Ladia Notes Revised

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CORPORATION LAW

Corporation is one of the types of business organizations. It is also the most

important in economic development.

INTRODUCTION

Sole proprietorship

- One man form of business entity, personally answers all liabilities, but enjoys all

the profits with the exclusion of others

- Limited shareholders responsibility

- Paid subscription in full, you are no longer liable

Partnership

- Based on mutual trust and confidence

Joint venture

- one time grouping of persons whether they be natural or juridical

- does not entail continuity because after the undertaking is completed it is

already the end

- particular partnership and joint venture would be similar, but there is already a

decision of the Supreme Court declaring them as different

- when they do not register, it does not exist

- Foreign corporations enters into an agreement with a domestic corporation, it

must be registered. Generally they do not need to be registered.

Corporations

- They may enter into joint venture, but generally they cannot enter into a

partnership, but there are exceptions allowed by the SEC: the 3 exceptions must

go hand in hand

1. The articles of incorporation expressly authorized the corporation to enter

into contracts of partnership;

2. The agreement or articles of partnership must provide that all the partners

will manage the partnership; and

3. The articles of partnership must stipulate that all the partners are and shall

be jointly and severally liable for all obligations of the partnership.

DEFINITION AND ATTRIBUTES

4 attributes of a corporation

1. Artif icial being

2. Created by operation of law

3. Right of succession

4. Powers, attributes and properties expressly authorized by law or incident to its

existence.

Doctrine of limited capacity

- Only such powers as are expressly granted to it by law and by its articles of

incorporation including others which are incidental to such conferred powers,

those reasonably necessary to accomplish its purpose and those which may be

incidental to its existence

- Can do things as the law asks or allows it to do

- If it does anything beyond, it shall be considered as ULTRA VIRES

General rule: Moral damages cannot be granted to corporations

Exception: Filipinas Broadcasting Network Inc. vs. Ago Med

- In cases of slander, libel and other forms of defamation (should not qualify

because the code does not qualify whether natural or juridical) Art. 2219 of the

civil code:

Art. 2219. Moral damages may be recovered in the following andanalogous cases:

(1) A criminal offense resulting in physical injuries;

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(2) Quasi-delicts causing physical injuries;

(3) Seduction, abduction, rape, or other lascivious acts;

(4) Adultery or concubinage;

(5) Illegal or arbitrary detention or arrest;

(6) Illegal search;

(7) Libel, slander or any other form of defamation;

(8) Malicious prosecution;

(9) Acts mentioned in Article 309;

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

The parents of the female seduced, abducted, raped, or abused, referred to inNo. 3 of this article, may also recover moral damages.

The spouse, descendants, ascendants, and brothers and sisters may bring theaction mentioned in No. 9 of this article, in the order named.

Advantages (SEE LADIA BOOK)

- No. 2 may also be a disadvantage

- No. 5 may also be a disadvantage

A corporation is a person, therefore protected by the due process clause andequal protection clause of the Constitution

CLASSIFICATION OF CORPORATIONS

Section 3 Stock and non-stock

- Importance of knowing, determining what provisions of the code or the law may

be applicable

Section 3.Classes of corporations. - Corporations formed or organizedunder this Code may be stock or non-stock corporations. Corporations whichhave capital stock divided into shares and are authorized to distribute to theholders of such shares dividends or allotments of the surplus profits on the basisof the shares held are stock corporations. All other corporations are non-stockcorporations. (3a)

Non-stock- title 10

Stock- section 51

Stockholders must generally cast their votes in the meeting; section 4 governed

primarily by the law creating them

Section 4. Corporations created by special laws or charters. -Corporations created by special laws or charters shall be governed primarily bythe 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)

Section 3

- The two requisites must always concur

1. That they have a capital stock divided into shares; and,

2. That they are authorized to distribute dividends or allotments as surplus profits

to its stockholders on the basis of the shares held by each of them.

Section 4

- Created by a special law, they have their own character

- They are not immune from suit unless provided by the law of their creation

- Primarily governed by the law creating them

- Their subsidiaries are entirely different or independent from that of the other

Close corporation

- There is no exemption it is absolute

Public corporation

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- Political or governmental purposes

- Those formed or organized for the government or a portion of the State or any of

its political subdivision and which have for their purpose the general good and

welfare

Private Corporation

- Immediate benefit, aim or advantage of private individuals

- Those formed for some private purpose, benefit, aim or end

- Distinction: public for governmental purpose

Corporation Sole

- Exemption to the rule because it is composed only of one person

- An incorporator may also be a juridical person

Close corporation

- There is exclusivity of shares of stock

- Section 96-105

- Restrictions to transfer shares

- Only those indicated can own shares

- Article must provide that there will be no public offering

Open corporation

- openly admit investors

- example: stock exchange

Domestic/ Foreign

Test

- Incorporation test

- If incorporated under the laws of the Philippines it is a domestic corporation

ME Gray vs. CA

- Parent or Holding/ subsidiaries and affiliates

- Affiliates- no majority vote

SMC 12%

HERSHEY CBPl 12%

12%

Affiliate is subject to common control by the 12 % owners

De jure

- cannot be attached by the state even in a quo warranto proceeding

De facto

- exists by virtue of colorable compliance

- Attached directly only by the state in a quo warranto proceeding

Corporation by estoppel

- So defectively formed, but still considered corporation, but only in relation to

those who cannot deny their existence section 20 and 21

FORMATION AND ORGANIZATION

3 stages

1. Creation

2. Re-organization or quasi-reorganization

3. Dissolution/winding-up

Purpose clause

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- Defining the scope of authority of the corporate enterprise pr undertaking. Both

confirmed and limited

4 limitations of purpose clause

1. Lawful

2. Specific or stated concisely

3. More than one, the primary and secondary must be specified

4. Lawfully combined

- Provision that states, cannot be issued less than par, exception is treasury shares

because it can be issued less than par

A corporation commences only upon issuance of the certificate, prior thereto it

has no being and cannot transact business. Promoters cannot act for a projected

corporation

Metro Manila - paid up capital requirement is 10 M

Non- stock- mere mention of the operating capital

Mention the authorized capital

Restrictions

- Mandatory in close

- Not mandatory in ordinary

Non-stock

- If value is not more than 100,000

A corporation cannot use any other name unless it has been amended

Section 19

- If confusingly similar it will not be allowed to be registered

- Verification slip from the records officer

Section 19. Commencement of corporate existence. - A privatecorporation formed or organized under this Code commences to have corporateexistence and juridical personality and is deemed incorporated from the date theSecurities and Exchange Commission issues a certificate of incorporation underits official seal; and thereupon the incorporators, stockholders/members and theirsuccessors shall constitute a body politic and corporate under the name stated inthe articles of incorporation for the period of time mentioned therein, unless saidperiod is extended or the corporation is sooner dissolved in accordance with law.(n)

- Words corporation or inc. either in full or abbreviated form must be included

Section 18.Corporate name. - No corporate name may be allowed bythe Securities and Exchange Commission if the proposed name is identical ordeceptively or confusingly similar to that of any existing corporation or to anyother name already protected by law or is patently deceptive, confusing orcontrary to existing laws. When a change in the corporate name is approved, theCommission shall issue an amended certificate of incorporation under theamended name. (n)

Doctrine of secondary meaning

- A word or phrase originally incapable of exclusive appropriation [usually generic]

with reference to an article in the market, because of geographically or otherwise

descriptive, might nevertheless have been used so long and so exclusively by

one producer with reference to his article that, in that trade and to that branch of

the purchasing public, the word or phrase has become to mean that the article

was his product.

Section 18

- Lyceum of the Philippines case, the additional geographical name does not make

it confusingly similar

- actual confusion is not necessary - Philips case it is enough that there is probable

confusion

2 requisites must be proven

- that the complainant corporation acquired a prior right over the use of such

corporate name

- identical, deceptively or confusingly, patently deceptive

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principal office

- statement of principal office is required

- city and municipality not only province must be specified

- principal office NOT operations office

- necessary because it will establish the residence of corporations

- venue of actions for or against the corporations

- venue of meetings

- section 51 meetings may only be within the boundaries of the city where the

principal office

- non-stock may be held anywhere in the Philippines, if provided in its by-laws

- where summons may be served

- registration of chattel mortgage must be registered in the register of deeds

where the principal office is located

Clavecilla Radio System vs. Antillon

- action not upon a written contract

- city where the defendant resides

term of existence

- corporate term required

- determining what point in time the juridical personality will cease to exist

- enter into contract only when it has juridical personality

- once it ceases to exist, it no longer has personality

- exist for another 3 years only for purposes of liquidation

- Dissolution- it is automatic

When should extension be made?

- General rule: Not earlier than 5 years

- Exception: unless there are justifiable reasons

May it be extended after expiration?

- Alhambra cigar vs. SEC once it ceases to exist it has no vested politic, exist only

for a period of 3 years only for liquidation and for that purpose only

Article 5 How many incorporators should there be?

- 5-15

May a corporation be an incorporator?

- General rule: only natural persons

- Exception: cooperatives and corporation primarily organized to hold equities inrural banks

How about minors?

- NO, because they must be of legal age

May a corporation organized by incorporators consisting solely of foreigners

- Yes, there is no nationality requirement only residence, as long as majority are

residents of the Phil

Define incorporators

- Those person mentioned in the articles as originally forming the corporation andwho are signatories of the articles of incorporation.

- Must be signatories to be incorporators

Section 5.Corporators and incorporators, stockholders and members.- Corporators are those who compose a corporation, whether as stockholders oras members. Incorporators are those stockholders or members mentioned in thearticles of incorporation as originally forming and composing the corporation andwho are signatories thereof.

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Corporators in a stock corporation are called stockholders orshareholders. Corporators in a non-stock corporation are called members. (4a)

Define corporators

- All persons who compose the corporation at any given time and need not be

among those who execute the articles of incorporation at the start of its

formation and organization.

- Originally or subsequently

- Sect ion 5 provides:

Corporators in a stock corporation are called stockholders or

shareholders. Corporators in a non-stock corporation are called members. (4a)

May a corporation be a corporator?

- YES. There is nothing to prevent a corporation from being a stockholder

Incorporator must subscribe to 1 share

There are those that are exclusively reserved to Filipinos

An incorporator maybe a corporator as long as he is a stockholder

section 6

Section 6. Classification of shares. - The shares of stock of stockcorporations may be divided into classes or series of shares, or both, any ofwhich classes or series of shares may have such rights, privileges or restrictionsas may be stated in the articles of incorporation: Provided, That no share may bedeprived of voting rights except those classified and issued as "preferred" or

"redeemable" shares, unless otherwise provided in this Code: Provided, further,That there shall always be a class or series of shares which have complete votingrights. Any or all of the shares or series of shares may have a par value or haveno par value as may be provided for in the articles of incorporation: Provided,however, That banks, trust companies, insurance companies, public utilities, andbuilding and loan associations shall not be permitted to issue no-par value sharesof stock.

Preferred shares of stock issued by any corporation may be givenpreference in the distribution of the assets of the corporation in case ofliquidation and in the distribution of dividends, or such other preferences as maybe 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 astated par value. The board of directors, where authorized in the articles ofincorporation, may fix the terms and conditions of preferred shares of stock orany series thereof: Provided, That such terms and conditions shall be effectiveupon the filing of a certificate thereof with the Securities and ExchangeCommission.

Shares of capital stock issued without par value shall be deemed fullypaid and non-assessable and the holder of such shares shall not be liable to thecorporation or to its creditors in respect thereto: Provided; That shares withoutpar value may not be issued for a consideration less than the value of five(P5.00) pesos per share: Provided, further, That the entire consideration receivedby the corporation for its no-par value shares shall be treated as capital and shallnot be available for distribution as d ividends.

A corporation may, furthermore, classify its shares for the purpose ofinsuring compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and statedin the certificate of stock, each share shall be equal in all respects to every othershare.

Where the articles of incorporation provide for non-voting shares in thecases allowed by this Code, the holders of such shares shall nevertheless beentitled 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 orsubstantially 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 othercorporations;

7. Investment of corporate funds in another corporation or business inaccordance with this Code; and

8. Dissolution of the corporation.

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Except as provided in the immediately preceding paragraph, the votenecessary to approve a particular corporate act as provided in this Code shall bedeemed to refer only to stocks with voting rights. (5a)

How many directors should there be?

- General rule: Not less than 5 not more than 15

- Exceptions:

1. Educational corporations registered as non stock corporation whose number of

trustees, though not less than five and not more than [15] should be divisible by

five [5], meaning they must have either five, ten, or fifteen trustees and no

other;

2. In close corporations where all the stockholders are considered as members of

the board of directors thereby effectively allowing twenty members in the board.

3. The by-laws of a corporation may provide for additional qualifications and

disqualifications of its members of the board of directors or trustees. However itmay not do away with the minimum disqualifications lay down by the Code.

Qualifications of the governing board

- Requires mere residency

Section 23. The board of directors or trustees. - Unless otherwiseprovided in this Code, the corporate powers of all corporations formed under thisCode shall be exercised, all business conducted and all property of suchcorporations controlled and held by the board of directors or trustees to beelected from among the holders of stocks, or where there is no stock, fromamong the members of the corporation, who shall hold office for one (1) yearuntil their successors are elected and qualified. (28a)

Every director must own at least one (1) share of the capital stock ofthe corporation of which he is a director, which share shall stand in his name onthe books of the corporation. Any director who ceases to be the owner of at leastone (1) share of the capital stock of the corporation of which he is a director shallthereby cease to be a director. Trustees of non-stock corporations must bemembers thereof. A majority of the directors or trustees of all corporationsorganized under this Code must be residents of the Philippines.

May a domestic corporation have a governing board consisting solely of

foreigners?

- YES, section 23 majority of them must be residents of the Philippines, no

nationality requirement

Anti-dummy act

- If the business undertaking or activity is only partially nationalized, aliens can be

elected as such directors, [unless the law provides otherwise] but their number

shall only be in proportion to their equity or participation in the capital stock of

the corporation.

Disqualifications

- The disqualifications provided for is absolute and may not be done away with.

Corporate by-laws may, however, provide for additional qualifications and

disqualifications.

Section 27. Disqualification of directors, trustees or officers. - Noperson convicted by final judgment of an offense punishable by imprisonment fora period exceeding six (6) years, or a violation of this Code committed within five

(5) years prior to the date of his election or appointment, shall qualify as adirector, trustee or officer of any corporation. (n)

Section 27 and 23 minimum disqualifications and qualifications

Lee vs. CA

- By laws may provide for additional

Govt vs. El hogar Filipino, Gokongwei vs. SMC

Capital structure

Foundation- minimum paid-up capital 3M

Authorized capital 1 M No. of shares 1M shares

par value 1.00

Amount of shares subscribed

50 K A

50 K B

C 250K

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D

E

PAID UP =62,500

Corporation cannot exceed more than 1 M it is the maximum amount it cannot issue more

unless amended

Maximum shares it can issue is 1M shares unless amended

How much shares should be subscribed?

- Must be at least 25% of the authorized capital stock

Paid- up must be at least 25%-minimum

Section 30

- Total subscription compliance with minimum 25% total

- Any combination would comply with the minimum required by section 30

Section 30. Compensation of directors. - In the absence of anyprovision in the by-laws fixing their compensation, the directors shall not receiveany compensation, as such directors, except for reasonable per diems: Provided,however, That any such compensation other than per diems may be granted todirectors by the vote of the stockholders representing at least a majority of theoutstanding capital stock at a regular or special stockholders' meeting. In nocase shall the total yearly compensation of directors, as such directors, exceedten (10%) percent of the net income before income tax of the corporation duringthe preceding year. (n)

Minimum for a domestic corporation?

- In no case shall the paid- up capital be less than 5k

Is there a minimum authorized capital imposed by the code?

- If there is minimum paid-up logically there should also be a minimum capital

=5000

Minimum paid-up capital for a financing company metro manila 10 M if located in

MM

Shares of stock

Purpose of classification

- To specify and define the rights and privileges of the stockholders;

- For regulation and control of the issuance of sale of corporate securities for the

protection of purchasers and stockholders.

- As a management control device.

- To comply with statutory requirements particularly those which provide for

certain limitations on foreign ownership and shares like overseas employment

agencies requiring to own at least 75% of the shares of stock thereof.

- To better insure return on investment which can be affected through the

issuance of redeemable shares or preferred shares, i.e., granting the holders

thereof, preference as to dividends and/or distribution of assets in case of

liquidation; and,

- For flexibility in price, particularly, no par shares may be issued or sold from time

to time at different price depending on the net worth of the company since they

do not purport to represent an actual of fixed value.

Section 6

- Each shall be equal in all respects to every other share

Preferred shares

- Speci fic preference

- Dividends or during liquidation

No par

- Can sell it with the network of the corporation

Distinction between the subscribed and outstanding stocks?

- Section 137

Section 137. Outstanding capital stock defined. - The term"outstanding capital stock", as used in this Code, means the total shares of stock

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issued under binding subscription agreements to subscribers or stockholders,whether or not fully or partially paid, except treasury shares. (n)

- Voting and dividend rights, it refers to the outstanding capital stocks

- Only outstanding stocks are allowed to vote and receive dividends

- Actually the same

Treasury shares

- are also subscribed shares

- while they remain in the treasury, no voting and dividend rights

- may be reissued by the corporation

- once reissued they become outstanding stocks again

common shares

- carry the r ight to vote

preferred shares

- grants the holder preference

- preference as to dividends

- preference as to distribution of the remaining assets upon dissolution or

- both

- YOU MUST STATE THE PREFERENCE BECAUSE IF NOT THEY ARE PRESUMED TO BEEQUAL

- It may include such other preferences not inconsistent with the Code. This is so

because Section 6 of the said law allows a stock corporation to issue preferred

shares subject only to the limitations imposed therein which are:

a. They can be issued only with sated par value; and,

b. The preferences must be stated in the articles of incorporation and in the

certificate of stock, otherwise, each share shall be, in all respect, equal to every

other share.

Participating

- Must be stated because the presumption is that it is participating

Cumulative

- Irrespective of whether or not they where earned

Preferred

- May be denied

- Unless denied they are still entitled

What if hindi i-declare kahit na may dividends rights for the previous years? May

they be denied dividend rights because they are non holders of non-cumulative?NOTE: YOU CANNOT COMPEL THE CORPORATION TO DECLARE DIVIDENDS

UNLESS IT EXCEEDS 100 % PAID UP CAPITAL SEC. 43

Section 43.Power to declare dividends. - The board of directors of astock corporation may declare dividends out of the unrestricted retainedearnings which shall be payable in cash, in property, or in stock to allstockholders on the basis of outstanding stock held by them: Provided, That anycash dividends due on delinquent stock shall first be applied to the unpaidbalance on the subscription plus costs and expenses, while stock dividends shallbe withheld from the delinquent stockholder until his unpaid subscription is fullypaid: Provided, further, That no stock dividend shall be issued without theapproval of stockholders representing not less than two-thirds (2/3) of theoutstanding capital stock at a regular or special meeting duly called for thepurpose. (16a)

Stock corporations are prohibited from retaining surplus profits inexcess of one hundred (100%) percent of their paid-in capital stock, except: (1)when justified by definite corporate expansion projects or programs approved bythe board of directors; or (2) when the corporation is prohibited under any loanagreement with any financial institution or creditor, whether local or foreign, fromdeclaring dividends without its/his consent, and such consent has not yet beensecured; or (3) when it can be clearly shown that such retention is necessaryunder special circumstances obtaining in the corporation, such as when there isneed for special reserve for probable contingencies. (n)

- It depends because there are three types of non-cumulative preferred shares

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- Discretionary dividend type

- Mandatory i f earned

- Earned cumulative or dividend credit type

Compare cumulative share from non-cumulative, earned cumulative or dividend

credit type

- Cumulative share whether or not earned

- Non-cumulative earned cumulative or dividend credit type- only if earned

Par

- stated par value; shall not be issued less than par

No par

- without stated par value

- once fully paid no longer liable

Corporations cannot use its capitals in declaring dividends; not all can issue no

par value section 6

Voting

- entitled to vote at any motion brought up in writing

Non-voting

- not enti tled to vote

What types of shares may be denied of the right to vote?

- Preferred and redeemable shares

Is it correct to state that common shares can never be denied the right to vote?

- Only preferred and redeemable shares are denied unless provided in this code

- PWEDENG MA-DENY YUNG COMMON SHARES, KASI YUNG FOUNDERS SHARES

MERON SILANG EXCLUSIVE RIGHTS NA SILA LANG ANG MERON, SO PWEDE

SILANG BUMOTO WITH REGARDS TO SOMETHING NA HINDI NA SAKOP NG

COMMON SHARE RIGHTS

- Example: founders shares- may be given certain rights and privileges

- Even common shares may be denied the right to vote of founders shares issued

Section 7.Founders' shares. - Founders' shares classified as such inthe articles of incorporation may be given certain rights and privileges notenjoyed by the owners of other stocks, provided that where the exclusive right tovote and be voted for in the election of directors is granted, it must be for alimited period not to exceed five (5) years subject to the approval of theSecurities and Exchange Commission. The five-year period shall commence fromthe date of the aforesaid approval by the Securities and Exchange Commission.(n)

Do you include non-voting shares in passing a valid corporate act?

- Even non-voting shares are entitled to vote under section 6

Redeemable shares

- Discretionary/optional

- Obligatory or mandatory

Generally a corporation can reacquire its own shares if it has unrestricted

retained earnings

Exception: redeemable shares may be reacquired irrespective of retained

earnings

Treasury shares

- They are treasury while in the treasury account of the corporation

May they be reissued by the corporation?

- YES

If they are reissued will they be denied the right to vote?

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- Once reissued they shall become outstanding stocks again and purchasers shall

be entitled to all the rights and privileges as the other holders have

Section 57 treasury shares have no voting and dividend rights. Why not?

Section 57.Voting right for treasury shares. - Treasury shares shallhave no voting right as long as such shares remain in the Treasury. (n)

- Answer: commissioner vs. manning page 62 first par.

Although authorities may differ on the exact legal and accounting

status of so-called treasury shares, they are more or less in agreement that

treasury shares are stocks issued and fully paid for and reacquired by the

corporation either by purchase, donation, forfeiture or other means. Treasury

shares are therefore issued shares but being in the treasury they do not have the

status of outstanding shares. Consequently, although a treasury share, not

having been retired by the corporation re-acquiring it, may be re-issued or sold

again, such shares, as long as it is held by the corporation as a treasury share,

participates neither in dividends, because dividends cannot be declared by the

corporation to itself, nor in meetings of the corporation as voting stock, forotherwise equal distribution of voting powers among stockholders will be

effectively lost and the directors will be able to perpetrate their control of the

corporation, though it still represents a paid for interest in the property of the

corporation. The foregoing essential features of a treasury stocks are lacking in

the questioned shares.

In this case, and under the terms of the trust agreement, the shares of

stock of Reese participated in dividends which the trustee received and the

said shares were voted upon by the trustee in all corporation meetings. They

were not, therefore, treasury shares.

When the law speaks of outstanding rights it does not include treasury shares

Treasury shares may be reissued

- They are actually assets of the corporation

- Once re-issued they become outstanding stocks again

- The corporation may cancel them; in effect there will be a reduction in the

outstanding capital stocks

- The code does not require ordinary corporations to provide for restrictions, but it

does not likewise prohibit restrictions

- Example: right of first refusal

- The restriction must be contained in the articles of incorporation

- If provided in by-laws but not in the articles of incorporation then it will not be

binding

- Restrictions and preferences are mandatorily required in close corporations

- If it does not provide restrictions it is not a close corporation

- Specified persons- close corporations

- If not one of those specified you are not included because there is exclusivity in

close corporations

- Should also be in the by-laws not only in the articles of incorporation

No transfer clause

Execution clause

Acknowledgment

Treasurer affidavit part of the articles of incorporation

Section 23-27 minimum qualifications, but there may be additional

Grounds for disapproval

- Only substantial and not strict is required

May the SEC refuse or reject registration?

-

Section 17. Grounds when articles of incorporation or amendmentmay be rejected or disapproved. - The Securities and Exchange Commission mayreject the articles of incorporation or disapprove any amendment thereto if thesame is not in compliance with the requirements of this Code: Provided, That theCommission shall give the incorporators a reasonable time within which tocorrect or modify the objectionable portions of the articles or amendment. Thefollowing are grounds for such rejection or disapproval:

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1. That the articles of incorporation or any amendment thereto is notsubstantially 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 stocksubscribed and/or paid is false;

4. That the percentage of ownership of the capital stock to be owned by citizensof the Philippines has not been complied with as required by existing laws or theConstitution.

No articles of incorporation or amendment to articles of incorporationof banks, banking and quasi-banking institutions, building and loan associations,trust companies and other financial intermediaries, insurance companies, publicutilities, educational institutions, and other corporations governed by special lawsshall be accepted or approved by the Commission unless accompanied by afavorable recommendation of the appropriate government agency to the effectthat such articles or amendment is in accordance with law. (n)

- But the grounds in section 17 are not exclusive

When will the corporation commence to exist?

- Section 19

Section 19. Commencement of corporate existence. - A privatecorporation formed or organized under this Code commences to have corporateexistence and juridical personality and is deemed incorporated from the date theSecurities and Exchange Commission issues a certificate of incorporation underits official seal; and thereupon the incorporators, stockholders/members and theirsuccessors shall constitute a body politic and corporate under the name stated inthe articles of incorporation for the period of time mentioned therein, unless saidperiod is extended or the corporation is sooner dissolved in accordance with law.(n)

A corporation de jure can come into existence only upon the issuance of the

certificate of registration by the SEC? TRUE OR FALSE?

- TRUE

- EXCEPTION: CORPORATION SOLE

Section 112.Submission of the articles of incorporation. - The articlesof incorporation must be verified, before filing, by affidavit or affirmation of thechief archbishop, bishop, priest, minister, rabbi or presiding elder, as the casemay be, and accompanied by a copy of the commission, certificate of election orletter of appointment of such chief archbishop, bishop, priest, minister, rabbi orpresiding elder, duly certified to be correct by any notary public.

From and after the filing with the Securities and Exchange Commissionof the said articles of incorporation, verified by affidavit or affirmation, andaccompanied by the documents mentioned in the preceding paragraph, suchchief archbishop, bishop, priest, minister, rabbi or presiding elder shall become acorporation sole and all temporalities, estate and properties of the religiousdenomination, sect or church theretofore administered or managed by him assuch chief archbishop, bishop, priest, minister, rabbi or presiding elder shall beheld in trust by him as a corporation sole, for the use, purpose, behalf and solebenefit of his religious denomination, sect or church, including hospitals, schools,colleges, orphan asylums, parsonages and cemeteries thereof. (n)

- CORPORATION SOLE- upon filing of the verified articles of incorporation, once

filed it is vested with a judicial capacity

General rule section 19

- Vested with judicial capacity upon issuance of the certificate by the SEC

o However it is not accurate according to atty. Ladia because there are

those that can issue for example cooperatives- BUREAU OF

COOPERATIVES which register, home insurance guaranty

corporation- HOME OWNERS

Cagayan Fishing vs. Sandika

- Corporations are created by law

- Commence to exist upon issuance by the CONCERNED government corporation

or agency

- Prior there to it has no being

- The transfer of the property was not valid, it likewise did not have the right to

transfer

De jure

- Strict or substantial compliance

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De facto

- 4 requisites must go hand in hand take out anyone of them there can be no de

facto corporation

1. There is a valid statute under which the corporation could have been created asa de jure corporation.

2. An attempt, in good faith, to form a corporation according to the requirements of

law, which goes far enough to amount to a colorable compliance with the law;

3. A user of corporate powers, the transaction of business in some way as if it were

a corporation; and,

4. Good faith in claiming to be and doing business as a corporation.

Are the rights and obligations between officers and directors of a de jure and de

facto the same?

- YES. Governed by the same law, rules and regulations

Only important in determining, is for the purpose of applying the rules with

regards to the direct and collateral attack

The existence of a de jure cannot be questioned even by the State, either directly

or indirectly

Existence of a de facto can be questioned only by the State directly in a quo

warranto proceeding only

Municipality of Malabang vs. Benito

- What is the missing link so as to consider it a de facto? A law, because the

executive order is unconditional

- An unconditional act affords no rights, creates no office

- Legal contemplation it was never passed at all

- It can therefore be questioned by any person

If the certificate of registration has not been issued, may a corporation de facto

exist?

- NO!

- Number 4 requirement, good faith in claiming to be and doing business as a

corporation

Hall vs. Piccio

- Missing link is good faith

- The certificate was not yet issued by the SEC, the members knew and therefore

they were not acting in good faith, therefore anybody can question its existence


- So defectively formed so that they are not to be considered a de jure or de facto

- General partners- liable even beyond his promise even his personal properties

are prone to attachment

Lozano vs. Delos Santos

- Founded on principle of equity

- Exercise corporate powers

- Enters with business with 3rd parties

- When there is no 3rd persons involved and the problem arises between there

members, therefore they themselves know that there is no corporation by

estoppel

Albert vs. University

- 1965 case, no section 21 yet

- Applied where the rules governing agency

- A person purporting in behalf of a non existing corporation

- Section 21, you arrive at the same decision

Chiang Kai Siek vs. CA

- SC based its decision from the provision of the education act

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- It cannot immune itself by virtue of its non compliance with the law

Assuming there was no law?

- YES, it may still be sued as a school for the past 32 years the school represented

itself as possessed of juridical personality

General rule: a 3rd party transacting with a non existent corporation shall be

estopped to deny

Asia banking vs. standard products

- General rule: absence of fraud a person who has dealt with a non incorporated

corporation shall be stopped to deny from actions in which it had benefited

- Exemptions: when there is fraud the general rule shall not apply

Salvatierra vs. Garlitos

- As a general rule a person who has contracted it a corporation lackingpersonality

- Doctrine is not applicable where fraud takes part in the transaction

Another exemption

International express travel and tours vs. CA

- No fraud in this case

- How come Kahn was made liable?

- Doctrine of incorporation

- Applies only if that person is trying to escape from a contract where he is

benefited

- In this case petitioner is not trying to escape liability, but rather the one claiming

from the contract

Would this apply to foreign corporation?

- YES, it may apply

- Georg Grotjahn vs. Isnami

A foreign corporation cannot gain access to our courts unless they attain a

license to engage in business in the Philippines but applying corporation by

estoppels, the court allowed

Municipality of Malabang case

- No law, hence may be questioned by any person

- An unconstitutional act is not a law, t confers no rights, it imposes no duties, it

affords no protections, it crates o office, it is in legal contemplation, as

inoperative as though it had never been passes

Hall vs. Piccio

- No good faith


- Admission, conduct or agreement

- Will not apply among members themselves there must be a 3rd party

- Cannot escape when benefited

- General rule: you deal with a corporation, as to estop it

- Exceptions: 1. fraudulently misrepresents the third person may file an action

directly to those members, 2. 3 rd party will not be estopped if he is not trying to

escape liability

2 possible remedies

- Chiang kai siek case

- Albert case

What would be the effect if the corporation failed to commence transaction?

- Automatic

Operated but becomes subsequently inoperative for 5 years only a ground for

suspension, proper notice and hearing

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Commencement

- Example realty company

CORPORATE CHARTER AND ITS AMENDMENTS

What do you understand by the word charter? Is it the same as articles of

incorporation?

- Corporate charter is broader

Franchise

- Primary power granted by the state to be and act as a corporation

- Secondary franchise is the right or privilege that the corporation may exercise

You cannot issue investment contracts without a secondary franchise, kailangan

primary muna hindi pwede mauna secondary kasi sa section 19 it does not exist

until issued with a certificate of registration or incorporation

Corporate entity

- Corporation exist separately and independently from the stockholders

- Stockholders cannot bring an action, to bring back the properties of a corporation

- Corporation has no interest in the individual properties of its members

Sulo ng Bayan vs. Araneta

- Corporation cannot bring an action for the recovery of the properties of its

members

Caram vs. CA

- Stockholders cannot be held liable for the legitimate obligations of the

corporation, they exist separately and independently from one another

Cruz vs. Dalisay

- Final judgment against a corporation cannot be enforced against stockholders

Rustan Pulp vs. CA

- Corporation exist separately and independently

- Corporation are juridical entities, they exist only in legal contemplation, can act

only through its authorized representatives

Soriano vs. CA

- They are not personally liable

- They where signed for and in behalf of the corporation

Palay inc. vs. Clave

- Liabilities incurred by the corporation cannot be enforced against stockholders,

etc., even if stockholders, etc. happens to own a substantial interest in the

corporation, mere ownership does not disregard the corporate entity theory

Corporate entity for legal or legitimate purposes only

Two or more corporations, one of them will be treated as a mere alter-ego

You cannot pierce the veil of corporate fiction when there are no facts attendant

in the case

Corporate Entity Theory

- The corporation is possessed with a personality separate and distinct from the

individual stockholders or members and is not affected by the personal rights,

obligations or transactions of the latter

Instrumentality rule

- Where one corporation is so organized and controlled and its affairs are

conducted so that it is, in fact, a mere instrumentality or adjunct of the other, thefiction of the corporate entity of the instrumentality may be disregarded

- Courts are concerned with reality and not form

- Mere ownership of all or substantially all of the shares of stock of a corporation is

not, in itself, insufficient ground for disregarding the separate corporate

personality. And for the separate personality of the corporation to be

disregarded, the wrong doing must be clearly and convincingly established

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- Fraud must be proven by clear and convincingly evidence amounting to more

than preponderance. It cannot be justified by speculation and can never be

presumed. And only if it sought to hold the stockholders liable directly for

corporate debt

Palacio vs. Fely

- Piercing the veil of corporate fiction

- Fely trans and the other corporation is one and the same

Marvel bldg. vs. David

- There must be facts before the court will be justified in piercing the veil of

corporate fiction

- Corporation was a mere extension of the personality of the person

Yutivo and sons vs. Court of Tax Appeals

- What where the facts or circumstances arrived by the court here?

- Subscribed capital where all advanced by Yutivo, the board where the same as

Yutivo

Commissioner of Internal Revenue vs. Norton and Harrison

- Court applied the general rule

- Mere substantial ownership does not mean that it has a same corporate

entity

La Campana Coffee Factory, Inc. vs. KKM

- Two corporations managed by the same family, workers were made

interchangeably

Emilio Cano vs. CIR

- Sued in there official capacity

- Reverse of Soriano vs. CA (signed in their official capacity)

Tesco vs. WCC

- The two corporations where located in the same office

Claparols vs. CIR

- Same as NAFLU and A.C. Ransom

Concept builders vs. NLRC

- Instrumentality rule. What is the instrumentality rule? where one corporation is

so organized and controlled and its affairs are conducted so that it is, in fact, a

mere instrumentality or adjunct of the other, the fiction of the corporate entity of

the instrumentality may be disregarded.

- Has no separate mind of its own. What is the degree of control?

1. Control, not mere majority or complete stock control, but complete domination,

not only of finances but of policy and business practice in respect to the

transaction attacked so that the corporate entity as to this transaction had at the

time no separate mind, will or existence of its own.

2. Such control must have been used by the defendant to commit fraud or wrong, to

perpetuate the violation of a statutory or other positive legal duty or dishonest

and unjust act in contravention of plaintiffs legal rights; and,

3. The aforesaid control and breach of duty must proximately cause the injury or

unjust loss complained of.

- The absence of one of the elements prevents piercing the corporate veil. In

applying the instrumentality or alter ego doctrine, the courts are concerned

with reality and not form, with how the corporation operated and the individual

defendants relationship to that operation.

There must facts and circumstances before warrant piercing the veil of corporate

fiction

The control necessary does not mean stock ownership

MCConnel vs. CA

- were located in the same floor

- while the mere ownership of all or nearly all of the capital stock of a corporation

does not necessary mean that it is a mere business conduit of the stockholder,

that conclusion is amply justified where it is shown, as in the case before us, that

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the operations of the corporation were so merged with the stockholders as to be

practically indistinguishable from them. To hold the latter liable for the

corporations obligations is not to ignore the corporations separate entity, but

merely to apple the established principle that such entity cannot be invoked or

used for purposes that could not have been intended by the law that created that

separate personality.

Tan boon bee vs. Jarencio

- Why would a drug company need a printing machine

- The property must be in pursuance of a company business

Cease vs. CA

- Alter-ego or the extension of the person of forest ware does the court pierced the

veil of corporate fiction

- As to not deprive the holders of their successional rights

- Mere ownership of all or substantially all is not a justification of piercing the veil

of corporate fiction

Fraud must be proven by clear and convincing evidence cannot presume or

speculate, there must be facts and circumstances

Fraud must be clear and convincing evidence more than preponderance

Remo Jr. vs. IAC

- The resolution was not entered to defraud anyone

Del Rosario vs. National Labor Commission

- The wrongdoing must be clearly established

- There must be facts to support

- Payment of claims cannot thus be presumed

Indophil Textile Mill vs. CALICA

- How do you distinguish this ruling to La Campana, having the same issues:

- La campana, one payroll, employees were made interchangeable. Acrylic had its

own standards

PNB vs. Ritratto Group

- Control test

- Not mere majority but rather complete

- Twin ace was only a subsequent interested party

- Assets and machineries

Amendment of the articles of incorporation

- Express power granted to a corporation

Section 16

- Appraisal right

- Section 81 to object on certain acts and transactions

Section 81. Instances of appraisal right. - Any stockholder of acorporation shall have the right to dissent and demand payment of the fair valueof his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect ofchanging or restricting the rights of any stockholder or class of shares, or ofauthorizing preferences in any respect superior to those of outstanding shares ofany class, or of extending or shortening the term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other

disposition of all or substantially all of the corporate property and assets asprovided in the Code; and

3. In case of merger or consolidation. (n)

- Right granted only in specified instances

Are non-voting shares included in amending the articles of incorporation

1 100/s XYZ-----ABC

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2 100/s

To

10 100/s

=1M/S what would be the 2/3?

Section 6 last paragraph

Voting shares are excluded except the foregoing instances

1 1

2 2

3 3

4 4

5 5

6 6

1 & 2=absent 1&2=absent but gave their

written assent

3 & 4= objected 3&4=objected

5 & 6= approved the amendment 5&6=approved

Would there be a valid amendment

Special amendments 37 & 38 shortening that would result to dissolution require

prior approval by the SEC

Section 37. Power to extend or shorten corporate term. - A privatecorporation may extend or shorten its term as stated in the articles ofincorporation when approved by a majority vote of the board of directors ortrustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of themembers in case of non-stock corporations. Written notice of the proposed actionand of the time and place of the meeting shall be addressed to each stockholderor member at his place of residence as shown on the books of the corporationand deposited to the addressee in the post office with postage prepaid, or served

personally: Provided, That in case of extension of corporate term, any dissentingstockholder may exercise his appraisal right under the conditions provided in thiscode. (n)

Section 38.Power to increase or decrease capital stock; incur, create

or increase bonded indebtedness. - No corporation shall increase or decrease itscapital stock or incur, create or increase any bonded indebtedness unlessapproved by a majority vote of the board of directors and, at a stockholder'smeeting duly called for the purpose, two-thirds (2/3) of the outstanding capitalstock shall favor the increase or diminution of the capital stock, or the incurring,creating or increasing of any bonded indebtedness. Written notice of theproposed 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 thestockholder's meeting at which the proposed increase or diminution of the capitalstock or the incurring or increasing of any bonded indebtedness is to beconsidered, must be addressed to each stockholder at his place of residence asshown on the books of the corporation and deposited to the addressee in thepost office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directorsof the corporation and countersigned by the chairman and the secretary of the

stockholders' meeting, setting forth:

(1) That the requirements of this section have been complied with;

(2) The amount of the increase or diminution of the capital stock;

(3) If an increase of the capital stock, the amount of capital stock or number ofshares of no-par stock thereof actually subscribed, the names, nationalities andresidences of the persons subscribing, the amount of capital stock or number ofno-par stock subscribed by each, and the amount paid by each on hissubscription in cash or property, or the amount of capital stock or number ofshares of no-par stock allotted to each stock-holder if such increase is for thepurpose of making effective stock dividend therefor authorized;

(4) Any bonded indebtedness to be incurred, created or increased;

(5) The actual indebtedness of the corporation on the day of the meeting;

(6) The amount of stock represented at the meeting; and

(7) The vote authorizing the increase or diminution of the capital stock, or theincurring, creating or increasing of any bonded indebtedness.

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Any increase or decrease in the capital stock or the incurring, creatingor increasing of any bonded indebtedness shall require prior approval of theSecurities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the

corporation and the other shall be filed with the Securities and ExchangeCommission and attached to the original articles of incorporation. From and afterapproval by the Securities and Exchange Commission and the issuance by theCommission of its certificate of filing, the capital stock shall stand increased ordecreased and the incurring, creating or increasing of any bonded indebtednessauthorized, as the certificate of filing may declare: Provided, That the Securitiesand Exchange Commission shall not accept for filing any certificate of increase ofcapital stock unless accompanied by the sworn statement of the treasurer of thecorporation lawfully holding office at the time of the filing of the certificate,showing that at least twenty-five (25%) percent of such increased capital stockhas been subscribed and that at least twenty-five (25%) percent of the amountsubscribed has been paid either in actual cash to the corporation or that therehas been transferred to the corporation property the valuation of which is equalto twenty-five (25%) percent of the subscription: Provided, further, That nodecrease of the capital stock shall be approved by the Commission if its effectshall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, orincrease the same, with the approval by a majority vote of the board of trusteesand of at least two-thirds (2/3) of the members in a meeting duly called for thepurpose.

Bonds issued by a corporation shall be registered with the Securitiesand Exchange Commission, which shall have the authority to determine thesufficiency of the terms thereof. (17a)

The vote must be cast at the meeting called for that purpose

Written assent would not suffice

When do amendments become valid and effective?

- Only upon the approval of the SEC TRUE OR FALSE?

- FALSE because it can be valid upon the date of filing if not acted upon within 6

months without fault attributable to the corporation

Why is it retroactive?

What provision may be amended, altered or repealed

Can you change name, address for example she married or changed address?

- NO. you cannot change that

Fait accompli, are beyond the powers or authority of the corporation to change,

alter or modify. These would include the following:

- Names of the incorporators and

- The incorporating directors or trustees,

- The name of the treasurer originally or first elected by the subscribers or

members to act as such until his successor has been duly elected and qualified,

- The number of shares and amount originally subscribed and paid out of the

original authorized capital stock of the corporation,

- The date and place of execution of the articles of incorporation,

- The signatories and acknowledgment thereof.

- All other provisions or matters stated or contained in the articles are subject to

amendment.

Founders or signatories hindi pwede palitan

Names, nationalities- you cannot

Capital- right granted by law to all corporation

Paid up capital- NO

Restriction and transfer of shares in ordinary stock corporations

- You can, but close corporation cannot

- Section 96, otherwise it will not be a close corporation

Section 96.Definition and applicability of Title. - A close corporation,within the meaning of this Code, is one whose articles of incorporation providethat: (1) All the corporation's issued stock of all classes, exclusive of treasuryshares, 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 subjectto one or more specified restrictions on transfer permitted by this Title; and (3)

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The corporation shall not list in any stock exchange or make any public offeringof any of its stock of any class. Notwithstanding the foregoing, a corporation shallnot be deemed a close corporation when at least two-thirds (2/3) of its votingstock or voting rights is owned or controlled by another corporation which is not aclose corporation within the meaning of this Code.

Any corporation may be incorporated as a close corporation, exceptmining or oil companies, stock exchanges, banks, insurance companies, publicutilities, educational institutions and corporations declared to be vested withpublic 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 suppletorilyexcept insofar as this Title otherwise provides.

Transfer clause, executor clause, acknowledgment, treasury affidavit-NO

Philippine First Insurance case

- Mere change in the name of a corporation or by merely complying with the law is

general amendment

- It does not change its personality. It is the same person in a different name. the

charter is the same

Amendment of a corporate term

- Extending the same can never be made 7 years prior? TRUE or FALSE

- FALSE. It can be if there are justifiable reasons for earlier extension as may be

determined by the SEC

Can you extend the corporate term if it has already expired?

- Once the term expires without an amendment having happen it ceases to existas a body politic. It is dissolved automatically on the day it expires.

Alhambra cigar and PNB case

Instances when the SEC allowed extension whose term has already expired

- All of them involved are institutions of learning, it was the case in order to avoid

confusion that would arise later on.

BOARD OF DIRECTORS/TRUSTEES

Section 23

Section 23. The board of directors or trustees. - Unless otherwiseprovided in this Code, the corporate powers of all corporations formed under thisCode shall be exercised, all business conducted and all property of suchcorporations controlled and held by the board of directors or trustees to beelected from among the holders of stocks, or where there is no stock, fromamong the members of the corporation, who shall hold office for one (1) yearuntil their successors are elected and qualified. (28a)

Every director must own at least one (1) share of the capital stock ofthe corporation of which he is a director, which share shall stand in his name onthe books of the corporation. Any director who ceases to be the owner of at leastone (1) share of the capital stock of the corporation of which he is a director shallthereby cease to be a director. Trustees of non-stock corporations must bemembers thereof. A majority of the directors or trustees of all corporationsorganized under this Code must be residents of the Philippines.

- Controlled by the board of directors

- Authority are however restricted to the day to day

- Stockholders may have all the profit but will turn over the management to the

governing board

- But unless the law provides the power may be delegated

General rule

- Corporations must sit and act as a body

- Will be bound by corporate officers if they acted within the 5 classification page

150

Ramirez vs. Orientalist co.

- What was the position of Fernandez in this case? TREASURER

- Why did the court rule that actions of Fernandez bound the corporation when he

is not even a board of director?

if a man is found acting for a corporation with the external indicia of

authority, any person not having notice of want of authority, may usually rely

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upon those appearances; and if it be found that the directors had permitted the

agent to exercise that authority and thereby held him out as a person competent

to bind the corporation, or had acquiesced in a contract and retained the benefit

supposed to have been conferred by it, the corporation will be bound,

notwithstanding the actual authority may never have been granted.

- Contracts must be made by the director and not the stockholders

- Actions of the stockholders in such matters is only advisory and not in any way

binding in the corporation

Barreto vs. La previsora Filipina

- Everything emanates from the board of directors

- Stockholders action is merely advisory except their approval or vote is necessary

to prove a valid corporate act

Qualifications:

- No citizenship requirement, at least majority must be residents

- Can have a governing board consisting solely of foreigners

- But we have to take into consideration partly nationalized industries and other

laws which prohibits or limits foreign ownership

- Anti-dummy act

- Utilization development of natural resources 60% must be owned by Filipino

citizens, therefore they only own 40%---10 members they can only have 4 seats,

but not entirely correct because the law may provide otherwise; educational

institutions restricted to Filipinos, but there are exceptions when created by

religious and charitable institutions.

- By-laws may provide additional qualifications and disqualifications

- To qualify as a director he must own at least 1 share

Should the stockholder be the equitable or beneficial owner in order to qualify as

a director?

- NO, it is not necessary, as long as you are listed in the books as owner of one

share

Lee vs. CA

- As long as you are listed in the books as owner of one share

- Under the old law he must be the beneficial owner and legal owner thereof but in

the new law it is not required as long as it stands in his name he is qualifies

1 A-100t/S B (own in the trust of X) is B qualif ied to be a director?

2

3-10

2 transferring there voting rights in favor of VT

Other rights will accrue in favor of them, but not the voting rights

voting rights must be recorder in the books of the corporation that it is transferred

PNB-IFL- wholly owned subsidiary of PNB

PNB will assign to PNB-IFL nominal shares and PNB-IFL now will be able to be nominated

Gen. Rule:

- Term of one year who will serve as such until there successors are elected and

qualified

Exception:

- Non-stock corporation can serve for a term of 3 years

- Educational non-stock- term of the governing board can be 5 years

May this term exceed one year?

- Yes, they may serve in a hold over capacity until their successors have been duly

elected and qualified

Detective and protective bureau vs. Cloribel

- In the by-laws, managing director must be elected from among themselves

- Must be duly elected and qualified

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How are the directors elected?

1-100T/S

2-100T/S

3-100T/S

to 10=1M/S

Do you include the vote of 1 & 2 to have a quorum to have a valid meeting?

- NO, quorum requirements is 401,000

Quorum requirement is 501k

Holders of non-voting shares are only entitled to vote in last par. Of section 6

1-200k

2-200k

3-200k

4-100k

5-100k

6-100k

7-50k

8-40k

9-5k

10-5k

=1MS

1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10, tumakbo and ninominate nila

yung sarili nila and cast all their shares on themselves

Who wins? Or who gets elected?

- No vote requirement, the one who gets the most number of votes gets elected,

section24.

What is cumulative voting?

- Process of multiplying the number of shares to the number of director to beelected

- Matter of right granted to stockholders in a stock corporation

1 to 5 has 200k/s and members of the same family- majority 800k they have 4M votes they

are guaranteed 4 seats

6 to 10 are not related- 1 seat 1M votes

Cumulative to allow the minority to have a rightful representation in the board

Is it allowed in a non-stock corporation?

- Not generally available

- Section 89 unless the articles or by-laws allow cumulative voting

Section 89.Right to vote. - The right of the members of any class orclasses to vote may be limited, broadened or denied to the extent specified inthe articles of incorporation or the by-laws. Unless so limited, broadened ordenied, 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 thisCode. (n)

Voting by mail or other similar means by members of non-stockcorporations may be authorized by the by-laws of non-stock corporations with theapproval of, and under such conditions which may be prescribed by, theSecurities and Exchange Commission.

Other corporate officers other than the governing board section 25

Section 25. Corporate officers, quorum. - Immediately after theirelection, the directors of a corporation must formally organize by the election ofa president, who shall be a director, a treasurer who may or may not be a

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director, a secretary who shall be a resident and citizen of the Philippines, andsuch other officers as may be provided for in the by-laws. Any two (2) or morepositions may be held concurrently by the same person, except that no one shallact as president and secretary or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform theduties enjoined on them by law and the by-laws of the corporation. Unless thearticles of incorporation or the by-laws provide for a greater majority, a majorityof the number of directors or trustees as fixed in the articles of incorporationshall constitute a quorum for the transaction of corporate business, and everydecision of at least a majority of the directors or trustees present at a meeting atwhich there is a quorum shall be valid as a corporate act, except for the electionof officers which shall require the vote of a majority of all the members of theboard.

Directors or trustees cannot attend or vote by proxy at boardmeetings. (33a)

Is the president required to be a stockholder. YES

The chairman may be another person

The president may also be another person

Prohibited is president to be secretary or treasurer at the same time

Board of director must sit and act as a body to arrive at a corporate act

What would constitute a quorum if 5 then 3 must be present

May the vote of 2 members past a 5 man governing board pass a valid corporate

act?

- YES. Voting requirement is majority of directors present at which there where a

quorum

1 1 and 2 present=valid voting requirement

2 1 and 2 voted yes

3 3 voted no

4

5

Is it absolute?

- NO, except in the election because it requires the majority of all the members of

the board

- If by-laws or articles provide a higher voting requirement

Artificial beings must act through its members and act as a body to have a valid

corporate act

Exception:

- Delegation

- Expressly conferred

- Where the officer or agent is clothed with actual or apparent authority

- Otherwise it will not bind the corporation

Yao ka sin trading case already asked in the bar

- Only bind the corporation to the extent of authority confined to him or virtue of

customs, usage and policy

- Must pass first the controller and counsel

What if the notice requirement is not complied with?

Lopez realty vs. Fotencha

- Notice requirement must be complied with hence it should have been with force

and effect, but according to the SC, it may be ratified expressly if there is a

subsequent meeting called for that purpose

- Impliedly through acts

- Asuncion was aware of the corporations obligation

- There was implied ratification or she was estopped

Pua casim vs. Neumark and Co.

- Considered 3 circumstanced

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- Check which was the proceed of the loan which was endorsed and deposit in the

corporate account

- Neumark as president and also stockholder

Yu chuck vs. Kong Li Po

- General manager usually has the power to hire but the SC said the contract must

be reasonable

- The contract here is so onerous that it would throw the corporation into

insolvency

Francisco vs. GSIS

- GSIS cannot evade the binding effect of the telegram

- Only 15 months later that the corporation said there was a mistake

- The silence coupled with the unconditional acceptance of the other subsequentremittances is binding to the corporation

Board of liquidators vs. Kalaw

Settled jurisprudence has it that where similar acts have been

approved by the directors as a matter of general practice, custom and policy, the

general manager may bind the company without formal authorization of the

board of directors. In varying language, existence of such authority is

established, by proof of the course of business, the usages and practices of the

company and by the knowledge which the board of directors has, or must be

presumed to have, of acts and doings of its subordinates in and about the affairs

of the corporation. So also, xx authority to act for and bind a corporation may be

presumed from acts of recognition in other instances where the power was in fact

exercised. xx Thus, when, in the usual course of business of a corporation, an

officer has been allowed in his official capacity to manage its affairs, his authorityto represent the corporation may be implied from the manner in which he has

been permitted by the directors to manage its business.

In the case at bar, the practice of the corporation has been to allow its

general manager to negotiate and execute contracts in its copra trading

activities for and in NACOCOs behalf without prior board approval. If the by-laws

were to be literally followed, the board should give its stamp of prior approval on

all corporate contracts. But that Board itself, by its acts and through

acquiescence, practically laid aside the by-law requirement of prior approval.

- Kalaw signed alone and said contracts were submitted to the board of directors

after its consummation and not before

Buenaseda vs. Bowen

- Express ratification is made through a formal board action

- Implied ratification is through: silence or acquiescence, acceptance benefits and

lastly recognition or adoption

An unauthorized act may nevertheless be binding either by express or implied by

estoppels

By virtue of silence the board had impliedly accepted the act

By recognition or adoption

By virtue of payment of obligations arising therefore- Lopez realty

May directors or trustees be disqualified to act as such?

- YES, crime, etc. disqualifications in book

- Possess or dispossess any of the qualifications or disqualifications , cease to hold

at least one share

May directors be ousted from office?

- At least 2/3 of members representing outstanding capital stock. Again notice

requirement must be complied with

1-200 1-5 same family

2-200

3-200

4-100

5-100 electing

6-100 6 to 10 not related

7-50

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8-40

9-5

10-5 outstanding director

Meetings called by the president or the secretary ordered by the president

It depends if the removal is without cause they cannot do so because removal

without cause shall not deprive the minority stockholders or members of the right

of representative

If with cause they can even if it will prejudice the rights of the minority, provided

of course additional requirements by-laws and articles of incorporation

Who will fill up the vacancy created due to the ouster of a member of the board

of directors

Section 29. Vacancies in the office of director or trustee. - Any

vacancy occurring in the board of directors or trustees other than by removal bythe stockholders or members or by expiration of term, may be filled by the voteof at least a majority of the remaining directors or trustees, if still constituting aquorum; otherwise, said vacancies must be filled by the stockholders in a regularor special meeting called for that purpose. A director or trustee so elected to fill avacancy shall be elected only or the unexpired term of his predecessor in office.

Any directorship or trusteeship to be filled by reason of an increase inthe number of directors or trustees shall be filled only by an election at a regularor at a special meeting of stockholders or members duly called for the purpose,or in the same meeting authorizing the increase of directors or trustees if sostated in the notice of the meeting. (n)

Other than by removal or expiration of term they do not have the power

When will the vacancies be filled up?

Is notice required, to fill up vacancies due to removal?

What if the vacancy is due to an increase, can it be filled up in the same meeting

where in the number is increased?

Election due to removal-in the same meeting notice is not required

Election due to increase in number- it must be so stated in the meeting

Section 30

Section 30. Compensation of directors. - In the absence of anyprovision in the by-laws fixing their compensation, the directors shall not receiveany compensation, as such directors, except for reasonable per diems: Provided,

however, That any such compensation other than per diems may be granted todirectors by the vote of the stockholders representing at least a majority of theoutstanding capital stock at a regular or special stockholders' meeting. In no caseshall the total yearly compensation of directors, as such directors, exceed ten(10%) percent of the net income before income tax of the corporation during thepreceding year. (n)

- Generally not entitled to receive compensation because they render it

gratuitously

- Unless the by- laws allows

- Stockholders may also grant pursuant to a majority vote

- Must not exceed net income of 10% tax of the preceding year

- Acting in special capacity

- In, sum directors may receive compensation when

1. there is a provision in the by-laws to that effect

2. When the stockholders, by a majority vote of the outstanding capital stock grant

the same; and,

3. If the director renders extra-ordinary or unsual service

Central cooperative exchange vs. Tibe

- By-laws may allow, stockholders may also allow such

What do you understand by the phrase as such directors

Western institute vs. Salas

- Compensation was granted without by-laws authority

- Prohibition is not a sweeping rule

- Members of the board may receive when they receive in a special capacity

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- Mere act of the board will suffice

Is the 10% ceiling applicable to other officers?

- NO. the phrase as such director was used twice

- The SC ruled that the 10% ceiling will not likewise apply if they acted in a

capacity other than as such directors

Government vs. El Hogar

- Judicial intervention is not proper

- The appropriates remedy is to those who can make or unmake the by-laws

Liability of corporate officers

- Obligations incurred by those acting for and in behalf of the corporations are not

theres BUT there are exceptions even if they are acting for and in behalf of the

corporation

Tramat vs. CA

- General rule was applied in the case

- Ong acted as officers and acted within the scope of his authority

- Court laid down 4 instances when even if acting within the scope of his authority

he is held solidarily liable

1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith,

or gross negligence in directing its affairs, or (c) for conflict of interest, resulting

in damages to the corporation, its stockholders or other persons;

2. He consents to the issuance of watered stocks or who, having knowledge thereof,

does not forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation;

4. He is made, by a specific provision of law, to personally answer for his corporate

action.

- Watered stocks- issued, fully paid up when in fact they have not been fully paid

or promised as such

Llamado vs. CA

- The corporate entity theory cannot be used as a defense to escape liability in

violation of B.P. 22

- Where the check is drawn by a corporation the persons who signed the checkshall be liable.

Uichico vs. NLRC

- Labor case corporate directors and officers are solidarily liable with the

corporation for the termination of employment of corporate employee done with

malice and bad faith

3 fold duty of directors

- obedient

- diligent

- loyal

Business judgment rule

- Questions of policy and management are left solely to the honest decision of the

board of directors and the courts are without authority to substitute its judgment

as against the former. The directors are the business managers of the

corporation and as long as they act in good faith, its actuations are not subject to

judicial review. Montelibano vs. Bacolod Murcia Milling

- questions of policy and management are left solely to the board of directors

- BOD, business manager of the corporation and as long as they act in good faith,

its actuations are not subject to judicial review

- They are not insurer of the property of the company, they were guarantors that

the enterprise undertaken by the corporation shall be successful

Montelibano vs. Bacolod Murcia Milling Co.

- Directors are not liable due to imprudence or honest error of judgment

- Duty of loyalty of corporate directors

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- 31,32,33,34

- 31,32,33- specific instances when corporate officers may violate loyalty

- 32,33 self-dealing and interlocking director

Corporate opportunity doctrine

- It places a director of a corporation in the position of a fiduciary and prohibits him

form seizing a business opportunity and/or developing it at the expense and with

the facilities of the corporation. He cannot appropriate to himself a business

opportunity which in fairness should belong to the corporation.

Last paragraph of section 31 and the provision of section 34 make reference to

recovery of forbidden profits

Distinction between section 31 and 34 relative to the ratification by the

stockholders

- The second paragraph of section 31 which makes a director liable to account forprofits if he attempts to acquire or acquires any interest adverse to the

corporation in respect to any matter reposed in him in confidence as to which

equity imposes a disability upon him to deal in his own behalf is not subject to

ratification by the stockholders. Whereas, in section 34 if a director acquires for

himself a business opportunity which should belong to the corporation, he is

bound to account for such profits unless his act is ratified by the stockholders

owning ore representing at least 2/3 of the outstanding capital stock.

- If reposed in him in confidence, not subject to ratification

- If the acquisition is merely that of a business opportunity which has not been

reposed in him in confidence, the same may be subject to ratification by the

stockholders.

Director x co.

A-REALTY

B

C Z owns property and is going abroad never to Return, he

wants to sell for 25M the fair market value is 30M

D

E

E goes to Z and offers to pay the property for 26 M and later he sells it for 30M making 4M

profit, one of the stockholders learned and complains that he should submit the profits. E

said that he will move for ratification of his actuation. Can it be ratified?

- It can be ratified he merely acquired a business owning to the corporation

- It would be different if it was entrusted in his confidence

Another scenario:

Had A not attended the meeting he would not have known of the sale it is then a

matter reposed in him in confidence

A corporation cannot reaquire its share if it has no restricted unretained earnings

Strong vs. Rapide

- What duty did he violate?

- He violated his duty of loyalty

- The law would be impotent if the sale were not invalidated

Self-dealing director and interlocking director

What is a self-dealing director?

- Director of a corporation dealing or transacting business with his corporation

Are the contracts and dealing of a self0dealing director valid?

General rule: voidable

May the contracts of a self-dealing director be valid per se.

- YES. If all the 4 conditions are present they will be valid per se

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;

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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 theboard of directors.

When do they become voidable?

- When any of the two requisites are absent it is voidable, but subject to

ratification by 2/3 of the outstanding capital stock or 2/3 of the member

Requisites for ratification (subject to ratification by the stockholders holding or

representing at least 2/3 of the outstanding capital stock or 2/3 of the members.)

- it mus

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