except when there is a regulated method, in which case, a court order may be dispensed with. This requirement is not imposed upon other corporations.

14. All religious corporations commence to exist and a re vested with juridical personality upon filing of the Articles of Incorporation I ncorporation with the Securities and Exchange Commission. False Only a Corporation Sole commence to t o exist and is vested with juridical personality upon filing of the verified Articles of Incorporation with the Securities and Exchange Commission. Other religious corporations such as religious societies acquire juridical personality, only upon the issuance of the certificate of incorporation by the SEC or the appropriate government agency. 15. A religious society does not commence to have a juridical personality until the issuance of the certificate of registration / incorporation by the SEC. False Other government agencies may also issue in favor of a corporation, a certificate of registration or incorporation, such as the bureau of cooperatives for cooperatives, and homeowners, for home insurance guaranty corporations.

16. The mere appointment by a foreign corporation of a distributor domiciled in the Philippines necessarily implies doing business in t he country. False In Communication Materials & Design, Inc. vs. CA, the Supreme Court ruled that if the distributor or representative appointed by the foreign corporation has maintained an independent status during the existence of their contra ct, the mere appointment of such distributor or representative will not constitute doing business in the Philippines. Such independent status may be determined by the provisions of the contractual agreement entered into by the foreign corporation and its representative. The appointment of an exclusive dealer domiciled in the Philippines by a foreign corporation does not necessarily imply doing / transacting business. True



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17. It is not the lack of the requisite license, but doing business without a license that bars a foreign corporation from access to our courts. False The statement is a general rule, which w hich is subject to certain exceptions. except ions. In the following instances, a foreign corporation can sue before the Philippine courts even without a license: 1. Where the act or tr ansaction involved is an “isolated transaction” or the corporation is not seeking to enforce any legal or contractual rights arising from, or growing out of, any business which it has transacted in the Philippines; 2. Where the purpose of the suit is to protect its trademark, trade name, corporate names, reputation or goodwill; 3. Where it is based on a violation of the Revised Penal Code; 4. Where the foreign corporation is merely defending a suit filed against it; or 5. Where a party is estopped to challenge the personality of the corporation by entering into a contract with it.

18. The remaining assets of a dissolved non-stock corp oration may be distributed among themselves, absent a by-law provision or articles of incorporation to that effect. False This act is prohibited by law in order to avoid fly by night foundations.

19. The averment of a foreign corporation’s capacity to sue is not necessary for it to gain access to our court if it is merely defending a suit filed against it. True. Basis: Time, Inc. vs. Reyes 20. In a corporate controversy, service of summons upon a corporation is valid if made upon any of its directors / trustees. True Basis: Under Section 5(a) Rule 1 of the Interim Rules of Procedure on Intracorporate Controversies, if the defendant is a domestic corporation, service shall be deemed adequate if made upon any of the statutory or corporate officers as fixed by the by-laws or their respective secretaries. A director or trustee is necessarily a “statutory officer”. 21. No corporation can be formed / organized unless there are at least 5 incorporators creating it. False An exception to the rule that corporations must have at least 5 incorporators is the corporation sole which consists of one person or individual only. 22. Minors are not qualified to become incorporators. True Minors are not qualified to become incorporators as the law requires that the incorporators must be of legal age. 23. Corporations are not allowed to be corporators or stockholders in a corporation. False The law does not preclude firms and other entities from becoming stockholders or subscribers to the shares of stock of a corporation. Neither are they prohibited from joining the corporation, after incorporation, as stockholders thereof. ---------------------------------------------------------------------------------------------------------------------------------------------The contents of this compilation are based on Atty. Ladia’s Lectures during the 2 nd Semester of S.Y. 2009-2010.


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Corporations are not allowed to be incorporators in a corporation. False Section 10 of the New Civil Code substantially provides that only natural persons can be incorporators. This implies that corporations and registered partnerships cannot become incorporators because they are not natural persons, but are juridical entities. Exceptions to this rule are cooperatives and corporations primarily organized to hold equities in rural banks and may rightfully become incorporators thereof.

24. A corporation whose stockholders consist solely foreigners is necessarily a foreign corporation. False Under the incorporation test, the nationality of a corporation follows that of the country under whose laws it was wa s incorporated. This is the test applied a pplied in our jurisdiction as can be determined from the definition of foreign corporation under Section 123 of the Corporation Code. This implies that nationality of stockholders, subject to some constitutional limitations, is immaterial in determining the nationality of a corporation.

25. A government-owned or controlled corporation, is for all intents and purposes, a public corporation. False Not all government-owned or controlled corporations are necessarily public corporations. The true test to determine the nature of a corporation as public or private is found in relation of the body to the State. Strictly speaking, a public corporation is one that is created, formed or organized for political or governmental purposes with political powers to be exercised for purposes connected with the public good in the administration of civil government.

26. It is the NLRC that is possessed po ssessed with jurisdiction to hear and decide cases involving employer-employee relationship in corporations created/ organized under the Corporation Code. True Employees of corporations created or organized under the Corporation Code are subject to the provisions of the Labor Code. Under the Labor Code, cases involving employer-employee relationship in such corporations are under the jurisdiction of the NLRC.

27. A corporation can not exist as such without the consent of the State thru its authorized agency. False Not all corporations in order to exist, need prior consent, clearance and/or approval of the State through its authorized agency. Only those corporations whose purpose or objective includes any p urpose under the supervision of another government agency need prior consent of the concerned government agencies or instrumentalities, pursuant to the provisions of the Corporation Code.

28. Common shares can never be denied the right to vote. False In case of founder’s shares, a common stock may be deprived of voting rights, subject to a limited period. ---------------------------------------------------------------------------------------------------------------------------------------------The contents of this compilation are based on Atty. Ladia’s Lectures during the 2 nd Semester of S.Y. 2009-2010.

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29. All corporations de jure can come come into existence upon the issuance of the certificate certificate of registration by the SEC. False As a general rule, corporations de jure can come into existence only upon the issuance of the certificate of registration by t he SEC. An exception to the t he rule is corporation sole, where it comes into existence upon the filing of the verified articles of incorporation. Once filed, it is vested with a juridical capacity. 30. Corporation by Estoppel will apply if there are no third persons prejudiced by the questioned act of the person who have represented himself as an agent of the corporation. False Corporation by Estoppel will not apply if there are no third persons involved in the conflict. Corporation by Estoppel will only apply if there are third persons involved in the conflict. 31. In all cases, filling up of vacancy of the Board of Directors must be based on the election held for its purpose by the stockholders representing 2/3 of the outstanding capital stock. False If the vacancy in the board of directors or trustees occur by virtue of a removal, Section 28 authorizes the filling of vacancy by the election of a replacement at the same meeting, without further notice. If the vacancy is due to an increase in number of directors, it may likewise likew ise be filled up in the same meeting authorizing the increase in directors or trustees, provided that it is so stated in the notice of the meeting. 32. The approval by the SEC is not necessary for an amendment of the by-laws to be valid and effective. False The Corporation Code provides that there should be an approval by the SEC for a by-law amendment to become valid and effective. It will not become valid and effective if the SEC fails to act on it within 6months from filing. It is the amendment to the articles of incorporation that will become valid if the SEC fails to act on it within 6months. 33. An ultra vires act is illegal per se. False An ultra vires are not illegal per se. They may become binding and enforceable either by satisfaction, estoppel ot equitable grounds. 34. Declaration or payment of stock dividends results in a decrease in corporate assets. a ssets. False The declaration or payment of stock dividends does not result in a decrease in corporate assets. It gives the stockholders nothing in the way of distribution of assets but merely divides his existing shares into smaller units.

- End Study for Atty. Ladia’s hypothetical q uestions. Review Codal Provisions. Good luck and God bless Brothers and Sisters. Soli Fortis Survivit!


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