Theories Bl2

7/28/2019 Theories Bl2

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BL 2

Submitted by:

TERENCIO, JENNILYN G.

CBET 02-601A

S 1:30-4:30pm


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1)Theory of ConcessionTo organize a corporation that could claim a juridical personality of its own and

transact business as such, is not a matter of absolute right but a privilege which

may be enjoyed only under such terms as the State may deem necessary toimpose.

Before a corporation may acquire juridical personality, the State must give itsconsent either in the form of a special law or a general enabling act, and the

procedure and conditions provided under the law for the acquisition of such juridicalpersonality must be complied with. The failure to comply with the statutory

procedure and conditions does not warrant a finding that such association achievedthe acquisition of a separate juridical personality, even when it adopts sets of

constitution and by-laws.Since all corporations, big or small, must abide by the provisions of the Corporation

Code, then even a simple family corporation cannot claim an exemption nor can ithave rules and practices other than those established by law.

2)Corporate personality

corporate personality refers to the fact that as far as the law is concerned a

company personality really exists apart and different from its owners. As a result of

this, a company can sue and be sued in its own name, hold its own property and

crucially be liable for its own debts. It is this concept that enables limited liability

for shareholders to occur as the debts belong to the legal entity of the company and

not to the shareholders in that company.

The history of corporate personality

Corporate legal personality arose from the activities of organisations such as

religious orders and local authorities which were granted rights by the government

to hold property and sue and be sued in their own right and not to have to rely on

the rights of the members behind the organisation. Over time the concept began to

be applied to commercial ventures with a public interest element such as rail

building ventures and colonial trading businesses. However, modern company law

only began in the midnineteenth century when a series of Companies Acts were

passed which allowed ordinary individuals to form registered companies with limited

liability. The way in which corporate personality and limited liability link together is

best expressed by examining the key

cases.


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3)Doctrine of Piercing the Veil of Corporate Entity

Piercing the veil of corporate fiction means that while the corporation cannot be

generally held liable for acts or liabilities of its stockholders or members, and vice

versa because a corporation has a personality separate and distinct from its

members or stockholders, however, the corporate existence is disregarded underthis doctrine when the corporation is formed or used for illegitimate purposes,

particularly, as a shield to perpetuate fraud, defeat public convenience, justify

wrong, evade a just and valid obligation or defend a crime.

Requires the court to see through the protective shroud which exempts its

stockholders from liabilities that they ordinarily would be subject to, or distinguishes

a corporation from a seemingly separate one, were it not for the existing corporate

fiction (Lim vs CA, 323 SCRA 102)

Extent: The application of the doctrine to a particular case does not deny the

corporation of legal personality for any and all purposes, but only for the particular

transaction or instance for which the doctrine was applied (Koppel v. Yatco 77 Phil.

496)

Rules:

has only a res judicata effect to prevent wrong or fraud and not available for other

purposes judicial prerogative only must be with necessary and factual basis

3 Classes of Piercing:

Fraud Cases

when a corporation is used as a cloak to cover fraud, or to do wrong.

Alter Ego Cases when the corporate entity is merely a farce since the corporation

is an alter ego, business conduit or instrumentality of a person or another

corporation

Equity cases when piercing the corporate fiction is necessary to achieve justice or

equity.

Instrumentality / Alter Ego 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 thecorporate entity of the instrumentality may be disregarded.

Requisites:

There must be 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

that time, no separate mind, will or existence of its own (control); Such control


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must have been used by the defendant to commit fraud or wrong, to perpetrate the

violation of a statutory or other positive duty, or dishonest and unjust act in

contravention of plaintiffs legal rights (breach of duty); and

Such control and breach of duty must proximately cause the injury to the plaintiff.

(Proximate cause)

4)Pre Incorporation Theory

A new corporation is frequently created through the efforts of promoters who may

also be active in securing capitalization for the corporation by subscriptions. The

duties and compensation of promoters are proper subjects of preincorporation

agreements. Promoters and promotion contracts are controlled by general fiduciary

principles, as well as specific statutes. Since the corporation has no existence prior

to its formal creation, it cannot be bound by promotion agreements made prior to

incorporation unless these are ratified or the benefits are accepted by the

corporation after its creation.

A stock subscription, strictly defined, is an agreement to purchase, at a certain

price, a stated number of shares of stock of a corporation which is to be formed,

although the term is also used in post incorporation stock sales agreements. Absent

any statutory or corporate bylaw restriction, any natural person, and any

corporation with the appropriate power, may be a subscriber to corporate stock. The

rules applicable to the formation of contracts generally govern the valid creation of

a stock subscription contract. The completed contract of subscription comes into

existence when the corporation, after its formation, accepts the offer to subscribe.Meanwhile, the subscription constitutes a continuing offer if supported by an

adequate consideration, such as the subscription promises of other subscribers.

5)Theory of Continuing Offers

A subscription to stock can mean nothing more or less than the words, I will pay

to the corporation a stated sum in return for the appropriate number of share.

These are words of promise is in terms conditional upon shares being given in

exchange for the performance of the promise. But words of promise can impose no

duty unless there is a correlative right in a promise and words of offer can give no

power of acceptance unless there is an offeree. If there is no corporation in

existence, therefore, such words addressed to a proposed corporation can have no

present legal effect. All that they can amount to is a continuing expression of

intention that may produce legal consequences after the corporation comes into

existence.


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6)Theory of Incorporation

Incorporation theory seems simple on its face. A simple definition is that

incorporation refers to the absorption of state law under the specific protections of

the Philippines Constitution, or more specifically, the Bill of Rights. But the

implication here is complex: that the Philippines Constitution should override all

state constitutions and state laws.

The legal theory that allows the Supreme Court to apply the Bill of Rights to the

states under the Fourteenth Amendment Due Process and Equal Protection

Clauses. It made most of the Bill of Rights (the first ten amendments to the

Constitution) applies to the state governments as well as to the federal

government.

Under the original understanding of the Constitution, the power of the states was

not limited by the Bill of Rights. States could restrict freedom of speech, search

without warrants, and deny trial by jury, just to name three examples. The

Supreme Court generally allowed states to restrict a fundamental right only if the

authorities had a compelling reason for the law, and only if the law was narrowly

tailored to accomplish a permissible purpose.

Some justices complained that there was no objective standard to judge which

rights were fundamental and which were not, which reasons were compelling and

which were merely rational.

While the incorporation doctrine greatly expanded the rights of Filipnos, it also

transferred to the Supreme Court much of the power that had resided in state

governments since the founding of the nation. Decisions about limits on police

power, searches, confessions, free speech and prayer in school, topless dancing,

Ten Commandments displays, abortion, vagrancy laws, and the death penalty all

were taken out of the hands of state lawmakers and judges and turned over to the

justices of the Philippines Supreme Court.

The incorporation doctrine is one of the reasons for the fierce political battles over

nominees to the federal bench. The definition of fundamental rights and compelling

state interests can change with the personal values and political views of the

judges.

7)Domiciliary test Determined by the principal place of business of the

corporation. One of the Tests in determining the nationality of corporations


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8)Control Test in determining Corporation Nationality

Control Test was based on a 1989 opinion of the justice department in establishing

the nationality of corporate stockholders.

It means that if Filipino citizens own at least 60% of the corporations capital,all

the shares of the corporation, including those owned by foreigners, shall be

considered of Philippine nationality.

If the Filipinos stake drops below 60%say 59%only the number of shares that

corresponds to that percentage (in the example, 59%) will be considered of Filipino

nationality.

But as long as Filipinosin their personal capacity or through a Filipino-owned or -

controlled corporationcan prove that they own at least 60% of the corporations

capital stock, no further inquiries shall be made on the nationality of the owners of

the remaining 40%.

Whenever that company owned at least 60% by a Filipino invests in another

company, say another company covered by the 60-40 ownership rule, its

investment shall be treated as one made by a Filipino company. The foreign-owned

portion in the investing corporation is disregarded.

9)Grandfather rule Nationality is attributed to the percentage of equity in the

corporation used in nationalized or partly nationalized area.

Grandfather Rule is vastly different from the Control Test. Under this rule, if Filipinocitizens own 60% of the corporations capital and foreigners own the remaining 40%,

then it is a straightforward 60-40 venture.

Thus, whenever the 60-40 corporation invests in another company that is also

covered by the 60-40 ownership rule, the foreign component in the cascade company

is aggregated.

Simply put, the foreigners 40% in the cascade company is actually 56%.

Once foreigners ownershipeither in their personal capacity or as a proportion oftheir ownership in a stockholder-corporationexceeds 40%, then a corporation

covered by the 60-40 ownership rule is considered to have breached the nationality

test.

The grandfather rule is stricter in allowing foreign companies to organize an

ownership structure that could mask their effective stake.


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Control Test is the standard for determining the nationality of corporations;

Grandfather Rule applies when there are issues about conforming with the 60-40

requirement

10)Doctrine of substantial compliance

A doctrine in equity that if a good faith attempt was made to perform therequirements of a contract, but failed to exactly meet the specifics, and if the essential

aim of the contract has been met, the agreement will still be considered as having

been completed. Minimal damages for the impreciseness may be permitted by the

court.

11)Doctrine of secondary meaning

This doctrine is to the effect that a word or phrase originally incapable of exclusive

appropriation with reference to an article on the market, because it is geographical or

otherwise descriptive, may nevertheless be used exclusively by one producer with

reference to his article so long as in that trade and to that branch of the purchasing

public, the word or phrase has come to mean that the article was his product.Doctrine of secondary meaning can be extended to corporation name but must comply

with the requirement that it has been used so long and so exclusively by one and that

the said name has come to mean that it is referred to as that corporation.

12)Doctrine of Corporate Power

This doctrine maps the legal limits of corporate power in our democratic society,

and explores the role of the corporate judiciary in creating public policy. It argues that

the judiciary must be more vigilant and act to curb corporate abuses. It demonstrates

that when corporations exercise their private power in civil society, they are just as

capable as the state of exercising it in ways that are dangerous, arbitrary, and

challenge the basic institutional arrangements of society civil society, they are just as

capable as the state of exercising it in ways that are dangerous, arbitrary, and

challenge the basic institutional arrangements of society.

This corporate power are:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of

incorporation and the certificate of incorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of this Code;


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5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or

repeal the same in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks

to subscribers and to sell treasury stocks in accordance with the provisions of this

Code; and to admit members to the corporation if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage andotherwise deal with such real and personal property, including securities and bonds of

other corporations, as the transaction of the lawful business of the corporation may

reasonably and necessarily require, subject to the limitations prescribed by law and the

Constitution;

8. To enter into merger or consolidation with other corporations as provided in this

Code;

9. To make reasonable donations, including those for the public welfare or for hospital,

charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,domestic or foreign, shall give donations in aid of any political party or candidate or for

purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its directors,

trustees, officers and employees; and

11. To exercise such other powers as may be essential or necessary to carry out its

purpose or purposes as stated in the articles of incorporation.

13)Doctrine of Apparent Authority

The doctrine of apparent authority provides that a corporation will be liable to

innocent third persons for the acts of its agent where the representation was made by

the agent in the course of business and acting within his/her general scope of authority

even though, in the particular case, the agent is secretly abusing his authority and

attempting to perpetrate a fraud upon his/her principal or some other person for his/her

own ultimate benefit.

The doctrine on apparent authority provide that if a private corporation

intentionally or negligently clothes its officers or agents with apparent power to perform

acts for it, the corporation will beestopped to deny that such apparent authority is real,

as to innocent 3rdpersons dealing in good faithwith such officers or agents. This

apparent authority may result from: (1) the general manager bywhich the corporation

holds out an officer or agents as having power to act (2) the acquiescence inhis acts of a

particular nature, with actual or constructive knowledge thereof, whether with or

withoutthe scope of power.


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NOTE: Under the doctrine of apparent authority and under the sub-classification

of apparentauthority by circumstance, the first contract is unenforceable because PWCC

effectively provedthrough clear and convincing evidence that their President cannot bind

the corporation withoutauthorization from the Board of Directors, so not the burden

shifted upon YKS for him to provide forsuch circumstances which have led him to believe

that the President has such apparent authority tobind the corporation; however such

was not effectively discharged by YKS, that is why the firstcontract is unenforceable.

Also, it is most important to note, that the contract for 10,000 bags of cement is

enforceable because such is a contract of sale entered into by the President in the

regularcourse of business of the corporation. However, the 45,000 bags contract is

unenforceable because itis a contract of dealership which is in the extraordinary course

of the business of the corporation.,hence, not within the purview of the apparent

authority of the President.

If a corporation knowingly permits one of its officers to act within the scope of

anapparent authority, it holds him out to the public as possessing the power to do

thoseacts, the corporation will, as against anyone who has in good faith dealt with itthroughsuch agent, be estopped from denying the agents authority. Soler v. Court of

Appeals,358 SCRA 57 (2001).

The authority of a corporate officer dealing with third persons may be actual or

apparent . . . the principal is liable for the obligations contracted by the agent. The

agent apparent representation yields to the principal's true representation and

thecontract is considered as entered into between the principal and the third person.

First Philipine International Bank v. Court of Appeals, 252 SCRA 259 (1996).

Persons who deal with corporate agents within circumstances showing thattheagents are acting in excess of corporate authority, may not hold the corporation

liable. Traders Royal Bank v. Court of Appeals, 269 SCRA 601 (1997).

Apparent authority may be ascertained through (1) the general manner in which

thecorporation holds out an officer or agent as having the power to act, or, in other

wordsthe apparent authority to act in general with which is clothes them; or (2)

theacquiescence in his acts of a particular nature, with actual or constructive

knowledgethereof, within or beyond the scope of his ordinary powers. Inter-Asia

Investment Industries v. Court of Appeals,403 SCRA 452 (2003).

14)Doctrine of Ultra Vires Acts(a) Concept and Types (Sec. 45)

An ultra vires act is one committed outside the object for which a corporation is

created as define by the law of its organization and therefore beyond the power

conferred upon it by law. The term ultra vire is distinguished from an illegal act from

the former is merely voidable which may be enforced by performance, ratification, or


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estoppel, while the latter is void and cannot be validated.Atrium Management

Corporation vs. Court of Appeals, G.R. No. 109491, 28 February 2001.

(b) Ratification ofUltra Vires Acts: (Pirovano v. De la Rama Steamship Co., Inc., 96

Phil. 335 [1954]; Carlos v. Mindoro Sugar Co., 57 Phil. 343 [1932];Republic v. Acoje

Mining Co., 3 SCRA 361 [1963]; Crisologo Jose v. CA, 177 SCRA 594 [1989];

BASIS OF ULTRA VIRES DOCTRINE (Two Corporate Principles)1. A corporation is acreature of the law and has only such powers and privileges as aregranted by theState the ultra vires doctrine is a product of the theory of concession asprovidedin Sec. 2.2. The doctrine upholds the fiduciary duty of directors and officers to the

stockholders ormembers such duty dictates that the corporation engage only intransactions to which thestockholders and members bind themselves by way of

the provisions of the purposes clause. This is also necessarily include an obligationnot to enter into transactions which violate thelaw.

TEST TO DETERMINE ULTRA VIRES Whether the act in question is in direct andimmediatefurtherance of the corporations business, fairly incident to the express

powers andreasonably necessary to their exercise. The strict terms direct and

immediate refers to thebusiness of the corporation while the liberal terms fairlyincident and reasonablynecessary with reference to the powers of the

corporation. With regard to the business of thecorporation as the reference point,much latitude is given to the corporation to enter intovarious contracts as long as

they have logical relation to the pursuit of such business. On theother hand, whenthe purpose clause used limiting words that Court will hold such corporationtosuch limited business.

POLICIES SUPERVENING IN ULTRA VIRES ISSUES Acts not per se illegal, liberalinterpretation.1.) PUBLIC CONVENIENCE if corporation contracts are strictlyconstrued, the public would beinconvenienced by having to verify and enter into

contractual safeguards when entering intocontracts with corporations. As such

liberal construction is afforded to such corporatecontracts.2.) CONTRAVENTION OFCONTRACTUAL EXPECTATIONS setting aside the corporate contracton theground of ultra vires would contravene the expectations of both parties who

enteredinto the contract expecting to be bound.3.) PRINCIPLE OF BUSINESS

JUDGMENT the court will not sit in judgment to substitute theirbusinessjudgment for that of the directors; and that as much as possible, directors in

theexercise of their business judgment, should be given leeway to adopt corporatepolicies andto engage in transactions as they deem best for the corporation.4.)

NATURE OF BUSINESS OF OPERATIONS it is impossible to anticipate allpossiblecontingencies at the time the Articles are drawn thus there would be a

need to amend orrevise the Articles to keep abreast with the various aspects ofthe business.

ULTRA VIRES ACTS DISTINGUISHED FROM ACTS WHICH ARE ILLEGAL PER SEIllegal acts of a corporation are those acts which are contrary to law, morals, or

publicorder or contravenes some rule of public policy or public duty are void. Suchacts orcontracts cannot be the basis of any court action nor acquire validity by

performance,ratification or estoppel.


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Ultra vires acts are those which are not illegal and void ab initio but are withinthescope of the articles of incorporation are merely voidable and may becomebindingand enforceable when ratified by stockholders. Said ratification cures the

infirmity of the corporate act and makes it valid and enforceable.

15.) Principle of Pre Emptive Right

The shareholders of a corporation do not have any preemptive right to acquire

the corporation's unissued shares except to the extent the articles of incorporation so

provide.

A statement included in the articles of incorporation that "the corporation elects

to have preemptive rights" or words of similar import means that the following

principles apply except to the extent the articles of incorporation expressly provide

otherwise:

1. The shareholders of the corporation have a preemptive right, granted on uniform

terms and conditions prescribed by the board of directors, to provide a fair and

reasonable opportunity to exercise the right to acquire proportional amounts of the

corporation's unissued shares on the decision of the board of directors to issue them.

2. A shareholder may waive his preemptive right. A waiver evidenced by a writing is

irrevocable even though it is not supported by consideration.

3. There is no preemptive right with respect to:

(a) Shares issued as compensation to directors, officers, agents or employees of the

corporation, its subsidiaries or its affiliates.

(b) Shares issued to satisfy conversion or option rights created to provide

compensation to directors, officers, agents or employees of the corporation, its

subsidiaries or its affiliates.

(c) Shares authorized in articles of incorporation that are issued within six months

from the effective date of incorporation.

(d) Shares issued in transactions for which shareholder approval is required by

chapters 1 through 17 of this title.

4. Holders of shares of any class without general voting rights but with preferential

rights to distributions or assets have no preemptive rights with respect to shares of

any class.

5. Holders of shares of any class with general voting rights but without preferential

rights to distributions or assets have no preemptive rights with respect to shares of

any class with preferential rights to distributions or assets unless the shares with


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preferential rights are convertible into or carry a right to subscribe for or acquire

shares without preferential rights.

6. Shares that are subject to preemptive rights and that are not acquired by

shareholders may be issued to any person for a period of one year after being

offered to shareholders at a consideration set by the board of directors that is not

lower than the consideration set for the exercise of preemptive rights. An offer at a

lower consideration or after the expiration of one year is subject to the shareholders'preemptive rights.

For purposes of this section, "shares" includes a security convertible into or carrying

a right to subscribe for or acquire shares.

16.) Principle of Appraisal Right

Statutory remedy available in many states to minority stockholders who object to

an extraordinary action taken by the corporation (such as a merger). This remedy

requires the corporation to repurchase the stock of dissenting stockholders at a priceequivalent to its value immediately before the extraordinary corporate action.

The Appraisal right of dissent shareholders means that the man who has objection

to the company's significant transaction items(for example, the purchases of

annexation ,the significant property sells, the revising of corporation's articles).when

it is being throughed by way of the principle of "Majority Consent" has the rights of

appraising the fair value of his stock according to legal procesure and requesting the

company to buy his stock back, he can realize his goal of withdrawing the company.

The system of The Appraisal right of Dissent shareholders formed to overcome thefaults of "Majority Consent" and protect the benifets of young shares holders. The

merging of company ,the establishing separately of the company and the significant

changing of property Only manifest major stockholder's benefits usually, The young

shareholder's benefits receives legitimate ignoring and violating frequently,

Protecting the young shareholder's benefits has already became the common knows

of various countries. While building the system of The Appraisal right of Dissent

shares holders is a kind of powerful method to protect the young shareholder's

benefits. On the first day of the year 2006,the new Company's law starts to execute

officially. In the article, the system of The Appraisal right of Dissent shareholders wasstipulated. This system provides advantageous safeguards of system, but it still has

many deficiencies.

17.) Derivative suit Principle. The general rule is that where a corporation is an

injured party, its power to sue is lodged with its board of directors or trustees.

Nonetheless, an individual stockholder is permitted to institute a derivative suit on

behalf of the corporation wherein he holds stocks in order to protect or vindicate


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corporate rights, whenever the officials of the corporation refuse to sue, or are the

ones to be sued, or hold the control of the corporation. In such actions, the suing

stockholder is regarded as a nominal party, with the corporation as the real party

in interest. A derivative action is a suit by a shareholder to enforce a corporate

cause of action. The corporation is a necessary party to the suit. And the relief

which is granted is a judgment against a third person in favor of the corporation.

Similarly, if a corporation has a defense to an action against it and is not asserting

it, a stockholder may intervene and defend on behalf of the corporation. By virtue

of Republic Act No. 8799, otherwise known as the Securities Regulation

Code, jurisdiction over intra-corporate disputes, including derivative suits, is now

vested in the Regional Trial Courts designated by the Supreme Court pursuant to

A.M. No. 00-11-03-SC promulgated on 21 November 2000.

Derivative Suit - brought by a stockholder for and in behalf of the corporation to

protect/vindicate corporate rights after he has exhausted intra-corporate remedies

Requisites:

a. cause of action in favor of the corporationb. refusal of corporation to sue

c. injury to the corporation

Although corporations dissolved have 3 years to wind up, they can convey their

properties to a trustee who can continue the suit beyond the 3 year period. The

lawyer who handled the case in the trial court may be considered as trustee for the

dissolved corporation with respect to the matter in litigation only even if no

appointment was extended to him. (Selano vs. CA)

Suits of stockholders/ members based on wrongful or fraudulent acts of

directors or other persons:

a. Individual suits - wrong done to stockholder personally and not to otherstockholders

(ex. When right of inspection is denied to a stockholder)

b. Class suit - wrong done to a group of stockholders(ex. Preferred stockholders' rights are violated)

c. Derivative suit - wrong done to the corporation itself

Cause of action belongs to the corp. and not the stockholder But since the directors who are charged with mismanagement

are also the ones who will decide WON the corp. will sue, the

Nature and Basis of derivative suit


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corp. may be left without redress; thus, the stockholder is giventhe right to sue on behalf of the corporation.

An effective remedy of the minority against the abuses ofmanagement

An individual stockholder is permitted to bring a derivative suitto protect or vindicate corporate rights, whenever the officials ofthe corp. refuse to sue or are the ones to be sued or hold the

control of the corp. Suing stockholder is merely the nominal party and the corp. is

actually the party in interest. A SH can only bring suit for an act that took place when he was

a stockholder; not before. (Bitong v. CA, 292 SCRA 503)

18.) Representative Suit

Representative Suit - brought by the stockholder in his own behalf and in behalf of

other stockholders similarly situated, having common cause against the corporation

In limited instances, a representative of such person may bring the suit, in whichcase it is called a representative suit. Examples of the latter are suits by trustees,

executors, administrators and guardians, derivative suits, and suits by legitimate

labor organizations on behalf of their members.

19.) Individual Suit Principle

It is where the stockholders of the corporation is injured by a tortuous reduction of

capital assets is obvious. It is equally apparent that considerations of administrative

convenience make it impossible to allow each shareholder a separate right of suit. The

acts are therefore termed corporate wrongs and the courts require that the corporation

refuses to sue. To avoid injustice where the corporation refuses to sue, a shareholder is

allowed to bring a representative suit in behalf of himself an all other shareholders.

A class action suit is a group of individuals and/or companies that are joined in the

common cause of recovering damages from the alleged liable corporation/business.

A lawsuit by an individual party is exactly what it sounds like, singular in nature.

20.)Doctrine of Residual Powers of Stockholders

Shareholder Residual Powers

- shareholders have the right to elect directors, and normally do not have the rightto manage the corporation
http://www.pinoylawyer.org/t717-representative-suit#1049http://www.pinoylawyer.org/t717-representative-suit#1049


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Shareholders elect directors to manage their company until the next annual general

meeting (AGM). The directors, who may also be removed by the shareholders, must act

in accordance with the specific duties and powers set out in the applicable corporate

statute and the company's articles. For example, directors have the powers to call AGMs

every 12 to 15 months and to call special general meetings. This is, of course, trite

law.

In the circumstances, the court found that the directors' residual powers included thefollowing:

the power to postpone an AGM that has already been called (as long as it is heldwithin 15 months of the previous AGM, in accordance with s. 182(1)(b));

the power to change the record date for the AGM; and the power to create a nomination policy that sets a deadline by which time

shareholders are required to submit nominations for directors.

In this case, a public company called apro forma AGM to consider and approve

financial statements, elect directors, and re-appoint auditors. Two weeks before the

AGM, the board approved an "Advance Notice Policy", which fixed a deadline by which

shareholders were required to submit nominations for directors, and only persons

nominated in accordance with the Policy would be eligible for election. The Petitioner,

an 8% shareholder, objected to the Policy as ultra vires the board. After receiving his

objection, the board postponed the AGM for two months and advised that it would

seek shareholder approval for the Policy. The Petitioner sought a declaration

invalidating the postponement and the Policy.

The crux of the Petitioner's argument was "that directors powers must be expressly

conferred and that they do not have any residual powers." Neither the BCBCA nor

the company's articles expressly provided for postponement of AGMs or restricted the

nomination process. Thus, the Petitioner argued that the directors did not have the

power to postpone the AGM or create the Policy which would mean that directors

could no longer be nominated at any time up to an including the AGM.

21.) Theory of Transferability of Shares of Stock

By delivery of the certificate/s indorsed by the owner or his attorney-in-fact or other

person legally authorized to make the transfer. (Sec. 63)

1

Consult a lawyer to create a trust. Deposit the stock you intend to transfer into thetrust by listing it in the trust and notifying the brokerage firm or other agency holding

the stock. Make the beneficiary of the trust the person to whom you are giving thestock.
http://www.bclaws.ca/EPLibraries/bclaws_new/document/LOC/freeside/--%20B%20--/Business%20Corporations%20Act%20SBC%202002%20c.%2057/00_Act/02057_06.xml#section182http://www.bclaws.ca/EPLibraries/bclaws_new/document/LOC/freeside/--%20B%20--/Business%20Corporations%20Act%20SBC%202002%20c.%2057/00_Act/02057_06.xml#section182


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2Contact your broker and instruct them to transfer the stock that is held in your nameto the account of the other party. Create a letter, date and sign it so there is written

confirmation of your instructions. Do not assume the transaction is complete until youhave received written confirmation of the transfer from your broker.

3

Invest in a company held by another person. Rather than depositing cash to fund

your investment, transfer shares of the investment to the company. The other partytherefore receives payment for your investment via the shares and can keep or sellthem as they wish.

4

Transfer shares to another person by signing the stock certificate over to them. Onthe back of the stock certificate, at the bottom of the page, is a line for stock

transfer. Sign and date the transfer. It is useful to have another separate documentacknowledging the transfer in the form of a bill of sale or receipt.

5

Gift stock to another person. Notify the broker to make the transfer or follow theinstructions in step 4 if you have the physical certificate. Understand that while youwill not be subject to taxes, the cost basis of the transaction for the other party will

be the price at which the gift was priced at on the day of sale. This price, particularlyin a stock that is not publicly traded should be noted in any document acknowledging

the gift.

22.) Doctrine of Corporate Opportunity

The corporate opportunity doctrine is the legal principle providing that directors, officers,

and controlling shareholders of a corporation must not take for themselves any business

opportunity that could benefit the corporation.

Legal principle that the members of the board of directors, executives, and other

employees of a firm owe it a fiduciary duty, and may not use the information acquired in

their official capacity for personal gain.

- Self-dealings (Secs. 32 and 33)

- Using Inside Information (Gokongwei v. SEC, 89 SCRA 336 [1979]).

When a director, who also owns of the equity of the corporation, who has also

been designated as the administrator of corporate affairs, and who was directly

negotiating the sale of the corporations large landholdings to the Government at great

prices, purchases the shares of stock of a shareholder without informing the latter of the

on-going negotiations, such director is deemed to have fraudulently acquired the

shareholdings by way of deceit practiced by means of concealing his knowledge of the


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state of the negotiations and their probable successful result. xStrong v. Repide, 41 Phil.

947 [1909];

- Applies to confidential employees (cf. xSing Juco v. Llorente, 43 Phil. 589 [1922])

23.) Doctrine of Intra-corporate controversy; fraud.

The doctrine asserts that a corporation or oter business entity may be found

vicariously liable for the wholly internal agreements of its agents. Although courts have

almost uniformly rejected civil intracorporate conspiracy allegations, the judiciary has

overwhelmingly approved the use of the intracorporate conspiracy doctrine in federal

criminal prosecutions.

It is essential for the complaint to show on its face what are claimed to be the

fraudulent corporate acts if the complainant wishes to invoke the courts special

commercial jurisdiction. This is because fraud in intra-corporate controversies must be

based on devises and schemes employed by, or any act of, the board of directors,

business associates, officers or partners, amounting to fraud or misrepresentation whichmay be detrimental to the interest of the public and/or of the stockholders, partners, or

members of any corporation, partnership, or association, as stated under Rule 1,

Section 1 (a)(1) of the Interim Rules. The act of fraud or misrepresentation complained

of becomes a criterion in determining whether the complaint on its face has merits, or

within the jurisdiction of special commercial court, or merely a nuisance suit. Simny G.

Guy, Geraldine G. Guy, Gladys G. Yao and the Heirs of the late Grace G. Cheu vs. Gilbert

Guy/Simny G. Guy, Geraldine G. Guy, Gladys G. Yao and the heirs of the late Grace G.

Cheu vs. The Hon. Ofelia C. Calo, in her capacity as Presiding Judge of the RTC-

Mandaluyong City-Branch 211 and Gilbert GuyG.R. No. 189486/G.R. No. 189699.September 5, 2012

24.) Best Judgment Rule

The business judgment rule is a United States case law-derived concept in corporations

law whereby the "directors of a corporation . . . are clothed with [the] presumption,

which the law accords to them, of being [motivated] in their conduct by a bona fide

regard for the interests of the corporation whose affairs the stockholders have

committed to their charge".

To challenge the actions of a corporation's board of directors, a plaintiff assumes "the

burden of providing evidence that directors, in reaching their challenged decision,

breached any one of the triads of their fiduciary duty good faith, loyalty, or due care".

Failing to do so, a plaintiff "is not entitled to any remedy unless the transaction

constitutes waste . . . [that is,] the exchange was so one-sided that no business person
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of ordinary, sound judgment could conclude that the corporation has received adequate

consideration".

25.) Doctrine of Estoppel

(a) Nature of Doctrine

Corporation by estoppel doctrine is founded on principles of equity and is designed

to prevent injustice and unfairness. It applies when persons assume to form a

corporation and exercise corporate functions and enter into business relations with third

persons. Where there is no third person involved and the conflict arises only among

those assuming the form of a corporation, who therefore know that it has not been

registered, there is no corporation by estoppel. Lozano v. De Los Santos, 274 SCRA 452

(1997)

A party cannot challenge the personality of the plaintiff as a duly organized

corporation after having acknowledged same when entering into the contract with the

plaintiff as such corporation for the transportation of its merchandise. (Ohta Dev. Co. v.

Steamship Pompey, 49 Phil. 117 [1926]); the same principle applied in Compania

Agricole de Ultramar v. Reyes, 4 Phil. 1 [1911] but that case pertained to a commercial

partnership which required registration in the registry under the terms of the Code of

Commerce.

(b) Two Levels: (i) With fraud and (ii) Without fraud

When incorporating individuals represent themselves to be officers of the corporation

never duly registered with SEC, and engages in the name of purported corporation in

illegal recruitment, they are estopped from claiming that they are not liable as corporate

officers, since Section 25 of Corporation Code provides that all persons who assume to

act as a corporation knowing it to be without authority to do so shall be liable as general

partners for all the debts, liabilities and damages incurred or arising as a result thereof.

People v. Garcia, 271 SCRA 621 (1997).

An individual cannot avoid his liabilities to the public as an incorporator of a

corporation whose incorporation was not consummated, when he held himself out as

officer of the corporation and received money from applicants who availed of theirservices. Such individual is estopped from claiming that they are not liable as corporate

officers for illegal recruitment under the corporation by estoppel doctrine under Sec. 25

of the Corporation Code which provides that all persons who assume to act as a

corporation knowing it to be without authority to do so shall be liable as general partners

for all the debts, liabilities and damages incurred or arising as a result thereof. People v.

Pineda, G.R. No. 117010, 18 April 1997.


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26.) Principle of Doing/Transacting/Engaging in Business

The following non-inclusive and non-exhaustive list of activities that do not constitutetransacting business:

Maintaining, defending or settling any proceeding, claim or dispute;

Holding meetings of the board of directors or shareholders or carrying on otheractivities concerning internal corporate affairs;

Maintaining bank accounts; Maintaining offices or agencies for the transfer, exchange and registration of the

corporations own securities or appointing and maintaining trustees or depositories

with respect to those securities;

Selling through independent contractors; Soliciting or obtaining orders, whether by mail or through employees or agents or

otherwise, if the orders require acceptance outside Tennessee before they become

contracts; Creating or acquiring indebtedness, deeds of trusts, mortgages and security

interests in real or personal property;

Securing or collecting debts or enforcing mortgages, deeds of trust, and securityinterests in property securing the debts;

Owning, without more, real or personal property (including, for a reasonable time,the management and rental of real property acquired in connection with enforcinga mortgage or deed of trust if the owner is attempting to liquidate the owners

investment and if no office or other agency, other than an independent agency, ismaintained in Tennessee);

Conducting an isolated transaction that is completed within one month and that isnot one in the course of repeated transactions of a like nature; or

Transacting business in interstate commerce.If a corporation does not formally organize and commence the transaction of its

business or the construction of its works within two (2) years from the date of itsincorporation, its corporate powers cease and the corporation shall be deemed

dissolved. However, if a corporation has commenced the transaction of its businessbut subsequently becomes continuously inoperative for a period of at least five (5)

years, the same shall be a ground for the suspension or revocation of its corporatefranchise or certificate of incorporation.

This provision shall not apply if the failure to organize, commence the transactionof its businesses or the construction of its works, or to continuously operate is due to

causes beyond the control of the corporation as may be determined by the Securitiesand Exchange Commission.


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27.) Doctrine of Valid Corporate Act

Intra vires - within the legal power or authority or a person or official or body etc. If

an act requires legal authority and it is done with such authority, it is characterised inlaw as intra vires (literally "within the powers"; standard legal translation and

substitute, "within power"). If it is done without such authority, it is ultra vires. Actsthat are intra vires may equivalently be termed "valid" and those that are ultra

vires "invalid".

28.) Collegial Body Rule

Board of Directors - refers to the collegial body that exercises the corporate

powers of all corporations formed under the Corporation Code. It conducts allbusiness and controls or holds all property of such corporations

The Board of Directors (Board) is primarily responsible for the governance of thecorporation. It needs to be structured so that it provides an independent check on

management. As such, it is vitally important that a number of board members be

independent from management.

1. Composition of the Board

The Board shall be composed of at least five (5) but not more than fifteen (15)members elected by shareholders. Public companies shall have at least two (2)

independent directors or such independent directors shall constitute at leasttwenty percent (20%) of the members of such Board, whichever is the lesser. All

other companies are encouraged to have independent directors as well.cralaw

The Board may include a balance of executive and non-executive directors

(including independent non-executives), having a clear division of responsibilitiessuch that no individual or small group of individuals can dominate the Board'sdecision making.cralaw

The non-executive directors should be of sufficient qualifications, stature andnumber to carry significant weight in the Board's decisions. Non-executive

directors considered by the Board to be independent shall be identified in theannual report.cralaw

2. Multiple Board Seats

The Board may consider guidelines on the number of directorships for itsmembers. The optimum number is related to the capacity of a director to performhis duties diligently in general. The Chief Executive Officer and other executivedirectors may submit themselves to a low indicative limit on membership in other

corporate Boards. The same low limit may apply to independent, non-executivedirectors who serve as full-time executives in other corporations. In any case, the

capacity of directors to serve with diligence shall not be compromised.cralaw


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3. The Chairman and the Chief Executive Officer

The roles of the Chairman and the Chief Executive Officer ("CEO") may be

separate to ensure an appropriate balance of power, increased accountability andgreater capacity of the Board for independent decision-making. The company shall

disclose the relationship between the Chairman and the CEO upon theirelection.cralaw

Where both positions of the Chairman and CEO are unified, there is clearly oneleader to provide a single vision and mission. In this instance, checks and balances

should be clearly provided to help ensure that independent, outside views,perspectives, and judgments are given proper hearing in the Board.cralaw

The Chairman's responsibilities may include:(chanroblesvirtuallawlibrary)

a. schedule meetings to enable the Board to perform its duties responsibly whilenot interfering with the flow of the company's operations

b. prepare meeting agenda in consultation with the CEO;

c. exercise control over quality, quantity and timeliness of the flow of informationbetween Management and the Board; andd. assist in ensuring compliance with company's guidelines on corporate

governance.

The responsibilities set out in the above guidelines may pertain only to theChairman's role in respect to the Board proceedings. It should not be taken as a

comprehensive list of all the duties and responsibilities of a Chairman.

4. Qualifications of Directors

Every director shall own at least one (1) share of the capital stock of thecorporation of which he is a director, which share shall stand in his name in thebooks of the corporation.cralaw

The Board may provide for additional qualifications of a director such as, but notlimited to, the following:chanroblesvirtuallawlibrary

a. Educational attainment

b. Adequate competency and understanding of businessc. Age requirement

d. Integrity/probitye. Assiduousness

5. Disqualification of Directors

The following shall be grounds for the disqualification of adirector:chanroblesvirtuallawlibrary


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a. Any person who has been finally convicted by a competent judicial oradministrative body of the following: (i) any crime involving the purchase or saleof securities, e.g., proprietary or non-proprietary membership certificate,

commodity futures contract, or interest in a common trust fund, pre-need plan,pension plan or life plan; (ii) any crime arising out of the person's conduct as anunderwriter, broker, dealer, investment company, investment adviser, principaldistributor, mutual fund dealer, futures commission merchant, commodity trading

advisor, floor broker; and (iii) any crime arising out of his relationship with a bank,quasi-bank, trust company, investment house or as an affiliated person of any of

them.cralaw

b. Any person who, by reason of any misconduct, after hearing or trial, is

permanently or temporarily enjoined by order, judgment or decree of theCommission or any court or other administrative body of competent jurisdictionfrom: (i) acting as an underwriter, broker, dealer, investment adviser, principal

distributor, mutual fund dealer, futures commission merchant, commodity trading

advisor, or a floor broker; (ii) acting as a director or officer of a bank, quasi-bank,trust company, investment house, investment company or an affiliated person of

any of them; (iii) engaging in or continuing any conduct or practice in connectionwith any such activity or willfully violating laws governing securities, and banking

activities. Such disqualification shall also apply when such person is currentlysubject to an effective order of the Commission or any court or other

administrative body refusing, revoking or suspending any registration, license orpermit issued under the Corporation Code, Securities Regulation Code, or any

other law administered by the Commission or Bangko Sentral ng Pilipinas, orunder any rule or regulation promulgated by the Commission or Bangko Sentral ng

Pilipinas, or otherwise restrained to engage in any activity involving securities and

banking. Such person is also disqualified when he is currently subject to aneffective order of a self-regulatory organization suspending or expelling him from

membership or participation or from associating with a member or participant ofthe organization.cralaw

c. Any person finally convicted judicially or administratively of an offense involving

moral turpitude, fraud, embezzlement, theft, estafa, counterfeiting,misappropriation, forgery, bribery, false oath, perjury or other fraudulent act or

transgressions.cralaw

d. Any person finally found by the Commission or a court or other administrative

body to have willfully violated, or willfully aided, abetted, counseled, induced or

procured the violation of, any provision of the Securities Regulation Code,the Corporation Code, or any other law administered by the Commission orBangko Sentral ng Pilipinas, or any rule, regulation or order of the Commission or

Bangko Sentral ng Pilipinas, or who has filed a materially false or misleadingapplication, report or registration statement required by the Commission, or anyrule, regulation or order of the Commission.cralaw

e. Any person judicially declared to be insolvent.cralaw
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A director's office is one of trust and confidence. He should act in the best interestof the corporation in a manner characterized by transparency, accountability andfairness. He should exercise leadership, prudence and integrity in directing the

corporation towards sustained progress over the long term. A director assumescertain responsibilities to different constituencies or stakeholders, who have theright to expect that the institution is being run in a prudent and soundmanner.cralaw

To ensure good governance of the corporation, the Board should establish the

corporation's vision and mission, strategic objectives, policies and procedures thatmay guide and direct the activities of the company and the means to attain the

same as well as the mechanism for monitoring management's performance. While

the management of the day-to-day affairs of the institution is the responsibility ofthe management team, the Board is, however, responsible for monitoring andoverseeing management action.cralaw

b. Duties and Functions

To insure a high standard of best practice for the company and its stakeholders,the Board should conduct itself with utmost honesty and integrity in the dischargeof its duties, functions and responsibilities which include, among others, the

following:chanroblesvirtuallawlibrary

i. Install a process of selection to ensure a mix of competent directors, each ofwhom can add value and contribute independent judgment to the formulation of

sound corporate strategies and policies. Select and appoint the CEO and othersenior officers, who must have the motivation, integrity, competence and

professionalism at a very high level. Adopt a professional development programfor employees and officers, and succession planning for senior management.cralaw

ii. Determine the corporation's purpose and value as well as strategies and generalpolicies to ensure that it survives and thrives despite financial crises and its assets

and reputation are adequately protected. Provide sound written policies andstrategic guidelines to the corporation that will help decide on major capital

expenditures. Determine important policies that bear on the character of thecorporation with a view towards ensuring its long-term viability and strength. It

must periodically evaluate and monitor implementation of such strategies andpolicies, business plans and operating budgets as well as management's over-all

performance to ensure optimum results.cralaw

iii. Ensure that the corporation complies with all relevant laws, regulations and

codes of best business practices.cralaw

iv. Identify the corporation's major and other stakeholders and formulate a clearpolicy on communicating or relating with them accurately, effectively and

sufficiently. There must be an accounting rendered to them regularly in order toserve their legitimate interests.cralaw


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Likewise, an investor relations program that reaches out to all shareholders andfully informs them of corporate activities should be developed. As a best practice,the chief financial officer or CEO should have oversight of this program and should

actively participate in public activities

v. Adopt a system of internal checks and balances, which may be applied in thefirst instance to the Board. A regular review of the effectiveness of such system

must be conducted so that the decision-making capability and the integrity ofcorporate operations and reporting systems are maintained at a high level at all

times.cralaw

vi. Endeavor to provide appropriate technology and systems rating to account for

available resources to ensure a position of a strong and meaningful competitor.Identify key risk areas and key performance indicators and monitor these factors

with due diligence.cralaw

vii. Constitute an Audit and Compliance Committee.cralaw

viii. Properly discharge Board functions by meeting regularly. Independent viewsduring Board meetings should be given due consideration and all such meetingsshould be duly minuted.cralaw

ix. Keep Board authority within the powers of the institution as prescribed in thearticles of incorporation, by-laws and in existing laws, rules and regulation.Conduct and maintain the affairs of the institution within the scope of its authority

as prescribed in its charter and in existing laws, rules and regulations.cralaw

c. Specific Duties and Responsibilities of a Director

i. To conduct fair business transactions with the corporation and to ensure thatpersonal interest does not bias Board decisions. The basic principle to be observedis that a director should not use his position to make profit or to acquire benefit or

advantage for himself and/or his related interests. He should avoid situations that

may compromise his impartiality. If an actual or potential conflict of interestshould arise on the part of directors or senior executives, it should be fully

disclosed and the concerned director should not participate in the decision making.A director who has a continuing conflict of interest of a material nature should

consider resigning.cralaw

ii. To devote time and attention necessary to properly discharge his duties andresponsibilities. A director should devote sufficient time to familiarize himself withthe institution's business. He should be constantly aware of the institution'scondition and be knowledgeable enough to contribute meaningfully to the Board's

work. He should attend and actively participate in Board and committee meetings,

request and review meeting materials, ask questions, and requestexplanations.cralaw


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iii. To act judiciously. Before deciding on any matter brought before the Board ofdirectors, every director should thoroughly evaluate the issues, ask questions andseek clarifications when necessary.cralaw

iv. To exercise independent judgment. A director should view each

problem/situation objectively. When a disagreement with others occurs, he shouldcarefully evaluate the situation and state his position. He should not be afraid to

take a position even though it might be unpopular. Corollarily, he should supportplans and ideas that he thinks are beneficial to the corporation.cralaw

v. To have a working knowledge of the statutory and regulatory requirementsaffecting the corporation, including the contents of its articles of incorporation and

by-laws, the requirements of the Commission, and where applicable, therequirements of other regulatory agencies. A director should also keep himself

informed of industry developments and business trends in order to safeguard thecorporation's competitiveness.cralaw

vi. To observe confidentiality. A director should observe the confidentiality of non-

public information acquired by reason of his position as director. He should notdisclose any information to any other person without the authority of theBoard.cralaw

vii. To ensure the continuing soundness, effectiveness and adequacy of the

company's control environment.cralaw

d. Internal Control Responsibilities of the Board

The control environment is composed of: (a) the Board which ensures that the

company is appropriately and effectively managed and controlled, (b) a

management that actively manages and operates the company in a sound andprudent manner, (c) the organizational and procedural controls supported by aneffective management information system and risk management reporting system,

and (d) the independent audit mechanisms to monitor the adequacy andeffectiveness of the organization's governance, operations, information systems,to include reliability and integrity of financial and operational information,effectiveness and efficiency of operations, safeguarding of assets, and compliance

with laws, rules, regulations, and contracts.cralaw

i. The minimum internal control mechanisms for the Board's oversight

responsibility may include:chanroblesvirtuallawlibrary

Defining the duties and responsibilities of the CEO; Selecting or approving an individual with appropriate ability, integrity,

experience to fill the CEO role;

Reviewing proposed senior management appointments; Ensuring the selection, appointment and retention of qualified and competent

management; Reviewing the company's personnel and human resource policies and sufficiency,


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